Sebi Suggests Revisiting Concept of ‘Promoter’; Moots ‘Person in Control’

Markets regulator Sebi on Tuesday proposed to rationalise the definition of 'promoter group' and move to the concept of 'person in control' as well as reduce the minimum lock-in periods for promoters and other shareholders post an IPO.

In a consultation paper, the watchdog has also suggested streamlining the disclosures required of group companies.

The Securities and Exchange Board of India (Sebi) has sought comments from the public on the proposals till June 10.

With regard to lock-in period, Sebi has proposed that if the object of the issue involves an offer for sale or financing other than for capital expenditure for a project, then the minimum promoters' contribution of 20  per cent 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.

However, shares held by promoters should be exempt from lock-in requirements after six months from the date of allotment in the IPO, only towards the purpose of achieving compliance with minimum public shareholding norms.

"Promoters' holding in excess of minimum promoters' contribution shall be locked in for a period of six months as opposed to the existing requirement of one year from the date of allotment in the IPO," Sebi suggested.

The entire pre-issue capital held by persons other than the promoters should be locked-in for six months from the date of allotment in the IPO as against the current requirement of one year.

In addition, the regulator has suggested rationalising the definition of 'promoter group' as the current definition focuses on capturing holdings by a common group of individuals or persons and often results in capturing unrelated companies with common financial investors.

Sebi noted that 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.

The regulator has proposed to do away with the current definition of promoter group specified in the ICDR (Issue of Capital and Disclosure Requirements) norms as the deletion would rationalise the disclosure burden and bring it in line with the post listing disclosure requirement.

The definition for promoter group under the ICDR rules stipulates that promoter group includes "any body corporate in which a group of individuals or companies or combinations thereof acting in concert, which holds 20 per cent or more of the equity share capital in that body corporate and such group of individuals or companies or combinations thereof also holds 20 per cent or more of the equity share capital of the issuer and are also acting in concert".

In respect of group companies, the regulator has proposed that only the names and registered office addresses of all the group companies should be disclosed in the Draft Red Herring Prospectus.

All other disclosure requirements like financials of top 5 listed or unlisted group companies, litigation, among others, in the draft papers, can be done away with.

However, these disclosures should continue to be made available on the websites of the listed companies.

Amid changing investor landscape in India, Sebi suggested that there is a need for revisiting 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 any disruption.

Also, increased focus on the quality of board and management has reduced the relevance of the concept of a promoter, Sebi said.

"Unlike the past, the concentration of ownership and control rights does 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," Sebi noted.

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, it added.

Moreover, a number of businesses, including new age and tech companies, are non-family owned and do not have a distinctly identifiable promoter group.

According to Sebi, the aggregate shareholdings of promoters in the top 500 listed entities in terms of market value, peaking at 58 per cent in 2009 and is showing a downward trend.

The promoters' shareholding was around 50 per cent in 2018. At the same time, the shareholding of institutional investors in the top 500 listed firms increased from about 25 per cent in 2009 to 34 per cent in 2018.

"Changes in nature of ownership could lead to situations where the persons with no controlling rights and minority shareholding continue to be classified as a promoter. By virtue of being called promoters, such persons may have influence over the listed entity disproportionate to their economic interest, which may not be in the interests of all stakeholders," Sebi noted.

The shift from the concept of 'promoter' to the concept of 'person in control' may have implications on laws administered by other regulators such as the MCA, RBI, and IRDAI, the regulator pointed out.

Given that the freezing of promoter holdings is presently an important tool of enforcement in the securities market, the shift would also necessitate reorientation of enforcement strategies, it added.