Difficult to unearth Sahara-like scams if disclosures are curtailed in DRHP
The market regulator Securities and Exchange Board of India last week came out with an important consultation paper on the ‘Review of the regulatory framework for promoter, promoter group and group companies.’
According to SEBI, the investor landscape in India is now changing. Unlike the past, the concentration of ownership and controlling rights do not vest completely in the hands of company promoters or the promoter group. There has been a significant increase in the number of private equity and institutional investors who invest in companies and take up substantial shareholding, and in some cases, control.
A number of businesses, including new age and tech companies, are non-family owned and/or do not have a distinctly identifiable promoter group. A few changes in nature of ownership could lead to situations where the persons with no controlling rights and minority shareholding continue to be classified as a promoter. “By virtue of being called promoters, such persons may have influence over the listed entity disproportionate to their economic interest, which may not be in the interests of all stakeholders,” the SEBI paper reasoned out.
If these are truly the reasons for the proposed changes, maintaining status-quo on the promoter rules appears appropriate.
Professionally managed cos
Currently, companies such as L&T, ITC, HFDC, ICICI Bank and HDFC Bank and a few others do not have ‘promoters’. They are ‘professionally’ managed, widely held companies with high standards of governance, which are responsible to minority shareholders. Major shareholders are institutions in these companies.
But promoters still own very significant stakes in a majority of listed companies. With shareholder activism on the rise, the argument that ‘minority promoter’ can influence decisions disproportionately may not hold water. As institutional investors responsible for their shareholders, they do tend to be proactive for every position they acquire. Besides, SEBI has also directed mutual funds to compulsorily vote in corporate resolutions, making it difficult for promoters to do what they want.
SEBI may consider a separate category of professionally managed companies within the current water tight regulations. It is also easy to fix responsibility on promoters for any wrong-doing of the company. Besides, the regulator could strengthen the ‘Innovators Growth Platform’ for fund raising by new age and novel businesses which aren’t promoter-driven. This can be done by roping in new players and platforms beyond the existing exchanges.
Need more disclosures
The other suggestion of streamlining disclosure requirement of group companies in the IPO draft paper is also not in a right direction. According to the proposal, only the names and registered office address of all the group companies should be disclosed in the offer document. “All other disclosure requirements like financials of top 5 listed/unlisted group companies, litigation etc., presently done in the Draft Red Herring Prospectus can be done away”.
However, these disclosures may continue to be made available on the websites of listed companies, it said.
If SEBI rewinds history, it will realise how disclosures on group companies helped it nail the Sahara scam. While analysing the DRHP filed by Sahara Prime City, the market regulator detected the big scam in the fund-raising process of the two Sahara group companies – Sahara India Real Estate Corporation and Sahara Housing Investment Corporation.
If disclosures are shifted to company web sites, it would be very difficult for the regulator go after such scamsters, as the website will be in control of the company which can change the contents at any time as it wishes.
At a time when everybody is looking for transparency and more disclosures, this move by SEBI is a step backward.