New promoter norms may bring down the liability for some stakeholders

The Securities and Exchange Board of India’s (Sebi’s) recent talk of shifting from the concept of promoters may bring down the liability for some stakeholders.  
 

Those having low shareholding may well see their liability fall if the globally-accepted norms are followed in India. 

Clarity on existing definitions of ownership could also be under review, believe experts.

Sebi Chairman Ajay Tyagi had said that the old concept of ‘promoter’ may need to be substituted with ‘controlling shareholder’. This is more prevalent globally.

“Keeping in mind the changing realities of the global and Indian markets, we are examining the relevance of the concept of promoter in today’s times along with whether any changes to Sebi regulations are warranted in this regard,” he said while speaking at the FICCI Capital Market Conference on Thursday.

Sandeep Parekh, managing partner of Finsec Law Advisors and former executive director, Sebi, said the current definition of promoter as it stands is in breach of a very fundamental principle of corporate law, that the company is an entity which is separate from its shareholders.

“This is kind of a shortcut to make shareholders liable for the company....And, if you expand it (definition) beyond the controlling shareholder, then it makes it perverse, as it attaches liability to a broad swathe of shareholders who just happen to be related to the controlling shareholders. In fact, they have nothing to do with the company,” he said.

Samir Paranjpe, Partner, Grant Thornton India, said a change in laws could help better define the concept of ownership and control.

“Promoters have been defined differently at different times. This could help bring more clarity to the concept,” he said.

In November 2018, the regulator had also introduced norms for those who did not want to classify themselves as promoters. The reclassification required that the entity or individual no longer hold more than 10 per cent voting rights in a company, or exercise control over the company’s affairs, directly or indirectly. 

There should also be no representation on the company board and the person concerned should not hold a key managerial position. 

Additionally, the entity ‘should not have any special rights with respect to the listed entity through formal or informal arrangements, including through any shareholder agreement,’ according to the notification.

The move was seen as a way for promoters who had moved on from the company to dissociate themselves from the liabilities associated with being classified as a promoter. 

Promoters face restrictions with respect to transactions in the stock of a company and other rules which are not binding on public shareholders.There have been previous discussions on defining the role of controlling shareholders better.

An earlier consultative paper had looked to define the fiduciary responsibilities of controlling shareholders. It looked at introducing a relationship agreement. It would cover matters such as ensuring that transactions with the company are done in a neutral manner.

“…it is proposed to lay down specific fiduciary responsibilities of controlling shareholders and also consider the feasibility of mandating relationship agreement between the company and the controlling shareholder, specifying the duties and responsibilities of controlling shareholders,” said the 2013 paper.