Bombay : A recent regulatory move tightening disclosures about groups of promoters of market-related companies has raised concerns among investment banks who fear distant family members could abuse it and delay the sale of shares, said two people familiar with the case.
The Securities and Exchange Board of India (Sebi) requires companies planning initial public offerings (IPOs) to disclose certain information about their promoters. Under the regulator’s capital and disclosure requirements (ICDR), an immediate relative of the promoter, such as spouse, parent, sibling or child, is necessarily considered part of the promoter group. . Any company in which these parents hold more than 20% of the capital is also considered part of the sponsoring group, and the parent and the company must provide the necessary information in the offer document and to Sebi and exchanges.
Previously, companies related to the IPO had to follow a process to send communication to these family members, followed by frequent reminders for a period of time, and if there was no response to the correspondence, the company could request a waiver to remove said family member from the sponsoring group. This process takes up to a month and is usually undertaken at the same time as the filing of the draft red herring prospectus.
However, Sebi recently issued a notice to investment banks, asking them to provide either an affidavit from that family member, clearly indicating that they do not want to be classified as part of the promoter group, or a memorandum of agreement (MoU) between sponsor and family member. Companies unable to provide these documents must be declared as a promoter group, as well as the prescribed information on this promoter group, in the DRHP. In addition, the exemption based on these documents must be obtained from Sebi before filing the DRHP.
“Often promoters have distant relationships with family members and as a result they request an exemption from Sebi to exclude those family members from the promoter group. However, seeking an exemption based on an affidavit or memorandum of understanding, which, given the nature of the relationship, may not result in a successful attempt and may have far-reaching consequences. For starters, the information about this promoter group may not be complete, which would expose the company to regulatory penalties for not disclosing it as necessary in the offering document, and this promoter group entity may not comply with the restrictions. set regulations. by Sebi in its regulatory framework, which brings new challenges for the company linked to the IPO,” said a capital markets lawyer, one of the two people named above, adding that the investment banks contacted Sebi to rethink the changes.
Emails sent to a Sebi spokesperson only elicited a response at press time.
The new standards are likely to delay the HRD filing process for businesses and could open up the possibility that promoters will face unnecessary harassment from such family members, the sources said.
“Given the broken relationship between the promoters and these family members, the latter may choose not to provide the information just to cause problems for the promoters and delay their IPO plans, and in extreme cases this may even lead those family members to extort promoters from providing those affidavits or memoranda of understanding,” the second person said, also speaking on condition of anonymity.
He added that many business families do not have a memorandum of family separation agreement between members, and the preparation of this process is tedious, which may not be completed due to various ongoing conflicts and property issues, especially in situations where family members do not get along. .
“While Sebi is likely concerned that such exemptions will be misused to hide certain members of the promoter group, the regulator’s proposed solution does little to mitigate such abuses and, in fact, adds to the problems of developers and companies that are planning to go public,” he said.