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MUMBAI: Listed Indian companies may soon see a radical shift in the way ‘promoters’ are classified. The Securities and Exchange Board of India (Sebi) is planning to overhaul the concept of promoters that could lead to the introduction of ‘controlling shareholders’ — a structure new to India but prevalent in various developed markets, said three people familiar with the matter.The capital markets regulator thinks that the promoter concept is outdated as many promoters have little or no say in the way companies are run but have the power to create nuisance value. The image and perception of some companies and management are also clouded by the action of these promoters.The market regulator wants to introduce the concept of controlling shareholders who are in de facto control of the company but whose actions and powers do not overshadow that of the board or the management. ‘Not Just a Name Change’“There are very few Indian companies without an identifiable promoter. The question is how can we have more such companies. Today, foreign investors like to deal with the management,” said a person familiar with the development. “It’s not just a change of name. Typically, shadow ownership is happening in our country.”
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This issue was discussed in a recent meeting of Sebi’s Primary Market Advisory Committee chaired by former Infosys chief financial officer TV Mohandas Pai. The plan is still on the drawing board, the person said.At present, a promoter, under the Sebi regulations, is a person who is in de facto control of a company. While the concept of promoter has considerably eroded in several global markets, it is relevant in India as the control vests with an individual or group of individuals. Control is defined as the day-to-day management of the affairs of the company, among other criteria.“The concept of promoter and promoter group has caused a lot of absurd consequences,” said Sandeep Parekh, founder, Finsec Law Advisors. “We have seen dozens of cases where family members who either have nothing to do with the company, or worse, are actively at war with the promoters, being tagged as promoters. The tag brings with it serious consequences of civil and even criminal liabilities for actions of the company and its management. Ideally, the controlling shareholders, if any, should have only limited liability except where fraud is involved.”“Today, the focus has to shift to controlling shareholders, board of directors and management who have the right to appoint directors,” he said.A controlling shareholder concept will work for financial investors who don’t run a company by themselves and are looking to run it through professional managers, said Kaushik Mukherjee, partner of law firm Shardul Amarchand Mangaldas. “The real question here is whether we are talking about a financial investor who is not actually controlling the company and looking at downside protection or is it a person who is indeed controlling the company, which is the case with India historically. I don’t think the concept should be done away with in cases where the promoters are in de facto control of the company.”“It is only fair that the person who is guiding the ship for all practical purposes be made known in a listing prospectus through disclosure. However, there also has to be a fine distinction between people who fall in the first bucket and promoters. While this has evolved partially, the concept is not yet fully captured under current law,” he added.Nowadays, more and more listed companies globally have multiple shareholders and professional managements handle their day-to-day affairs.Corporate lawyers said the regulator’s move for substituting the concept of promoter with controlling shareholder will align Sebi regulations with international practices. The proposed changes may also reduce the compliance and disclosures by the listed entity as well as by persons forming part of the promoter group.“The proposed change will shift the focus towards the shareholders who control the company instead of persons who are identified as promoters in the prospectus or filings made with the stock exchange and who may be controlling affairs of the company, directly or indirectly, as a shareholder, director or otherwise,” said RS Loona, former executive director, Sebi, and managing partner of law firm Alliance Law. “It may also result in dispensing with the concept of ‘promoter group’ which includes close relatives of the promoters and companies in which promoter holds 20% or more shareholding.”Moving away from promoters to controlling shareholdings is like moving away from a ‘family feudal concept to a democratic concept’, said one of the persons cited above. “If you look at the past few years, a lot more professionally managed private equity run firms are floating IPOs (initial public offerings),” the person said.Sebi thinks the economy and business drivers are changing and the shareholding structure need to be altered.The proposed changes may help startups where promoters may not be in control.
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