ET Explainer: Debating promoter reclassification
committee recently discussed a proposal to reclassify promoter or promoter group entities in publicly listed companies. After debate, the panel rejected it. A look at what it means:
What are the existing provisions for promoter reclassification?
According to regulations, if a promoter or a promoter entity must be reclassified as a public shareholder, the promoter group's total voting rights should not exceed 10% of the total equity in the company.
What did companies and promoters ask for?
Companies and lobby groups had suggested removing the rule about «together holding more than 10%», or they requested for this threshold limit to be increased to 25%. For example, if a promoter's siblings or children hold small stakes, say 2%, and seek reclassification as a non-promoter due to non-involvement in the business, they should be allowed to be reclassified as a non-promoter or public shareholder irrespective of the promoter group stake.
Why did companies want this rule changed?
When a family member runs a business independently, other relatives prefer not to be liable for the compliances and liabilities imposed on the promoter group. Many of these shareholders are merely relatives and not part of the company's operations. «This is an unfortunate requirement, as promoters' relatives, even if married and often having small holdings, living separate lives, and not involved in the day-to-day management of the company, cannot be recategorized as public shareholders,» said Ketan Dalal, managing director of Katalyst
