Executive startup founders holding more than 10% stake may be categorised as promoters

Regulatory diktat: Executive founders holding more than 10% stake should be categorised as promoters

Founders holding more than 10 percent stake in an IPO-bound company, individually or collectively, and who hold executive positions in the firm, will have to  be categorised as promoters, investment banks were told at a meeting held at the National Stock Exchange (NSE) last week, sources aware of the development informed Moneycontrol.

This formal guidance to investment bankers follows similar instructions  in the recent past by the markets regulator, the Securities and Exchange Board of India (SEBI), wherein the regulator had made observations on some DRHPs (draft red herring prospectus), and asked the companies why their founders should not be classified as promoters.

“SEBI has made such observations on DRHPs over the past few months, and discussed the same with bankers. So far, this was being done on a case-to-case basis, but now bankers have been given  formal guidance by the NSE,” said one of the sources.

A notification on the same is expected to be issued soon by the stock exchanges or the regulator, the source added.

The guidance from NSE, coming on behalf of the markets regulator, will affect the founders of new age tech companies.

Thus far, these companies were categorising themselves as “professionally managed companies with no identifiable promoter” when they filed their DRHP for SEBI’s approval.

But now the companies will have to necessarily call out their founders as promoters, if they hold executive positions and more than 10 percent stake in the company at the time of filing the DRHP.

Last year, SEBI had asked the founders of Portea (Healthvista India Ltd), Meena Ganesh and Ganesh Krishnan, to classify themselves as promoters. While individually these founders held less than 10 percent stake in the company, collectively they held over 18 percent.

“Our company is a professionally managed company and does not have an identifiable promoter,” Healthvista had said in the DRHP it had filed with SEBI.

SEBI has issued similar observations to other companies where founders have  more than 10 percent stake, the sources cited above said.

“The promoter tag comes with lots of responsibilities and liabilities, so, founders who may individually have single-digit shareholding in the company are not comfortable taking on the designation of a promoter. But now they will have to necessarily classify themselves as promoters and deal with the associated liabilities and obligations," said another source.

If the founder is classified as a promoter, then the disclosure requirements  go up significantly for the company, as the company will have to make disclosures regarding the promoter group, which includes the spouse and other family members of the founder, the source added.

Emails sent to SEBI and NSE have not elicited a response till the time of publication.

Sources added that this latest guidance on promoter classification is part of SEBI’s enhanced scrutiny of promoters of companies that are coming to the  markets with their IPOs (initial public offerings).

“We have seen that in the past few months, SEBI has increased its scrutiny on promoters and promoter groups of companies that have filed their DRHPs for an IPO. In several cases, individuals or entities that were identified as a ‘promoter group’ at the time of filing the DRHP, were asked to be re-classified as ‘promoters’ by SEBI,” said one of the sources.