Promoters' contribution
Also written Minimum promoters' contribution · Minimum promoter contribution · Promoter contribution
The 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).
In plain language
When a company sells shares to the public, the public is entitled to ask whether the people running it are staying in. Promoters' contribution is the regulation's answer: a minimum slice of the post-issue company that the promoters must hold, using only shares that genuinely cost them something, and that they may not sell for a fixed period after listing.
It does two jobs. It keeps the promoters' own money at risk alongside the investors', and — through the list of ineligible shares — it stops promoters from meeting the requirement with cheap bonus shares or recently bought discount shares.
How it works
How much (Chapter 6, item 9).
| Issue | Minimum promoters' contribution |
|---|---|
| Initial public offer | Not less than 20% of post-issue capital; if promoters fall short, AIFs may contribute the shortfall, up to 10% of post-issue capital |
| Further public offer | 20% of the proposed issue size or 20% of post-issue capital |
| Composite issue | 20% of the proposed issue size or 20% of post-issue capital, excluding the rights component |
| IPO of convertible debt instruments without a prior equity issue | At least 20% of the project cost in equity shares, subject to at least 20% of the issue size from own funds in equity |
When and where the money goes. Promoters must satisfy the requirement at least one day before the issue opens; the amount is kept in an escrow account with a scheduled commercial bank and released with the issue proceeds. Where the minimum contribution exceeds Rs 100 crore, at least Rs 100 crore must come in before opening, and the rest pro-rata before calls are made to the public. A statutory auditor's certificate that the contribution has been received goes to SEBI before opening.
Shares that do not count.
- specified securities acquired in the preceding three years for consideration other than cash involving revaluation of assets or capitalisation of intangibles, or from a bonus issue out of revaluation reserves or unrealised profits (or bonus on ineligible shares);
- specified securities acquired in the preceding one year at a price lower than the IPO price — unless the difference is paid to the issuer, or they came under a court/tribunal-approved scheme for a business that existed for over a year, or the issuer is a government infrastructure company or SPV;
- shares allotted in the preceding one year below the issue price to partners of a firm or LLP converted into the issuer (capital existing for over a year continuously remains eligible);
- specified securities pledged with any creditor.
Lock-in (Chapter 6, item 10).
| Holding | Lock-in from IPO allotment | If majority of fresh proceeds is for capital expenditure |
|---|---|---|
| Minimum promoters' contribution | 18 months | 3 years |
| Promoters' holding in excess of the minimum | 6 months | 1 year |
| Pre-issue capital held by persons other than promoters | 6 months (with exceptions for ESOP shares, VCF / Cat I–II AIF / FVCI holdings) | — |
"Capital expenditure" includes civil work, miscellaneous fixed assets, purchase of land, building and plant and machinery, and repayment of loans taken for such capital expenditure.
A worked example
Illustrative figures. An issuer has 8 crore shares before its IPO, of which the promoters hold 2.3 crore. It issues 2 crore fresh shares at Rs 250 — Rs 500 crore.
Post-issue capital = 8 + 2 = 10 crore shares
Required contribution = 20% × 10 = 2 crore shares
Promoters hold = 2.3 crore = 23%
On its face that clears 20%. But 50 lakh of the promoters' shares were bought eight months ago at Rs 180 — within one year and below the IPO price — so they are ineligible.
Eligible holding = 2.3 crore − 0.5 crore = 1.8 crore shares = 18%
Shortfall = 2.0 − 1.8 = 20 lakh shares (2%)
Two ways out:
- Pay the difference. (Rs 250 − Rs 180) × 50,00,000 = Rs 35 crore paid to the issuer makes those shares eligible, and the promoters are back at 23%.
- Let an AIF fill the gap. AIFs may contribute the 2% shortfall — well inside the 10% of post-issue capital ceiling.
Lock-in. The issuer will spend Rs 280 crore of the Rs 500 crore on a new plant — 56%, a majority — so:
- the 2 crore minimum-contribution shares are locked in for 3 years;
- the promoters' 30 lakh excess shares are locked in for 1 year;
- the non-promoter pre-issue holders' 5.7 crore shares are locked in for 6 months, subject to the listed exceptions.
Had only Rs 200 crore gone to the plant, the first two would fall back to 18 months and 6 months.
Why NISM asks about it
Chapter 6 (Issue Management – General Obligations of Merchant Bankers and Due Diligence), 15% of the paper, carries the whole regime; Chapter 5 requires the board resolution and statutory auditor's certificate on promoters' contribution before the issue opens; Chapter 4 states the SME version.
This is one of the most numerically dense topics in the paper: 20%, 10%, Rs 100 crore, one day, three years / one year look-backs, and the 18-month / 3-year / 6-month / 1-year lock-in grid.
Common exam traps
- 18 months, not 3 years, is the default. Three years applies only when the majority of the proceeds (excluding the offer for sale) is for capital expenditure.
- The look-backs differ: three years for revaluation/intangible and bonus-from-revaluation shares; one year for shares bought below the IPO price.
- The FPO test is an either/or: 20% of issue size or 20% of post-issue capital.
- Who may fill a shortfall — the workbook is not uniform. Chapter 6 (main board IPO) names alternative investment funds, up to 10% of post-issue capital; Chapter 4 (SME exchange) names AIFs, FVCIs, scheduled commercial banks, FPIs or IRDAI-registered insurers, up to 10%, "without being identified as promoter(s)"; and Chapter 6's own lock-in clause lists AIFs, FVCIs, SCBs, PFIs and insurers as contributors. Answer from the chapter the question is set in.
- Excess contribution in an FPO or composite issue is a preferential allotment to the promoters, priced at the preferential-issue price or the issue price, whichever is higher.
- Pledged shares are ineligible for the contribution, although locked-in shares may later be pledged (other than SR equity shares) for a loan from specified lenders on specified terms.
Check yourself
1.What is the minimum promoters' contribution in an initial public offer?
- a)Not less than 20% of the post-issue capital
- b)Not less than 20% of the issue size
- c)Not less than 10% of the post-issue capital
- d)Not less than 25% of the issue size
Show the answer
Answer: (a) Not less than 20% of the post-issue capital
In case of an initial public offer, not less than 20% of the post-issue capital.
Post-issue capital is the base in an IPO. Option B describes the FPO alternative: in case of a further public offer, either to the extent of 20% of the proposed issue size or to the extent of 20% of the post-issue capital, with the same choice for a composite issue excluding the rights issue component.
Where the promoters cannot reach 20%: in case the post-issue shareholding of the promoters is less than twenty percent., Alternative investment funds may contribute for the purpose of meeting the shortfall in minimum contribution as specified for promoters, subject to a maximum of ten percent of the post-issue capital.
For an IPO of convertible debt without a prior equity issue: the promoters shall bring in a contribution of atleast 20% of the project cost in the form of equity shares, subject to contributing at least 20% of the issue size from their own funds in the form of equity shares.
The money must be in early and held aside: the promoters shall satisfy the requirements of this regulation at least one day prior to the date of opening of the issue and the amount of promoter's contribution shall be kept in an escrow account with a scheduled commercial bank and shall be released to the issuer along with the release of the issue proceeds.
And for very large contributions there is staging: where the minimum promoters' contribution is more than one hundred crore rupees, the promoters shall bring in at least one hundred crore rupees before the date of opening of the issue and the remaining amount may be brought on pro-rata basis before the calls are made to public.
Not all promoter shares count. Ineligible are certain non-cash acquisitions of the last three years, bonus shares from revaluation reserves or unrealised profits, shares acquired in the last year below the IPO price, certain firm-conversion allotments, and specified securities pledged with any creditor.
2.What is the minimum promoters' contribution in a further public offer?
- a)Either 20% of the proposed issue size or 20% of the post-issue capital
- b)20% of the post-issue capital only
- c)10% of the proposed issue size
- d)25% of the pre-issue capital
Show the answer
Answer: (a) Either 20% of the proposed issue size or 20% of the post-issue capital
Either limb of twenty percent. The workbook: (b) In case of a further public offer, either to the extent of 20% of the proposed issue size or to the extent of 20% of the post-issue capital. For a composite issue, it is the same choice, excluding the rights issue component.
- 20% of post-issue capital only — that is the IPO rule; the FPO gives an alternative.
- 10% of issue size — ten percent appears only as the cap on AIF contributions in an IPO shortfall.
- 25% of pre-issue capital — no such rule.
3.The aggregate reservation on a competitive basis for employees shall not exceed what percentage of the post-issue capital of the issuer?
- a)5 percent
- b)10 percent
- c)15 percent
- d)20 percent
Show the answer
Answer: (a) 5 percent
The aggregate of reservations for employees shall not exceed five percent of the post-issue capital of the issuer, and the value of allotment to any employee shall not exceed two lakhs rupees.
Note the base — post-issue capital, not issue size.
The per-employee cap can rise: in the event of under-subscription in the employee reservation portion, the unsubscribed portion may be allotted on a proportionate basis, for a value in excess of two lakhs rupees, subject to the total allotment to an employee not exceeding five lakhs rupees.
The other reservation uses a different base and figure: reservation for shareholders shall not exceed ten percent. of the issue size — for shareholders (other than promoters and promoter group) of listed subsidiaries or listed promoter companies.
So 5% of post-issue capital for employees; 10% of issue size for shareholders.
**Reservations come out of the issue size excluding promoters' contribution.
And some people may never be included: the issuer shall not make any reservation for the lead manager(s), registrar, syndicate member(s), their promoters, directors and employees and for the group or associate companies (as defined under the Companies Act, 2013) of the lead manager(s), registrar and syndicate member(s) and their promoters, directors and employees.
Unsubscribed portions cascade: any unsubscribed portion in any reserved category may be added to any other reserved category, and the unsubscribed portion, if any, after such inter-se adjustments among the reserved categories shall be added to the net offer category — and conversely in case of under-subscription in the net offer category, spill-over to the extent of under-subscription shall be permitted from the reserved category.
The same limits apply in an FPO and in an SME IPO.
Where this is taught
Free preparation for NISM Series IXRelated terms
- PromoterUnder 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.
- 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.
- SME ExchangeA trading platform of a recognised stock exchange with nationwide terminals, permitted by SEBI to list securities of small and medium enterprises — distinct from the Main Board.
- 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.
- 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.
- 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.
- DisinvestmentThe direct or indirect sale by the Central Government, a State Government or a government company of shares, voting rights or control in a public sector undertaking.