Regulator SEBI Expands Promoter Definition for IPO-bound Companies

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Context

• The Securities and Exchange Board of India (SEBI) has expanded the promoter definition for companies preparing for an initial public offering (IPO).
• The move aims to redefine the criteria for individuals classified as promoters, impacting IPO-bound companies and their stakeholders.

New Guidelines:

Criteria for Promoter Classification:

• According to current SEBI regulations, a promoter is someone who:
  • Controls the affairs of the company.
  • Can appoint the majority of directors.
  • Is named as such in an offer document.
• Previously, founders holding 25% were deemed promoters due to their significant influence over company decisions.

SEBI's Recent Insistence:

• SEBI has been pushing for founders holding 10% or more in IPO-bound companies to classify themselves as promoters.
• However, no formal consultation paper or regulatory amendments have been introduced to enforce this view.

Expanded Scope:

• Founders collectively holding 10% will now be deemed promoters if they hold key managerial positions (KMP) or director roles in the company.
• Immediate relatives of promoters, holding 10% or more in the company, directly or indirectly, will also be classified as promoters.

Impact on Immediate Relatives:

• Even relatives not involved in company management may be classified as promoters if they hold a significant stake.
• This extends the definition beyond what is traditionally envisioned in law, potentially including distant relatives like brother-in-laws.

Challenges and Concerns:

Declassification Difficulty:

• Once classified as part of the promoter group, declassification as a public shareholder becomes challenging.
• Restrictive rules, such as 31A of (Listing Obligations and Disclosure Requirements) (LODR) Regulations, 2015 (Listing Regulations), make declassification practically impossible.
• This poses particular challenges for relatives like married daughters who have no active role in the company.

Case Example: Flair Writing Industries:

• Initially, Khubilal Jugraj Rathod and Vimalchand Jugraj Rathod were identified as promoters.
• Later, additional relatives holding 10%, such as Rajesh Rathod, Mohit Rathod, and Sumit Rathod, were included as promoters.
• Subsequently, several more relatives, including in-laws, were incorporated into the promoter group.

Subjective Definition and Expert Insights:

• The subjective definition of a promoter has been a subject of numerous court rulings.
• According to Vinod Kothari, Director at Vinod Kothari Consultants, there is no perfect way to ascertain control.
• The move towards a more objective test is seen as a positive step in aligning with complex accounting standards.
• Immediate relatives encompass spouses, parents, siblings, and children of the individual or their spouse, further broadening the scope of promoter classification.

READ ALL ABOUT SEBI: https://www.iasgyan.in/daily-current-affairs/securities-and-exchange-board-of-india-sebi#:~:text=The%20SEBI%20is%20managed%20by,the%20Reserve%20Bank%20of%20India.

SOURCE: THE HINDU