Regulator SEBI Expands Promoter Definition for IPO-bound Companies

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Context

• The Securities and Exchange Board of India (SEBI) has expanded the promoter definition for companies preparing for an initial public offering (IPO).
• The move aims to redefine the criteria for individuals classified as promoters, impacting IPO-bound companies and their stakeholders.

New Guidelines:

Criteria for Promoter Classification:

• According to current SEBI regulations, a promoter is someone who:
  • Controls the affairs of the company.
  • Can appoint the majority of directors.
  • Is named as such in an offer document.
• Previously, founders holding 25% were deemed promoters due to their significant influence over company decisions.

SEBI's Recent Insistence:

• SEBI has been pushing for founders holding 10% or more in IPO-bound companies to classify themselves as promoters.
• However, no formal consultation paper or regulatory amendments have been introduced to enforce this view.

Expanded Scope:

• Founders collectively holding 10% will now be deemed promoters if they hold key managerial positions (KMP) or director roles in the company.
• Immediate relatives of promoters, holding 10% or more in the company, directly or indirectly, will also be classified as promoters.

Impact on Immediate Relatives:

• Even relatives not involved in company management may be classified as promoters if they hold a significant stake.
• This extends the definition beyond what is traditionally envisioned in law, potentially including distant relatives like brother-in-laws.

Challenges and Concerns:

Declassification Difficulty:

• Once classified as part of the promoter group, declassification as a public shareholder becomes challenging.
• Restrictive rules, such as 31A of (Listing Obligations and Disclosure Requirements) (LODR) Regulations, 2015 (Listing Regulations), make declassification practically impossible.
• This poses particular challenges for relatives like married daughters who have no active role in the company.

Case Example: Flair Writing Industries:

• Initially, Khubilal Jugraj Rathod and Vimalchand Jugraj Rathod were identified as promoters.
• Later, additional relatives holding 10%, such as Rajesh Rathod, Mohit Rathod, and Sumit Rathod, were included as promoters.
• Subsequently, several more relatives, including in-laws, were incorporated into the promoter group.

Subjective Definition and Expert Insights:

• The subjective definition of a promoter has been a subject of numerous court rulings.
• According to Vinod Kothari, Director at Vinod Kothari Consultants, there is no perfect way to ascertain control.
• The move towards a more objective test is seen as a positive step in aligning with complex accounting standards.
• Immediate relatives encompass spouses, parents, siblings, and children of the individual or their spouse, further broadening the scope of promoter classification.

READ ALL ABOUT SEBI: https://www.iasgyan.in/daily-current-affairs/securities-and-exchange-board-of-india-sebi#:~:text=The%20SEBI%20is%20managed%20by,the%20Reserve%20Bank%20of%20India.

PRACTICE QUESTION Q. How many of the following powers are granted to the Securities and Exchange Board of India (SEBI) to regulate the Indian securities market effectively? Authority to access records and financial statements of the exchanges. Capability to conduct hearings and issue judgments on market malpractices. Power to approve listing and enforce delisting of companies from exchanges. Responsibility to regulate intermediaries and brokers in the market. A) Only one B) Only two C) Only three D) All Answer. C) Only three READ ALL ABOUT SEBI: https://www.iasgyan.in/daily-current-affairs/securities-and-exchange-board-of-india-sebi#:~:text=The%20SEBI%20is%20managed%20by,the%20Reserve%20Bank%20of%20India.

SOURCE: THE HINDU