Indian IPOs - Promoters Holding and Lock-in

Proposal to reduce lock in period for promoter holding is a welcome move and timely. In India Promoter is defined as a person who have formed company or named as Promoter in the annual filings with the registrar of companies or in the offer document. The whole assumption was Promoter is in control and management of the company. This has been true largely till few years ago where institutional capital was missing. Most of the companies were funded by promoters through their equity and debt capital from the banks and financial institutions. Over the last 2 decades the investment and role of institutional capital (angel, seed, VC, growth, impact capital) has grown many folds in Indian companies and they are also equally involved in governance of the companies. Start-ups in India raised $ 8 Billion between Jan - April 2021 as against $ 12.1 billion and $ 14.2 billion in comparable period of 2020 and 2019 respectively. Due to pandemic the funding has impacted little bit.  

The threshold for size of the company and money to be raised on Main Stock Exchanges (BSE and NSE) also raised significantly due to market forces, attractiveness to investors, cost of IPO transaction etc.,  India witnessed highest ever IPO proceeds of INR 39,676 cr (USD 5.5 billion) across 28 issues  in FY 2020-2021 and most of the IPOs have raised more than INR 500 crores from the market and highest being SBI Cards which raised INR 10300 cr.

In view of the emergence of new economy companies, new business models and institutional capital, the shareholding of  founders is getting diluted due to multiple rounds and sometime its going down to 20% or even less. Founders get very limited liquidity during these rounds and they wait for listing to get the liquidity.  Due to SEBI regulations some of them are having to wait 1-3 years to get the liquidity if their holding does not meet minimum promoter stake of 20%.

The aggregate shareholdings of promoters in the top 500 listed entities in terms of market value, peaked at 58% in 2009 and is showing a downward trend. The promoters’ shareholding was approximately 50% in 2018. At the same time, the shareholding of institutional investors in the top 500 listed companies, in terms of market value, increased from approximately 25% in 2009 to 34% in 2018.

 As per the SEBI regulations Promoters shall hold at least 20% of post issue holding which has to be locked in at least for three years and remaining holding has to be locked in at least for one year. This is proposed to be changed to one year for 20% of holding and six months for additional holding held by the Promoters. This is fantastic and will lot of companies and promoters.

SEBI should also consider allowing companies to go public even if promoters holding is less than 20% on post issued capital and there are situations promoters / founders holding has   gone below 20%  due to dilution not because of selling their stake. This is a deserving case to be  considered by the SEBI. SEBI does allow professionally run companies (who don’t have identified promoters) to go public without promoters and consequently no promoter lock-in.

 The lock in concept was introduced to ensure promoters have skin in the game at least for three years and shall not run away with the IPO proceeds.  This has outlived its purpose with the so many changes which have happened over the years such as -  

a. Regulations have become more stringent for companies to for IPOs.

b. Markets have become matured and able to judge companies more intelligently.

c. Corporate Governance norms for listed companies evolved very well and there is good amount discipline, fairness and accountability.

Promoter Lock-in  proposed to be reduced to one year for 20% stake and six months for the rest of the stake is very timely and helpful to the lot of founders and companies. As I mentioned earlier SEBI should also consider relaxation on promoter holding of 20% to the deserving companies and promoters. 

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