Source: BL
Context:
The Securities and Exchange Board of India (Sebi) is exploring changes to how promoters are defined in companies planning initial public offerings (IPOs). The move aims to ensure that promoter status reflects actual control and influence, rather than historical association or nominal holdings, reducing investor confusion and improving transparency.
Promoter
A promoter in an IPO is an individual or entity who:
- Directly or indirectly controls the company or has the ability to influence management and policy decisions.
- Initiates or contributes to the formation of the company, setting up its operations, strategy, or capital structure.
- Is identified in the IPO prospectus to inform investors about accountability, stability, and long-term commitment.
- May include founders, key shareholders, or entities with significant influence, even if not the largest shareholder.
Key Issues Identified
- Legacy Labels vs. Real Control
- Individuals named as promoters may no longer hold operational or strategic control.
- Some companies list former founders or historical promoters, while private equity or institutional investors hold real influence.
- Transparency Gaps
- Beneficial owners and those exerting indirect control through side agreements may not be disclosed.
- Misleading promoter labels affect investor perception and legal obligations for those named.
- Reclassification Challenges
- Current rules on reclassifying promoters to public shareholders may not suit pre-IPO ownership structures.
- Investment bankers currently guide promoter classification, leading to inconsistencies.
Proposed Changes
| Proposal | Details |
|---|---|
| Basis for Promoter Identification | Companies to explain the rationale for naming promoters based on actual control and influence, not historical affiliation or shareholding. |
| Disclosure of Beneficial Owners | List individuals/entities with ultimate control and clarify why they are not promoters. |
| Indirect Control Check | Confirm that informal arrangements or side agreements do not grant unlisted parties control. |
| Reclassification Rules | Avoid mechanical application of promoter reclassification rules to IPO-bound firms. |
| Redefinition of Control | Align with takeover regulations, focusing on ability to influence policy/management, rather than numerical thresholds (e.g., 15% voting rights). |
