Promoter
Also written Promoters
Under the ICDR Regulations, a person named as promoter in the offer document or annual return, or who controls the issuer's affairs, or on whose advice the board is accustomed to act.
In plain language
In most markets, the people behind a company are just "founders" or "controlling shareholders". Indian securities law gives them a legal label: promoter.
Why? Because a very large set of duties hangs on that label. For example:
- the minimum amount they must put in and lock in at an IPO;
- the bars that stop an issue if they are debarred or defaulters;
- the ban on them bidding in their own delisting;
- the takeover rules that treat them as acting together.
The definition is wide on purpose. It catches three kinds of person. First, the obvious one: whoever the company names. Second, the powerful one: whoever controls the company's affairs. Third, the shadow one: whoever the board takes orders from, even without a title.
How it works
The three limbs (Chapter 6, section 13). "Promoter" means a person:
- who has been named as such in a draft offer document or offer document, or is identified by the issuer in the annual return under the Companies Act, 2013; or
- who has control over the affairs of the issuer, directly or indirectly, whether as a shareholder, director or otherwise; or
- in accordance with whose advice, directions or instructions the board of directors is accustomed to act.
Two exclusions.
- A person acting merely in a professional capacity is not a promoter under the third limb.
- A financial institution, scheduled commercial bank, foreign portfolio investor other than a Category III FPI, mutual fund, venture capital fund, alternative investment fund, foreign venture capital investor or IRDAI-registered insurer is not deemed a promoter merely because it holds twenty percent or more of the issuer's equity — unless it satisfies the other requirements.
What the label switches on.
| Rule | What happens to promoters | Chapter |
|---|---|---|
| IPO ineligibility (Regulation 5) | Issue barred if a promoter is debarred by SEBI, is a promoter/director of a debarred company, is a wilful defaulter or fraudulent borrower, or is a fugitive economic offender | 5 |
| Demat before filing | Promoters' specified securities must be dematerialised before the draft offer document is filed | 5 |
| Promoters' contribution | Not less than 20% of post-issue capital in an IPO, locked in | 6 |
| Anchor book | No person related to the promoter / promoter group may apply as an anchor investor | 4 |
| SME IPO | After a complete change of promoter, or new promoters acquiring more than 50%, the draft offer document can be filed only after one year | 6 |
| SME market making | The market maker may not buy from promoters during compulsory market making | 8 |
| Takeovers | Promoters and members of the promoter group are deemed persons acting in concert | 7 |
| Delisting | A promoter or person acting in concert may not bid in the offer | 8 |
A worked example
Illustrative facts. Kaveri Foods Ltd is preparing a Rs 900 crore IPO. Its lead manager has to decide who goes into the offer document as promoter.
| Person | Facts | Promoter? |
|---|---|---|
| Meera Iyer | Founder, MD, 46% holder | Yes — controls the affairs, and will be named |
| Suresh Iyer | Meera's husband, 4%, no board seat | Not by the three limbs on these facts — but he is an immediate relative, so he sits in the promoter group |
| A Category II AIF | 24% holder, one nominee director | Not merely by its 24% — the 20% deeming is switched off for AIFs; the manager must still test control and the "accustomed to act" limb |
| The company's statutory auditor | Advises the board on accounts | No — acting merely in a professional capacity |
| A retired chairman | No shares, no title; the board still clears every capex decision with him | Likely yes under the third limb — the board is accustomed to act on his directions |
Two consequences follow at once.
- The anchor book. The AIF's right to appoint a nominee director makes it a person deemed related to the promoters for the anchor investor rules (Chapter 4), so it cannot apply as an anchor investor — even though it is not itself a promoter.
- The Regulation 5 check. If the retired chairman is identified as a promoter and turns out to be a wilful defaulter, the whole Rs 900 crore IPO is ineligible. Getting the promoter list right is a gating item for the issue, not a disclosure nicety.
Why NISM asks about it
Chapter 6 (Issue Management – General Obligations of Merchant Bankers and Due Diligence) carries the definition under "Identification of Promoters and Promoters Group"; Chapter 5 uses it in the IPO ineligibility rules; Chapter 7 incorporates it into the takeover regulations; and Chapter 5's review question 2 — a promoter debarred by SEBI last year for insider trading: can the company make a public issue? — turns on it (answer: No).
Expect a "which of these is a promoter" question built on the exclusions: the professional adviser and the 20%-holding institution.
Common exam traps
- Three limbs joined by "or". Being named is enough; so is control; so is the board being accustomed to act on one's advice.
- A 20%+ holding does not by itself make an institution a promoter — but it does not immunise it either if it satisfies another limb.
- Category III FPIs are carved out of the exclusion, not into it: the exclusion covers FPIs other than Category III.
- Professional capacity excludes only the advice limb. A lawyer who also controls the company is still a promoter.
- Promoter ≠ promoter group. Relatives and connected entities are in the promoter group; they are not promoters unless they meet a limb themselves.
- The takeover regulations as quoted in Chapter 7 still refer to the ICDR Regulations of 2009 for this meaning; the regulations in force for issues in this workbook are the ICDR Regulations, 2018 — read the 2009 reference as out of date.
Where this is taught
Free preparation for NISM Series IXRelated terms
- Anchor investorA qualified institutional buyer allotted shares a day before a book-built issue opens — at least Rs 10 crore on the main board or Rs 2 crore on the SME exchange — under a discretionary, locked-in allocation.
- Merchant bankerA SEBI-registered body corporate engaged in the business of issue management — arranging the selling, buying or subscribing of securities, or acting as manager, consultant or adviser in relation to an issue.
- Due diligence certificateThe formal certificate a lead manager signs and files with SEBI at prescribed stages of an issue, confirming that it has verified the issuer's disclosures and that the offer document is compliant.
- Persons acting in concertPersons who, with a common objective of acquiring shares, voting rights or control of a target company, co-operate under a formal or informal agreement — plus categories the SAST Regulations deem to act in concert.
- Promoter groupThe promoter plus immediate relatives and the connected companies, HUFs and firms defined by 20% shareholding links — the circle whose holdings the ICDR Regulations treat together with the promoter's.
- Promoters' contributionThe minimum stake promoters must hold and lock in at a public issue — in an IPO not less than 20% of post-issue capital, locked in for 18 months (three years if most proceeds fund capital expenditure).
- Preferential issueAn issue of specified securities by a listed issuer to a select person or group on a private placement basis — excluding public, rights, bonus and ESOP issues, QIPs, sweat equity and overseas depository receipts.
- SR equity sharesSuperior voting right equity shares issued to promoter-founders of a technology-intensive company — same face value and economics as ordinary shares, but 2 to 10 votes per share.
- Dissenting shareholdersShareholders who voted against the resolution for a change in objects, or a variation in the terms of a contract referred to in the prospectus — and who must therefore be offered an exit.
- Management BuyoutA leveraged buyout in which the company's own management team borrows to buy a majority stake from existing shareholders and takes control of the business it already runs.
- Differential Voting RightsEquity shares that carry less than one vote each, letting a company raise capital without diluting control — and letting an investor who does not want the vote buy the same economics at a discount.
- Corporate governanceThe rules, processes and procedures followed in running a company, judged by an analyst against a checklist of board, audit and related-party tests rather than by reputation.
- Independent directorA director who is neither part of management nor otherwise connected to the company — at least half the board where the chairman is executive, and one-third otherwise.
- Right of First RefusalA shareholder right to match the best outside quote a selling shareholder has obtained — the holder sees the price first and may buy at it, or refuse and let the sale proceed.
- Pledging of sharesPromoters using their shareholding as collateral to raise a loan instead of selling it — legitimate on its own, but a governance risk analysts must size up when the pledged amount is high.
- Ownership rightsThe rights an equity shareholder gets as a part-owner of the company: ownership in proportion to shares held, one vote per share, and a claim on the residual profits after all expenses and provisions.
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