[2021] 

127 taxmann.com 412 (Article)
Date of Publishing: May 19, 2021

Analysis of SEBI’s Consultation Paper on Regulatory Framework on

Promoter
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AAYUSH KHANDELWAL ABHINAV GUPTA

Introduction

The Securities and Exchange Board of India ("SEBI") issued a consultation paper on May 11, 2021, to
review the regulatory provisions related to promoter and promoter group in the SEBI (Issue of Capital
and Disclosure Requirements) Regulations, 2018 ("ICDR Regulations"). The regulator has also
proposed to review the lock-in requirement on equity shares post IPO and the disclosure of group
companies in the offer document.In this article, the authors discuss these proposals and analysehow
SEBI missed the mark with regards to certain proposals and issues it could have addressed through this
consultation paper.

Reduction in lock-in period on equity shares-

The current provision under the ICDR Regulations requiresthe minimum promoters' contribution, that
is twenty percent of the post-issue capital, to be under a lock-in period of three years post the initial
public offer ("IPO"). The promoters' holding over minimum promoters' contribution is locked-in for
one year from the date of IPO.

The regulator has proposed to decrease the lock-in periodon minimum promoters' contribution to one
year where the IPO comprises only an offer for sale or the object of the IPO for financing other than for
capital expenditure of a project. Further, an exemption may be given on the lock-in requirement post
six months of IPOto comply with the minimum public shareholding ("MPS") norms. It is a welcome
step as it could help in achieving the MPS promptly since a company is required to achieve an MPS of
25% in three years from the date of listing. Companies with post-issue market capital exceeding
Rs.1,00,000 crores are required to achieve at least 10% public shareholding in two years and at least
25% public shareholding within five years from the date of listing. Non-compliance with the MPS norms
attracts severe actions being taken by the recognized stock exchanges. Moreover, SEBI has refused to
consider reasons given by companies in cases of non-compliance with the MPS norms. Therefore, it
becomes necessary to reduce the lock-in period on the promoters' shareholding, as the sale of shares
held by the promoter is one of the methods to comply with MPS. It is noteworthy that SEBI has recently
done away with the minimum promoters' contribution and the subsequent lock-in norms in case of a
further public offer.

In another proposal, SEBI has proposed to decrease the lock-in period on promoters' holding over
minimum promoters' contribution to six months post IPO. If this proposal is implemented then the
proposal to exempt the minimum promoters' contribution from the lock-in periodpost six months of
IPO to comply with MPS norms seems redundant. For instance, if a promoter is required to dilute its
holding after six months to achieve MPS, it may do so even if the minimum promoters' contribution is
under lock-in period. In other words, the promoter will not be required to dilute the minimum
promoters' contribution part to achieve 25% public shareholding, as the minimum promoters'
contribution is only 20% of the post-IPO capital. Therefore, we believe that the exemption on minimum
promoters' contribution from lock-in requirements post six monthsof IPO serves no purpose.

Removing definition of Promoter Group –

The definition of promoter group includes a body corporate in which a common set of investors of the
company holds twenty percent equity share capital in the company as well as in that body corporate.
For instance, A holds more than 20% both in a listed company B and a body corporate C then as per the
definition C is included in the promoter group of B. SEBI has observed that such a provision puts a
burden on the body corporate that is related to the company only because of common investors and
does not share any relationship with the company. Moreover, the regulator has also observed that the
aggregate holding of an identified set of investors in other entities may not give any significant
information to the investors. Therefore, the regulator has proposed to rationalize the classification of
the promoter group by deleting the provision. SEBI has been working towards such rationalization from
quite some time and even amended the SEBI (Listing Obligations and Disclosure Requirements)
Regulations, 2015 ("LODR Regulations")easing few requirements for reclassification of promoter
group entities to status of public shareholders.

The proposal of SEBI is a welcome step as it could help the unrelated body corporates which get caught
in the wide definition of promoter group from making unnecessary disclosures.Some SEBI regulations
do not make a difference between promoter and promoter group and put them under one umbrella for
disclosure. For instance, the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
("SAST Regulations") has various disclosure burdenson the promoter group viz. on the acquisition,
disposal of shares, pledge, etc., as the definition of the promoter here includes promoter group.

From 'promoter' to 'person-in-control'-

The most significant suggestion in the consultation paper was regarding removing the concept of
promoter and introducing person in control or controlling shareholder. This is a quest to move towards
a regime similar to international markets where instead of the concept of a promoter, controlling
shareholders or persons with significant control is prevalent. This is a concrete step towards an earlier
indication by the SEBI chairman in 2019 regarding the introduction of controlling shareholders.

Currently, ICDR regulations define a promoter to be a person:

a.   who is named as such in the offer document or annual return; or

b.   who has direct or indirect controlover the issuer; or
c.   on whose advice the board of directors is accustomed to act.
This is a wide definition that often, within its ambit, includes people who are not actually in control of
the organization or have minimal shareholding but are still considered as promoters. SEBI in the paper
stated various reasons for suggesting such a shift from the concept of a promoter to the concept of a
person in control. There is a trend of private equity firms investing in unlisted companies and holding a
substantial shareholding even post-listing. An OECD report indicated that promoter shareholding in
companies is showing a downward trend with an increase in investment by institutional investors.
These kinds of trends lead to a situation where a person might not have any controlling rights but still
gets classified as a promoter due to the aforementioned broad definition. Moreover, corporate
governance norms in India majorly focus on the functioning of the board of directors and the upper
management making the concept of promoter further irrelevant. For these reasons, SEBI felt that the
concept of promoters warranted a rejigging.

In our opinion, even though this is a positive move by SEBI for the reasons mentioned above, SEBI
failed to define how classification and identification of 'person in control' would be different from
'promoters'. It is a missed opportunity to clear the air around the concept of 'control'. SEBI needs to
clearly define what 'in control' would entail to successfully enforce the concept of a person in control. It
is not unknown that there has been much subjectivity regarding the aspect of 'control'. Even though
control is defined under Regulation 2(1)(e) of the SAST Regulations, the definition is broad and has
been the cause of multiple litigations.

Furthermore, SEBI can take guidance from foreign jurisdictions where the concept of 'person in control'
and 'controlling shareholder' is already prevalent, to develop a sound regulation regarding controlling
shareholder.The person in control concept is followed in various international regimes such as the
United Kingdom and Singapore.In the United Kingdom, the numerical threshold for being classified as
a controlling shareholder is thirty percent of voting rights. In Singapore, this threshold is fifteen
percent. In addition to this, if a personcan directly or indirectly dominate the decision-making with
respect to financial and operational policies of the companythen they will be considered as a controlling
shareholder.

SEBI can consider incorporating a clause on the lines of following definition for determination of
'controlling shareholder' or 'person in control' which includes the elements of jurisprudence developed
over years and takes guidance from foreign jurisdictions.

A person will be classified as a 'person in control' or 'controlling shareholder' if he/she:

(a)   has the right or entitlement to exercise twenty-five percent or more of total voting
rights in the company; or
(b)   has the right to appoint the majority of non-independent directors in the company;
or
(c)   has a positive influence in the determination of financial and operational policies of
the company.
Such a definition of person in control would lead to easy determination of shareholders who have
substantial shareholding and can be classified as a person in control. Noting that foreign jurisdictions
have resorted to a numerical threshold in addition to a subjective criterion, it is pertinent Indian
regulator provides such a threshold that helps in clearly establishing control. SEBI in one of its
consultation papers has noted that considering the open offer triggering criteria under SAST
regulations in twenty-five percent, even the threshold for establishing control should be kept as twenty-
five percent. It also provided for the right to appoint for the majority of non-independent directors as a
determinant of control. This was suggested as part of the 'brightline test' which was later scrapped by
SEBI citing that it could be abused by parties.Moreover, adding the determinant 'positive influence in
the determination of policy' would be in line with landmark judgment like Arcelor Mittal where the
Supreme Court considered such element as reflective of control.

An additional benefit of changing the definition of the promoter to the person in control and
prescribing a new threshold for determining control would tackle problems where shareholders with
minuscule shareholding and no influence over affairs of the company were classified as promoters. To
address this issue, SEBI did notify Regulation 31A ofthe LODR Regulations, which would allow
promoters to reclassify as public shareholders upon fulfillment of certain conditions. However, despite
amendments it remains a complex procedure requiring the approval of shareholders and the regulator
in cases where promoter shareholding is more than one percent. With the introduction of 'controlling
shareholder', such shareholders will not have to go through the tedious process of reclassification.

Conclusion:

SEBI's proposal on reducing the lock-in period seeks to provide a timely exit to the private equity firms
and promoters. In jurisdictions like the UK and the US, the lock-in period range is similar to what has
been proposed by the regulator. This will make the regulation at par with other developed markets.
With regards to the proposal of shifting from 'promoter' to 'person in control', it is important SEBI
comes out with concrete guidelines surrounding the concept of controlling shareholders to eradicate the
current subjectivity surrounding 'control'. In absence of any such guideline, this would come across
merely as a rebranding exercise without any significant change in position of law. It is yet to be seen if
SEBI chooses to fall back to the brightline test in order to identify a 'person in control' or 'controlling
shareholder' or turn a blind eye to the prevailing uncertainty regarding the concept of control.

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