Introduction
The term promoter means a person who takes active steps in the formation of a company. In general parlance it can also be said that the promoter is a person who is engaged in pre-incorporation functions. It’s the promoter who develops an idea for new business venture, look for the persons interested to invest in such business venture and take all the necessary legal steps for the flotation of the company[1]. In the beginning of 19th century there was no much restriction on the promoters who intended to offer public the securities of the company. Disadvantage of the same was taken by the promoters as a result of which many laws were framed to avoid the same from time and then.
Meaning of Promoter
Indian companies Act 1956 as well as the UK Companies Act are silent regarding the definition of the term promoter. The reason being that the term “Promoter” is more a term relating to business than that of law usually summing up in a single word all activities imperative in the floatation of the company[2]. In USA, the Securities Exchange Commission Rule 405(a) defines a promoter as a person who, acting alone or in conjunction with other persons directly or indirectly takes the initiative in founding or organising the business enterprise[3]. The relation between the promoter and the company is fiduciary in nature and the promoter is prohibited from making any secret profits.
In India even thought Companies Act 1956 is silent regarding the definition of term promoter, but the term is defined under SEBI (Issue of Capital and Disclosure Requirement) Regulation 2009 and SEBI (Substantial Acquisition of Shares and Takeover) Regulation 2007 hence its of significant importance.
The term “Promoter” of the company has been defined in ICDR Regulation 2009 as the person or persons in the control of the issuer and the person or persons who are instrumental in the formulation of a plan or programme pursuant to which securities are offered to public, it also includes the persons named in the offer document as promoters[4]. The term control used in the definition has been given the same meaning as in SEBI (Substantial Acquisition of Shares and Takeover) Regulation 2007. The term ‘control’ has been defined according to the takeover code, which means the right to appoint majority of the directors or the right to control the management or policy decisions[5].
Hence under this definition the term “Control” is very wide. This also raises several questions like whether the control under ICDR Regulation 2009 involves “Management Control”. Generally the managerial control will be exercised by the board of directors. However the general principle is that promoters promote the company so that they can take the advantage of incorporation of company by assuming in the process of management control. Generally it’s pertinent to note that promoters will be the first directors of the company[6]. Can such directors or board of directors come within the purview of promoters? Moreover under ICDR Regulation the director or officer of the issuer acting in official capacity is excluded from the definition of Promoter.
The board of directors who has substantial shares and are in position to exercise real and substantial control over the management of the company they can be treated as “Promoters”. Moreover under this wide definition where the term control includes the right to appoint the majority of directors the private equity investors who always insist on these rights would fall within the purview of “persons in control” and can be treated as promoters, hence they will be required to fallow the disclosure requirement as mentioned by the ICDR Regulation 2009[7].
Further in defining the term “Promoter Group”[8] distinction has been made between the natural persons and corporate promoter[9]. The natural promoters include the relatives[10] of the promoter, firm or Hindu Undivided family where they hold ten percent or more equity share capital of a body corporate. Promoter as Corporate Promoter includes the holding companies and their subsidiaries. Hence in any body corporate if the promoter is holding ten percent or more of equity share capital it can be considered as promoter. Moreover in any body corporate if the group of individuals holds more than twenty percent of the equity share capital than it can be termed as promoter. The proviso attached to this section exempts the Scheduled bank, foreign institution and foreign institutional investors from the applicability of this section.
Promoters Contribution in Public Issues
Before making public issues promoters are required to make the minimum contribution to the capital of the company. The main object behind the promoter’s minimum contribution is to assure the promoters continuing commitment towards the company or any project for which the capital is raised.
Under the DIP Guidelines 2000 which was superseded by The ICDR Regulation 2009, the promoter’s minimum contribution could be brought in by promoter’s persons belonging to promoter group, friend, friends, relatives and the associates of the promoters. Under ICDR Regulations 2009 only the securities held by persons identified as promoters in the offer document will be counted towards the minimum promoter contribution[11]. This may however affect the ability of the promoters towards the promoters minimum contribution still it provides an opportunity to promoters to prove his commitment towards the company while raising the public money. This will also help in curbing misuse of promoter’s quota for money laundering.
The minimum contribution of the promoters of the Issuer in initial public offer shall not be less than twenty percent of the post issue capital[12]. In case of Further public Offer the promoter’s contribution shall be to the extent of twenty percent of the proposed issue size or to the extent of twenty percent of the post issue capital[13]. Moreover in case of composite the contribution shall be either to the extent of twenty percent of the proposed issue size or to the extent of twenty percent of the post –issue capital excluding the rights issue component[14]. In case of public issue of convertible securities minimum contribution shall also be twenty percent either by way of equity shares or by way of subscription of the convertible securities[15]. Promoters are required to bring in full amount of their contribution including premium at least one day prior to the issue opening date which shall be kept in an escrow account with a scheduled commercial bank and the said contribution shall be released to the company along with public issue proceeds[16]. However the securities ineligible for promoter’s contribution is not included while calculating the above limits.
Moreover where the promoters minimum contribution exceeds Rs 100 crores, the promoters shall bring in Rs.100 crores before the opening of the issue and the remaining contribution shall be brought in by the promoters in advance on pro-rata basis before the calls are made on public. Certain securities are considered as ineligible for considering the promoters contribution if the promoters of the issuer company have acquired the equity before three preceding year from the date of filing of the documents with SEBI if it is acquired for consideration other than cash and revaluation of assests or capitalisation of intangible assests is involved in such transaction or if such securities are resulting from the bonus issues out of revaluation of assests[17]. However there are certain conditions where this provision is inapplicable that is when the promoter has paid the issuer the difference between the price when the specified securities are issued to the public and the price at which they were acquired or IPO by government companies or statutory corporation or the specified securities are acquired through the schemes of merger and acquisition with the approval of High Court by promoters in lieu of business and invested capital that had been in existence for a period of more than one year prior to such approval.
Lock-in Requirements
Lock-in period is the freezing period of the shares. In other words when the company offers new shares in an Initial Public Offer insiders agree to abstain themselves from selling the shares for a specified period of time. The object of having lock-in period is that as the insiders will be having better information the insiders may try to take advantage of the information. If insiders knew that the price immediately after the offering was unjustifiably high, they might wish to cash out at high price[18].
In case of any public issue the promoter’s minimum contribution shall be locked in for a period of three years[19]. The commencement period shall start either from the date of commercial production or from the date of allotment in the public issue whichever is later[20]. However the relaxation of the lock-in period is provided in case if the promoters contribution is excess the minimum promoter’s contribution than it shall be locked-in for a period of one year[21].
In case if the promoter has lend the specified securities to the stabilising agent for green shoe option than the lock-in period shall not be applied form the period between lending the securities to the stabilising agent and when such lending comes to an end and they are returned. It’s pertinent to note that the securities shall be locked-in for the remaining period from the date of returning[22].
Moreover in case of initial public offer, the entire pre-issue capital held by persons other than promoters shall be locked-in for a period of one year[23]. Under this regulation lock-in restriction is inapplicable in certain cases as provided under Regulation 36 (a) and (b)[24].
Pledge of locked-in shares
Specified securities held by promoters and locked-in may be pledged but here the condition is that it can only be pledged with banks or financial institutions as collateral security for loans granted by such banks or financial institutions, provided the pledge of shares is one of the terms of sanction of loan[25]. It’s pertinent to note that recently lot of changes has been introduced with regard to the pledge of locked-in shares by promoters. The recent amendment in the takeover regulations requires the promoter or the member of promoter group to make disclosure about the pledge of shares of the company to the SEBI[26]. Further the promoter is also required to inform the company the pledge of shares within a period of seven working days[27].
However this is an absurd provision which can be deleted as the pledge of shares will always be pursuant to a term of the sanction of the loan. Moreover the Malegam committee in its reports also recommended to delete this provision on grounds that even when the shares are pledged the lock-in will continue as the pledge cannot get the better title than the borrower.
Transfer of locked-in specified securities
This provision was included in regulation on the recommendation given by the maligam committee. This provision for transfer was absent under DIP Guidelines. According to this provision a promoter can transfer the specified securities held by him to any other promoter or any person among the promoter group or to a new promoter or to the person in control of the issuer. However the lock-in period shall continue in the hands of the transferee and he is further ineligible to transfer the same until the lock-in period is completed[28].
Untouched Issue
SEBI has taken positive steps for protection of investors by issuing ICDR Regulation 2009 which provides for various mandatory provisions for promoters to prevent frauds. Still the important area remains untouched like what’s the fate of the investors who suffered loss due to revelation of fraudulent activities of promoters?
On January 2009 when the news of Satyam’s fraud was revealed the price of the Satyam shares saw the great fall in its price from Rs.178.95 to Rs.3.80 before closing at Rs. 4.25 the next day. The shareholders of the company sold the shares due to panic at very low price and incurred huge loss[29]. Although there s punitive action against the offender for manipulation of prices still it can no way put the investors who suffered loss in better position. Hence its of utmost importance that provision has to be made to compensate the investors who take the shares in high price and sold the same at low price because of the fraudulent activities of the promoter. The provision can be made for payment of compensation through merging various investor protection funds.
Conclusion
The term promoter as defined under ICDR Regulation 2009 has undergone change as compared to the traditional definition where generally the person concerned with the incorporation function of the company was considered as ‘Promoter’. Moreover stringent provisions are introduced by SEBI to prevent fraud by promoters like listed companies are required to declare the promoters and provisions have been made by the SEBI to monitor the activities of the promoter. Further main object behind having promoter’s minimum contribution and locked-in period is to show the commitment of the promoters towards the company or any other project and the protection of the investors. Some absurd provisions like pledge of shares are required to be deleted. The very important provision required to be added is the compensation for the shareholders who suffer loss because of fraudulent conduct of the promoters.
[6] Suprio Bose, “Analysis of definition of Promoter as per Disclosure and Investor Protection Guidelines 2000”, [2005] 62 SCL 234
[7]Reena Zachariah, “ Promoter PEs won’t have it easy anymore” http://economictimes.indiatimes.com/markets/analysis/Promoter-PEs-wont-have-it-easy-anymore/articleshow/5095772.cms
[10] Relatives include any spouse of that person, or any parent, brother, sister or child of the person or of the spouse.
[11]Saibal C.Pal “Promoter,Director & Company Preview of inter se Relationship”, http://www.taxguru.in/company-law/promoter-director-company-%E2%80%93-preview-of-inter-se relationship.html Mar 27
[24] Equity shares allotted to employees under an employee stock option or employee stock purchase scheme of the issuer prior to the initial public offer, if the issuer has made full disclosures with respect to such options or scheme. Equity shares held by venture capital fund or foreign venture capital investors for a period of at least one year to the date of filing the draft prospectus with the board are exempted from lock-in period.
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