Who is a ‘sponsor/promoter’ – the capital market conundrum – (December 2011, Issue 2)

December 12, 2011, by Junayed Chowdhury

Lately, the Bangladesh stock markets have been a classic case of bubble-burst. In early 2011, the General Index of Dhaka Stock Exchange (DSE) slumped by 660 points and Selective Categories Index of the Chittagong Stock Exchange (CSE) by 914 points, that forced the Securities and Exchange Commission (SEC) to instruct the exchanges to suspend trading[i]. Since then the stock market has largely failed to return the retail investors‟ capital investments resulting in widespread agitation and criticism.

 

Recently, to boost up the market, the SEC has unveiled a market rejuvenation package with a special scheme for small investors to help them recoup their losses[ii]. As part of this market rejuvenation package, the SEC has issued a notification[iii] (“the November Notification”) to the effect that sponsor and directors of listed companies will now have to own at least 30% stakes in their respective companies.

 

The November Notification states, among others, that (a) all sponsors/promoters and directors of a listed company shall all time jointly hold minimum 30% shares of the paid-up capital of the company and (b) each director other than independent director(s) of any listed company shall hold minimum 2% shares of the paid up capital of the company.

 

The pivotal question regarding the November Notification is that what is meant by sponsors/promoters? The terms “sponsors‟ and “promoters‟ are not defined in the November Notification. Also these terms are not defined in any of the relevant securities laws[iv] .

 

In the absence of a defined parameter of the terms “sponsors/promoters” a specific problem arises. For example, sponsors A, B and C, who are all corporate entities, incorporate Company X, which is listed in the DSE. A, B and C each holds 20% of the paid up equity of Company X. The nominee directors of A, B and C individually holds 2% paid up equity of Company X. Therefore, under the November Notification, all sponsors/promoters and directors of Company X collectively hold 66% shares of the paid up capital of Company X. Let us assume that A, B and C each has one 100% subsidiary – X, Y and Z respectively, who own 1% each of the paid up equity of Company X and the remaining shares of Company X are held by the public. Now, A, B and C each wishes to sell 13% shares out of the 20% of their respective shareholding. The result is that in postsale situation, A, B and C would have 7% shareholding Company X and together with their nominee directors‟ collective 6% shareholding, the total shareholding of A, B and C and their nominee directors would be 27%.

 

Would A, B and C be allowed to sell 13% of their respective 20% shareholding? Would this be violative of the November Notification? A, B and C may argue that the 1% shareholding of X, Y and Z shall be regarded as part of the equity of sponsors/promoters under the November Notification, thereby satisfying the requirement of maintaining 30% shares in the paid up capital of Company X.

 

Can it be said that X, Y and Z are also part of the term sponsors/promoters under the November Notification? Certainly X, Y and Z are associate[v] companies of A, B and C respectively under the Securities and Exchange Commission (Public Issue) Rules 2006 as 100% of X, Y and Z are owned by their parent companies A, B and C and over which A, B and C have complete control. A, B and C may argue that as per a SEC notification of October 2011[vi] (“the October Notification”), X, Y and Z are part of the “sponsor/promoter group”. Then, two questions come – firstly, what is meant by “sponsor/promoter group” as used in the October Notification and secondly, whether the term “sponsors/promoters” used in the November Notification also includes “sponsor/promoter group”. The October Notification also does not define the term “sponsor/promoter group”. In fact, this term is not defined anywhere else.

 

The term “sponsor/promoter” may be defined as ‘any person who, acting alone or in conjunction with one or more other persons, directly or indirectly takes initiative in founding, incorporating and organizing the business of an issuer’. Under this sample definition A, B and C would be regarded as “sponsor/promoter”. But the problem of this sample definition is that it does not cover the subsidiary situation and thus under this definition X, Y and Z will not be regarded as “sponsor/promoter”. To bring these subsidiaries under the umbrella of “sponsor/promoter” the definition must include the concept of “group companies”. Under Bangladeshi company or securities laws, however, there is no separate branch dealing with corporate groups[vii].

 

The scenario gets complicated by section 14A of the Banking Companies Act 1991[viii]. How does the November Notification work in view of section 14A of the Banking Companies Act 1991?

One way to look at this problem is to say that section 14A of the Banking Companies Act 1991 talks about concentration of shares in the hands on one person, company or a family[ix] and the November Notification talks about collective holding of shares by the promoter/sponsor. In other words, in case of our example, A, B and C cannot individually hold more than 10% of shares of Company X under section 14A of the Banking Companies Act 1991 and under the November Notification, their collective shareholding must remain at 30%. However, the above ratio does not seem to work in group-of-companies situation. For example, what about X, Y and Z (subsidiaries of A, B and C) who hold 1% each in Company X? Under section 14A of the Banking Companies Act 1991, would X, Y and Z, being 100% subsidiaries, be regarded as member of A, B and C respectively? If yes, then it appears that A, B and C each would be regarded as holding (jointly with X, Y and Z respectively) 11% of Company X, which may be a violation of section 14A of the Banking Companies Act 1991. Again, the November Notification does not deal with this important issue concerning banks that are listed in the stock exchange.

Thus, from an interpretative perspective, there remain ambiguities in the SEC‟s Notifications dated 22.11.2011 and 02.10.2011 and transaction planners should be careful while structuring a transaction favouring the promoters of a listed company.

 

Written by Junayed Chowdhury, Managing Partner  

 

† Disclaimer: The opinions and comments expressed in this Blawg are not to be regarded or construed as legal advice by and from Vertex Chambers or any of its members. It is highly advisable that any person should seek independent legal advice before relying on any of the contents of this Blawg.

[i] See http://www.thedailystar.net/newDesign/news details.php?nid=169630

[ii] See http://www.thefinancialexpressbd.com/more.php?new s_id=157112

[iii] SEC Notification dated 22.11.2011 bearing reference No. SEC/CMRRCD/2009-193/119/Admin/

[iv] The only reference to the term “sponsor” (ÔÔD‡`¨v³v) is in Securities and Exchange Commission (Mutual Fund) Rules 2011, which define the term as follows: ÔÔD‡`¨v³vÕÕ A_© †Kvb ‡Kv¤úvbx, e¨vsK, Avw_©K ev exgv †Kv¤úvbx, mswewae× ms¯’v, wbewÜZ dvÛ, h_v-Uªv÷ dvÛ, †iwR÷vW© cÖwf‡W›U I †cbkb dvÛ, Kwgkb KZ©„K wbewÜZ m¤ú` e¨e¯’vcK †Kv¤úvbx ev Kwgk‡bi Aby‡gv`b mv‡c‡¶ Ab¨ †Kvb cÖwZôvb †h GKKfv‡e ev Ab¨ †Kvb †Kv¤úvbx, e¨vsK, Avw_©K ev exgv †Kv¤úvbx, mswewae× ms¯’v, wbewÜZ dvÛ, h_v-Uªv÷ dvÛ, †iwR÷vW© cÖwf‡W›U I †cbkb dvÛ, Kwgkb KZ©„K wbewÜZ m¤ú` e¨e¯’vcK †Kv¤úvbx ev Kwgk‡bi Aby‡gv`b mv‡c‡¶ Ab¨ †Kvb cÖwZôvb Gi mwnZ wjwLZfv‡e wgDP¨yqvj dvÛ MVb K‡i|

It is to be noted that the earlier Securities and Exchange Commission Public Issue Rules 1998 defined the term “sponsors” as “any persons who form a company”. However, this definition was subsequently taken out from the Securities and Exchange Commission (Public Issue) Rules 2006.

[v] See Securities and Exchange Commission (Public Issue) Rules 2006 – “associate” means … a body corporate over which the directors or subscribers to the Memorandum of Association and Articles of Association can exercise significant influence or control”.

[vi] See SEC Notification dated 02.10.2011 bearing reference No. SEC/CMRRCD/2009-193/114/Admin where it is stated inter alia that in case of issuance of further security, “sponsor/promoter group” should maintain a minimum post-issue shareholding of thirty percent (30%) of the total paid up capital of the company at least for three years from the date of according consent

[vii] Although not clearly stated or dealt within the text, the Securities and Exchange Commission (Public Issue) Rules 2006 talks about associate companies (see footnote 5 above); Also the Companies Act 1994 talks about subsidiary company (See section 2(2)) while dealing with holding-subsidiary relationship.

[viii] Section 14A(1) states that the shares of bank shall not be concentrated on any person, company or members of a family and no person, company or members of a family shall buy more than 10% of the

[ix] Family includes wife, husband, father and mother, sons and daughters, brothers and sisters and all those who are dependent on such person (See the Explanation in section 14A of the Banking Companies Act 1991).