Sebi in Talks to Redefine Promoter Norms

The Securities and Exchange Board of India (Sebi) is in talks with other regulators on the transition from the traditional concept of ‘promotors’ to that of ‘controlling shareholders’ so that corporate control is accurately reflected.

As a part of this process, the regulator is reaching out to the Reserve Bank of India (RBI), Ministry of Corporate Affairs (MCA) and Insurance Regulatory Development Authority of India (IRDAI) in an attempt to bring a uniform framework.

The marked regulator is of the view that the current concept of promoter and promoter group has become irrelevant for the new-age companies, especially start-ups since these are not family-owned businesses but backed by institutional investors.

Even in traditional companies, the prominence of promotors is reducing as institutional holdings are going up. Hence, the regulator wants to transition to the controlling shareholder concept. But if Sebi alone were make this transition, it could potentially lead to conflicting scenarios wherein Sebi rules will have a different framework to those from sectoral regulators, say legal experts.

Currently, all regulators including RBI and IRDAI use the concept of promotors in their rules and this concept is largely derived from Sebi rules with minor modifications.

For instance, RBI uses the promoter concept while issuing banking licenses, while IRDAI uses it to determine the ownership limits and liability.

More importantly, the concept of promoter is the cornerstone for regulators while defining control and determining who is in control of a firm.

Emails sent to Sebi, RBI, the ministry of corporate affairs and IRDAI remained unanswered.

“Sebi shall engage with other regulators that utilize the ‘concept of promoter’ in their respective regulatory frameworks,” said minutes for the Sebi board meeting held on August 6.

“The exercise shall aim at understanding their concerns, if any, in respect of moving toward the concept of ‘controlling shareholder’ in the securities market and also evaluate possible solutions in this regard.”

Legal experts say the concept of promoter was to distinguish public shareholders from the promoter groups who exercise control. However, sometimes the regulations inadvertently bring people with no control of the company under the definition.

For instance, in one of the biggest IT companies in the country, the founding members hold about 13% stake.

They are all retired and have nothing to do with the day-to-day functioning of the company and yet they continue to be called the company’s promoters.

“Other regulators including the RBI also rely on the promoter concept to determine control,” said Moin Ladha, partner, Khaitan & Co. “Some of the current regulations provide relaxations for promoter/promoter groups, which is only intended for controlling shareholders, but several entities get classified as promoters without actually having any control and hence enjoy such relaxations.”

To be sure, there are also serious liabilities on promoter groups under the current rules.

“Moving away from the ‘promoter’ classification will be almost an ideological shift across our public markets and hence other regulators like RBI will also have to weigh in,” said Shruti Rajan, partner, Trilegal. “For instance, the bank license guidelines are structured around the concept of a promoter.”

Sebi is already in process of coming out with rules changing the current concept of promoter. In the August 6 board meeting, Sebi announced that it will ‘rationalize’ the definition for companies looking for IPOs and companies backed by corporate bodies will get special relaxations.  S-ET

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