LOOPHOLE IN THE DEFINITION OF PROMOTER GROUP IDENTIFIED DURING MY ANALYSIS

Definition of Promoter Group under SEBI ICDR Regulations, 2018

Regulation 2(pp) "Promoter Group" includes:

1. The promoter

2. An immediate relative of the promoter (i.e., spouse, or any parent, brother, sister, or child of the person or of the spouse).

3. If the promoter is a body corporate:

   • A subsidiary or holding company of such body corporate.
   • Any body corporate in which the promoter holds 20% or more of the equity share capital, or any body corporate that holds 20% or more of the equity share capital of the promoter.

4. If the promoter is an individual:

   • Any body corporate in which 20% or more of the equity share capital is held by the promoter or an immediate relative of the promoter, or a firm or Hindu Undivided Family (HUF) in which the promoter or any one or more of their relatives is a member.
   • Any body corporate in which a body corporate mentioned in (A) above holds 20% or more of the equity share capital.
   • Any HUF or firm in which the aggregate share of the promoter and their relatives is equal to or more than 20% of the total capital.

5. All persons whose shareholding is aggregated under the heading "shareholding of the promoter group".

Exceptions:

• Financial institutions, scheduled banks, foreign portfolio investors (other than individuals, corporate bodies, and family offices), mutual funds, venture capital funds, alternative investment funds, foreign venture capital investors, and insurance companies registered with the Insurance Regulatory and Development Authority of India (IRDAI) or other specified categories shall not be deemed to be part of the promoter group merely because they hold 20% or more of the equity share capital of the promoter.
• However, these entities will be considered part of the promoter group for subsidiaries, companies promoted by them, or for mutual funds sponsored by them.

In this we are going to see “2(pp) (iii)”….

This regulation talks about Promoter Group inclusions, when the Promoter is a body corporate. There are 3 ways to be identified as promoter group under this:-

So what is the loophole here?

• In Point 2 it only talks about a body corporate holding 20% or more of Promoter will form part of promoter group, but it doesn’t talk about an Individual.

Example:-

• ABC Ltd being Promoter of a Company and Mr.X holds 99% of ABC ltd, still Mr.X can’t be classified as a promoter group according to the definition. One might think what the big flaw in this is, but this can be loophole for passing Related Party Transactions.

• According to 2(zb) of SEBI LODR Regulations, 2015 the related party includes any person or entity forming a part of the promoter or promoter group of the listed entity.

• Further according to Regulation 23 (4) of SEBI LODR Regulations, 2015, all material related party transactions and subsequent material modifications as defined by the audit committee under sub-regulation (2), shall require prior approval of the shareholders through resolution and no related party shall vote to approve such resolutions whether the entity is a related party to the particular transaction or not. 

• So a person can, have 99% of shareholding of a company, then do an investment with that company in a company and name that body corporate as promoter, and still not be a related party to that company and transact without violating regulation 23(4).

• Further in connection with this promoter group, i also see a loophole in Regulation 16 (1) (b)

(b)"independent director" means a non-executive director, other than a nominee director of the listed entity:

(iii) who is not related to promoters or directors in the listed entity, its holding, subsidiary or associate company

(vi) who, neither himself [herself],nor whose relative(s) —

(A) holds or has held the position of a key managerial personnel or is or has been an employee of the listed entity or its holding, subsidiary or associate  company  or  any  company  belonging  to  the promoter group  of  the  listed  entity, in  any  of  the  three  financial  years immediately preceding the financial  year in which he is proposed to be appointed

- Here in point (iii) it doesn’t mention about promoter group and in point (vi) (A) it doesn’t mention about  having shareholding in promoter group.

- Hence a Independent Director can be related to Promoter Group and can have shareholding to the maximum extent in Promoter Group.

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Article Compiled by:-

~From the desk of CS Sharath

(LegalMantra.net Team)

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