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Understanding the Concept of a 'Promoter' under SEBI Regulations

A 'Promoter' is a significant term in the context of the Securities and Exchange Board of India (SEBI) regulations. This term has wide-ranging implications and effects on the functioning of companies and their interaction with investors and regulators. Let's take a deeper look at the role, responsibilities, and legal standing of a promoter in the realm of SEBI regulations.


Understanding the Concept of a 'Promoter' under SEBI Regulations

The term 'Promoter' is defined under Regulation 2(1)(pp) of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, known as SEBI ICDR Regulations. According to the regulations, a promoter refers to:

  1. The person or persons who are in overall control of the company;

  2. The person or persons who are instrumental in the formulation of a plan or program pursuant to which the specified securities are offered to the public;

  3. The persons named in the offer document as promoters.

However, a director or officer of the company, if acting merely in his or her professional capacity, would not be considered a promoter.



Role and Responsibilities of a Promoter

Promoters play an integral role in the formation and management of a company. They identify a business opportunity, mobilize resources, formulate policies, and take on risks to establish a company. Under SEBI regulations, they are bestowed with specific responsibilities such as:

  1. Compliance with SEBI regulations and guidelines: Promoters are required to adhere to all the guidelines and regulations issued by SEBI. Non-compliance can lead to penalties, disqualification, and legal repercussions.

  2. Disclosure requirements: Promoters must disclose their shareholding and any changes in it. They are also required to disclose any pending litigation or investigation against them.

  3. Lock-in period: Promoters' shares are subject to a lock-in period as per SEBI ICDR Regulations. The lock-in period ensures that the promoters remain committed to the company post-listing.


Case Laws Related to Promoters under SEBI Regulations

Understanding the role and responsibilities of promoters through case laws can provide insights into the practical aspects of how the regulations operate.

  1. Sahara India Real Estate Corporation Ltd and Ors v. SEBI: The Supreme Court held that the promoters were liable for refunding the money raised from investors through optionally fully convertible debentures as the issue was in violation of SEBI regulations.

  2. SEBI v. Shri Ram Mutual Fund: SEBI found that the promoters had failed to maintain the minimum stipulated promoter's contribution, leading to regulatory action.


The Paradigm of 'Promoter' to 'Promoter Group' to 'Specified Persons'

SEBI, in 2020, proposed to shift the focus from 'promoter' to 'persons exercising control' to bring parity between the rights and responsibilities of controlling shareholders, irrespective of whether they are promoters or not. It aims to focus on 'those who are in control' rather than just 'promoters' in terms of compliance with SEBI regulations. This change reflects the evolving nature of corporate structures and control mechanisms.



Conclusion

In the intricate web of corporate regulation, the concept of 'promoter' is instrumental. SEBI, through its guidelines and regulations, provides a comprehensive framework defining the role and responsibilities of promoters. However, the evolving dynamics of corporate structures demand a more encompassing view, which is why the paradigm is shifting from 'promoters' to 'persons exercising control'.

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