SEBI may set up panel to clear the ‘promoter’ tag muddle

The Securities and Exchange Board of India (SEBI) may set up a committee under AIBI, an industry body representing investment bankers, to delve into the issue of promoter classification of founders and investors of companies headed for initial public offerings, said two people familiar with the matter.

Private equity and venture capital players, together with some start-up heads, recently met officials from the Ministry of Finance to discuss the issue, said a person in the know.

The promoter has to be identified at the time of filing the draft red herring prospectus for an IPO. Several issuers in the past had identified themselves as professionally managed companies without an identifiable promoter.

• Read: Redefining corporate ownership: SEBI prefers ‘controlling shareholders’ to ‘promoters’

In the recent past, however, SEBI has been nudging founders with a stake of 10 per cent or more to classify themselves as promoters at the time of filing the draft prospectus for public share sales. The minimum promoters’ contribution of 20 per cent has to be locked in for 18 months post-listing. In addition, the promoter tag comes with higher regulatory obligations.

This could especially impact new-age companies where the founder’s holdings could be low because of frequent equity dilution to PE players.

The regulator’s recent stance has not been consistent with the ICDR guidelines, which define a promoter as someone who is in control of the company and on whose instructions the board of directors is accustomed to act.

“The notion that someone holding 10 per cent in a company is in control is misleading. It makes the IPO process very difficult, as 20 per cent of the promoters’ shares post-listing have to be locked in for 18 months. If you don’t address this issue, some of these new-age companies will start thinking about listing overseas,” said an industry official.

The regulator needs to amend the regulations to say that a promoter is someone who holds 10 per cent or more in the company or clarify its view, the person added.

“The uncertainty may unnerve PE investors. The industry is hoping the regulator will offer a carve-out to such institutional investors for not being identified as a promoter given the mindset behind such an equity infusion,” said a legal expert.

“A possible solution could be to allow financial investors to contribute shares for lock-in to make up the required 20 per cent promoter contribution (if the founder holding is low) without asking the financial investor to become a promoter,” said Prashant Gupta, partner, Shardul Amarchand Mangaldas & Co.

An email sent to SEBI, AIBI, and the finance ministry did not get a response.

“Currently, there are no regulations on minimum promoter holding, which is why regulators are grappling with the distinction between promoters and founders. When the founders’ shareholding is low, the role of the board and shareholders becomes important,” said Shriram Subramanian, Founder and MD, InGovern Research Services.

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