SEBI Regulations:Reviewing Framework of Promoter and Promoter Groups

A consultation paper was issued by the Securities and Exchange Board of India (“SEBI”) on
11th May, 2021 to review the regulatory provisions for promoters and promoter groups in the
SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR
Regulations”). It also proposed a lock-in requirement on equity shares post the Initial Public
Offering (“IPO”). The authors, through this article, will analyse certain proposals and look
into issues missed by SEBI.

Reduction in lock-in period on equity shares

Under ICDR the regulation requires the minimum promoter’s contribution, which is 20% of
the post issued capital, locked in for the period of 3yrs post-IPO. The excess promoters
holding over minimum promoter’s contribution is locked for one year from the date of IPO.
The regulators have asked to reduce the lock-in period to one year for minimum promoter’s
contribution if the IPO comprises the offer of sale or if the object of the IPO is financing
rather than using it for capital expenditure for a project.

An exemption could also be given to comply with Minimum Public Shareholding (MPS)
norms on the lock in requirement post six months of IPO. A company is required to achieve
25% MPS within the first 3yrs from the date of listing and this could help as a welcome step
in achieving the goal quickly. Companies with market capital exceeding 100000 crores are
required to achieve public shareholding of 10% within 2 year and 25% within 5yrs of listing.
Non-compliance attracts serious actions against them by stock exchanges. SEBI has already
refused to listen to any explanation for the non-compliance of MPS in the adjudication order
in respect to Sayaji Hotels Limited where its promoter group failed to comply with the MPS
norms under rule 19(2)(b) and 19(a) of Securities contracts (Regulation) Rules, 1957.
Therefore, reducing the minimum time for holding the promoter shares can help achieve the
MPS fast by selling promoters shares. SEBI recently dumped the minimum promoter
contribution and lock-in norms.

In another proposal, SEBI proposed to reduce the lock-in period on promoters holding to six
months after IPO. If passed then the proposal to exempt the minimum promoter contribution
from the lock-in period, which is to restrict the controlling shareholders from disposing of
their holdings after listing the company, to ensure that they have ‘skin in the game’, and to
make them responsible, to get 25% MPS fast would become redundant and of no use.
Removing definition of Promoter Group 
Currently, according to the definition provided in the Regulation 2(pp) of ICDR, a promoter
group is an individual or companies or combination of both which has the stake of 20% or
more of the equity shares of that corporate body and also have 20% or more stake of the
issuer. According to SEBI, such a clause burdens the body corporate that is solely connected
to the company because of common investors and has no other relationship with it.
Furthermore, the regulator has noted that an identity group of investors’ aggregate holdings in
other companies may not provide substantial information to the investors. One of the grounds
for considering someone as the Promoter might be that they are a subscriber to the
memorandum. Persons acting in concert with the Promoter Group are also considered
members of the Promoter Group.
SEBI accordingly is making some easement in the regulation for the reclassification of
promoter group to general investors.The proposal seems to be a welcome step as it reduces
the burden on various companies which are not related to the corporate body other than
having investment in it. But due to the wide definition of promoter group they get caught in
between and end up making unnecessary disclosures.

From ‘promoter’ to ‘person-in-control’

The most interesting suggestion in the paper was regarding removal of the term ‘promoter’
and introducing a person in control or controlling shareholder. This is a similar move to the
international markets such as the United Kingdom, where the threshold is 30% of voting
rights, and in Singapore, the threshold is 15%, to determine the person in control. This step
was first indicated by SEBI chairman regarding controlling shareholders in 2019:- 
According to the current definition of promoter, someone who is named in the offer document
or annual return or who has direct/indirect control over the issuer company or on whose
advice the board of directors acts.

Sometimes people who do not control the company or have very little shareholding in the
company get considered as promoters. According to the Takeover code, a person in control
is someone who has the right to appoint the majority of the directors of a company or have
the power to control the management and policy decisions. The problem with the current
system is that whoever has the most equity gets to control it, so the big private equity firms
invest in the unlisted companies and hold substantial shareholding post-listing. Also an
OECD report shows a decline in the promoter shareholding and increment in the investment
by the private institutional investors; this shows that people who are merely an investor in the
company with no controlling rights still get disclosed as promoter due to its broad definition.
Recently, corporate governance norms in India have been focusing on making the concept of
promoter an afterthought. Therefore, SEBI felt that the concept of promoter needs a revisit.

Analysis

In our viewpoint, this is the positive step by SEBI for the points discussed but SEBI failed to
define how a ‘person in control’ differs from a ‘promoter’ in terms of categorization and
identification. Many cases have been filed due to lack of clarity on the definition of control as
control is broadly defined under Regulation 2(1) (e) of the SAST Regulations, 1997. In the
case of Subhkam Ventures (I) (P.) Ltd. v. SEBI, the SAT has interpreted the control under the
Takeover Code. It has legitimized the investor's decision to include supermajority rights
without referring to them as "control," thereby exempting it from Regulation 12's
requirements. As a result, it is possible to examine the relevant sections of the Takeover Code
in light of the SAT decision. However, the Supreme Court has ruled that the SAT judgment
in Subhkam Ventures does not set a precedent. To properly enforce the idea of a person in
control, SEBI must clearly define what it means for the term “control” to cover within its
scope?

Furthermore, SEBI might draw on the experience of other jurisdictions where the concepts of
“person in control” and “controlling shareholder” are already well-established to build an
effective controlling shareholder rule. Various foreign regimes, such as the United Kingdom
and Singapore, use the person in control notion. The numerical requirement for being classed
as a controlling stakeholder in the United Kingdom is thirty percent of voting rights. This
threshold is set at 15% in Singapore. Furthermore, if a person may directly or indirectly
influence the company's financial and operational policies, they are deemed a controlling
shareholder. By going through the definitions of various countries, we can conclude that a
person must be classified as a person in control if he has the right to exercise 25 percent or
more of shares or can appoint the majority of non-independent directors. It will address issues
where owners with too little shareholdings and influence over the company’s activities are
categorized as promoters. To resolve this issue, SEBI issued a notification under Regulation
31A of the LODR Regulations, allowing promoters to reclassify as public shareholders if
certain requirements are met. Despite the modifications, it remains a complicated system that
requires shareholder and regulatory approval in circumstances when promoter holding is
greater than 1%. Such owners will no longer have to go through the arduous process of
reclassification due to the adoption of the term “controlling shareholder.”
Such a definition of a person in control would make identifying shareholders with significant
shareholdings and who can be classed as a ‘person in control’ much easier. SEBI has said in
one of its consultation papers that while the open offer triggering requirement under SAST
regulation is twenty-five percent, the control level should also be twenty-five percent. This
was proposed as part of the ‘brightline test’ which was eventually cancelled by SEBI due to
the possibility of misuse by parties. In the judgement of Arcelor Mittal v. Satish Kumar
Gupta, the Supreme Court noted that the ‘positive influence in the determination of policy’
will act as an important element as reflective of control.

Conclusion
SEBI has proposed changes to the ICDR to standardize promoters’ roles and responsibilities,
bringing Indian regulation in line with international standards. It will help reduce the lock-in
period which will provide a timely exit to the promoters and private equity firms. In light of
the proposal to change the term ‘promoter’ to ‘person in control’, it is critical that SEBI issue
precise rules around the idea of controlling shareholders in order to eliminate the present
subjectivity around the term. In the absence of such a regulation, this would appear to be little
more than a rebranding exercise with no meaningful change in legal standing. It is important
to see that, will SEBI go back to their previous failed brightline test in order to determine the
identity of ‘person in control’ or ‘controlling shareholder’ or simply ignore the uncertainty
around the concept of control.