Sebi catches up with changing corp landscape

By: |
May 13, 2021 6:00 AM

‘Person in control’ instead of ‘promoter’ as key person, change in lock-in period for promoters’ stake nod to new-age companies

SebiThe auction is part of Sebi's effort to recover investors' money. Kerala Housing Finance had garnered funds from investors through issuance of securities without complying with the regulatory norms.

The Securities and Exchange Board of India (SEBI) is spot on when it points out that the concept of “person in control” may be more relevant today for corporate India than the concept of a promoter. Many of today’s new-age companies are owned by one or more partners, not families. Since Private Equity (PE) players and other institutional investors own large stakes in companies—often more than the promoters—they have a bigger say in the running of the business than the founders do, including in the choice of directors on the board. Their influence could continue even after the company is listed. So, it is not always the owner who is in charge, though, historically in India, owners with minuscule holdings have enjoyed disproportionate powers as boards looked the other way.

However, as much as the idea is forward-looking, we must tread carefully. To begin with, one would need to come up with a sharp definition of control, one that is not vulnerable to misuse or abuse, and which clearly spells out the rights and responsibilities. It is true that owners with small stakes wield influence that is not desirable. A change from the current promoter concept is sure to have significant ramifications—since several laws would need to be amended—and must be accompanied by adequate checks and balances. But, there is no doubt we need regulations for companies where there is no clear promoter and where the managements call the shots. Given how the corporate landscape is changing thanks to many more first-generation entrepreneurs and more PE players and institutional investors, an overhaul of the some of the rules and definitions is probably helpful and necessary. The current lot of regulations were framed keeping in mind the large number of family-run businesses spread across a web of firms with common promoters and shareholders. Promoters often controlled the enterprises through complex holding structures. Much of this was cleaned up when the Companies Act was overhauled; post the Kotak Committee corporate governance norms too have been tightened. Investors too now have access to more information since companies do make detailed disclosures. Now, SEBI is looking to make some of the rules more relevant and less onerous for founders. For instance, if the objective of an IPO is an offer for sale, or to raise funds for a project that is not capital expenditure, it wants the lock-in period for the ‘20% minimum promoter stake’ to be just one year and not three. The idea of the longer holding period was to ensure the promoters continued to have skin in the game since, typically, money was raised to fund greenfield ventures; nowadays, businesses are more stable by the time they hit the markets, having often been backed by AIFs or PEs. Moreover, most promoters have just one business and would not really like to dilute their stakes. The ‘excess’ stake, SEBI believes, should be locked-in for just six months post the IPO, and not a year as is the rule now. That’s fair. Moreover, it feels that others with pre-issue capital too should be allowed to sell their shares after six months of the IPO. Again, that would help investors like PEs who may need to close their funds. The regulator rightly points out that the regulation defining ‘promoter group’ often ends up capturing unrelated companies with common financial investors and that, post listing, it is more meaningful to identify and put out information on related parties and related party transactions. Doing away with regulations that define ‘promoter group’ makes sense.

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