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Sebi’s promoter tag push stumps startups, may disrupt IPO plans

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Portea Medical (Health- vista India Ltd) has reclassified its founders Meena Ganesh and Ganesh Krishnan as “promoters”, the company disclosed in a filing with the Securities and Exchange Board of India (Sebi) last month.

It marks the first instance where the stock markets regulator has intervened to get the founders to be reclassified as promoters, said people aware of the development. In its draft red herring prospectus filed in June 2022, Portea Medical said it is a “professionally managed company” and that it “does not have an identifiable promoter”.

Portea Medical’s founders hold an 18.07% stake in the company. So far, only founders with at least 25% stake were classified as promoters under the Sebi regulations.

But now, Sebi has started asking founders who have at least 10% stake to be legally classified as promoters. Such a move could not only disrupt the listing plans of several new-age companies with low founder shareholding that position themselves as professionally managed entities but also lead to restrictions on their shareholding in the company and higher disclosure requirements, said experts and industry executives.

For instance, they said, taking on the promoter’s tag would mean that these founders will have put up 20% of the equity of the company as minimum promoter contribution towards a post-public issue lock-in of 18 months or three years after the initial public offering (IPO) of the company.

Higher disclosure requirements

Young startups which are funded by venture capital or private equity often see a significant dilution of founders’ equity holding — in some cases to single digits. Most tech startups that are aiming to list themselves on Indian stock exchanges fall under this category.

A promoter is required to make several disclosures during the IPO and after listing, under various Sebi norms, including issue of capital and disclosure requirements, besides being subject to substantial acquisitions of shares and takeover regulations, prohibition of insider trading regulations and listing obligations. Contravention of these regulations can bring penalties on the promoters.

“Sebi has been issuing observations to such companies where the founders hold over 10% stake. Sebi is asking these companies to classify the founders as promoters. There is no blanket order as such that all promoters over 10% have to be classified as promoters. Sebi is looking at it on a case-by-case basis,” a capital markets lawyer said on the condition of anonymity.

“No particular benefit is being achieved by introducing a promoter tag to a 10% shareholder, as legally such member still cannot independently control the issuer or instruct the board to take any decisions.”

An investment banker said the promoter tag will cause complications for such companies since, in several cases, while the founder may have more than 10% shareholding, their shareholding may fall short of the minimum 20% contribution that a promoter has to offer for the post-listing lock-in. In such cases, investors will have to pitch in with their shares to fill the gap, he said.

“Any such shares provided to meet the shortfall in promoter contribution will come under the post-IPO lock-in requirement, which could be 18 months to three years and many investors may not be comfortable in doing that. This will add more complications to the IPO process,” said the banker, who did not wish to be identified.

In the case of Portea, Accel India and Ventureast are contributing part of their shares to meet the shortfall, documents filed with Sebi showed.

An email sent to Sebi did not elicit a response till press time. Portea Medical declined to comment on ET’s queries.

Legal experts said the Sebi move will improve corporate governance, although there are concerns that some founders will be hesitant to take on the promoter tag and this could lead to delay in IPO plans of such companies.

“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,” said Sumit Agrawal, founder, Regstreet Law Advisors.

Agrawal, also a former Sebi officer, said, “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.”

He said it is possible that some companies may delay their IPO plans until they can find a way to comply with Sebi’s requirements without assuming the full responsibilities of a promoter.