NISM Series IIA: Chapter IX — Public Offering of Shares

A company making a public issue of shares must go through a series of internal and external regulatory, financial, and administrative steps to execute the issue successfully. This chapter details the processes, roles, timelines, and structures involved in a public offering of securities in India.

1. The Central Role of the Lead Manager

In a public offer of shares, the Lead Manager (also referred to as the Book Running Lead Manager or BRLM in book-built issues) acts as the primary coordinator and director of the entire issuing process.

Key Regulatory Responsibilities

• Compliance Enforcement: The Lead Manager is solely responsible for ensuring that all statutory and regulatory requirements mandated by SEBI and the Companies Act are fully complied with throughout the issue cycle.
• Lifecycle Ownership: Their responsibilities cover all operational and administrative activities starting from the pre-issue preparation phase up until the shares are formally listed and commence trading on the recognized stock exchanges.

2. Pre-Issue Workflow and Preparatory Steps

Before a public offer of shares can be opened to investors, the Lead Manager must coordinate a series of critical structural, legal, and operational preparations:

Essential Pre-Issue Activities

1. Intermediary Appointments: The Lead Manager formally appoints key market intermediaries to execute various dimensions of the issue:
   • Registrars and Share Transfer Agents (RTAs) to manage applications and allotment.
   • Bankers to the Issue to manage fund flows.
   • Syndicate Brokers and Brokers to collect bids and applications.
   • Underwriters to guarantee minimum subscription.
2. In-Principle Stock Exchange Approval: The Lead Manager must obtain formal in-principle approval from the recognized stock exchanges where the shares are proposed to be listed.
3. Bidding Centre Coverage: The Lead Manager must ensure that the syndicate brokers cover the mandatory number of bidding centres required by SEBI regulations.
4. IPO Grading: For an issue made by an unlisted company (an Initial Public Offering), the company must get the IPO graded by an approved, registered credit rating agency.
5. Depository Admission: The issuer must enter into agreements with both national depositories (NSDL and CDSL) for the formal admission of the securities into electronic/dematerialised format.
6. SEBI Filing and Vetting: The Lead Manager files the draft prospectus with SEBI for detailed vetting, implementing any changes or revisions directed by the regulator.
7. Filing with RoC: Once vetted, the prospectus is filed with the Registrar of Companies (RoC).
8. Signing Due Diligence: The Lead Manager signs the mandatory due diligence certificate confirming that all regulatory requirements, disclosures, and norms have been strictly complied with.
9. National Advertisements: The company must issue statutory advertisements in national newspapers as required by SEBI public issue guidelines.
10. Printing and Dispatch: The Lead Manager arranges the high-volume printing and country-wide dispatch of prospectuses, application forms, and other promotional issue material.
11. Mandatory Abridged Prospectus: Regulations mandate that every single application form distributed to the public must be accompanied by an abridged prospectus containing key summary disclosures.

3. Post-Issue Workflow & Finalising the Basis of Allotment

Once the issue preparatory steps are completed, the offering is launched to the public.

Timing Rules

• Mandatory Open Period: By regulation, a public issue is required to be kept open for a minimum of 3 days and a maximum of 10 working days.

Post-Issue Operations

A. Bidding & Funds Blocking

Once the issue opens, the Lead Manager ensures that Self-Certified Syndicate Banks (SCSBs), syndicate brokers, registered brokers, and other designated intermediaries bid the applications on the stock exchange electronic platform. They must ensure that the designated SCSBs block the respective application funds in the investors' bank accounts.

B. Data Collection and Reconciliation

Once the issue closes, the Lead Manager coordinates with the RTA to collect electronic bid data from the stock exchanges. The RTA must then reconcile this stock exchange bid data with the fund blocking data received from the SCSBs. Once reconciled, the RTA obtains the final collection certificates from the SCSBs.

C. Finalising the Basis of Allotment

The Basis of Allotment is the formal, regulated process of deciding the exact number of shares that each individual investor is entitled to be allotted.

1. Collation of Bids: The applications and bids are collated under various pre-defined investor categories: Retail Investors, High Net Worth Individuals (HNIs/Non-Institutional Investors), Qualified Institutional Buyers (QIBs), and reserved categories.
2. Oversubscription Calculation: The RTA compares the total number of shares applied for in each category against the shares reserved for that specific category.

• Oversubscription Ratio Formula (Simple Line Format): Oversubscription Ratio = Total Shares Applied for in Category / Total Shares Reserved for Category

1. Approval and Publication: The finalized basis of allotment must be formally approved by the company's Board of Directors and published in national newspapers for public verification.

4. Categories of Investors in a Public Issue

SEBI regulations divide the investing public into distinct categories based on transaction size, institutional status, and association with the issuer:

A. Retail Individual Investors (RIIs)

• Investment Limit: Investors who apply or invest for a total value of less than Rs. 2,00,000 in a public issue.
• Cut-off Price Bidding: In a book-built issue, RIIs are the only category of investors permitted to bid at the "cut-off price" (the final price discovered through book building).
• Upfront Payment: RIIs are required to tender the entire subscription amount at the time of submitting their application, unless specifically exempted or modified in the Prospectus.

B. Non-Institutional Investors (NIIs)

• Investment Limit: Investors (including High Net Worth Individuals, corporates, and trusts) who invest Rs. 2,00,000 or above in a public issue.

C. Qualified Institutional Buyers (QIBs)

• Entities Included: These are highly regulated, professional institutional entities including mutual funds, scheduled commercial banks, and financial institutions.

D. Anchor Investors

• Definition: Anchor Investors are a subset of Qualified Institutional Buyers (QIBs) who make a large application in a book-built public issue.
• Investment Threshold: The application value must be Rs. 10 Crores or more.

E. Other Categories of Eligible Investors

• Shareholders: Existing shareholders of the promoter group companies.
• Employees: Permanent, full-time employees of the company. In the case of a new issuer, this includes permanent and full-time employees of the promoting companies.
• Qualified Foreign Investors (QFIs).

5. Types of Prospectus in Fixed Price vs. Book-Built Issues

The disclosures required by an investor vary based on whether the issue uses a fixed-price structure or a book-building process. SEBI regulates three distinct document formats:

Comparative Analysis of Prospectus Types

6. Underwriting in Public Issues

Underwriting is a mandatory risk-mitigation mechanism designed to ensure that the issuer secures the minimum capital required to list on stock exchanges.

Key Rules of Underwriting

• The 90% Minimum Subscription Rule: Under both SEBI regulations and the Companies Act, a public issue must receive a minimum subscription of at least 90% of the net offer to the public.
• Refund Obligation: If the issue fails to secure the 90% minimum threshold, the company is legally required to refund the entire subscription amount received from investors immediately.
• The Underwriting Agreement: To protect against the risk of an undersubscribed issue, companies enter into an underwriting agreement with financial institutions. Under this agreement, the underwriters commit to subscribe to the company's shares if they remain unsubscribed by the public.
• Underwriting Commission: For taking on this financial commitment, underwriters are paid a regulated commission by the company. Underwriting is a mandatory requirement for public issues.

7. The Green Shoe Option (GSO)

The Green Shoe Option (GSO) is a specialized over-allotment mechanism incorporated into public issues to ensure orderly secondary market trading.

Objectives and Mechanics of GSO

• Primary Objective: To provide price stability to the company's shares in the secondary market immediately upon listing, preventing excessive volatility or speculative spikes.
• Over-Allotment Limit: The company is permitted to allot additional shares to the public not exceeding 15% of the original issue size.
• Proportional Allocation: The additional GSO shares must be allotted to the general public in the exact same ratio in which reservations were made for the various investor categories in the main offer.

8. Fixed Price vs. Book-Built Offer Methods

Companies can choose between two primary methods for pricing and executing a public issue:

A. Fixed Price Issue

• Pricing: The company, in consultation with the Lead Manager, decides on the exact price per share before the issue opens.
• Allocation: Investors apply for a specific number of shares at this single pre-determined price.

B. Book-Built Issue

• Pricing: The objective of the book-building process is price discovery—identifying the exact price the market is willing to pay for the shares.
• Price Band / Floor Price: The company and its lead managers do not set a single price; instead, they specify a floor price (minimum price) or a price band (a range, such as Rs. 100 to Rs. 110) within the Red Herring Prospectus.
• Bidding Process: When the issue opens, investors submit bid applications specifying the number of shares they want and the price they are willing to pay. All bids must be above the specified floor price or within the price band.

Key Terms Glossary

• Lead Manager (BRLM): The principal merchant banker appointed to manage, coordinate, and ensure regulatory compliance for a public issue.
• Abridged Prospectus: A condensed version of the prospectus containing key features and disclosures, which must accompany every public application form.
• Basis of Allotment: The approved systematic method of distributing shares to applicants when an issue is oversubscribed.
• Retail Individual Investor (RII): An individual investor bidding for shares worth less than Rs. 2,000,000.
• Anchor Investor: A Qualified Institutional Buyer applying for Rs. 10 Crores or more in a book-built issue.
• Draft Red Herring Prospectus (DRHP): The initial draft prospectus containing all statutory disclosures except the final price, filed with SEBI for vetting.
• Underwriting: A mandatory commitment by financial institutions to buy any unsold shares in an issue to ensure the 90% subscription threshold is met.
• Green Shoe Option (GSO): An over-allotment option of up to 15% used by issuers to stabilize secondary market share prices post-listing.
• Cut-off Price: The market-clearing price discovered through the book-building process, at which retail investors are uniquely permitted to bid.

Chapter Key Takeaways

1. Lead Manager Liability: The Lead Manager bears sole responsibility for regulatory compliance and all coordination activities until the issue is officially listed on stock exchanges.
2. Unlisted IPO Requirement: While listed FPOs may be exempt from certain norms, an unlisted company launching an IPO must have its issue graded by an approved credit rating agency.
3. Compulsory Abridged Prospectus: Distributing a public share application form without attaching a summary abridged prospectus is a regulatory violation.
4. Issue Window Limits: Public offers cannot remain open indefinitely; they must close within a tight regulatory window of 3 to 10 working days.
5. Strict Underwriting Trigger: If a public issue does not receive 90% subscription of the net offer to the public, it must be cancelled, and all blocked or collected application money must be refunded to the investors.
6. GSO Stabilisation Limit: The Green Shoe Option is strictly capped at 15% of the original issue size and must preserve the original reservation ratios across investor categories.