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Promoter to Person in Control Approach of SEBI

The Securities and Exchange Board of India (SEBI) is a statutory body established in April, 1992 which regulates and provides a cloak of protection for investors in the securities markets in India.

SEBI defines a promoter to include any person:

  1. Who has been identified as a promoter by the company in its offer documents or annual returns;
  2. Who has direct or indirect control over the affairs of the company whether as a shareholder, director or otherwise; or
  3. In accordance with whose advice, directions or instructions, the board of directors of the company is accustomed to act.

Promoter Group includes a body corporate, a group of individuals or companies or combinations which hold 20% or more of the equity share capital in that body corporate. A promoter formulates an idea, complies with numerous formalities and sets ground for starting a company.

A consultation paper rolled out in May 2021 by SEBI, proposed changes in pursuance with the concept of promoters in India. It suggested to do away from the old age concept of promoter and the focus to be shifted to person in control. SEBI would like to include some major investors like private equity, pension funds, venture capitalist etc. to run the company, from a non-promoter to person in control.

It also declared to reduce the minimum lock in for promoters holding minimum 20% from three years to one year and more than 20% from one year to six months after an IPO. Also, it proposed to reduce the lock in period for pre-IPO shareholders from one year to six months.

The Need for Promoter to Person in Control Concept:

  • With the emergence of a new era for capital markets flowing with abundance of liquidity, flooded with IPOs, Sensex and Nifty reaching new milestones, the occurrence of new shareholders such as private equity and institutional investors have paved a new way by changing investors landscape in India where ownership and controlling rights do not completely vest in the hands of promoters.
     
  • Unlike the traditional days where promoters use to have ample amount of control over its course of business even after its listed, in the present scenario the institutional investors have considerable control over the board through their representative directors. As a result, people with no controlling rights or minority shareholdings would still be classified as promoters. This would lead to situations where the liability is placed on the wrong party and by virtue of being considered as a promoter, the person may have uneven influence over the board.
     
  • Therefore, the shift from promoter to person in control (PIC) would ensure that the responsibility and liability is placed on the correct person with significant control over the board. It would also ensure better corporate governance.

Significance of this Move

  • With this concept being implemented, it will curtail the burden for companies to disclose the names of the investors.
     
  • In today’s competitive start up ecosystem, companies under go several series of funding, the promoters already have skin in the game. Therefore, a further lock in period would only make going public, burdensome for the promoters. In order to solve this issue, SEBI decided that if the objective of the company going public involves offer for sale or financing other than capital expenditure for a project, the lock in period for promoters holding minimum 20% shall be locked in for a period of one year instead of three.
     
  • Further the lock in for pre-IPO shareholders who are not promoters is reduced from 1 year to six months. This shift would help ensure that people who have the board’s control is classified as the people running the company and are responsible.

Disadvantages:
  • This shift would require several rules to be rewritten such a as the concept of promoter defined under the Indian regulatory framework.
     
  • However, this shift would indeed be a disaster for investors who sought to book profits and exist. If Private equity and venture capital investors under take investments with the motive to book profit and exist after an IPO then the concept of Promoter to Person in control (PIC) would impose responsibilities, have a minimum lock in period and the requirement of disclosure under ICDR would be mandatory. This regulatory framework would turn out to be onerous and less lucrative for such investors.
     
  • Promoter tend to stay even after the IPO because they are concerned about the functioning of the company, replacing promoter with investors who desire to exist after making profit and are in charge of the board might be tantamount to replace the pilot of the plane with the airhostess, it would lead to great turmoil in the companies.

The Paradoxical Effect of the Proposed Concept:

  • Is it the right time to drop the concept of promoters? Have the promoters become stagnant? Will the so called "person in control" be enthusiastic to take control and responsibility?
     
  • SEBI will indeed retract the notion of "once a promoter, always a promoter". The concept of promoters includes all types of informal people, including blood relatives. This rather gives a dubious effect on investors since persons with no control are classified as promoters.
     
  • During the previous decade, the investor structure in India experienced a radical variation where a new class of shareholders arose as leading investors, namely private equity funds, alternate investment funds, mutual funds, etc. Due to this, the shareholding of the promoter has been decreased to marginal, and total promoters’ holdings in prominent 500-listed entities by market value is on a downhill track since 2009, when it topped at 58%.
     
  • In today’s time the new class of investors like private equity or alternate investment funds have major holdings in the new age tech business units prior to their IPO, they continue to retain shares post listing and turn out to be the biggest public shareholders holding special privileges such as actual ownership and controlling rights but despite holding such privileges the promoter (who’s shareholding is reduced to a minority status) continue to possess power. Therefore, the market watchdog intends on fixing this glitch.
     
  • A lot of investors look up to the founders of the company, a reduction in the lock in period may not instill confidence and comfort to the public shareholders who hope for the founders to have substantial shareholdings post listing.
     
  • According to the disclosure obligations, the issuer need not name the financial investors and corporate entities who are a part and parcel of the promoter group, in such a scenario can an entity be trusted whose funds are masked in privacy?
     
  • Can the "Person in Control" be at par with the CEO or the board of directors? Companies today are professionally administered; they have numerous teams to help them assist and run the day-to-day affairs. Such professionals have adequate knowledge and experience, they are nominated by shareholders but if majority shareholders vacate then it is doubtful that the current CEO or board of directors would continue.
     
  • Hence shareholding entrusted in a mutual fund, private equity or alternate investments funds, should be held accountable to accept the role of person in control and remain invested for a long period.

SEBI should make this concept smarter and accurate, rather than completely abolishing the responsibility of the leading shareholder. It should reflect upon the term "control" with more clarity as to who exactly is overseeing the entity.

References:
  1. https://www.drishtiias.com/daily-updates/daily-news-analysis/proposal-for-changing-promoters-to-person-in-control-sebi
  2. https://cbcl.nliu.ac.in/capital-markets-and-securities-law/sebis-reforms-related-to-promoters-a-step-in-the-right-direction/
  3. https://law.asia/whos-in-control/
  4. https://economictimes.indiatimes.com/markets/stocks/news/sebi-proposes-rationalising-promoter-group-definition-moots-person-in-control-concept/articleshow/82549988.cms
  5. https://www.acc.com/resource-library/indian-securities-laws-proposed-shift-promoters-persons-control-overview-key#
  6. https://taxguru.in/sebi/symbolic-promoters-listing-regulations.html
  7. https://www.sebi.gov.in/reports-and-statistics/reports/may-2021/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-re-_50099.html

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