Tech unicorns, which now symbolise the new-age Indian business space, necessitate a relook of norms designed when family-owned businesses dominated
By Saurabh Pramod Shah
Etymologically speaking, ‘promoter’ is derived from Latin promotor, which translates into ‘the one who forwards or advances some cause’. Thus, a promoter is someone who moves things forward. They take all the steps to form the company. Their contribution is significant in establishing the company. The word ‘promoter’ is also defined in the SEBI Regulations and the Companies Act, 2013.
The definition in Regulation 2 (1) (oo) of SEBI (Issue of Capital and Disclosure Requirement) Regulation 2018, is quite similar to the one in the Companies Act 2013, except for the fact that the SEBI definition states that a financial institution, scheduled commercial bank, FPIs other than individuals, and the other specified body corporates shall not be deemed to be promoters merely by holding 20% or more of the equity share capital unless they satisfy other requirements prescribed under the regulations.
In the US, the Securities Exchange Commission Rule 405(a) defines a promoter as a person who, acting alone or in conjunction with other persons, directly or indirectly takes the initiative in founding or organising the business enterprise.
The SEBI Act 1992 was framed with an intent to protect the investors, promote the development and regulation of the securities market, but considering the current entrepreneurship trends, the ease of doing business, should also be considered for a better participation in the securities market. Currently, the tabulated disclosures and compliances are to be followed by promoters under the SEBI Regulations.
These and other norms are to be followed extensively by the promoters. But, these regulations are cumbersome and affect promoter-participation in the economy. These regulations were framed in this manner because most of the businesses then were family-owned. Now, the ownership scenario has changed. A step towards adjusting to the current situation and focusing on the ‘control’ of the promoter is the need of the hour, as the ecosystem is going through a major change due to the start-up wave—witnessing significant departure from the family-run-enterprise days. Even though, the promoter is an instrumental element in the formation of the company, we cannot disagree with the fact that, in recent years, the corporate structure has seen a dramatic change.
SEBI had recently released a discussion paper suggesting various changes, specifically on the definition of the promoter against the backdrop of start-up ‘unicorns’ proposing to list on the stock exchange. The heavy burden on the promoters through various SEBI-mandated compliances is also considered in the discussion paper, as these start-ups have a substantial investment in the form of institutional investors and PE firms, leaving promoters with very little control over the company. It would be remiss if we did not also note that over the years, the contribution of the institutional investors has grown considerably in India’s capital market; thus, SEBI’s suggestion to include institutional investors in the definition of promoters is a welcome move that would help in better governance.
It is pertinent to note that the new-generation companies, especially the unicorns, are are not family-run and, in many cases, do not have an identifiable promoter. The reason for this is that promoters of these start-ups have, over the years, diluted their equity over various rounds of funding. Various SEBI compliances required of promoters such as lock-in period, reclassification and penalties have become a cause for concern for these unicorns wishing to list on the bourses.
Of the mentioned provisions, the share lock-in requirement on promoters, after the public issue, is to be noted; it was framed to ensure that promoters take ownership of the working of the company and are connected to it in the long run. Today, the companies going public have a promoter-base that has worked hard over the years and matured the businesses’ profile. They see their holding as a means for leverage, to acquire funds in the market. Hence, the lock-in requirement should be relaxed by SEBI for these new-age start-ups.
The changing business environment demands a balanced approach in the laws governing the promoters. The challenge for the regulator would be to address the falling desire for being appointed a promoter. Currently, being appointed promoter is a one-way road as the shareholders are the deciding factor when the promoter wishes to reclassify themselves as a public shareholder. These promoters are not willing to bear the burden of the contraventions since they are not involved in the regular affairs of the company, apart from being named on the company documents as promoters. They are seen as primary culprits in contraventions related to the company. There are cases wherein the promoters, without being actively involved in the day-to-day activities of the company, have had to bear the burden and penalty of such contraventions.
Thus, SEBI must revisit the definition and ensuing onus of being regarded as a promoter and, hopefully, its discussion paper that focuses more on “person in control” rather than the promoter would pave the way for better governance in India.
Corporate advisor & company law consultant