Who is a Company Promoter? Definition, Promoter Group Rules, MPC & IPO Lock-in

In the world of investing, if a company is a ship, the Promoter is its captain. For any IPO investor, understanding who is behind the steering wheel is as critical as analyzing the balance sheet. In this guide, we break down the legalities, the SEBI mandates, and the red flags associated with company promoters.

1. Who is a Company Promoter?

In the Indian capital markets, the term “Promoter” is a legal designation that carries heavy fiduciary responsibility. According to Section 2(69) of the Companies Act, 2013 and the SEBI (ICDR) Regulations, 2018, a person is not classified as a promoter simply because they founded the company. The classification is determined by three specific criteria: Identification, Control, and Influence.

A. The Three Pillars of Identification

• Named in the Prospectus: They are explicitly identified as a ‘Promoter’ in the Draft Red Herring Prospectus (DRHP), the Red Herring Prospectus (RHP), or the company’s Annual Returns.
• Control over Affairs: They have the power to appoint the majority of the directors or to control the management or policy decisions, whether as a shareholder, director, or through contractual agreements.
• Directorial Influence: The Board of Directors is “accustomed to act” according to their advice or instructions (unless that advice is given in a professional capacity, such as by a lawyer or auditor).

B. The Equity Thresholds: Beyond the Definitions

To prevent promoters from hiding their influence through complex holding structures, SEBI utilizes specific equity percentages to define “Control” and the “Promoter Group”:

• The 20% Rule for Promoter Groups: The definition of Promoter Group: any entity or body corporate where the Promoter holds 20% or more of the equity share capital. This ensures that all interconnected businesses under the promoter’s umbrella are disclosed to investors, preventing the siphoning of funds to “sister concerns.”
• The 10% Ceiling for Professionally Managed Companies: In recent years, many startups have opted for a “Professionally Managed” status (having no identifiable promoter). However, SEBI guidelines dictate that for a company to be classified as such, no single shareholder (except for institutional investors like Banks or FIs) can hold 10% or more of the post-issue equity. If an individual holds more than 10%, SEBI often scrutinizes them as a “De-facto Promoter.”
• The 25% Takeover Threshold: While 20% is the benchmark for disclosure in an IPO, the SEBI (SAST) Regulations (Takeover Code) establishes that holding 25% or more voting rights constitutes formal “Control.” Crossing this limit usually triggers a mandatory Open Offer to minority shareholders.

C. The “Promoter Group” Net

It is vital for investors to realize that “Promoter” is a collective term. The Promoter Group includes:

Related Entities: Any company, firm, or HUF where the promoter or their relatives hold significant influence or a 20%+ stake.

Immediate Relatives: Spouse, parents, siblings, and children of the promoter.

2. The “Skin in the Game”: Minimum Promoters’ Contribution (MPC)

SEBI wants to ensure that promoters don’t just “dump” the company on the public and exit. To ensure they have “skin in the game,” the following rules apply:

• The 20% Rule: Promoters must collectively hold at least 20% of the post-issue capital of the company.
• Shortfall: If the existing promoters hold less than 20%, they must subscribe to more shares or bring in “Alternative Investment Funds” (AIFs), Foreign Venture Capital Investors (FVCIs), or Scheduled Commercial Banks to meet the gap.

Read Also: What are Different IPO Investor Categories?

3. The Lock-in Period: When Can Promoter Sell?

Investors often worry about promoters selling their stake immediately after listing, which can crash the stock price. SEBI has strict Lock-in requirements:

Note: The 18-month/6-month relaxation was a significant update in the 2022-2024 SEBI amendments (previously it was 3 years/1 year). However, if the IPO proceeds are primarily used for capital expenditure (buying plants, machinery, etc.), the longer lock-in applies to ensure long-term commitment.

4. Restrictions on Selling: The “Offer for Sale” (OFS) Rule

In many IPOs, the company promoters sell their existing shares through an Offer for Sale (OFS).

• Pre-IPO Selling: Promoters cannot sell any shares in the 12 weeks preceding the IPO.
• Shareholding Rule for Promoter: Under the latest guidelines, any shareholder (including promoters) holding more than 20% cannot sell more than 50% of their pre-issue holding in the IPO. This prevents “mass exits” during the public offer.

Read Also: Types of Shares: Breaking Down the Common Types in India

Final Words

As an investor, when you read a DRHP, look beyond the numbers and ask these three questions about the promoters:

• Is there a “Professional Managed” Tag? If a company has no identifiable promoter (like many New-age and VC Funded startups), it is called a “Professionally Managed” company. Here, the risk is different because there is no single “owner” to blame if things go south.
• Are the Shares Pledged? Check if the promoters have taken loans against their shares. High pledging is a massive red flag, as a drop in stock price could trigger a forced sell-off by lenders.
• What is the ‘Quality’ of the Promoter? Check the “Litigation” section of the DRHP. Are there any criminal proceedings or SEBI debarment orders against the promoters? A promoter banned from the capital markets is an automatic “No” for any serious investor.

A promoter’s vision builds the company, but their integrity sustains it. While SEBI’s 18-month lock-in provides a safety net, your job as an investor is to ensure the promoter is staying because they believe in the growth, not just because the law forces them to.