Corporate Governance: ‘Promoters’ to ‘Person in control’

Capital markets regulator SEBI (Securities and Exchange Board of India) has proposed changing the concept of company ‘promoters’, and moving towards the idea of ‘person in control’.

At its board meeting on August 6, 2021, SEBI approved certain long-term transformational changes in respect of promoter, promoter group, and group companies. It is indeed remarkable that the regulator in these tough times is not just focused on business as usual, but is also exhibiting resilience by working on progressive issues with long-term positive implications.

The SEBI said this shift is necessitated by the changing investor landscape in India where the concentration of ownership and control 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.

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

Since this change involves multiple regulations and regulators, the SEBI board has advised SEBI to:

1. engage with other regulators to ascertain and resolve regulatory hurdles, if any.

2. prepare draft amendments to securities market regulations and analyse the impact of the same.

3. further deliberate at the PMAC and develop a roadmap for the implementation of the proposed transition.

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.

The SEBI, market regulator has proposed doing away with the classification of the ‘promoter’ concept and moving to the ‘person in control’ system and scrapping the ‘promoter group’.

With the definition of a promoter undergoing a change as a large number of private equity and venture fund-led companies are getting listed on the bourses, Sebi has decided to do away with this traditional concept.

“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,” SEBI said.

Board-controlled companies

Most banks and other large financial institutions and several corporates are examples of board-controlled companies. Recognising the evolved business scenarios, the Sebi board is proposing just that – to shift from ‘promoter’ to ‘person in control.’

The proposed changes will facilitate more board-controlled companies to tap the Indian capital markets. This will eventually add further depth to the market and bring it on par with the global standards. Both these steps are in the right direction and would take us closer to global standards.

For instance, in the recently listed Zomato, there are no identifiable promoters, NSE data showed. Its early backers like Info Edge and Alipay (an arm of Alibaba of China), Deepinder Goyal, the founder as well as Uber BV, which sold its food delivery business to it recently, are all listed as public shareholders.

Traditionally, most of the blue-chips like Reliance Industries, TCS, HDFC Bank, and several others have promoters. The exceptions include HDFC, ICICI Bank, ITC, and L&T.

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

These will be subject to some conditions relating to the use of funds raised through the IPO, Sebi said.

Industry experts say both the decisions are to keep market regulations in tune with the emerging shareholding scenario in the country.

According to Sandeep Parekh, a securities lawyer and former executive director with Sebi, the concept of the promoter is a rigid one with “almost no international parallel”. “SEBI’s decision to move to the concept of ‘person in control’ is a more realistic, fluid, and accurate portrayal of who actually controls the company,” Parekh said.

Securities lawyers also feel that the reduction in lock-in of holdings is a forward-looking step. “Private equity investors will welcome the reduction of the post-IPO lock-in period as they can get a timely exit,” Anand Lakra, partner, J Sagar Associates, said.

According to Parekh, this decision also has the potential to increase liquidity in the market, “as more shares become available for trading”. Lakra also feels that Sebi could use this opportunity — the move to change from promoter to person-in-control — to re-consider the definition of control itself.

To facilitate the government’s ‘ease of doing business’ objective, Sebi on Friday also scrapped the requirement of disclosing post-facto nod for acquisitions between 2-5% shareholding in market infrastructure institutions. “The stock exchanges, clearing corporations, and depositories shall put in place appropriate mechanisms to ensure compliance with fit and proper criteria,” SEBI said.

Sebi also merged two regulations — Issue of Sweat Equity Regulations and Share Based Employee Benefits Regulations — into a new one called Sebi (Share Based Employee Benefits and Sweat Equity) Regulations, 2021.

Lock-in period

The origin of this thought goes back to the control environment pre-1991 when industries were being set up based on special permissions. In those days, the licence conditions used to prescribe a minimum equity contribution by the promoter, which was locked up until the lender’s money was paid off. The same thing found resonance in the capital markets regulations and the minimum of 20% equity contribution from promoters was made compulsory with a lock-in period. The SEBI board has now approved the reduction of the lock-in period on the 20% minimum promoter shareholding to 18 months and on other pre-IPO shares to six months, except in situations of project financing. This reduced lock-in period is a welcome first step. This regulation certainly required a rethink, and the SEBI board has approved this change.

Promoter under Companies Act, 2013

Under the Companies Act, 2013, a promoter is a person who has been named as such in the prospectus or is identified by the company in the annual return filed every year. The definition also covers a person(s) who has control over the affairs of the company, directly or indirectly whether in the capacity of a shareholder, director or otherwise. Further, those person(s) in accordance with whose advice, directions, or instructions the Board of Directors of the company is accustomed to act, except in case of a person acting in a professional capacity, would also be considered as a promoter of a company.

Promoter under SEBI Regulations

The term ‘Promoter’ is defined under ICDR and various other SEBI regulations has the reference to the definition as given in ICDR.

Promoter under ICDR

Regulation 2 (1) (oo) of ICDR defines the term ‘promoter’. The definition is similar to the definition in the Companies Act, 2013 and provides that a financial institution, scheduled commercial bank, foreign portfolio investor other than individuals, and the other specified body corporates shall not be deemed to be a promoter merely by holding 20% or more of the equity share capital of the issuer unless such person satisfies other requirements prescribed under the regulations.