By Rupin Chopra and Shantam Sharma
Introduction
Fundraising through IPOs has seen a robust surge in recent years in India, as represented by the following data[1]:
| Year | Number of Companies (IPO) | Capital Raised (in USD) | Remarks |
| 2017 | 36 | 7.9 billion | Beginning of growth in IPO market |
| 2021 | 63 | 14.1 billion | Driven by the mega LIC IPO |
| 2023 | 57 | 5.8 billion | Decline from 2021 but still substantial |
| 2024 | 60 | 7.6 billion | 29% increase from 2023, third highest amount ever raised |
The Securities and Exchange Board of India (SEBI) has played a crucial role in setting regulations to ensure transparency, investor protection, and fairness in these processes. Among these regulations, the role of promoters in an IPO is vital, particularly in terms of their contribution and maintaining a stake in the company, which will be explored in detail in this article.
Promoters’ Role and Contribution in an IPO
Promoters are key figures in a company, often founders or those in control of its management and operations. Their role becomes especially important during an IPO as they are required to meet certain regulatory obligations to ensure the stability and credibility of the public offering. SEBI mandates that promoters contribute a minimum percentage of post-issue capital to demonstrate their commitment and vested interest in the success of the company.
According to Chapter Securities and Exchange Board Of India (Issue Of Capital And Disclosure Requirements) Regulations, 2018[2] (for brevity “SEBI regulation”) the promoters of an issuer must hold at least 20% of the post-issue capital. This is known as the minimum promoters’ contribution. In cases where the promoters’ post-issue shareholding is less than the 20% threshold, the shortfall can be met by contributions from alternative investment funds (AIFs), foreign venture capital investors, public financial institutions, insurance companies, or any non-individual public shareholder holding at least 5% of the post-issue capital. These entities, however, cannot be identified as promoters even if they help meet the required threshold.
For new-age companies and startups, this regulation offers some flexibility. Startups often have promoters who have diluted their stakes in previous funding rounds, making it difficult to meet the minimum contribution. SEBI allows other significant investors to fill this gap, enabling these companies to go public without being hindered by promoter stake limitations.
Key Regulations Governing Promoters’ Contribution
SEBI’s regulations on promoters’ contribution outline several conditions that must be met during an IPO:
- Type of Contribution: Promoters can fulfill their contribution either through equity shares or by subscribing to convertible securities. If convertible securities are issued, promoters must commit in writing to convert them into equity shares.
- Timing of Contribution: Promoters are required to fulfill their contribution at least one day before the IPO is opened to the public. This ensures transparency and certainty regarding the promoters’ stake before public investors commit their funds.
- Escrow Accounts: When promoters contribute through equity shares or convertible securities, the amount must be deposited in an escrow account with a scheduled commercial bank. This account holds the contribution until the IPO proceeds are released, further ensuring the integrity of the promoters’ contribution.
- Restrictions on Securities: Not all securities held by promoters are eligible for minimum contribution. For instance, securities acquired during the preceding three years through revaluation of assets, capitalisation of intangible assets, or bonus issues involving unrealized profits are ineligible. Furthermore, securities acquired at a price lower than the public issue price within the previous year are also ineligible, unless the promoters pay the price difference to the issuer.
- Staggered Contributions for Projects: In cases where a project is implemented in stages, promoters must contribute at least 20% of the total project cost in the form of equity shares. This ensures that the promoters’ financial commitment is aligned with the project’s capital needs over time.
- Government Companies and Infrastructure Projects: Special provisions exist for government companies and infrastructure projects. Promoters in such cases may benefit from relaxed contribution requirements, particularly in sectors critical to national development.
Challenges for Startups and New-Age Companies
The traditional 20% minimum contribution requirement has often posed challenges for startups and new-age companies where promoters tend to have lower stakes due to successive funding rounds. Recognizing this, SEBI has introduced flexibility in the regulations to accommodate such companies. Entities like alternative investment funds (AIFs) and foreign venture capital investors can step in to fulfill the minimum contribution requirement, thus enabling these companies to proceed with their public listing without being bogged down by promoter stake constraints.
Additionally, SEBI’s relaxation of promoter contribution rules reflects the evolving nature of the capital markets, where new-age businesses often follow different ownership and funding structures than traditional companies. This relaxation has been instrumental in encouraging startups to go public, boosting the overall IPO activity in India.
Conclusion
The role of promoters in an IPO is pivotal to ensuring the success and stability of a public offering. SEBI’s regulations requiring a minimum contribution from promoters reflect the need for accountability and transparency in the process, instilling confidence among public investors. However, the flexibility introduced in these regulations has made it easier for new-age companies and startups to meet these obligations, further fueling the growth of India’s IPO market.
With the ongoing surge in IPO activity and increasing participation from various sectors, including technology startups and government-backed infrastructure projects, the role of promoters and their contributions will continue to be a focal point of regulatory oversight. As IPOs become more prominent in India, understanding these legal intricacies will be crucial for investors, promoters, and companies alike. This not only safeguards investor interests but also promotes a healthy and transparent market environment for capital raising in the future.
[1] Available at: https://www.business-standard.com/markets/news/ipo-fundraise-thus-far-in-2024-third-highest-in-primary-market-history-124092500204_1.html
[2] PART III: PROMOTERS’ CONTRIBUTION, Regulation 14