Promoter’s Contribution
PART III: PROMOTERS’ CONTRIBUTION
Regulation 112. Requirement of minimum promoters’ contribution not applicable in certain cases
The requirements of minimum promoters’ contribution shall not apply in case of:
(a). Issuer Without an Identifiable Promoter
If the issuer does not have any person or group who can be identified as its promoter.
In such a case, the issuer is treated as having no identifiable promoter for the purposes of the relevant ICDR provision.
(b). Frequently Traded Equity Shares
The equity shares of the issuer must have been frequently traded on a stock exchange.
This frequent trading must have continued for at least 3 years immediately preceding the reference date.
The 3-year period must be continuous and must directly precede the relevant reference date.
This condition establishes that the issuer has an established trading history in its equity shares.
(i). Investor Complaint Redressal
The issuer must have redressed at least 95% of the complaints received from investors.
The calculation is made based on complaints redressed up to the end of the quarter immediately preceding the month of the reference date.
So . the issuer must have addressed substantially all investor complaints before the relevant reference date.
(ii). Compliance with SEBI LODR Regulations
The issuer must have complied with the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
This compliance must have been maintained for a minimum period of 3 years immediately preceding the reference date.
The 3-year period must directly precede the reference date.
Exception for Board Composition Non-Compliance
The issuer must generally comply with the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 for the required 3-year period.
However, if the issuer failed to comply specifically with the provisions relating to composition of the Board of Directors during any quarter in those 3 years then:
It can still be treated as compliant if certain conditions are met.
The issuer must be compliant with the Board composition requirements at the time of filing the Draft Offer Document/Offer Document.
The issuer must make adequate disclosures in the Offer Document regarding the earlier non-compliance.
The disclosure must cover the instances of Board composition non-compliance during the 3 years immediately preceding the filing of the Draft Offer Document/Offer Document.
If these conditions are satisfied, the earlier non-compliance will be deemed to constitute compliance with the 3-year compliance requirement.
Promoters’ Subscription Above the Permitted Limit
Promoters may subscribe to the specified securities offered in the public issue up to the higher of the two options permitted under Regulation 113(1)(a).
If promoters propose to subscribe beyond that permitted percentage, the excess subscription is subject to a separate pricing requirement.
The securities subscribed to in excess of the permitted percentage must be issued at:
The price determined under Regulation 164 or The issue price whichever is higher.
Therefore, promoters cannot obtain the excess portion at a price lower than the applicable price under Regulation 164 or the issue price.
Example:
Assume the higher permitted promoter subscription under Regulation 113(1)(a) is 20%.
The promoter wants to subscribe to 25%.
The additional 5% is the excess subscription.
Assume the Regulation 164 price is ₹120 per share and the issue price is ₹100 per share.
The promoter must subscribe to the excess 5% at ₹120 per share, because ₹120 is higher than the ₹100 issue price.
Explanation:
Reference Date for Annualised Trading Turnover
The “reference date” is the date used for calculating the annualised trading turnover mentioned in the relevant Explanation.
For a normal issue, the reference date is the date on which the Draft Offer Document is filed with the Board.
For a fast track issue, the reference date is different:
It is the date on which the Offer Document is filed with the Registrar of Companies (RoC).
This filing must take place before the issue is opened.
Therefore, the applicable reference date depends on whether the issue follows the normal route or the fast track route.
Example:
Normal issue: Draft Offer Document is filed with the Board on 10 March.
The reference date is 10 March.
Fast track issue: Offer Document is filed with the RoC on 15 March, before the issue opens. The reference date is 15 March.
Regulation 113. Minimum promoters’ contribution
113(1).
The promoters shall contribute in the public issue as follows:
(a). Promoters’ Subscription Limit
The promoter may contribute to the public issue up to either:
20% of the proposed issue size; or
20% of the post-issue capital.
The applicable limit is the higher of these two amounts.
“Proposed issue size” refers to the securities being offered to the public in the issue.
“Post-issue capital” refers to the issuer’s total capital after completion of the issue.
Example:
Proposed issue size = 10 lakh shares → 20% = 2 lakh shares.
Post-issue capital = 12 lakh shares → 20% = 2.4 lakh shares.
The promoter can subscribe up to 2.4 lakh shares because it is the higher of the two limits.
(b). Promoters’ Subscription in a Composite Issue
A composite issue means a Further Public Offer (FPO) is combined with a Rights Issue.
In such an issue, the promoter’s subscription can be up to either:
20% of the proposed issue size or
20% of the post-issue capital, excluding the Rights Issue component.
The applicable limit is the higher of these two amounts.
While calculating the post-issue capital for this purpose, the securities issued through the Rights Issue are not included.
Example:
Proposed issue size through FPO = 10 lakh shares → 20% = 2 lakh shares.
Post-issue capital excluding Rights Issue component = 14 lakh shares → 20% = 2.8 lakh shares.
The promoter can subscribe up to 2.8 lakh shares, as this is the higher of the two amounts.
113(2). Minimum Promoters’ Contribution for Convertible Securities
In a public issue or composite issue involving convertible securities, the promoters are required to make a minimum contribution to the issue.
The exact minimum contribution depends on the nature and structure of the convertible securities.
The applicable minimum contribution is prescribed under as follows:
(a). Promoters’ Contribution Through Equity or Convertible Securities
The promoters must contribute 20% as required under clause (a) or clause (b) of sub-regulation (1), as applicable.
This 20% promoters’ contribution can be made in either of the following forms:
Equity shares or
Subscription to the convertible securities offered by the issuer.
Therefore, promoters are not necessarily required to make the entire contribution directly through equity shares.
Where convertible securities are subscribed to, the contribution is treated as the promoters’ contribution in accordance with the applicable provision.
Example:
Assume the applicable promoters’ contribution is 20% of the relevant capital.
The promoter may satisfy this requirement by subscribing entirely to equity shares, entirely to convertible securities, or through a combination of both, subject to the applicable regulations.
Promoters’ Contribution Where Conversion Price Is Not Predetermined
If the price of the equity shares to be issued upon conversion is not predetermined and is not disclosed in the Offer Document, a special rule applies.
In such a case, promoters must make their contribution only by subscribing to the convertible securities being issued in the public issue.
Promoters cannot satisfy the promoters’ contribution requirement directly through equity shares at this stage.
The promoters must also give a written undertaking that they will subscribe to the equity shares when the convertible securities are converted.
Therefore, the promoters’ commitment covers both:
The initial subscription to the convertible securities and
The future subscription to equity shares upon conversion.
Example:
An issuer offers convertible securities to the public, but the equity share conversion price has not yet been determined.
The promoter’s required contribution is ₹20 crore.
The promoter must subscribe to ₹20 crore worth of the convertible securities.
The promoter must also give a written undertaking to subscribe to the equity shares that will be issued when those securities are converted.
(b). Promoters’ Contribution for Securities Convertible on Different Dates
This provision applies where convertible securities are convertible or exchangeable on different dates.
If the promoters’ contribution is made through equity shares, the conversion price must already be predetermined.
The price at which the promoters make their equity contribution cannot be lower than the weighted average price of the equity shares that will arise from conversion of those convertible securities.
Example:
Convertible securities are convertible on different dates.
The weighted average price of the equity shares arising from their conversion is ₹150 per share.
The promoters’ contribution through equity shares cannot be made at ₹140 per share.
It must be at least ₹150 per share.
113(3). Excess Promoters’ Contribution in FPO or Composite Issue
With respect to:
Further Public Offer (FPO) or Composite Issue, meaning an FPO combined with a Rights Issue.
If promoters contribute more than the stipulated minimum promoters’ contribution, the excess portion is subject to a specific pricing rule.
The excess contribution must be allotted at:
The price determined under Regulation 164; or
The issue price, whichever is higher.
The rule applies only to the portion contributed by promoters that exceeds the minimum required contribution.
Example:
Minimum promoters’ contribution required = ₹20 crore.
Promoters actually contribute = ₹30 crore.
Excess contribution = ₹10 crore.
Regulation 164 price = ₹120 per share.
Issue price = ₹100 per share.
The excess ₹10 crore contribution must be allotted at ₹120 per share, since it is higher than the issue price.
113(4).
Timing and Escrow of Promoters’ Contribution
Where promoters are required to subscribe to equity shares or convertible securities towards their promoters’ contribution, they must satisfy all requirements of this regulation at least 1 day before the issue opens.
So , the required promoters’ contribution must be completed before the public issue opens for subscription.
The amount of promoters’ contribution must be kept in an escrow account with a scheduled commercial bank.
The money remains in the escrow account until the issue proceeds are released.
When the issue proceeds are released to the issuer, the promoters’ contribution is also released to the issuer.
Example:
Public issue opens on 20 June.
Promoters must satisfy the promoters’ contribution requirements by 19 June at the latest.
If the promoters’ contribution is ₹10 crore, this amount must be placed in the specified escrow account with a scheduled commercial bank.
The ₹10 crore is released to the issuer along with the release of the public issue proceeds.
Minimum Promoters’ Contribution Above ₹100 Crore
The following applies only whem:
The minimum promoters’ contribution is more than ₹100 crore and
The Further Public Offer (FPO) is for partly paid shares.
The promoters must bring in at least ₹100 crore before the date on which the issue opens.
The remaining amount of the promoters’ contribution can be brought in on a pro-rata basis.
The remaining amount must be brought in before the corresponding calls are made to the public.
Therefore, the promoters do not have to pay the entire contribution upfront when the FPO involves partly paid shares.
Example:
Minimum promoters’ contribution = ₹150 crore.
FPO is for partly paid shares.
Before the issue opens, promoters must bring in at least ₹100 crore.
Remaining contribution = ₹50 crore.
The ₹50 crore can be brought in proportionately before the issuer makes the relevant calls on the public.
113(5).
SR Equity Shares in Minimum Promoters’ Contribution
“SR equity shares” means equity shares carrying superior voting rights.
If promoters hold SR equity shares, those shares can be counted while calculating the minimum promoters’ contribution.
Therefore, promoters do not necessarily have to satisfy the minimum contribution requirement only through ordinary equity shares.
The SR equity shares held by promoters can also form part of the required promoters’ contribution, subject to the applicable conditions under the ICDR Regulations.
Example:
Minimum promoters’ contribution required = 20 lakh shares.
Promoters hold 5 lakh SR equity shares and 15 lakh ordinary equity shares.
The 5 lakh SR equity shares can be included in calculating the promoters’ minimum contribution.
Therefore, the entire 20 lakh shares can qualify towards the required contribution.
Explanation:
Computation of Promoters’ Contribution
Promoters’ contribution is calculated on the basis of the post-issue expanded capital.
“Post-issue expanded capital” means the capital that would exist after considering the additional equity shares that may arise from conversion or exercise of relevant securities/options.
The calculation is made assuming full conversion or exercise in the following cases:
(a). Full conversion of all proposed convertible securities into equity shares.
The calculation assumes that all the convertible securities proposed in the issue will ultimately be converted into equity shares.
The equity shares resulting from such conversion are included while determining the post-issue expanded capital.
(b). Exercise of all vested employee stock options or Stock Appreciation Rights (SARs).
If vested ESOPs or SARs are outstanding at the time of the FPO, the calculation assumes that all such vested options will be exercised.
The equity shares that would arise from such exercise are therefore included in the expanded capital.
Example:
Existing equity shares = 100 lakh.
Convertible securities, if fully converted = 20 lakh equity shares.
Vested ESOPs, if fully exercised = 10 lakh equity shares.
Post-issue expanded capital = 130 lakh shares.
The promoters’ contribution requirement is calculated with reference to this expanded capital, rather than only the existing 100 lakh shares.
Computation of Weighted Average Price
(a). Weight:
“Weight” means the number of equity shares that arise from converting the specified securities at each stage.
If different portions of the convertible securities are converted at different stages, the number of equity shares arising at each stage is considered separately.
Therefore, a stage resulting in more equity shares has a greater weight in the calculation.
(b). Price:
“Price” means the price of the equity shares that will arise upon conversion of the specified securities.
This price is determined by taking into account the predetermined conversion price applicable at each stage.
Therefore, where conversion takes place at different stages and each stage has a predetermined conversion price, the relevant price for each stage is used.
Example:
Stage 1: 1,000 equity shares arise on conversion at ₹100 per share.
Stage 2: 2,000 equity shares arise on conversion at ₹150 per share.
Weight for Stage 1 = 1,000 shares.
Weight for Stage 2 = 2,000 shares.
Price for Stage 1 = ₹100.
Price for Stage 2 = ₹150.
The weighted average price would therefore give greater weight to the ₹150 conversion price because more equity shares arise at that stage.
Regulation 114. Securities ineligible for minimum promoters’ contribution
114(1).
Specified Securities Not Eligible for Minimum Promoters’ Contribution
For calculating the minimum promoters’ contribution, certain specified securities held by the promoters cannot be counted.
Under clause (a), specified securities acquired during the preceding 3 years are ineligible if they fall into either of the following categories:
(i). Specified securities acquired for consideration other than cash:
The securities must have been acquired without paying cash consideration.
In addition, the transaction must involve either:
Revaluation of assets or
Capitalisation of intangible assets.
Such securities cannot be counted towards the minimum promoters’ contribution.
(ii). Certain bonus shares:
Bonus shares issued by using revaluation reserves or unrealised profits of the issuer are ineligible.
Bonus shares issued against equity shares that themselves are ineligible for minimum promoters’ contribution are also ineligible.
Therefore, issuing bonus shares does not make otherwise ineligible securities eligible for promoters’ contribution.
Example:
A promoter received shares 2 years ago in exchange for an asset, without paying cash, and the transaction involved revaluation of that asset.
Those shares cannot be counted towards the minimum promoters’ contribution.
Similarly, if the promoter received bonus shares out of revaluation reserves, those bonus shares cannot be counted.
Specified Securities Pledged with Creditors
Specified securities that are pledged with a creditor are generally not eligible to be counted towards the minimum promoters’ contribution.
However, there is an exception where the pledge is for borrowings by: The issuer itself or Its subsidiaries.
Therefore, securities pledged to secure the issuer’s or its subsidiaries’ borrowings can still be considered for minimum promoters’ contribution.
Securities pledged to secure the promoter’s or another person’s separate borrowing from a creditor will not qualify.
Example:
A promoter holds 10 lakh shares and pledges them to a bank for a personal loan → these shares cannot be counted towards minimum promoters’ contribution.
If the same shares are pledged to secure a borrowing by the issuer → they can be counted, subject to the other requirements.
114(2).
Exception for Securities Acquired Under an Approved Scheme
The specified securities mentioned in clause (a) of sub-regulation (1) are generally not eligible for computing minimum promoters’ contribution.
However, these securities become eligible if they were acquired pursuant to a scheme approved under the Companies Act, 2013.
The scheme must have been approved by:
The High Court or
A Tribunal or
The Central Government under Sections 230 to 234 of the Companies Act, 2013.
Therefore, the normal exclusion under clause (a) does not apply when the securities were acquired through a duly approved corporate restructuring scheme.
Example:
A promoter acquires shares through a scheme of arrangement approved by the Tribunal under Sections 230 to 234 of the Companies Act, 2013.
Even if those shares would otherwise fall within the securities excluded under clause (a), they can be counted towards minimum promoters’ contribution because they were acquired under an approved scheme.
