November 2021

PERSON IN CONTROL (PIC): NEW MODIFICATION IN THE ENTITY

Shivanand Pandit
Financial and Tax Adviser

Cementing the path for a notable modification in the manner that the promoters and more than 5,000 publicly-listed corporate entities operate in India, the Securities and Exchange Board of India (SEBI), in a consultation paper has suggested doing away with the concept of promoters and shifting to ‘person in control.’ It has proposed the change to put an end to the present definition of promoter group with an idea to streamline the disclosure encumbrance. Apart from this, SEBI has announced a few other proposals that include (a) decreasing the minimum lock-in period (tenure an investor can hold on to the securities) after an initial public offer (IPO) for promoters’ portion of a minimum 20% from the current three years to one year, and the lock-in period for holding more than 20% from one year to six months; and (b) decreasing the lock-in period for pre-IPO shareholders (those who invest in the entity even before the public issue) from the current one year to six months.

The notion of the promoter is a heritage from history when a corporate body or a group of companies (say, a business house like Tata, Birla and so on) would establish a business unit; for example, a power or steel or fertilizer plant, by pledging some funds of their own and financing the remainder of the project cost by borrowings from banks or financial institutions, on top of raising funds from the capital market. This business unit would remain linked with the establishment – virtually all through the life-span of the project – having a fundamental interest in safeguarding its constant profitability and progress and consistently work for achieving this goal, thereby obtaining the position of what one may label as ‘once a promoter, always a promoter’.

FIRST LESSONS IN INTERPRETATION OF CONTROL
In order to move with the times, SEBI in its Board meeting on 6th August, 2021 gave in-principle assent to move from the concept of promoter to ‘controlling shareholders’ as was recommended in the Consultation Paper dated 11th May, 2021 which dealt with the evaluation of the structure relating to promoters and the promoter group. Although the Consultation Paper has mentioned many other viewpoints and aspects, restructuring the definition of the promoter group rationalising the disclosure needs for group entities is one of the key changes proposed. This seems to be a branding modification in the configuration of the company law.

The Companies Act, 2013 along with the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 has defined the term promoter ‘as a person who has been named as such in a prospectus or is identified by the company in the annual return in section 92; or a person who has control over the affairs of the company, directly or indirectly, as a shareholder, director or otherwise; or a person with whose advice, directions or instructions the Board of Directors of the company is accustomed to act.’ A person or

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