NISM Series VI Study Notes: Chapter 10 – Special Services: Public Issues and Tender Offer

1. Role of the Primary Market and Capital Raising

The primary market serves as the essential channel for organizations to raise fresh capital from investors through the creation and sale of new securities.

• Purpose of Issuance: Issuers utilize the primary market to secure funds for new investments, business expansion, or to discharge existing corporate obligations.
• Eligible Issuers: A primary market issue can be initiated by various types of entities, including:
  • A completely new company.
  • A new company promoted by an existing company.
  • An existing public listed company.
  • An existing public unlisted company.
• Modes of Raising Capital: Issuers can raise these funds either by making public issues (which include Initial Public Offers (IPOs) and Follow-on Public Offers (FPOs)) or through private placements.

2. Public Issue Procedures and Demat Requirements

To modernise the primary market and protect investors, regulatory guidelines mandate the use of the electronic depository system during public offerings.

The Mandatory Demat Rule

• Equity Allotments: Allotments of equity shares in public issues are mandatory in dematerialised form.
• Pre-requisite for Investors: Because physical allotments are not permitted for equity, any investor wishing to subscribe to a public issue must open a active demat account with a Depository Participant (DP) before submitting their application.
• Compulsory Size Threshold: Under SEBI guidelines, all public issues of a size of Rupees 10 crores and above must compulsorily be made in dematerialised form.

Required Application Details

To facilitate electronic allotment, the public issue application form contains dedicated fields. Investors must accurately furnish their demat account information, which includes:

1. Depository Name (e.g., NSDL or CDSL).
2. Depository Participant's (DP) Name.
3. DP-ID (the unique identification code of the DP).
4. Beneficiary Account Number / BO ID (the unique client account identifier).

3. Step-by-Step IPO Process Flow through the Depository

Based on the official depository workflow, the process of allotting and crediting securities during an IPO involves structured verification loops between the Issuer/RTA, the Depository, and the Investor:

Detailed Steps of the IPO Allotment:

1. Application Submission: The investor (Beneficial Owner) submits their public issue application form to the Issuer/RTA, specifying their demat details.
2. BO ID Verification Setup: The Issuer or its Registrar and Transfer Agent (RTA) forwards the collected Beneficial Owner IDs (BO IDs) to the Depository to verify their active status and details.
3. Verification Report: The Depository processes the verification and sends a formal verification report back to the Issuer/RTA.
4. Allotment Details Processing: The Issuer/RTA determines the final allotment of shares and submits the database containing the successful allotment details of the BOs to the Depository.
5. Credit of Securities: Upon receiving the allotment file, the Depository processes the electronic book entries and directly credits the allocated securities to the respective Beneficial Owner’s demat account.
6. Intimation of Allotment: The Issuer sends a formal allotment advice/intimation of allotment directly to the Beneficial Owner to complete the communication loop.

4. Understanding Tender Offers (Buyback, Takeover, and Delisting)

A tender offer is a public invitation by an issuer or an acquirer to eligible shareholders to purchase back or acquire their shares under specific corporate situations.

Types of Tender Offers:

• Buybacks: When a company offers to purchase its own outstanding shares back from its shareholders.
• Takeovers: When an acquiring entity makes an offer to acquire shares from the existing shareholders of a target company.
• Delisting Offers: When an issuer or promoter offers to buy back shares to voluntarily delist the company’s securities from stock exchanges.

The Operational Process for Tender Offers:

• Instruction Submission: Shareholders who wish to participate in a tender offer must submit a Delivery Instruction Slip (DIS) or electronic instructions to their Depository Participant (DP), indicating the exact details of the offer.
• DP Upload: The DP uploads these delivery instructions into the depository system (such as NSDL or CDSL) following standard processes.
• The Blocking Mechanism:
  • Unlike a standard transfer where shares are debited immediately, during a tender offer, if there is a sufficient balance in the client’s demat account, the requested quantity of shares is blocked in the client's own demat account.
  • This block is marked in favor of the respective Clearing Corporation (CC), based on the specific market type and settlement number assigned to that tender offer.
  • This ensures the client cannot sell or transfer these shares elsewhere while the tender offer process is pending.
• Inter-Depository Tender Offers: If an inter-depository instruction is received for a tender offer where the target account is a Clearing Member Pool Account, the shares are automatically transferred to the Clearing Corporation.

5. Key Takeaways & Exam-Focused Points

• Rs. 10 Crores Compulsory Limit: Public issues with a size of Rs. 10 crores or more must be made compulsorily in dematerialised form.
• Pre-issue Demat Requirement: Investors must hold an active demat account before applying to receive equity allocations in a public issue.
• Tender Offer Blocking: Shares submitted for tender offers are not immediately debited; they are blocked in the investor's demat account in favor of the Clearing Corporation until the transaction is finalised.
• Automatic CM Pool Transfers: For inter-depository tender offers targeting a Clearing Member Pool Account, the depository automatically routes the transfer directly to the Clearing Corporation.

6. Important Terms Glossary

• Primary Market: The segment of the capital market where issuers create and sell new securities to investors to raise fresh capital.
• Initial Public Offer (IPO): The first public sale of a company's shares to the investor public.
• Tender Offer: A broad public offer (such as a buyback, takeover, or delisting) to buy back or acquire outstanding shares from existing shareholders.
• Blocking of Securities: An electronic hold marked on a specific quantity of shares in a client’s demat account in favor of a Clearing Corporation, restricting further transfer during a tender offer.

7. Practical Real-World Examples

Example 1: Applying for an IPO

• Scenario: Rohan wants to apply for the IPO of ABC Tech Ltd. The issue size is Rs. 150 crores.
• Process: Because the issue size is well above Rs. 10 crores, Rohan must receive his shares in demat form. Before filling out his application, Rohan must open a demat account with a registered DP. On his application form, Rohan must explicitly provide his Depository Name (e.g., NSDL), DP Name, DP-ID, and his unique 8-digit or 16-digit Beneficiary Account Number (BO ID). If allotted, the shares are credited electronically to his account.

Example 2: Participating in a Share Buyback (Tender Offer)

• Scenario: Deepa owns 500 shares of XYZ Ltd. The company announces a share buyback under a tender offer. Deepa decides to offer 100 shares for buyback.
• Process: Deepa fills out and submits a Delivery Instruction Slip (DIS) to her DP, specifying the buyback's market type and settlement number. Her DP enters the instructions in the system. Since Deepa has 500 shares, the system checks her balance and successfully blocks 100 shares in her demat account in favor of the Clearing Corporation. The remaining 400 shares remain free, while the 100 blocked shares cannot be traded or moved until the buyback is settled or rejected.