SEBI Proposes to Review the Regulatory Framework of Promoter and Promoter Group Companies under ICDR Norms

In May 2019, Primary Markets Advisory Committee (PMAC) had constituted a sub-group to examine the relevance of the ‘concept of promoter’ in the context of the Indian Securities Market. The sub-group interacted extensively with various stakeholders, including investors, law firms, industry associations as well as corporates. The sub-group also did a study of various international jurisdictions. As a result, SEBI has issued a consultation paper intending to seek Public views on the following matters:-

1. Reduction in lock-in periods for minimum promoter’s contribution and other shareholders for public issuance on the Main Board.
2. Rationalization of the definition of ‘Promoter Group’
3. Streamlining the disclosures of group companies and
4. Shifting from the concept of ‘promoter’ to the concept of ‘person in control’.

1. Reduction in lock-in period for minimum Promoters’ Contribution and other shareholders for public issuance on the Main Board

1.1 Present Provisions

According to Regulation 16 of Issuing of Capital & Disclosure Requirement (ICDR) 2018, the lock-in requirement for minimum promoter contribution is 20% for a period of 3 years from the date of commencement of commercial production or date of allotment whichever is later and lock-in requirement for the excess over minimum promoter contribution is for a period of 1 year from the date of allotment in the initial public offer.

In Addition, as per regulation 17 of ICDR regulations, 2018, the lock-in requirement for the entire pre-issue capital held by a person other than promoters is locked for a period of 1 year from the date of allotment in the initial public offer.

1.2 Proposed Provisions

Now, SEBI proposes to change the existing provision of promoter contribution and proposes that if the object of the issue involves an offer for sale or financing other than for capital expenditure for a project, minimum promoters’ contribution of 20% shall be locked in for a period of one year from the date of allotment in the initial public offer, unlike existing requirement of three years.

The shares held by Promoter shall exempt from lock-in requirements after six months from the date of allotment in the IPO if such are sold to achieve compliance with minimum public shareholding norms.

Another change proposed by SEBI is that Promoters’ holding in excess of minimum promoters’ contribution shall be locked in for a period of six months as compared to the existing requirement of one year from the date of allotment in the Initial Public Offer. The entire  pre-issue  capital  held  by  persons  other  than  the  promoters  shall be locked-in for a period of six months from the date of allotment in the initial public offer as opposed to the existing requirement of one year.

1.3 Reason Behind proposed changes

SEBI is of view that 20% lock-in of promoters’ shareholding for 3 years was considered necessary when companies raised public capital for project financing/ greenfield projects. And the proposed objective behind this is the promoters use their own money to buy stock in the company as they are running for several years before proposing a listing.

In the present scenario companies going public are well established with mature businesses, have pre-existing   institutional   investors like   private  equity   firms,  alternate investment fund and in a large number of companies, promoters did not materially sell their shares even after the expiry of the lock-in period.

2. Rationalization of the definition of ‘Promoter group’

2.1 Present Provision

 Promoter Group Definition:-

Reg. 2(1) (pp) “promoter group” includes:

1. the promoter
2. An immediate relative of the promoter (i.e. any spouse of that person, or any parent, brother, sister, or child of the person or of the spouse); and
3. in case promoter is a body corporate:

• • a subsidiary or holding company of such body corporate;
  • anybody corporate in which the promoter holds twenty percent. Or more of the equity share capital; and/or anybody corporate which holds twenty percent. Or more of the equity share capital of the promoter;
  • Anybody corporate in which a group of individuals or companies or combinations thereof acting in concert, which holds twenty percent. Or more of the equity share capital in that body corporate and such group of individuals or companies or combinations thereof also holds twenty percent. Or more of the equity share capital of the issuer and are also acting in concert

4. in case the promoter is an individual:

• • any body corporate in which twenty percent. or more of the equity share capital is held by the promoter or an immediate relative of the promoter or a firm or Hindu Undivided Family in  which the promoter or any one or more of their relative is a member;
  • any body corporate in which a body corporate as provided in (A) above holds twenty percent. Or more, of the equity share capital; and
  • any Hindu Undivided Family or firm in which the aggregate share of the promoter and their relatives is equal to or more than twenty percent. Of the total capital;

5. all persons whose shareholding is aggregated under the heading “shareholding of the promoter group.

2.2 Proposed Change

SEBI proposed Regulation 2(1)(pp)(iii)(c)  in the definition of promoter group i.e. “Anybody corporate  in  which  a  group  of  individuals  or  companies  or  combinations  thereof acting in concert, which holds twenty percent or more of the equity share capital in that body corporate and such group of individuals or companies or combinations thereof also holds twenty percent or more of the equity share capital of the issuer and are also acting in concert.” Would be deleted.

2.3 Reason Behind proposed changes

The intention of capturing the promoter group is to disclose the interrelationships of various entities within the group to the entity accessing the capital market. The said changes are proposed by SEBI as it is  more  relevant  to  identify  and disclose  related  parties  and  related  party  transactions.  Accordingly,  this  deletion shall  rationalize  the  disclosure  burden  and  bring  it  in  line  with  the  post  listing disclosure requirements.

3. Streamlining the disclosures of ‘Group Companies’

3.1 Present Provision

According to the present provision of ICDR regulations that the group companies which defined regulation 2(t) of these regulation to include those  companies  (other  than  promoters  and  subsidiaries)  with  which  the  issuer company has had related party transactions during the period for which financials are disclosed in the offer document.

Disclosures  by the group companies are to include information  such  as  date  of incorporation,  nature  of  activities,  equity  capital,  reserves,  sales,  profit  after  tax, earnings  per  share  and  diluted  earnings  per  share,  net  asset  value,  pending litigation involving the group company which has a material impact on the issuer etc.  has  to  be  provided  for  the  last  three  years  for  the  five  largest  listed  group companies.  In case there are no listed group companies, the financial information has to be given for the five largest unlisted group companies based on turnover.

3.2 Proposed Change

It is proposed by SEBI that only the names and registered office addresses of all the Group Companies should be disclosed in the Offer Document. Other disclosures like financials of top 5 listed/unlisted group companies, litigation, etc. which are presently disclosed in Draft Red Herring Prospectus is need not be disclosed in the offer document. However, these disclosures may continue to be made available on the websites of the listed companies.

3.3 Reason Behind proposed changes

The SEBI wants to streamline the disclosures of ‘Group Companies. The concept of group companies does not continue after listing and does not find a  mention either in the  SEBI  (Listing  Obligations and  Disclosure  Requirements) Regulations,  2015 (LODR  Regulations)  or the  SEBI  (Substantial  Acquisition of Shares and Takeover Regulations), 2011 (Takeover Regulations).

The Disclosure  on  related  party  transactions  is  required  to  be  made  in  an  offer document (including in the financial statements). There may be no need to have additional   disclosures   on   group   companies.   Disclosures   on   related   party transactions are also made post listing in terms of the LODR Regulations.

4. Shifting from the concept of ‘promoter’ to concept of ‘person in control’

4.1 Present Provisions

Promoter Definition:-According to section 2(69) of the Companies Act, 2013 the term ‘Promoter’ can be defined as the following:

1.  A person who has been named as such in a prospectus or is identified by the company in the annual return in section 92; or
2.  A person who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or
3.  A person who is in agreement with whose advice, directions or instructions the Board of Directors of the company is accustomed to act.

4.2 Need for revisiting the concept of a promoter

1. Changing nature of ownership of listed entities–The SEBI suggested that there is a need for revisiting the concept of ‘promoter’ to a concept of ‘person in control’ and a period of three years has been proposed for such a shift over in a smooth and progressive manner without causing any disruption.The SEBI also noted that “Unlike the past, the concentration of ownership and control rights does not vest completely in the hands of the promoters or the promoter group. 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.
2. Moreover, a number of businesses, including new age and tech companies, are non-family owned and do not have a distinctly identifiable promoter group.According to SEBI, the aggregate shareholdings of promoters in the top 500 listed entities in terms of market value, peaked at 58 percent in 2009 and is showing a downward trend.
3. The promoters’ shareholding was around 50 percent in 2018. At the same time, the shareholding of institutional investors in the top 500 listed firms increased from about 25 percent in 2009 to 34 percent in 2018.
4. Changes in nature of ownership could lead to situations where the persons with no controlling rights and minority shareholding continue to be classified as a promoter. By virtue of being called promoters, such persons may have influence over the listed entity disproportionate to their economic interest, which may not be in the interests of all stakeholders,”.
5. The shift from the concept of ‘promoter’ to the concept of ‘person in control’ may have implications on laws administered by other regulators such as the MCA, RBI, and IRDAI, the regulator pointed out.

Given that the freezing of promoter holdings is presently an important tool of enforcement in the securities market, the shift would also necessitate reorientation of enforcement strategies.It is also argued that it is time to plan for such a shift over, say a period of 3 years, in a smooth and progressive manner without causing any disruption.