BACKGROUND:

SEBI came out with the discussion paper which reduces minimum lock-in period for promoters after IPO, agrees to controlling shareholder’s concept. Markets regulator SEBI proposed to rationalise the definition of ‘promoter group’ and move to the concept of ‘person in control’ as well as lower the minimum lock-in periods for promoters and other shareholders after an IPO.

Why is SEBI moving towards the new system?

The regulator said this shift is necessitated by the changing investor landscape in India where concentration of ownership and controlling rights do not vest completely in the hands of the promoters or promoter group because of the emergence of new shareholders such as private equity and institutional investors.

Symbolic Changes For Promoters Under Listing Regulations

The investor focus on the quality of board and management has increased, thereby reducing the relevance of the concept of promoter, SEBI said in a consultation paper last week. Governance practices have become the keyword in boardrooms and boards have become more professional with the arrival of independent directors and the structure of board composition. Besides, there are various committees in the board, including audit and remuneration, for transparent functioning of the affairs of a listed company.

Increasingly, there is focus on better corporate governance with the responsibilities and liabilities shifting to the board of directors and management. Shareholders now look to the board of directors and management to protect their rights and add value, while discharging their duties. This increased focus on quality of board and management has also reduced the relevance of the concept of promoter.

INTRODUCTION:

Who is a Promoter?

A promoter conceives an idea for setting-up a particular business at a given place and performs various formalities required for starting a company. The persons who assist the promoter in completing various legal formalities are professional people like Counsels, Solicitors, Accountants etc. and not promoters.

Promoter

Regulations 2(1)(za) and (z) of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (hereinafter referred to as ‘ICDR Regulations’) define promoter and promoter group as under: (za) “promoter” includes:

(i) the person or persons who are in control of the issuer;

(ii) the person or persons who are instrumental in the formulation of a plan or programme pursuant to which specified securities are offered to public;

(iii) the person or persons named in the offer document as promoters: Provided that a director or officer of the issuer or a person, if acting as such merely in his professional capacity, shall not be deemed as a promoter: Provided further that a financial institution, scheduled bank, foreign institutional investor and mutual fund shall not be deemed to be a promoter merely by virtue of the fact that ten per cent or more of the equity share capital of the issuer is held by such person; Provided further that such financial institution, scheduled bank and foreign institutional investor shall be treated as promoter for the subsidiaries or companies promoted by them or for the mutual fund sponsored by them;

Need for review:

As the present regulatory framework does not prescribe criteria for re-classification, it is proposed to prescribe specific criteria to lend objectivity to the process of reclassification of promoters of listed companies as public shareholders under various circumstances.

Proposed Policy Framework:

An entity belonging to promoter / promoter group of listed companies may re-classify its shareholding to public category under the following three scenarios, subject to certain conditions as stated thereafter: I. Pursuant to an open offer under the SAST Regulations or on account of an exemption granted by SEBI under the said Regulations. II. In case of a separation agreement – The said agreement shall be duly registered under the Registration Act, 1908 or the material terms of the separation agreement should be disclosed to the stock exchanges, prior to the reclassification. III. The promoter along with the entire promoter group to which the promoter belongs, taken together, holds less than 5% shares in the company (including any convertibles/outstanding warrants/ADR/GDR Holding).

SEBI reduces minimum lock-in period for promoters after IPO, agrees to ‘controlling shareholders’ concept

The market watchdog has decided to streamline the disclosure requirement of group companies.

♦ The Securities and Exchange Board of India (SEBI) on August 6 eased the lock-in period for promoters’ investments after stock market listing of the company from three years to 18 months subject to certain conditions.

The market watchdog has also decided to streamline the disclosure requirement of group companies.

♦  SEBI approved relaxation of lock-in requirement for promoter’s shareholding in IPO/FPO if the object of the issue involves only offer for sale, fundraising other than for capital expenditure, for a project.

The board also agreed in principle to the proposal for shifting from the concept of the promoter to ‘person in control’ or ‘controlling shareholders’ in a smooth, progressive and holistic manner.

♦  To this effect, it has been decided to engage with other regulators to ascertain and resolve regulatory hurdles, if any, prepare draft amendments to securities market regulations and analyse the impact of the same and further deliberate at the SEBI’s primary market advisory committee (PMAC) and develop a roadmap for implementation of the proposed transition.

The board noted that the investor landscape is now changing, with private equity and institutional investors holding significant shareholding in listed companies.

“In recent years, a number of businesses and new-age companies with diversified shareholding and professional management that are coming into the listed space are non-family owned and/or do not have a distinctly identifiable promoter group,” the board said.

♦  “The proposal to replace the concept of Promoter with ‘person(s) in control’ or ‘controlling shareholders’ may turn out to be a step in the right direction, which takes into account the changing business practices in today’s day and age. However, it will have a direct impact on various legislations and may lead to serious interpretational issues, unless corresponding changes are made across other legislations, and objective changes are made to the meaning of the term ‘control’. Having said that, this change is intended to depart from the traditional owner-manager concept and practices, and move to a more practical and objective approach particularly since the concept of professional management is gaining momentum in India.”

The board has also decided to approve ways to reduce the disclosure requirements at the time of IPO. These measures include rationalising the definition of the promoter group, in the case where the promoter of the issuer company is a corporate body, to exclude companies having common financial investors.

In addition, the disclosure requirements in the offer documents, in respect of group companies of the issuer company, should be rationalised to exclude disclosure of financials of top 5 listed or unlisted group companies.

These disclosures will continue to be made available on the website of the group companies.

♦ The change in regulatory framework for the promoter and promoter group is a boost to the start-up fraternity and their investors. “Going forward, more changes should follow including simpler due diligence process for such companies. This well-timed initiative augurs well for over 50 unicorns in India, and can constitute 10-20 percent market capital of the whole industry,” he said.

♦ Relaxations proposed by SEBI in relation to disclosure requirements under the Takeover Regulations are a welcome change. “It will reduce the compliance burden on promoters and acquirers significantly due to the ‘System Driven Disclosures’ process which is already in place. More importantly, it will reduce human intervention as the data would get aggregated at the depository level and therefore, should leave little or no scope for clerical errors or possible data manipulation,”

“The discussion paper is a step towards empowering the regulator (SEBI) as the Indian bourses are about to see listing of start-ups with Zomato being the first among the several such unicorns. According to one estimate, these Indian unicorns are valued close to $150-160 billion and unlike conventional shareholding patterns, promoters do not hold a substantial controlling stake in such entities. Invariably, institutional investor’s collectively holding larger stakes in such unicorns calls for the regulator to play a more proactive role with some of these institutions that may be beneficially owned by neighbouring countries.”

For Non-promoter holding the lock period requirement is being proposed to be reduced to six months from 1 year will surely boost pre-IPO investments, which is good for the Markets, as investors can encash their returns or have early exit route.

♦The SEBI board gave its nod to begin the method of fixing the idea of ‘promoters’ to ‘individual in management’ or ‘controlling shareholders’ and requested the regulator to arrange a street map in session with their counterparts. “Lately, variety of companies and new age corporations with diversified shareholding {and professional} administration which can be coming into the listed area are non-family owned and/or wouldn’t have a distinctly identifiable promoter group,” SEBI stated.

For example, within the lately listed Zomato, there are not any identifiable promoters, NSE information confirmed. Its early backers like Data Edge and Alipay (an arm of Alibaba of China), Deepinder Goyal, the founder in addition to Uber BV, that bought its meals supply enterprise to it lately, are all listed as public shareholders. Historically, a lot of the bluechips like Reliance Industries, TCS, HDFC Financial institution and a number of other others have promoters. The exceptions embody HDFC, ICICI Financial institution, ITC and L&T.

The board additionally determined to halve the 20% lock-in of promoter holding in newly listed corporations to 18 months from three years and for non-promoters for six months from one year.

♦SEBI on additionally scrapped the requirement of exposing post-facto nod for acquisitions between 2-5% shareholding in market infrastructure establishments. “The inventory exchanges, clearing firms and depositories shall put in place applicable mechanism to make sure compliance with match and correct standards,”

SEBI additionally merged two laws — Concern of Sweat Fairness Laws, and Share Based mostly Worker Advantages Laws — into a brand new one known as SEBI (Share Based mostly Worker Advantages and Sweat Fairness) Laws, 2021.

SEBI looks to do away with the promoters Concept:

With the concept of promoters slowly losing its relevance in India Inc, SEBI has proposed doing away with the classification of ‘promoter’ concept and moving to ‘person in control’ system and scrapping the ‘promoter group’. The markets regulator is expected to come out with the new regime soon, paving the way for a major change in the way the promoters and over 4,700 listed corporates function in the country.

What has SEBI proposed?

The regulator has proposed the shifting of the concept of ‘promoter’ to ‘person in control’. SEBI’s ICDR Regulations define a “promoter” as a person who has been named as such in the offer document or in the annual return of the issuer or a person who has control over the issuer (directly or indirectly) or in whose advice, directions or instructions the board of directors of the issuer is accustomed to act. Thus, the definition of promoter is wide-ranging and goes beyond persons in control of the issuer. The concept of promoter is used in a number of regulations issued by SEBI and other regulatory authorities.

Why is the system of ‘promoter group’ being scrapped?

The definition of the ‘promoter group’ focuses on capturing holdings by a common group of individuals or persons and often results in capturing unrelated companies with common financial investors, SEBI says.

Capturing the details of holdings by financial investors while being a challenging task, may not result in any meaningful information to investors. Further, post listing, it is more relevant to identify and disclose related parties and related party transactions. Accordingly, this deletion should rationalise the disclosure burden and bring it in line with the post listing disclosure requirements.

Further, the Companies Act, 2013 has incorporated a definition of promoter in Section 2 (69). However, it does not define a promoter group. The definition for promoter group has been provided in Regulation 2(pp) of the ICDR 2018 of the SEBI.

Is the promoter landscape changing?

The investor landscape in India is now changing. Unlike the past, the concentration of ownership and controlling rights do not vest completely in the hands of the promoters or the promoter group. There has been a significant increase in the number of private equity and institutional investors who invest in companies and take up substantial shareholding, and in some cases, control. Such private equity and institutional investors invest in unlisted companies and continue to hold shares post listing, many times being the largest public shareholders, having special rights on the listed company, such as the right to nominate directors, SEBI says.

SEBI pitches for ‘person in control’ over ‘promoter’:

Markets regulator SEBI proposed to rationalise the definition of ‘promoter group’ and move to the concept of ‘person in control’ as well as lower the minimum lock-in periods for promoters and other shareholders after an IPO.

With regard to lock-in periods, SEBI has proposed that if the objective of the issue involves offer for sale or financing other than for capital expenditure for a project, then the minimum promoters’ contribution of 20% should be locked-in for one year from the date of allotment in the Initial Public Offer (IPO). Currently, the lock-in period is three years.

Conclusion:

Citing the changing investor landscape, SEBI said there was a need to revisit the concept of ‘promoter’ to a concept of ‘person in control’ and a period of three years has been proposed for such a shift over in a smooth and progressive manner without causing disruption.

“Unlike the past, the concentration of ownership and controlling rights does not vest completely in the hands of the promoters or promoter group. There has been a significant increase in the number of private equity and institutional investors who invest in companies and take up substantial shareholding, and in some cases, control,” SEBI noted. Such investors invest in unlisted firms and continue to hold shares post listing, many times being the largest public shareholders, having special rights, such as the right to nominate directors, it added.

Aggregate promoters’ holdings in the top 500 listed firms by market value, peaked at 58% in 2009 and is on a downward trend.

Bibliography

https://timesofindia.indiatimes.com/business/india-business/sebi-looks-to-do-away-with-promoter-concept/articleshow/85114108.cms

https://www.financialexpress.com/market/sebi-wants-to-eliminate-promoters-proposes-changing-corporate-ownership-terminology-explained/2251285/

https://indianexpress.com/article/explained/why-does-sebi-want-to-reclassify-promoters-7316685/

https://www.sebi.gov.in/sebi_data/attachdocs/1419934886654.pdf

*****

Disclaimer: Absolute care is taken to prepare this article; however, inadvertently if any errors occur then the Author(s) shall not be held responsible for any such cause. The content published is only for educational purpose and shall not be construed as the rendering of any Professional Advice in any manner whatsoever. Readers must exercise their own judgment and refer the original source before any implementation. Further, the Content is an original work of the author and may be used only after written permission.

About the firm: Jaya Sharma and Associates is a firm of Practicing Company Secretaries located in Mumbai, Maharashtra, India that specializes in solving the complexities of corporate laws and company secretarial practice promptly and correctly with an attention to detail and personal services catering to pan-India and foreign clients. The peer-reviewed firm specializes and adheres to the parameters of quality control systems and guidelines as prescribed by the regulatory body.

FCS Jaya Sharma-Singhania, Founder & Mentor has been listed as one of the Top Best Ten Women Legal Consultants in India 2021 by Women Entrepreneur Magazine. 

Mehul Solanki and Ishita Samani

Mehul Solanki and Ishita Samani

Mehul Solanki is a commerce and law graduate having more than four years of working experience in company law compliances, setting-up companies, compliances of listed companies and not-for-profit companies. He is currently Research Associate & Start-up Consultant at Jaya Sharma & Associates and has authored various articles on corporate and securities law related topics which have been published on various websites, blogs and professional magazines including Compliance Calendar, Taxguru, Legal Service India and journal of ICSI etc.

Ishita Samani holds a commerce background and is a law graduate having two years of working experience in corporate laws and compliances and one year of working experience in the field of Sales & Marketing. She is currently a Compliance Associate at Jaya Sharma & Associates and believes that “Dedication and Hard work is the key to Success”. She has also made contribution in various articles on corporate and securities law related topics which have been published on various websites, blogs including Compliance Calendar, Taxguru,etc.

Creating Visionary Leaders Beyond Compliance 

www.jsa-cs.com

Tags:

Author Bio

More Under SEBI

Leave a Comment

Your email address will not be published. Required fields are marked *

Search Posts by Date

September 2021
M T W T F S S
 12345
6789101112
13141516171819
20212223242526
27282930