Promoter group

A promoter rarely holds everything personally. Shares sit with a spouse, a parent, a family holding company, a HUF, a group company. If the rules looked only at the promoter's own name, every lock-in and every restriction could be sidestepped by moving shares one step sideways.

The promoter group closes that gap. It is a defined circle around the promoter — family by blood and marriage, and entities linked by twenty percent shareholding — whose holdings are aggregated under the heading "shareholding of the promoter group" and treated, for most purposes, as the promoter's side of the table.

The definition (Chapter 6, section 13). "Promoter group" includes:

1. the promoter;
2. an immediate relative of the promoter — any spouse of that person, or any parent, brother, sister or child of the person or of the spouse;
3. where the promoter is a body corporate:
   • a subsidiary or holding company of that body corporate;
   • any body corporate in which the promoter holds 20% or more of the equity; and/or any body corporate which holds 20% or more of the promoter's equity;
4. where the promoter is an individual:
   • any body corporate in which 20% or more of the equity is held by the promoter, an immediate relative, or a firm or HUF in which the promoter or any of their relatives is a member;
   • any body corporate in which a body corporate described just above holds 20% or more;
   • any HUF or firm in which the aggregate share of the promoter and their relatives is 20% or more of the total capital;
5. all persons whose shareholding is aggregated under the heading "shareholding of the promoter group".

The institutional proviso. A financial institution, scheduled bank, FPI other than Category III, mutual fund, VCF, AIF, FVCI or IRDAI-registered insurer is not in the promoter group merely because it holds 20% or more of the promoter's equity — but such an institution is promoter group for the subsidiaries or companies it has promoted, or for the mutual fund it sponsors.

Where the phrase does work in the workbook.

• Net offer to public excludes securities subscribed by the promoter group (Chapter 4).
• Lock-in: any entity forming part of the promoter group, other than the promoters, is within the 18-month lock-in list for minimum contribution (Chapter 6).
• Reservations for shareholders of listed subsidiaries or promoter companies exclude promoters and promoter group (Chapter 6).
• Debarment: an IPO or FPO is barred if the promoter group is debarred from the capital market (Chapter 5).
• Preferential issues cannot be made if the promoter(s) or promoter group sold shares within 90 trading days before the relevant date, subject to exceptions (Chapter 6).
• Due diligence: the lead manager reviews and retains certificates confirming the constitution of the promoter group and group companies (Chapter 6).
• Takeovers: promoters and members of the promoter group are deemed persons acting in concert (Chapter 7).

Illustrative facts. Rajesh Shah is the individual promoter of an issuer planning an IPO. The lead manager maps the circle:

Now the rupee consequence. Shah Holdings holds issuer shares worth Rs 45 crore at the IPO price. Because it is promoter group, Shah Holdings' shares are aggregated in "shareholding of the promoter group"; any of its shares counted towards minimum promoters' contribution are locked in with the promoters; and if Shah Holdings had sold even a small block within 90 trading days before a later preferential issue's relevant date, that preferential issue would be blocked unless an exception applied.

The partnership firm, one percentage point under the line on the other side, is outside all of it — which is why lead managers ask for the shareholding certificates rather than taking the family tree on trust.

Chapter 6 (Issue Management – General Obligations of Merchant Bankers and Due Diligence), 15% of the paper, carries the definition and the lead manager's duty to review and retain certificates on the constitution of the promoter group. The phrase then recurs across Chapters 4, 5, 7 and 8.

The definition is examined as a "which of these is not an immediate relative" question — the answer is usually a cousin, uncle or nephew — and as a 20%-threshold question on connected entities.

• Immediate relative includes the spouse's parents and siblings. A brother-in-law (spouse's brother) is in; a cousin is out.
• The threshold is twenty percent, "or more" — exactly 20% is inside.
• For a HUF or firm the test is the aggregate share of the promoter and relatives. For a body corporate under an individual promoter, the workbook lists the promoter, an immediate relative, or a firm/HUF as the holder.
• The institutional proviso runs one way. A mutual fund holding 20% of the promoter is not thereby promoter group of the issuer, but it is promoter group for companies it promoted and the mutual fund it sponsors.
• Promoter group is wider than promoter. Being in the group does not make someone a promoter.
• The 90-trading-day bar on preferential issues looks at sales by promoter(s) and promoter group, with exceptions for inter-se transfers and pledge invocation by specified lenders.