The Securities and Exchange Board of India (Sebi) has suggested that the concept of promoters be phased out in favor of the concept of "individual in charge". In a consultation paper published Tuesday, it also proposed lowering the minimum lock-in periods for promoters and pre-IPO shareholders after a public offering.
The consultation paper suggested that a three-year transition period for moving from the promoter to person in control concept. It said this shift is necessitated by the changing investor landscape in India where concentration of ownership and controlling rights do not vest completely in the hands of the promoters or promoter group because of the emergence of new shareholders such as private equity and institutional investors. Also, investor focus on the quality of board and management has increased, thereby reducing the relevance of the concept of promoter.
The “changes in nature of ownership, could lead to situations where the persons with no controlling rights and minority shareholding continues to be classified as a promoter. By virtue of being called promoters, such persons may have influence over the listed entity disproportionate to their economic interest, which may not be in the interests of all stakeholders,” the consultation paper said.
It also suggested doing away with the current definition of promoter group since it “focuses on capturing holdings by a common group of individuals or persons and often results in capturing unrelated companies with common financial investors.” This move will lighten the disclosure burden for firms.
For companies publicly issuing shares, Sebi has proposed that if the object of the issue involves offer for sale or financing other than for capital expenditure for a project, then the minimum promoters’ contribution of 20 per cent should be locked-in for one year from the date of allotment in the initial public offering (IPO). Currently, the lock-in period is three years.