SEBI Expands Promoter Definition for IPO-Bound Companies

  • June 7, 2024
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
No Comments

 

 

SEBI Expands Promoter Definition for IPO-Bound Companies

Sub: Economy

Sec: Capital Market

Introduction: The Securities and Exchange Board of India (SEBI) has expanded the definition of promoters for companies preparing for an initial public offering (IPO). This move aims to enhance transparency and accountability in the listing process.

Current SEBI Regulations:

  • Definition of Promoter: A promoter controls the affairs of the company, can appoint the majority of directors, or is named as such in the offer document.
  • Previous Threshold: Founders holding 25% were considered promoters due to their negative control and power to block special resolutions.

New Guidelines:

  • Lower Threshold: Founders holding 10% or more must classify themselves as promoters.
  • Collective Holding: Founders collectively holding 10% will be considered promoters if they are key managerial personnel (KMP) or directors.
  • Immediate Relatives: Immediate relatives of promoters will also be deemed promoters if they are on the company board, are KMPs, or hold 10% or more in the company, directly or indirectly.

Impact of New Guidelines:

  • Increased Coverage: Immediate relatives holding significant shares, even if not directly involved in management, will now be classified as promoters.
  • Example Scenario: A non-executive director who is a brother or father of a promoter, with no shares, will be considered a promoter. This extends to in-laws if connected through shareholding relatives.

Declassification Challenges:

  • LODR Regulations: Regulation 31A of the LODR Regulations makes it difficult for individuals classified as part of the promoter group to be declassified as public shareholders.
  • Practical Implications: This is particularly challenging for married daughters or other relatives who may not have an active role in the company.

Case Study: Flair Writing Industries:

  • Initial Promoters: Khubilal Jugraj Rathod and Vimalchand Jugraj Rathod.
  • Subsequent Inclusions: Relatives Rajesh Rathod, Mohit Rathod, and Sumit Rathod, each holding 10%, were included as promoters, along with several in-laws.

Subjective Definition Issues:

  • Court Rulings: The subjective definition of promoters has been debated in courts.
  • Need for Objectivity: Moving towards a more objective test for determining control is considered beneficial.

Definition of Immediate Relatives:

  • Inclusions: Spouse, parents, brothers, sisters, or children of the person or their spouse.

Conclusion: SEBI’s expanded promoter definition aims to cover a broader range of individuals with significant influence or shareholding in IPO-bound companies. While this promotes greater transparency, it also presents challenges in declassification and may affect individuals not actively involved in company management. The new guidelines necessitate careful consideration by companies and their advisors to ensure compliance and avoid unintended consequences.

SEBI – Listing Obligations and Disclosure Requirements (LODR) Regulations in 2015

The Securities and Exchange Board of India (SEBI) introduced the Listing Obligations and Disclosure Requirements (LODR) Regulations in 2015 to enhance transparency, accountability, and investor protection in the securities market. These regulations provide a comprehensive framework for the listing of securities on stock exchanges and prescribe the obligations and disclosure requirements for listed entities.

Key Features of LODR Regulations 2015:

  • Applicability:
    • The LODR Regulations apply to all entities listed on recognized stock exchanges in India, including equity shares, debentures, and other securities.
  • Disclosure Requirements:
    • Listed entities must disclose material events and information promptly to ensure that all stakeholders have timely access to relevant information.
    • Disclosures include financial results, board meetings, corporate actions (like dividends, mergers, and acquisitions), and other material developments.
  • Corporate Governance:
    • The regulations emphasize robust corporate governance practices, including the composition of the board of directors, the roles of independent directors, and the functioning of board committees.
    • It mandates the establishment of committees such as the Audit Committee, Nomination and Remuneration Committee, Stakeholders Relationship Committee, and Risk Management Committee.
  • Financial Reporting:
    • Listed entities are required to submit quarterly and annual financial statements within specified timelines.
    • The regulations mandate the use of Indian Accounting Standards (Ind AS) for financial reporting.
  • Related Party Transactions:
    • The regulations require listed entities to formulate a policy on materiality of related party transactions and on dealing with related party transactions.
    • All related party transactions must be disclosed to the stock exchanges and included in the annual report.
  • Shareholding Patterns:
    • Listed entities must disclose their shareholding patterns, indicating the distribution of shareholding among promoters, public shareholders, institutional investors, and other categories.
    • Changes in shareholding patterns must be reported to the stock exchanges periodically.
  • Subsidiaries:
    • Significant transactions and arrangements involving subsidiaries must be disclosed, and the performance of subsidiaries must be reported in the consolidated financial statements.
  • Penalties and Enforcement:
    • Non-compliance with LODR regulations attracts penalties and enforcement actions by SEBI, which may include fines, suspension of trading, or delisting of securities.
economy SEBI Expands Promoter Definition for IPO-Bound Companies