Proposal for Changing Promoters to Person in Control: SEBI

• 12 May 2021

Why in News

Recently, the Securities and Exchange Board of India (SEBI) has proposed doing away with the concept of promoters and moving to ‘person in control.’

• It has also suggested reducing the minimum lock-in periods post a public issue for promoters and pre-Initial Public Offering (IPO) shareholders.

SEBI

• SEBI is a statutory body established in April, 1992 in accordance with the provisions of the Securities and Exchange Board of India Act, 1992.
• The basic functions of the Securities and Exchange Board of India is to protect the interests of investors in securities and to promote and regulate the securities market.

Key Points

• Promoter:
  
  • The meaning of ‘promoter’ and ‘promoter group’ is defined in Companies Act, 2013 and SEBI (ICDR) Regulations, 2018.
  • Generally, a promoter conceives an idea for setting-up a particular business at a given place and performs various formalities required for starting a company.
  • Promoter group includes:
    
    • Any body corporate in which a group of individuals or companies or combinations thereof acting in concert, which hold 20% or more of the equity share capital in that body corporate and
    • Such a group of individuals or companies or combinations thereof also holds 20% or more of the equity share capital of the issuer and are also acting in concert.
      
      • An issuer is a legal entity that develops, registers and sells securities to finance its operations.
• Promoter to Person in Control Concept:
  
  • Need:
    
    • The shift is necessitated by the changing investor landscape in India where concentration of ownership and controlling rights do not vest completely in the hands of the promoters or promoter group because of the emergence of new shareholders such as private equity and institutional investors.
    • Investor focus on the quality of board and management has increased, thereby reducing the relevance of the concept of promoter.
    • The current definition focuses on capturing holdings by a common group of individuals or persons and often results in capturing unrelated companies with common financial investors.
  • Significance:
    
    • This move will lighten the disclosure burden for firms.
    • The 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.
• Transition Period:
  
  • A three-year transition period for moving from the promoter to person in control concept has been suggested.
• Reducing the Locking Period of IPOs:
  
  • If the object of the issue involves an offer for sale or financing other than for capital expenditure for a project, then the minimum promoters’ contribution of 20% should be locked-in for one year from the date of allotment in the IPO.
    
    • Currently, the lock-in period is three years.

Initial Public Offering

• IPO is the selling of securities to the public in the primary market.
  
  • Primary market deals with new securities being issued for the first time. It is also known as the new issues market.
  • It is different from the secondary market where existing securities are bought and sold. It is also known as the stock market or stock exchange.
• It is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public.
  
  • Unlisted companies are companies that are not listed on the stock exchange.
• It is generally used by new and medium-sized firms that are looking for funds to grow and expand their business.

IPO-Locking Period

• It is a caveat outlining a period of time after a company has gone public when major shareholders are prohibited from selling their shares.

Offer For Sale

• Under this method, securities are not issued directly to the public but are offered for sale through intermediaries like issuing houses or stock brokers.
• In this case, a company sells securities enbloc at an agreed price to brokers who, in turn, resell them to the investing public.

Source: IE