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SEBI seeks transparency and accountability before IPOs of new-age companies 

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The Economic Times has featured a detailed story in the background that SEBI has been actively pushing companies wherein founders holding 10% or more of the equity share capital to be classified as a ‘promoter’ at the time of filing the draft prospectus itself.

One such instance seems to be of Portea Medical (Healthvista India Limited), which in its draft red herring prospectus (DRHP) dated June 29, 2022 clearly noted that their company is a professionally managed company and does not have an identifiable promoter. However, in an addendum to the DRHP filed with SEBI on March 10, 2023, it reclassified its founders, Meena Ganesh and Ganesh Krishnan as “promoters”.

SEBI ICDR Regulations requires promoters of the issuer to hold at least 20% of the post-issue capital which will be locked-in for 18 months to 3 years thereafter, meaning thereby that the securities held by the promoters are not transferable in the specified period. Further, SEBI ICDR defines promoters to be those who are named in the offer document or in control or those instrumental in the formulation of decisions.

Such a classification of founders as promoters will nudge new-age companies to identify and classify persons responsible for the company to its stakeholders. SEBI has always been of the belief that understanding the ownership and management structure of the company is essential for investors and in this regard classification of promoters is necessary for corporate governance.

In this regard Mr. Sumit Agrawal, Founder of Regstreet Law Advisors and former SEBI Officer, commented that, “Sebi’s move aims to increase transparency and accountability in corporate governance. By classifying themselves as promoters, these founders would be subject to the same obligations and liabilities as traditional promoters, including disclosure requirements, insider trading restrictions and fiduciary responsibilities”.

Mr. Sumit Agrawal further noted that “The benefit of this promoter classification is that it would bring greater clarity and transparency to the ownership and control of such companies. This would help investors make more informed decisions and ensure that the interests of all stakeholders are protected. However, some founders may be hesitant to take on the promoter tag, given the additional obligations and associated liabilities that come with it.”

Readers are welcome to send their views to Regstreet Law Advisors at info@regstreetlaw.com.

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