Pursuant to the decision taken at the meeting of the Board of Securities Exchange Board of India (SEBI) held on 16 August 2012, SEBI vide its Circular No CIR/CFD/DIL/11/2012 dated 29 August 2012 (Circular) has introduced additional modes of compliance with the minimum public shareholding requirements to be followed by listed companies as contemplated under Rule 19(2)(b) and Rule 19(A) of Securities Contract (Regulations) Rules, 1957 and Clause 40A of the Listing Agreement. This is a welcome respite for listed companies which are currently non-compliant, given that the deadline for ensuring compliance with Clause 40A of the Listing Agreement is June 2013.

The following two new methods have been introduced by the Circular:

– Rights Issues to public shareholders, with promoters / promoter group shareholders forgoing their rights entitlement; and

– Bonus Issues to public shareholders, with promoters / promoter group shareholders forgoing their bonus entitlement.

The aforementioned methods are in addition to the already existing methods under Clause 40A of the Listing Agreement, being follow-on public offer, offer for sale, and institutional placement programme.

Interestingly, by virtue of the Circular, listed companies desirous of achieving the minimum public shareholding by modes other than the available modes, are permitted to approach SEBI with the appropriate details. Further, as per the Circular, any requests seeking relaxations from the available methods would be considered by SEBI based on facts involved and would be approved at its discretion. SEBI shall also make efforts to give its decision within thirty days of receipt of such requests.

Customarily, in cases of rights and bonus issues, all shareholders (including promoters) are entitled to their rights based on their current holding. Therefore, SEBI has opened an avenue through renunciation of rights entitlement and bonus shares for complying with the minimum public holding requirements by allowing promoters of a listed company, undertaking the rights and bonus issue, to forego their entitlement of shares in such issues. As the (Indian) Companies Act, 1956 does not contemplate renunciation of bonus shares, this particular mode may be a subject matter of further debate.

The introduction of these modes of increasing public shareholding seem to be SEBI’s response to various requests from non-compliant companies for permitting additional methods of compliance with the existing law. The methods existing prior to the Circular did not seem feasible in situations involving under-performing companies and non-availability of interested investors, given the existing financial uncertainty.