[2021] 

129 taxmann.com 310 (Article)
Date of Publishing: August 25, 2021

SEBI revisits the concept of Promoter & Promoter Group

Proposes shift from 'Promoter' to 'Persons in control' & rationalises the definition of Promoter Gtoup
image
AJAY KUMAR K.V.
Manager, Vinod Kothari & Company

Introduction

The capital market watchdog, Securities and Exchange Board of India ('SEBI') has come out with a
consultation paper on changing the concept of company 'promoters', and moving towards the idea of
'person in control'. The proposal has come in the light of a drift from the conventional Indian ownership
structure to the contemporary ownership structure where more than one person or persons controls an
entity. The start-up ventures and the most celebrated 'unicorns' of the industry have substantial
investment from Institutional investors and Private Equity players ('PE firms') who exercises control
over the decision-making process through board representation and other means.

Further, SEBI has also proposed changes to the existing lock-in period requirements, streamlining
disclosures of group companies, and rationalising the 'Promoter Group' definition in SEBI (Issue of
Capital and Disclosure Requirements) Regulations, 2018 ('ICDR').

In this write-up, we have made an analysis of the concept of Promoter and Promoter Group, various
obligations of the Promoter under SEBI Regulations, and the rationale for the shift from 'Promoter and
Promoter Group to 'Person in Control'

Who is a Promoter?

Generally, any person who plays a major part in forming a company or establishing its business usually
the prospective owners or directors of the company is regarded as a Promoter. They bring the business
idea into existence and sets the vision and growth targets.

Promoter under Companies Act, 2013

Under the Companies Act, 2013, a promoter is a person who has been named as such in the prospectus
or is identified by the company in the annual return filed every year. The definition also covers
person(s) who has control over the affairs of the company, directly or indirectly whether in the capacity
of a shareholder, director, or otherwise. Further, those person(s) in accordance with whose advice,
directions, or instructions the Board of Directors of the company is accustomed to act, except in case of
a person acting in a professional capacity, would also be considered as a promoter of a company.

Promoter under SEBI Regulations

The term 'Promoter' is defined under ICDR and various other SEBI regulations has the reference to the
definition as given in ICDR.

Promoter under ICDR

The Regulation 2 (1) (oo) of ICDR defines the term 'promoter'. The definition is similar to the definition
in the Companies Act, 2013 and provides that a financial institution, scheduled commercial bank,
foreign portfolio investor other than individuals, and the other specified body corporates shall not be
deemed to be a promoter merely by holding 20% or more of the equity share capital of the issuer unless
such person satisfies other requirements prescribed under the regulations.

Obligations on Promoters under SEBI Regulations

The identification of promoters is crucial in the listing process as the ICDR places substantial
responsibilities on the Promoters. To ensure their 'skin in the game' after the IPO, the ICDR place
various obligations on the promoters such as a 20% minimum shareholding in the post-issue share
capital of the company and lock-in restriction of three years on such shareholding. There are also
onerous disclosure requirements on promoters with respect to disclosures in the prospectus so that the
general public has adequate information on the company for deciding whether to invest in the IPO or
not.

However, being classified as a promoter of an investee company (Company) may not be favourable for a
PE investor especially for those investors targeting the IPO as an exit route from the company.
Therefore, it is vital for a PE investor to understand the key responsibilities and continuous disclosure
requirements when classified as a promoter under the ICDR, including disclosure requirements relating
to members of promoter group entities.

Figure-1

A. Disclosure requirements of Promoters under SEBI Regulations

image
$ SEBI (Substantial Acquisition of Shares and Takeover Regulations), 2011 ('SAST')

# SEBI (Prohibition of Insider Trading Regulations), 2015 ('PIT')

* SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 ('LODR')

B. Freezing of Promoter holding in case of default

Under Chapter XI, Regulation 98 of LODR provides that in case of contraventions of the provisions of
LODR, the shareholding of promoter/promoter group may be frozen by the respective stock
exchange(s), in the manner specified in circulars or guidelines issued by the Board in coordination with
depositories.

Thus, the promoters are subject to such action by the SEBI or the stock exchange in case of
contraventions which adds up to the responsibilities of the promoter/promoter group. They need to
ensure that the entity is in compliance with all the rules & regulations even if they are not involved in
the day-to-day management of the entity.

The concept of Promoter Group

Regulation 2 (1) (pp) of ICDR defines Promoter Group ('PG') based on the nature of the promoter i.e. if
the promoter is an individual and if the promoter is a body corporate. The definition, essentially,
includes the promoter and the relatives of the promoter (spouse, parents, brother, sister, or child of the
person or of the spouse).

PG, if the promoter is an individual PG, if the promoter is a body corporate

  a body corporate in which 20%  
or more of the equity share
capital is held by the promoter or  
an immediate relative of the
promoter and
  a firm or Hindu Undivided  
Family in which the promoter or
any one or more of their relative
is a member would fall under the  
promoter group category.
  a body corporate in which a body
corporate as mentioned above
holds 20% or more, of the equity
share capital and
  a Hindu Undivided Family
(HUF) or firm in which the
aggregate share of the promoter
and their relatives is equal to or
more than 20% of the total
capital of the company.
The promoter group will also include all persons whose shareholding is aggregated under the heading
"shareholding of the promoter group" in the shareholding pattern of the company.
a subsidiary or holding company of
such body corporate
a body corporate in which the
promoter holds 20% or more of the
equity share capital; and/or
a body corporate which holds 20%
or more of the equity share capital
of the promoter
a body corporate in which a group
of individuals or companies or
combinations thereof acting in
concert, which hold 20% or more
of the equity share capital in that
body corporate and such group of
individuals or companies or
combinations thereof also holds
20% or more of the equity share
capital of the issuer and are also
acting in concert

It should be noted that, under the proviso to the definition of the promoter group, financial institutions,
scheduled bank, foreign portfolio investor other than individuals, mutual funds, and such other body
corporates as provided, are not deemed to be promoter group merely by virtue of the fact that 20% or
more of the equity share capital of the promoter is held by such person or entity. However, such entities
will be treated as promoter group for the subsidiaries or companies promoted by them or for the mutual
fund sponsored by them.

The SEBI has proposed to delete Regulation 2(1) (pp)(iii)(c) from the definition of prompter group in
the case of a promoter being a body corporate. The sub-clause covers those entities in which a group of
individuals or companies or a combination thereof holds 20% or more who are also holding 20% or
more of the equity in the issuer. These entities could be unrelated and the financial objectives of the
investors can also be different. Since the only factor connecting the two entities is the common financial
investors, the data captured under the said sub-clause may not be a piece of fruitful information to the
investors and in turn, adds up the compliance & disclosure burden on the listed entity.

There arises a situation where persons who are not involved with the business of the issuer are covered
by the definition and are required to make disclosures merely by falling within the ambit of the
definition. The said proposal of deletion of the clause will bring in much more meaningful data to the
investors for better analysis and will also help the issuer in reducing its compliance burden.

The definition of promoter group under ICDR is referred to in various SEBI regulations as in the case of
the definition of the promoter. The obligations of the promoter group are similar to those of the
promoters in terms of continuous disclosures and compliances under various SEBI regulations.

Figure-2

Disclosure requirements of Promoter Group under SEBI Regulations

image
The need for re-visiting the concept of Promoter

The recent studies show that institutional investors are gaining a notable share in the Indian capital
market, especially in the space of Top 500 listed companies by market capitalisation. The OECD report 1
shows that institutional investors represent an estimated investment of close to USD 400 billion in the
public equity market, which is around 30% of total market capitalisation in India. In the year 2018, the
institutional investors held almost 34% of equity holding of the top 500 Indian listed companies by
market capitalization2.

Among the top 500 listed entities by market cap, there is a sharp increase in the shareholding by the
institutional investors from 14% in 2001 to 26% in 2018.

The current growth of the Indian primary and secondary markets is also due to the growing number of
foreign institutional investors who have made considerable investments in the listed and unlisted space.

Figure-3

Institutional ownership in Indian listed companies (2001-2018) 3

image
The data shows that there is a considerable shareholding in listed companies that may not fall under the
'promoter/promoter group' instead appears under the 'public' category but is in a position to influence
the management and the decision-making process.

Thus, to bring such entities and persons who are now outside the umbrella of the promoters for the
benefit of the retail investors as well as to have better governance over such entities to be accountable
under the various provision of the SEBI Regulations, a re-visit to the very definition of the promoter is
necessary.

A paradigm shift from promoter to the person in control is essential because several businesses,
including new age and tech companies, are non-family owned and/or do not have a distinctly
identifiable promoter group. The typical Indian family-owned companies are slowly moving away from
their "once a promoter, always a promoter" status with the change in their leadership.

Figure-4

Shifts in the pledge of Promoters' shares (2001-2018) 4

image
In India, the promoters of listed entities pledge their shares as collateral to secure finance from banks &
financial institutions. The underlying risk factor on the pledging of promoter stake is that an instance of
default would significantly affect the share prices thereby putting the market as well as the retail
individual investors at potential losses.

The number of shares pledged shows an upward trend until 2016 across all listed companies. However,
the market value of shares pledged has remained stable while the number of pledged shares shows a
slight downward trend since 2013.

In the Financial Stability Report, December 2014" (2014), RBI stated, "a typical Indian company, the
promoters pledge shares not for funding outside business ventures but for the company itself. Given
the vulnerabilities in some promoter-led companies, pledging of promoters' shares could pose risks to
the financial stability."

SEBI has made the disclosure framework in respect of pledge of shares as collateral more stringent
through the SAST regulations and has also provided strict timelines for such disclosures by promoters
and promoter group. The data is disseminated through the stock exchange for the benefit of the
investors.

Figure-5

Shifts in directors who are Promoters (2001-2018) 5

image
Due to the traditional family-owned business setup, the promoters also get a seat on the board of
directors of the company. The above figure shows the paradigm shift in the board participation by
promoters and the average proportion between promoter directors and non-promoter directors during
the period 2001- 2018.

The   Where a regular non-executive chairperson of a listed entity is a promoter of the

SEBI listed entity or is related to any promoter, at least half of the board of directors of the
listed entity shall consist of independent directors.
has
broug
ht
safeg
uards
to
prote
ct the
mino
rity
share
holde
rs'
rights
espec
ially
to
cover
the
 comp
anies
with
prom
oters
holdi
ng
board
positi
ons.
The
Regul
ation
17

 
The fees or compensation payable to executive directors who are promoters or
members of the promoter group shall be subject to the approval of the shareholders
by special resolution in the general meeting of the members where such fees or
compensation exceeds the limits prescribed therein.
These are a few measures to ensure that the promoter directors do not get an undue advantage due to
their ability to influence the decision-making process by the Board of directors of the company and an
element of independence is involved in the Board process.

However, it is pertinent to note that, the restrictions are only attracted to the 'promoters' and persons
'related to promoter' of the company. A shift from 'promoter' to 'person in control' may cover those
persons who are currently outside the ambit of the definition of 'promoter' but enjoys an element of
influence on the entities.

SEBI discussion paper on Brightline Tests for the acquisition of 'Control' of the LODR provides that;
6

The SEBI had issued a discussion paper on Brightline Tests for Acquisition of 'Control' under SEBI
Takeover Regulations in 2016, with the intent to decide whether a numerical threshold as the current
practice or a principle-based test can be conducted to determine whether a person is in control of a
listed entity.

image
The term 'control' implies the ability of a person or a group of persons acting with a common objective
to influence the management and policy-making process of an entity. It can be said that such person(s)
is(are) in the 'driving seat' with a substantial influence over the key business decision making, even
without involving in the day-to-day affairs of the company.

The identification of control is undemanding in the instances where the rights arise from the
shareholding/voting rights in the company. The real test of control in the cases of contractual
agreements becomes complex and demands elaborate consideration of facts and circumstances of the
case.
There   The Insurance Laws (Amendment) Act, 2015provides that control shall include
fore, the right to appoint a majority of the directors or to control the management or policy
decisions including by virtue of their shareholding or management rights or
the shareholders agreements or voting agreements. Thus, the ambit of coverage of
natur promoter under the Act is wide enough to include various types of business ownership
e of structures.
the
defini
tion
of
contr
ol in
such
cases
has to
be
based
on a
set of
defin
ed
princi
ples
rather
than
the
rules.
In the
matte
r of
Subh
kam
Ventu
res (I)
Pvt.
Ltd.7•

•   Consolidated FDI Policy Circular of 2020 has a similar definition as provided in

the Insurance Laws (Amendment) Act, 2015.
•   In Competition Act 2002, the concept of control includes controlling the affairs or
management by one or more enterprises,
(a)   either jointly or singly, over another enterprise or group;
(b)   one or more groups, either jointly or singly, over another group or enterprise
•   International Financial Reporting Standard (IFRS) also defines the principle
of control and establishes control as the basis of determining which entities are
consolidated in the consolidated financial statements. Under IFRS, the principle of
control sets out the following three elements of control:
(a)   power over the investee;
 (b)   exposure, or rights, to variable returns from involvement with the investee; and
(c)   the ability to use power over the investee to affect the amount of the investor's returns.
Whether test applied for identifying SBO under CA, 2013 is of any relevance here?

The MCA vide its Notification dated June 13, 2018, the Hon'ble SAT, in its judgment dated January 15,
2010, rejected SEBI's view stating that none of the clauses of the agreements, individually or
collectively, demonstrated control in the hands of the acquirer wherein SEBI argued that the rights
conferred upon the acquirer, through the agreements, amounted to 'control' over the target company.

The essence of the order was, control, according to the definition, is a proactive and not a reactive
power. The test is whether the acquirer is in the 'driving seat'.

The SEBI's proposal for replacing the term 'promoter' with 'person in control' would change the current
regulatory framework and will align with what was intended to be amended under SAST. However, the
amended definition should exclude protective rights/ veto exercised by the acquirer that are
participative in nature.

The concept of Control under various other Acts, Rules & Circulars
8
Proposal SEBI Consultation paper SEBI Board decision
Reduction in lock-in Accepted
periods for minimum The lock-in of promoters'
promoter's contribution shareholding to the extent of
and other shareholders minimum promoters'
for public issuance on the contribution (i.e. 20% of post
Main Board issue capital) shall be for a period
of 18 months from the date of
allotment in initial public
offering (IPO)/further public
offering (FPO) instead of existing
3 years, in the following cases:

(a)   If the object of the

issue involves only
offer for sale
(b)   If the object of the
issue involves only
raising of funds for
other than for capital
expenditure for a
project (more than
50% of the fresh
issue size)
(c)    In case of combined
offering (Fresh Issue
+ offer for sale), the
object of the issue
involves financing
for other than capital
expenditure for a
project (more than
50% of the issue size
 excluding OFS
portion)
Lock-in of Promoter Further, in all the above- Accepted
holding in excess of mentioned cases, the promoter
minimum promoter shareholding in excess of
contribution minimum promoter contribution
shall be locked-in for a period of
6 months instead of existing 1
year.
Reduction in lock-in The entire pre-issue capital held The lock-in of pre-IPO securities
periods for other by persons other than the held by persons other than
shareholders for public promoters shall be locked-in for promoters shall be locked-in for a
issuance a period of 6 months from the period of 6 months from the date of
date of allotment in the initial allotment in IPO instead of existing 1
public offer as opposed to the year. The period of holding of
existing requirement of 1 year. equity shares for Venture Capital
Fund or Alternative Investment
Fund (AIF) of category or Category
II or a Foreign Venture Capital
Investor shall be reduced to 6
months from the date of their
acquisition of such equity shares
instead of existing 1 year.
Rationalization of the Deletion of Regulation 2(1) (pp) The definition of promoter group
definition of 'Promoter (iii)(c) in the definition of shall be rationalized, in case where
Group' promoter group the promoter of the issuer company
is corporate body, to exclude
companies having common financial
investors
Streamlining the Only the names and registered The disclosure requirements in the
disclosures of group office address of all the Group offer documents, in respect of Group
companies Companies should be disclosed Companies of the issuer company,
in the Offer Document. All other shall be rationalized to, inter-alia,
disclosure requirements like exclude disclosure of financials of
financials of top 5 listed/unlisted top 5 listed/unlisted group
group companies, litigation etc., companies. These disclosures
presently done in the Draft Red will continue to be made
Herring Prospectus can be done available on the website of the
away. However, these group companies.
disclosures may continue to
be made available on the
websites of the listed
companies.
Shifting from concept of To revisit the concept of Agreed in-principle.
'promoter' to concept of promoter and shift to the concept To this effect, the Board, advised
'person in control' of 'person in control' or SEBI to:
'controlling shareholders'.
(a)   engage with other
regulators to ascertain
and resolve regulatory
hurdles, if any.
(b)   prepare draft
amendments to
securities market
 regulations and analyse
impact of the same.
(c)   further deliberate at the
PMAC and develop a
roadmap for
implementation of the
proposed transition.
In furtherance to the acceptance of the proposals at its Board meeting, the SEBI notified Issue of
Capital and Disclosure Requirements (Third Amendment) Regulations, 2021 on 13th August 2013,
whereby the Regulation 2(1)(pp)(iii)(c) from the definition of prompter group has been deleted. Thus,
the actionable for listed companies pursuant to the said amendment are;

image
The FAQs of CDSL on System Driven Disclosure in Securities Market also provides that In case of any
subsequent update in the information about Promoters, members of the promoter group, director(s),
designated persons, the listed company shall update the information with the designated depository on
the same day.

Further, the disclosure requirements under various SEBI regulations as depicted in Figure 2 will not be
applicable to such entities henceforth.

Conclusion

The Indian investor perception is evolving at a faster pace and the regulatory framework needs to align
at the same pace. The move of SEBI in bringing a paradigm shift from 'Promoter/Promoter group to
'Person in control' will have a substantial effect in the capital market as it would bring in considerable
changes in various SEBI regulations like ICDR, LODR, SAST, PIT, etc., and would pave the way for the
introduction of a more comprehensive framework for IPOs.

How will the regulator define the term 'person in control'? Whether the existing framework in respect of
SEBI SAST would be re-designed with a rule-based as well as a principle-based test of control as
discussed in the discussion paper on 'Brightline test'? these questions could interest us as we dig deeper
into SEBI's proposal.

■■

1. https://www.oecd.org/corporate/ownership-structure-listed-companies-india.pdf
2. OECD (2019), OECD Equity Market Review of Asia 2019
3. https://www.oecd.org/corporate/ownership-structure-listed-companies-india.pdf
4. https://www.oecd.org/corporate/ownership-structure-listed-companies-india.pdf
5. https://www.oecd.org/corporate/ownership-structure-listed-companies-india.pdf
6. https://www.sebi.gov.in/sebi_data/attachdocs/1457945258522.pdf
7. https://www.sebi.gov.in/satorders/subhkamventures.pdf
8.
https://www.mca.gov.in/Ministry/pdf/CompaniesSignificantBeneficial1306_14062018.pd
f