Shareholders of a subsidiary cannot be classified as ‘public’: SEBI

SEBI issued guidance in response to Anjani Portland Cement Limited’s request concerning its proposed amalgamation with its subsidiary, Bhavya Cements Private Limited. The letter, dated May 14, 2024, clarified several points about regulatory compliance under the SEBI Master Circular. The Company sought to categorize the subsidiary’s minority shareholders as ‘public’ and queried compliance with minimum public shareholding requirements. SEBI explained that shareholders of a subsidiary cannot be classified as ‘public’ and highlighted that the scheme must ensure pre-scheme public shareholders hold at least 25% in the merged entity. SEBI further indicated that compliance must be maintained even post-amalgamation and that the promoter’s share disposal would not be exempt from insider trading regulations. The guidance emphasized that these responses are based on the specific facts presented and do not address broader SEBI regulations or other legal requirements.
Securities and Exchange Board of India
Deputy General ManagerCorporation Finance DepartmentPolicy and Development – 2Email: raikdRsebi.gov.in
SEBI/HO/CFD/PoD-2/0W/P/2024/16806/1
May 14, 2024
Anjani Portland Cement Limited6-3-553, Unit No.: E3 & E4, 4th Floor,Quena Square, Off Taj Deccan Road,Erramanzil, Hyderabad — 500 082, Telangana
Sir,
Kind attention: Mr. Subhanarayan Muduli (Company Secretary)
Sub: Request for Informal Guidance by way of an Interpretive Letter under Clause 5(ii) of the Securities and Exchange Board of India (Informal Guidance) Scheme, 2003.
1. This is with reference to your letter dated February 27, 2024 (“application”) seeking guidance by way of an interpretive letter under the Securities and Exchange Board of India (Informal Guidance) Scheme, 2003 (“Informal Guidance Scheme”) and the subsequent clarification in the matter vide email dated March 15, 2024.
2. In your application under reference you have, inter alia, represented as under:
2.1. Anjani Portland Cement Limited (“the Company”) is a public limited company incorporated under the Companies Act, 1956 and the equity shares of the Company are presently listed on BSE Limited (“BSE”) and National Stock Exchange of India Limited (“NSE”);
2.2. The present shareholding of the Company is as under-

Table 1: The present shareholding pattern of the Company

Type of Shareholder
Face value of shares
No. of Equity shares held
% ofholding

Promoter (Chettinad Cement Corporation Private Limited)
10/-
2,20,31,071
75

Public
10/-
73,43,693
25

Total

2,93,74,764
100

2.3. The Company has one unlisted subsidiary under the name Bhavya Cements Private Limited (“the Subsidiary Company”) and holds 99.09% of the total issued and paid-up share capital of the Subsidiary Company. The Shareholding pattern of the Subsidiary Company is as under-

Table 2- The present shareholding pattern of the Subsidiary Company

Type of Shareholder
Face value of shares
No. of Equity shares held
% of holding

Promoter (Anjani Portland Cement Limited)
10/-
13,11,13,974
99.09

Other Non-Promoter Public shareholders
10/-
12,01,901
0.91

Total

13,23,15,875
100

2.4.A scheme of amalgamation has been approved by the Board of Directors of the Company and the Subsidiary Company for merger of the Subsidiary Company with the Company and their respective shareholders and creditors under Sections 230 to 232 of the Companies Act, 2013 (“the Companies Act”). Upon the Scheme becoming effective and in consideration for the amalgamation of the Subsidiary Company with the Company, the Company shall issue and allot Equity Shares, on a proportionate basis to the members i.e., Other Non-Promoter Public shareholders of the Subsidiary Company.
2.5. Clause 3(b) of Part 1(A) of SEBI Master Circular dated June 2023 (“Master Circular on Scheme of Arrangement”), specifies the following condition to be satisfied in case of scheme of arrangement between a listed and an unlisted entity-
“The percentage of shareholding of pre-scheme public shareholders of the listed entity and the Qualified Institutional Buyers (QIBs) of the unlisted entity, in the post scheme shareholding pattern of the “merged” company on a fully diluted basis shall not be less than 25%”
2.6.As evident from the shareholding pattern of the Company given in Table 1 above, the percentage of shareholding of pre-scheme public shareholders of the listed entity is already 25%.
2.7. Pursuant to the scheme of amalgamation, when equity shares are issued to the other non-promoter shareholders of the Subsidiary Company by way of consideration, the pre and post-scheme Shareholding pattern of the merged entity would be as depicted in Table 3 given below;

Table:3 Pre and post-scheme Shareholding pattern of the Merged Company

Particulars
Pre-Amalgamation (No. of Equity Shares)
% of holding
Post-Amalgamation (No. of Equity Shares)
% of holding

Promoter
22,031,071
75.00
22,031,071
74.73

Public
7,343,693
25.00
7,461,762
25.27

Total
29,374,764
100.00
29,482,833
100.00

–

Table: 4 Calculation of the percentage of shareholding of pre-scheme public shareholders of the listed entity, in the post- scheme shareholding pattern of the “merged” company on a fully diluted basis

Particulars
Pre-Amalgamation (No. of Equity Shares)
% of holding
Post- Amalgamation (No. of Equity Shares)
% of holding

Promoter
22,031,071
75.00
22,031,071
74.73

Public
7,343,693
25.00
7,451,762
25.27

Total
29,374,764
100.00
29,482,833
100.00

Percentage of shareholding of pre-scheme public shareholders of the listed entity, in the post- scheme shareholding pattern of the “merged” company on a fully diluted basis i.e. 7,343,693/29,482,833*100
24.91

2.8. As evident from Table: 4 above, the percentage of shareholding of pre-scheme public shareholders of the listed entity, in the post- scheme shareholding pattern of the “merged” company on a fully diluted basis will be 24.91% which is less than the stipulated 25% limit as specified in the Master Circular on Scheme of Arrangement thereby failing to satisfy the required condition under Clause 3(b) of Part 1(A). Further, in order to satisfy the aforesaid condition the promoter of the listed entity has proposed to dilute its existing shareholding in the Company.
3. In view of the above, you have sought clarification as under:
3.1. “The Company proposes to consider the “other non-promoter shareholders” of the Subsidiary Company as ‘public shareholders’ and group them under ‘public shareholders’ post approval of the Scheme of Amalgamation, pursuant to Regulation 31 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. The Company would like to know if such a categorization is permitted under applicable SEBI Regulations;
3.2. Should the compliance as per Part 1(A) clause 3(b) of SEBI Master Circular SEBI/HO/CFD/POD-2/P/CIR/2023/93 dated June 20, 2023 be only as on the Effective Date of the Scheme of Amalgamation (or) would require continued compliance by the Company even post-amalgamation.
In other words, can the Promoter of the Company, holding shares or voting rights in excess of 25%, acquire additional shares or voting rights in the Company in compliance with Regulation 3(2) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, post approval of the scheme of amalgamation, without requiring continued compliance with Part 1(A) clause 3(b) of SEBI Master Circular SEBI/HOICFD/POD-2/P/CIR/2023/93 dated June 20, 2023
3.3. Whether any disposal of shares by the promoter of the Company, in order to comply Part 1(A) clause 3(b) of SEBI Master Circular SEBI/HO/CFD/POD-2/P/CIR/2023/93 dated June 20, 2023, would come under the exemption of Regulation 4(1)(iii) of the SEBI (Prohibition of Insider Trading) Regulations, 2015.”
4. We have considered the submissions made by you in your application. Without necessarily agreeing with your analysis, we are issuing interpretative letter as under:
5. In response to query at paragraph 3.1-
(a) The terms “public shareholding” is defined under Rule 2(e) of the Securities Contracts (Regulation) Rule 1957 (“SCRR”) as follows:
e) public shareholding” means equity shares of the company held by public including shares underlying the depository receipts if the holder of such depository receipts has the right to issue voting instruction and such depository receipts are listed on an international exchange in accordance with the Depository Receipts Scheme, 2014:
Provided that the equity shares of the company held by the trust set up for implementing employee benefit schemes under the regulations framed by the Securities and Exchange Board of India shall be excluded from public shareholding.”
(b) The term “public” is defined under Rule 2(d) of the SCRR as follows: “(d) “public” means persons other than —
(d) “public” the promoter and promoter group;
(ii) subsidiaries and associates of the company.
Explanation: For the purpose of this clause the words “promoter” and “promoter group” shall have the same meaning as assigned to them under the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009;”
From the above definition, it can be noticed that a subsidiary company of a company is not included within the definition of the term “public” under the SCRR. The same definition for the term “public” has been adopted under the LODR Regulations, in Regulation 2(1)(x) thereof. Further, in terms of the definition of the term “promoter group” under Regulation 2(1)(pp) of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 read with Regulation 2(1)(w) of the LODR Regulations, a ‘subsidiary company’ is included within the ambit of the term “promoter group”. Taking guidance from the above definitions, it may be said that the shareholders of a subsidiary company may not be classified under the head “public”.
(c) Regulation 31(1)(4) of the LODR Regulations specifies as under-
“Holding of specified securities and shareholding pattern.
31(1). . .
(4) All entities falling under promoter and promoter group shall be disclosed separately in the shareholding pattern appearing on the website of all stock exchanges having nationwide trading terminals where the specified securities of the entity are listed, in accordance with the formats specified by the Board.”
(d) The Master Circular for LODR Regulations in Chapter II-A inter-alia specifies the manner of representation of holding of specified securities under Regulation 31. The relevant paragraph of the Chapter is reproduced as under: –
“2.1 The holding of specified securities shall be divided into the following 3 categories viz. Promoter and Promoter Group, Public and Non-Promoter Non-Public.
3.1 The categories as defined at paragraph2.1above:
a) Promoter and Promoter Group (A)
b) Public (including shares underlying DRs which fulfil the conditions laid down in Rule 2(e) of Securities Contracts (Regulation) Rules, 1957) (B)
i. Non-Promoter Non-Public (C)Shares held by DR Holders (which don’t fulfill the conditions laid down in Rule 2(e) of Securities Contracts (Regulation) Rules, 1957) (C1)
(ii) Shares held by Employee Benefit Trust under Securities and Exchange Board of India (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 (C2)”
(e) From a reading of the above provisions, it is clear that “promoter and promoter group”, “Public” and “Non-Promoter Non-Public” are distinct categories which are identified on the basis of the conditions laid down under the aforesaid provisions.
(f) In the present case, the Company has stated that in its Subsidiary Company, 0.91% of shares are held by “other non-promoter public shareholders”. It is therefore not clear as to how the Subsidiary Company could classify the said shares under the “public shareholders” category. Hence, the shares allotted to such persons under the scheme of amalgamation may have to be classified under the “promoter and promoter group” category. The Company may resort to the provisions of Regulation 31A of the LODR Regulations for re-classification, if it so intends. Further, any filing done by the listed entity post amalgamation has to ensure compliance, including appropriate categorization of shareholders, with the provisions of Regulation 31 of the LODR Regulations read with the Master Circular for LODR Regulations.
6. In response to query at paragraph 3.2-
(a) Clause 3(b) of Part 1(A) of the Master Circular on Scheme of Arrangement specifies as under-
“The percentage of shareholding of pre-scheme public shareholders of the listed entity and the Qualified Institutional Buyers (QIBs) of the unlisted entity, in the post scheme shareholding pattern of the “merged” company on a fully diluted basis shall not be less than 25%”
(b) The aforesaid clause specifies the requirements to be satisfied before the Scheme of arrangement is submitted for sanction by the National Company Law Tribunal (NCLT) in case of schemes of arrangement between listed and unlisted entities. Therefore, the requirement is to be fulfilled as specified in the said Master Circular.
(c) In the instant case, there is no averment made in the application that QIBs are holding shares in the unlisted Subsidiary Company. Hence, as per the above said regulatory provision, it is to be ensured that the percentage of shareholding of pre-scheme public shareholders of the Company, in the post scheme shareholding pattern of the “merged” company on a fully diluted basis, shall not be less than 25%.
(d) Since the Company would continue to be a listed entity even post the proposed scheme of arrangement, it shall, in terms of Regulation 38 of the LODR Regulations, comply with the minimum public shareholding (MPS) requirements specified in Rule 19(2) and Rule 19A of the SCRR, in the manner as specified by SEBI from time to time. This would be a requirement on a continuing basis for a listed company. Hence, even if the promoter holding is in excess of 25%, it could acquire shares/voting rights in the Company in compliance with the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, subject to compliance with other applicable laws including the continuing MPS requirements.
7. In response to query at paragraph 3.3-
(a) The term “insider” is defined under Regulation 2(1)(g) of the PIT Regulations as follows:
“(g) “insider” means any person who is:
i. a connected person; or
ii. in possession of or having access to unpublished price sensitive information;”
Further, the expression “unpublished price sensitive information” is defined in the PIT Regulations as follows:
“(n) “unpublished price sensitive information” means any information, relating to a company or its securities, directly or indirectly, that is not generally available which upon becoming generally available, is likely to materially affect the price of the securities and shall, ordinarily including but not restricted to, information relating to the following: —
(i) financial results;
(ii) dividends;
(iii) change in capital structure;
(iv) mergers, de-mergers, acquisitions, delisting’s, disposals and expansion of business and such other transactions;
(v) changes in key managerial personnel.
(b) The relevant provisions of Regulation 4 of the PIT Regulations dealing with ‘trading when in possession of unpublished price sensitive information’ is reproduced for reference as under-
“4. (1) No insider shall trade in securities that are listed or proposed to be listed on a stock exchange when in possession of unpublished price sensitive information:
Provided that the insider may prove his innocence by demonstrating the circumstances including the following: —
(iii) the transaction in question was carried out pursuant to a statutory or regulatory obligation to carry out a bona fide transaction…”
Hence, trading on the basis of unpublished price sensitive information (being the proposed merger of the Company with its Subsidiary Company) could be a violation of Section 12A(d) & (e) of the Securities and Exchange Board of India Act, 1992 (`SEBI Act’) and Regulation 4(1) of the PIT Regulations.
(c) The proviso to Regulation 4(1) provides for an inclusive list of circumstances, which may be used by a person alleged of insider trading to “prove his innocence” for trading when in possession of UPSI, and does not provide for exemption from the rule under Regulation 4(1). Necessary guidance is available in the ‘Note’ appended to Regulation 4 of the PIT Regulations.
(d) Clause (iii) of the proviso to Regulation 4(1) provides for a defence if the transaction in question was carried out pursuant to a statutory or regulatory obligation to carry out a bonafide transaction. In the present case, disposal of shares by the promoter of the Company, as proposed, for complying with the requirement under Clause 3(b) of Part 1(A) of the Master Circular on Scheme of Arrangement cannot be construed as a transaction that is carried out pursuant to a statutory or regulatory obligation as there is no mandate under the said clause on the promoter to offload shares. Therefore, it is clear that clause (iii) of the proviso to Regulation 4(1) of the PIT Regulations cannot be used for granting exemption/permission for disposal of shares by the promoter of the Company.
8. The above position is based on the information furnished in your letters under reference. Different facts or conditions might lead to a different result. Further, this letter does not express a decision of the Board on the questions referred.
9. You may also note that the above position is expressed only with respect to the guidance sought in your letter under reference in respect of the provisions as referred above and does not affect the applicability of any other law or requirement of any other SEBI Regulation, Guidelines and Circulars administered by SEBI or the laws administered by any other authority.
Yours faithfully,
Raj Kumar Das