Rationalising regulation

Sebi's proposals are in line with changing investor landscape

The Securities and Exchange Board of India (Sebi) has released a discussion paper indicating substantial changes to regulations governing the Issue of Capital and Disclosure Requirements 2009 (ICDR 2009). If the proposed changes are accepted, it would ease requirements for listing and allow quicker exits for early investors by reducing the lock-in periods. The concept of “promoter” is also to be replaced by “persons in control”, or “controlling shareholders”. The requirements for disclosures pertaining to group companies and related-party transactions would be reduced. Under the 2009 rules, the “promoter group” must maintain a minimum shareholding of 20 per cent for a lock-in period of three years, and a lock-in period of one year for stakes in excess of 20 per cent. This would reduce to a lock-in period of one year for 20 per cent, and a lock-in of six months for stakes above 20 per cent. Other stakeholders in an unlisted company are on a one-year lock-in, which is to be reduced to six months.

The regulator has noted that in many instances, no stakes were sold even after lock-in expiry. Besides, most initial public offerings (IPOs) are made by mature businesses in existence for five years or more, which means investors have displayed long-term commitment. Reducing the lock in allows private equity (PE) investors to exit swiftly if they desire, thus releasing funding for investment in new start-ups. Sebi proposes dropping a clause which classifies entities holding 20 per cent or more pre-IPO stake as “promoter”. Instead of the current requirement of disclosing financial and other details of the top five group companies in the prospectus, the amended regulations would just list the name and registered address of such entities. Related-party transactions would continue to be disclosed in IPO documents and on the websites of group entities.

The current requirement captures a lot of information which is not meaningful to investors. Thus, this rationalisation for IPO disclosures would fall in line with requirements for listed concerns. The definition of a “promoter” is somewhat loose and often extends beyond persons in control of the entity. As markets have matured, the traditional “family” mould has become less common. More companies are floated by first-generation entrepreneurs and backed by institutions and PE investors. According to the paper, aggregate shareholdings of promoters in the top 500 listed companies have dipped from 58 per cent (2009) to 50 per cent (2018) while stakes held by institutions have risen from 25 per cent to 34 per cent in the same period.

Such institutions have board representation. The proposal: Remove references to promoters and promoter groups, and replace them with “person in control”, or “controlling shareholders”. Apart from the ICDR, this would affect other regulations like the Takeover Regulations and Insider Trading Regulations. This would also affect other regulators such as the Ministry of Corporate Affairs and the Reserve Bank of India, and impact enforcement strategies, which often involve freezing promoter holdings. Such a shift in perspective would reduce the scope for harassing pure financial investors. But given the wider implications, it would need to be phased out over a period. In sum, the proposed changes would reduce the burden of paperwork and encourage a faster reallocation of capital to start-ups. They would also reflect the changes in the corporate structure that have occurred as economic sophistication has increased.