For Listed Cos, Sebi Proposes ‘Person in Control’ Concept in Place of ‘Promoter’

India’s capital market regulator has proposed to do away with the concept of a ‘promoter’ for listed companies, seeking to align the definition of executive ownership with that in the West where the concept of a ‘person in control’ is used to link decision making and primary shareholding.

“The investor landscape in India is now changing. Unlike the past, the concentration of ownership and controlling rights does not vest completely in the hands of the promoters or the promoter group,” Sebi said in a discussion paper on Tuesday.
“There has been a significant increase in the number of private equity and institutional investors who invest in companies and take up substantial shareholding, and in some cases, control,” Sebi said.

According to an OECD (Organisation for Economic Co-operation and Development) report, aggregate shareholding of promoters in the top 500 listed entities by way of market value peaked at 58% in 2009, and is now showing a downward trend. Promoters’ shareholding was about 50% in 2018. At the same time, the shareholding of institutional investors in the top 500 listed companies, in terms of market value, increased from about 25% in 2009 to 34% in 2018.
“The concept of promoter is unique to India and has outgrown its utility. It doesn’t indicate where control actually lies and often creates an illusion of persons, who may in fact be fighting with each other, acting together. The concept of a ‘person in control’ is globally understood and is a better compass as to who controls the company,” said Sandeep Parekh,founder, Finsec Law Advisors.

The regulator also said that a number of businesses, including new-age firms and tech companies, are non-family owned and do not have a distinctly identifiable promoter group.
“Also, traditional and family-run companies with identified promoters are now increasingly open to M&A opportunities and exits instead of maintaining the ‘once a promoter, always a promoter’ status,” Sebi said.

The regulator has also proposed to reduce the lock -in period for minimum promoter contribution of 20% to one year from the date of allotment in the initial public offer, from the current three years.
Also, for the pre-issue capital held by persons others than the promoters the lock-in period has been reduced to six months from the existing one year.
” The reduction in the lock-in period is a very logical proposal by Sebi. Promoters go for listing their company only when they believe that the market is ready to give them valuation over a period of time.
No promoters is going to look at existing within a short span after listing,”  said Rajesh Thakkar, Partner and Leader M&A Tax and Regulatory Services, BDO India.

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