The Securities and Exchange Board of India (Sebi) has objected to a plan by Blackstone to reclassify the founders of Gokaldas Exports - the Hinduja family (not related to the London-based Hinduja Group) - as public shareholders, instead of promoters.
The US-based private equity major wanted to take the reclassification route to comply with the 25 per cent public shareholding requirement.
Bangalore-based textile exporter Gokaldas had approached the market regulator with the plan that it will reclassify six individuals from the Hinduja family, who own 20 per cent stake in the company, as minority shareholders so that Gokaldas becomes a public shareholding rules-compliant company.
According to the Sebi guidelines, private sector companies have to increase the public shareholding to 25 per cent and public sector companies have to do the same to 10 per cent. The deadline for private sector companies is June 2013 and for public sector companies is August 2013. Any company that wants to take any other route than those prescribed by Sebi - such as offer for sale, or bonus issue - for compliance has to seek the regulator's permission first.
According to insiders, two leading law firms made a representation to Sebi on behalf of Gokaldas on the plan, which said the Hinduja family was not the promoter anymore as it is involved in the day-to-day operations in Gokaldas and had handed it over to Blackstone in March 2011.
The Hindujas, however, continued to remain classified as promoters even after that. Gokaldas' lawyers have argued that as Hindujas didn't have the capacity to control the company now, they were not promoters.
According to the shareholding data on the Bombay Stock Exchange (BSE), the promoter holding in Gokaldas Exports stands at 88.27 per cent. Blackstone, which had acquired Gokaldas in August 2007, owns 68.27 per cent and the rest is owned by the Hinduja family members. Gokaldas had on December 20 made changes in its shareholders' agreement to remove the Hinduja family as promoters.
Sebi is wary of allowing reclassification of promoters as one of the routes for meeting the shareholding requirement as the main objective behind the rule was to increase public float. Sources said the reclassification of Hindujas as ordinary shareholders just ahead of the June 2013 deadline for meeting public shareholding requirement was being interpreted by Sebi as the rule not being followed in the right spirit.
An email sent to Sebi on this issue remained unanswered. Blackstone didn't offer any comments. A Hinduja family member confirmed that they were not promoters anymore.
Securities law experts said that the market regulator does not have the power to stop any company from reclassifying its promoters. However, they added, the government has given Sebi the powers to prescribe the modes for meeting the public shareholding requirement and it has all the powers to disapprove a route the company takes.
"Sebi cannot stop any company from reclassification of its promoters," said M S Sahoo, secretary, Institute of Company Secretaries of India (ICSI). "But the company will not get the benefit of it for meeting public holding requirement as it doesn't meet the objective. The company will have to dilute promoter holdings."
Pavan Kumar Vijay, managing director, Corporate Professionals, said, "Under normal circumstances, this method is not allowed. However, Sebi can grant exemptions on the merit of the case, like it did in the case of Wipro demerger