Issue Management - General Obligations of Merchant Bankers and Due Diligence

General Obligations: The SEBI ICDR Regulations prescribe general obligations for merchant bankers related to issue management, including:
- Prohibition of payment of incentives to investors for making an application for allotment of specified securities
- Compliance with public communication and research report guidelines
Public Communications/Research Reports: All public communications, including advertisements and research reports, must:
- Be truthful, fair, and not manipulative or deceptive
- Reproduce information from the draft offer document or offer document in full, without select extracts
- Be set forth in a clear, concise, and understandable language
- Not include issue slogans or brand names, except for the normal commercial name of the issuer or its products
- Not contain statements that promise or guarantee rapid increase in revenue or profits
- Not display models, celebrities, or fictional characters
- Comply with specific guidelines for television and billboard advertisements
Due Diligence: Merchant bankers must conduct due diligence to ensure compliance with the SEBI ICDR Regulations and other applicable laws
Key Concepts:
- SEBI ICDR Regulations: Regulations governing issue management and due diligence
- Merchant Bankers: Intermediaries responsible for managing issues and conducting due diligence
- Public Communications: Advertisements, research reports, and other communications related to the issue
- Research Reports: Reports analyzing the issuer and the issue, subject to specific guidelines and regulations
- Due Diligence: The process of verifying the accuracy of information and assessing the risks associated with the issue

Issue Management - General Obligations of Merchant Bankers and Due Diligence (Part 2)

Publicly Available Documents: The lead merchant banker and the issuer must ensure that the contents of offer documents hosted on websites are the same as those of the printed copies filed with the RoC, SEBI, and stock exchanges.
Redressal of Investor Grievances: The post-issue lead merchant banker is responsible for monitoring the redressal of investor grievances, if any, and looking into post-issue activities such as allotment, refund, and dispatch.
Post-issue Reports: The lead manager(s) must submit a final post-issue report and a due diligence certificate within the specified timeframe, which varies depending on the type of issue (public or rights).
Post-issue Advertisements: The lead manager(s) must ensure that an advertisement giving details relating to subscription, basis of allotment, and other relevant information is released in at least one English national daily newspaper, one Hindi national daily newspaper, and one regional language daily newspaper.
Co-ordination with Intermediaries: The post-issue merchant banker must maintain close coordination with registrars to the issue and other intermediaries to monitor the flow of applications, processing of applications, and other related matters.
Miscellaneous Responsibilities: The merchant banker has various responsibilities, including ensuring that audited financial statements are not older than six months from the date of filing of the DRHP with SEBI and the RHP & Prospectus with RoC.
Promoters Contribution: The SEBI (ICDR) Regulations specify the minimum promoter's contribution in a public issue, which is at least 20% of the post-issue capital, and the securities that are ineligible for minimum promoters' contribution.
Due Diligence Certificate: The lead merchant banker must submit a due diligence certificate as per the format specified in Form F of Schedule V, along with the final post-issue report.
Regulatory Compliance: The merchant banker must ensure compliance with various regulations, including the Companies (Prospectus and Allotment of Securities) Rules, 2014, and the SEBI (ICDR) Regulations, 2018.

Issue Management - General Obligations of Merchant Bankers and Due Diligence (Part 3)

Lock-in Period: The lock-in period is the time during which promoters and other persons are not allowed to transfer their specified securities.
Lock-in Provisions: The lock-in provisions apply to promoters and persons other than promoters, and the lock-in period varies depending on the type of security and the purpose of the issue.
Restriction on Transferability: The specified securities held by promoters shall be locked-in for a period of at least 18 months from the date of commencement of commercial production or date of allotment in the public issue, whichever is later.
Exceptions to Lock-in: There are certain exceptions to the lock-in provisions, such as:
- Equity shares allotted to employees under an employee stock option or employee stock purchase scheme.
- Equity shares held by a venture capital fund or alternative investment fund.
- Equity shares lent to a stabilising agent for the purpose of a green shoe option.
Pledge of Locked-in Securities: Specified securities held by promoters and locked-in may be pledged as a collateral security for a loan granted by a scheduled commercial bank or a public financial institution.
Transferability of Locked-in Securities: The specified securities held by promoters and locked-in may be transferred to another promoter or any person of the promoter group or a new promoter.
Eligibility Conditions for Fast-Track Issue: The issuer must meet certain eligibility conditions, such as:
- The equity shares of the issuer have been listed on any stock exchange for a period of at least three years.
- The entire shareholding of the promoter group of the issuer is held in dematerialised form.
- The average market capitalisation of public shareholding of the issuer is at least two hundred and fifty crore rupees.
- The annualised trading turnover of the equity shares of the issuer during six calendar months immediately preceding the month of the reference date has been at least two percent of the weighted average number of equity shares listed during such six-month period.

Issue Management - General Obligations of Merchant Bankers and Due Diligence (Part 4)

General Obligations: The issuer or promoter or promoter group or director of the issuer must not have settled any alleged violation of securities laws through the settlement mechanism with SEBI during the three years immediately preceding the reference date.
Disclosure Requirements: The disclosure of such compliance with the settlement order shall be made in the letter of offer.
Trading Suspension: The equity shares of the issuer must not have been suspended from trading as a disciplinary measure during the last three years immediately preceding the reference date.
Conflict of Interest: There shall be no conflict of interest between the intermediary (s) and the issuer or its group companies in accordance with the applicable regulations.
Promoter Subscription: The promoters and promoter group shall mandatorily subscribe to their rights entitlement and shall not renounce their rights, except to the extent of renunciation within the promoter group or for the purpose of complying with minimum public shareholding norms prescribed under the Securities Contracts (Regulation) Rules, 1957.
Audit Qualifications: For audit qualifications, if any, in respect of any of the financial years for which accounts are disclosed in the letter of offer, the issuer shall provide the restated financial statements adjusting for the impact of the audit qualifications.

Eligibility Requirements for an IPO by Small and Medium Enterprises (SME)

Post-Issue Paid-Up Capital: 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.
Post-Issue Face Value Capital: An issuer, whose post-issue face value capital is more than ten crore rupees and up to twenty-five crore rupees, may also issue specified securities as per the regulations.
Track Record: An issuer may make an initial public offer if it satisfies the track record and/or other eligibility conditions of the SME Exchange(s) on which the specified securities are proposed to be listed.

Additional Conditions for an Offer for Sale

Holding Period: Only such fully paid-up equity shares may be offered for sale to the public that have been held by the sellers for a period of at least one year prior to the filing of the draft offer document.
Exceptions: The requirement of holding equity shares for a period of one year shall not apply in certain cases, such as an offer for sale of a government company, or statutory authority, or corporation, or any special purpose vehicle set up and controlled by any one or more of them, which is engaged in the infrastructure sector.

Corporate Governance and Composition of the Board of Directors

Compliance Officer: The Compliance Officer is required to ensure that the laws for the conduct of Board and Committee meetings and the information to be provided to the Board for this purpose are complied with.
Corporate Governance: The norms of Corporate Governance specified in Listing Regulations with respect to composition of the Board, to have optimum combination of executive and non-executive directors with at least one woman director with not less than 50 percent of the board of directors comprising of non-executive directors, non-executive directors’ compensation and disclosures, code of conduct for the board of directors, disclosures related to related party transactions, appointment of independent directors on the board, formation of committee’s viz., audit committee, investor grievances redressal committee, remuneration committee, nomination committee etc. need to be complied with.

Reservation in IPO’s

Reservation Categories: The issuer is permitted to make reservations for certain categories of persons, such as employees and shareholders (other than promoters and promoter group) of listed subsidiaries or listed promoter companies.
Reservation Limits: 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.
Reservation for Shareholders: Reservation for shareholders shall not exceed ten percent of the issue size.

Issue Management - General Obligations of Merchant Bankers and Due Diligence (Part 5)

Reservation on a Competitive Basis: The issuer may make reservations on a competitive basis out of the issue size, excluding promoters' contribution, for certain categories of persons, including:
- Employees: 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.
- Shareholders: Reservation for shareholders shall not exceed ten percent of the issue size.
Conditions for Reservation: The reservations on a competitive basis shall be subject to the following conditions:
- No further application for subscription in the net offer can be made by persons in favor of whom reservation on a competitive basis is made.
- 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, shall be added to the net offer category.
- 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 public offer.
Identification of Promoters and Promoter Group:
- Promoter: A person who has been named as such in a draft offer document or is identified by the issuer in the annual return, or has control over the affairs of the issuer.
- Promoter Group: Includes the promoter, immediate relatives of the promoter, and certain entities in which the promoter or its relatives have a significant interest.
Disclosures Relating to Group Companies: The lead merchant banker shall review and retain certificates confirming the constitution of the promoter group and the group companies, shareholding, board of directors, litigation, and other confirmations required under the ICDR Regulations.
Disclosures Relating to Litigations: The lead managers shall review and retain documents related to litigations involving the issuer, including a summarised table of legal cases, certifications, and case papers.
General Information Document (GID): The lead managers shall ensure that the GID is updated and made available to investors, and that it explicitly incorporates the date of last updation.
Preferential Issue: The lead manager shall ensure that the listed issuer makes a preferential issue of specified securities only if certain conditions are met, including that all equity shares allotted by way of preferential issue shall be made fully paid up at the time of allotment, and a special resolution has been passed by its shareholders.

Issue Management - General Obligations of Merchant Bankers and Due Diligence (Part 6)

Preferential Issue Conditions: The issuer must ensure that all equity shares held by proposed allottees are in dematerialised form before seeking in-principle approval from the stock exchange.
Listing Agreement Compliance: The issuer must comply with the conditions for continuous listing of equity shares as specified in the listing agreement with the stock exchange and the SEBI (Listing Obligations and Disclosure Requirements), 2015.
PAN Requirements: The issuer must obtain the Permanent Account Numbers (PANs) of the proposed allottees, except those exempt by SEBI.
In-Principle Approval: The issuer must make an application seeking in-principle approval to the stock exchange on the same day as the notice for the general meeting seeking shareholders' approval.

Restrictions on Preferential Issues

90-Day Restriction: Preferential issues cannot be made when equity shares of the issuer have been sold or transferred by any person, including promoters and promoter groups, within 90 trading days preceding the relevant date.
Exceptions: This restriction does not apply to inter-se transfers amongst qualifying persons or transfers due to invocation of pledge by a scheduled commercial bank or public financial institution.
Promoter Ineligibility: Promoters or promoter groups who have failed to exercise warrants are ineligible for a period of one year from the date of expiry or cancellation of the warrants.

Eligibility Criteria

Fugitive Economic Offenders: Issuers with promoters or directors who are fugitive economic offenders are not eligible for preferential issues.
Outstanding Dues: Issuers with outstanding dues to the Board, stock exchanges, or depositories are not eligible, unless the dues are subject to a pending appeal or proceeding.

Disclosure Requirements

Explanatory Statement: The issuer must disclose objects of the preferential issue, maximum number of specified securities to be issued, and shareholding pattern before and after the issue.
Additional Disclosures: The issuer must also disclose the intent of promoters, directors, or key managerial personnel to subscribe to the offer, time frame for completion, and identity of ultimate beneficial owners.

Pricing

Frequently Traded Shares: The price of equity shares to be allotted pursuant to a preferential issue must be not less than the higher of the 90-day or 10-day volume-weighted average price.
Infrequently Traded Shares: The price must be determined based on valuation parameters, including book value, comparable trading multiples, and other customary parameters.
Recomputation of Price: The issuer must recompute the price on completion of 90 trading days from the date of listing, and if the recomputed price is higher, the difference must be paid by the allottees.

Issue Management - General Obligations of Merchant Bankers and Due Diligence (Part 7)

Preferential Issue Price Adjustment: The price determined for a preferential issue shall be subject to appropriate adjustments if the issuer makes certain events such as:
- Issue of equity shares by way of capitalization of profits or reserves
- Issue of equity shares after completion of a demerger
- Rights issue of equity shares
- Consolidation of outstanding equity shares
- Division of outstanding equity shares including stock split
- Re-classification of equity shares into other securities
Price Adjustment Exclusion: The effect on the price of equity shares due to material price movement and confirmation of reported event or information may be excluded as per the framework specified under sub-regulation (11) of regulation 30 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
Allotment Timeframe: Allotment pursuant to the special resolution shall be completed within a period of 15 days from the date of passing such resolution, with certain exceptions.
Lock-in of Specified Securities: The specified securities allotted on a preferential basis shall be locked-in for a certain period, which varies depending on the allottee and the type of securities.
- Lock-in Periods:
  - 18 months for promoters and promoter group
  - 6 months for persons other than promoters and promoter group
  - 1 year for convertible securities or warrants not listed on stock exchanges
Qualified Institutional Placement (QIP): A listed issuer may make a QIP of eligible securities if it satisfies certain conditions, including:
- Special Resolution: A special resolution approving the QIP has been passed by its shareholders.
- Listing Requirement: The equity shares of the same class have been listed on a stock exchange for at least one year prior to the date of issuance of notice to its shareholders.
- Fugitive Economic Offender: None of the promoters or directors is a fugitive economic offender.
Conditions for QIP: All eligible securities issued through a QIP shall be listed on the recognised stock exchange, and the issuer shall not make any subsequent QIP until the expiry of 2 weeks from the date of the prior QIP.
Offer for Sale by Promoters: The promoters and members of the promoter group may make an offer for sale of fully paid-up equity shares through a QIP for the purpose of achieving minimum public shareholding.

Issue Management - General Obligations of Merchant Bankers and Due Diligence (Part 8)

General Obligations: The promoters or members of the promoter group shall not make an offer for sale if they have purchased or sold any equity shares of the issuer during the twelve weeks' period prior to the date of the opening of the issue.
Due Diligence: The merchant banker shall furnish 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.
Monitoring Agency: If the issue size exceeds Rs. 100 crores, 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.
Pricing and Restrictions on Allotment: The qualified institutions placement shall be made 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.
Minimum Number of Allottees: The minimum number of allottees for each placement of eligible securities made under QIP shall be at least two, where the issue size is less than or equal to Rs. 250 crores, and five, where the issue size is greater than Rs. 250 crores.
Rights Issue: The issuer making a 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: 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 favor of the holders of outstanding compulsorily convertible debt instruments, if any, in proportion to the convertible part thereof.
Abridged Letter of Offer: The abridged letter of offer shall contain the disclosures as specified by SEBI in the regulations and shall not contain any matter extraneous to the contents of the letter of offer.
Application Form: Every application form distributed by the issuer or any other person in relation to the issue shall be accompanied by a copy of the abridged letter of offer.
ASBA Facility: The issuer shall provide the ASBA facility in the manner specified by SEBI, where not more than one payment option is provided.
Record Date: The issuer shall announce a record date for the purpose of determining the shareholders eligible to apply for specified securities in the proposed rights issue.
Issue Price: The issue price shall not be less than the face value of the specified securities, and the issuer shall disclose the issue price in the letter of offer filed with SEBI and the stock exchange(s).

Issue Management - General Obligations of Merchant Bankers and Due Diligence (Part 9)

Payment Options: The issuer shall give one of the following payment options to all the shareholders for each type of instrument:
- Part payment on application with balance money to be paid in calls
- Full payment on application
Pre-Issue Advertisement for Rights Issue: The issuer shall issue an advertisement in at least one English national daily newspaper, one Hindi national daily newspaper, and one regional language daily newspaper, disclosing:
- Date of completion of despatch of abridged letter of offer and the application form
- Centres where shareholders can obtain duplicate copies of the application form
- Statement that shareholders can make application in writing on a plain paper to subscribe to the rights issue
Utilisation of Funds: The issuer shall utilise the funds collected in rights issues after the finalisation of the basis of allotment
Manner of Disclosures: The draft letter of offer and letter of offer shall contain all material disclosures that are true and adequate to enable the applicants to take an informed investment decision
Due Diligence: The intermediary shall exercise due diligence and satisfy themselves about all aspects of the issue, including the veracity and adequacy of disclosure in the draft letter of offer and the letter of offer
Exemption from Open Offer: The acquisition of shares by any shareholder up to their entitlement pursuant to rights issue is exempt from the obligation to make an open offer under Takeover Regulation
Indian Depository Receipts (IDRs): IDRs offer a route for domestic companies to tap into international markets by listing their shares on global stock exchanges
Eligibility Conditions for IDRs: The issuer shall be eligible to make an issue of IDRs only if:
- 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 securities market regulations in its home country
Minimum Subscription: The minimum subscription to be received in the issue shall be at least 90% of the offer through the offer document
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
Disclosures in Offer Documents: The offer document shall contain all material disclosures which are true, correct, and adequate to enable the applicants to take an informed investment decision

Issue Management - General Obligations of Merchant Bankers and Due Diligence (Part 10)

Filing of Draft Offer Document: The issuer shall file 3 copies of the draft offer document with SEBI, along with the specified fees through the lead manager(s).
Draft Offer Document Availability: 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 and one Hindi national daily newspaper, disclosing the fact of filing of the draft offer document with SEBI.
Lead Manager's Responsibilities: The lead manager(s) shall submit a certificate confirming an agreement with the issuer, a due diligence certificate, and certify that all amendments and observations made by SEBI have been incorporated in the offer document.

General Obligations

Offer Document Filing: The issuer shall file the offer document with the Registrar of Companies and SEBI through the lead manager(s).
Appointment of Intermediaries: The issuer shall appoint a lead manager, registrar, and compliance officer, and enter into agreements with them.
Pricing and Price Band: The issuer may determine the price of the IDRs in consultation with the lead manager(s) or through the book building process.
Differential Pricing: The issuer may offer IDRs at different prices, subject to certain conditions.

Issuance Conditions

Minimum Application Amount: The minimum application amount shall be Rs. 20,000/-.
Allocation in the Issue: At least 50% of the issue shall be allotted to qualified institutional buyers, and at least 30% shall be available for allocation to retail individual investors.

Post Issue Reports

Final Post-Issue Report: The lead manager(s) shall submit a final post-issue report along with a due diligence certificate within 7 days of the date of finalisation of basis of allotment.
Undersubscribed Issue: In case of an undersubscribed issue, the merchant banker shall furnish information in respect of underwriters who have failed to meet their underwriting devolvement to SEBI.

Allotment Procedure

Basis of Allotment: The issuer shall not make any allotment in excess of the specified securities offered through the offer document, except in case of oversubscription.
Allotment to Retail Individual Investors: 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 the retail individual investor category.

Issue Management - General Obligations of Merchant Bankers and Due Diligence (Part 11)

General Obligations: The issuer and lead manager(s) shall ensure that the IDRs are allotted and/or application monies are refunded or unblocked within the period specified by the Board.
Electronic Allotment and Refund: The lead manager(s) shall ensure that the allotment, credit of dematerialised securities, refunding or unlocking of application monies are done electronically.
Interest Payment: If the specified securities are not allotted and/or application monies are not refunded or unblocked within the stipulated period, the issuer shall undertake to pay interest at the rate of fifteen percent per annum to the investors.
Regulatory Framework: The general obligations to be followed by issuers and other intermediaries are prescribed by the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.

Review Questions

The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 prescribes the general obligations to be followed by issuers and other intermediaries.
It is True that no advertisement shall be issued giving any impression that the issue has been fully subscribed or oversubscribed during the period the issue is open for subscription.
The Lead merchant banker is required to look into and monitor the redressal of the investor grievances, if any, which has arisen during the issue management process.
The aggregate reservation on a competitive basis for employees shall not exceed 10 percent of the post-issue capital of the issuer as per SEBI (ICDR) Regulation.