New Delhi: The show cause notice issued by the Securities and Exchange Board of India (SEBI) to Vijay Shekhar Sharma, the founder of Paytm, raises pertinent questions about the definition of a “promoter” and the reliability of SEBI’s regulatory framework. The notice alleges that Vijay Shekhar Sharma was misclassified as a non-promoter during Paytm’s IPO, and SEBI is now revisiting this classification nearly three years after the company went public. This retrospective action prompts a closer examination of SEBI’s regulatory oversight during the IPO process, its definition of promoters, and the potential consequences of revisiting approvals long after they have been granted.
The Delay in SEBI’s Action
The timing of SEBI’s action is particularly striking. The Paytm IPO, one of the largest in India’s history, was heavily scrutinized by various regulatory bodies, proxy advisory firms, merchant banks, underwriters, and investors. Given the scale of the IPO, which was second only to the Life Insurance Corporation (LIC) IPO in size, it would be expected that any issues related to promoter classification would have been identified during the regulatory review process. SEBI’s decision to initiate action years after the fact raises questions about the thoroughness of the due diligence conducted during the IPO process.
The IPO process in India involves a rigorous review of the Red Herring Prospectus (RHP), which includes verifying the classification of promoters and non-promoters. This review is intended to ensure that all regulatory requirements are met before a company is allowed to list on the stock exchange. If SEBI is now questioning the classification of Vijay Shekhar Sharma as a non-promoter, it suggests that either the original review was flawed or new information has come to light. In either case, the delay undermines confidence in the regulatory process and raises concerns about the effectiveness of SEBI’s oversight during the IPO approval stage.
The Impact of Retrospective Approvals
Revisiting approvals retrospectively, as SEBI appears to be doing in the case of Paytm, has significant implications for the credibility of the regulatory framework. Once SEBI has approved an IPO and the company has addressed any observations or clarifications related to the RHP, there is an expectation that the process is complete and final. By reopening the issue of Vijay Shekhar Sharma’s classification as a promoter, SEBI risks creating uncertainty for companies that have already undergone the IPO process and complied with all regulatory requirements at the time.
This retrospective action could lead to broader concerns about the stability and reliability of SEBI’s regulatory framework. Companies may begin to question whether their IPO approvals are truly final or if they could be subject to future scrutiny and potential revision. Such uncertainty could have a chilling effect on the IPO market, as companies may hesitate to list if they fear that their approvals could be revisited years later. SEBI’s role is to provide clear and consistent oversight, and actions that cast doubt on the finality of its decisions could undermine its authority and credibility in the long run.
The Evolving Definition of “Promoter”
A central issue in SEBI’s notice to Vijay Shekhar Sharma is the definition of a “promoter.” SEBI’s Issue of Capital and Disclosure Requirements (ICDR) regulations define a promoter as a person who has been named as such in the offer document or annual return, or as someone who has control over the issuer, either directly or indirectly. The definition also includes individuals whose advice, directions, or instructions the board of directors is accustomed to act upon. This broad definition captures a wide range of individuals and raises questions about how promoters should be classified, especially in modern corporate structures where control is often diffuse.
SEBI has recognized the need to update its approach to defining promoters and has floated the concept of “Persons in Control (PSC)” in a discussion paper. The distinction between promoters, founders, and controlling shareholders has become increasingly important as corporate India raises more capital from public markets and private equity investors. As companies grow and their shareholding becomes more widely dispersed, the traditional concept of a promoter may no longer be relevant.
Promoters’ roles evolve over time, and their influence within the company may diminish as they dilute their holdings. The regulatory framework needs to reflect this evolution, recognizing that the rights and obligations of promoters are distinct from those of the board of directors or shareholders. SEBI’s current approach to classifying promoters may be too rigid for the realities of modern corporate governance, where control is often shared among a broader group of stakeholders.
SEBI’s Role in Ensuring Market Integrity
SEBI has been instrumental in fostering the growth and stability of India’s securities market, and its regulatory oversight has contributed to increased investor confidence. However, as the markets evolve and grow more complex, SEBI must adapt its regulatory framework to keep pace with these changes. The transition from a promoter-based model to a “Persons in Control” model is part of this evolution, but it must be implemented with clarity and consistency to avoid creating confusion among companies and investors.
While SEBI’s role in maintaining market integrity is crucial, revisiting its own approvals retrospectively could undermine the confidence that companies and investors place in the regulatory process. SEBI must strike a balance between upholding compliance and providing clear, predictable oversight. Retrospective actions should be used sparingly and only in cases where there is clear evidence of wrongdoing or misrepresentation. Otherwise, they risk undermining the credibility of the regulatory framework and creating unnecessary uncertainty in the market.
Conclusion
The show cause notice to Vijay Shekhar Sharma has brought attention to the complexities of defining a promoter in India’s evolving corporate landscape. SEBI’s retrospective action raises concerns about the effectiveness of its initial review process and the impact of revisiting approvals long after they have been granted. As SEBI continues to evolve its regulatory framework, it must ensure that its actions promote clarity, consistency, and confidence in the market. Balancing regulatory enforcement with the need to adapt to modern corporate structures is essential for maintaining the integrity of India’s securities market.
SEBI’s decision to initiate action years after the fact raises questions about the thoroughness of the due diligence conducted during the IPO process. Economy Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
