Issue Management — Important Terms

What this chapter is

Chapter 4 carries 5% — a small weight for a long list of definitions.

In the following chapters we will discuss the Issue management process, underwriting provisions with regards to the Merchant banker's role in it. However before going into the process details, we look at the important frequently used terms in the Issue Management process and the primary market.

Learn the definitions here and Chapters 5, 6 and 7 become far easier.

The kinds of offering

Initial Public Offer

Initial Public Offer (IPO) means an offer of specified securities by an unlisted issuer to the public for subscription and includes an offer for sale of specified securities to the public by any existing holders of such securities in an unlisted issuer.

When an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both; for the first time to the public; it is termed as an IPO. This paves the way for listing and trading of the issuer's securities.

Two things can happen in an IPO, separately or together — a fresh issue that raises new money for the company, and an offer for sale where existing holders sell their shares.

Further Public Offer

A further public offering (FPO) means an offer of specified securities by a listed issuer to the public for subscription and includes an offer for sale of specified securities to the public by any existing holders of such securities in a listed issuer.

It is when an already listed company makes either a fresh issue of securities to the public i.e. other than to its existing shareholders or an offer for sale to the public or both through an offer document it is called a further public offer.

And on method: FPO can be made through a book building process or a fixed price issue.

Not book building only — both routes are open.

There is also a fast lane. FPO may be made through the Fast Track Issue (FTI) process, provided certain conditions as prescribed under the SEBI ICDR Regulations are complied with. Such issues are also granted exemptions from requirements such as filing the draft offer document with SEBI, issuance of observations by SEBI etc.

Unlisted issuer → IPO. Listed issuer → FPO.

Net offer to public

"Net offer to public" means an offer of specified securities to the public but does not include reservations made for certain investor-categories. It also does not include securities if any, to be subscribed by the promoter group.

It is important to note that the Net Offer to the Public should be in compliance with Rule 19(2)(b) of SCRR.

So the total issue size and the net offer are different numbers — reservations and promoter subscription come out before you arrive at the net offer.

Rights issue

A rights issue means an offer of specified securities by a listed issuer to the shareholders of the issuer as on the record date fixed for the said purpose.

Rights issue may also be made, provided certain conditions, as prescribed under the SEBI ICDR Regulations, are complied with. Such issues are also granted exemptions from requirements such as filing the draft offer document with SEBI, issuance of observations by SEBI, etc.

Existing shareholders on the record date — not the public.

Qualified Institutions Placement

When a listed issuer issues equity shares or securities convertible in to equity shares to Qualified Institutional Buyers only in terms of provisions of Chapter VI of SEBI (ICDR) Regulations, 2018 SEBI ICDR, it is called a QIP.

As per SEBI ICDR, Qualified Institutional Buyer means:

SEBI registered mutual fund, venture capital fund, Alternative Investment Fund and foreign venture capital investor registered with the Board · Foreign portfolio investor other than individuals, corporate bodies and family offices · A Public financial institution · Scheduled commercial bank · Multilateral and bilateral Development Financial Institution · State Industrial Development Corporation · Insurance company registered with the IRDA · Provident Fund with minimum corpus of Rs. 25 crore · Pension Fund with minimum corpus of Rs. 25 crore · National Investment Fund set up by the Government of India · Insurance Funds set up and managed by army, navy or air force of the Union of India · Insurance Funds set up by the Department of Posts · Systemically important non-banking financial companies.

Note the exclusions inside the FPI limb — other than individuals, corporate bodies and family offices. An FPI is not automatically a QIB.

And the Rs. 25 crore corpus applies to both provident funds and pension funds.

Preferential issue

Preferential issue means an issue of specified securities by a listed issuer to any select person or group of persons on a private placement basis and does not include an offer of specified securities made through a public issue, rights issue, bonus issue, employee stock option scheme, employee stock purchase scheme or qualified institutions placement or an issue of sweat equity shares or depository receipts issued in a country outside India or foreign securities.

The definition is mostly a list of what it is not — a preferential issue is what remains once every other named route is excluded.

Offer for sale through the stock exchange mechanism

In order to facilitate promoters to dilute/offload their holding in listed companies in a transparent manner with wider participation, SEBI has allowed the offer for sale of shares by promoters of such companies through a separate window provided by the stock exchange(s).

The details about the mechanism are given in SEBI Circular Reference No. SEBI/HO/MRD/MRD-PoD-3/P/CIR/2023/10 dated January 10, 2023.

Offer documents

Offer document is a document which contains all the relevant information about the company, promoters, projects, financial details, objects of raising the money, terms of the issue etc. and is used for inviting subscription to the issue being made by the issuer.

Offer Document is called "Red Herring Prospectus" and/or "Prospectus" in case of a public issue or offer for sale and "Letter of Offer" in case of a rights issue.

As per the SEBI ICDR Regulations, "offer document" means a red herring prospectus, prospectus or shelf prospectus and information memorandum in terms of section 31 of the Companies Act, 2013 in case of a public issue and letter of offer in case of a rights issue.

Draft offer document — an offer document filed with SEBI for specifying changes, if any, in it, before it is filed with the Registrar of companies (ROCs) in case of a public issue and before it is filed with the Stock Exchanges in case of a Rights Issue.

And it is public: draft offer document is made available in public domain including SEBI website, for enabling public to give comments, if any, on the draft offer document.

Red herring prospectus — an offer document used in case of a book built public issue. It contains all the relevant details except that of price or number of shares being offered. It is filed with RoC before the issue opens.

"Red herring" because the price is missing.

Pricing methods

Book building

As per the SEBI ICDR Regulations, "book building" means a process undertaken to elicit demand and to assess the price for determination of the quantum or value or coupon of specified securities or Indian Depository Receipts, as the case may be, in accordance with these regulations.

In the book built method, the process aids price and demand discovery. It is a mechanism where, during the period for which the book for the offer is kept open, bids are collected from investors at various prices at which they are willing to subscribe to a certain number of shares, which is within the price band specified by the issuer.

The price band: price band indicates the floor price, which is the minimum price at which the bid can be made, and the cap, which is the upper limit of the price at which the bid can be made.

And the band has a width rule: the cap price shall be at 105% of the floor price, but cannot be more than 120% of the floor price.

In other words a minimum spread of 5% and a maximum of 20% — the workbook footnotes that in case of book-built issues, a minimum price band of at least 105% of the floor price shall be applicable for all issues opening on or after SEBI notification in the official gazette.

The process is directed towards both the institutional as well as the retail investors. The issue price is determined after the bid closure based on the demand generated in the process.

Fixed price issue

In fixed price issue, the prospectus that is filed with RoC contains the issue price per share and the demand for the issue is known only while the issue is kept open for subscription.

Book building discovers the price; a fixed price issue announces it and discovers only the demand.

Differential pricing

When one category of investors is offered shares at a price different from the other category it is called differential pricing. An issuer company can allot the shares to retail individual investors and certain other categories of investors at a prescribed discount to the price at which the shares are offered to other categories of public.

Green shoe option

SEBI ICDR Regulations has defined green shoe option as an option of allotting equity shares in excess of the equity shares offered in the public issue as a post-listing price stabilising mechanism.

Green Shoe Option is a price stabilizing mechanism in which shares are issued in excess of the issue size, by a maximum of 15%.

From an investor's perspective, an issue with green shoe option provides more probability of getting shares and also that post listing price may show relatively more stability.

How the borrowed shares come back: the specified securities bought from the market and credited in the special account with the depository participant shall be returned to the promoters or pre-issue shareholders immediately, in any case not later than two working days after the end of the stabilisation period.

Hence effectively, the issuer borrows securities from the promoters or pre-issue shareholders and returns it to them after the stabilisation period.

Maximum 15%; returned within two working days after the stabilisation period ends.

Paying for an application

ASBA

Application Supported by Blocked Amount (ASBA) means an application for subscribing to a public issue or rights issue, along with an authorisation to self-certified syndicate bank to block the application money in a bank account.

The bank will block the application money in the bank account specified in the ASBA on the basis of the authorisation.

Where it is mandatory:

(i) In case of all, public issues, the issuer shall accept bids using only ASBA facility in the manner specified by the Board;

(ii) In case of rights issues, where not more than one payment option is given, the issuer shall provide the facility of ASBA... provided that in case of qualified institutional buyers and non-institutional investors the issuer shall accept bids using ASBA facility only.

With eligibility conditions for rights issue applicants: the applicants in a rights issue shall be eligible to make applications through ASBA facility only if such applicant: (i) is holding equity shares in dematerialised mode; (ii) has not renounced entitlement in part or in full; and (iii) is not a renouncee.

And an exception: payment made for application for any reserved portion outside the issue period can be through electronic banking modes.

When the money actually leaves: when applying through ASBA, his application money shall be debited from the bank account only if his/her application is selected for allotment after the basis of allotment is finalised, or the issue is withdrawn/failed.

The mechanics: investor submits the ASBA form (available at the designated branches of the banks acting as SCSB) after filling the details like name of the applicant, PAN number, demat account number, bid quantity, bid price and other relevant details, to their banking branch by giving an instruction to block the amount in their account. In turn, the bank will upload the details of the application in the bidding platform.

And a caution: investors shall ensure that the details that are filled in the ASBA form are correct otherwise the form is liable to be rejected.

A duty on intermediaries: every stock broker shall accept orders from all clients/investors who place orders through him and every Self Certified Syndicate Bank, Registrar to Issue and Share Transfer Agents or Depository Participants shall accept Applications Supported by Blocked Amount from ASBA investors.

UPI

Unified Payments Interface or UPI is an immediate real-time payment system that helps in instantly transferring the funds between the two bank accounts. UPI is built over the IMPS infrastructure using a payment address which uniquely identifies a person's bank a/c.

It was developed by the National Payments Corporation of India, an RBI regulated entity.

SEBI issued a circular to introduce UPI based payment mechanism with Application Supported by Block Amount (ASBA) for applications in public issues by retail individual investors through intermediaries (Syndicate members, Registered Stock Brokers, Registrar and Transfer agent and Depository Participants) — SEBI/HO/CFD/DIL2/CIR/P/2018/138 dated November 1, 2018.

The objective: to increase the efficiency, eliminate need for manual intervention at various stages, and to reduce the time duration from issue closure to listing by upto 3 working days.

Two phases: In the first phase, UPI was introduced as an additional payment feature along with existing payment methods. In the second phase, the existing process of physical movement of forms from intermediaries to Self-Certified Syndicate Banks (SCSBs) for blocking of funds was to be discontinued and only the UPI mechanism was proposed to be used.

A new intermediary appears: the use of UPI in a public issue requires a sponsor bank which means a Banker to the Issue registered with SEBI that is appointed by the Issuer to act as a conduit between the Stock Exchanges and NPCI in order to push the mandate collect requests and / or payment instructions of the retail investors into the UPI.

For retail investors only: a retail individual investor would submit the bid-cum-application form with any of the intermediaries and use his / her UPI ID for the purpose of blocking of funds.

The outcome: SEBI has implemented a T+3 timeline for public issues, significantly reducing the time taken from issue closure to listing. This has streamlined the public issue process and enabled faster allotment, refunds, and listing of securities.

Underwriting styles and the book

Hard and soft underwriting

Hard underwriting is when an underwriter agrees to buy his commitment at its earliest stage. The underwriter guarantees a fixed amount to the issuer from the issue. The underwriter bears a risk which is much higher than soft underwriting. Hard underwriting is also known as firm underwriting because the underwriter undertakes to buy a certain number of securities in a public offer.

In case of soft underwriting, the underwriter has to take up his share of devolvement (i.e. underwriting commitment less procurement) in case public response to the offer is not sufficient. So, the underwriter's liability arises at a later stage based on investor response.

Thus, in case the shares are not subscribed by investors, the issue is devolved on underwriters and they have to bring in the amount by subscribing to the shares. In soft underwriting, the risk to the underwriter is lower.

Hard = firm = commitment at the earliest stage, higher risk. Soft = liability only on devolvement, lower risk.

A related bid rule sits in the same paragraph: in a public offer, retail individual investors may either withdraw or revise their bids until closure of the issue. However, the qualified institutional buyers and the non-institutional investors shall neither withdraw nor lower the size of their bids at any stage.

Open and closed book

In an open book building system the merchant banker along with the issuer ensures that the demand for the securities and the bids are displayed online on the website of the Stock Exchanges. Here, the investor can be guided by the movements of the bids during the period in which the bid is kept open.

Indian Book building process provides for an open book system.

In the closed book building system, the book is not made public and the bidders will have to take a call on the price at which they intend to make a bid without having any information on the bids submitted by other bidders.

Basis of allocation

After the closure of the issue, for example a book built public issue, the bids received are aggregated under different categories i.e., Qualified Institutional Buyers (QIBs), Non-Institutional Buyers (NIBs), Retail, etc.

The allotment of specified securities to each retail individual investor shall not be less than the minimum bid lot, subject to availability of shares in retail individual investor category, and the remaining available shares, if any, shall be allotted on a proportionate basis.

Further, the allotment of specified securities to each Non-Institutional Buyers shall not be less than the Rs. 2,00,000/-, subject to availability of shares in Non-Institutional Buyers category, and the remaining available shares, if any, shall be allotted on a proportionate basis.

Both categories get a floor first, then proportionate allotment of the rest.

Categories of investor

Retail individual Investor (RIIs): means an investor who applies or bids for securities for a value of not more than Rs. 2 lakh.

Qualified Institutional Buyers (QIBs): a public financial institution · a scheduled commercial bank · a mutual fund, venture capital fund, alternative investment fund and foreign venture capital investor registered with SEBI · a foreign portfolio investor registered with SEBI, other than individuals, corporate bodies, and family offices · a multilateral and bilateral development financial institution · a state industrial development corporation · an insurance company registered with the Insurance Regulatory and Development Authority of India (IRDAI) · a provident fund with minimum corpus of Rs. 25 crores · a pension fund with minimum corpus of Rs. 25 crores · National Investment Fund · insurance funds set up and managed by army, navy or air force of the Union of India · insurance funds set up and managed by the Department of Posts, India · systemically important non-banking financial companies.

Non-Institutional Investors (NIIs): Investors who do not fall within the definition of the above two categories are categorized as "Non-Institutional Investors".

So NII is a residual category — neither retail (up to Rs. 2 lakh) nor institutional.

Anchor investors

Anchor investor means a qualified institutional buyer who makes an application for a value of at least ten crore rupees in a public issue on the main board made through the book building process in accordance with these regulations or makes an application for a value of at least two crore rupees in case of a public issue on the SME exchange.

Rs. 10 crore on the main board, Rs. 2 crore on the SME exchange.

The portion: up to sixty percent of the portion available for allocation to qualified institutional buyers shall be available for allocation/allotment ("anchor investor portion") to the anchor investor(s).

Allocation to the anchor investors shall be on a discretionary basis, subject to numbers.

On the main board, through the book building process, SEBI has enhanced the framework for anchor investor allocation to improve diversification and depth in the anchor book. For issues where the anchor portion exceeds ₹250 crore, the maximum number of anchor investors per ₹250 crore block has been increased from 10 to 15.

Accordingly:

For allocations up to ₹250 crore, a minimum of two (2) and a maximum of fifteen (15) anchor investors shall be permitted. For every additional ₹250 crore or part thereof, an additional fifteen (15) anchor investors may be allowed. Each anchor investor shall receive a minimum allotment of ₹5 crore.

And on the merger of the old sub-categories: the earlier sub-categories: Category I (allocation up to ₹10 crore) and Category II (above ₹10 crore up to ₹250 crore) have been merged into a single category for allocations up to ₹250 crore. Within this combined category, the minimum number of anchor allottees shall be five (5) and the maximum fifteen (15), subject again to a minimum allotment size of ₹5 crore per investor.

On the SME exchange, through the book building process: (i) maximum of 2 such investors shall be permitted for allocation up to two crore rupees; and (ii) minimum of 2 and maximum of 15 such investors shall be permitted for allocation above two crore rupees and up to twenty five crore rupees, subject to minimum allotment of one crore rupees per such investor; and (iii) in case of allocation above twenty five crore rupees; a minimum of 5 such investors and a maximum of 15 such investors for allocation up to twenty five crore rupees and an additional 10 such investors for every additional twenty five crore rupees or part thereof, shall be permitted, subject to a minimum allotment of one crore rupees per such investor.

Reservation inside the anchor portion: forty per cent of the anchor investor portion shall be reserved: one-third (33%) for domestic mutual funds and seven per cent (7%) for Life Insurance Companies registered with IRDAI and Pension Funds registered with PFRDA; any undersubscription in the Life Insurance Companies registered with IRDAI and Pension Funds flows to domestic mutual funds.

The timetable and money:

The bidding for anchor investors shall open one day before the issue opening date.

The anchor investors shall pay on application the same margin which is payable by other categories of investors and the balance, if any, shall be paid within two days of the date of closure of the issue.

The allocation to anchor investors shall be completed on the day of the bidding by the anchor investors.

The price adjustment is one-way: if the price fixed because of book building is higher than the price at which the allocation is made to the anchor investors, the anchor investors shall pay the additional amount. However, if the price fixed as a result of book building is lower than the price at which the allocation is made to the anchor investors, the excess amount shall not be refunded to the anchor investors and the anchor investor shall be allotted the securities at the same price at which the allocation was made to it.

They pay up but never get money back.

Disclosure: the number of shares allocated to the anchor investors and the price at which the allocation is made, shall be made available to the stock exchange(s) by the lead manager(s) for dissemination on the website of the stock exchange(s) before opening of the issue.

Lock-in: there shall be a lock-in of 90 days on fifty per cent of the shares allotted to the anchor investors from the date of allotment, and a lock-in of 30 days on the remaining fifty per cent of the shares allotted to the anchor investors from the date of allotment.

Half for 90 days, half for 30 days.

Who may not be an anchor investor: neither the (i) lead manager(s) or any associate of the lead managers... nor (ii) any person related to the promoter/promoter group/ shall apply under the Anchor Investors category — with carve-outs for mutual funds sponsored by entities which are associate of the lead managers or insurance companies promoted by entities which are associate of the lead managers or Alternate Investment Funds (AIFs) sponsored by the entities which are associate of the lead manager or a foreign portfolio investor other than individuals, corporate bodies and family offices which are associate of the lead manager, or pension funds sponsored by entities which are associate of the lead manager.

"Related to the promoters" is deemed where a QIB has rights under a shareholders' agreement or voting agreement entered into with promoters or promoter group of the issuer, or veto rights, or the right to appoint any nominee director on the board of the issuer.

And "associate of the lead manager" here uses fifteen percent, not ten: either of them controls, directly or indirectly through its subsidiary or holding company, not less than fifteen percent. of the voting rights in the other; or... exercises control over the other; or... there is a common director, excluding nominee director, amongst the anchor investor and the lead manager.

One helpful clarification: applications made by a qualified institutional buyer under the anchor investor category and under the non-anchor Investor category shall not be considered as multiple applications.

Other defined terms

Designated Stock Exchange — the stock exchange where securities of the issuer are proposed to be listed and is chosen by the issuer. In case where one or more of such stock exchanges have nationwide trading terminals, the issuer shall choose one of them as the designated stock exchange.

Employee — a permanent employee, working in India or outside India, of the issuer or of the promoters or subsidiary company of the issuer, or a director of the issuer, whether whole-time or not — and does not include (i) promoters, (ii) a person belonging to the promoter group; or (iii) a director who either himself/herself or through their relatives or through anybody corporate, directly or indirectly, holds more than ten percent of the outstanding equity shares of the issuer.

For stock option schemes, employee shall have the same meaning as assigned to under the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021.

Specified securities — equity shares and convertible securities.

Alternate capital markets

SME Exchange

Under the ICDR Regulations, small and medium enterprises (SMEs) have been given an opportunity to list their securities on an alternative platform in the stock exchange, known as the SME Exchange.

'SME exchange' means a trading platform of a recognised stock exchange having nationwide trading terminals permitted by the SEBI to list the specified securities issued in accordance with the regulations and includes a stock exchange granted recognition for this purpose but does not include the Main Board (Main Exchange).

Eligibility: the issue of specified securities under the SME platform is applicable to companies whose post-issue paid up capital will not exceed face value of Rs. 10 crores. However, companies whose paid up capital is between Rs. 10 crore and Rs. 25 crore are also eligible to make such issues if they decide to continue the SME exchange without migration to the Main Board.

Promoter contribution: the promoters shall continue to hold atleast 20% of such post-issue capital. However, in case the post-issue shareholding of the promoters is less than twenty per cent., AIFs or FVCIs or SCBs or FPIs or insurance companies registered with IRDAI 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).

And an exemption: the requirement of minimum promoters' contribution shall not apply in case an issuer does not have any identifiable promoter.

Migration to SME Exchange: a listed issuer with post-issue paid-up capital of less than 25 crore rupees may migrate to SME exchange if the shareholders approve by special resolution through postal ballot. Provided that the votes cast in favour of such proposal by non-promoter shareholders are at least two times the votes cast against it by non-promoter shareholders.

Migration to Main Board: an issuer, whose specified securities are listed on a SME Exchange and whose post issue paid up capital is more than ten crore rupees and upto twenty-five crore rupees, may migrate its specified securities to Main Board (Main exchange) if its shareholders approve such migration by passing a special resolution through postal ballot and upon fulfilling the listing eligibility criteria. Provided that the votes cast in favour of the special resolution by the non-promoter shareholders are at least two times the votes cast against it by non-promoter shareholders.

The same two-to-one non-promoter test runs in both directions.

Innovators Growth Platform

SEBI ICDR Regulations specifies provisions for specified categories of issuers to seek listing of their specified securities pursuant to an IPO or only for trading on a stock exchange of their specified securities without making a public offer. This market known as the 'Innovators Growth Platform (IGP)' is accessible only to institutional investors and non-institutional investors.

No retail access.

Who may list: an issuer which is intensive in the use of technology, information technology, intellectual property, data analytics, bio-technology or nano-technology to provide products services or business platforms with substantial value addition shall be eligible for listing on the innovators growth platform.

The holding condition: as on the date of filing of draft information document or draft offer document with SEBI, as the case may be, twenty-five per cent of the pre-issue capital of the issuer company for at least a period of one year, should have been held by:

I. Qualified Institutional Buyers; II. Innovators Growth Platform Investors...; III. The following regulated entities: a. Foreign Portfolio Investor; b. An entity meeting all the following criteria: i. It is a pooled investment fund with minimum assets under management of one hundred and fifty million USD; ii. It is registered with a financial sector regulator in the jurisdiction of which it is a resident; iii. It is resident of a country whose securities market regulator is a signatory to the IOSCO's Multilateral Memorandum of Understanding or a signatory to Bilateral Memorandum of Understanding with the Board; iv. It is not resident in a country identified in the public statement of FATF for counter measures or other specified ineligibility. IV. Any other class of investors as specified by SEBI from time to time.

Who counts as an IGP Investor: (i) any individual with total gross income of Rs. 50 lakhs annually and who has minimum liquid net worth of Rs. 5 crore; or (ii) any body corporate with net worth of Rs. 25 crore (iii) any family trust with net worth of Rs. 25 crore.

An important exclusion: pre-issue capital held by promoters/promoter groups, even if they are registered as Innovators Growth Platform Investors, shall not be considered for the 25% pre-issue capital eligibility requirement.

And a conduct condition: an issuer shall be eligible for listing on the institutional trading platform if none of the promoters or directors of the issuer company is a fugitive economic offender.

Companies listed on the Innovators Growth Platform have the option of migrating to the main board of the stock exchange subject to fulfilment of the conditions specified in the SEBI ICDR Regulations 2018.