Mezzanine Round
Also written Mezzanine funding round · Pre-IPO round
The last private round before listing: pre-IPO money that pays for listing formalities, often with anchor investors allotted shares at a discount to the IPO price and ESOP holders selling out.
In plain language
A company that has decided to list still has to pay for getting there — merchant bankers, legal counsel, auditors, registrar and transfer agents. The mezzanine round is the funding raised for that final stretch.
It is the last stage in the workbook's sequence of fund-raising, after later-stage capital. The investors are anchor investors, institutional investors and retail investors. Anchor investors are allotted shares at a reasonable discount to the issue price in the IPO.
The round has a second use: employees holding stock options can exercise their options and sell shares to the new investors.
Do not confuse the round with mezzanine capital, which is a hybrid instrument with features of both debt and equity. A mezzanine round can be raised in equity; the company can also use convertible instruments for it.
How it works
Chapter 11 (section 11.1.1) places the mezzanine round fifth:
| Stage | Purpose |
|---|---|
| 1. Pre-seed | Validate the idea |
| 2. Seed | Build the early product |
| 3. Early-stage | Set up operations; Pre-Series A, A, B |
| 4. Later-stage | Scale; Series C, D, E, F… until the IPO |
| 5. Mezzanine round | Fund listing formalities; pre-IPO |
Instruments. Equity shares to anchor investors at a discount to the issue price, or hybrid instruments — convertible debentures or convertible preference shares.
Where "mezzanine" appears elsewhere in the workbook:
- Mezzanine capital (Chapter 2): funds provided in a hybrid structure with features of both debt and equity; private equity includes equity, preference, debt or mezzanine capital depending on the structure.
- Mezzanine financing (Chapter 6): debt financing with an equity upside, such as warrants attached to the debt — how some venture debt funds finance growth-stage companies.
- Mezzanine debt with conversion rights (Chapter 11): given to companies preparing for an IPO so the lender can hold equity eligible for an offer for sale in the IPO.
- Mezzanine debt in an LBO sits with senior and subordinate debt in the debt syndicate.
The fund's side. AIFs that invest ahead of listing appear as Pre-IPO funds, which Chapter 6 places in Category II, and as the Pre-IPO strategy in Chapter 11. Shares subscribed before an IPO are subject to a lock-in from the date of listing under the SEBI (ICDR) Regulations, 2018 — the discount is compensation for accepting that lock-in and the listing risk.
A worked example
Kanak Foods (illustrative figures throughout) has grown through Series C and D and appoints bankers for an IPO. It needs Rs 18 crore for listing formalities and pre-IPO working capital.
The round. An AIF subscribes 4,00,000 shares at Rs 450, while the IPO is expected to be priced at Rs 500.
| Line | Figure |
|---|---|
| Shares | 4,00,000 |
| Price paid | Rs 450 |
| Amount invested | Rs 18,00,00,000 |
| Value at the expected issue price | Rs 20,00,00,000 |
| Discount per share | Rs 50 (10% of the issue price) |
| Paper gain at the issue price | Rs 2,00,00,000 (11.1% on cost) |
The gain is on paper. The AIF's shares are locked in from the date of listing, so if the stock lists and falls below Rs 450 while the lock-in runs, the discount is gone.
The ESOP side. In the same round, Kanak's head of technology exercises options over 20,000 shares and sells them to the incoming investors — the liquidity event the workbook describes.
The alternative. Kanak could instead issue compulsorily convertible debentures to a mezzanine lender, converting into equity eligible for an offer for sale in the IPO.
Why NISM asks about it
Chapter 11 (Investment Strategies, Investment Process and Governance of Funds), section 11.1.1 defines the mezzanine round as stage 5; section 11.2.4.3 covers the Pre-IPO strategy and the ICDR lock-in. Chapter 2 defines mezzanine capital and Chapter 6 mezzanine financing. Expect a stage-ordering question, a question on who invests in the mezzanine round (anchor, institutional and retail investors), and a trap that confuses the round with mezzanine capital.
Common exam traps
- Mezzanine round ≠ mezzanine capital. The round is a pre-IPO funding stage; mezzanine capital is a hybrid debt-equity instrument.
- It comes after later-stage capital, immediately before listing — it is stage 5, not an early-stage bridge.
- Anchor investors get a discount to the issue price, not a premium.
- Pre-IPO shares carry a lock-in from the date of listing under the ICDR Regulations — the discount is not a free gain.
- ESOP holders can exercise and sell in this round; that is one of its stated purposes.
- A bridge round funds working capital between two rounds; the mezzanine round funds the route to listing.
Where this is taught
Free preparation for NISM Series XIX-CRelated terms
- Anchor investorA qualified institutional buyer allotted shares a day before a book-built issue opens — at least Rs 10 crore on the main board or Rs 2 crore on the SME exchange — under a discretionary, locked-in allocation.
- Employee Stock Option PlanA right, not an obligation, for an employee to buy employer shares at a pre-fixed price — taxed twice: as a salary perquisite on exercise, and as capital gains on eventual sale.
- Category II AIFThe residual AIF category: anything that is neither Category I nor Category III and takes no fund-level leverage beyond a narrow temporary carve-out — private equity, private debt and fund-of-funds.
- Mezzanine CapitalCapital provided in a hybrid structure carrying features of both debt and equity — typically subordinated debt with an equity upside attached, such as warrants.
- Venture DebtSpecialised lending to start-ups that have already raised institutional venture equity — unsecured, priced above commercial rates, repaid in two to three years, usually with an equity kicker attached.
- Bridge RoundShort-term financing that funds a company's working capital between two funding rounds, provided by banks, debt funds, venture debt funds or venture capital funds.
- Pre-IPO StrategyAn AIF mandate to subscribe to a company's shares before its IPO at a discount to the issue price, accepting the ICDR lock-in that runs from the date of listing.
- Pre-seed capitalThe first money into a start-up, given to founders to develop and validate an idea — to show it is sustainable, scalable and saleable — usually from family and friends, since there is no revenue yet.
- Later-stage capitalCapital from Series C onwards to scale a business — new markets, geographies, product segments or acquisitions — typically from private equity funds and institutional investors, as angels and VCs exit.
- Special purpose acquisition vehicleThe company incorporated for a leveraged buyout to pool the debt and equity capital and give the lenders a ring-fenced secured structure, sitting between the investors and the target.