SEBI has recently come up with the consultation paper “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) Regulations, 2018” dated May 11, 2021.
The objective behind the paper is to seek comments/views from the public on the following norms of the Securities Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018 [ICDR Regulations] by June 10, 2021:
- Streamlining the definition of ‘Promoters', and moving ahead with the concept of ‘Person in Control' on one side and reducing and minimizing the lock-in-requirements of concerned promoters and also of shareholders that are investing in an IPO.
- From the current lock-in-period of 3 years, the said has been proposed to reduce to one year, in the case if the objective of the issue is concerning offer for sale or something related to financing, but not for any of capital expenditures for a project, and therefore the specified promoters contribution has to be of 20% (minimum) to be locked in from the date of allotment in an IPO.
- Further, if in any case the minimum contribution of promoters is more than what is prescribed, then the said excess to be lock in for period of six months in comparison to current one year period at present, and at the same time, those persons other than promoters, who have pre-issue capital in their hands have to follow six months lock-in time from IPO allotment as compared to one year at present.
- With regard to “Promoter”, SEBI is looking for doing away with its definition for bringing the current disclosure requirements in hand with what has been specified in ICDR Regulations, and at the same time, amending the definition of “Promoter Group” as at present what is happening is that there are some bunch of common or related persons who are holding such esteemed positions even in companies that are completely unrelated to one another, therefore ending up with same financial investors and disregarding the investment environment by holding common holdings among selective and identified persons and their relatives or family members.
- Also in case of “Promoter Group”, it suggested that only the names and Registered Office Address of such group companies of the issuing company needs to be disclosed in Draft Red Herring Prospectus, as provided or mentioned in Section 32 of Companies Act 2013, and hence any other disclosure requirements aren't required to be followed in that draft paper.
Reason behind SEBI making amendments
SEBI has clarified that the current investment environment has been changing very rapidly, and now there are various high net worth individuals, private equity investors, institutional investors, etc. who have been investing in many big companies and at the same time holding a very key and important position in that company post their investment, and at the same time have been able to run and look after that company very well, thereby serving the twin purpose of “Substantial Shareholding”, and “Control over company”.
For proving the same reasoning, it has also said that in the past, ranging from the year 2008, the aggregate shareholdings of promoters in top 500 listed entities is on a decreasing trend, and at the same time, the holdings (in terms of market value) of institutional investors from the year 2009 in top 500 listed entities is on increasing trend.
And for this implementation, a time period of almost three years has been proposed so that the changes can be made in the regulations and in the market and its functioning in a steady and simplified manner without causing any disruptions among relevant stakeholders.
The above changes in nature of ownership, could lead to situations where the persons with no controlling rights and minority shareholding continues 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.
Thus, the SEBI has argued that it is time to plan for such shift, over a period, in a smooth and progressive manner without causing any disruption.
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