The Securities Exchange Board of India (SEBI) has approved a major conceptual shift in securities market and governance laws such that the onus for regulatory compliance henceforth falls on ‘controlling shareholders’ and ‘persons in control’, rather than on the promoter and promoter group. Given that it is shareholders who exercise de facto control over a company this shift is certainly logical. Key laws that ensure minority shareholder protection in India, from LODR/ICDR regulations to the Takeover Code and Prohibition of Insider Trading rules, are based on definitions of ‘promoter group’ and ‘persons acting in concert’. While redrafting these laws, SEBI must keep in mind the peculiarities of the Indian market, where business families or top managers tend to exercise disproportionate influence over corporate actions even with a minority shareholding.

SEBI has offered a two-fold rationale for this change. With large listed companies acquiring a diversified shareholder base with more institutional investors, SEBI believes that promoters’ influence has waned while institutions are now calling the shots. But there are caveats to this view. Recent boardroom battles have shown that promoters hailing from marquee business families or a firm’s founders continue to wield considerable influence over corporate decisions long after they have diluted their equity. While index or blue-chip companies may have a wide dispersion of public ownership, promoters still rule the roost across most mid- and small-cap firms at India Inc with their average holding in NSE-listed companies still at 44-45 per cent. Domestic institutions such as insurance companies and mutual funds seldom call promoters or managements to account for governance infractions. Therefore, while redrafting its laws, SEBI will need to ensure that the definition of ‘persons in control’ is watertight and take institutional investors to task on exercising their rights.

IPO-bound companies have been cut some slack too. For IPOs that are primarily offers for sale and don’t entail capex, the lock-in period for the minimum promoter stake of 20 per cent has been trimmed from three years to 18 months. Promoter holdings beyond this and shares of private equity investors will now be subject only to a six-month lock-in after the IPO. As most IPOs nowadays are from established businesses where promoters and private equity investors have been onboard for a while, SEBI reckons there’s no need for them to demonstrate further skin in the game. While this will cheer the start-up and PE community, it enhances risks for public investors in IPOs. Allowing all major shareholders to bail out of a company shortly after its listing may make for less business continuity and management stability. This could put at risk the high growth trajectory that is used to justify the astronomical valuations for the current crop of IPOs.

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