IPO Guide - Part 1
What is the meaning of promoter in SEBI ICDR
Under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, the definition of a "promoter" is central to determining who controls the issuer and who is subject to lock-in requirements.
The term is defined under Regulation 2(1)(oo). A person or entity is classified as a promoter if they fall into any of the following three categories:
1. Named in the Offer Documents
Any person who has been named as a promoter in the Draft Red Herring Prospectus (DRHP), Red Herring Prospectus (RHP), or Prospectus. This also includes individuals named as promoters in the annual return of the company (as per Section 92 of the Companies Act, 2013).
2. Control over the Issuer
Anyone who has "control" over the affairs of the issuer, whether directly or indirectly. This control can be exercised in various capacities:
As a shareholder.
As a director.
Through an agreement or any other manner.
3. Direction and Instruction
A person in accordance with whose advice, directions, or instructions the Board of Directors of the issuer is accustomed to act.
Key Exclusions
The SEBI ICDR Regulations specifically exclude certain parties from being labeled as promoters, even if they provide advice or hold influence:
Professional Capacity: A person acting merely in a professional capacity (such as a lawyer, accountant, or consultant) is not considered a promoter simply because the Board follows their professional advice.
Financial Institutions & Tenders: Specifically, Financial Institutions, Scheduled Commercial Banks, Foreign Portfolio Investors (FPIs), and Mutual Funds are not deemed promoters merely because they hold 20% or more of the equity share capital, unless they are specifically named as promoters in the offer documents.
Now let's learn that why Promoters matters in any IPO
Identifying the promoter is critical for several regulatory mandates:
Promoters' Contribution: Promoters must generally hold a minimum of 20% of the post-issue capital.
Lock-in Period: The minimum promoters’ contribution is usually locked in for three years (with certain exceptions reducing this to 18 months), while the excess is locked in for one year (or 6 months in specific cases).
Disclosures: Extensive personal and financial information regarding the promoter group must be disclosed in the offer documents.
Beyond the immediate lock-in and contribution requirements, defining the Promoter is the cornerstone of the entire SEBI ICDR framework because it establishes the chain of accountability for the public’s money.
Following are the critical regulatory reasons why this identification is mandatory for an IPO:
1. Liability for Misstatements (Section 34 & 35)
The promoter is the ultimate signatory to the offer documents. If there is any material misstatement or omission of a fact in the Prospectus, the promoter is held personally liable—both civilly and criminally. This ensures that the individuals who "know the company best" are legally bound to provide an honest picture to retail investors.
2. Eligibility Criteria (The "Fit and Proper" Test)
SEBI strictly prohibits certain entities from accessing the capital markets. If a promoter falls under any of the following, the company cannot launch an IPO:
Fugitive Economic Offender: If any promoter is declared a fugitive, the issue is barred.
Wilful Defaulter: If a promoter is a wilful defaulter with any bank, the company is ineligible.
Debarred Entities: If the promoter is currently debarred from accessing the securities market by SEBI.
3. Identification of the "Promoter Group"
Once a "Promoter" is defined, the law automatically triggers the definition of the Promoter Group (Regulation 2(1)(pp)). This is a wider net that includes:
Relatives of the promoter.
Entities where the promoter holds 20% or more equity.
Inter-connected companies.
Rationale: SEBI requires disclosure of all transactions between the issuer and the entire promoter group to prevent "siphoning of funds" or unfair Related Party Transactions (RPTs) before the IPO.
4. Tracking "Skin in the Game" (Post-IPO)
The market needs to know who the "controlling mind" is. If the promoter starts offloading shares immediately after the lock-in expires, it serves as a massive signal to the market regarding the company’s future health. Without a defined promoter, the exchange cannot track these "insider" movements effectively.
5. Continuous Obligations (LODR)
The definition carries over after the listing into the SEBI (LODR) Regulations. It dictates:
Reclassification: A promoter cannot simply "quit" and become a public shareholder without a formal, regulated process.
Voting Power: Promoters are often restricted from voting on specific "Material Related Party Transactions" to ensure minority shareholders are not sidelined.
6. Source of Funds Disclosure
SEBI requires the promoter to disclose the source of the funds used to acquire their pre-IPO stake. This prevents "round-tripping" or the use of unaccounted money to build up equity before selling it to the public at a premium.
Under Regulation 2(1)(pp) of the SEBI (ICDR) Regulations, 2018, the "Promoter Group" is a broad umbrella designed to capture all entities and individuals who are effectively under the same control as the promoter.
Identifying the promoter group is a rigorous exercise because their shareholdings are often aggregated for compliance, and their financial dealings require extensive disclosure in the offer documents.
The purview of the promoter group includes:
1. Individuals Related to the Promoter
If the promoter is an individual, the group includes:
Immediate Relatives: Spouse, parents, children, and siblings.
Extended Relatives: Parents, children, and siblings of the spouse.
2. Entities Linked to the Promoter (The "20% Rule")
Body Corporates: Any company in which the promoter (or their relatives) holds 20% or more of the equity share capital.
Reciprocal Holdings: Any company that holds 20% or more of the equity share capital in the promoter’s company.
Common Control: Any company where a common group of individuals or companies holds 20% or more of the equity in both the promoter’s company and the other body corporate.
3. Partnerships and HUFs
Any Hindu Undivided Family (HUF) or Partnership Firm where the promoter or any of their relatives is a member or partner.
Any partnership firm where the aggregate share of the promoter and their relatives is 20% or more.
4. Trusts
Any trust where the promoter or a relative is a settlor or trustee.
Any trust where the promoter/relative (or a company they control) has a beneficial interest of 20% or more.
5. Group Companies (Commonality of Interests)
The "Promoter Group" also encompasses any company that shares a common promoter with the issuer. If "Company A" is the issuer and "Company B" has the same promoter, Company B is automatically part of the promoter group.
Critical Exclusions
SEBI provides specific relief to prevent the definition from becoming unintentionally burdensome:
Financial Institutions & Venture Capital: A Financial Institution, Scheduled Commercial Bank, Foreign Portfolio Investor (FPI), or Mutual Fund is not considered part of the promoter group merely because they hold 20% or more of the equity.
Professional Managed Companies: If the promoter of the issuer is a professionally managed company, its directors and their relatives are generally not dragged into the "Promoter Group" unless they have a significant personal stake.
Special Note during IPO Preparations
When you are drafting the RHP or preparing for Listing Compliance (LODR), the promoter group identification serves two main functions:
Aggregate Holding: For the purpose of the 25% Minimum Public Shareholding (MPS) rule, any shares held by the entire Promoter Group are excluded from the "public" category.
RPT Scrutiny: Every entity falling under this definition must be mapped for Related Party Transactions. Even if a transaction seems minor, if it involves a "Promoter Group" entity, it may trigger the need for Audit Committee approval or shareholder Special Resolutions.
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