Paving the way for a major change in the way the promoters and over 4,700 listed corporate function in the country, in a consultation paper, the Securities and Exchange Board of India (SEBI) has proposed doing away with the concept of promoters and moving to ‘person in control’ (a three-year transition is recommended for the switch over); It has also suggested doing away with the current definition of promoter group with a view to rationalize the disclosure burden and bring it in line with post-issue disclosure requirement.
The other proposals include (i) reducing the minimum lock-in period (the time period an investor can hold on to the shares) post an initial public offer (IPO) for promoters’ share of minimum 20% from existing three years to one year (locked-in for holding in excess of 20% is proposed to be reduced from existing one year to six months); (ii) reducing lock-in for pre-IPO shareholders (those shareholders who invest in the company even before it goes for public issue) from existing one year to six months.
The concept of promoter is legacy from the past when a corporate entity or a group of entities (say, an industrial house viz. Tata, Birla, Dalmia and so on) would set up a business enterprise; for instance, a power or steel or fertilizer plant etc committing substantial capital of its own and financing the balance of project cost by borrowings from banks and financial institutions (FIs) besides raising funds from the market. This entity would remain associated with the enterprise – almost all through the life cycle of the project – having an intrinsic interest in ensuring its profitability and growth and steadfastly work for realizing this goal thereby acquiring the status of what one may describe as “once a promoter, always a promoter”
As per Issue of Capital and Disclosure Requirements (ICDR) Regulations (2018), the SEBI defines a promoter “as a person who has been named as such in the offer document as promoters or in the annual return of the issuer or a person who has control over the issuer (directly or indirectly) or in whose advice, directions or instructions the board of directors (BoD) of the issuer is accustomed to act”. A person or group of persons should have a minimum of 20% equity share capital to be classified as ‘promoter group’.
In recent years however, investor landscape in India has undergone a drastic change whereby new breed of shareholders such as private equity funds (PEF), alternate investment funds (AIFs), mutual funds etc have emerged as dominant investors (this is typical of new age and tech companies even traditional, family-run companies with identified promoters are vacating space for the new breed). Such investors invest in firms (albeit unlisted) through what is termed as control deals even before these go for an IPO and continue to hold shares post-listing, many times being the largest public shareholders, having special rights, such as the right to nominate directors.
This results in an anomalous situation whereby the ‘ownership’ and ‘controlling rights’ of a company have shifted to the new breed of shareholders, yet the entity (read: promoter group) despite being reduced to minority shareholding and no controlling rights continues to have influence over the listed entity disproportionate to its economic interest merely because the law continues to classify it as a promoter. That won’t be in the interests of all stakeholders. In this backdrop, the market regulator may feel that shifting focus from promoters to controlling shareholders or ‘person in control’ (PIC) will help in correcting the anomaly. This is misplaced.
Under the changing scenario, even as PEF/AIFs et al hold largest shareholding and controlling rights, they are reluctant to be designated as PIC. In fact, in new age and tech companies, where they are dominant shareholders even before the entity goes for public issue (by virtue of this, they are even mentioned as ‘promoters’ in the red herring prospectus for the IPO), they want to leave at the earliest possible. The SEBI is also more than willing to let them go.
The market regulator intends to not only dispense with the requirement of minimum of 20% shareholding for an entity to be classified as promoter, but also, allow it to shed these shares within one year of the IPO. It also wants to substantially liberalize disclosure requirements. Thus, the issuer need not give financials of group companies linked to the one being listed; it need not mention specific corporate bodies which are part of the promoter group and it need not name financial investors as promoters in IPOs. Put simply, he can maintain a veil of secrecy around its ‘sources of funding’.
We are heading for a period where on one hand, minority shareholders (read: promoters) can’t continue in the role of PIC on the other, new breed of shareholders having largest shareholding and controlling rights in the company are unwilling to take the responsibility. This will leave the firm without an anchor person (call him promoter or PIC) who needs to remain bonded to the company for a reasonable long period and is an absolute must for steering the business enterprise and ensuring the profitability and sustainability of its operations.
Most listed companies today are professionally managed and much of the activity is centered around the Board of Directors (it includes a number of independent directors) and the CEO (chief executive officer) assisted by various committees including audit committee and remuneration committee etc for transparent functioning. But, all that can’t fill the void generated by absence of an anchor person. In the earlier times, this role was performed by the promoter. Now, SEBI expects the so called PIC to take the lead but has not given any blue print of how this will be taken forward.
Far from that, the market regulator is only attempting to relax various regulations to ensure that the PEF/AIFs/mutual funds et al who hold majority shareholding continue to do what we may term as ‘back seat driving’ for as long as they remain invested in the company and make an exit as and when they get an opportunity to make profit from sale of their shares. There is need for course correction.
While, broad-based ownership and control of a business enterprise involving greater participation of private equity funds and institutional investors is the new norm, in sync with the cardinal principle of corporate governance viz. ‘the voting power of an investor has to be proportional to his investment or the shares held by him’, these institutions – by virtue of their largest (in many cases ‘majority’) shareholding – should proactively come forward to take charge as ‘person in control’. They should drive from the front.
An argument that these institutions being a conglomeration of tens of thousand investors can’t be likened to an easily identifiable family owned promoter and therefore, can’t be held accountable is untenable The crucial determinant of who should be PIC is share of an entity in the ‘equity capital’ of the company. If, the former holds majority shares say >50% then they should take charge and stay with it for a fairly long period. The PEF/AIFs/mutual funds et al can’t be allowed to have the cake and eat it too i.e. invest short-term only for giving return to their members leaving company in the lurch
SEBI needs to take a re-look at its proposals to ensure that the institutions stay invested in the firm over a reasonably long period.