By Shivanand Pandit
With the intention of rationalising markets, the Securities and Exchange Board of India (SEBI) has recommended relaxing the Issue of Capital and Disclosure Requirements (ICDR) by lessening the lock-in period for promoters and other shareholders after an Initial Public Offer (IPO). It also proposed to downsize the definition of promoter group and adhere to the concept of “person in control”.
These suggestions, if executed effectively, will ease the governing load on listed entities and motivate more companies to list. In a consultation paper, the watchdog has also intended reshuffling the disclosures essential for group companies. SEBI has sought remarks from the public on the proposals till June 10, 2021.
With respect to the lock-in period, SEBI has recommended that if the objective of the issue includes an offer for sale or financing other than for capital expenditure for a project, then the minimum contribution of the promoter is 20 percent and should be locked in for one year from the date of allotment in an IPO compared to the existing lock-in period of three years. After six months from the day of allotment in the IPO, shares possessed by promoters should be exempt from lock-in conditions.
However, this should be only regarding the objective of achieving fulfilment with minimum public shareholding rules and norms. Excluding the promoters, the complete pre-issued shares retained by others should be locked in for six months from the day of allocation in the IPO offer, contrary to the present prerequisite of 12 months.
Such change in ICDR guidelines for the promoter group and remaining shareholders will motivate more corporate entities to increase capital from the market via IPOs. A majority of companies whose shares are listed have a strong reputation with decent governance and an autonomous board. Therefore, the necessity for skin in the game for such a lengthy period may be decreased. With the upsurge in control deals in the private equity zone and increased management involvement, relaxation of lock-in limits will increase departures of private equity investments via IPOs.
Many Indian rules pertaining to issues of disclosures and accountabilities of promoters and their associates are unwarranted. Globally, regulations have been rationalised, which provides developed capital markets an edge over India. Hence, this move to relax pre-IPO investment will make Indian regulations at par with rest of developed markets and the SEBI has a chance to create a remarkable impact by linking regulations with them.
Importantly, it has been an age-old demand of investors to lessen the lock-in period. It is significant to offer timely exit avenue to private equity investors so that they can reinvest in another private company. Earlier, when SEBI restructured foreign portfolio investment rules to make it simpler for investors to enter and exit, it not only assisted in a surge of FPI investments to India but also made the markets more solid. Likewise, granting timely exits for private equity investors will eventually help India to become a more favourable destination for this alternate investment asset class.
Nevertheless, the proposed cut in the lock-in period could be challenging as changing eras have redefined the buying and selling procedures of consumers and corporates. Consequently, inexperienced entities may enter the market. Considering the tragic consequences, a lock-in period of three years works as a protective guard.
Due to the gradual reduction in the significance of the concept of a promoter, SEBI has suggested doing away with the category of promoter and shifting to person in control structure. This move will concretise change in promoters and more than 4,700 listed corporates. SEBI’s move comes as a growing number of companies assume corporate configurations where there is more than one owner. A few entities also have institutional investors and private equity players holding more power than those registered as promoters.
According to the new definition, a “promoter” is a person who has been termed as such in the company’s offer document or in its annual return or a person who has command over the company, directly or indirectly, or under whose guidance, orders or directions the board of directors is accustomed to perform. The investor landscape in India is changing. Due to the rise of new shareholders, namely private equity and institutional investors, ownership and managing privileges do not vest entirely in the hands of promoters or the promoter group.
SEBI’s suggestion to move from promoter to persons in control is a long-awaited modification from the present stance of “once a promoter, always a promoter”. The present definition of promoter is comprehensive and goes beyond persons who are really in control. At one time, corporate entities with wide shareholding wanted to term financial investors as promoters in IPOs where such investors were not actually in control or command. The planned alteration from the concept of promoter to person in control will remove the need for terming shareholders as promoters who are not in control.
The suggested amendments are meant to streamline and simplify the role and accountability of promoters and try to bring Indian law in line with international standards. There will be less disclosure pressure on the promoter group and group entities, although more could have been pursued in this round. The move will help lessen compliance weight and make pertinent information simpler for investors to handle because a major portion of the promoter group is shaped by way of “immediate relatives”.
The Indian securities market has grown over the years even though it may not be as established as the other international markets like the US, UK and Singapore. Currently, we see numerous private equity funds and institutional investors participating in unlisted companies and taking control of them by obtaining considerable shares. These investors also select a director on board to protect their investment. This indicates that the concentration of these investors is largely on the superiority of the board and management than on the promoter. Hence, there is a complete necessity to move away from the concept of “promoter” to that of “person in control”.
Read Also: Delhi HC grants protection to couple living together against family’s wishes
However, the concept of promoter is widely used and SEBI has to make relevant amendments to the impacted rules. Such amendments may demand a re-looking of the definition of control. The big miss is the definition of “control” itself, without which any shift in this field will have less impact.
If one takes into account the instance of NSE-listed companies, collective equity investments by private promoters are around 44-46 percent, while institutional investors are 35-36 percent and retail investors, 6-7 percent. This makes it fairly untimely for the watchdog to ease its attentiveness on promoters or their associated entities.
—The writer is a financial and tax specialist, author and public speaker based in Margao, Goa