Why in the news?

• SEBI expands promoter definition for IPO-bound companies, including founders holding 10% or more, and their immediate relatives.
  • According to current SEBI regulations, a promoter is someone who controls the affairs of the company or can appoint the majority of directors or is named as such in an offer document.

What Norms Say

• Expanded Definition of Promoter: The definition of a promoter has been expanded for companies preparing for an IPO. A promoter is someone who controls the company’s affairs, can appoint the majority of directors, or is named as such in an offer document.
• Previous Criteria: Founders holding 25% were previously deemed promoters due to their negative control and power to block special resolutions.
• New Criteria: Founders holding 10% or more must classify themselves as promoters if they are key managerial personnel (KMP) or directors in the company. Immediate relatives on the company board or KMP will also be classified as promoters, even if they hold just 1%.

About Declassification and 31A of LODR (Listing Obligations and Disclosure Requirements) Regulations

• Declassification Difficulty: The current regulations do not provide an easy path for declassifying a promoter as a public shareholder.
• Rule 31A of LODR Regulations: To be declassified, a person must not hold more than 10% in the listed company along with their relatives.
• Restrictive Nature: This restrictive rule makes declassification almost impossible for immediate relatives who are classified as promoters by virtue of their relationship, especially problematic for married daughters with no active role in the company.

Issue Over Subjective Definition

• Subjective Nature of Promoter Definition: The definition of a promoter has been historically subjective, leading to varying interpretations and legal disputes.
• Court Rulings: There have been several court rulings addressing the subjective nature of who qualifies as a promoter, highlighting inconsistencies and complexities.
• Complex Criteria: Accounting standards and regulatory criteria for determining control and influence in a company are often complicated and can be interpreted in multiple ways.
• Need for Objectivity: Experts argue for a more objective test to ascertain control and promoter status, which would provide clearer guidelines and reduce disputes.
• Example: Vinod Kothari, Director at Vinod Kothari Consultants, points out that moving towards an objective test is a positive step, given the current complexities in determining control.

Way forward: 

• Standardised Guidelines: Develop clear and standardised guidelines for identifying promoters, reducing subjectivity and ensuring consistency.
• Detailed Disclosures: Mandate detailed disclosures from companies about their promoters, including shareholding patterns, roles, and influence in decision-making.

Mains PYQ:

Q In the light of Satyam Scandal (2009), discuss the changes brought in corporate governance to ensure transparency and accountability. (UPSC IAS/2015)

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