Concept of Promoters to Person in Control

News: Recently, the Securities and Exchange Board of India (SEBI) has proposed doing away with the concept of promoters and moving to ‘person in control.’ It has also suggested reducing the minimum lock-in periods post a public issue for promoters and pre-Initial Public Offering (IPO) shareholders.

What is Promoter?

  • The meaning of ‘promoter’ and ‘promoter group’ is defined in Companies Act, 2013 and SEBI (ICDR) Regulations, 2018. Generally, a promoter conceives an idea for setting-up a particular business at a given place and performs various formalities required for starting a company.
  • Promoter group includes any body corporate in which a group of individuals or companies or combinations thereof acting in concert, which hold 20% or more of the equity share capital in that body corporate and
  • Such a group of individuals or companies or combinations thereof also holds 20% or more of the equity share capital of the issuer and are also acting in concert. An issuer is a legal entity that develops, registers and sells securities to finance its operations.

Promoter to Person in Control Concept:

  • The shift is necessitated by the changing investor landscape in India where concentration of ownership and controlling rights do not vest completely in the hands of the promoters or promoter group because of the emergence of new shareholders such as private equity and institutional investors.
  • Investor focus on the quality of board and management has increased, thereby reducing the relevance of the concept of promoter. The current definition focuses on capturing holdings by a common group of individuals or persons and often results in capturing unrelated companies with common financial investors.
  • A three-year transition period for moving from the promoter to person in control concept has been suggested.
  • If the object of the issue involves an offer for sale or financing other than for capital expenditure for a project, then the minimum promoters’ contribution of 20% should be locked-in for one year from the date of allotment in the IPO. Currently, the lock-in period is three years.

Significance of such proposal:

  • This move will lighten the disclosure burden for firms. The changes in nature of ownership could lead to situations where the persons with no controlling rights and minority shareholding continue to be classified as a promoter.
  • By virtue of being called promoters, such persons may have influence over the listed entity disproportionate to their economic interest, which may not be in the interests of all stakeholders.