Chapter 5: Issue Management - Process and Underwriting

The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations) establish the statutory entry requirements that any unlisted corporate entity must satisfy prior to launching an Initial Public Offer (IPO) on the main board of recognized stock exchanges. These eligibility benchmarks protect public investors from speculative or insubstantial corporate entities by ensuring that only companies with verifiable track records or substantial institutional backing can access public capital.

The Dual Eligibility Routes: Regulation 6(1) vs. Regulation 6(2)

MAIN BOARD IPO ELIGIBILITY FRAMEWORK

1. The Profitability Route (Regulation 6(1))

To qualify under the standard profitability track, an issuer must satisfy three cumulative financial criteria:

1. Net Tangible Assets Benchmark:
   • The issuer must possess Net Tangible Assets of at least INR 3 Crores in each of the preceding three full financial years (of 12 months each).
   • Not more than 50% of these net tangible assets may be held in monetary assets (cash, bank balances, liquid investments).
   • Exception: If more than 50% is held in monetary assets, the issuer must have made firm commitments to deploy such excess monetary assets in its core business or project.
2. Operating Profit Benchmark:
   • The issuer must have an average operating profit of at least INR 15 Crores (calculated on a restated, consolidated basis) during the preceding three financial years.
   • Furthermore, the company must demonstrate positive operating profit in each of these three preceding years.
3. Net Worth Benchmark:
   • The issuer must have a Net Worth of at least INR 1 Crore in each of the preceding three full financial years.
4. Name Change Rule:
   • If the issuer has changed its corporate name within the last one year prior to filing the draft offer document, at least 50% of the revenue for the preceding one full year must have been earned from the activity suggested by the new corporate name.

2. The Alternative Route (Regulation 6(2))

Recognizing that modern high-growth technology companies, digital platform operators, and emerging enterprises frequently prioritize market scale over immediate accounting profitability, SEBI introduced the Alternative Book Building Route:

• An issuer unable to satisfy the profitability criteria of Regulation 6(1) may access public capital markets only if the issue is executed through a 100% Book Building Process.
• Mandatory 75% Institutional Allotment: The issuer must allocate at least 75% of the Net Offer to Qualified Institutional Buyers (QIBs).
• If institutional investors fail to subscribe to at least 75% of the net offer, the entire issue fails, and all application funds blocked under ASBA must be immediately unblocked.
• Retail participation is capped at a maximum of 10%, shielding retail investors from excessive risk in early-stage or loss-making enterprises.

General Disqualifications and Ineligibility (Regulation 5)

Under Regulation 5 of the ICDR Regulations, an issuer is barred from making a public offering if:

• The issuer, any of its promoters, promoter group entities, or directors are debarred from accessing the capital markets by SEBI.
• Any promoter or director is a promoter or director of another company debarred by SEBI.
• The issuer, its promoters, or directors are categorized as Wilful Defaulters by the RBI or any lending institution.
• Any promoter or director has been declared a Fugitive Economic Offender under the Fugitive Economic Offenders Act, 2018.
• There are outstanding convertible debt securities or any other right that entitles any person to receive equity shares (unless conversion occurs prior to filing the RHP or are employee stock options).

To ensure that promoters maintain substantial long-term commitment to the enterprise following public capital mobilization, SEBI enforces stringent Minimum Promoters' Contribution (MPC) benchmarks and mandatory share lock-in periods under Chapter II of the ICDR Regulations.

Minimum Promoters' Contribution (MPC)

Under Regulation 14 of the ICDR Regulations:

• In an Initial Public Offer (IPO), the promoters of the issuer must contribute not less than 20% of the post-issue capital of the company.
• If the public issue involves a convertible debt or warrant structure, promoters must contribute either 20% of the post-issue equity capital or at least 20% of the total project cost, whichever is higher.

PROMOTERS' CONTRIBUTION & LOCK-IN TIMELINES

Eligibility of Shares for Minimum Promoters' Contribution

Under Regulation 15, not all promoter-held shares qualify toward the mandatory 20% MPC. Shares are statutorily ineligible if:

1. Acquired for consideration other than cash and without a revaluation or independent valuation report, or acquired through bonus shares issued out of revaluation reserves.
2. Acquired by promoters during the preceding one year at a price substantially lower than the public issue offer price (unless the promoter pays the differential amount to the company).
3. The shares are pledged, encumbered, or subject to any contractual lock-in or lien with any financial institution or third party.

Statutory Lock-In Periods

Under Regulations 16 and 17 of the ICDR Regulations (reflecting modern regulatory amendments):

1. Minimum Promoters' Contribution (20%):
   • Locked in for 18 months from the date of allotment in standard commercial offerings where the issue proceeds do not fund capital projects.
   • Locked in for 3 years if the issue proceeds fund greenfield capital expenditure or infrastructure development.
2. Promoter Holding in Excess of 20%:
   • Any equity shares held by promoters beyond the mandatory 20% MPC are locked in for 6 months (or 1 year for project-financing issues).
3. Pre-Issue Non-Promoter Shareholding:
   • The entire pre-issue equity share capital held by non-promoter shareholders is locked in for 6 months from the date of allotment.
   • Exemptions: Equity shares held by SEBI-registered Venture Capital Funds (VCFs), Category I Alternative Investment Funds (AIFs), or Category II AIFs are exempt from the 6-month pre-issue lock-in, provided such shares have been held for a minimum period of one year prior to filing the DRHP.

The preparation, verification, and regulatory review of public offering documents represent the core operational responsibility of SEBI-registered Merchant Bankers. Indian capital markets follow a phased disclosure regime ensuring comprehensive transparency before shares are offered to public investors.

The Hierarchy of Public Offer Documents

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|                                  THE OFFER DOCUMENT LIFECYCLE                                     |
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|                                                                                                   |
|  [ DRAFT RED HERRING PROSPECTUS ]     -->  [ RED HERRING PROSPECTUS ]     -->  [ FINAL PROSPECTUS ]|
|  (DRHP)                                    (RHP)                               (Prospectus)        |
|  • Filed with SEBI & Stock Exchanges       • Updated with SEBI comments        • Final price &     |
|  • 21-day public comment period            • Contains Price Band / Floor         quantity printed  |
|  • No price or final share quantum         • Filed with ROC at least           • Registered with   |
|  • Undergoes rigorous SEBI review            3 days before opening               ROC & SEBI        |
|  • In-principle exchange approvals         • Used for book building              post-pricing      |
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1. Draft Red Herring Prospectus (DRHP)

• Prepared jointly by the Lead Merchant Bankers, legal counsels, statutory auditors, and the issuer's management.
• Contains comprehensive business operations descriptions, industry analyses, capitalization tables, restated financial statements for the preceding three financial years under Indian Accounting Standards (Ind AS), extensive risk factor disclosures, outstanding litigations, and stated objects of the issue.
• SEBI Filing and Public Scrutiny:
  • Filed simultaneously with SEBI and recognized stock exchanges along with requisite statutory filing fees.
  • Hosted on the websites of SEBI, the issuer, lead merchant bankers, and stock exchanges for a minimum public comment period of 21 days.
• SEBI Observation Letter:
  • SEBI scrutinizes the disclosures, calls for clarifications, conducts inter-departmental reviews, and issues a formal Observation Letter detailing mandatory disclosure modifications and rectifications.
  • The merchant banker must submit a formal response demonstrating full compliance with all SEBI observations. The validity of SEBI observations is twelve months from the date of issuance; the issuer must open the public issue within this 12-month window.

2. Red Herring Prospectus (RHP)

• Prepared after incorporating all modifications required by SEBI and public comments.
• Contains the complete disclosure dossier, including the total issue size (in currency terms) and the Price Band or Floor Price, but omits the final discovered price and exact number of equity shares.
• Must be registered with the Registrar of Companies (ROC) at least three working days prior to the opening of the issue bidding window.

3. Final Prospectus

• Prepared immediately following the closure of the book-building window and final price discovery.
• Contains the exact discovered issue price, the precise number of shares allotted across investor categories, underwriting commitments, and final proceeds utilization schedules.
• Formally registered with the ROC, SEBI, and Stock Exchanges before shares are credited and admitted to trading.

Underwriting provides the structural safety net guaranteeing that an issuer mobilizes required capital even in adverse market environments. Underwriting regulations differ significantly between fixed price issues and modern book-built offerings.

Statutory Underwriting Framework

UNDERWRITING DYNAMICS: FIXED PRICE VS. BOOK BUILDING

Statutory Obligations of the Lead Merchant Banker

Under Regulation 22 of the SEBI (Merchant Bankers) Regulations, 1992:

• In every public offering where underwriting is undertaken, the Lead Merchant Banker must accept a minimum statutory underwriting obligation: $$ ext{Minimum Underwriting Obligation} = \min\Big(5% ext{ of Total Underwriting Commitment},; ext{INR } 25,00,000\Big)$$
• This statutory underwriting commitment must be carried on the Merchant Banker's own balance sheet and cannot be transferred or sub-underwritten, ensuring that the lead manager maintains direct financial alignment with issue success.

Syndicate Agreements and Devolvement Process

• In book-built issues, the issuer, lead managers, and syndicate members execute an Underwriting Agreement after the book closes and the cut-off price is determined, but before filing the Prospectus with the ROC.
• Underwriting Devolvement Procedure:
  • If valid applications received fall short of the 90% minimum subscription benchmark, the lead merchant banker issues formal Devolvement Notices to syndicate members and underwriters.
  • Underwriters are legally obligated to procure applications or subscribe to un-subscribed shares up to their agreed underwriting quota within the contractually stipulated timeline (typically within 2 to 3 working days).
  • If an underwriter defaults on its devolvement commitment, the Lead Merchant Banker remains jointly and severally liable to ensure capital procurement or refund the collected proceeds.

The operational mechanics of conducting a public offering are strictly governed by statutory timelines and disclosure requirements designed to ensure orderly price formation.

Issue Bidding Window

Under Regulation 46 of the ICDR Regulations:

• A public issue must remain open for bidding for a minimum period of three working days.
• The maximum statutory duration for a public issue is ten working days.
• Price Band Revision Rules:
  • If market conditions shift during the bidding window, the issuer and merchant bankers may revise the price band (upwards or downwards).
  • Any revision in the price band mandates extending the bidding window by a minimum of three additional working days, provided the total bidding period does not exceed the 10-working-day ceiling.
  • The merchant banker must publish an immediate press release and advertisement in national newspapers announcing the revised price band and extended closing date.

Statutory Advertisement Norms (Schedule IX)

Merchant bankers must coordinate the publication of mandatory statutory advertisements in at least one English national daily, one Hindi national daily, and one regional language daily with wide circulation where the issuer's registered office is located:

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|                                 STATUTORY ADVERTISEMENT CHRONOLOGY                                |
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|                                                                                                   |
|  1. PRE-ISSUE ADVERTISEMENT   • Published after ROC filing; announces issue dates & core metrics. |
|  2. PRICE BAND ADVERTISEMENT  • Discloses Price Band / Floor Price at least 2 WORKING DAYS        |
|                                 prior to issue opening date.                                      |
|  3. ISSUE OPENING AD          • Reminds investors of opening; highlights ASBA & UPI mechanisms.   |
|  4. ISSUE CLOSING AD          • Published on or immediately prior to closing date.                |
|  5. BASIS OF ALLOTMENT AD     • Published within 2 WORKING DAYS of allotment approval by DSE.     |
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The final execution phase of an Initial Public Offer requires strict adherence to statutory minimum subscription rules and the unified T+3 listing timeline mandated by SEBI.

Minimum Subscription Benchmark

Under Regulation 45 of the ICDR Regulations:

• An issuer making a public issue must receive a minimum subscription of 90% of the offer through the offer document.
• In an offering comprising both a fresh issue and an Offer for Sale (OFS), the 90% minimum subscription condition applies strictly to the fresh issue component, provided the OFS component is not conditioned on the fresh issue.
• Consequence of Non-Receipt:
  • If the issuer fails to receive 90% minimum subscription, the entire issue is deemed void.
  • The issuer and merchant bankers must immediately instruct SCSBs to unblock all ASBA funds.
  • If unblocking is delayed beyond four working days from the issue closing date, the issuer and directors become jointly and severally liable to pay penal interest at the rate of 15% per annum for the period of delay.

The Mandatory T+3 Listing Workflow

To align the Indian capital market with leading global standards, SEBI transitioned the mandatory IPO listing timeline from T+6 to T+3 working days (where T represents the Issue Closing Date):

T+3 IPO LISTING TIMELINE

A Merchant Banker's statutory responsibilities do not conclude upon the listing of securities. SEBI enforces comprehensive post-issue monitoring and reporting requirements to ensure issue proceeds are deployed transparently.

Statutory Post-Issue Compliance Reports

Under Regulation 55 of the ICDR Regulations, the Lead Merchant Banker must submit two formal compliance reports to SEBI:

1. Initial Post-Issue Report:
   • Must be submitted within seven days from the date of finalization of the basis of allotment or within seven days of issue closure in refund cases.
   • Details total subscription figures, category-wise application breakdowns, details of invalid bids, and basis of allotment approval.
2. Final Post-Issue Report:
   • Must be submitted within seven days of completion of all post-issue obligations (or within 82 days from issue closure).
   • Confirms total funds collected, complete unblocking of ASBA liens, electronic credit of shares, demat reconciliation, and resolution of investor grievances.

Mandatory Appointment of Monitoring Agency

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|                             MONITORING AGENCY REGULATORY BLUEPRINT                                |
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|                                                                                                   |
|  • APPLICABILITY           : Mandatory for all public / rights issues EXCEEDING INR 100 CRORES.   |
|  • ELIGIBLE ENTITIES       : SEBI-registered Credit Rating Agencies (CRAs) or Scheduled Banks.     |
|  • MANDATE                 : Monitor deployment of issue proceeds against stated prospectus goals.|
|  • REPORTING FREQUENCY     : Submits monitoring reports QUARTERLY to the company's Audit Committee|
|                              and recognized Stock Exchanges until 100% of proceeds are utilized. |
|  • COMPLIANCE TRANSPARENCY : Report published on stock exchange portals within 45 days of quarter.|
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• Under Regulation 41, if the public issue size (excluding OFS) exceeds INR 100 Crores, the issuer must appoint a Credit Rating Agency (CRA) as an independent Monitoring Agency.
• The Monitoring Agency conducts quarterly audits tracking the utilization of funds against the specific capital expenditure, debt retirement, and working capital objectives disclosed in the prospectus, submitting reports until issue proceeds are 100% deployed.