Promoter Group Meaning in an IPO: Who SEBI Counts and the 20% Test

Open any draft prospectus and you’ll see the phrase “promoter and promoter group” dozens of times. Most of us skim past it. That’s a mistake, because the promoter group meaning in an IPO decides whose holdings, whose trades and whose regulatory troubles get tied to the company you’re about to buy. SEBI doesn’t leave it to the company to decide who’s in the group. It writes the list into its rulebook, and a lot of that list hinges on one number: 20%.

Here’s how the definition works, clause by clause, with a few made-up family trees so you can actually apply it the next time you open a DRHP.

Promoter group meaning in an IPO: the SEBI definition

The definition sits in Regulation 2(1)(pp) of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, the ICDR Regulations. Everything below is drawn from that text as notified in September 2018. SEBI does amend these regulations from time to time, so if you’re relying on a clause for a real decision, check the latest consolidated version on SEBI’s website.

Before the group, though, you need the promoter. Regulation 2(1)(oo) says a promoter includes a person who:

• is named as a promoter in the draft offer document or offer document, or is identified as one by the issuer in its annual return under section 92 of the Companies Act, 2013; or
• has control over the issuer’s affairs, directly or indirectly, whether as a shareholder, director or otherwise; or
• is someone whose advice, directions or instructions the board is accustomed to act on.

Two carve-outs follow. Someone acting purely in a professional capacity isn’t caught by that third limb, so the company’s lawyer or auditor doesn’t become a promoter just because the board listens to them. And a financial institution, scheduled commercial bank, foreign portfolio investor other than Category III, mutual fund, venture capital fund, alternative investment fund, foreign venture capital investor or IRDAI-registered insurer isn’t deemed a promoter merely because it holds 20% or more of the issuer’s equity. It has to meet the other requirements too.

Now the group. Under Regulation 2(1)(pp), the promoter group includes five sets of people and entities.

1. The promoter

Obvious, but it matters. The group always starts with the promoter, so anything that applies to “the promoter group” applies to the promoter as well.

2. Immediate relatives

SEBI spells out exactly who counts: any spouse of the promoter, and any parent, brother, sister or child of the promoter or of the spouse. That last bit is easy to miss. Your wife’s brother is in. Your sister’s husband is not, because he isn’t your spouse’s sibling and isn’t on the list. Cousins, uncles and nephews are not named either.

3. When the promoter is a company

If the promoter is a body corporate, the group also takes in:

• its subsidiary or holding company;
• any company in which the promoter holds 20% or more of the equity, and any company that holds 20% or more of the promoter’s equity;
• any company in which a set of individuals or companies acting in concert holds 20% or more, where that same set also holds 20% or more of the issuer and is acting in concert.

4. When the promoter is an individual

If the promoter is a person, the group includes:

• any company in which 20% or more of the equity is held by the promoter, an immediate relative, or a firm or Hindu Undivided Family (HUF) in which the promoter or one or more relatives is a member;
• any company in which such a company holds 20% or more of the equity;
• any HUF or firm in which the promoter and their relatives together hold 20% or more of the total capital.

5. The disclosure catch-all

Finally, the group includes everyone whose shareholding is aggregated under the heading “shareholding of the promoter group”. In plain terms, if the company bundles you into that line, you’re in the group for these purposes.

The promoter group isn’t who the founder trusts. It’s who SEBI’s 20% tests and the relative list pull in, whether the founder likes it or not.

The institutional exception

There’s a proviso that matters for companies with big financial backers. The same list of institutions (financial institutions, scheduled banks, FPIs other than Category III, mutual funds, VCFs, AIFs, FVCIs, insurers and any other category SEBI specifies) is not deemed part of the promoter group merely because it holds 20% or more of the promoter’s equity.

But the exception has a limit. Those same institutions are treated as promoter group for their own subsidiaries or the companies they promote, and for a mutual fund they sponsor. So a bank that sets up an AMC subsidiary and takes it public is squarely in the picture. A bank that simply owns a 22% stake in someone else’s promoter company is not pulled in by that stake alone.

Worked examples: drawing the circle

These are hypothetical. No real company or family is described. The point is to practise the tests.

Example 1: an individual promoter and her family

Meera is the named promoter of Kaveri Foods, which has filed a DRHP. Her circle looks like this:

Notice how Meera Packaging gets in. Meera herself owns none of it. Her husband’s 25% is enough, because the test counts a holding by the promoter or an immediate relative. And once Meera Packaging is in, Coastal Cold Chain follows through the second-level 20% test. One stake by a spouse has pulled in two companies. Where a stake is split across several family members and none crosses 20% alone, don’t guess: check the issuer’s own promoter group list in the DRHP.

Example 2: a corporate promoter

Now say the promoter of an issuer is Delta Holdings Ltd. Delta owns 60% of Delta Logistics (a subsidiary), 24% of Northline Steel, and 12% of Harbour Paints. Separately, Zenith Capital Ltd owns 21% of Delta Holdings.

• Delta Logistics is in, as a subsidiary.
• Northline Steel is in, because Delta holds 24%, above the 20% line.
• Harbour Paints is out on this test, since 12% is below 20%.
• Zenith Capital is in, because it holds 20% or more of the promoter, unless it’s one of the listed institutions relying on the exception.

Change one fact. If Zenith were a mutual fund holding 21% of Delta Holdings, the institutional proviso would apply, and Zenith wouldn’t be dragged into the promoter group just because of that holding.

Example 3: the near miss

A promoter holds 19% of a small trading company. On that alone, the company is outside the 20% test. Next year his mother, who held nothing, buys 22% of the same company from an outside shareholder. Now an immediate relative holds more than 20%, and the company is in the promoter group even though the promoter’s own stake never moved. Small transfers inside a family can quietly change who sits in the promoter group, which is why the list in each offer document is a snapshot, not a permanent fact.

One relative’s share purchase can move a company into the promoter group. Treat every DRHP list as a snapshot taken on a particular day.

Why the promoter group actually matters to IPO investors

All this would be trivia if the label didn’t carry consequences. It does. Here are the ones written into the same ICDR text.

Eligibility. Under Regulation 5(1)(a), an issuer can’t make an IPO if the issuer, any of its promoters, its promoter group, directors or selling shareholders are debarred from accessing the capital market by SEBI. So a SEBI ban on, say, a company that sits in the promoter group only because of a 20% family stake can hold up the whole issue. Our explainer on IPO eligibility norms covers the rest of that checklist.

Where the money goes. Regulation 12 bars an issuer from using convertible debt instruments to finance, lend to, or buy shares of anyone in the promoter group or its group companies. The one exception is fully convertible debt that converts within 18 months of issue.

Trades around the IPO. Regulation 54 requires the issuer to make sure every securities transaction by the promoter and promoter group between the filing of the draft offer document and the close of the issue is reported to the stock exchanges within 24 hours. If the family is buying or selling in the run-up, the market is meant to know fast.

Disclosure. The offer document disclosure requirements ask for the aggregate pre-issue shareholding of the promoter and promoter group, and for the aggregate number of securities bought or sold by the promoter group in the preceding six months. That six-month trading record is one of the most useful tables a retail investor can read.

Minimum contribution, which is about promoters only. Regulation 14(1) says the promoters must hold at least 20% of the post-issue capital. If they fall short, certain AIFs, FVCIs, scheduled commercial banks, public financial institutions or insurers can make up the gap, up to 10% of post-issue capital, without being identified as promoters. The rule doesn’t apply when the issuer has no identifiable promoter. We go deeper on this in our piece on minimum promoter contribution in an IPO.

After listing. The label doesn’t vanish on listing day. Regulation 173, for instance, lets promoters and promoter group members sell shares through a qualified institutions placement to meet minimum public shareholding, but not if any of them bought or sold the company’s shares in the twelve weeks before the issue opens. They also can’t trade in the twelve weeks after it closes, other than through the specific routes SEBI allows.

How to read the promoter group section of a DRHP

When we go through an offer document, this is the short routine we follow:

1. Find the list. The DRHP names the promoters, and the promoter group entities and individuals are usually set out alongside. Count them. A long list of private companies is normal for an old business family, but it also means more places for related-party dealings to hide.
2. Read the pre-issue holding line. How much does the promoter and promoter group own before the issue, and how much is being sold through the offer for sale? A large OFS by group members tells you who is cashing out.
3. Check the six-month trading table. Did group members buy shares cheaply shortly before the IPO? At what price compared with the issue price?
4. Look for pledges. Pledged promoter shares are a separate red flag; our guide on promoter pledge explains why.
5. Scan the litigation and regulatory sections. Since debarment of the promoter group can block an IPO, it’s worth checking whether any group entity shows up with regulatory action against it.

For the bigger picture on judging a new issue, start with our guide to IPO investing in India.

Common mix-ups

“Promoter group” and “group companies” aren’t the same thing. The ICDR text uses both phrases. Regulation 12, for example, mentions the promoter group or group companies, which tells you they’re treated as separate sets.

Being in the group doesn’t make you a promoter. Meera’s brother-in-law Ravi is in the promoter group, but he isn’t a promoter unless he meets the promoter definition himself. The 20% minimum contribution test in Regulation 14 is about promoters, not every group member.

A big institutional stake isn’t automatically control. The institutional carve-outs in both definitions exist precisely so that a fund or bank with a large stake isn’t treated as a promoter or promoter group member just because of the size of its holding.

Once you’ve drawn the circle for one IPO, the next one gets quicker. And you’ll start noticing which families keep their groups tidy and which have a sprawl of 20%-held private companies that deserve a second look.

Sources

• SEBI: Issue of Capital and Disclosure Requirements Regulations, 2018 (as notified September 2018)

Disclaimer: This article is for education only and is not investment advice. All people, companies and shareholdings in the worked examples are hypothetical. Regulations change; refer to the latest SEBI text and consult a SEBI-registered investment adviser before making any investment decision.