The concept of ‘persons in control’ — a proposal by the capital markets regulator for promoter-less companies — needs greater scrutiny as it leaves scope for founders or initial promoters to escape any responsibility, said InGovern Research, a proxy advisory firm.
In a note issued on promoter-less companies, the firm pointed out that founders and initial promoters, who have diluted their stake to a minority or no longer control the company, have a chance of escaping the onus placed on an identified promoter.
Over the past two years, the Securities and Exchange Board of India (Sebi) has been consulting on the proposal for shifting from the concept of ‘promoter’ to that of ‘person in control’.
The market watchdog floated a discussion paper first in May 2021.
Since then, Sebi has also been pushing for the promoter tag at the application stage of the initial public offering of certain companies but has not enforced the identification of persons in control of existing promoter-less companies.
The identification of a promoter is important for many enforcement procedures and mandatory disclosure requirements.
While pointing out gaps in the proposed norms for persons in control, the advisory firm has also highlighted that the present definition of promoters is incomplete as it misses including the persons who are currently managing the affairs of the company.
The report analyses the rights and roles of founders in new-age technology companies to point out the difference. With rising investments from private equities and venture funds, the role of the board and shareholders has become significantly important.
“Any individual or group named as ‘promoter’ with limited shareholding has only limited rights, but largely obligations. As the shareholding of the promoter gets diluted, many of the rights of the promoter largely vest with the board, and increasingly with shareholders,” said the report.
“Dominance of and/or powers of any shareholder or group of shareholders in control is what needs greater scrutiny,” it added.
At present, there is no regulation on the minimum holding for a promoter tag. Usually, an individual with over 10 per cent stake in the company is considered a promoter, but founders with lesser holdings can also be categorised as promoters.
However, on the issue of employee stock ownership plans (ESOPs) to founder promoters who have single-digit shareholdings, the report points in favour of the current regulations.
The report notes that it should not be separately regulated as current regulations sufficiently empower the board and shareholders to approve such issuances, and newer norms could curb rights for the shareholders.
“Sebi should not differentiate with new-age companies, and ESOPs should be allowed to be granted to promoters of late-stage promoter-led or promoter-less companies,” states the report.
The norms around ESOPs came to the highlight earlier this year when the founder and chief executive of a financial technology firm were granted ESOPs after he pared his shareholding to a family trust, bringing individual stake below 10 per cent.
“All widely held companies need to incentivise the managing director (MD) and chief experience officers (CXOs) to perform, and giving up a couple of percentages of shareholding of dilution vesting over three to five years means a win-win for shareholders. Also, after a founder and promoter transitions to a board-led company, his/her role as an MD should be seen as ESOP issued to the role of MD and not to the founder,” the report said.