General Obligations of Merchant Bankers and Due Diligence

What this chapter covers

Chapter 6 carries 15%.

The SEBI ICDR Regulations prescribes general obligations of Issuers and other intermediaries who are related with the process of issue management for different offers prescribed under the Regulations. However, we will only discuss those obligations which are pertaining to Merchant Bankers.

Note the source of the obligations — the workbook's review question asks which regulation prescribes them, and the answer is the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.

1. No incentives

No person connected with the issue shall offer any incentive, whether direct or indirect, in any manner, whether in cash or kind or services or otherwise to any person for making an application for allotment of specified securities.

However, this does not apply to fees or commission for services rendered in relation to the issue.

And the same bar covers publicity: no public information with respect to the issue shall contain any offer of incentives, to the investors whether direct or indirect, in any manner, whether in cash or kind or services or otherwise.

2. Public communications, publicity and research reports

All public communication, publicity materials, advertisements and research reports shall comply with the provisions as specified in Schedule IX of the SEBI ICDR Regulations.

Who is covered: communication issued or made by the issuer or its associate company, or by the lead manager(s) or their associates or any other intermediary connected with the issue or their associates.

The core restriction: it shall contain only such information as contained in the draft offer document/offer document (or the draft letter of offer/letter of offer).

The rules, in the workbook's own words:

(a) it shall be truthful, fair and shall not be manipulative or deceptive or distorted and it shall not contain any statement, promise or forecast which is untrue or misleading

(b) if it reproduces or purports to reproduce any information contained in the draft offer document... it shall reproduce such information in full and disclose all relevant facts not to be restricted to select extracts

No cherry-picking.

(c) it shall be set forth in a clear, concise and understandable language

(d) it shall not include any issue slogans or brand names for the issue except the normal commercial name of the issuer or commercial brand names of its products already in use or disclosed in the draft offer document

(e) it shall not contain slogans, expletives or non-factual and unsubstantiated titles

(f) if it presents any financial data, data for the past three years shall also be included along with particulars relating to revenue, net profit, share capital, reserves / other equity..., earnings per share, dividends and the book values

(g) advertisements shall not use technical, legal or complex language and excessive details which may distract the investor

(h) advertisements shall not contain statements which promise or guarantee rapid increase in revenue or profits

(i) advertisements shall not display models, celebrities, fictional characters, landmarks, caricatures or the likes

No film stars, no mascots.

(j) advertisements on television shall not appear in the form of crawlers (advertisements which run simultaneously with the programme in a narrow strip at the bottom of the television screen)

(k) advertisements on television shall advise the viewers to refer to the draft offer document or offer document... for the risk factors — and the risk factors shall not be scrolled on the television screen

(l) advertisement or research report containing highlights, shall advise the readers to refer to the risk factors and other disclosures... in not less than point seven size, with risk factors with equal importance in all respects

(m) advertisement displayed on a billboard/banners shall contain information as specified in the regulations; and shall prominently advise the viewers to refer to the draft offer document and offer document for details and risk factors.

Point seven is the minimum print size for the risk warning.

Timing rules

From board approval to draft filing: all public communications shall be consistent with its past practices — and where such public communication is not consistent with the past practices of the issuer, it shall be prominently displayed or announced in such public communication that the issuer is proposing to make a public issue of specified securities in the near future and is in the process of filing a draft offer document.

From draft filing to allotment: communications shall prominently disclose that the issuer is proposing to make a public issue or rights issue... and has filed the draft offer document... and that it is available on the websites of SEBI, lead manager(s) and stock exchanges — but requirements of this sub-regulation shall not be applicable in case of advertisements of products or services of the issuer.

And no performance references in product advertising: no advertisement relating to product or service provided by the issuer shall contain any reference, directly or indirectly, to the performance of the issuer during the period commencing from the date of the resolution of the board of directors of the issuer approving the public issue till the date of allotment.

Material developments and selective disclosure

The issuer shall make a prompt, true and fair disclosure of all material developments which take place between the date of filing offer document and the date of allotment of specified securities, which may have a material effect on the issuer, by issuing public notices in all the newspapers in which the issuer had released pre-issue advertisement.

The issuer shall not, directly or indirectly, release, during any conference or at any other time, any material or information which is not contained in the offer document.

And no favoured audience: no information which is extraneous to the information disclosed in the draft offer document or offer document... shall be given by the issuer or any member of the issue management team or syndicate to any particular section of the investors or to any research analyst in any manner whatsoever, including at road shows, presentations, in research or sales reports or at bidding centres.

Approval and copies: for all issue advertisements and public communications, the issuer shall obtain the approval from the lead manager(s) responsible for marketing the issue and shall also provide copies of all issue related materials to all lead manager(s).

A media compliance certificate: the lead manager(s) shall submit a compliance certificate for the period between the date of filing the draft offer document/ draft letter of offer and the date of closure of the issue, in respect of news reports appearing in the specified newspapers and print and electronic media controlled by a media group where the media group has a private treaty or shareholders' agreement with the issuer or promoters of the issuer.

Two footnote definitions matter. Public communication or publicity material includes corporate, issue advertisements of the issuer, interviews by its promoters, directors, duly authorized employees or representatives of the issuer, documentaries about the issuer or its promoters, periodical reports and press releases.

And an advertisement is misleading if it contains statements made about the performance or activities of the issuer without necessary explanatory or qualifying statements, which may give an exaggerated picture or an inaccurate portrayal of past performance or its portrayal in a manner which implies that past gains or income will be repeated in the future.

3. Publicly available document

The lead merchant banker along with the issuer shall ensure that the contents of offer documents hosted on the websites as required in the Regulation is same as that of the printed copies filed with the RoC, SEBI and the stock exchanges.

As and when required by any investor, the lead merchant banker and the recognised stock exchange should furnish a copy of the draft offer document and final offer document. However, a reasonable sum of money can be charged.

4. Redressal of investor grievances

The post-issue lead merchant bankers should look into the post-issue activities such as allotment, refund, dispatch and giving instructions to the syndicate members, Self-Certified Syndicate Banks and other intermediaries. The lead merchant banker is required to also look into and monitor the redressal of the investor grievances if any.

The workbook's review question asks exactly this — the answer is the lead merchant banker, not the registrar, debenture trustee or depository.

5. Post-issue reports

Public issue — Regulation 55: the lead manager(s) shall submit a final post-issue report as specified in Part A of Schedule XVII, along with a due diligence certificate within seven days of the date of finalization of basis of allotment or within seven days of refund of money in case of failure of issue.

Rights issue — two reports:

Initial post issue report as specified in Part B of Schedule XVII, within three days of closure of the issue

Final post issue report as specified in Part C of Schedule XVII, within fifteen days of the date of finalization of basis of allotment or within fifteen days of refund of money in case of failure of issue

The lead merchant banker shall submit a due diligence certificate as per the format specified in Form F of Schedule V, along with the final post issue report.

Seven days for a public issue; three and fifteen days for a rights issue.

6. Post-issue advertisements

The lead manager(s) shall ensure that an advertisement giving details relating to subscription, basis of allotment, number, value and percentage of all applications including ASBA, number, value and percentage of successful allotted for all applications including ASBA, date of completion of despatch of refund orders,... date of credit of specified securities and date of filing of listing application, etc. is released within ten days from the date of completion of the various activities.

Where: in at least one English national daily newspaper with wide circulation, one Hindi national daily newspaper with wide circulation and one regional language daily newspaper with wide circulation at the place where registered office of the issuer is situated.

**And the aforementioned details shall also be placed on the websites of the stock exchange(s).

7. Co-ordination with other intermediaries

The post-issue merchant banker has to maintain close coordination with the registrars to the issue and arrange to depute its officers to the offices of various intermediaries at regular intervals after the closure of the issue in order to monitor (a) the flow of application from collecting bank branches and/or SCSBs; (b) processing of the applications including the application form for ASBA; (c) other related matters till the basis of allotment is finalized.

On devolvement: the underwriting merchant banker must ensure that the notice for devolvement containing the obligation of the underwriters is issued within a period of ten days from the date of closure of the issue.

And on releasing the money: it is the responsibility of the post-issue merchant banker to confirm to the bankers to issue that all formalities in connection with the issue have been completed and that the banker is free to release the money to the issuer or release the money for refund in case of failure of the issue.

8. Miscellaneous responsibilities

The merchant banker has to ensure that all the information contained in the offer document and the particulars as per the audited financial statements in the offer document are not more than 6 months old from the issue opening date.

And in practice the test bites earlier: although Regulation 24 requires that audited financial statements contained in the offer document are not older than six months from the date of opening of the issue, it is actually required to be ensured that the same are not older than six months from the date of filing of the DRHP with SEBI and the RHP & Prospectus with RoC as well.

Company law is stricter still: as per Rule 5 of the Companies (Prospectus and Allotment of Securities) Rules, 2014, the audited financial statements should not be older than 120 days from the date of issue of the Prospectus. And for issues marketed abroad, in case of a Regulation S or a Rule 144A transaction, the audited accounts should not be older than 135 days from the date of the offer document.

Six months, 120 days, 135 days — the tightest one governs.

The other duties:

Ensure that the dispatch of refund orders, allotment letters, and share certificates is done by way of registered post or certificate of posting, whichever is applicable.

Ensure payment of interest to the applicants for delayed dispatch of allotment letters, refund orders, etc., as per the disclosures made in the offer document.

In case of absence of definite information about subscription figures, the issue shall be kept open for the required number of days to avoid any dispute, at a later date, by the underwriters in respect of their liability.

9. Promoters' contribution

(a) In case of an initial public offer, not less than 20% of the post-issue capital, and where the promoters' post-issue shareholding is below that, Alternative investment funds may contribute for the purpose of meeting the shortfall in minimum contribution as specified for promoters, subject to a maximum of ten percent of the post-issue capital.

(b) In case of a further public offer, either to the extent of 20% of the proposed issue size or to the extent of 20% of the post-issue capital

(c) In case of a composite issue, either to the extent of 20% of the proposed issue size or to the extent of 20% of the post-issue capital, excluding the rights issue component.

Twenty percent throughout — of post-issue capital in an IPO, and of either issue size or post-issue capital in an FPO or composite issue.

For convertible securities:

The promoters shall contribute 20%... either by way of equity shares or by way of subscription to the convertible securities, provided that if the price of the equity shares allotted pursuant to conversion is not predetermined and not disclosed in the offer document, the promoter shall contribute only by way of subscription to the convertible securities... and shall undertake in writing to subscribe to the equity shares pursuant to conversion.

**Where conversion happens on different dates and the contribution is in equity shares, it shall not be at a price lower than the weighted average price of the equity share capital arising out of conversion.

And for an IPO of convertible debt instruments without a prior equity issue: the promoters shall bring in a contribution of atleast 20% of the project cost in the form of equity shares, subject to contributing at least 20% of the issue size from their own funds in the form of equity shares — with staged projects measured with respect to total equity participation till the respective stage vis-à-vis the debt raised.

Excess contribution is treated as a preferential allotment: in an FPO or composite issue, contribution in excess of the mandated minimum contribution, will be treated as a preferential allotment to the promoters and shall be priced as per the provisions applicable for preferential allotment or issue price whichever is higher.

Timing and custody: the promoters shall satisfy the requirements of this regulation at least one day prior to the date of opening of the issue and the amount of promoter's contribution shall be kept in an escrow account with a scheduled commercial bank and shall be released to the issuer along with the release of the issue proceeds.

Two provisos: where already brought in and used, the issuer shall give the cash flow statement disclosing the use of such funds in the offer document; and where the minimum promoters' contribution is more than one hundred crore rupees, the promoters shall bring in at least one hundred crore rupees before the date of opening of the issue and the remaining amount may be brought on pro-rata basis before the calls are made to public.

Securities ineligible for minimum promoters' contribution

(a) Specified securities acquired during the preceding three years, if they are: i. Acquired for consideration other than cash and revaluation of assets or capitalization of intangible assets is involved in such transaction; or ii. Resulting from a bonus issue by utilization of revaluation reserves or unrealised profits of the issuer or from bonus issue against equity shares which are ineligible for minimum promoters' contribution.

Note the company law overlay: proviso to Section 63(1) of Companies Act, 2013 specifically states that no issue of bonus shares shall be made by capitalising reserves created by revaluation of assets.

(b) Specified securities acquired by the promoters and alternative investment funds or foreign venture capital investors or scheduled commercial banks or public financial institutions or insurance companies registered with... IRDAI, during the preceding one year at a price lower than the price at which specified securities are being offered to the public in the initial public offer.

Three exceptions: where the holders pay to the issuer the difference between the price at which the specified securities are offered in the initial public offer and the price at which the specified securities had been acquired; where acquired in terms of the scheme under sections 230 to 234 of the Companies Act, 2013... in lieu of business and invested capital that had been in existence for a period of more than one year prior to such approval; and to an initial public offer by a government company, statutory authority, or corporation, or any special purpose vehicle set up by any of them, which is engaged in the infrastructure sector.

(c) Specified securities allotted to the promoters and alternative investment funds during the preceding one year at a price less than the issue price, against funds brought in by them during that period, in the case of an issuer formed by converting partnership firms or LLPs where the partners are the promoters and there is no management change — provided that specified securities, allotted to the promoters against the capital existing in such firms for a period of more than one year on a continuous basis, shall be eligible.

(d) Specified securities pledged with any creditor.

10. Lock-in

Minimum promoters' contribution — including contribution by alternative investment funds or foreign venture capital investors or scheduled commercial banks or public financial institutions or insurance companies registered with... IRDAI (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)) — shall be locked-in for a period of eighteen months from the date of allotment in the initial public offer.

But three years if the money buys plant: in case the majority of the issue proceeds excluding the portion of offer for sale is proposed to be utilized for capital expenditure, then the lock-in period shall be three years from the date of allotment.

**Where capital expenditure shall include civil work, miscellaneous fixed assets, purchase of land, building and plant and machinery, etc. and repayment of existing loan(s) that may have been taken for the purpose of such capital expenditure.

Promoters' holding above the minimum: locked in for a period of six months — or one year from the date of allotment where the majority of proceeds go to capital expenditure.

SR equity shares: under lock-in until conversion into equity shares having voting rights same as that of ordinary shares or shall be locked-in for a period specified in sub regulations (1), whichever is later.

Others' pre-issue capital: in case of an initial public offer, the entire pre-issue capital held by persons other than the promoters shall be locked-in for a period of six months from the date of allotment — with exceptions for equity shares allotted to employees... under an employee stock option or employee stock purchase scheme (or a stock appreciation right scheme)... prior to the initial public offer with full disclosure, equity shares held by an employee stock option trust, and equity shares held by a venture capital fund or alternative investment fund of Category I or Category II or a foreign venture capital investor — the last locked in for a period of at least six months from the date of purchase.

Mechanics: the certificate shall contain the inscription "non-transferable" and the lock-in period, and in demat form the issuer shall ensure that lock-in is recorded by the depository.

Partly paid shares: where the amount called up is less than that on the public shares, the "lock-in" shall end only on the expiry of three years after such specified securities have become Pari-passu with the specified securities issued to the public.

Green shoe: lock-in shall not apply with respect to the specified securities lent to a stabilising agent... during the period starting from the date of lending... and ending on the date on which they are returned — and then locked-in for the remaining period.

Pledge: locked-in securities except Superior Voting Rights Equity Shares... held by the promoters... may be pledged as a collateral security for a loan granted by a scheduled commercial bank or a public financial institution or a systemically important non-banking finance company or a housing finance company, subject to the loan financing one or more of the objects of the issue (for minimum contribution) and the pledge being one of the terms of sanction. Such lock-in shall continue pursuant to the invocation of the pledge.

Transfer: locked-in promoter securities, except SR equity shares, may be transferred to another promoter or any person of the promoter group or a new promoter, and non-promoter locked-in securities to any other person holding the specified securities which are locked-in — with the lock-in... continu[ing] for the remaining period with the transferee.

SME IPO eligibility

An issuer shall be eligible to make an initial public offer only if its post-issue paid-up capital is less than or equal to ten crore rupees, and one whose post-issue paid-up value capital is more than ten crore rupees and up to twenty-five crore rupees, may also issue specified securities as per the regulations.

It must satisfy the exchange's own tests: the track record and/or other eligibility conditions of the SME Exchange(s) on which the specified securities are proposed to be listed.

Where the issuer was a firm or LLP, its operating profit track record counts only if the financial statements of the partnership business... conform to and are revised in the format prescribed for companies under the Companies Act, 2013, with adequate disclosures and certification by auditors, who have subjected themselves to the peer review process of the Institute of Chartered Accountants of India (ICAI) and hold a valid certificate issued by the Peer Review Board' of the ICAI. The same applies to an issuer formed out of a merger or a division of an existing company.

On conversion: an issuer that had been a proprietorship or a partnership firm or a limited liability partnership before conversion... may make an initial public offer only if the issuer company has been in existence for at least one full financial year before filing of draft offer document.

On promoter change: in cases where there is a complete change of promoter of the issuer or there are new promoter(s) of the issuer who have acquired more than fifty per cent of the shareholding of the issuer, the issuer shall file draft offer document only after a period of one year from the date of such final change(s).

And a profit test: an issuer may make an initial public offer, only if the issuer had minimum operating profits (earnings before interest, depreciation and tax) of ₹1 crore from operations for at least two out of the three previous financial years.

The general conditions and offer-for-sale rules mirror the main board — SME exchange application and designated exchange, depository agreement, fully paid or forfeited partly paid shares, dematerialised holdings of the listed categories, the one-year holding period with its three exemptions, and Regulation 8A's caps for 6(2) issues.

12. Reservations

The issuer may make reservations on a competitive basis out of the issue size, excluding promoters' contribution, in favour of the following categories of persons: a. employees; b. shareholders (other than promoters and promoter group) of listed subsidiaries or listed promoter companies.

And a firm exclusion: the issuer shall not make any reservation for the lead manager(s), registrar, syndicate member(s), their promoters, directors and employees and for the group or associate companies... of the lead manager(s), registrar and syndicate member(s) and their promoters, directors and employees.

The conditions:

a. The aggregate of reservations for employees shall not exceed five percent of the post-issue capital of the issuer, and the value of allotment to any employee shall not exceed two lakhs rupees — with under-subscription allowing proportionate allotment in excess of two lakhs rupees, subject to the total allotment to an employee not exceeding five lakhs rupees.

b. Reservation for shareholders shall not exceed ten percent. of the issue size

c. No further application for subscription in the net offer can be made by persons (except an employee and retail individual shareholder) in favour of whom reservation on a competitive basis is made

d. Any unsubscribed portion in any reserved category may be added to any other reserved category, and the unsubscribed portion, if any, after such inter-se adjustments among the reserved categories shall be added to the net offer category

e. In case of under-subscription in the net offer category, spill-over to the extent of under-subscription shall be permitted from the reserved category to the net offer.

**And an applicant in any reserved category may make an application for any number of specified securities, but not exceeding the reserved portion for that category.

Five percent of post-issue capital for employees, ten percent of issue size for shareholders — the workbook's review question asks the first of these.

In an FPO the same rules apply, with an extra option: in a further public offer, other than in a composite issue, the issuer may make a reservation on a competitive basis out of the issue size, excluding promoters' contribution for the existing retail individual shareholders of the issuer.

The SME IPO reservation rules are identical.

In a rights issue: the issuer shall make a rights issue of equity shares only if it has made a reservation of equity shares of the same class in favour of the holders of outstanding compulsorily convertible debt instruments, if any, in proportion to the convertible part thereof — issued to them at conversion on the same terms at which the equity shares offered in the rights issue were issued, and the issuer company shall not be required to credit rights entitlements for that purpose.

13. Promoter and promoter group

"Promoter" has been defined in SEBI ICDR regulations as a person:

i) who has been named as such in a draft offer document or offer document or is identified by the issuer in the annual return referred in the Companies Act, 2013; or

ii) who has control over the affairs of the issuer, directly or indirectly whether as a shareholder, director or otherwise; or

iii) in accordance with whose advice, directions or instructions the board of directors of the issuer is accustomed to act

With two provisos: nothing in above mentioned shall apply to a person who is acting merely in a professional capacity; and a financial institution, scheduled commercial bank, foreign portfolio investor other than Category III foreign portfolio investor, mutual fund, venture capital fund, alternative investment fund, foreign venture capital investor, insurance company registered with the... IRDAI or any other category as specified by SEBI... shall not be deemed to be a promoter merely by virtue of the fact that twenty percent or more of the equity share capital of the issuer is held by such person.

"Promoter group" includes:

i) the promoter

ii) an immediate relative of the promoter (i.e. any spouse of that person, or any parent, brother, sister or child of the person or of the spouse)

iii) in case promoter is a body corporate: A) a subsidiary or holding company of such body corporate; B) anybody corporate in which the promoter holds twenty percent or more of the equity share capital; and/or anybody corporate which holds twenty percent or more of the equity share capital of the promoter

iv) in case the promoter is an individual: A) any body corporate in which twenty percent or more of the equity share capital is held by the promoter or an immediate relative of the promoter or a firm or Hindu Undivided Family in which the promoter or any one or more of their relative is a member; B) any body corporate in which a body corporate as provided in (A) above holds twenty percent or more, of the equity share capital; and C) any Hindu Undivided Family or firm in which the aggregate share of the promoter and their relatives is equal to or more than twenty percent of the total capital

v) all persons whose shareholding is aggregated under the heading "shareholding of the promoter group".

Twenty percent is the recurring threshold.

The same institutional exclusion applies — such institutions are not promoter group merely by virtue of the fact that twenty percent or more of the equity share capital of the promoter is held by such person — provided further that such [institutions] shall be treated as promoter group for the subsidiaries or companies promoted by them or for the mutual fund sponsored by them.

14 and 15. Group companies and litigation

The lead merchant banker shall review and retain the certificates confirming the constitution of the promoter group and the group companies; shareholding, board of directors of the corporate promoters and the group companies, litigation, disassociation by the promoters in the last 3 years and various other confirmations.

Also to be reviewed: the Non-Compete agreement, if applicable and the family settlement agreement, if any; the Memorandum of Association (MoA) and Article of Association (AoA) of the corporate promoters and group companies; and the annual reports of the group companies for the last 3 years, agreements and regulatory filings where promoters have been identified as such by the issuer in the past.

On litigation: the legal counsel assists the Lead Merchant Bankers to assess the diligence process and review litigation related documents, and the issuer company is required to immediately inform the Lead Managers about any new development on any disclosed litigation matter or any new litigation.

To be reviewed and retained: MIS/Summarised table of legal cases involving the issuer · certifications provided by the promoters, Directors, Issuer, Group Companies, Subsidiaries and Joint Ventures in respect of the litigations · last orders etc of litigation against the issuer, subsidiaries which could have a materially adverse effect.

And to be reviewed and checked: case papers of all the litigations relating to the issuer and subsidiaries which are required to be disclosed under the ICDR Regulations — with case papers for some litigation... reviewed on a sample basis where a large number of similar cases are combined.

16. General Information Document

Lead Managers' shall ensure that: 1. the GID should explicitly incorporate the date of last updation; 2. the updated copy of GID is provided to an investor as and when requested, in form and manner so requested by the investor; 3. The updated GID is made available on the websites of the: a. Stock Exchange(s) where the shares pursuant to an issue are proposed to be listed; and b. The respective Lead Manager(s) to the issue, where DRHP / RHP / Draft Prospectus / Prospectus is made available.

6.2 Preferential issue

The lead manager shall ensure that listed issuer makes a preferential issue of specified securities, if only the following conditions are met:

a. All equity shares allotted by way of preferential issue shall be made fully paid up at the time of the allotment

b. A special resolution has been passed by its shareholders

c. All equity shares held by the proposed allottees in the issuer are in dematerialised form before an application seeking in-principle approval is made

d. The issuer is in compliance with the conditions for continuous listing under the listing agreement and the LODR Regulations

e. The issuer has obtained the Permanent Account Numbers (PANs) of the proposed allottees, except those exempt

f. the issuer has made an application seeking in-principle approval to the stock exchange(s)... on the same day when the notice has been sent in respect of the general meeting.

A trading cool-off: preferential issue of specified securities shall not be made when equity shares of the issuer have been sold or transferred by any Person including the promoter(s) and promoter group, within 90 trading days, preceding the relevant date — save for inter-se transfer amongst qualifying persons or transfer on account of invocation of pledge by a bank, PFI, systemically important NBFC, mutual fund or IRDAI-registered insurer.

A warrant penalty: where promoters previously subscribed to warrants of an issuer but has failed to exercise the warrants, they are ineligible for a period of one year from a) the date of expiry of the tenure of the warrants due to non-exercise of the option to convert; or b) the date of cancellation of the warrants.

And two absolute bars: an issuer shall not be eligible to make a preferential issue if any of its promoters or directors is a fugitive economic offender or it has any outstanding dues to the Board, the stock exchanges or the depositories — unless those dues are the subject matter of a pending appeal or proceeding(s), which has been admitted.

Disclosures in the explanatory statement

a) Objects of the preferential issue · b) Maximum number of specified securities to be issued · c) Intent of the promoters, directors or key managerial personnel of the issuer to subscribe to the offer · d) Shareholding pattern of the issuer before and after the preferential issue · e) Time frame within which the preferential issue shall be completed · f) Identity of the natural persons who are the ultimate beneficial owners of the shares proposed to be allotted and/or who ultimately control the proposed allottees — with no further disclosure needed where any listed company, mutual fund, scheduled commercial bank, insurance company registered with the... IRDAI sits in the ownership chain.

Plus the percentage of post preferential issue capital that may be held by the allottee(s) and change in control, if any · undertaking that the issuer shall re-compute the price... where it is required to do so · undertaking that if the amount payable on account of the re-computation of price is not paid within the time stipulated..., the specified securities shall continue to be locked-in · disclosures specified in Schedule VI, if the issuer or any of its promoters or directors is a wilful defaulter or a fraudulent borrower · and the current and proposed status of the allottee(s) post the preferential issues namely, promoter or non-promoter.

A certificate is required: the issuer shall place a copy of the certificate of a practicing company secretary before the general meeting... certifying that the issue is being made in accordance with the requirements of these regulations, hosted on its website with a link in the notice.

Non-cash consideration is narrow: consideration other than cash shall comprise only swap of shares pursuant to a valuation report by an independent registered valuer, submitted to the exchanges — which may get the valuation done by any other valuer if not satisfied.

Pricing

Frequently traded shares, listed 90 trading days or more: the price shall be not less than higher of... a) the 90 trading days volume weighted average price... preceding the relevant date; or b) the 10 trading days volume weighted average prices... preceding the relevant date.

Listed less than 90 trading days: not less than the higher of... a) The price at which equity shares were issued by the issuer in its initial public offer or the value per share arrived at in a scheme of compromise, arrangement and amalgamation...; or b) The average of volume weighted average prices... during the period the equity shares have been listed preceding the relevant date; or c) The average of the 10 trading days the volume weighted average prices... during the two weeks preceding the relevant date.

And then a recomputation: on completion of 90 trading days from the date of listing, with reference to the 90-day VWAP, and if such recomputed price is higher than the price paid on allotment, the difference shall be paid by the allottees to the issuer.

An AoA floor may override: where the articles provide a method producing a floor price higher than that determined under these regulations, then the same shall be considered as the floor price.

Five or fewer QIBs: a preferential issue of specified securities to qualified institutional buyers, not exceeding five in number, shall be made at a price not less than 10 trading days volume weighted average prices... preceding the relevant date.

But not to promoter-related QIBs: no allotment shall be made, either directly or indirectly, to any qualified institutional buyer who is a promoter or any person related to the promoters — though a qualified institutional buyer who does not hold any shares in the issuer and who has acquired rights in the capacity of a lender shall not be deemed to be a person related to the promoters. A QIB is deemed related where it has rights under a shareholders' agreement or voting agreement entered into with promoters or promoter group, veto rights, or the right to appoint any nominee director.

"Frequently traded shares" means the shares of the issuer, in which the traded turnover on any recognised stock exchange during the 240 trading days preceding the relevant date, is at least ten percent of the total number of shares of such class.

Infrequently traded shares: the price shall take into account the valuation parameters including book value, comparable trading multiples, and such other parameters as are customary, with a compliance certificate obtained from an independent registered valuer submitted to the exchange.

Adjustments apply for bonus issues, post-demerger issues, rights issues, consolidation, stock splits, reclassification and similar events.

Completion and lock-in

Allotment pursuant to the special resolution shall be completed within a period of 15 days from the date of passing such resolution — extended where a SEBI exemption or another approval is pending, and inapplicable to allotments pursuant to a scheme of corporate debt restructuring.

If not completed in 15 days, a fresh special resolution shall be passed, and the relevant date... will be taken with reference to the date of latter special resolution.

Allotment shall only be made in dematerialised form.

Lock-in:

Promoters and promoter group — 18 months from the date of trading approval, with not more than twenty percent of the total capital of the issuer... locked-in for 18 months, and equity shares allotted in excess of the twenty percent... locked-in for six months. Unlisted convertibles or warrants: one year from the date of allotment.

Others — six months from the date of trading approval; unlisted convertibles or warrants one year from the date of allotment.

Conversion credit: lock-in on shares from conversion of convertibles other than warrants shall be reduced to the extent the convertible securities have already been locked-in.

Stressed asset resolutions — one year from the trading approval, save to the extent needed to achieve 10% public shareholding.

Unpaid recomputation amount: the shares shall continue to be locked-in till such amount is paid.

And the allottee's existing holding: the entire pre-preferential allotment shareholding of the allottees, if any, shall be locked-in from the relevant date up to a 90 trading days from the date of trading approval.

An allottee who becomes a promoter through a change in control gets promoter lock-in.

6.3 Qualified Institutions Placement

"Eligible securities" include equity shares, non-convertible debt instruments along with warrants and convertible securities other than warrants.

"Relevant date" means for equity shares the date of the meeting in which the board of directors of the issuer or the committee of directors duly authorised... decides to open the proposed issue, and for convertibles either that date or the date on which the holders of such convertible securities become entitled to apply for the equity shares.

Conditions (Regulation 172):

a) A special resolution approving the QIP has been passed by its shareholders, specifying that the allotment is proposed to be made through QIP and the relevant date — though no shareholders' resolution will be required in case the qualified institutions placement is through an offer for sale by promoters or promoter group for compliance with minimum public shareholding requirements, and allotment pursuant to the special resolution... shall be completed within a period of 365 days.

b) The equity shares of the same class... have been listed on a stock exchange for a period of at least one year prior to the date of issuance of notice to its shareholders for convening the meeting.

c) An issuer shall be eligible to make a qualified institutions placement if any of its promoters or directors is not a fugitive economic offender.

All eligible securities issued through a qualified institutions placement shall be listed on the recognised stock exchange where the equity shares of the issuer are listed.

And a gap between placements: the issuer shall not make any subsequent qualified institutions placement until the expiry of 2 weeks from the date of the prior qualified institutions placement.

Promoter OFS through QIP for minimum public shareholding: the promoters shall not make such offer for sale if the promoter or member of the promoter group has purchased or sold any equity shares of the issuer during twelve weeks' period prior to the date of the opening of the issue and they shall not purchase or sell any equity shares... during the twelve weeks' period after the date of closure — though within those windows they may sell through offer for sale through stock exchange mechanism specified by SEBI or through an open market sale, subject to a gap of minimum two weeks between the two successive offer(s).

The merchant banker's certificate: while seeking in-principle approval, it must furnish to each stock exchange... a due diligence certificate stating that the eligible securities are being issued under QIP and that the issuer complies with the provisions of the SEBI ICDR Regulations, with the issuer furnishing a copy of the placement document, a certificate confirming compliance.

Monitoring agency: if the issue size, excluding the size of offer for sale by selling shareholders, exceeds one hundred crore rupees, the issuer shall make arrangements for the use of proceeds of the issue to be monitored by a credit rating agency registered with the Board — not applicable to a bank or public financial institution or an insurance company.

Documents: a preliminary placement document and placement document which shall contain all material information, with Schedule VII disclosures including on wilful defaulter or fraudulent borrower status.

Pricing: at a price not less than the average of the weekly high and low of the closing prices of the equity shares of the same class quoted on the stock exchange during the two weeks preceding the relevant date — with a discount of not more than five percent permitted subject to shareholder approval, not needed for a minimum-public-shareholding OFS.

No partly paid securities: the issuer shall not issue or allot partly paid-up eligible securities, save that with NCDs plus warrants the allottee may pay the full consideration or part thereof payable with respect to warrants, at the time of allotment, and the resulting equity shares shall be fully paid-up.

Minimum allottees: a) two, where the issue size is less than or equal to Rs. 250 crores; b) five, where the issue size is greater than Rs. 250 crores — and no single allottee shall be allotted more than fifty percent of the issue size.

Group QIBs count as one: qualified institutional buyers belonging to the same group or who are under same control shall be deemed to be a single allottee, where "same group" means not less than fifteen percent of the voting rights, control, or a common director, excluding nominee and independent directors.

Tenure and sale restriction: the tenure of the convertible or exchangeable eligible securities... shall not exceed sixty months from the date of allotment, and the securities shall not be sold by the allottee for a period of one year from the date of allotment, except on a recognised stock exchange.

6.4 Rights issue

The issuer making rights issue, shall ensure that none of its promoters, promoter group or directors are debarred from accessing the capital market by SEBI and are not a fugitive economic offender.

Reservation for convertible holders as described above, and the issuer may make reservation for its employees... subject to the condition that the value of allotment to any employee shall not exceed Rs. 2 Lakhs, extendable on under-subscription to Rs. 5 lakhs.

Documents and dispatch: the abridged letter of offer shall contain the disclosures as specified... and shall not contain any matter extraneous to the contents of the letter of offer, and every application form... shall be accompanied by a copy of the abridged letter of offer.

The lead manager(s) shall ensure availability of the letter of offer and other issue material including application forms with stock exchanges, registrar to issue, registrar and share transfer agents, depository participants, stock brokers, underwriters, bankers to the issue, investors' associations and self-certified syndicate banks before the opening of the issue.

The abridged letter of offer, along with application form, shall be despatched through registered post or speed post or by courier service or by electronic transmission to all the existing shareholders at least three days before the date of opening of the issue.

Plain paper applications: shareholders who have not received the form may make an application in writing on a plain paper, along with the requisite application money — but they shall not be entitled to renounce their rights and shall not utilise the application form for any purpose including renunciation even if it is received subsequently. And if a shareholder makes an application both in an application form as well as on a plain paper, both applications are liable to be rejected.

ASBA applies as in Chapter 4 — available only to an applicant who is holding equity shares in dematerialised mode, has not renounced entitlement in part or in full, and is not a renouncee.

Pricing and record date: the issuer shall decide the issue price, in consultation with the lead manager(s), before determining the record date, which shall be determined in consultation with the designated stock exchange; the issue price shall not be less than the face value; and it shall disclose the issue price in the letter of offer filed with SEBI and the stock exchange(s).

Opening: a rights issue may be opened within twelve months from the date of issuance of the observations by SEBI. Provided that in case of a fast track issue, the issue shall open within twelve months from the record date.

No withdrawal after the record date: if the issuer does withdraw, it shall not be eligible to make an application for listing of any of its specified securities on any stock exchange for a period of twelve months from the record date — save for shares from conversions, ESOPs or warrants issued before the announcement.

Payment options: a) part payment on application with balance money to be paid in calls; or b) full payment on application — with the part payment, if any, on application... not... less than twenty-five percent of the issue price.

Pre-issue advertisement: in the three newspapers and also give an intimation to the stock exchanges for dissemination on their websites at least two days before the date of opening of the issue, disclosing the dispatch completion date, the centres for duplicate forms, the plain paper procedure with its required particulars, and the warning that dual applications shall be liable to be rejected at the option of the issuer.

Two advertising prohibitions: during the period the issue is open for subscription, no advertisement shall be released giving an impression that the issue has been fully subscribed or oversubscribed, or indicating investors' response to the issue — the workbook's review question tests this — and an announcement regarding closure of issue shall be made only after the lead manager(s) are satisfied that at least ninety percent of the offer through the letter of offer has been subscribed and a certificate has been obtained to that effect from the registrar to the issue, not before the closing date.

Use of funds: the issuer shall utilise the funds collected in rights issues after the finalisation of the basis of allotment.

Disclosure standards mirror the public issue — material, true and adequate disclosures; due diligence by the intermediary; financial particulars not more than six months old from the issue opening date; wilful defaulter or fraudulent borrower disclosure; and disclosure of the process of crediting rights entitlements in the demat account and renunciation thereof.

Takeover exemption: the acquisition of shares by any shareholder upto his entitlement pursuant to rights issue is exempt from the obligation to make an open offer, and acquisition beyond his entitlement is exempt on conditions — broadly that shareholder has not renounced any of his entitlement and the price at which the rights issue is made is not higher than the Ex-right price.

6.5 Indian Depository Receipts

Indian Depository Receipts (IDR) offers a route for domestic companies to tap into the international markets by listing their shares on global stock exchanges. IDRs are issued by a domestic depository on behalf of the issuing company, which is listed on a foreign stock exchange. Each IDR represents a certain number of underlying shares of the issuing company, whose value is derived from those shares.

These receipts are denominated in Indian rupees.

Eligibility: the issuing company is listed in its home country for at least three immediately preceding years · the issuer is not prohibited to issue securities by any regulatory body · the issuer has a track record of compliance with the securities market regulations in its home country · any of its promoters or directors is not a fugitive economic offender and not a wilful defaulter.

Issue conditions: issue size shall not be less than Rs. 50 crore · at any given time, there shall be only one denomination of IDRs · the underlying shares have been or will be listed in its home country before listing of IDRs · and they shall rank pari passu with the existing shares of the same class.

Plus in-principle approval and a designated exchange, a depository agreement, firm arrangements of finance... towards 75% of the stated means of finance, and general corporate purposes not exceed[ing] 25% of the amount being raised.

Minimum subscription: at least 90% of the offer through the offer document — with refund forthwith if not received or if it falls below 90% after closure, and interest to the subscribers at the rate of 15% per annum if not refunded within 4 days.

Fungibility: the Indian Depository Receipts shall be fungible into underlying equity shares of the issuing company in the manner specified by the Board and Reserve Bank of India.

Filing: 3 copies of the draft offer document, with a certificate on the agreement and a due diligence certificate as per format given in Part H of Schedule V, then Part C of Schedule V, at the time of filing the offer document with the Registrar of the Companies, and Form D of Schedule V on a material development notice.

Public comment: the draft offer document filed with SEBI shall be made public for comments, if any, for a period of at least 21 days from the date of publication of the public announcement — with the announcement made within 2 working days of filing of the draft offer document with SEBI in an English and a Hindi national daily, and the lead managers filing with SEBI details of the comments received.

Appointments mirror the main board, adding an agreement with an overseas custodian bank and a domestic depository and requiring a person qualified to be a company secretary as the compliance officer.

Pricing: cap less than or equal to 120 percent of the floor price; floor not less than the face value; announcement at least 2 working days before the opening of the issue; and differential pricing for retail or employees not lower by more than 10% of the net offer price excluding anchors.

Issuance: the minimum application amount shall be Rs. 20,000/-.

Allocation: at least 50% of the issue shall be allotted to qualified institutional buyers on proportionate basis; the remainder among NIIs and retail at the discretion of the issuer, with at least 30% of the IDRs being offered in the public issue... available for allocation to retail individual investors and spillover permitted on retail under-subscription.

Allotment follows the public issue pattern — the one percent rounding-off allowance, proportionate allotment for non-retail, value of specified securities allotted to retail individual investors shall not exceed two lakhs rupees, minimum bid lot for retail, and finalisation by the designated stock exchange with the lead managers and registrars.

Post-issue: a final post-issue report along with a due diligence certificate... within 7 days of the date of finalisation of basis of allotment or within 7 days of refund of money in case of failure of issue, and information to SEBI in respect of underwriters who have failed to meet their underwriting devolvement.

And the same interest rule: the issuer shall undertake to pay interest at the rate of fifteen percent per annum to the investors.