Introduction
In the journey to a successful Initial Public Offering (IPO), Minimum Promoter Contribution (MPC) plays a pivotal role. It signifies the promoter’s commitment, financial stability and regulatory compliances. Securities and Exchange Board of India (SEBI) (Issue of Capital and Disclosure Requirement) Regulations, 2018 (ICDR Regulations) have set the limits and the lock-in period for the minimum contribution by the promoters. It mandates not less than 20% of the post issue capital should be contributed by the promoter[i]. However, in real-world scenarios promoters might face difficulties to comply with this MPC requirement due to various reasons such as historical dilution, restructuring, pre-IPO shares sales etc.
This article explores the regulatory framework governing Minimum Promoter Contribution (MPC) in IPOs, common challenges faced by issuers, and the practical measures available to address shortfalls and ensure compliance.
Understanding the regulatory framework
The requirement for MPC is governed by Regulation 14(1) and Regulation 236(1) of SEBI ICDR Regulations, 2018 for Main Board and SME IPOs respectively:
The promoters shall contribute to the public issue not less than twenty per cent. of the post-issue capital, which shall be brought in by way of equity shares and shall be locked in for a period of three years from the date of allotment in the initial public offer. This contribution must be in the form of fully paid-up equity shares and must be unencumbered or not pledged. These shares must be held by promotors as on the date of the Red Herring Prospectus.
The calculation of MPC is based on the post-issue capital at face value, not the issue price. For instance, if the post-issue capital of a company is Rs. 100 crore (face value), promoters must contribute at least Rs. 20 crore worth of equity shares by face value.
Lock in Requirements of MPC:
The SEBI (ICDR) Amendment Regulations, 2022, notified on 14 March 2022, revised the lock-in period applicable to MPC. The key changes include:
| Particulars | Pre-2022 | Post-2022 |
| Lock-in for MPC | 3 years | 18 months |
| Lock-in for excess promoter shares (above 20%) | 1 year | 6 months |
This move aims to improve liquidity for promoters while preserving investor protection through a still-significant lock-in duration.
Exceptional Cases where MPC is not mandatory:
As per Regulation 14(1) of the SEBI ICDR Regulations, the requirement of Minimum Promoters’ Contribution does not apply in cases where the issuer has no identifiable promoter. However, there is no explicit exemption granted to Public Sector Undertakings (PSUs) in the current text of the regulation. Hence, PSUs must comply with MPC norms unless they fall within the ambit of this exemption based on their specific promoter structure.
Challenges Companies may face with MPC requirements:
Although the Minimum Promoters’ Contribution (MPC) framework appears straightforward at a conceptual level, its implementation often presents several practical and legal challenges for issuers and merchant bankers. Some of the common issues observed in practice are elaborated below:
- Promoter Group Holding is less than 20%:
In case where the promoter and promoter group does not hold twenty percent of the post issue capital, issuers are faced with the difficulty of the maintaining minimum promoters’ contribution.
One can always bring in the new investors as ‘co-promoters’ or undertake the pre-IPO placement to the promoters to overcome the shortage of the MPC. Regulation 14(1) of ICDR provides for the same to bring in the co- promoters to complete the criteria of the 20% MPC. If the promoter fall short of this criteria, certain specified entities can step in to help fulfil the requirement. These include alternative investment funds, foreign venture capital investors, scheduled commercial banks, public financial institutions, registered insurance companies, any non-individual shareholder holding at least five percent of the post-issue capital, or any individual or non-individual who is part of the promoter group other than the promoters themselves. These entities may contribute towards meeting the MPC, subject to a cap of ten percent of the post-issue capital, and such contribution will not result in them being classified as promoters.
- Complexities in Calculating MPC on Fully Diluted Post-Issue Capital:
One common challenge, particularly for first-time issuers, is accurately calculating the Minimum Promoters’ Contribution (MPC). While regulations require MPC to be computed on a “post-issue capital” basis, the term itself is not explicitly defined in SEBI’s ICDR Regulations. In practice, post-issue capital refers to the total equity share capital of the company after the IPO is completed including all outstanding convertible securities, employee stock options, and rights instruments that are likely to convert into equity. To ensure proper compliance, it is advisable for issuers to consult legal advisors and conduct thorough cross-verification of share capital structure at the drafting stage.
- Who Qualifies as Promoter/Promoter Group?
Identifying the correct persons forming the “promoter group” can be legally challenging, especially in cases involving family trusts, investment vehicles, or when companies have transitioned from family ownership to professional management. Misidentification can lead to gaps in MPC compliance, requiring corrective filings or regulatory intervention.
Conclusion
Minimum Promoter Contribution is more than just a regulatory threshold; it reflects the promoter’s skin in the game and sets the tone for investor confidence. But meeting the 20% benchmark isn’t always straightforward, especially when past transactions, complex shareholding patterns, or funding constraints come into play. The key lies in anticipating these challenges early and working within the regulatory framework to find practical solutions; whether it’s through co-promoter structuring, legal vetting of shareholding, or bridging valuation gaps ahead of time. With thoughtful planning and a clear understanding of the ICDR requirements, companies can navigate these hurdles effectively and move towards a successful IPO with greater certainty and fewer surprises.
Mr. Anismesh Joshi –Associate –animeshjoshi@mmjc.in
[i] Regulation 14(1) of ICDR Regulations:
The promoters of the issuer shall hold at least twenty per cent. of the post-issue capital:
Provided that in case the post-issue shareholding of the promoters is less than twenty per cent., alternative investment funds or foreign venture capital investors or scheduled commercial banks or public financial institutions or insurance companies registered with Insurance Regulatory and Development Authority of India 37[or any non-individual public shareholder holding at least five per cent. of the post-issue capital or any entity (individual or non-individual) forming part of promoter group other than the promoter(s)] may contribute to meet the shortfall in minimum contribution as specified for the promoters, subject to a maximum of ten per cent. of the post-issue capital without being identified as promoter(s).
Provided further that the requirement of minimum promoters’ contribution shall not apply in case an issuer does not have any identifiable promoter.