Sebi’s easing of minimum promoter contribution norms to help startup IPOs

Meeting the shortfall

Under the MPC norms until now, promoters of IPO-bound companies were required to contribute 20 percent of the post-offer paid-up share capital on a fully diluted basis to a mandatory lock-in period of three years or, in some case, 18 months.

However, in many startups, founders have single-digit shareholding, and in such cases, other shareholders have to come forward and contribute their shares to meet the MPC requirements.

Previously, only a few categories of investors were allowed to contribute shares to meet the MPC shortfall, without getting classified as promoters. Investors who did not have this exemption tended to be apprehensive in contributing to the MPC shortfall because the promoter tag comes with several disclosure requirements as well as several liabilities.

With the latest announcement, Sebi has eased the concerns of many such investors who would want to contribute their shares to meet MPC norms without taking on the responsibilities and liabilities that come with the tag of being called a promoter.

Experts said the latest Sebi move expands the list of investors getting the promoter tag significantly. Until now, the list included only alternative investment funds, public financial institutions, foreign venture capital investors, banks and insurance companies.

“Earlier, the list of eligible entities was extremely limited and included investor categories who were not often seen on the cap tables. Further, permitting promoter group entities to contribute towards MPC would help prioritise the MPC build-up,” said Ravi Dubey, a partner at IndusLaw.

He added that by expanding the list of eligible entities, Sebi has effectively delivered on “ease of doing business” for IPO-bound companies.

Experts said the Sebi move is in line with the reality of emerging companies in the country that are being built on investor capital and where founders tend to end up holding very small stakes by the time the company becomes mature enough to go public.

“In the era of first-generation startups and a consequent dependency on PE funding, dilution by promoters is a reality leading to fragmented shareholding,” said Arka Mookerjee, a partner at law firm JSA. “The ability of an investor to contribute towards post-issue lock-in capital eases the pressure on the promoter and the investor continues to have skin in the game post-listing without being identified as a promoter, which would have been factually incorrect.”