The recent development at Zomato wherein Co-founder Gaurav Gupta resigned in an abrupt manner has brought to the fore a challenge that regulators and stock exchanges might face in the coming months as a slew of start-ups are scheduled to list on the bourses.
The listing and disclosure regulations as laid down by the Securities and Exchange Board of India (SEBI) mandate that any resignation by a key management person (KMP) should be disclosed on the stock exchanges for the public shareholders at large.
While Gupta was listed as a KMP in the company's draft document for its public issue, there was no disclosure even as Zomato founder Deepinder Goyal tweeted about his resignation.
While mentioning Gupta as a KMP, the draft document stated that his designation changed twice in the last three years. In March 2019, Gupta's designation was changed from Co-founder & Chief Operating Officer to Co-founder. Thereafter, his designation was changed to the head of supply in March 2021.
Legal experts say that while Gupta was formerly designated a Co-founder and appears as a KMP in the draft document, his official designation was the head of supply that does not fall under the definition of a KMP under the regulatory framework. This, according to them, is the reason why his resignation was not announced on the stock exchanges.
More importantly, they add that this could be a concern area going ahead as new-age start-ups follow a different nomenclature when it comes to giving designations to founders and co-founders, and it is time that regulators expand the traditional definitions under old laws so that proper and timely disclosures are made to the public shareholders at large.
Former SEBI law officer Sumit Agrawal believes there are two aspects of the issue -- one being the broad purview of the word KMP and the other being the structure or the hierarchy within the company.
"There are two broader questions, one needs to look into. The first relates to the scope of the term Key Managerial Person and if the same includes a person who may not hold a designation of a director, CEO, CS, or a senior executive of the company in terms of Companies Act, 2013 or SEBI LODR Regulations, 2015 or SEBI ICDR Regulations, 2018," said Agrawal, Founder, Regstreet Law Advisors.
"The second question relates to the governance structure of a company, whose founder or co-founder has resigned and the investors do not know the rationale or the reason of such a resignation that could lead to speculation related to governance," he added.
There are three broad definitions of the term KMP as included in Companies Act, SEBI ICDR and SEBI LODR. While ICDR stands for Issue of Capital and Disclosure Requirements, LODR refers to Listing Obligations and Disclosure Requirements.
Makarand Joshi, Founding Partner, MMJC and Associates LLP -- a corporate compliance firm, says that while Companies Act and SEBI LODR has laid down that KMPs cover managing director (MD), chief executive officer (CEO), whole time director (WTD), chief financial officer (CFO) and company secretary (CS), the board can designate additional people as KMPs.
However, when a company files for an IPO, the ICDR rules kick in, and Regulation 2(bb) of SEBI ICDR states that KMPs could be members of the core management team, including management one level below executive director and functional heads, along with the KMPs as mandated by the Companies Act and any person whom the company has declared a KMP.
"Many banks intimate any change in Chief Risk Officer (CRO) to stock exchange although CRO may not be KMP under Companies Act and SEBI LODR. Banks generally consider any change in CRO as material and price sensitive information," said Joshi.
"Looking at the new breed of companies coming out with IPO and claiming many officers as founders, their exit would be price sensitive and therefore relevant amendments in SEBI LODR may be on its way," he added.
Interestingly, the difference in the definition of a KMP under the aforementioned regulations leads to a situation wherein a resignation of a person listed as a KMP in the draft document need not mandatorily be disclosed to the stock exchanges post listing.
Joshi, a qualified CS, however, highlights the fact that Regulation 4 of SEBI LODR specifically says that "listed entity shall provide adequate and timely information to stock exchange and investors" and even the SEBI (Prohibition of Insider Trading) Regulations states that prompt public disclosure of unpublished price sensitive information (UPSI) should be made as soon as the "credible and concrete information comes into being".
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