The exchanges have expanded the promoter definition for companies tapping the market for an initial public offering, said two people in the know.
According to current SEBI regulations, a promoter is someone who controls the affairs of the company or can appoint the majority of directors or is named as such in an offer document. Earlier, founders holding 25 per cent were deemed as promoters by virtue of having negative control and the power to block special resolution.
For the past year or so, the market regulator has been insisting that founders of IPO-bound companies holding 10 per cent or more classify themselves as promoters. SEBI has yet to introduce a consultation paper or any amending regulations to put this view into practice, according to experts.
What guidelines say
The new guidelines now go a step further and say that founders collectively holding 10 per cent will all be promoters if they are key managerial personnel (KMP) or a director in the company. So, if A, B, C and D are founders, D will be classified as a promoter, even if holds just 1 per cent and the above two conditions are met.
Even the immediate relative of the promoter will have to be classified as a promoter if she/he is on the company board or a KMP. Immediate relatives who hold 10 per cent or more in the company, directly or indirectly, will also be deemed promoters.
It is not unusual for immediate relatives to hold 10 per cent or more in Indian companies despite not being on the board or involved in its management, said experts. “A brother or father of a promoter who is a non-executive director and does not hold any shares in the company will be deemed a promoter. This is going way beyond what is envisaged in law,” said a lawyer.
If a promoter’s brother is classified as a promoter, for instance, then the latter’s brother-in-law (his spouse’s brother) will be classified as part of the promoter group, even though he may not be involved in the business of the listed company.
“The business relationship with in-laws is very limited. If they purchase some shares and it’s not reported, there could be issues. Being part of the promoter or promoter group brings its own set of obligations. Why make them unnecessarily liable?” said the lawyer.
Declassification
Once considered part of the promoter group, the present regulations do not provide for easy declassification as a public shareholder. To declassify, 31A of LODR Regulations requires that a person not hold more than 10 per cent in the listed company together with his or her relatives.
“Since such a person was anyway classified as a part of the promoter group by virtue of him being an immediate relative of the promoter, any declassification would be impossible due to the restrictive rule. This is especially problematic in case of married daughters who may not have any active role in the listed company,” said Binoy Parikh, Executive Director, Katalyst Advisors.
Last year, Khubilal Jugraj Rathod and Vimalchand Jugraj Rathod were identified as promoters while filing the draft prospectus for Flair Writing Industries. Later, relatives Rajesh Rathod, Mohit Rathod and Sumit Rathod, each holding 10 per cent, were included as promoters. Consequently, several relatives of these three new promoters, including in-laws, were made part of the promoter group.
The subjective definition of promoter has been a subject matter of several court rulings in the past, according to Vinod Kothari, Director, Vinod Kothari Consultants. “There is no perfect way to ascertain control. Accounting standards have very complicated criteria for determination of control. So, moving to a more objective test is appreciable.”
Immediate relatives include spouse of that person, or any parent, brother, sister or child of the person or of the spouse.