FROM THE PROMOTERS’ PRESPECTIVE- SEBI AMENDMENTS OF 2021

Neena Teresa Varghese, 5th year student at the National University of Advanced Legal Studies (NUALS), Kochi

The pandemic took its toll on businesses and markets around the world. The Securities and Exchange Board of India (SEBI) made a solid attempt to accommodate these changes. However, both 2020 and 2021 saw numerous amendments to the already existing SEBI Regulations. However, two regulations that have had major implications for the promoters are contained in the SEBI (Issue of Capital and Disclosure Requirements, (ICDR)) (Third Amendment) Regulations, 2021 and the SEBI (Listing Obligations and Disclosure Requirements, (LODR)) (Sixth Amendment) Regulations, 2021. These two amendments, as will be discussed subsequently, have profound impact on the relationship between promoters and their entities. While it may not be accurate to categorize the two amendments as being positive and negative, it may be fairly said that while one tightens the grip on promoters, the other cuts back and gives them some breathing space.

The ICDR (Third Amendment) Regulations, 2021

The Third Amendment Regulations cut down the lock in period for minimum promoters’ contribution in half. While the unamended ICDR Regulations mandated that “minimum promoters’ contribution including contribution made by alternative investment funds or foreign venture capital investors or scheduled commercial banks or public financial institutions or insurance companies registered with Insurance Regulatory and Development Authority of India shall be locked-in for a period of three years from the date of commencement of commercial production or date of allotment in the initial public offer, whichever is later”, the 2021 amended brought down the lock in period to eighteen months. However, a new proviso was also added to the end that the lock in period would remain as three years in case the majority of the issue proceeds excluding the portion of offer for sale is proposed to be utilized for capital expenditure. Further, the amendment also brought the lock in period for the entire pre-issue capital held by persons other than the promoters to six months from the earlier existing mandate of one year.

By introducing such a change, the SEBI has acknowledged the change in the age-old belief that locking in twenty percent of promoters’ shareholding for three years is necessary to ensure continuous ‘skin in the game’ by such promoters. The rationale behind this change is evident in SEBI’s findings that “Nowadays, companies going public are well established with mature businesses, have pre-existing institutional investors like private equity firms, alternate investment funds etc. and their promoters have demonstrated ‘skin in the game’ for several years before proposing listing.”

The amendment further attempts to clarify any ambiguity that may be present by defining the term ‘capital expenditure’ as including include civil work, miscellaneous fixed assets, purchase of land, building and plant and machinery etc.

However, this move by the SEBI is in contrast to its Circular which mandates that “a minimum of 20% of the salary/perks/bonus/non-cash compensation net of income tax and any statutory contributions of the key employees of the AMCs shall be paid in the form of units of Mutual Fund schemes in which they have a role/oversight. While the SEBI is trying to drive home, rather aggressively, the ‘skin in the game’ directive in the case of Mutual Funds, it has adopted a more relaxed front with respect to promoters.

The LODR (Sixth Amendment) Regulations, 2021

The Sixth Amendment Regulations has filled up the lacunae that has existed in the sphere of related party transactions (RPTs), even after the enactment of the Companies Act, 2013. While the Companies Act provides an illustrious definition of the term ‘related party’, as well as that of ‘relative’, it failed to give due regard to promoters, who the Act itself acknowledges as people whose advice has such command that the Board of Directors are accustomed to act on their directions or instructions. The The LODR (Sixth Amendment) Regulations, 2021expressly provides that “any person or entity forming a part of the promoter or promoter group of the listed entity” is to be deemed as a related party.

Further, the definition of ‘related party transaction’ that was present in the unamended LODR, which was criticized as having very limited scope, was expanded to mean a transaction involving a transfer of resources, services or obligations between:

· a listed entity or any of its subsidiaries on one hand and a related party of the listed entity or any of its subsidiaries on the other hand; or

· a listed entity or any of its subsidiaries on one hand, and any other person or entity on the other hand, the purpose and effect of which is to benefit a related party of the listed entity or any of its subsidiaries, with effect from April 1, 2023.

The inclusion of promoters in the category of related parties was fueled by the Report of the Working Group on Related Party Transactions, which recommended the same for the following reasons:

1. A promoter may exercise control over a company irrespective of the volume of shareholding.

2. The subjective definition of “related party” as given in the Accounting Standards which categorizes any person who has control or significant influence over an entity, may result in promoters/promoter group with less than twenty percent shareholding being excluded from the category and therefore, it is necessary that they be expressly categorized as “related parties”.

3. Promoters, irrespective of the extent of shareholding, may exercise control and influence the decision of promoter groups and hence, it becomes a necessity that promoter group members are also brought under the definition of a “related party”, irrespective of their shareholding.

This move has to be seen as a monumental effort by the SEBI in its endeavor to promote and raise the standard of Corporate Governance in respect of listed companies. Though not expressly recognised as a related party until the 2021 amendment, it has been widely acknowledged that promoters are powerful players when it comes to the handling and operations of a listed entity. They have a role in the company’s fall and rise, and cannot always be expected to be impartial parties if in case they company has to do business with them. This position has been affirmed by the NCLT as well, when it ruled that promoters being ineligible parties under Section 29A of the IBC, 2016, cannot be allowed a back-door entry in the company and are hence, ineligible to participate in the corporate insolvency resolution process of the company.

Therefore, by expressly bringing promoters within the ambit of related parties, the SEBI has clearly shown its intent to make the business of listed companies transparent and shareholder-friendly. However, even though the 2021 amendment is laudable, there is still a lot that remains vague in India’s RPT regime. For instance, the phrases such as “ordinary course of business” and “arm’s length basis”, which form the crux of the governing provision with respect to RPTs, lack a solid, unambiguous definition.

In conclusion, 2021 has been eventful for promoters. From the decision of the Apex Court that banks can proceed against personal guarantors (which includes promoters) even after the approval of the resolution plan to the LODR (Second Amendment) Regulations, 2021 that provided for the reclassification of promoter to public, the position occupied by promoters has witnessed a lot of friction.