The Indian capital markets have matured over the years, with a more robust disclosure framework, adoption of best international practices aimed at providing better information to investors for decision making, at the same time balancing the ease of doing business of issuers. In the aforesaid background, a proposal was received from the Association of Investment Bankers of India (“AIBI”) by the Primary Markets Advisory Committee (“PMAC”) providing views relating to the definition of ‘promoter group’ and lock-in requirements at the time when the issuer makes an issue. The AIBI recommended a reduction on lock-in periods for minimum promoter’s contribution and other shareholders for public issuance on the main board, rationalization of the definition of ‘promoter group’, streamlining the disclosures of group companies and change in concept from ‘promoter’ to ‘person in control’. Subsequently, the PMAC deliberated on the agenda and constituted a sub-group to examine the relevance of ‘concept of promoter’ and the lock-in requirements in the context of Indian securities market. The sub-group held deliberations and also interacted extensively with various stakeholders, including investors, law firms, industry associations as well as corporates, subsequent to which the recommendations of the sub-group were deliberated by the PMAC and thereafter approved by the Securities and Exchange Board of India (“SEBI”) in its board meeting held on December 16, 2020. With an aim to ease the regulatory burden for the listed companies and encourage more companies to opt the listing route, the SEBI vide a consultation paper dated May 11, 2021 (“Consultation Paper”) has now opened up the window for deliberations for liberalizing the SEBI (Issue of Capital and Capital Disclosure Requirements) Regulations, 2018 (“ICDR Regulations”) by easing certain restrictions which have been briefly dealt hereunder.
The Consultation Paper proposes the changes on the following relating to the ICDR Regulations, which have been briefly discussed below:
|Reduction in lock-in period for minimum promoters’ contribution and other shareholders for public issuance on the main board
|Rationale: The lock-in requirement was necessary to ensure continuous “skin in the game”, particularly in the case of companies that were raising public capital for project financing or setting up greenfield projects. However, as most companies going public these days are well established with mature businesses, the condition can be done away with. Besides, greenfield financing through IPOs has become practically non-existent.
|Rationalization of the definition of ‘promoter group’
|Rationale: The definition of the promoter group includes holdings by a common group of individuals or persons and often results in capturing unrelated companies with common financial investors. Capturing the details of holdings by financial investors may not result in any meaningful information to investors, apart from being a challenging task. Further, post listing, 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.
|Streamlining the disclosures of ‘group companies’
|Rationale: The concept of group companies ceases after listing and does not find a mention either in the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 or the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011. Further, the financial investors may get covered under the umbrella of group company on account of investments made and/or dividends paid despite there being no other transactions between them and the listed company. Besides, entities which are not material to the issuer company may also get covered under the definition of group company. Also, there is a possibility where companies may have ceased to be group companies during the last three years, but issuers are required to reach out to such companies and seek their cooperation for providing information.
|Shifting from the concept of ‘promoter’ to concept of ‘person in control’
Rationale: In view of the changing investor landscape in India, the concentration of ownership and controlling rights does not vest completely in the hands of the promoters or the promoter group. Also, a number of new age companies do not have a distinctly identifiable promoter group. Further, a downward trend has been witnessed in the aggregate shareholding of promoters and a contrasting trend in case of institutional investors. These changes could lead to a situation where the persons with no controlling rights and minority shareholding continue to be classified as 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.
The increased focus on quality of board and management has also diluted the incisive focus on the concept of promoter. In the present scenario, the identification and updation of promoter group is required to be done for each promoter of the listed entity. Over time, this may become more challenging and even resulting in identification of persons who are not involved with the business of the issuer. These issues have resulted into an increased need to shift to the concept of ‘person in control’ or ‘controlling shareholders.’
SEBI’s proposal to shift from promoter to persons in control is a welcome change from the existing stand of ‘once a promoter, always a promoter’. Under current norms, until reclassification, promoter shareholders who are not in control continue to bear burden. Further, the current definition of promoter is an inclusive one and goes beyond persons who are actually in control. Hence, the proposed change of shifting the focus on persons in control is logical and good for the markets. It will avoid situations of naming shareholders as promoters, who are not in control. Further in relation to the reduction of lock-in period, it will give a boost to private equity players who seek an early exit. For non-promoters, reducing the lock-in period requirement will boost pre-IPO investments which are good for the markets. Overall, the proposed changes shall rationalize and simplify the roles and responsibilities of promoters. There will be a lesser disclosure burden on the promoter group and the group companies and shall make relevant information easier for promoters to process. The proposed changes recognise the ground realities for new age issuers and lays a stepping stone for rationalizing the listing process in India.
Available at https://www.sebi.gov.in/sebiweb/about/AboutAction.do?doBoardMeeting=yes&year=2020.
SEBI Consultation Paper on Review of the regulatory framework of promoter, promoter group and group companies as per the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 dated May 11, 2021. Available at 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.