Sebi cracks whip on IPO promoter classification

Questions were recently raised by securities lawyers and proxy advisory firms on founders of money-losing startups continuing to retain control of the companies even though they classified themselves as public shareholders. The issue of founders enjoying the perks of being a promoter without being classified as one was thrust into the limelight after Paytm founder-chief executive Vijay Shekhar Sharma decided to acquire an additional 10.3% in the company from Ant Group.

Sharma is a non-retiring director on the board of Paytm parent One97 Communications Ltd, chairman of the company, and has a right to a board seat as long as he holds at least 2.5% of the company, things which securities lawyers believe give him control of the company. But Sharma does not call himself a promoter of Paytm.

A similar situation was observed at Mumbai-based Valiant Laboratories, a maker of raw materials for drugs. The company did not club managing director Santosh Vora as part of the promoter group even though his father, Shantilal, was defined as the promoter in the draft red herring prospectus (DRHP) filed with Sebi on 8 June. On 14 August, Valiant filed an addendum to the initial public offering (IPO) papers, saying Santosh Vora is also a promoter of the company.

Four other companies, including facilities management firm Updater Services Ltd, Motisons Jewellers, industrial packaging firm Pyramid Technoplast, and agricultural inputs maker Nova Agritech, included entities as promoters in response to regulatory observations.

According to Sebi’s Issue of Capital and Disclosure Requirements, a promoter controls the company and is the signatory to all the annual returns, while individuals or entities related to the promoter are allowed to be part of the promoter group.

“The corporate governance track record of several companies that have listed post-2020 has been below par,” said a Mumbai-based securities lawyer.

“The point here is simple: If a person is enjoying some degree of control in the company, then such a person ought to be classified promoter and not a promoter group. Now, given the experience in the past, Sebi is now proactively screening the promoter classification in IPO documents.”

“This appears to be Sebi’s first step as its looks to do a course correction from the past when it allowed loss-making startups to list and where the founders, despite being in control of the company, still called themselves as a public shareholder,” said Amit Tandon, the founder and managing director of IiAS.

A detailed questionnaire sent to Sebi did not elicit a response. Emails sent to Updater Services, Motisons, Pyramid Technoplast, and Nova Agritech went unanswered.

A sixth company that changed promoter classification after the markets regulator’s observations is Gurugram-based hospitality firm, Samhi Hotels. After filing a draft prospectus in April, Samhi Hotels filed a corrigendum earlier this week, stating that five shareholders, together owning 15.8% of the company, had agreed not to sell their shares for 18 months after the company goes public.

Such a voluntary lock-in of shares by shareholders of Samhi Hotels, which does not have a promoter, is akin to strictures that limit a promoter of a company from selling shares and is an effort to allay Sebi’s fears, according to an investment banker.

“The company has offered an alternative route, and it is now up to Sebi to consider or not,” said an investment banker on the condition of anonymity. “Once this is cleared, we will know the fate of other such public issues that are facing the same challenge of no identifiable promoter,” said the executive who did not want to be identified as discussions with Sebi are private.

Samhi Hotels did not reply to Mint’s questions.

Sneha Shah from Mumbai contributed to the story.

Updated: 17 Aug 2023, 12:35 AM IST