While allowing the change to play out, SEBI should look ahead and see what regulatory and enabling frameworks need to be in place
By Sai Venkateswaran
The king is dead, long live the king!
It may be too early to make this proclamation, heralding the transition from the old king (the ‘promoter’) to the new king (the ‘controlling shareholder’), but the change has been set in motion. At the SEBI board meeting this month, an important decision was taken regarding the regulatory framework for promoters, and granted an in-principle go-ahead to move from the concept of ‘promoter’ to ‘person in control’ or ‘controlling shareholders’ in a smooth, progressive and holistic manner. It has advised SEBI to develop an implementation roadmap and work with other regulators to resolve regulatory hurdles.
As per SEBI, the key driver for this change is the evolving investor landscape and shareholder profile, with promoter stakes coming down over time, and institutional investor holdings and participation increasing, together with the emergence of several new-age companies backed by multiple financial and other investors. Further, there are increasing expectations from the board and management in enhancing corporate governance, which is meant to make companies more independent from promoters.
While the promoter holdings in top-500 Indian companies by market capitalisation have been showing a downward trend from a peak of 58% in 2009, these remain well over 50% in 2018 as per the OECD report on ownership structure of listed companies in India. The proportion of companies where promoters hold more than 50% stake has increased from 56% in 2001 to 66% in 2018. In contrast, the aggregate average ownership held by private corporations and strategic individuals in listed companies in the US is 6%, while it is 12% in the UK, and the institutional shareholding in the US is 80%, and for UK companies it is 68%. So, it is still a long way before we can really underplay the role of promoters in the Indian market.
On the other hand, there is no denying that there are many new-age companies that are emerging in India, including unicorns, where the founder isn’t a dominant shareholder and majority ownership is vested with one or more financial investors. While there is an enabling framework to allow issue of shares with superior voting rights to allow founders to retain control or have a greater say, it hasn’t taken off in its current form, and SEBI is engaged in consultations to revamp this framework. Once this takes off, we can expect another class of listed companies that are founder-controlled without significant ownership. Globally, there are many companies, including many of the large tech companies, which are controlled by founders through this route.
While allowing these changes to play out, SEBI should look ahead and see what regulatory and enabling frameworks need to be in place, recognising that Indian capital markets will, in the near future, have three classes of companies: firstly, ‘promoter-controlled entities’; secondly, ‘founder-controlled companies’ (through superior voting rights); and lastly, ‘widely-held professionally-managed companies’. From an investor protection perspective, the regulatory framework and corporate governance requirements for each of these classes of companies should be different, with sufficient checks and balances based on unique considerations relevant for each of these classes of companies.
While SEBI moves away from the concept of promoter to that of a controlling shareholder, it should only seek to do away with the archaic elements of the current definition of promoter and its current use across regulations, and not dilute the concept per se, as the Indian promoter or controlling shareholder will continue to play a dominant role in the Indian capital markets for the foreseeable future. As SEBI develops this definition of ‘controlling shareholder’, it should also look at similar concepts used elsewhere in other capital markets—for instance Singapore, which, as a market, has dominant ownership by private corporations and strategic individuals, and uses a 15% voting rights threshold in its definition of controlling shareholder, whereas the UK uses a 30% voting rights threshold.
The UK Listing Rules also require premium listed companies with a controlling shareholder to put an agreement in place to safeguard the independence of the company. Further, while the concept of promoter group is being revisited, focus should be on ensuring that there are adequate safeguards to cover transactions with entities that are part of the controlling shareholder’s ecosystem, including through suitable enhancements to the definition of related parties. In summary, we need to recognise that the future will see the co-existence of promoter-controlled, founder-controlled and widely-held professionally-managed companies, and accordingly have suitable frameworks to govern each of these classes of companies. As the concept of ‘controlling shareholder’ develops, SEBI needs to strike the right balance in recognising the various classes of shareholders and bringing a framework that is well-suited for all, but most importantly one that is relevant and protects the interests of investors, including public shareholders.
The author is partner, KPMG in India. Views are personal