Further Order by SEBI on Shareholding Disclosures

(The following post is contributed by Yogesh Chande, an advocate practising in Mumbai)

SEBI’s whole time member in an order dated 26 March 2012 (Order), has revoked the directions which were issued by an interim order dated 8 March 2010 (which has been discussed earlier) against the entities mentioned in paragraph 4 of the Order. One of the issues which required to be examined by the whole time member was a reference received by SEBI from RBI as regards incorrect disclosure made by the erstwhile listed bank (Bank) regarding the shareholding pattern of the promoter group of the Bank.

Interestingly, in paragraph 9 of the Order the SEBI whole time member has observed as follows in relation to the incorrect shareholding of the said entities:

The second issue to be examined is whether any such attempt at camouflaging the real level of share holding by promoters should be considered as a serious, very serious or fatal threat to the securities market. Again, as a baseline, the securities regulations are disclosure based and the securities market regulator does expect that all disclosures should be true and fair. I am of the opinion that such an offence would have been considered as very serious or fatal if the wrongful disclosures would have led genuine investors into trades that would eventually expose them to much greater risk. I have noted that there is no allegation as to any price or volume manipulation by the promoters. Therefore, I am of the opinion that purely from a securities market point of view, the severity of the offence could be considered not very grave.

While there may not be any allegation as to any price or volume manipulation by the promoters, it is possible to argue that an incorrect disclosure of shareholding amounts to indulging in fraudulent and unfair trade practice,[1] thereby misleading the investors and depriving of correct information at the relevant point of time to the shareholders and investors.

The words underlined above could be a possible defence available going forward to companies/promoters in cases where shareholding is incorrect and there is no allegation of any price manipulation, notwithstanding that the incorrect reporting of shareholding was deliberate.

-  Yogesh Chande

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[1] Section 15HA of the Securities and Exchange Board of India Act, 1992 read with applicable provisions of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 2003.

SAT on Disclosures Regarding “Promoters”

The Securities Appellate Tribunal (SAT) has issued its decision overturning an order of SEBI’s adjudicating officer that had found Enam Securities to have violated securities laws in connection with the IPO of Yes Bank.

One of the key issues in contention was whether Rabobank ought to have been disclosed as a “promoter” of Yes Bank. On facts, while the application to the Reserve Bank of India (RBI) for a banking licence recognised Rabobank as a co-promoter of the issuing bank, the prospectus filed with SEBI pursuant to which securities where issued did not disclose Rabobank as a promoter. After analysing the provisions of the erstwhile SEBI (Disclosure and Investor Protection) Guidelines, 2000, SAT came to the conclusion that the disclosure was indeed appropriate. It noted:

The appellant has been successful in demonstrating as to why Rabobank was shown as a co-promoter in its application for banking license with the RBI.  Simply because Rabobank was shown as a copromoter of Yes Bank for getting a banking license from the RBI will not ipso facto make it a promoter for the purposes of DIP guidelines or other regulations issue by the Board. To bring Rabobank within the promoter category, it must satisfy the definition of promoter as given in the DIP guidelines. There is no general definition of promoter in the DIP guidelines.

Although the SAT’s reasoning largely involves analysis of the erstwhile DIP Guidelines, they are likely to continue to have some impact under the SEBI (ICDR) Regulations that currently govern disclosures.

The fact that SEBI had not raised its concern while reviewing the draft red herring prospectus or other subsequent filings regarding the company seemed to weigh heavily on SAT:

If the Rabobank falls within the promoter category, we fail to understand how such a vital aspect escaped notice of the regulator while clearing the DRHP where Rabobank is not shown as a promoter.  We also fail to understand as to why the regulator continued to accept financial statements, quarter after quarter, year after year, without Rabobank being shown in the promoters’ category and why no action was initiated against Yes bank for making incorrect disclosure in the financial statements. In this background, no fault can be found with the merchant banker of exercising due care and diligence when Rabobank was not shown in the promoter category. 

Such an approach likely places a heavier burden on SEBI to scrutinize draft offer documents more carefully when filed with it.

SAT also did not find a failure on the part of Enam Securities on other aspects of the IPO process involving Yes Bank, including on discretionary allocation of shares in the qualified institutions category and other alleged irregularities in the allotment process.

Supplemental Shareholding Disclosure Norms

In its board meeting held on August 4, 2010, SEBI introduced three changes to its norms requiring disclosure of shareholding patterns of listed companies.

1. Listing: The first change relates to companies undertaking an IPO. The current regime requires disclosure of shareholding pattern in the offer document and thereafter (after listing) on a quarterly basis with the stock exchanges under the listing agreement. The new norms require companies to file shareholding pattern that exists one day prior to the date of listing, which must be available to stock exchanges before commencement of trading. This would ensure that information regarding the allocation of shares in the IPO is available to the investors prior to trading in the shares.

2. Corporate Actions: Any change in excess of 2% of the paid up shares capital of the company arising out of a corporate event should be disclosed within 10 days of such change. This will ensure the availability of updated information to investors following corporate events such as mergers, corporate restructuring or even rights issues (where all investors do not take up their entitlements).

3. Depository Receipts: Companies that have issued depository receipts (ADRs/GDRs) must now classify in their quarterly shareholding pattern the shares held by custodians as either ‘promoter/promoter group’ and ‘non-promoter’. This is perhaps the most significant in this round of changes. Since companies issue shares to the custodian (whose name is entered in their register of members), the identity of holders of the actual depository receipts is opaque to the issuing companies. Therefore, in their shareholding patterns, companies provide a composite disclosure of the total number of shares held through depository receipts, without providing any break-down of the receipt holders. However, this opacity has the potential of misuse because it has often been alleged that promoters of some Indian companies have been holding depository receipts (in addition to underlying shares) thereby providing a distorted picture of the companies’ shareholding pattern to its investors. The new requirement will make such shareholding transparent, and impose the onus on companies to prod beyond the custodian to determine the identity of depository receipt holders. This is yet another effort to curb the abuse of the ADR/GDR mechanism, with the previous instance relating to an amendment to the Takeover Regulation that imposed restrictions on ADRs/GDRs from exemptions under the those Regulations.