The Securities Contracts Regulation Rules, 1957 mandates a listed entity to have a minimum public float of shares constituting 25% of the total issued capital of the entity (“MPS Norms”). Such requirement, which provides for a bare minimal level dispersed shareholding in companies that avail the benefit of listing its securities, is ended towards ensuring that entities that undergo listing by virtue of initial public offerings, and avail the benefit of infusion of public funds, corner shares by virtue of open market acquisitions for the promoter / promoter group entities.

The Securities and Exchange Board of India (“SEBI”), has time and again vide circulars, intimated listed companies the requirement to comply with the MPS Norms, and has provided for the modes by which listed entities that have more than 75% shareholding vested in promoters / promoter group entities can bring down such holding, and consequently increase the public float. Further, SEBI has taken action against errant directors of listed entities that fall foul of the MPS Norms such as restricting such directors from holding important positions in listed entities, the freezing of their Demat accounts, etc. However, in light of continued non-compliance, SEBI vide Circular dated October 10, 2017 (“Circular”), has mandated stock exchanges to monitor compliance of listed entities with MPS Norms, and upon observing violation thereof, take the following actions –

  1. Levy a monetary fine of Rs. 5000 per day of non-compliance and deposit such amounts into the Investor Protection Fund maintained by SEBI.
  2. Notify the directors / promoters / promoter group entities that they shall not be permitted to hold the position of director in any other listed entity.
  3. Intimate depositories to freeze the entire shareholding of the promoter and promoter group in such listed entity till the date of compliance by such entity.

Further, upon continuation of violation of MPS Norms by entities identified by stock exchanges in spite of the above mentioned deterrents, the stock exchanges have been directed to –

  1. Levy a monetary fine of Rs. 10,000 per day of non – compliance and deposit such amounts into the Investor Protection Fund maintained by SEBI.
  2. Intimate depositories to freeze all the securities held in the Demat account of the promoter and promoter group till the date of compliance by such entity.

The Circular further posits that upon continued non-compliance of MPS norms, the stock exchanges may, at their discretion, proceed with the compulsory delisting of the entity in violation as per applicable law.

Such measures, the regulator is of the opinion, shall act as a sufficient deterrent against the promoter / promoter group of listed entities from cornering shares of the entity for themselves while simultaneously reaping the benefits of listing of its shares and the infusion of public funds therein.

Disclaimer: The information provided in this update is intended for informational purposes only and does not constitute legal opinion or advice. Readers are requested to seek formal legal advice prior to acting upon any of the information provided herein. This update is not intended to address the circumstances of any particular individual or corporate body. There can be no assurance that the judicial/ quasi-judicial authorities may not take a position contrary to the views mentioned herein.