Reclassification of promoters
- Posted By
10Pointer
- Categories
Economy
- Published
17th May, 2021
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Context
The Securities and Exchange Board of India (Sebi) has proposed doing away with the classification of ‘promoter’ concept and moving to ‘person in control’ system and scrapping the ‘promoter group’.
About the SEBI’s proposal
- SEBI has proposed the shifting of the concept of ‘promoter’ to ‘person in control’.
Promoter
- The Companies Act, 2013 has a definition of promoter in Section 2 (69). However, it does not define a promoter group.
- A “promoter” is a person who:
- is named as such in the offer document;
- or in the annual return of the issuer;
- or a person who has control over the issuer (directly or indirectly);
- or in whose advice, directions the board of directors of the issuer is accustomed to act
- Definition of the promoter is wide-ranging and goes beyond the persons in control of the issuer.
Promoter Group
- The definition for promoter group is provided in Regulation 2(pp) of the ICDR 2018 of the SEBI.
- The ‘promoter group’ focuses to capture holdings by a common group of individuals or persons and which results in capturing unrelated companies with common financial investors.
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Need of the change
- The investor landscape in India has changed.
- Now, the concentration of ownership and controlling rights do not vest completely in the hands of the promoters or promoter group.
- New shareholders such as private equity and institutional investors have emerged.
- The investor focus has increased on the quality of board and management that has reduced the relevance of the concept of promoter.
- Governance practices have become important and the boards have become more professional due to the arrival of independent directors and the structure of board composition.
- The various committees in the board, that includes audit and remuneration, for transparent functioning of the affairs of a listed company.
- There is a growing shift in the responsibilities and liabilities to the board of directors and management.
- Shareholders now look to the board of directors and management to protect their rights and add value, while discharging their duties.
- This increased focus on quality of board and management has also reduced the relevance of the concept of promoter.
