How can Promoters hold shares in a listed company but still ensure that they are not counted as part of Promoters’ holding for purposes such as Takeover Regulations which place various limits over creeping acquisitions, maximum holding, etc.?

While there could be many ways, but to talk of something current, if one goes by comments (   here   ) by CNBC’s correspondent Sajeet Manghat regarding RIL , it seems Reliance has as per this report done something that   appears to   achieve   this  .

  Sajeet says:-

“RIL has nearly 14% of its equity under treasury stock and classified under promoter and PAC. The treasury stock is held under petroleum trust and eight corporate bodies. RIL has converted eight corporate bodies into its subsidiaries. Subsidiaries lose promoter status and voting rights under regulations. …. Promoter stake has fallen to 44.8% from over 51%. Post warrant conversion, RIL promoter stake has gone up to 49%. RIL promoter voting right also goes up to 52%. …“   

The report talks of many things but one thing that is relevant is regarding conversion of certain corporate entities holding shares of RIL and forming part of the Promoters Group of RIL into subsidiaries of RIL. Thus, by doing this, such holding went out of the “legal” holding of the Promoters.

What does this mean in terms of basis of law and some coDSEquences? Let us discuss this conceptually   and   academically,   avoiding facts in RIL’s and their Promoters’ case which are not known.

The SEC Takeover Regulations and other legal requirements consider the Promoters’ shareholding in a listed company and place various types of controls over them. Such Promoters Group may consist of corporate entities too.

  Section 42 of the   Companies Act, 195  6   essentially   deals with restrictions on holding of shares   in the parent   company   by a subsidiary and also provides that shares already held by the subsidiary in the parent   would not carry any voting rights.   

Thus, if one of the companies forming part of the Promoters Group of a listed company becomes a subsidiary of such listed company, the shares held by such subsidiary lose voting rights in the manner stated in Section 42. 

SEC Takeover Regulations define shares as only those that carry voting rights. The argument possible therefore (though not without some weak points) is that the shares held by the corporate entity that is now a subsidiary of the parent would not carry any voting rights and therefore would not be counted as shares for the purposes of the Takeover Regulations. 

  Several questions arise   from the above   with interesting coDSEquences.   Can the   Promoters   hold more than 55% shares and thus   avoiding   the upper limit? Can the   Promoters   acquire shares through such subsidiary and thus avoid the 5%   creeping acquisition limits? And so on.

It is interesting to see how two wholly unconnected provisions of law can join up to create a unique situation!

  Jayant Thakur  , CA