Commentary on SEBI Consultation Paper on “Review of the Regulatory Framework of Promoter, Promoter Group and Group Companies as per Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018”

I. Summary of the paper

An assessment of the applicability of the ‘concept of promoter’ for the Indian Securities market has been established by the Primary Market Advisory Committee (PMAC). The suggestion has emerged with the result that more than one person or person controls the entity migrate from the traditional Indian structure to the current ownership structure. A subset of participants, such as investors, legal firms industrial organisations, and business groups, engaged intensively with the subset. The subgroup also researched several jurisdictions abroad. As a conclusion, SEBI published a consultation paper aimed at seeking public opinions on lock-in time concerns for the minimum contribution promoter. “Promoter Group” definition, Flexibility of group businesses' filings and Shift from the 'promoter' idea to the ‘person in control’.

The current contribution of the promoter will be changed by SEBI as proposed in the paper. The contribution of the minimum promoter of 20% shall be locked in the first public offer for a year from the date of allocation. For six months, any pre-issue money owned by people other than developers will be free from lock-in rules.

SEBI suggested modifications to the group promoter's definition. As the promoter group describes it as a combination of persons or corporations, who control a percentage or more of the share capital of the corporation and hold twenty percent of it. SEBI stated that under the new proposal it will not be able to amend the present 'promoter' definition.

Next, SEBI would like to simplify 'Group Companies' disclosures. SEBI is proposing that the Offer Document should contain just the names and locations of the registered offices of all Group companies. The offer document shall not reveal any other publication such as the financial statements of top 5 listed / unlisted group businesses, proceedings, etc., currently available in Draft Red Herring Prospectus. Nevertheless, such information may strive to be published on the websites of the firms named.

SEBI recommends a reform to "staff in control" of the notion of "promotor" 3 years were recommended without any hindrance for such a change in a fluid and gradual way. It was also highlighted by the SEBI that the concentration of rights of ownership and control does not lie fully with the promoters. The move from the "promoter" to the "person" may have an impact on the legislation handled by other authorities like the MCA, RBI and IRDAI, cautioned by the regulator. The moment has come to prepare such a change smoothly and gradually, perhaps for 3 years.

II. Reasons for proposed changes

1. For Minimizing lock-in time reduction for Promoters' Contribution and other public issue shareholders on Main Board

SEBI believes that 20% of the promoters' shareholdings have been locked inside the company for three years when firms obtain public investment for project financing/greenfield initiatives. The planned goal is for promoters to acquire shares in the Company using their own money, since they will last many years prior to submitting a listing. Companies with mature enterprises, institutional investors like private equity corporations and alternative investments funds are widely known in the present environment public companies.

2. For rationalization of the of ‘Promoter group’ concept

SEBI suggested modifications to the promoter group's disclosure obligations. The aim is to reveal the interconnections between the different companies in the group and the company accessing the capital market. This makes it more important that linked persons and transactions are identified and divulged. SEBI claimed that this deletion will streamline the burden of disclosure and comply with the standards for post listings.

3. For optimizing the disclosures of ‘Group Companies’

SEBI aims to simplify 'Group Companies' disclosures After listing, the idea of group businesses will not persist. Additional disclosures may not be required for group enterprises, says SEBI. Disclosure of linked party transactions is nonetheless necessary.

4. For revisiting the concept of a promoter

SEBI stated that "In contrast to the previous situation there was a substantial growth in the number of private equities and institutional investors that participate in firms and that the concentration of ownership and control rights does not entirely lie with the promoters or developers' group.

According to SEBI, the top 500 firms listed in India exhibit a decreasing trend in their market values. The stake of the promoters in 2018 amounted to about 50%. At the same time, institutional investor ownership in the top 500 listed companies grew to 34 per cent in 2018 from around 25 per cent in 2009.The study noted that 'changes in ownership character may lead us to scenarios in which individuals with no control rights are nevertheless considered promoters and minority shareholdings.' The study noted that the company's name was "not for the benefit of all stakeholders".

Since the freezing of promoter holdings is now an essential instrument for security market enforcement, a change in enforcement policy would also need reorientation

III. Impact on invertor due to proposed changes

These proposed shifts to eliminate the disclosure of not very important information by the companies is a good move as previously in a situation when the investors go for the investment there were too many documents which initially intended to aid the inventor but on the other hand due many unneeded information causes unwanted diffusion and time to interpret the. But with the new approach this will enable them to gather and interpret relevant and effective information in much less time and enable them to make their decisions about investments faster, as whether to invest or not and without compromising any effective company disclosures and documents. Also, this may result in better IPOs and FPOs performances of the companies resulting in the benefitting both.

Furthermore, with the proposed shift from the concept promoter group to the concept of person in control will greatly help the investors to find the person who really has the control over the company as previously this was shadowed. Let’s understands with an example that in a company Ratan Tata is a promoter due to which that company undergoes a successful IPO but few years later the company was at the brink of bankruptcy and it was discovered that Ratan Tata though being a promoter did not had any control in the company and the board of directors who had the control who were quite incompetent in running a company and finally this anomaly ended up in crashing the investor’s money. But with a concept like this in place would eliminate anomalies like such and let the investor see who really has control over company and who is the decisions for the company while investing and thus aiding its decision to invest smartly.

IV. Impact of the proposed changes on the corporate entity

So here the lock-in period required by the promoter is being proposed to be reduced from 3 years to 1 year which would encourage and incentivising promoters to buy more shares in Initial Public Offering (IPO) as SEBI stated that the necessity for lock-in was required to ensure a continued “skin in the game,” especially for enterprises that had raised public funds for project finance or implemented greenfield initiatives. However, as most companies now go public "with mature corporations" the criteria can be removed. Moreover, IPO greenfield funding is no longer available. This will affect in more successful IPOs and corporate entities could gather more capital.

Next SEBI aims to simplify and streamline the 'Group Companies' disclosure requirements this will lowers the burden on the corporate entities as when the companies go for the IPOs or FPOs a lot of information had to be presented and scrutinized which elevates the rigorousness of the procedure. Furthermore, some SEBI rules do not distinguish between the promoter and the promoter and make them disclosed under a single umbrella. For example, there are several disclosure obligations under the Regulations 2011 for SEBI (Substantial Acquisition of Shares and Takeovers) Regulations of promoters, namely acquisition, disposition of shares, undertaking, etc. now this will enable the corporate entities to cull out effective information is much less time and will also aid IPOs and FPOs.

The change in the concept of promoter group to person in control will greatly impact the corporate entities, as previously even though the control of the promoter is little or none but just because of his name on the offer document the disclosure requirement is still to be followed by the promoter and on the other hand company’s board of director who have the actual control over the company gets a bypass while the promoters is still in the envelope. Moreover, if the SEBI disqualifies the promoter, then the issuer company had to suffer for the same as they cannot issue IPO and FPO which has a drastic impact on the company itself even though the promoter has no control. Now, with the person in control concept in place instead of the previous one of promoters, the person who will be having the actual control will be responsible and not the promoter which will eliminate the anomalies which were previously there and also this will change and recalibration in the share holding pattern of the companies too with the introduction of concept of person in control.

V. Suggestions

Although SEBI's proposal is positive and appropriate step for the aforementioned reasons and in my opinion the timeframe in particular is a practical step. But SEBI failed to clarify how "person in control" categorization and designation would differs from "promoters" SEBI must explicitly explain what control would mean if the idea of a person in control was effectively applied. While control is defined in accordance with Regulation 2(1)(e) of the SAST Regulations, the term is wide and causes various disputes. In order to establish an effective legislation for controlling shareholders, such as the UK, SEBI may draw direction from foreign jurisdictions where the principle is already predominant; the number threshold for being classed as controlling shareholder is 35% of voting rights in U.K.

In order to determine the "controlling shareholder" or the "person in charge," SEBI may consider including the following definition clause which incorporates jurisprudence components established over years, and accepts advise from international courts.

A person is regarded as a " person in control" if he/she is:

(a) holds the right to have the whole voting rights in the corporation exercised by 25% or more; or;

(b) Right to nominate and appoint the majority of the company's non-independent directors;

(c) positive influence over the financial and operational policy decision of the firm.

Secondly, in order for promoters to reclassify themselves as public shareholders SEBI has notified Regulation 31A of the LODR Rules. However, in instances when the promotional ownership exceeds 1%, it remains a difficult procedure needing the consent of both shareholders and the regulator in spite of changes. When 'controlling shareholders' are introduced, these stockholders are not going through the laborious reclassification procedure.

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Footnotes

1. Author is a Student at Bennett University, India.