IPO-bound  cos  wary  as  Sebi tightens promoter norms

The Securities and Exchange Board of India (Sebi) mandates companies planning initial public offerings (IPO) to disclose certain information about their promoters. Under the regulator’s Issue of Capital and Disclosure Requirements (ICDR), an immediate relative of the promoter, such as the spouse, parent, brother, sister or child, is necessarily considered part of the promoter group. Any company where such relatives hold more than 20% stake is also considered part of the promoter group, and both the relative and the company must furnish necessary information in the offer document and to Sebi and exchanges.

Earlier, IPO-bound companies had to follow a process to send out a communication to these family members, followed by frequent reminders over a certain time, and in case of failure to respond to the correspondence, the company could seek an exemption to remove the said family member from the promoter group. This process takes up to a month and is usually undertaken along with filing the draft red herring prospectus.

However, Sebi recently issued an advisory to investment banks, asking them to furnish either an affidavit from such family member, clearly stating they do not want to be classified as part of the promoter group, or a memorandum of understanding (MoU) between the promoter and the family member. Companies unable to furnish such documents must be disclosed as a promoter group, along with prescribed disclosures about such promoter group, in the DRHP. Also, the exemption based on such documents has to be obtained from Sebi before filing the DRHP.

“Often, promoters have estranged relationships with family members and, thus, they seek an exemption from Sebi to exclude these family members from the promoter group. However, seeking an exemption on the basis of an affidavit or an MoU, which, given the nature of the relationships, may not result in a successful attempt and may have far-reaching consequences. To begin with, the information about such promoter group may not be complete, which would subject the company to regulatory penalties by failure to make necessary disclosures in the offer document, and such promoter group entity post-listing may not adhere to the regulatory restrictions set out by Sebi under its regulatory framework, resulting in further challenges for the IPO-bound company,” said a capital markets lawyer, one of the two people cited above, adding that investment banks have reached out to Sebi to rethink the changes.

Emails sent to a spokesperson for Sebi did not elicit a response till the time of going to press.

The new norms are likely to delay the DRHP filing process for companies and may open up the possibility of promoters facing unnecessary harassment by such family members, the people said.

“Given the broken relationships between promoters and such family members, the latter may choose to not furnish the information purely to cause trouble for the promoters and delay their IPO plans, and in extreme cases, this may even lead to such family members extorting the promoters to provide these affidavits or MoUs,” said the second person, also speaking on the condition of anonymity.

He added that many business families do not have any MoU of family separation between members, and preparing this is a tedious process, which may not be completed due to various ongoing disputes and ownership issues, especially in situations where family members don’t get along.

“While Sebi is probably worried that such exemptions are being misused to hide some members of the promoter group, the solution that the regulator has come up with adds little to alleviate such misuse and, in fact, adds to problems for promoters and companies who are planning to go public,” he said.