SEBI’s Bold Proposal For India Inc.’s Promoters

The Securities and Exchange Board of India has proposed to do away with certain disclosure requirements by issuers at the time of capital-raising. But more importantly, the regulator has proposed to revisit the concept of ‘promoter’ and shift to the concept of ‘person in control’ or ‘controlling shareholders’.

Increasingly, concentration of ownership and controlling rights don’t vest completely with the promoter or promoter group. In some cases, control lies with private equity and institutional investors, who also enjoy certain special rights, the market regulator has said.

Changes in nature of ownership, it has stated, could lead to situations where persons with no controlling rights and minority shareholding continue to be classified as a promoter. The relevance of promoter concept has also been diminished by increasing focus on quality of board and management.

And so, would it be prudent to move away from the ‘promoter’ concept, the regulator has asked in a consultation paper this week.

The proposal is in line with some developed markets, like the U.S. and the U.K. which have the concept of ‘controlling shareholders’, Manan Lahoty, capital markets partner at IndusLaw, said. But this shift needs to come with a clear onus on boards and not merely shift the responsibilities of the promoter to the controlling shareholder, he said.

There are certain obligations that come with being a promoter. One is disclosure requirements — that can be moved to controlling shareholders. Second is disclosures during listing — globally, it’s the directors and board that are responsible for it and not the controlling shareholder. Third is post-listing obligations under delisting regulations, buyback rules, takeover code - those too need to move to the company.

Manan Lahoty, Partner, IndusLaw

Only then, Lahoty said, will “we really move the needle on aligning India’s capital markets with the changing reality.”

“Company and the board should be wholly responsible for compliance.”

The change will need to be accompanied by certain guardrails, Hetal Dalal, president of proxy advisory firm IiAS, said. The regulator will need to ensure that this shift doesn’t result in misuse of ‘majority of the minority’ voting concept, she said.

For that, SEBI needs to articulate how it will define ‘control’, which will define the set of individuals/holding companies on whom strictures will apply. Family members/relatives of controlling shareholders will necessarily need to be included as those in control — not including them will allow them the ability to swing the public vote on resolutions which require majority of minority approval.

Hetal Dalal, President, IiAS

A fear that’s quite real in India’s promoter-driven corporate culture. For instance, take the recent developments at Gufic Biosciences Ltd. With a 3.71% stake, the promoter’s wife Vipula Choksi has been classified as a public shareholder. Only after certain proxy advisory firms raised concerns, the company gave a declaration to the stock exchanges that she will not vote on resolutions that her son or husband — the promoters — are interested in.

Dalal said even though SEBI has been pushing for greater board accountability, boards in India continue to rely on promoters to drive strategic direction and take the difficult decisions. “So, this shift will require a lot of safeguards.”

To be fair, SEBI has mentioned that this move will require a change to its regulations that have reference to ‘promoter or promoter group', namely listing regulations, insider trading framework, takeover code, etc. It will also need a rethink of enforcement strategies since freezing of promoter holdings is currently an important tool used by the regulator.

Listing Process: Proposed Reliefs

SEBI has made three other suggestions to ease compliance by promoters, but experts BloombergQuint spoke with said they are of limited .

First is changing the lock-in period for promoter shareholding from current 3 years to 1 year once the company has listed. The language here is confusing.

It says that if the object of the issue involves offer for sale or financing other than for capital expenditure for a project, period for promoter lock-in can be one year. The proposal doesn’t specify the lock-in period where the objective is capex related.

Yash Ashar, capital markets partner at Cyril Amarchand Mangaldas, is of the view that it’ll be three years.

Relaxation of lock-in period of three years to one year will be applicable only in where (i) IPO comprises only an offer for sale (and no fresh issue) or (ii) IPO comprises fresh issue which will be utilised for an object which is other than funding of capital expenditure for a project.

Yash Ashar, Partner, Cyril Amarchand Mangaldas

In all other cases, three year lock-in period for promoters will continue to apply. SEBI has been following this thought process for certain relaxations for rights issue and FPOs as well, he said.

But another statement in the consultation paper obfuscates this understanding.

“Greenfield financing through IPOs is presently almost non-existent. Further, IPOs exceeding Rs 100 crore (excluding the component of offer for sale) are required to have a monitoring agency…” - SEBI Consultation Paper

This could lead one to believe that SEBI is saying there’s adequate oversight of use of funds when raised for capex requirement, so there need not be any promoter lock-in for such cases, Lahoty said.

The second relates to narrowing the definition of promoter group.

The proposal is to exclude a company that comes within this definition by virtue of a common set of entities holding more than 20% in it and the listing company. For instance, X becomes a promoter group entity of listing company Y if Z holds more than 20% in both of them. In such a scenario, Y will have to make detailed disclosures on X during the listing process.

Lahoty said this is of little consequence since hardly any entities get caught in this limb of the ‘promoter group’ definition.

The onerous bit is disclosures relating to relatives, extended family, entities, etc. For instance, in a recent IPO, disclosures had to be made for close to 100 entities that ended up getting covered by other limbs of the definition of promoter group. “So this proposal isn’t going to change much if the intent is to ease disclosures.”

The final proposal is to limit the information required on group companies while listing.

Instead of giving details on the financials, nature of business, pending litigation, etc. of group companies, the disclosure in the offer documents can be restricted to just their name and registered office. These disclosures may continue to be made available on the websites of the listed companies, SEBI has suggested.

And that prompted experts to tell BloombergQuint “what is the point?” if only the medium of relaying the information is proposed to be changed.