Issue Management - Process and Underwriting

Issue Management - Process and Underwriting (Part 1)

• Definition: Issue management refers to the process of managing public offers such as IPOs, rights issues, and secondary issues.
• Key Concepts:
  • Issue Management Process: Includes filing of offer document, documents required to be filed before the issue, pricing of issue, underwriting obligations, minimum subscription, allotment, and refund.
  • Role of Merchant Bankers: Plays a crucial role in issue management, acting as an expert advisor, event manager, coordinator, watchdog for statutory compliance, and fiduciary for investor protection.
  • SEBI ICDR Regulations: Governs the process of issue management and underwriting of issues.

Key Concepts in Issue Management

• Eligibility Requirements for IPO:
  • Net Tangible Assets: At least Rs. 3 crore in each of the preceding three full years.
  • Average Operating Profit: At least Rs. 15 crore during the preceding three years.
  • Net Worth: At least Rs. 1 crore in each of the preceding three full years.
• General Conditions for IPO:
  • In-Principle Approval: From one or more stock exchanges for listing of specified securities.
  • Dematerialisation: All specified securities held by promoters must be in dematerialised form.
  • Firm Arrangements of Finance: For at least 75% of the stated means of finance for a specific project.
• Additional Conditions for IPO:
  • Holding Period: Fully paid-up equity shares offered for sale must have been held for at least one year.
  • Exceptions: Applies to government companies, statutory authorities, or special purpose vehicles in the infrastructure sector, or shares acquired under a scheme approved by a High Court or tribunal.

Issue Management - Process and Underwriting (Part 2)

• Offer for Sale: Shares offered for sale to the public by shareholders, individually or with persons acting in concert, holding more than 20% of pre-issue shareholding of the issuer, shall not exceed more than 50% of their pre-issue shareholding on a fully diluted basis.
• Selling Shareholders: Shares offered for sale by selling shareholders, individually or with persons acting in concert, holding less than 20% of pre-issue shareholding of the issuer, shall not exceed more than 10% of pre-issue shareholding of the issuer.
• Computing Permissible Quantum: For computing the permissible quantum of shares under Regulation 8A, both shares offered in the Offer for Sale and any pre-IPO secondary transfers by the selling shareholders shall be aggregated.

Eligibility Requirements for Issue of Convertible Debt Instruments in IPO

• Regulation 9 of SEBI ICDR Regulations: An issuer shall be eligible to make an initial public offer of convertible debt instruments even without making a prior public issue of its equity shares and listing thereof, provided that it is not in default of payment of interest or repayment of principal amount in respect of debt instruments issued by it to the public, if any, for a period of more than six months.

Additional Requirements for Issue of Convertible Debt Instruments in IPO

• Regulation 10 of SEBI (ICDR) Regulations: In addition to other requirements, an issuer making an initial public offer of convertible debt instruments shall also comply with the following conditions:
  • Obtain a credit rating from at least one credit rating agency.
  • Appoint at least one debenture trustee in accordance with the provisions of the Companies Act, 2013, and the SEBI (Debenture Trustees) Regulations, 1993.
  • Create a debenture redemption reserve in accordance with the provisions of the Companies Act, 2013, and rules made thereunder.
  • Ensure that assets are sufficient to discharge the principal amount at all times, free from any encumbrance, and obtain consent from existing lenders or security trustees for a second or pari passu charge.

Eligibility for Further Public Offer (FPO)

• Regulation 102 of SEBI ICDR: An issuer shall not be eligible to make a further public offer if it, any of its promoters, promoter group, or directors, selling shareholders are debarred from accessing the capital market by SEBI.
• Regulation 103 of SEBI ICDR: An issuer is eligible to make a FPO if it has not changed its name in the last one year period immediately preceding the date of filing of the offer document.

General Conditions for Further Public Offer (FPO)

• Regulation 104 of SEBI ICDR: An issuer making a further public offer shall ensure that:
  • It has made an application to one or more stock exchanges to seek an in-principle approval for listing of its specified securities.
  • It has entered into an agreement with a depository for dematerialization of specified securities.
  • All its existing partly paid-up equity shares have either been fully paid-up or have been forfeited.
  • It has made firm arrangements of finance through verifiable means towards seventy-five percent of the stated means of finance for the specific project proposed to be funded from the issue proceeds.

Additional Conditions for an Offer for Sale in FPO

• Regulation 105 of SEBI ICDR: Only such fully paid-up equity shares may be offered for sale to the public which have been held by the selling shareholder(s) for a period of at least one year prior to the filing of the draft offer document.

Eligibility for Issue of Convertible Debt Instruments and Warrants in FPO

• Regulation 106 of SEBI ICDR: An issuer shall be eligible to make a further public offer of convertible debt instruments if its equity shares are already listed and it is not in default in payment of interest or repayment of principal amount in respect of debt instruments issued by it to the public, if any, for a period of more than six months.

Issue Management - Process and Underwriting (Part 3)

• Convertible Debt Instruments: An issuer making a public issue of convertible debt instruments must comply with certain conditions, including:
  • Obtaining a credit rating from one or more credit rating agencies
  • Appointing at least one debenture trustee in accordance with the Companies Act, 2013 and the SEBI (Debenture Trustees) Regulations, 1993
  • Creating a debenture redemption reserve in accordance with the provisions of the Companies Act, 2013 and rules made thereunder
  • Ensuring that assets used to secure convertible debt instruments are sufficient to discharge the principal amount at all times and are free from any encumbrance
• Rollover of Non-Convertible Portion: The non-convertible portion of partly convertible debt instruments may be rolled over subject to certain conditions, including:
  • Approval by 75% of holders (in value) of the convertible debt instruments through a resolution
  • Auditors' certificate on the cash flow and liquidity position of the issuer
  • Undertaking to redeem the non-convertible portion of the partly convertible debt instruments of all holders who have not agreed to the resolution
  • Obtaining a credit rating from at least one SEBI-registered credit rating agency within a period of one month prior to the due date of redemption
• Conversion of Optionally Convertible Debt Instruments: The issuer shall not convert its optionally convertible debt instruments into equity shares unless the holders of such convertible debt instruments have sent their positive consent to the issuer
• Issue of Convertible Debt Instruments for Financing: An issuer shall not issue convertible debt instruments for financing or for providing loans to or for acquiring shares of any person who is part of the promoter group or group companies, unless the period of conversion of such debt instruments is less than 18 months from the date of issue
• Issue of Warrants: An issuer shall be eligible to issue warrants in a further public offer subject to certain conditions, including:
  • The tenure of such warrants shall not exceed 18 months from the date of their allotment
  • A specified security may have one or more warrants attached to it
  • The price or formula for determination of exercise price of the warrants shall be determined upfront and at least 25% of the consideration amount based on the exercise price shall also be received upfront
• Obligations Relating to Issues: The issuer company shall appoint merchant bankers and other intermediaries, and ensure that they comply with the regulations, including:
  • Appointment of Merchant Bankers: The issuer shall appoint one or more SEBI-registered merchant bankers as lead manager(s) to the issue
  • Due Diligence: The lead manager shall exercise due diligence, ensure proper care, and exercise independent professional judgment
  • Preparation of Offer Document: The lead manager shall prepare the offer document, which shall contain all the necessary disclosures to enable investors to make an informed investment decision
  • Compliance Officer: The issuer shall appoint a compliance officer who shall be responsible for monitoring the compliance of the securities laws and for redressal of investors' grievances

Issue Management - Process and Underwriting (Part 4)

• Due Diligence: The process of collecting information about the issuer company to assess disclosures in the offer document, covering aspects such as:
  • Review of documents and discussions with the issuer's representatives
  • Examination of documents to understand the issuer's businesses, operations, and financial condition
  • Independent review of all documents and information provided by the issuer
  • Briefing the issuer's representatives on their statutory responsibilities and liabilities
• Key Areas of Due Diligence:
  • Promoter/promoter group
  • Capital Structure
  • Capital Built Up
  • Risk Factors
  • Management
  • Business
  • Financial Statements
  • Litigations
• Role of External Parties:
  • Legal counsels assist in legal documentary due diligence and preparation of the offer document
  • Statutory auditors provide reports on financial information and certifications
  • Specialized industry experts may be appointed for technical expertise
• Key Due Diligence Documents:
  • Contracts (e.g., letters of appointment, issue agreement, MOU, escrow agreement)
  • Indicative list of other documents (e.g., memorandum and articles of association, certificate of incorporation, auditors' reports)
• Preparation of Offer Document:
  • The lead manager ensures that the offer document contains all material disclosures required for investors to make informed decisions
  • The offer document shall contain disclosures specified in the Companies Act, 2013 and SEBI ICDR Regulations
  • The lead manager shall exercise Due Diligence and satisfy themselves about all aspects of the issue
• Filing of Offer Document:
  • The issuer files three copies of the draft offer document with SEBI, along with fees, through the lead manager
  • The lead manager submits a certificate, due diligence certificate, and other required documents to SEBI
  • SEBI may specify changes or issue observations on the draft offer document within 30 days from the receipt of the document or satisfactory reply from the lead manager.

Issue Management - Process and Underwriting (Part 5)

• Draft Offer Document: The issuer and lead manager(s) shall carry out changes specified by SEBI in the draft offer document and submit an updated draft offer document.
• Filing with SEBI and Stock Exchange(s): A copy of the offer documents shall be filed with SEBI and the stock exchange(s) through the lead manager(s) after filing with the Registrar of Companies.
• Fees to be Paid: The issuer shall pay fees to SEBI with respect to every draft offer document or offer document, as specified in the SEBI ICDR Regulations.
• Fee Structure: The fee structure varies based on the issue size, with different rates for public issues, rights issues, and listing without a public issue.
• Documents to be Submitted: The lead manager(s) shall submit certain documents to SEBI, including a statement certifying that all changes have been incorporated, a due diligence certificate, and a certificate from a statutory auditor.
• Security Deposit: The issuer shall deposit an amount with the designated stock exchange before the opening of the subscription list, which shall be refundable or forfeitable as specified by SEBI.
• Listing Approvals: The issuer shall obtain in-principle approval from the recognized stock exchange(s) and enter into a listing agreement with the stock exchange(s) where the securities are proposed to be listed.
• Listing Requirements: The issuer shall comply with certain listing requirements, including those related to the Articles of Association, and meet the eligibility criteria specified by the stock exchange(s).
• In-Principle Approval: The issuer shall obtain in-principle approval from the recognized stock exchange(s) before issuing further securities.
• Application for Listing: The issuer shall make an application for listing within the specified time period and complete the pre-listing formalities.
• Listing Agreement: The issuer shall execute a listing agreement with the stock exchange(s) in terms of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.

Issue Management - Process and Underwriting (Part 6)

• In-Principle Approval: The company is required to obtain in-principle approval for listing from the exchanges having nationwide trading terminals before issuing further shares or securities.
• Listing Application: The company must make an application to the Exchange for the listing of any new issue of shares or securities and of the provisional documents relating thereto.
• Trading Permission: The company must obtain trading permission, which is granted after fulfillment of the requirements stated by the respective exchanges.
• Listing Agreement: One of the requirements at this stage is to enter into the Listing Agreement between the Issuer and the Stock Exchange.

Key Concepts

• Draft Offer Document: The draft offer document filed with SEBI shall be made public for comments for a period of at least 21 days from the date of filing.
• Public Announcement: The issuer shall make a public announcement in one English national daily newspaper, one Hindi national daily newspaper, and one regional language newspaper, disclosing the fact of filing of the draft offer document with SEBI.
• Lead Manager: The lead manager(s) shall file with SEBI, details of the comments received by them or the issuer from the public, on the draft offer document, during that period and the consequential changes, if any, that are required to be made in the draft offer document.

Issue Opening and Listing

• Issue Opening: A public issue or a rights issue may be opened within twelve months from the date of issuance of the observations by SEBI under regulation 25.
• Listing: An issuer has to list the security for trading within 3 days, i.e. (T+3) from the date of close of the issue.
• Shelf Prospectus: A shelf prospectus is a prospectus in respect of which the securities or class of securities included therein are issued for subscription in one or more issues over a certain period without the issue of a further prospectus.

Pricing of Issue

• Issue Pricing: Issue pricing, especially in IPOs, is a determinant based on the fundamentals of the company, prevailing market valuations for other companies in general, and peer companies (if any) in particular.
• Face Value: The disclosure about the face value of equity shares shall be made in the draft offer document, offer document, advertisements, and application forms, along with the price band or the issue price in identical font size.
• Price Band: The issuer may mention a price or a price band in the offer document (in case of a fixed price issue) and a floor price or a price band in the red herring prospectus (in case of a book built issue) and determine the price at a later date before filing the prospectus with the Registrar of Companies.

Issue Management - Process and Underwriting (Part 7)

• Issue Price: The floor price or the final price shall not be less than the face value of the specified securities.
• Price Announcement: The issuer shall announce the floor price or the price band at least two working days before the opening of the issue in the pre-issue and price band advertisement.
• Advertisement Requirements: The announcement shall contain relevant financial ratios computed for both upper and lower end of the price band and a statement drawing attention of the investors to the section titled “basis of issue price” of the offer document.
• Disclosure: The announcement and the relevant financial ratios shall be disclosed on the websites of the stock exchange(s) and shall also be pre-filled in the application forms to be made available on the websites of the stock exchange(s).

Underwriting

• Underwriting Agreement: Every merchant banker acting as an underwriter shall enter into an agreement with each body corporate on whose behalf it is acting as an underwriter.
• Agreement Terms: The agreement shall provide for the period for which the agreement shall be in force, allocation of duties and responsibilities, the amount of underwriting obligations, the period within which the underwriter has to subscribe to the issue, the amount of commission or brokerage payable, and details of arrangements made by the underwriter for fulfilling the underwriting obligations.
• General Responsibilities: A Merchant Banker acting as an underwriter shall not derive any direct or indirect benefit from underwriting the issue other than the commission or brokerage payable under the agreement.
• Underwriting Limitations: The total underwriting obligations under all agreements shall not exceed twenty times the net worth of the merchant banker.
• Subscription Requirements: The merchant banker shall subscribe to the securities within 45 days of receipt of intimation from the issuer.

Issuance Conditions and Procedures

• Allocation in Net Offer: The allocation in the net offer category shall be as follows:
  • Not less than thirty-five percent to retail individual investors
  • Not less than fifteen percent to non-institutional investors
  • Not more than fifty percent to qualified institutional buyers
• Anchor Investors: The issuer may allocate up to sixty percent of the portion available for allocation to qualified institutional buyers to anchor investors.
• Non-Institutional Investors: One third of the portion available to non-institutional investors shall be reserved for applicants with application size of more than two lakh rupees and up to ten lakh rupees, and two third shall be reserved for applicants with application size of more than ten lakh rupees.

Minimum Subscription

• Minimum Subscription Requirement: The minimum subscription to be received in the issue shall be at least ninety percent of the offer through the offer document.
• Refund of Application Monies: In the event of non-receipt of minimum subscription, all application monies received shall be refunded to the applicants forthwith, but not later than four days from the closure of the issue.

Allotment, Refund, and Payment of Interest

• Allotment Procedure: The issuer shall not make an allotment pursuant to a public issue if the number of prospective allottees is less than one thousand.
• Basis of Allotment: The allotment of specified securities to applicants other than to the retail individual investors, non-institutional investors, and anchor investors shall be on a proportionate basis within the respective investor categories.
• Use of Unified Payments Interface (UPI): SEBI has introduced the use of UPI as a payment mechanism with Application Supported by Blocked Amount (ASBA) for applications in public issues by retail individual investors.

Issue Management - Process and Underwriting (Part 8)

• Allotment Process: The allotment of specified securities to each retail individual investor shall not be less than the minimum bid lot, subject to the availability of shares in retail individual investor category, and the remaining available shares, if any, shall be allotted on a proportionate basis.
• Minimum Allotment: The value of specified securities allotted to any person, except in case of employees, shall not exceed two lakhs rupees for retail investors or up to five lakhs rupees for eligible employees.
• Allotment to Non-Institutional Investors: The allotment of specified securities to each non-institutional investor shall not be less than the minimum application size, subject to the availability of shares in non-institutional investors’ category, and the remaining shares, if any, shall be allotted on a proportionate basis.
• Basis of Allotment: The authorised employees of the designated stock exchange, along with the lead manager(s) and registrars to the issue, shall ensure that the basis of allotment is finalised in a fair and proper manner in accordance with the procedure specified in the regulations.

Post Issue Functions, Reporting and Compliance

• Lead Manager Responsibilities: The lead manager(s) shall be responsible for and co-ordinate with the registrars to the issue and with various intermediaries at regular intervals after the closure of the issue to monitor the flow of applications and processing of the applications.
• Reporting to SEBI: The lead manager(s) shall report any act of omission or commission on the part of any of the intermediaries to SEBI.
• Devolvement on Underwriters: In case of devolvement on the underwriters, the lead manager(s) shall ensure that the notice for devolvement containing the obligation of the underwriters is issued within ten days from the date of closure of the issue.
• Advertisement: The lead manager(s) shall ensure that an advertisement giving details relating to subscription, basis of allotment, and other information is released within ten days from the date of completion of the various activities.

Key Concepts

• Refund and Payment of Interest: The issuer and lead manager(s) shall ensure that the specified securities are allotted and/or application monies are refunded or unblocked within the specified period, and interest at the rate of fifteen percent per annum shall be paid to the investors if the application monies are not refunded or unblocked within the specified period.
• Listing and Trading: The lead manager(s) shall ensure that the monies received in respect of the issue are released to the issuer in compliance with the provisions of Section 40 (3) of the Companies Act, 2013, and that the issuer obtains listing or trading permission from the stock exchanges where the specified securities were to be listed.
• Post-Issue Activities: The lead manager(s) shall continue to be responsible for post-issue activities till the applicants have received the securities certificates, credit to their demat account or refund of application monies, and the listing agreement is entered into by the issuer with the stock exchange and listing or trading permission is obtained.