The Securities and Exchange Board of India (SEBI) has garnered attention recently with its proposal to eliminate the promoter terminology and instead adopt the ‘person in control’ concept. In addition to this, the statutory body has also proposed reducing the required lock-in periods post-public issue for promoters and pre-Initial Public Offering (IPO) shareholders.
About SEBI
SEBI is a statutory entity established in April 1992 under the Securities and Exchange Board of India Act, 1992. The organization’s primary role is to safeguard investor interests in securities and to regulate and promote the securities market.
The Promoter Concept
As delineated in the Companies Act, 2013 and SEBI (ICDR) Regulations, 2018, a ‘promoter’ and ‘promoter group’ have specific definitions. A promoter is the individual who conceives the idea for a business and manages the varied formalities necessary for starting a company. The promoter group comprises any corporate body wherein a group of individuals, companies, or combinations thereof hold 20% or more of the equity share capital and act in concert.
Purpose and Significance of Shifting from Promoter to Person in Control
The investor landscape in India has evolved, leading to a shift in the concentration of ownership and controlling rights. They no longer fully reside with the promoters or promoter group due to the advent of new shareholders such as private equity and institutional investors. The existing definition focuses on capturing holdings by a common group of individuals or entities, often resulting in capturing unrelated companies with common financial investors. With increased scrutiny of board quality and management, the promoter concept is becoming less relevant. The proposed transition aims to mitigate these issues.
The proposed change can alleviate disclosure burdens for firms. The changing nature of ownership may result in individuals with no controlling rights and minority shareholding continuing to be classified as promoters. Being labeled as promoters gives such individuals an influence disproportionate to their economic interest, which could conflict with the interests of other stakeholders.
Transition Period
SEBI has proposed a three-year transition period for shifting from the promoter to the person in control concept.
Reduction in IPO Lock-In Period
SEBI’s proposal includes reducing the lock-in period post a public issue from three years to one year if the object of the issue involves an offer for sale or funding other than for capital expenditure for a project.
About Initial Public Offering (IPO)
An IPO is when an unlisted company makes either a new issuance of securities or offers its existing securities for sale to the public for the first time. The primary market is where new securities are issued for the first time, different from the secondary market where existing securities are bought and sold.
IPO Locking Period
The IPO lock-in period refers to a predetermined span after a company goes public during which major shareholders cannot sell their shares.
Offer For Sale
In this method, securities aren’t directly issued to the public but are offered for sale through intermediaries like issuing houses or stock brokers. A company sells securities en bloc at an agreed price to brokers who then resell them to the investing public.