For instance, in addition to persons and entities falling squarely within the ambit of the definition of “promoter” under the SEBI ICDR Regulations, immediate relatives of individual promoters, and in case of professionally managed issuer companies, their founders, may need to be considered for promoter
identification if they collectively hold 10% or more of the issuer company, directly or indirectly, and/or hold position on/have nomination rights to the board of directors or as key managerial personnel/senior management.

Similarly, with corporate promoters, the ultimate promoters thereof may need to be considered for promoter identification, which necessitates assessment of group holding structures of institutional investors. Certain group holding structures favoring portfolio investments being held through a single
investment vehicle/layers of holding companies, may need to be evaluated to avoid entities not factually in control or related to the issuer company being identified as promoters or part of the promoter group.

Minimum Promoters’ Contribution

A welcome regulatory development is the expansion of the pool of non-promoters eligible to contribute towards minimum promoters’ contribution (“MPC”) requirements for an IPO (equivalent to 20% of the post-IPO equity share capital), which was previously open only to certain categories of investors such as alternative investment funds and foreign venture capital investors. Recognizing that issuer companies “often have several rounds of funding prior to listing of their equity shares on the stock exchanges”, where “the promoters’ holding may fall short of the minimum promoter contribution”, the SEBI has recently amended SEBI ICDR Regulations to now permit non-individual public shareholders holding at
least 5% of the post-IPO share capital and members of the promoter group to contribute towards MPC requirements.

While the quantum of permissible contribution from non-promoters remains capped at 10%, pre-IPO institutional investors (falling under “non-individual public shareholders holding at least 5%”) no longer need to weigh IPO feasibility against the burden of volunteering to be identified as promoters solely to suffice MPC requirements.

Participation in IPO Decision-making

Not all regulatory feedback received has been entirely clear, however, with perhaps the key cause of consternation being the directive to allow issuer companies exclusive authority in taking key IPO decisions, including in particular, in respect of pricing and allocation, without participation of selling shareholders in such decisions, directly or indirectly. Promoters and investors alike may find themselves at a loss to appreciate their exclusion from decision making in respect of existential IPO terms such as pricing of shares that they, themselves, are offering for sale. Discretionary allocation to anchor investors would also be germane to promoters as well as investors that elect to retain a portion of shareholding in the issuer company post-listing. However, until regulatory reconsideration on this issue, selling shareholders may be unable to retain control over IPO terms, whether by way of veto/approval rights
under shareholders’ agreements/articles of association (which is a common practice), or specific rights stipulating their participation under the offer agreement for the IPO.

Special Shareholder Rights

Further to its consultation paper on “Strengthening corporate governance at listed entities by empowering shareholders – Amendments to the LODR Regulations” issued in February 2023, the SEBI amended the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“SEBI LODR Regulations”) to introduce Regulation 31B, which permits special shareholder rights to be granted by listed companies, subject to approval by way of special resolution of the shareholders in general meeting every five years. More recently, following a prolonged period of evolving regulatory feedback on special shareholder rights in the context of listing (and the resultant lack in clarity with respect to nuances ranging from timing of fall away of such special shareholder rights, to
their survival/revival post-listing), the SEBI has now clarified that all special shareholder rights (whether stipulated under shareholders’ agreements or the articles of association) may be retained up until the date of listing, at which point, they should terminate and automatically fall away.

The following nuances in relation to certain specific shareholder rights should be noted, however

Board nomination rights: The erstwhile practice of stipulating provisions under shareholders’ agreements requiring parties to re-instate board nomination rights (and by extension, any other special shareholder rights proposed to be granted pursuant to Regulation 31B of the SEBI LODR Regulations) by way of special resolution of shareholders passed in the first general meeting post-listing has been frowned upon as a creative work-around, with regulatory expectation being to terminate all such rights at listing in entirety, and any proposals for their reinstatement being floated to shareholders for approval anew post-listing.

Information rights: Pursuant to the SEBI ICDR Regulations, an issuer company is required to disclose all key performance indicators (“KPIs”) “that have been disclosed to its investors at any
point of time during the three years preceding to the date of filing of the DRHP/RHP”. Given heightened scrutiny by the regulator of KPIs disclosed by issuer companies in recent IPOs, issuer companies that share an expansive suite of information with institutional investors pursuant to agreed information rights may find themselves struggling with the onerous task of trawling through all information shared with investors over three years preceding the IPO, and painstakingly explaining the inclusion/exclusion of all such metrics as KPIs. Promoters and investors ordinarily enjoy information rights covering an agreed-upon scope for reasons varying from performance monitoring to regulatorily mandated disclosures in the relevant jurisdictions in which they operate, and not all the information sought by
them as part of such arrangements would be material or relevant to the valuation of the issuer company. Accordingly, the requirement under the SEBI ICDR Regulations may be clarified to cover only such KPIs as disclosed to investors for the purposes of their investment in the issuer company, and not information
shared in the ordinary course of business with existing shareholders/promoters.

Certain exit rights: Typically, shareholder arrangements stipulate secondary/tertiary exit rights for investors in the event an IPO is not consummated by an agreed date, such as third-party sale, put and call options between shareholders and ultimately, if all else fails, buy back. These rights have recently been scrutinized through the lens of eligibility of the issuer company to undertake the IPO (Regulation 5(2) of the SEBI ICDR Regulations requires that there be no “right which would entitle any person with
any option to receive equity shares of the issuer”), as well as the requirement that there be no buy-back arrangements in place. While such rights can be waived for the duration of the IPO, since such rights do not get triggered unless the IPO does not go through, their relevance in a listing context is moot.

Inter-se Agreements

While the SEBI ICDR Regulations mandate disclosure of inter-se shareholders’ agreements (where the issuer company is not a party) if the issuer company is aware of such agreements, in certain instances, recent regulatory feedback has viewed the scope of such requirement expansively, to disclose all inter-se agreements, with promoters and investors being required to confirm whether or not they have entered into such inter-se agreements, and if applicable, to disclose such inter-se agreements to the public. Given such inter-se agreements are myriad in nature and may frequently contain commercially sensitive information that do not otherwise impact the issuer company, it may be more meaningful to limit such
disclosure to only inter-se agreements that are material or adverse/prejudicial to the issuer company or its shareholders.

This article was originally published in FICCI on << date>> Co-written by: Dr. Shardul S. Shroff, Executive Chairman; Abhiroop Amitava Datta, Partner. Click here for original article

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