Pre-IPO Capital Restructuring in India: Promoters’ Contribution, Shareholder Rights and Lock-in Requirements under SEBI ICDR

Introduction

Preparing a company for an Initial Public Offering (“IPO”) involves more than converting it into a public company and filing the offer documents. It requires a structured review of the issuer’s capitalisation, shareholding pattern, securities issued to investors, contractual arrangements and corporate governance framework. These matters must be examined well before the filing of the Draft Red Herring Prospectus (“DRHP”), since unresolved rights or inconsistencies in the capital structure can affect IPO eligibility, promoter contribution, lock-in requirements and disclosures to prospective investors.

Companies backed by private equity (“PE”) and venture capital (“VC”) investors may have multiple classes of securities and contractual arrangements negotiated during earlier funding rounds. These may include compulsorily convertible preference shares (“CCPS”), compulsorily convertible debentures (“CCDs”), warrants, anti-dilution protections, affirmative voting rights, board nomination rights, information rights and preferential economic entitlements.

The Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“SEBI ICDR Regulations”) prescribe the framework governing an IPO, including eligibility conditions, minimum promoters’ contribution, the treatment of outstanding convertible securities and restrictions on the transfer of pre-issue capital. The Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“SEBI LODR Regulations”) also become relevant when assessing the governance arrangements and shareholder rights that may continue after listing.

Accordingly, pre-IPO restructuring should be approached as an integrated legal and transactional exercise. This article examines the principal considerations for companies preparing for an IPO, with particular focus on capital structure, promoters’ contribution, statutory lock-ins and the rationalisation of investor rights.

1. Finalising the Capital Structure and Shareholding Pattern

A settled and verifiable capitalisation table is one of the starting points for IPO preparation. The issuer should identify all securities issued and outstanding, including equity shares, CCPS, CCDs, warrants, employee stock options and other instruments that may result in the issue of equity shares.

For each convertible instrument, the issuer and its advisers should review:

• the original subscription and issuance documents;
• the terms governing conversion, including the conversion ratio and pricing mechanism;
• the amount of consideration paid and whether the instrument is fully paid-up;
• the conversion timeline and any outstanding conditions;
• the identity and regulatory classification of the holder; and
• the number of equity shares that would be issued upon conversion.

This exercise is necessary to determine the issuer’s fully diluted share capital and assess the effect of conversion on the shareholding of promoters, investors and other shareholders.

Treatment of outstanding convertible securities under Regulation 5(2)

Regulation 5(2) of the SEBI ICDR Regulations generally restricts an issuer from undertaking an IPO while outstanding convertible securities or other rights remain that would entitle a person to receive equity shares of the issuer.

The provision contains specified exceptions. These include outstanding employee stock options granted under a compliant employee stock option scheme and fully paid-up outstanding convertible securities that are required to be converted on or before the filing of the red herring prospectus in a book-built issue or the prospectus in a fixed-price issue, as applicable.

The provision also recognises a specific exception for employee stock appreciation rights (“SARs”). Such rights must be fully exercised for equity shares before the filing of the relevant red herring prospectus or prospectus, and the prescribed disclosures regarding the SARs, the scheme and the resulting equity shares must be included in the offer documents.

Consequently, issuers should identify and resolve outstanding conversion rights at an early stage rather than treating conversion as a procedural matter to be addressed immediately before filing the RHP. The conversion of securities may affect the issuer’s post-issue shareholding, promoters’ contribution, shareholder classification and applicable lock-in obligations.

Once the conversion is completed, the issuer should reconcile the resulting share capital with its register of members, statutory records, corporate filings and depository records. Applicable filings under the Companies Act, 2013, including the return of allotment in Form PAS-3, should be completed wherever required.

2. Determining Minimum Promoters’ Contribution

The Minimum Promoters’ Contribution (“MPC”) is a central consideration in IPO structuring. Regulation 14 of the SEBI ICDR Regulations generally requires promoters to hold at least 20% of the post-issue capital of the issuer.

Where the promoters’ post-issue shareholding is below 20%, specified categories of eligible investors or entities may contribute towards the shortfall, subject to the conditions and limits prescribed under Regulation 14. These include alternative investment funds, foreign venture capital investors, scheduled commercial banks, public financial institutions, insurance companies and certain other eligible shareholders or entities forming part of the promoter group. Such contribution by eligible persons towards the shortfall is subject to the prescribed ceiling and does not, by itself, result in their identification as promoters. The MPC requirement does not apply in the same manner where the issuer does not have an identifiable promoter.

Computation of promoters’ contribution

The MPC is computed with reference to the post-issue expanded capital. The computation must take into account the full proposed conversion of convertible securities into equity shares and the exercise of vested employee stock options or stock appreciation rights that are outstanding at the time of the IPO, in accordance with Regulation 14.

Accordingly, the issuer should not rely solely on its existing issued and paid-up equity share capital when determining whether the MPC requirement is satisfied. A fully diluted capitalisation analysis is necessary to identify any shortfall and determine the securities that can validly form part of the promoters’ contribution.

3. Assessing the Eligibility of Securities for Minimum Promoters’ Contribution

Meeting the quantitative threshold under Regulation 14 is not sufficient. The securities proposed to constitute MPC must also satisfy the eligibility conditions under Regulation 15 of the SEBI ICDR Regulations. Regulation 15 identifies specified categories of securities that are ineligible for computation of MPC. These include:

Securities acquired through certain non-cash transactions: Securities acquired during the preceding three years may be ineligible where they were acquired for consideration other than cash and the transaction involved revaluation of assets or capitalisation of intangible assets. Certain bonus shares may also be ineligible, including those issued by utilising revaluation reserves or unrealised profits, or against shares that are themselves ineligible for MPC.

Securities acquired at a price below the IPO issue price: Securities acquired by promoters and specified eligible investors during the preceding one year at a price lower than the IPO issue price are generally subject to the restrictions under Regulation 15. The regulation provides specified exceptions, including payment of the prescribed price difference and certain acquisitions pursuant to approved schemes or qualifying transactions.

Securities issued in connection with conversion of firms or LLPs: Specific restrictions and exceptions apply to securities allotted to promoters and eligible investors where an issuer has been formed by conversion of one or more partnership firms or limited liability partnerships.

Pledged securities: Securities pledged with a creditor are also identified as ineligible for computation of MPC under Regulation 15.

The assessment should therefore focus on the actual circumstances of acquisition, the consideration paid, the relevant acquisition period, the price at which the securities were acquired and whether any specific regulatory exception is available.

The 2025 amendment to the ICDR Regulations also clarified that, for determining whether securities acquired below the IPO issue price are ineligible under the relevant provision, the price per share must be adjusted for corporate actions such as a share split or bonus issue. An issuer should consequently maintain a security-by-security acquisition history for the shares proposed to constitute MPC. A general review of the promoters’ current shareholding is unlikely to be sufficient to establish regulatory eligibility.

4. Lock-in Requirements for Promoters’ Shareholding

After determining the MPC, the issuer must identify the securities forming part of the MPC and distinguish them from the promoters’ shareholding in excess of that contribution. Regulation 16 of the SEBI ICDR Regulations prescribes different lock-in periods for these categories.

The principal lock-in requirements for an IPO are:

• Minimum Promoters’ Contribution: The MPC is generally subject to a lock-in of 18 months from the date of allotment in the IPO.
• Capital expenditure exception: Where the majority of the issue proceeds, excluding the portion attributable to the offer for sale, is proposed to be utilised for capital expenditure, the lock-in period for MPC increases to three years from the date of allotment.
• Promoters’ holding in excess of MPC: The excess shareholding is generally subject to a six-month lock-in from the date of allotment.
• Capital expenditure exception: Where the majority of the relevant issue proceeds is proposed to be utilised for capital expenditure, the lock-in period for the excess promoters’ holding increases to one year.

The issuer must therefore examine the proposed objects of the issue and the allocation of proceeds between fresh issue and offer for sale while determining the applicable lock-in period.

Superior Rights equity shares

The treatment of Superior Rights (“SR”) equity shares also requires separate consideration. Under Regulation 16, SR equity shares are subject to a lock-in until their conversion into equity shares carrying voting rights equivalent to those of ordinary equity shares, or until the expiry of the applicable lock-in period, whichever is later.

The issuer should therefore identify any SR equity shares and evaluate their treatment as part of the pre-IPO capital restructuring and offer-document disclosures.

5. Lock-in Requirements for Non-Promoter Shareholders

Regulation 17 of the SEBI ICDR Regulations generally requires the entire pre-issue capital held by persons other than promoters to be locked in for six months from the date of allotment in the IPO, subject to the exceptions specified in the regulation.

The regulation provides specified exemptions, including in relation to qualifying employee stock option or employee stock purchase scheme holdings and securities held by venture capital funds, Category I and Category II alternative investment funds, and foreign venture capital investors.

For the specified institutional investors, the exemption from the general six-month post-IPO lock-in is subject to a separate requirement that the securities remain locked in for at least six months from the date of their purchase.

Importantly, where the equity shares held by such an investor have resulted from the conversion of fully paid-up compulsorily convertible securities, the holding period of the original convertible securities and the resulting equity shares may be considered together for calculating the prescribed holding period. This treatment is subject to the conditions under Regulation 17, including the requirement that the convertible securities are fully paid-up.

This distinction is particularly relevant for PE and VC-backed issuers, where institutional investors may have subscribed to CCPS or other compulsorily convertible instruments several years before the proposed IPO. The issuer should accordingly examine the original subscription date, payment status, conversion date and regulatory classification of each investor. The holding period of convertible instruments should not be assumed to count towards the prescribed period for every category of shareholder; the relevant regulatory conditions must be satisfied.

Lock-in of securities that cannot be technically locked in

A further operational consideration arises from the March 2026 amendment to Regulation 17. Where the lock-in of specified securities cannot be created, the depositories may, upon receiving instructions from the issuer, record the securities as “non-transferable” for the duration of the applicable lock-in period.

SEBI’s April 2026 circular operationalised this mechanism for pledged shares. The framework requires issuers to coordinate with the relevant depositories and address related matters, including appropriate provisions in the Articles of Association, communication with lenders or pledgees and disclosures in the offer documents. Accordingly, pledged pre-IPO shareholding should be examined not only for its eligibility towards MPC but also for the practical implementation of applicable lock-in restrictions.

6. Rationalising Private Equity and Venture Capital Investor Rights

Capital restructuring is only one part of IPO readiness. Companies backed by PE and VC investors frequently have shareholder arrangements that confer rights beyond those available to ordinary shareholders. These may include:

• board nomination and observer rights;
• affirmative voting rights or vetoes over reserved matters;
• anti-dilution protections;
• information and inspection rights;
• rights of first refusal and rights of first offer;
• tag-along and drag-along rights; and
• preferential economic rights, including liquidation preferences.

These rights are commonly negotiated to protect investors in private companies. However, their continuation after listing must be evaluated against the governance and disclosure framework applicable to listed entities.

It would be inaccurate to assume that every investor protection is automatically prohibited upon an IPO. The legal treatment depends on the nature of the right, the manner in which it has been created, the relevant constitutional documents and the requirements of the applicable securities regulations.

Special rights under the SEBI LODR Regulations

Regulation 31B of the SEBI LODR Regulations provides that special rights granted to shareholders of a listed entity are subject to approval by shareholders through a special resolution in a general meeting once every five years, beginning from the date on which the special right is granted. The regulation also provides specified exceptions, including for certain rights available to financial institutions and debenture trustees in the circumstances set out in the provision.

This framework is relevant when assessing whether particular investor rights can continue after listing and what approvals may be required. It does not mean that every right contained in a private-company shareholder agreement can automatically survive an IPO. The issuer must separately examine the nature of the right, its contractual and constitutional basis, and its compatibility with the applicable listed-company governance requirements.

Rights such as board nomination, observer access, vetoes over operational matters and preferential exit arrangements should therefore be reviewed individually. The issuer should determine whether a right should be terminated, modified, incorporated into the Articles of Association, made subject to shareholder approval or otherwise restructured. The review should also consider the principle of equitable treatment of shareholders under the SEBI LODR Regulations, the composition and responsibilities of the board, the role of independent directors and the governance requirements applicable to listed entities.

7. Aligning Shareholder Agreements with the Articles of Association

A termination or amendment of the Shareholders’ Agreement (“SHA”) may not, by itself, be sufficient to complete the restructuring of investor rights. Similar rights may also be reflected in the Articles of Association (“AoA”), subscription agreements, side letters or other contractual arrangements. The issuer should therefore undertake a document-by-document review to identify all provisions that confer special rights or impose obligations inconsistent with the proposed listed-company structure.

Depending on the rights involved, the restructuring may require:

• amendment or termination of the existing SHA;
• execution of investor waivers or consent letters;
• termination or amendment of side letters and ancillary agreements;
• amendment of the AoA;
• approval of the requisite corporate resolutions; and
• completion of applicable filings under the Companies Act, 2013.

Any amendment to the AoA must comply with the Companies Act, 2013, including the applicable requirements for shareholder approval and statutory filings.

What happens if the IPO does not proceed?

Investors may seek contractual protection where they agree to terminate or modify certain rights in anticipation of an IPO that is ultimately withdrawn or does not proceed. The parties may therefore negotiate provisions dealing with the consequences of an unsuccessful IPO, including whether specified rights are reinstated.

Such reinstatement arrangements are contractual mechanisms and are not prescribed as a mandatory requirement under the SEBI ICDR Regulations. If adopted, they should clearly identify the rights capable of reinstatement, the event that triggers reinstatement, the duration of the arrangement and the corporate actions required to give effect to it. Any such arrangement should also be examined to ensure that it does not create uncertainty in the issuer’s governance structure or conflict with the regulatory requirements applicable if the company subsequently pursues an IPO.

8. Key Legal and Transactional Considerations Before Filing the DRHP

A coordinated pre-IPO legal review can help identify issues that may otherwise delay the offer-document process or require last-minute restructuring. The following matters should form part of the issuer’s IPO-readiness exercise:

1. Capitalisation review: Reconcile the issued, subscribed and paid-up share capital with the statutory registers, corporate filings and depository records.
2. Convertible securities review: Identify outstanding CCPS, CCDs, warrants, options, SARs and other rights to receive equity shares, and determine their treatment under Regulation 5(2).
3. MPC assessment: Calculate the minimum promoters’ contribution on the prescribed post-issue expanded capital basis and identify securities eligible to form part of the contribution.
4. Acquisition-history review: Examine the source, consideration, acquisition date, issue price and encumbrance status of securities proposed to constitute MPC.
5. Lock-in analysis: Prepare a shareholder-wise schedule identifying the applicable lock-in period under Regulations 16 and 17, including relevant exceptions and holding-period calculations.
6. Investor-rights review: Identify special rights under SHAs, subscription agreements, side letters and the AoA, and determine which rights require termination, amendment or continuing shareholder approval.
7. Corporate approvals and filings: Complete the necessary board and shareholder approvals, amendments to constitutional documents and applicable filings under company law.
8. Offer-document disclosures: Ensure that the capital structure, promoters’ contribution, investor holdings, outstanding securities, contractual arrangements and lock-in obligations are accurately reflected in the offer documents.

Conclusion

Pre-IPO capital restructuring is a substantive legal exercise that requires careful coordination between the issuer, promoters, existing investors, merchant bankers and legal advisers. A company must not only establish a clear and verifiable capital structure but also ensure that the securities forming part of minimum promoters’ contribution satisfy the eligibility requirements and that the applicable lock-in obligations are correctly identified.

Equally important is the review of investor rights and shareholder arrangements. The objective is not to eliminate every protection negotiated during the company’s private funding history, but to ensure that the rights retained, modified or terminated are consistent with the legal and governance framework applicable to a listed company. Engaging experienced capital markets law firms in India for an early and comprehensive pre-IPO legal due diligence and restructuring exercise can help identify regulatory gaps, reduce execution risks and support a more orderly transition from private ownership to the public markets.

Last Updated on 4 November, 2026