Promoters Contribution

PART III: PROMOTERS’ CONTRIBUTION

Regulation 14. Minimum promoters’ contribution

14(1).

• Minimum Promoters’ Contribution

  1. The promoters of the issuer must hold at least 20% of the post-issue capital.

  2. Post-issue capital means the share capital of the issuer after completion of the issue.

  3. Therefore, promoters should normally hold a minimum of 20% after the issue.

  4. If the promoters’ post-issue shareholding is less than 20%, the shortfall can be met by specified eligible persons or entities.

• Entities that can contribute to the shortfall

Alternative Investment Funds (AIFs) can contribute.

1. Foreign Venture Capital Investors (FVCIs) can contribute.

2. Scheduled commercial banks can contribute.

3. Public financial institutions can contribute.

4. Insurance companies registered with IRDAI can contribute.

5. A non-individual public shareholder holding at least 5% of the post-issue capital can contribute.

6. An entity forming part of the promoter group, other than the promoter(s), can contribute.

7. Such promoter-group entity may be an individual or a non-individual entity.

• Limit on such contribution

  1. The eligible persons or entities can contribute only to meet the shortfall in promoters’ minimum contribution.

     1. Their contribution cannot exceed 10% of the post-issue capital.

     2. This 10% limit is calculated with reference to the post-issue capital.

  2. The contributing person or entity will not be identified as a promoter merely because of this contribution.

Example:

• Suppose the post-issue capital is ₹100 crore.

  1. The promoters should normally hold at least ₹20 crore.

  2. If promoters hold only ₹15 crore, there is a shortfall of ₹5 crore.

  3. An eligible entity can contribute ₹5 crore to meet this shortfall.

  4. However, the maximum contribution permitted under this provision would be ₹10 crore.

Exemption from Minimum Promoters’ Contribution

• The requirement of minimum promoters’ contribution does not apply where the issuer does not have any identifiable promoter.

• Therefore, an issuer without an identifiable promoter is not required to maintain the prescribed minimum promoters’ contribution.

14(2).

• The minimum promoters’ contribution shall be as follows:

(a). Promoters’ Contribution through Equity Shares or Convertible Securities

• The promoters must contribute 20% as required under 14(1).

  1. This 20% contribution may be made through equity shares.

     1. Equity shares may also include SR equity shares held by the promoters, if any.

     2. Alternatively, the promoters may contribute through subscription to convertible securities.

  2. Therefore, promoters can satisfy the 20% contribution requirement through either equity shares or convertible securities.

• Promoters’ Contribution Where Conversion Price Is Not Pre-determined

  1. If the price of equity shares to be allotted on conversion is not pre-determined, this condition applies:

     1. The conversion price must also not be disclosed in the offer document.

     2. In such a case, promoters cannot make their contribution through equity shares.

     3. Promoters must contribute only by subscribing to the convertible securities issued in the public issue.

     4. The promoters must give a written undertaking to subscribe to the equity shares arising from conversion.

     5. Therefore, promoters initially subscribe to the convertible securities.

     6. Subsequently, when the securities are converted, promoters must subscribe to the equity shares.

(b). Promoters’ Contribution Where Convertible Securities Have Different Conversion Dates

• Convertible securities may be convertible or exchangeable on different dates.

  1. Where promoters contribute through equity shares, the conversion price must be pre-determined.

     1. The promoters’ contribution must not be made at a price lower than the weighted average price.

     2. The weighted average price is based on the equity shares arising from conversion of the convertible securities.

     3. Therefore, promoters must contribute at a price equal to or higher than the weighted average price.

• Example:

  1. A company issues convertible securities with conversion prices of ₹100, ₹120 and ₹140.

     1. The securities are convertible on different dates.

     2. The weighted average price of the equity shares arising from conversion is ₹120.

     3. The promoters must therefore make their contribution at ₹120 or more per equity share.

(c). Promoters’ Contribution in an IPO of Convertible Debt Instruments

• The promoters must follow the requirements mentioned in clauses (a) and (b).

  1. The company may make an initial public offer of convertible debt instruments without having made a prior public issue of equity shares.

  2. In such a case, the promoters must contribute at least 20% of the project cost in the form of equity shares.

  3. The promoters must also contribute at least 20% of the issue size from their own funds.

  4. This contribution towards the issue size must also be made in the form of equity shares.

• Therefore, promoters have to meet two separate requirements.

Two Contribution Requirements

• At least 20% of the project cost must be contributed through equity shares.

• At least 20% of the issue size must be contributed from the promoters’ own funds through equity shares.

Example:

• Suppose the project cost is ₹100 crore.

• The promoters must contribute at least ₹20 crore towards the project cost through equity shares.

• If the issue size is ₹80 crore, the promoters must also contribute at least ₹16 crore from their own funds through equity shares.

Promoters’ Contribution Where the Project Is Implemented in Stages

• A project may be implemented in different stages.

  1. In such a case, promoters’ contribution is calculated with reference to the total equity participation required up to the relevant stage.

  2. This equity participation is compared with the debt raised or proposed to be raised through the public issue.

  3. Therefore, promoters must bring in the required contribution according to the stage of the project being financed.

• Example:

  1. Suppose a project is divided into three stages.

     1. The company raises debt through a public issue to finance the first stage.

     2. The promoters’ contribution is determined based on the total equity participation required up to that stage.

  2. When the project moves to the next stage, the promoters’ contribution is considered with reference to the equity participation required up to that stage.

14(3).

• Time Limit for Promoters’ Contribution

• The promoters must satisfy all the requirements relating to their contribution before the public issue opens.

  1. The promoters must complete the required contribution at least one day before the issue opening date.

  2. The required contribution cannot be completed on the day the issue opens.

14(4).

• Escrow Account for Promoters’ Contribution

  1. Promoters may need to subscribe to equity shares or convertible securities to meet the minimum promoters’ contribution.

     1. The amount contributed by the promoters must be kept in an escrow account.

     2. The escrow account must be maintained with a scheduled commercial bank.

     3. The promoters’ contribution remains in the escrow account until the issue proceeds are released.

  2. The amount is then released to the issuer along with the release of the issue proceeds.

Example:

• Promoters are required to contribute ₹20 crore towards the issue.

  1. The ₹20 crore is deposited into an escrow account with a scheduled commercial bank.

  2. The amount remains in the escrow account during the required period.

  3. Once the issue proceeds are released, the ₹20 crore is also released to the issuer.

Disclosure of Promoters’ Contribution Already Utilised

• The promoters’ contribution may have already been brought into the company and utilised.

• In such a case, the issuer must provide a cash flow statement in the offer document.

• The cash flow statement must disclose how the promoters’ contribution has been used.

Promoters’ Contribution Exceeding ₹100 Crore

• The minimum promoters’ contribution may exceed ₹100 crore.

  1. The initial public offer may also involve partly paid shares.

  2. In such a case, promoters must bring in at least ₹100 crore before the issue opens.

  3. The remaining promoters’ contribution can be brought in on a pro-rata basis.

• The remaining amount must be brought in before calls are made to the public.

Example:

• Suppose the minimum promoters’ contribution is ₹150 crore.

  1. The IPO is for partly paid shares.

  2. Promoters must bring in at least ₹100 crore before the issue opens.

  3. The remaining ₹50 crore can be brought in on a pro-rata basis.

• This remaining amount must be brought in before the corresponding calls are made to public investors.

Explanatio

n:

• For the purposes of this regulation:

• (I). Computation of Promoters’ Contribution

  1. Promoters’ contribution is calculated on the basis of the post-issue expanded capital.

  2. The post-issue expanded capital is calculated assuming that all the proposed convertible securities are fully converted into equity shares.

  3. Therefore, the calculation considers the equity shares that would exist after full conversion of the convertible securities.

  4. (a). Full proposed conversion of convertible securities into equity shares is assumed for calculating the promoters’ contribution.

  5. (b). If employee stock options or stock appreciation rights are outstanding at the time of the IPO, all vested options are assumed to be exercised.

  6. This calculation is made in accordance with the relevant proviso to Regulation 5(2).

• (II). Computation of “Weighted Average Price”

  1. The weighted average price is calculated by considering the equity shares arising from conversion at different stages.

  2. (a). Weight

     1. It means the number of equity shares that arise from conversion of the specified securities at each stage.

     2. A greater number of equity shares arising at a particular stage gives that stage greater weight in the calculation.

  3. (b). Price

     1. It means the price per equity share resulting from conversion at each stage.

     2. The price at each stage is determined using the pre-determined conversion price applicable to that stage.

Example:

• Suppose convertible securities are converted in three stages.

  1. Stage 1 results in 1,000 equity shares at ₹100 per share.

  2. Stage 2 results in 2,000 equity shares at ₹120 per share.

  3. Stage 3 results in 3,000 equity shares at ₹140 per share.

• The “weight” is the number of equity shares arising at each stage.

• The “price” is the conversion price applicable to the equity shares at each stage.

• These weights and prices are then used to calculate the weighted average price.

Regulation 15. Securities ineligible for minimum promoters’ contribution

15(1).

• Specified Securities Not Eligible for Minimum Promoters’ Contribution

  1. Certain specified securities cannot be counted towards the minimum promoters’ contribution.

  2. This restriction applies to specified securities acquired during the preceding three years.

• (a).

  1. Specified securities acquired during the preceding three years are not eligible where they fall under the following categories:

  2. (i).

     1. Securities acquired for consideration other than cash are not eligible.

     2. Securities are also not eligible where the transaction involves revaluation of assets.

     3. Securities are also not eligible where the transaction involves capitalisation of intangible assets.

  3. (ii).

     1. Bonus shares issued by using revaluation reserves are not eligible.

     2. Bonus shares issued by using unrealised profits of the issuer are also not eligible.

     3. Bonus shares issued against equity shares that are themselves ineligible for minimum promoters’ contribution are also not eligible.

• Example:

  1. A promoter acquires shares without paying cash during the preceding three years.

  2. If the transaction involves revaluation of assets, those shares cannot be counted towards minimum promoters’ contribution.

  3. Similarly, bonus shares issued out of revaluation reserves cannot be counted towards minimum promoters’ contribution

     .

• (b).

• Specified Securities Acquired at a Lower Price Before the IPO

  1. Specified securities acquired during the preceding one year cannot be counted towards minimum promoters’ contribution.

     1. This applies when the securities were acquired at a price lower than the price offered to the public in the IPO.

     2. The restriction covers specified securities acquired by the promoters.

     3. It also covers specified securities acquired by Alternative Investment Funds (AIFs).

        1. Foreign Venture Capital Investors (FVCIs) are also covered.

        2. Scheduled commercial banks are also covered.

        3. Public financial institutions are also covered.

        4. Insurance companies registered with IRDAI are also covered.

  2. A non-individual public shareholder holding at least 5% of the post-issue capital is also covered.

  3. An individual or non-individual entity forming part of the promoter group, other than the promoter(s), is also covered.

• Example:

  1. The IPO price is ₹100 per equity share.

  2. A promoter acquired specified securities at ₹70 per share during the preceding one year.

  3. These securities cannot be counted towards minimum promoters’ contribution.

  4. The same restriction applies if an eligible AIF or other specified entity acquired the securities at ₹70 per share.

• Provided that nothing contained in this clause shall apply to:

• (i).

  1. Payment of Price Difference on Earlier Acquired Securities

     1. Promoters or other specified eligible persons may have acquired specified securities during the preceding one year.

        1. Those securities may have been acquired at a price lower than the IPO offer price.

        2. The securities can be considered for minimum promoters’ contribution if the required price difference is paid to the issuer.

        3. The promoter or eligible person must pay the difference between the IPO offer price and the earlier acquisition price.

     2. The payment must be made to the issuer.

     3. After paying this difference, the specified securities can be counted towards minimum promoters’ contribution.

  2. Example:

     1. The IPO offer price is ₹100 per share.

        1. A promoter had acquired the specified securities at ₹70 per share.

        2. The difference between the two prices is ₹30 per share.

        3. The promoter must pay ₹30 per share to the issuer.

     2. The securities can then be considered for minimum promoters’ contribution.

• (ii).

  1. Securities Acquired Under a Court or Tribunal Approved Scheme

     1. Specified securities may be acquired under a scheme approved under Sections 230 to 234 of the Companies Act, 2013.

        1. The scheme may be approved by a High Court, a Tribunal or the Central Government, as applicable.

        2. The specified securities may be acquired by the promoters under such a scheme.

        3. The securities may also be acquired by AIFs, FVCIs, scheduled commercial banks, public financial institutions or IRDAI-registered insurance companies.

     2. A non-individual public shareholder holding at least 5% of the post-issue capital may also acquire such securities.

        1. An individual or non-individual entity forming part of the promoter group, other than the promoter(s), may also acquire such securities.

        2. The securities must be received in lieu of a business and invested capital that had existed for more than one year before the scheme was approved.

  2. Example:

     1. A promoter has invested capital in a business for more than one year.

        1. A scheme under Sections 230 to 234 of the Companies Act, 2013 is approved by the appropriate authority.

        2. Under the scheme, the promoter receives specified securities in exchange for the existing business and invested capital.

     2. Such specified securities can be considered for minimum promoters’ contribution, subject to the other requirements of the regulation.

• (iii).

  1. Initial Public Offer by Government Infrastructure Entities

     1. The restriction on specified securities does not apply to an IPO by a government company.

        1. It also does not apply to an IPO by a statutory authority or statutory corporation.

        2. A special purpose vehicle (SPV) set up by any of these entities is also covered.

     2. The government company, statutory authority, corporation or SPV must be engaged in the infrastructure sector.

  2. Example:

     1. A government company engaged in developing highways comes out with an IPO.

     2. The specified securities covered by this exception can qualify for minimum promoters’ contribution.

• (iv).

  1. Equity Shares Arising from Conversion of Fully Paid-up Compulsorily Convertible Securities

     1. Equity shares arising from the conversion or exchange of fully paid-up compulsorily convertible securities can be considered for minimum promoters’ contribution.

        1. This includes equity shares arising from the conversion or exchange of depository receipts.

        2. The relevant securities must have been held for at least one year before filing the draft offer document.

        3. The securities may be held by the promoters.

     2. They may also be held by AIFs, FVCIs, scheduled commercial banks, public financial institutions or IRDAI-registered insurance companies.

     3. A non-individual public shareholder holding at least 5% of the post-issue capital may also hold such securities.

        1. An individual or non-individual entity forming part of the promoter group, other than the promoter(s), may also hold such securities.

        2. The fully paid-up compulsorily convertible securities must be converted or exchanged into equity shares before filing the offer document.

     4. For a book-built issue, the relevant offer document is the red herring prospectus.

     5. For a fixed-price issue, the relevant offer document is the prospectus.

     6. The draft offer document must contain full disclosure of the terms of conversion or exchange.

  2. Example:

     1. A promoter holds fully paid-up compulsorily convertible securities for more than one year before filing the draft offer document.

        1. The securities are converted into equity shares before the offer document is filed.

        2. The terms of conversion are fully disclosed in the draft offer document.

     2. The resulting equity shares can then be considered for minimum promoters’ contribution.

  3. Explanation:

  4. Adjustment of Price for Corporate Actions

     1. The price per share must be adjusted before deciding whether securities are eligible for minimum promoters’ contribution.

        1. The adjustment is made for corporate actions undertaken by the issuer.

        2. Corporate actions include events such as share splits and bonus issues.

        3. Therefore, the original acquisition price may need to be adjusted to reflect such corporate actions.

     2. The adjusted price is then used to determine whether the securities are eligible for minimum promoters’ contribution.

  5. Example:

     1. A promoter acquired shares at ₹200 per share.

        1. The company later carries out a 1:1 bonus issue.

        2. After adjusting for the bonus issue, the effective price becomes ₹100 per share.

     2. The ₹100 adjusted price is used for determining eligibility.

• (c).

• Securities Allotted to Promoters or Specified Persons Before the IPO

  1. Specified securities may have been allotted during the preceding one year at a price lower than the issue price.

  2. Such securities may have been allotted to the promoters.

     1. They may also have been allotted to AIFs, FVCIs, scheduled commercial banks, public financial institutions or IRDAI-registered insurance companies.

     2. A non-individual public shareholder holding at least 5% of the post-issue capital may also receive such securities.

     3. An individual or non-individual entity forming part of the promoter group, other than the promoter(s), may also receive such securities.

     4. The securities must have been allotted against funds brought in by these persons or entities during the preceding one year.

     5. The issuer must have been formed by converting one or more partnership firms or LLPs.

  3. The partners of the erstwhile partnership firms or LLPs must be the promoters of the issuer.

  4. There must be no change in the management of the business after the conversion.

• Example:

  1. A partnership firm is converted into a company.

  2. The partners of the earlier partnership firm become the promoters of the company.

     1. The company has no change in management after the conversion.

     2. During the year before the IPO, the promoters bring funds into the company and receive specified securities at a price lower than the IPO issue price.

     3. Such securities fall within the category described by this clause.

• Eligibility of Securities Issued Against Existing Capital

  1. Specified securities may be allotted to the promoters against the capital already existing in the partnership firms or LLPs.

     1. Such securities will be eligible for minimum promoters’ contribution.

     2. The capital in the partnership firm or LLP must have existed continuously for more than one year.

     3. The one-year period is counted before the conversion of the firm or LLP into the issuer.

• Example:

  1. A partnership firm has ₹10 crore of capital that has remained continuously invested for more than one year.

  2. The firm is converted into a company.

     1. The promoters receive specified securities against this existing ₹10 crore capital.

     2. These specified securities can be counted towards minimum promoters’ contribution.

• (d).

  1. Securities Pledged with a Creditor

     1. Specified securities pledged with any creditor are not eligible for minimum promoters’ contribution.

     2. Therefore, promoters cannot count pledged specified securities towards their required minimum contribution.

     3. A pledge means the securities are given as security for a debt or other obligation.

  2. Example:

     1. A promoter holds 1,00,000 specified securities.

     2. The promoter pledges these securities with a bank as security for a loan.

     3. These pledged securities cannot be counted towards minimum promoters’ contribution.

15(2).

• Eligibility of Securities Acquired Under an Approved Scheme

  1. Specified securities covered under clauses (a) and (c) of sub-regulation (1) can be counted towards promoters’ contribution.

     1. The securities must have been acquired pursuant to an approved scheme.

     2. The scheme must be approved by a High Court, Tribunal or the Central Government, as applicable.

     3. The approval must be under Sections 230 to 234 of the Companies Act, 2013.

  2. Therefore, securities that would otherwise be ineligible under clauses (a) and (c) can become eligible when acquired under such an approved scheme.

• Example:

  1. Securities fall under clause (a) or (c) and would normally be excluded from promoters’ contribution.

     1. The promoters acquire those securities under a scheme approved under Sections 230 to 234.

     2. The scheme is approved by the appropriate authority.

     3. The securities can then be counted towards promoters’ contribution.