Fostering entrepreneurship: looking beyond the ‘promoters’

Presently, tabular disclosure and compliance are to be followed by the promoters under SEBI regulations.

Saurabh Pramod Shah

Etymologically, ‘promoter’ is derived from Latin promotor, which translates to ‘one who leads or leads to a cause’. Thus, a promoter is someone who moves things forward. They take all the steps to build the company. His contribution in the establishment of the company is significant. The term ‘promoter’ has also been defined in the SEBI Regulations and the Companies Act, 2013.

The definition in regulation 2(1)(oo) of SEBI (Issue of Capital and Disclosure Requirement) Regulations 2018, is the same as the one in the Companies Act 2013, except for the fact that SEBI’s definition states that a financial institution, Commercial banks, FPIs other than individuals, and other specified body corporates holding only 20% or more equity share capital shall not be deemed to be promoters unless they fulfill other requirements prescribed under the rules.

In the US, Securities Exchange Commission Rule 405(a) defines a promoter as a person who, either alone or in association with other persons, directly or indirectly takes the initiative in establishing or organizing a business enterprise.

SEBI Act 1992 was framed with the intention of protecting investors, promoting development and regulation of securities market, but also considering the prevailing entrepreneurial trends, ease of doing business, better participation in securities market needed. Presently, tabular disclosure and compliance are to be followed by the promoters under SEBI regulations.

Presently, tabular disclosure and compliance are to be followed by the promoters under SEBI regulations.

These and other norms are to be followed extensively by the promoters. But, these regulations are cumbersome and affect promoter-participation in the economy. These rules were framed this way because most of the businesses then were family owned. Now, the ownership landscape has changed. A move towards accommodating the current situation and focusing on promoter ‘control’ is the need of the hour, as the ecosystem is undergoing a major change due to the start-up wave – witnessing a significant departure from the family Enterprise day. Although, promoter is an important element in the formation of a company, we cannot disagree with the fact that, in recent years, the corporate structure has witnessed dramatic changes.

SEBI had recently released a discussion paper suggesting various changes, especially on the definition of promoter against the backdrop of start-ups ‘unicorns’ getting listed on the stock exchange. The heavy burden on promoters through various SEBI-mandated compliances is also considered in the discussion paper, as these start-ups have substantial exposure in the form of institutional investors and PE firms, giving promoters little control over the company. . It would be a pity if we do not take into account that over the years, the contribution of institutional investors to India’s capital market has increased significantly; Thus, SEBI’s suggestion to include institutional investors in the definition of promoters is a welcome move which will help in better governance.

It is worth noting that new generation companies, especially unicorns, are not family-run and in many cases, do not have an identifiable promoter. This is because the promoters of these start-ups have diluted their equity in various rounds of funding over the years. Various SEBI compliances such as lock-in period, reclassification and penalties required by the promoters have become a cause of concern for these unicorns who wish to list in the stock market.

Out of the mentioned provisions, post public issue, share lock-in requirement on promoters is to be noted; This was devised to ensure that the promoters take ownership of the company’s functioning and remain associated with it in the long run. Today, companies going public have a promoter-base that has worked hard over the years and matured the profiles of businesses. They view their holdings as a means of leverage to gain funds in the market. Hence, the lock-in requirement should be relaxed by SEBI for these new age start-ups.

The changing business environment demands a balanced approach in the laws governing promoters. The challenge for the regulator will be to overcome the declining desire to be appointed a promoter. Presently, being appointed a promoter is a one-way street as the shareholders are the deciding factor when the promoter wants to reclassify himself as a public shareholder. These promoters are unwilling to bear the burden of contravention as they are not involved in the regular affairs of the company other than being named as promoters on the company’s documents. He is seen as the primary culprit in company-related breaches. There are cases in which the promoters, without being actively involved in the day-to-day activities of the company, bear the burden and penalty of such violations.

Thus, SEBI should revisit the definition and ensuing responsibility of what is considered as a promoter and, hopefully, its discussion paper which focuses more on the “person in control” rather than the promoter, will do better in India. Government will pave the way.

Corporate Consultant & Company Law Consultant