Section 194N Exemption for Foreign Representations: Key Highlights of the New Income-Tax Notification

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  On 28th November 2024 , the Ministry of Finance issued Notification No. 123/2024 , bringing clarity to the applicability of Section 194N of the Income-tax Act, 1961. The notification exempts specified foreign representations from the provisions of this section, reinforcing India's commitment to international diplomatic norms and global cooperation. Effective from 1st December 2024 , this move comes after due consultation with the Reserve Bank of India (RBI) and aligns with international protocols such as the Vienna Convention and the United Nations Privileges and Immunities Act . Understanding Section 194N of the Income-tax Act Section 194N mandates tax deduction at source (TDS) on cash withdrawals exceeding ₹1 crore in a financial year . The provision applies to withdrawals from banks, co-operative banks, and post offices, aiming to curb cash usage and promote digital transactions. Fifth Proviso to Section 194N The fifth proviso grants the Central Government the authority ...
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Understanding SEBI’s Informal Guidance on the Classification of Nominee Shareholders as Promoters under LODR Regulations

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Introduction

In India’s regulated financial environment, public companies listed on the stock exchange are required to follow strict disclosure standards. Recently, CMS Info Systems Limited sought informal guidance from the Securities and Exchange Board of India (SEBI) on classifying nominee shareholders in accordance with SEBI’s Listing Obligations and Disclosure Requirements (LODR) Regulations and the Issue of Capital and Disclosure Requirements (ICDR) Regulations. SEBI's response clarified various provisions regarding the classification of nominee shareholders as promoters and the process of reclassification. This blog delves into SEBI’s guidance, the relevant regulations, and what it means for listed entities and their shareholders.

Background: The CMS Info Systems Case

CMS Info Systems Limited, a listed company, initially held its shares through Sion Investments Pte. Limited, its primary promoter. To meet the minimum shareholder requirements outlined in the Companies Act, six nominee shareholders held one share each on behalf of Sion before the company's IPO. These shares were held solely for compliance purposes, without any actual ownership or financial interest by the nominees, who acted as "Nominee Shareholders."

However, post-IPO, the nominee shares were transferred back to Sion as their purpose had been served. Following this, CMS Info Systems sought SEBI’s guidance on whether these nominee shareholders should be considered part of the promoter or promoter group under the LODR and ICDR regulations, and if they require reclassification after returning the shares to Sion.

Key Regulatory Provisions: LODR and ICDR Regulations

The following SEBI regulations are central to understanding this case:

  • Regulation 2(1)(oo) and 2(1)(pp) of the ICDR Regulations: Define the terms “promoter” and “promoter group.”

    • A promoter is defined as anyone who has been named as such in the offer document or who exercises control over the company, either directly or indirectly.
    • The promoter group includes immediate relatives of the promoter, subsidiaries, and other companies in which the promoter holds a significant interest.

  • Regulation 31 of the LODR Regulations: Requires listed entities to disclose their shareholding patterns, with promoters and promoter groups disclosed separately.

  • Regulation 31A of the LODR Regulations: Governs the reclassification of individuals from promoters to non-promoters, subject to SEBI and stock exchange approval.

SEBI’s Informal Guidance: Addressing CMS Info Systems’ Queries

CMS Info Systems posed three specific questions to SEBI for guidance:

Query 1: Do the nominee shareholders qualify as part of the promoter or promoter group?

SEBI’s response: SEBI clarified that nominee shareholders would be considered part of the promoter or promoter group only if they meet the definition of “promoter” or “promoter group” under Regulation 2(1)(oo) and 2(1)(pp) of the ICDR Regulations. In this case, nominee shareholders do not exhibit control over the company nor have beneficial interest in the shares, thus falling outside the promoter group’s definition.

Query 2: Should nominee shareholders be disclosed in the shareholding pattern as part of the promoter or promoter group?

SEBI’s response: Under Regulation 31 of the LODR, companies must disclose promoter and promoter group shareholdings in their quarterly filings. If the nominee shareholders fall under the promoter or promoter group definition, their holdings must be disclosed as part of that group. If not, a note indicating that these shares are held by nominees on behalf of Sion can be added for clarification.

SEBI further advised that any additional shares acquired by nominee shareholders for personal use should be classified based on whether they meet the “promoter” criteria, either under the promoter group or public category.

Query 3: Do nominee shareholders need to apply for reclassification to be removed from the promoter group?

SEBI’s response: SEBI confirmed that if nominee shareholders qualify as part of the promoter or promoter group, they must follow the reclassification procedure outlined in Regulation 31A of the LODR Regulations before being removed from that category.

Key Takeaways for Listed Companies and Shareholders

1. Clarifying Nominee Shareholder Roles

  • Nominee shareholders holding shares purely to meet regulatory requirements, without any beneficial ownership, control, or influence, may not need to be classified as part of the promoter group.

2. Clear Disclosure Practices

  • For transparency, companies can clarify in the notes section of their shareholding disclosures that certain shares are held by nominee shareholders on behalf of the promoter.

3. Reclassification Requirements

  • If nominee shareholders are inadvertently categorized under the promoter group, they must apply for reclassification through SEBI’s formal process to align with regulatory standards.

4. Avoiding Multiple Disclosures

  • SEBI’s guidance emphasizes the importance of consolidating shareholding data to prevent redundant disclosures, ensuring a clear representation of actual promoter ownership.


References

  • SEBI (LODR) Regulations, 2015
  • SEBI (ICDR) Regulations, 2018
  • SEBI Master Circular on LODR Compliance, July 11, 2023

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