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Wednesday, June 16, 2021

Explained: Why does Sebi want to reclassify promoters?

The Sebi has proposed doing away with the classification of ‘promoter’ concept and moving to ‘person in control’ system and scrapping the ‘promoter group’.

Written by George Mathew , Khushboo Narayan | Mumbai |
Updated: May 18, 2021 10:09:30 am
The markets regulator is expected to come out with the new regime soon, paving the way for a major change in the way the promoters and over 4,700 listed corporates function in the country.

With the concept of promoters slowly losing its relevance in India Inc, the Securities and Exchange Board of India (Sebi) has proposed doing away with the classification of ‘promoter’ concept and moving to ‘person in control’ system and scrapping the ‘promoter group’. The markets regulator is expected to come out with the new regime soon, paving the way for a major change in the way the promoters and over 4,700 listed corporates function in the country.

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What has Sebi proposed?

The regulator has proposed the shifting of the concept of ‘promoter’ to ‘person in control’. Sebi’s ICDR Regulations define a “promoter” as a person who has been named as such in the offer document or in the annual return of the issuer or a person who has control over the issuer (directly or indirectly) or in whose advice, directions or instructions the board of directors of the issuer is accustomed to act. Thus, the definition of promoter is wide-ranging and goes beyond persons in control of the issuer. The concept of promoter is used in a number of regulations issued by Sebi and other regulatory authorities.

Why is Sebi moving towards the new system?

The regulator said this 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.

The investor focus on the quality of board and management has increased, thereby reducing the relevance of the concept of promoter, Sebi said in a consultation paper last week. Governance practices have become the keyword in boardrooms and boards have become more professional with the arrival of independent directors and the structure of board composition. Besides, there are various committees in the board, including audit and remuneration, for transparent functioning of the affairs of a listed company.

Increasingly, there is focus on better corporate governance with the responsibilities and liabilities shifting to the board of directors and management. Shareholders now look to the board of directors and management to protect their rights and add value, while discharging their duties. This increased focus on quality of board and management has also reduced the relevance of the concept of promoter.

Why is the system of ‘promoter group’ being scrapped?

The definition of the ‘promoter group’ focuses on capturing holdings by a common group of individuals or persons and often results in capturing unrelated companies with common financial investors, Sebi says.

Capturing the details of holdings by financial investors while being a challenging task, may not result in any meaningful information to investors. Further, post listing, it is more relevant to identify and disclose related parties and related party transactions. Accordingly, this deletion should rationalise the disclosure burden and bring it in line with the post listing disclosure requirements.

Further, the Companies Act, 2013 has incorporated a definition of promoter in Section 2 (69). However, it does not define a promoter group. The definition for promoter group has been provided in Regulation 2(pp) of the ICDR 2018 of the Sebi.

Is the promoter landscape changing?

The investor landscape in India is now changing. Unlike the past, the concentration of ownership and controlling rights do 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, Sebi says.

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