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

Subject : Economy

Section: Capital Market

In News: Securities and Exchange Board of India (SEBI) may set up a committee under Association of Investment Bankers of India (AIBI).

Key Points:

AIBI an industry body representing investment bankers, will take up the issue of promoter classification of founders and investors of companies headed for initial public offerings.

What is the problem?

Many issuers have identified themselves as professional managers, not promoters, in draft prospectus for the initial public offering (IPO)
A 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.
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.

Obligations of promoters:

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 private equity (PE) players
ICDR Regulations (Issue of Capital and Disclosure Requirements) define a promoter as someone who is in control of the company
Currently, there are no regulations on minimum promoter holding, which is why regulators are grappling with the distinction between promoters and founders.