Securities and Exchange Board of India (“SEBI”) has issued an advisory dated April 26, 2022, to the Association of Investment Bankers of India mandating changes and clarifying processes in for exemptions with respect to classification and inclusion of details of members of promoter group of a company en route an initial public offering (“Advisory”).
Regulation 2 (1) (pp) (ii) of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, as amended (“SEBI ICDR Regulations”) includes an immediate relative of a promoter or its spouse in the definition of the promoter group. As per the Advisory, any exemption sought with respect to inclusion of such members in promoter group of the issuer shall have to be necessarily accompanied with either (a) a reference or affidavit from the relative stating in clear terms that the person does not want to be part of the promoter group or (b) a memorandum of understanding (“MoU”) duly signed between the promoter and the said relative. Accordingly, formal communication between the issuer or promoter and the concerned relative of the promoter will require to be placed before SEBI along with the exemption application. The communication may be supported by an affidavit issued by the relative declaring their intention to not be named as part of the promoter group. Alternatively, a formal family settlement agreement or MoU setting out estrangement will be required to be presented.
Further, an immediate relative in relation to whom an exemption is being sought, should not be holding any interest in the issuer including through equity or debt, or as a vendor, supplier, client or otherwise. Therefore the issuer or promoter will require to demonstrate complete separation of business interests of the immediate relative from the issuer. However, no clarification has been provided in respect of time frame or period within which such transactions or interests may have been held.
The Advisory also clarifies that any such exemption shall have to be obtained prior to filing of the draft red herring prospectus with SEBI.
Prior to this Advisory, issuers used to send applications to the relatives of the promoters and their spouses for obtaining their consent for inclusion of their name(s) in the offer documents, in the absence of obtention of which, it would seek an exemption from SEBI for removal of the name of such relative(s) from the promoter group and non-disclosure of confirmation required from promoter group in respect of such relative(s). The exemption applications were previously filed immediately prior to or co-terminus with the filing of the draft offer document with SEBI. Therefore, the Advisory has escalated concerns that this requirement to obtain positive confirmations or affidavits or additional documentation demonstrating estrangement, may potentially be a serious hurdle to IPO-bound companies.
While SEBI’s intention appears to be prevention of the abuse of exemption process to conceal disclosure of some promoter group members, the proposed solution may give rise to regulatory impediment in genuine cases where a member of the promoter group may mala fide withhold signing of necessary documents.
This blog is authored by the JSA Capital Markets Team.