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The Securities and Exchanges Board of India (Sebi) has proposed to reduce the minimum lock-in period for selling the stake of promoters and other shareholders after an initial public offering (IPO). In a consultation paper, the markets regulator has also proposed to alter the definition of 'promoter group' and move to the concept of 'person in control'.
Moneycontrol has spoken to legal experts and market observers to obtain their views on the discussion paper. Most are of the opinion that the regulator’s proposals would have a favourable impact on the Indian equity market.
‘Person in Control’ a novel concept
Says Anand Lakra, Partner, J Sagar Associates: “Sebi's proposal to shift from promoter to persons in control is a welcome change from the existing stand of 'once a promoter, always a promoter'. Under current norms, until reclassification, promoter shareholders who are not in control continue to bear the burden. However, given that the concept of the promoter is widely legislated, Sebi would need to make necessary amendments to the impacted regulations and in particular, such amendments may warrant a re-look at the definition of control.”
Aninda Pal, Partner with DSK Legal, also echoed this view. “The current definition of promoter is an inclusive one and goes beyond persons who are actually in control. In the past, companies with broad-based shareholding needed to name financial investors as promoters in IPOs where such investors were not in control. The proposed change from the concept of promoter to the person in control will avoid situations of naming shareholders as promoters, who are not in control”.
However, Manan Lahoty, Partner with Indus Law, believes the change in the definition of promoters won’t reduce the disclosure burden substantially.
“The current focus of the paper is to resolve issues related to “non-controlling” promoters, which to begin with is less common and hence less problematic. Similarly, the proposed changes to the definition of the promoter group will not reduce the disclosure burden much. A large part of the promoter group is formed by way of “immediate relatives” definition and by including the companies in which they hold more than 20 percent stake.”
Another crucial point in the discussion paper is reducing the lock-in period for pre-IPO investors. Market experts say that the move will give a boost to private equity players who seek an early exit. Sebi has proposed to cut down the promoter lock-in period from three years to one year. Secondly, a pre-IPO investor can exit from the company in six months, compared to the one-year time period at present.
DSK Legal’s Pal thinks such relaxation in ICDR regulations for promoter group and other shareholders will encourage more companies to raise capital from the market through IPOs. “Most companies going for listing nowadays have a robust track record with good governance and independent management. Thus, the need for skin in the game for such a prolonged period may be reduced. This change will also be a boost for the private equity industry. With the increase in control deals in the private equity space and enhanced management participation by private equity firms, relaxation of lock-in restrictions by Sebi will enhance exits of private equity investments through IPOs,” he opined.
However, Sonam Chandwani, Partner with KS Legal thinks skin in the game of promoter is protection for investors. “The said reduction of the lock-in period for minimum promoters’ contribution and other shareholders for public issuance on the Main Board could be problematic as changing times have redefined the buying and selling processes of consumers and companies. As a result, fledgeling firms are primed to enter the market, whereby, the promoters need to show skin in the game to gain the trust of investors. Also, considering the disastrous repercussions, a lock-in period of three years acts as a protectionist guard,” Chandwani pointed out.
But Lahoty says relaxation in pre-IPO investment will make Indian regulations at par with other developed markets. “Through this paper, Sebi has an opportunity to make a big impact and bridge the regulatory gap with other large markets. Indian regulations are still seen as excessive when it comes to matters of disclosures and obligations of promoters and their affiliates. Not only at the time of listing, but later on too, promoters are burdened with several commercial commitments (such as delisting offer or exit offer when IPO objects are altered or limitations for a buyback). Globally, the regulations have been streamlined which gives those markets an edge over India,” he observed.
Speaking to Moneycontrol, Pratibha Jain, Group General Counsel and Head of Corporate Affairs, Everstone Group, says it has been a long-standing demand of investors to reduce the lock-in period. “In recent times, as private equity funds have been doing more control deals in India, they qualify as ‘promoters’ because of which their investment is locked up in the company as per current regulations. In control deals, we invest and nurture a company to get to the level of doing an IPO to have the option to exit from the company. It’s important to provide this timely exit route to private equity investors so that they can reinvest in another private company. Keeping that capital invested in a public company is sub-optimal for the economy as that capital can instead be used to make an investment in another company that needs the capital,” she noted.
“When Sebi reformed the foreign portfolio investment regulations to make it easier for investors to enter and exit, it not only helped increase the volume of FPI investments into India but also made the markets more stable. Similarly, allowing timely exits for private equity investors will ultimately help make India a more favourable destination for this alternate investment asset class,” Jain added.
Lastly, the discussion paper also proposes relaxation in disclosing related-company financials in the draft red herring prospectus (DRHP). Most experts say that this will reduce the burden on the company on disclosure. However, all this information will be available on the listed company’s website.