The Indian investment landscape has emerged as a dynamic space. With investments pouring in from different quarters of the globe, India is experiencing a historic boom in the number of private equity transactions, owing to factors like rise in technology-based start-ups, e-commerce, retail, etc. In this light, the Securities and Exchange Board of India ("SEBI") released a consultation paper dated May 11, 2021, to seek comments on the proposals aimed at examining a matured Indian market. Herein, "the relevance of 'concept of promoter' in the context of Indian securities market" became the focal point of this examination, where SEBI mooted the idea of moving away from the concept of promoter and changing focus on "controlling shareholder". In this backdrop, SEBI also ventured into studying different international jurisdictions to better appreciate the concept of 'controlling shareholder' to be used in lieu of the term 'promoter'.
A few broad causes considered instrumental in fueling the need for making a shift to the 'controlling shareholder' construct, were detailed by the SEBI in its consultation paper, few of which have been summarized herein:
- changing nature of ownership of listed entities- a hike in the number of private equity and institutional investors holding substantial stake in listed companies has led to the new-age companies becoming increasingly non-family owned, with no distinct identifiable promoter group at the helm. This has sometimes resulted in situations where the persons with no controlling rights continue to be classified as a promoter;
- increased focus on quality of board and management- an upswing in the expectations of the shareholders from the board has been witnessed, i.e., elevated expectations of the board vis-à-vis protection of shareholders' rights, etc. These heightened expectations in turn lead to a diminishment of the relevance of the concept of promoter;
- Utility of identification of promoter group – the exercise of identifying and updating information of promoter group for each promoter of the listed entity may become onerous in the coming time, particularly for large conglomerates. This is because persons not otherwise involved with the business of the issuer company may continue being identified as promoter group such that information pertaining to them, which otherwise may not be useful for investors, may continue to be extracted and updated.
In this backdrop, this article examines the proposal furthered by SEBI, i.e., "whether the existing concept of promoter and promoter group should continue or there is a need to shift to the concept of 'person in control' or 'controlling shareholders' and 'persons acting in concert'" to conclude that a limited tinkering to the existing framework, rather than a complete overhaul, is enough to address the concerns so raised.
A collective reading Section 2(69) of the Companies Act 2013 ("the Act") and Regulation 2(1)(oo) of the SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018 ("ICDR Regulations"), highlights that 'promoter' is defined to mean –a person (a) named as such in the prospectus/annual filings of a company; or (b) who has control over the affairs of the company, directly or indirectly in the capacity of a shareholder/director/otherwise; or (c) in accordance with whose advice/ directions/ instructions, the board of directors of the concerned company is accustomed to act. A plain reading of this definition makes it evident that it is expansive enough to include 'control' such that if the definition of promoter were a tripodal stand, 'control' would be one of its legs. This means that the component of 'control' serves as a fundamental parameter for identifying and labelling an individual as a promoter.
'Control' is in turn defined under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 to include (a) the right to appoint majority of the directors; or (b) to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or in any other manner. Importantly, the essence of the 'control', is visibly present in the Act, the ICDR Regulations, and other SEBI regulations.
Both the Act and the ICDR Regulations use the term 'promoter' and 'controlling shareholders' interchangeably, thereby emphasising on the presence of 'control' as a key element in the current regime. To illustrate, as per Section 27 of the Act, dissenting shareholders who do not agree to the proposal to vary the terms of contracts or objects referred to in the prospectus, are given an exit offer, by the promoters or by the controlling shareholders. Similarly, the existing regulatory framework also makes provisions for affixing liability on 'promoters' in case of non-compliance by the company, the rationale being that a promoter is in 'control' of the said company (for example- in case of any liability for misstatement or omission in the prospectus of a company under the Act; liability of the promoter in case of non-compliance with the provisions of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 ("LODR Regulations"); etc.). Therefore, the company law framework in India as it stands, sufficiently encompasses the 'control' feature.
Contrasting this with the legal landscape in the United Kingdom (UK), it can be observed that the term 'promoter' therein is embedded with a narrow understanding is restricted to mean persons who help with the floatation of a company, and are thereby consequently, named in the prospectus. To address the ills stemming from this myopic understanding of 'promoter', the concept of 'persons with significant control' was introduced. This shift helped in expanding the net of corporate accountability by permitting identification of the de facto control bearers a body corporate, over and above persons named as promoters in the prospectus of such a body corporate. Given that the three-pronged Indian definition of 'promoter' is broad enough to encompass the element of control within its ambit, overhauling the concept of promoter and replacing it with controlling shareholder may serve limited purpose. Therefore, instead of transposing the foreign remedy of shifting to the 'controlling shareholder' concept, the following modifications could be considered.
- First, an amendment to the definition of 'promoter' under the ICDR Regulations by deleting Regulation 2(1)(oo)(i) of the ICDR Regulations, and limiting the definition to the parameters under Regulation 2(1)(oo)(ii) and (iii), could be considered. This will ensure that persons not in control of a company anymore will not stay categorized as promoters of such company. This would also be beneficial to the cause of streamlining the understanding of a promoter and identification of relevant shareholders as promoters. Moreover, it would also be in tandem with the current market trend.
- Secondly, the reclassification conditions under the LODR Regulations should be amended to ensure that persons in control of the company are categorised as 'promoters', and persons not in control of company are re-classified as 'public shareholders'. Currently, any person named as a promoter in the prospectus of a company can request reclassification from the position of a 'promoter' to a 'public shareholder' upon having ceased control of such company. This option, however, is subject to the following key conditions - the concerned promoter and the persons related to her should (i) not be in possession of any special right; (ii) not hold more than 10% shareholding of such company; (iii) not act as 'key managerial personnel' (iv) not be in control of the affairs of such company, whether directly or indirectly; (v) not have any director representation; (v) not be a wilful defaulter; and (vi) not be a fugitive economic offender. By means of an amendment to Regulation 31A, in case a promoter is stripped off control, she could be made eligible for reclassification irrespective of her shareholding and without her being subjected to any other criterion. This would not only unravel the regulatory rigmarole but would also emphasise upon the control-related character of the position of a promoter, which in turn is a crucial benchmark for identifying the managers of a body corporate. It would also be in line with objectives detailed by SEBI in its consultation paper, particularly those of categorically focusing on who the actual controller of the company is.
These suggested alterations also go a long way to address the need for simplification of the reclassification process which was flagged out by SEBI in its Consultation Paper on 'Re-classification of promoter(s)/ promoter group entities and disclosure of the promoter group entities in the shareholding pattern' dated November 23, 2020 and simultaneously, lend objectivity to the said reclassification process.
In conclusion, the proposals tabled by the SEBI, while noble in their origin, may not be necessary in light of the adequacy of the Indian scheme as it stands. Instead of heralding a shift to the 'controlling shareholder' framework, slight modifications to the current 'promoters' structure, in respect of (a) the manner in which they are classified and re-classified, and (b) the corresponding harmonization of different legislations, would prove sufficient and would permit the law to keep pace with changes in the investment paradigm. A simplified test with the concept of control as its pivot would, hence, provide a holistic framework guaranteeing corporate accountability of the controlling private equity and institutional investors.
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