Explained | How SEBI board proposals reflect changing market realities

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The board of the Securities and Exchange Board of India (SEBI) on August 6, outlined a bold new set of proposals intended to reflect changing market realities in a country where a bevy of tech firms backed by venture capital and private equity firms is raising capital from public shareholders.  The regulator has proposed to move away from the traditional concept of company promoters, relaxed the share lock-in period for promoters of newly listed companies, eased disclosure norms and made it easier for companies to reward employees with shares.

Here is a closer look at the proposals.

What key changes has the SEBI board proposed?   

The board wants SEBI to move from the traditional concept of company promoters to one of “person in control” or “controlling shareholders” in a “smooth, progressive and holistic manner.”

“To this effect, the Board advised SEBI to: a) engage with other regulators to ascertain and resolve regulatory hurdles, if any. b) prepare draft amendments to securities market regulations and analyse impact of the same. c) further deliberate...and develop a roadmap for implementation of the proposed transition,” the board said in a statement released on August 6.

The statement added: “The Board noted that investor landscape is now changing, with private equity and institutional investors holding significant shareholding in listed ... companies. In recent years, a number of businesses and new-age companies with diversified shareholding and professional management that are coming into the listed space are non-family owned and/or do not have a distinctly identifiable promoter group. Further, there is an increasing focus on better corporate governance with responsibilities and liabilities shifting to the board of directors and management.” 

What about the relaxation of the lock-in period for promoters and investors? 

The board also decided to reduce the lock-in period for promoters of newly listed companies (they are required to hold a 20 percent stake) to 18 months from three years and other investors to six months from one year, affording founders as well as PE and VC firms an opportunity to exit their investments early.

“A SEBI consultation paper dated May 11, 2021, had provided a detailed rationale for the reduction in lock-in period such as demonstration of skin in the game by promoters, existence of private equity firms and AIFs several years before proposing listing, much less greenfield financing through IPOs, etc.,” the board said.

Also Read: SEBI reduces minimum lock-in period for promoters after IPO

In addition, it spelt out proposals to loosen a slew of disclosure norms, potentially improving the ease of doing business for promoters and investors.

What does the sweat equity proposal entail?

The board approved the merger of SEBI (Issue of Sweat Equity) Regulations, 2002 and SEBI (Share Based Employee Benefits) Regulations, 2014, into a single regulation called the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021.

Some of the other key proposals approved by the board were to allow companies to provide share-based employee benefits to employees exclusively working for them or any of their group companies.

“The companies will have flexibility in switching the administration of their schemes from the trust route to the direct route and vice versa with the approval of the shareholders, subject to the condition that the switch is not prejudicial to the interest of the employees,” the board said in its statement.

“It has been decided to dispense with the minimum vesting period and lock-in period for all share benefit schemes in the event of death or permanent incapacity (as defined by the company) of an employee,” it said.

“Maximum yearly limit of sweat equity shares that can be issued by a company listed on the main board has been prescribed at 15 percent of the existing paid-up equity share capital within the overall limit not exceeding 25 percent of the paid-up capital at any time.”

Sweat equity, as a rule, refers to an employee’s contribution to a business in terms of physical labour, mental effort and time.

What has been the reaction to the proposals?

It has been positive. Sandeep Parekh, a former SEBI executive director and a securities lawyer, told the Times of India: “SEBI’s decision to (move to) the concept of a person in control is a more realistic, fluid and accurate portrayal of who actually controls the company.”

The newspaper noted that food delivery platform Zomato, which is backed by Info Edge and Alipay, an arm of Alibaba of China; Zomato founder Deepinder Goyal; and Uber BV, which sold its food delivery business to the company, are all listed as public shareholders and that it has no identifiable promoters.

“Overall, the changes and amendments proposed are well thought of and much needed to move towards a regime of self-governance and lesser regulatory interference and to make the regulatory regime concurrent with the current business and economic framework in India and will surely boost investor confidence,” Transique Corporate Advisers founder Deepika Vijay Sawhney wrote in a statement.