Note on Sale of Shares held by promoters through the secondary market

INTRODUCTION

The Rule 19(2) and Rule 19A of the Securities Contracts (Regulation) Rules, 1957 deal with the maintaining minimum public shareholding of 25%. The Ministry of Finance has notified the Securities Contracts (Regulation) (Amendment) Rules, 2010 on June 04, 2010 by which a new Rule 19A has been inserted which says that every Listed company other than public sector company shall maintain public shareholding of at least 25%. To raise the public shareholding to the required level a new clause 40A has been included in Equity Listing Agreement. Under this clause the Securities and Exchange Board of India (the SEBI) has prescribed the different method which promoter/promoters can use to raise the public shareholding, out of these methods, one is sale of shares held by promoters through the secondary market. This article tries to give basic awareness on sale of shares by promoter through stock exchanges.

 RULES AND REGULATIONS

There are following Act, Rules and Regulations deal with sale of shares held by promoters through the secondary market:

(i) Section 11 (1) of Securities and Exchange Board of India Act, 1992.

(ii) Rule 19(2) and Rule 19A of the Securities Contracts (Regulation) Rules, 1957

(iii) Clause 40A of Equity Listing Agreement

(iv) Circulars issued by the Securities and Exchange Board of India on time to time.

Section 11 (1) of the Securities and Exchange Board of India Act, 1992

Section 11(1) of the Securities and Exchange Board of India Act, 1992 deal with duty of the Board to protect the interest of investor in securities and to promote the development of and to regulate the securities market.

 Rule 19(2) of the Securities Contracts (Regulation) Rules, 1957

The main point of Rule (19(2) of the Securities Contracts (Regulation) Rules, 1957 are given below:

- At least 25% of each class or kind of equity shares or debentures convertible into equity shares issued by the company was offered and allot to public in terms of an offer document;

- At least 10% of each class or kind of equity shares or debentures convertible into equity shares issued by the company was offered and allot to public in terms of an offer document if the post issue capital of the company calculated at offer price is more than Rs. 4000 crores;

-  A company may increase its public shareholding by less than 5% in a year if such increase brings its public shareholding to the level of 25% in that year.

Rule 19A of the Securities Contracts (Regulation) Rules, 1957

(1) Every listed company (other than public sector company) shall maintain public shareholding of at least twenty five per cent.

Provided that any listed company which has public shareholding below twenty five per cent. on the commencement of the Securities Contracts (Regulation) (Amendment) Rules, 2010, shall increase its public shareholding to at least twenty five per cent, with in a period of three years from the date of such commencement, in the manner specified by the Securities and Exchange Board of India.

Explanation: For the purpose of this sub rule, a company whose securities has been listed pursuant to an offer and allotment made to the public in terms of sub-clause (ii) of clause (b) of sub-rule (2) of rule 19, shall maintain minimum 25%, public shareholding from the date on which the public shareholding in the company reaches the level of 25% in terms of said sub clause.

Provided further that the company may increase its public shareholding by less than five per cent. in a year if such increase brings its public shareholding to the level of twenty five per cent. in that year.

(2) Where the public shareholding in a listed company falls below twenty five per cent. at any time, such company shall bring the public shareholding to twenty five per cent. within a maximum period of twelve months from the date of such fall in the manner specified by the Securities and Exchange Board of India.

Clause 40A of Listing Agreement – Minimum Level of Public Shareholding

(i) The issuer company agrees to comply with the requirements specified in Rule 19(2) and Rule 19A of the Securities Contracts (Regulation) Rules, 1957.

(ii) Where  the  issuer  company  is  required  to  achieve  the  minimum  level  of  public shareholding  specified  in Rule 19(2)(b)  and/or Rule  19A of  the Securities Contracts (Regulation)  Rules,  1957,  it  shall  adopt  any  of  the  following  methods  to  raise  the public shareholding to the required level:-

(a)  issuance of shares to public through prospectus; or

(b)  offer for sale of shares held by promoters to public through prospectus; or

(c)  sale of shares held by promoters through the secondary market in terms of SEBI circular CIR/MRD/DP/18/2012 dated July 18, 2012; or

(d) Institutional Placement Programme (IPP) in terms of Chapter VIIIA of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, as amended.

Comprehensive Guidelines on Offer For Sale (OFS) of Shares by Promoters through the Stock Exchange Mechanism

This guideline is one of the methods as specified under clause 40A of the Listing Agreement to raise the public shareholding to the required level. Such Guidelines is issued by the SEBI first time vide Circular no. CIR/MRD/DP/05/2012 dated February 1, 2012, and CIR/MRD/DP/07/2012 dated February 23, 2012 and CIR/MRD/DP/8/2012 dated February 27, 2012 on the captioned subject. The SEBI on July 18, 2012 vide Circular no. CIR/MRD/DP/18/2012 replaced the procedure and instructions contained in the aforementioned circulars by the following:

1. ELIGIBILITY

(a) Exchange: The facility of offer for sale of shares shall be available on Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).

(b) Seller:            

(i) all promoter/promoter group entities of such companies that are eligible for trading and are required to increase public shareholding,

(ii) all promoter/promoter group entities of top 100 companies based on average market capitalization of the last completed quarter.

(iii) promoter/promoter group entities who have already offered their shares through OFS/IPP.

For the (i) and (ii) above, the promoter/promoter group entities should not have purchased/sale shares of the company in the 12 weeks period prior to the offer and they should undertake not to purchase/sale shares of the company in the 12 week period after the offer.

(c) Buyer: All investors registered with the broker (DP) of the aforesaid stock exchanges other than promoter/promoter group entities

2. SIZE OF OFFER

The size of offer for sale of shares shall be a minimum of Rs. 25 crores. However, size of offer can be a less than Rs. 25 crores so as to achieve minimum public shareholding in a single tranche.

3. ADERTISEMENT AND EXPENSES

All advertisement relating to offer for sale of shares through stock exchanges, if any, shall be made after the announcement or notice for such sale to the stock exchanges and content of notice should be in specific format. The expenses relating to offer for sale through stock exchanges shall be borne by the seller.

4. OPERATIONAL REQUIREMENTS

(a) Appointment of Broker:

The seller will appoint broker for this purchase. The seller broker may also undertake transaction on behalf of eligible buyers.

(b)Content of the Announcement/Notice of Offer for Sale of Shares:

The seller shall announce the intention of sale of shares at least one clear trading day prior to the opening of offer, along with the following information:

(i) Name of the seller (promoter) and the name of the company whose shares are proposed to be sold.

(ii) Name of exchange where the order shall be placed. If orderare placed on both NSE and BSE, one of them shall be declared as Designated Stock Exchange (DSE).

(iii) Date and time of opening and closing of the offer.

(iv) Number of shares being offered for sale.

(v) Allocation methodology (i.e. either on a price priority(multiple clearing prices)basis or on a proportionate basis at a single clearing price.

(vi) Maximum number of shares  that he seller may choose to sell over and above offer made at point (iv) above.

(vii) Name of the broker on behalf of the seller.

(viii) The date and time of declaration of floor price, if the seller choose to announce it to the market.

(ix) Conditions, if any for withdrawal or cancellation of the offer.

(c) Floor Price:

(i) In case the seller chooses to disclose the floor price, the seller shall declare it after the close of trading hours and before the close of business hours of the exchanges on T-1 day else the seller shall give floor price in a sealed envelope to DSE before opening of the offer. (T days being the day of the offer for sale)

(ii) The floor price if not declared to the market, shall not be disclosed to anybody, including the selling broker.

(iii) Sealed envelope shall be opened by the DSE after the closure of the offer for sale and the floor price suitably disseminated to the market.

(d) Timelines:

(i) The duration of the offer for sale shall be as per the trading hours of the secondary market and shall not exceed one trading day.

(ii) The placing of orders and funds on the exchange system shall take place only during trading hours.

(iii) In case of institutional traders, the custodian shall conclude the confirmation of bids with the available fund not later than end of the half an hour post close session.

(e) Order Placement:

(i) A separate window for the purpose of offer for sale of shares shall be created by stock exchanges. Modification/Cancellation of orders/bids will be allowed during the duration of the offer only for bid for which 100% upfront margin has been received. However such modifications, etc shall not be allowed during the last 60 minutes of the duration of the offer.

(ii) Cumulative orders/bid quantity information shall be made available online by the exchange at specific time intervals. The indicative price shall be disclosed by the exchanges only during the last 60 minutes of the duration of the offer.

(iii) If the security has a price band in the normal segment, the same shall not apply for the orders placed in the offer for sale.

(iv) In case of shares under offer for sale, the trading in the normal market shall be also continue.

(v) Only limited order/bids shall be permitted.

(vi) Multiple orders from a single buyer shall be permitted.

(vii) In case floor price is disclosed, order/bids below floor price shall not be accepted.

5. ALLOCATION

(a) Minimum of 25% of the shares offered shall be reserved for mutual fund and insurance companies, subject to allocation methodology. Any unsubscribed portion thereof shall be available to the other bidders.

(b) The orders shall be cumulated by the DSE immediately on close of the offer. Based on the methodology for allocation to be followed as disclosed in the notice, the DSE shall draw up the allocation.

(c) No allocation will be made in case of order/bid is below floor price.

(d) No single bidder other than mutual funds and insurance companies shall be allocated more than 25% of the size of offer for sale.

(e) The allocation details shall be shared by the DSE with the other exchange after the allocation is crystallized.

6. SETTLEMENT

a.The allocation and the obligations resulting thereof shall be intimated to the brokers on T day.

b. The settlement shall take place similar to trade for trade basis and shall be completed on  T + 1   day. There shall be no netting of settlement at broker’s end.

c. Funds collected from the bidders who have not been allocated shares shall be released after the download of the obligation.

d. On T+1 day, to the extent of obligation determined, the clearing Corporation/ Clearing house of DSE shall transfer such number of shares to the clearing corporation/clearing house of the other stock exchange, without consideration of money. Excess shares, if any, shall be returned to seller broker(s).The direct credit of shares shall be given to the demat account of the successful bidder provided such manner of credit is indicated by the broker/bidder.

7. HANDLING OF DEFAULT IN PAY IN

a. In the event of default in pay-in an amount of 10% of the bid value shall be forfeited as penalty and shall be credited to Investor Protection Fund. The balance amount shall be returned to the bidder.

 b. The price at which allotments have been made based on the allocation on T day shall not be revised as a result of any default in pay-in.

c. Issuer shall have the option to cancel in full or conclude the offer.

d. Allotment details after settlement shall also be disseminated by the exchange.

e. Allocation details after settlement shall be consolidated by the DSE and excess shares, if any, shall be returned by the respective Clearing Corporation/ Clearing house to the seller(s) broker(s).

f. Settlement Guarantee Fund shall not be available for OFS through stock exchange mechanism.

8. ISSUANCE OF CONTRACT NOTE

The brokers shall be required to issue contracts note to its clients based on the allotment pricand quantity in terms of conditions specified by the exchange.

9. WITHDRAWAL OF OFFER

The offer for sale may be withdrawn prior to its proposed opening. In such a case there will be a cooling off period of 10 trading days from the date of withdrawal before an offer is made once again. The stock exchange(s) shall suitably disseminate details of such withdrawal.

10. CANCELLATION OF OFFER

Cancellation of offer shall not be permitted during the bidding period. If the seller(s) fails to get sufficient demand at or above the floor price, he may choose to either conclude the offer or cancel it in full. The seller may also choose to conclude the offer or cancel it in full, in case of defaults in settlement obligation.

11. DISCLOSURES OF SHAREHOLDING

The disclosures under Chapter V of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 shall be of the aggregated shareholding and voting rights of the acquirer or promoter of the target company or every person acting in concert with him.

12. DEFINITIONS

The definition of following terms used in this article is given below:

(a) “public” means persons other than –

(i) 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.

(b) “public shareholding” means equity shares of the company held by public and shall exclude shares which are held by custodian against depository receipts issued overseas.

(c) "Single Clearing Price” is the price at which the shares are allocated to the successful bidders in a proportionate basis methodology.

(d) “Multiple Clearing Prices” are the prices at which the shares are allocated to the successful bidders in a price priority methodology.

(e) “Indicative Price” is the volume weighted average price of all the valid/confirmed bids

(f) “Floor Price” is the minimum price at which the seller intends to sell the shares.

(NOTE: The above article is given for the limited purpose of bringing awareness about the subject matter for readers.)

Regards

CS Ajay Mishra

Email: ajaygkp@gmail.com & csajaygkp@gmail.com