Who’s in control?

The markets regulator has begun a process to move away from the broad concept of promoter to controlling shareholders in order to better identify who’s in charge. Shivanand Pandit reports

Paving the way for a notable change in the way promoters and more than 5,000 publicly listed corporate entities operate, the Securities and Exchange Board of India (SEBI) in a consultation paper has suggested doing away with the age-old concept of promoters, and shifting to “person in control”.

The SEBI has proposed the change to put an end to the present definition of the promoter group, with a vision of streamlining the disclosure incumbrance. It also announced other proposals, including: (1) decreasing the minimum lock-in period (the tenure an investor can hold on to securities) after an IPO for the promoters’ portion of a minimum 20% from the current three years to one year; and decreasing the lock-in period for holding more than 20% from one year to six months; and (2) decreasing the lock-in period for pre-IPO shareholders (those who invest in the entity even before the public issue) from one year to six months.

The notion of the promoter is a heritage from the time when a corporate body or a group of companies would establish a business unit, for example, a power or steel or fertiliser plant, pledging some funds of its own and financing the remainder of the project cost by borrowing from banks or financial institutions, on top of raising capital from the capital market.
This business unit would remain linked with the establishment – virtually through the entire lifespan of the project – having a fundamental interest in safeguarding its constant profitability and progress, and consistently working to achieve that goal of what one may label as “once a promoter, always a promoter”.

Clarifying meaning of control

The SEBI, in its board meeting on 6 August 2021, gave an in-principle assent to move from the concept of the promoter to “controlling shareholders”, as was recommended in the consultation paper dated 11 May 2021, which dealt with the evaluation of structure relating to promoters and the promoter group.

Although the consultation paper mentioned many other viewpoints and aspects, restructuring the definition of the promoter group and rationalising the disclosure needs for group entities was one of the key changes proposed. This seems to be a branding modification in the configuration of company law.