In light of the powers accorded to the Government of India under Section 30 of the Securities Contracts (Regulation) Act, 1956; and in furtherance of its public policy goals to ensure that an additional degree of care is embedded into the system with regard to public shareholding, the Securities Contracts (Regulation) Rules, 1957 (“Rules“) were enacted by the Government of India. These Rules lay down the procedure for applications that stock exchanges may make to the Securities and Exchange Board of India in order to be recognised, the fees required to be paid for such applications, and the documents and particulars required for this purpose as well. The Rules also detail the qualifications for the membership of a recognised stock exchange, their compliances and disclosure requirements, and the requirements with respect to the listing of securities on such recognised stock exchanges.
On January 2, 2023, the Ministry of Finance, Government of India introduced some significant amendments to the Rules. By way of this amendment, the erstwhile definition of “government company” was over-written by the definition of government company contained in the Companies Act, 2013 (“Companies Act“).
Earlier, the Rules defined a government company to mean any company in which at least 51% (fifty-one per cent) of the share capital is held by the Central Government/ any state Government(s)/ partly by the Central Government and partly by one or more State Governments.
Section 2(45) of the Companies Act, with which this definition has now been aligned, defines a government company to mean any Company in which at least 51% (fifty-one per cent) of the paid-up share capital is held by the Central Government/ any State Government(s)/ partly by the Central Government and partly by one or more State Government(s); and includes a company which is a subsidiary company of such a government company.
It is essential to highlight that Section 2(87) of the Companies Act defines a “subsidiary company”, in relation to any other company (i.e., the holding company) to mean a company in which such holding company controls the composition of the board of directors; or exercises or controls more than one-half of the total voting power either at its own or together with one or more of its subsidiary companies.
Accordingly, this aforesaid prong of the amendment to the Rules provides clarity on the crucial point of determination of the cumulative shareholding of the government in a company; and resolves the pre-existing disparity in the definitions. It is now clear that the cumulative shareholding will now be based on the total voting power flowing to the government (both directly and indirectly).
Additionally, an amendment was also made to Rule 19A(6) of the Rules. Rule 19A of the Rules requires listed companies (other than public sector companies) to maintain a minimum public shareholding of 25% (twenty-five per cent) or higher and details other matters in relation thereto. Public shareholding is defined as equity shares of the company held by persons other than the promoter/promoter group; or subsidiaries/associates of the company. Prior to the amendment, Rule 19A(6) of the Rules empowered the Central Government to exempt any listed public sector company from any or all provisions of Rule 19A (a “public sector company” is defined by the Rules as a body corporate constituted by an act of Parliament or any state legislature, and includes a government company).
However, the amendment to the Rules now enables the Central Government to, in public interest, exempt from the provisions of Rules 19A, any listed entity in which the Central Government or State Government or public sector company, either individually or in any combination with the other, holds (directly/indirectly) a majority of the shares or voting rights or control of such listed entity. Additionally, an explanation stating that such an exemption would continue to be valid for the period specified therein, regardless of any change in control of the listed entity (after the exemption is issued), was also incorporated into the Rules.
This increases the ambit of entities to whom such exemptions may be granted; and affords to the government the opportunity to carry out its disinvestments in a more strategic manner. It also addresses the ambiguity that was prevalent prior to the amendment in relation to the definition of “government company”. Overarchingly, it restates the Indian government’s intention to carry out changes at the most granular level to ensure public money (and consequently, public interests) are adequately safeguarded.