Home / News / India /  Sebi to introduce new identity for Indian companies

MUMBAI: To enable companies, especially startups without promoters, to get listed on stock exchanges for accessing public capital, Sebi is planning to introduce the concept of "controlling shareholders-driven companies" in place of "promoter-driven" companies.

Sebi chairman Ajay Tyagi said this while addressing a capital market summit organized by industry body Ficci on Wednesday.

In order to effect this regulation, enormous changes in the existing securities norms will be required.

"With almost all corporate-related laws in India based on the promoter concept, I need not emphasize how important and far-reaching this proposal is," said Tyagi.

"The concept of promoters has been existing in India for years. Concentrated ownership is still predominant in our country. However, over time, with high levels of PE/VC funding, increasing startup culture and new-age companies, there is an increasing trend of companies with diversified shareholding and in many cases, with professional management and no promoters," said Tyagi.

With entrepreneurial activities thriving in India, most of the startups do not have any clear promoter. Typically, a group of investors, mostly PEs and VCs, come together and put in the initial growth capital with an aim to expand the company's business and exit with high returns. The new rules will particularly benefit startups but even all listed firms will need to make changes in their articles and memorandum.

Sebi's new rules will change the listing landscape in India and give it a complete makeover.

Sebi had issued a consultation paper some time back seeking comments on whether there is a need to shift from the ‘promoter’ regime to a ‘controlling shareholder’ regime as it exists in many countries and if yes, the manner and timeframe for such a shift, said Tyagi.

"There is a need to move from promoters regime to controlling shareholder regime. The minimum public shareholding requirement for listing will, however, remains at 25%. Beyond that the company can decide if it wants to be a more widely-held entity or not," said Tyagi.

In June 2017, Mint first reported that Sebi was planning to ease norms for listing of companies that do not have any clear promoter and are majority-owned by PEs and VCs.

The issue is that once a shareholder is classified as a promoter the listing rules impose certain obligations including a lock-in period on shareholding.

Under the new norms, which are expected to be rolled out this fiscal, Sebi may grant some rights akin to what promoters hold in listed firms.

Current rules classify firms as promoter-driven or professionally managed. In the first case, promoters have to contribute at least 20% of the post-issue shareholding and promise not to sell this stake for at least three years. At the same time, they get some rights, such as appointing a majority of the directors, control the management or make policy decisions.

Companies that have no identifiable promoters are called professionally managed. Big shareholders get no special rights nor do they have to lock in their shares for three years (although pre-issue shareholders—with a few exceptions—have to lock in their shares for a year after listing).

Thus, when PE- or VC-owned firms list, there is an exit of stakeholders who oversaw the growth phase of these companies, which is a key factor in such companies being hesitant to come to the market.

The new rules being considered by Sebi may provide relaxation in these lock-in norms while allowing key stakeholders to retain some of the special rights given only to promoters.

A change in norms, as being mooted by Sebi, could help companies such as ReNew Power Ventures Pvt Ltd, Sutures India Pvt Ltd, CMS Info Systems Ltd, Ecom Express Pvt Ltd and Medall Healthcare Pvt. Ltd to come to the market.

To be sure, Sebi had earlier relaxed some rules for start-ups wanting to raise money and trade on Indian stock exchanges on a so-called institutional trading platform. But, it has been a non-starter till date.

“It is important to remember that even without any agreements, a 20% or 30% shareholder has overwhelming rights over the control of the company," said an investment banker.

On Wednesday, the Sebi chairman said the market regulator is also discussing ways to create and develop a SPAC (special purpose acquisition company) market in India.

Several Indian companies, mostly startups, are looking for US listing through the fast-emerging SPAC route.

Data from Refinitiv, a data analytics firm, shows 126 SPAC IPOs raised $44 billion in the first nine months of 2020, which is more than three times the sum raised during the same period in 2019, as corporate value creators and investors seek to dodge the volatility and uncertainty of the traditional listing process.

"Sebi's primary market advisory committee is deliberating on SPAC. There has been a demand from the industry to introduce SPAC in Indian markets as well. It will provide an alternative route for companies to get listed. The committee is examining whether we really need a SPAC market or not and if yes, then what safeguards we must have in place," said Tyagi.

Companies using the SPAC route, get listed on an exchange through a reverse merger, without any offer being made to the common public.

"Sebi will see whether the sponsors (who provide a SPAC) are taking undue benefits from SPAC listing or not. This can be a concern. We have to address the minority shareholders issue," added Tyagi.

Anirudh Laskar
Anirudh Laskar is a senior editor at Mint, with 17 years of experience. He has reported on significant corporate matters including large mergers and acquisitions, India's emerging e-commerce sector and regulatory issues in the financial services industry. Based out of Mint’s Mumbai bureau, Anirudh has worked with Business Standard and The Telegraph before joining Mint in 2009.
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