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SEBI’s New Guidelines: Startup Founders with Over 10% Stake to be Classified as Promoters

SEBI's New Guidelines: Startup Founders with Over 10% Stake to be Classified as Promoters

22 March 2024SEBI’s recent guidelines mandate that founders holding more than a 10% stake in IPO-bound companies, along with executive roles, will now be categorized as promoters. This move, directed through a meeting at the National Stock Exchange (NSE), is expected to impact new-age tech companies preparing for IPOs.

About the Regulation and Impact:

The regulatory shift affects startup founders who traditionally held lower shareholdings and were not classified as promoters. Now, with SEBI’s stricter stance, founders with significant stakes and executive positions must embrace the promoter designation, triggering increased disclosure requirements and legal responsibilities.

SEBI’s intensified scrutiny of IPObound companies stems from observations made on past Draft Red Herring Prospectuses (DRHPs), where founders’ roles and shareholdings were questioned. This formal guidance from NSE signals a shift towards greater transparency and accountability in the startup IPO landscape.

Founders’ Response and Disclosure Requirements:

While some founders may feel uncomfortable with the promoter tag due to associated responsibilities and liabilities, the designation necessitates comprehensive disclosures, including details about the promoter group, including family members.


Conclusion:

SEBI’s move to classify founders with significant stakes as promoters underscores the evolving regulatory landscape for startups entering the IPO market. The increased scrutiny aims to ensure transparency, investor confidence, and adherence to regulatory standards as companies navigate the complexities of going public.

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