Sebi may revisit promoter classification framework to address concerns

Sebi may review promoter norms amid changing ownership patterns and growing concerns over the broad definition of the term

The Securities and Exchange Board of India (Sebi) may soon issue a consultation paper on classifying “promoters” of a company as the market regulator revisits the framework amid changing ownership patterns and concern over the broad definition of the term, according to sources. 

The review could examine whether the regulatory framework should move towards identifying principal or significant shareholders with certain thresholds as those with control, according to sources familiar with the discussions. 

Another request from industry has been on relaxing the identification of founders of the companies as promoters because in many cases they may exit the firm at a certain point in time. 

“There is no clear answer to how ‘control’ should be defined. Every situation demands a separate approach because entities may find ways around the rules,” a source said, pointing to the difficulty of identifying control beyond formal shareholding and board representation. 

Sources said the concept of a principal shareholder could be considered, with a 20 per cent shareholding threshold as a starting point, which may be raised to 25 per cent over time. 

A shareholder with a 25 per cent stake can exercise blocking rights over certain special resolutions.

 

Another source added that the regulator might retain the “promoter” tag — a nomenclature seldom used by other global peers.

Further, the regulator might heed a request from private-equity (PE) players to exempt them from the stock-exchange criterion of being called “promoter’’ in the case of significant holdings because they may not be able to disclose who their limited partners or investors are. 

At present, the term “promoter” refers to entities named as such in the draft offer document or have been identified by the issuer in its annual report. It refers to those who have direct or indirect control of the affairs of the company, or those on whose advice or directions the board of directors is accustomed to act upon. 

However, regulations of the Issue of Capital and Disclosure Requirements (ICDR) specify that merely a 20 per cent or more holding by any financial institution, mutual fund, or certain foreign portfolio investors (FPIs) does not classify them as promoters unless they meet other requirements. 

While defining promoter-group entities, a 20 per cent holding by a promoter is specified in the current regulations.

Sources said the current stock-exchange criterion was that if a promoter was a holding company and unlisted, one might need to go all the way to the individual, which is difficult in the case of PE. 

Emailed queries to Sebi remained unanswered till the time of going to press. 

The existing framework has become increasingly complex as ownership patterns evolve, with some founders and their families reducing their stakes or stepping away from businesses, said industry experts. 

At the same time, PE investors are increasingly seeking controlling stakes rather than limiting themselves to minority investment, an investment banker added. 

The broad definition of “promoter group entities” also creates challenges for companies preparing to go public, particularly in gathering information and disclosures relating to group entities, the banker added. 

Any change to promoter classification could have implications beyond initial public offering (IPO) because several Sebi regulations refer to promoters and promoter-group entities. 

The Listing Obligations and Disclosure Requirements (LODR) framework also uses promoter-group status in provisions relating to related-party transactions or RPTs, while norms prohibiting insider-trading prescribe disclosure obligations for promoters and members of promoter groups. A change in classification could, therefore, require consequential amendments across regulations.