The Paytm case, involving many regulatory issues, has been the subject of
much deliberation and confusion over the past month. The primary issue in the
case has been the question about the ownership and management status of the
company. This article delves into these issues and aims to critically analyse
the long-term effects of the prospective steps SEBI intends to take to address
this regulatory gap.
To understand the basis of these issues, it is first necessary to grasp the
meaning of these terms and what they consist of. Section 2(69) of the Companies
Act, 2013 defines a promoter as a person who performs preliminary steps, like
floating the securities in the market, making the company's prospectus, etc.,
for establishing the company's business. However, if a person does these things
professionally, they will not be considered a promoter.
The recent instance involving a prominent fintech firm underscores a pertinent
scenario. The company's promoters discreetly shifted their shares to a family
trust structure, retaining control while evading public disclosure norms. This
poses a significant worry for investors and the Indian capital markets. SEBI
must address this regulatory gap, mandating comprehensive shareholding
disclosure by all listed company promoters, irrespective of direct or family
trust ownership. Under the current rules, promoters must disclose their
shareholding in an IPO and provide information about their control over the
In 2019, the NCLT mandated the delisting of Mindtree Limited due to a
promoter-driven conflict of interest, favouring personal gains over minority
shareholders' welfare. In 2020, Infosys Limited faced a SEBI fine over a
suspected conflict of interest. The regulator discovered insufficient disclosure
of Infosys' ties to a company the chairman's son owned, providing him with an
unjust business advantage. Delabelling emerges as a potential remedy to curb
conflicts and prevent promoter misuse of power.
This analysis aims to assess the consequences of delabelling promoters under the
Companies Act 2013 and consider alternative provisions. It delves into the
potential merits and demerits for companies and investors. By examining
replacement options, the goal is to identify optimal solutions. Additionally,
the analysis aims to offer readers a thorough understanding of the matter and
its potential alterations. Ultimately, the objective is to equip stakeholders
with insights for informed decisions on this pivotal matter.
By decreasing a promoter's ownership, delabelling creates hurdles for
self-dealing and unethical conduct. It chips away at the promoter's control over
decisions, granting minority shareholders a stronger voice in management.
However, it's vital to recognise that delabelling isn't foolproof against
The proposed amendments by SEBI include requirements for increased independent
director oversight, enhanced disclosures about related party transactions, and a
new framework for shareholder activism. SEBI initiates an investor education
campaign for promoting corporate governance and safeguarding minority
It forms a task force to enhance existing governance practices. Delisting
promoters have substantial drawbacks. It strips them of their crucial
shareholder and decision-making roles, eroding control and influence. The
company's share price can plummet due to perceived instability. Furthermore,
accessing capital and attracting investment becomes more accessible with a
prominent promoter's support.
Given the challenges associated with delabelling promoters according to the
Companies Act 2013, the government is considering alternative options for
potential replacements. One proposition is including a mandatory independent
director, offering impartial oversight of company affairs. Another suggestion
involves enhanced reporting on company operations, fostering transparency and
furnishing pertinent information to shareholders.
The aspiration is that these alternatives would improve corporate governance,
safeguard shareholders, and align company interests with stakeholders.
Nonetheless, the viability and efficacy of these replacements warrant
assessment, necessitating further deliberation and analysis before definitive
conclusions are drawn.
Nominee directors are critical figures in a company's structure appointed to
represent specific shareholders or groups at the board level. They ensure
alignment between company objectives and shareholder interests. Typically
nominated by institutional investors like banks or pension funds holding
significant stakes, they prioritise appointing shareholders' interests over
Though essential for governance and shareholder engagement, nominee directors
can pose management challenges due to potential conflicts with other board
members' roles. Thus, careful selection and role definition are crucial to
maintaining board effectiveness.
Independent directors play a pivotal role in corporate governance, offering a
fresh outlook and impartial judgment. As non-executive directors, they bring
diverse expertise and experience to the boardroom. Independents act as a conduit
between stakeholders, considering the interests of shareholders, employees,
customers, and the community. They provide oversight on decisions, risk
management, and regulatory compliance.
Mandated by the Companies Act 2013, independent directors bolstered their role
with regulatory and advisory endorsements. Replacing the promoter-centric system
with a new framework will impact director appointments, qualifications, and
compensation. Consequently, it's crucial to assess how delabelling promoters
will affect independent directors and governance in the long term. In March
2023, the Confederation of Indian Industry (CII) introduced a code of conduct
for independent directors, outlining their duties and responsibilities. This
code underscores the significance of their autonomy from management and their
commitment to prioritising shareholders' best interests.
Exploring Differential Voting Rights and Delabelling Promoters in Corporate
As an alternative avenue to restructuring ownership dynamics, Differential
Voting Rights (DVRs) offer a distinctive approach that balances funding needs
with preserving founders' control. Differential Voting Rights (DVRs) entail
shares with differing voting rights, offering a means to secure funding while
preserving founders' or promoters' voting influence. India introduced DVRs
through the Companies Act 2013, permitting their issuance to founders or
promoters holding over 10% of total share capital. Despite being a recent
addition, the regulatory landscape surrounding DVRs is evolving.
This prompts inquiries about ownership, control, and decision-making dynamics
within firms. In April 2023, Indian e-commerce firm Flipkart garnered $3.6
billion in funding, utilising Differential Voting Rights (DVRs). These DVRs
bestowed investors, such as SoftBank Vision Fund and Qatar Investment Authority,
with ten votes per share, while existing shareholders held one vote per share.
This arrangement empowered investors to hold significant sway in the company's
affairs, all the while ensuring founders retained control.
The comprehensive examination of the Companies Act 2013 and potential
alternatives about delabelling promoters has yielded noteworthy conclusions. A
key discovery is that delabelling promoters can exert substantial enduring
effects on companies, encompassing restricted access to resources and diminished
market valuation. Moreover, while the existing Companies Act 2013 incorporates
certain safeguards against misuse, it also permits room for potential
In contrast, envisioned substitutes, such as the Companies Act Amendment Bill
2020, advocate for more stringent measures to forestall misuse and promote
enhanced transparency. In summation, the analysis underscores the critical
importance of diligently contemplating the consequences of delabelling promoters
and underscores the necessity for regulatory frameworks that uphold equitable
and transparent business practices.
The comprehensive examination of the Companies Act 2013 and potential
alternatives pertaining to delabelling promoters has yielded noteworthy
conclusions. A key discovery is that delabelling promoters can exert substantial
enduring effects on companies, encompassing restricted access to resources and
diminished market valuation. Moreover, while the existing Companies Act 2013
incorporates certain safeguards against misuse, it also permits room for
potential exploitation. In contrast, envisioned substitutes, such as the
Companies Act Amendment Bill 2020, advocate for more stringent measures to
forestall misuse and promote enhanced transparency.
The analysis underscores the critical importance of diligently contemplating the
consequences of delabelling promoters and the necessity for regulatory
frameworks that uphold equitable and transparent business practices. Given the
ambiguity surrounding the enduring implications of delabelling promoters on
business longevity, there is a clear imperative for future research to conduct a
more extensive investigation into this matter. Specifically, researchers should
comprehensively assess the merits and limitations of eliminating a promoter
This evaluation should further account for the distinct attributes inherent to
various industries. Moreover, forthcoming inquiries could delve into enhancing
regulatory frameworks, aiming to provide enhanced lucidity concerning
delineating roles and responsibilities for enterprises, promoters, and
investors. Additionally, it is worthwhile to explore the potential effects of
delabelling promoters on investors, as this factor can significantly reverberate
throughout the broader economic landscape.
Award Winning Article Is Written By: Ms.Anushree Srivastava
Authentication No: SP363913199631-30-0923