The committee is proposing that companies must show the basis on which they have identified promoters in their draft offer documents, as the capital markets regulator increasingly deals with instances of several founders being labelled promoters despite not being in control, according to a discussion paper reviewed by ET.
The matter came up for discussion last month at a meeting of Sebi’s Primary Market Advisory Committee (PMAC), chaired by former banker Keki Mistry.
Agencies Debate on Paper Likely
It will likely be debated in upcoming meetings before Sebi releases a discussion paper, said a person familiar with the discussion.
Sebi didn’t respond to queries.
The PMAC suggests that promoters in IPO-bound companies be identified on the basis of control and influence. Such firms should also give the rationale for this.
Promoter classification is a key part of IPO disclosures. In the recent IPO rush, Sebi has come across situations, especially in new-age businesses, where companies without any identifiable promoter classify individuals as promoters in the offer documents only for the sake of disclosure.
These individuals are usually former promoters who have diluted their holdings over time. In many such instances, companies, effectively controlled by private equity firms, identify these individuals as promoters in their annual filings with the Registrar of Companies or in IPO prospectuses despite having little role in day-to-day operations.
Misleading investors
This is seen as misleading to investors for whom promoter identity is a critical part of assessing a company’s prospects. For the individuals concerned, being classified as promoters saddles them with legal responsibilities and restrictions, while they are not eligible for stock options.
The regulatory committee is recommending that the Sebi regulations for reclassification of promoters to public shareholders should not apply to companies preparing to list. Similarly, IPO-bound companies must disclose significant beneficial owners – the ultimate controllers – in IPO documents and why these individuals or entities are not being classified as promoters. The panel has also suggested that companies must attest that these beneficial owners, who are not promoters, do not indirectly control the companies through side agreements.
Currently, investment bankers to these IPOs advise companies on the reclassification of promoters in the absence of a concrete framework for such firms. The lead managers of the issue usually identify promoters based on various factors for disclosures in the issue documents.
The PMAC has suggested scrapping a rule stating that a person holding 15% or more voting rights is the person who controls the company. The discussion paper said control should instead be determined under the Sebi takeover regulations, which spell out actual power to drive decisions in a company.
