Chapter V: Issue Management – Process and Underwriting (Part 6 of 8)
This study guide provides a detailed and structured breakdown of Chapter V: Issue Management – Process and Underwriting from the NISM Series IX: Merchant Banking curriculum. This is Part 6 of 8, focusing on Allocation Conditions in the Net Offer to the Public, Rules for Anchor Investors, and the Minimum Subscription Mandate.
1. Allocation Conditions in the Net Offer to the Public (Regulation 32)
Under Regulation 32 of the SEBI (ICDR) Regulations, 2018, the allocation of specified securities in the Net Offer to the Public is strictly structured based on the type of issue (book-built vs. fixed-price) and the eligibility route under which the issuer is making the offering.
A. Allocation under the Standard Route (Standard Book-Built Issues)
For standard book-built public issues made by issuers qualifying under the primary eligibility criteria, the allocation of the net public offer is distributed across three distinct investor categories:
- Retail Individual Investors (RIIs): Not less than 35% of the net offer must be allocated to this category. An RII is defined as an investor who applies or bids for specified securities for a total value of not more than Rs. 2 lakh.
- Non-Institutional Investors (NIIs): Not less than 15% of the net offer must be allocated to NIIs. These are investors who do not fall under the definitions of RIIs or Qualified Institutional Buyers (QIBs).
- Qualified Institutional Buyers (QIBs): Not more than 50% of the net offer can be allocated to QIBs. QIBs include institutional entities such as mutual funds, scheduled commercial banks, insurance companies, venture capital funds, and non-banking financial companies (NBFCs).
- Mutual Fund Reservation: Within this QIB allocation, 5% must be specifically reserved for Mutual Funds on a proportionate basis. Mutual funds are also eligible for allocation under the balance remaining in the QIB category.
B. Allocation under the Alternate Route (Under Regulation 6(2) / Regulation 26(2))
When an issuer does not meet the standard profitability and financial track record benchmarks, they are permitted to access the market via an alternative route. This route shifts the allocation heavily toward institutional buyers who are better equipped to evaluate the risk:
- Retail Individual Investors (RIIs): Not more than 10% of the net offer can be allocated to RIIs.
- Non-Institutional Investors (NIIs): Not more than 15% of the net offer can be allocated to NIIs.
- Qualified Institutional Buyers (QIBs): Not less than 75% of the net offer must be allocated to QIBs.
- Mutual Fund Reservation: Similar to the standard route, 5% of this QIB portion is reserved specifically for Mutual Funds. Mutual funds are additionally eligible to bid for the remaining balance in the QIB category.
| Category of Investor | Standard Route | Alternate Route |
|---|---|---|
| Retail Individual Investors (RII) | Not less than 35% | Not more than 10% |
| Non-Institutional Investors (NII) | Not less than 15% | Not more than 15% |
| Qualified Institutional Buyers (QIBs) | Not more than 50% (5% reserved for Mutual Funds) | Not less than 75% (5% reserved for Mutual Funds) |
C. Spillover and Category Reallocation Rules
To prevent the failure of an issue due to localized under-subscription, SEBI permits the reallocation of unsubscribed portions between categories under specific conditions:
- Any unsubscribed portion in either the Retail Individual Investor (RII) or Non-Institutional Investor (NII) category may be reallocated to applicants in any of the other categories.
D. Allocation in Fixed-Price (Non-Book-Built) Issues
For issues executed outside of the electronic book-building process, the distribution rules are simplified:
- Retail Individual Investors (RIIs): A minimum of 50% of the net offer must be allocated to RIIs.
- Remaining Portion: The balance is allocated to:
- Individual applicants other than RIIs.
- Other investors, including corporate bodies or institutions, irrespective of the number of specified securities applied for.
- Reallocation: Unsubscribed portions in either of the categories may be transferred to applicants in the other category.
2. Rules and Conditions Governing Anchor Investors
Anchor Investors are key institutional investors who buy large blocks of shares before the public issue opens, signaling institutional confidence and helping to establish market price validity.
Statutory Definition and Eligibility
- Anchor Investor Status: An Anchor Investor is a Qualified Institutional Buyer (QIB) who makes an application for specified securities of a value of Rs. 10 crores or more in a book-built public issue.
- Bidding Timeline: The bidding and application process for Anchor Investors takes place exactly one day before the public issue opens to the general public.
Allocation Ceiling for Anchor Investors
- In a book-built issue, the issuer is permitted to allocate up to 60% of the total portion available for QIBs directly to Anchor Investors.
- This allocation must be conducted in accordance with the specific allocation conditions and guidelines prescribed by SEBI.
3. The Minimum Subscription Mandate
To ensure that projects are adequately funded and to prevent companies from listing with illiquid or inadequate capital bases, SEBI enforces strict minimum subscription requirements.
| Step | Action / Outcome |
|---|---|
| 1. Public Issue Closes | The public issue bidding/application period ends. |
| 2. Check Minimum Subscription | Verify whether 90% minimum subscription has been achieved. |
| If YES — ≥90% | Proceed with allotment and complete listing within the prescribed T+6 days timeline. |
| If NO — <90% | The issue fails and the issuer must refund all application money received from applicants. |
The 90% Minimum Subscription Rule
- The Threshold: The minimum subscription to be received from a public or rights issue must not be less than 90% of the total offer made through the offer document.
- SCRR Allotment Clause: In the case of an Initial Public Offer (IPO), the minimum subscription to be received is also subject to the allotment of a minimum number of specified securities as prescribed under the Securities Contracts (Regulation) Rules, 1957 (SCRR).
Consequences of Subscription Failure
- Abortion of Issue: If the 90% minimum subscription is not successfully gathered, the entire issue is deemed to have failed, and the issuer cannot proceed with allotment.
- Mandatory Refunds: The issuer is legally bound to refund all application monies received from investors forthwith.
Cross-Reference: Minimum Subscription Rules for Indian Depository Receipts (IDRs)
For foreign companies raising funds in India through IDRs, the minimum subscription standard is also set at 90%, but with unique penal timelines in the event of failure:
- Non-Underwritten IDR Issues: If the 90% threshold is not met, the issuing company must refund the subscription amount received immediately. If they fail to refund the entire amount within 15 days from the issue closure date, they are liable to pay the subscription amount along with interest at a rate of 15% per annum for the period of delay.
- Underwritten IDR Issues: If the minimum 90% subscription is not received, the company must refund the entire subscription amount received with interest at the rate of 15% per annum for any delay beyond 60 days.
Key Exam Terms & Definitions
- Net Offer to Public: The net portion of specified securities offered to the public, excluding any specific reservations made for other investor categories (such as employees).
- Retail Individual Investor (RII): An individual investor who applies or bids for securities for a total transaction value of not more than Rs. 2 lakh.
- Non-Institutional Investor (NII): Any investor (such as high-net-worth individuals or corporate bodies) who does not fall under the definition of RIIs or QIBs.
- Anchor Investor: A Qualified Institutional Buyer who applies for a minimum value of Rs. 10 crores one day prior to the official opening date of a public issue.
- 90% Minimum Subscription Mandate: The statutory minimum funding floor required for a public or rights issue to proceed with allotment and listing, failing which all money must be refunded.
Part 6: Key Takeaways for the Exam
- Standard Route Allocations: Remember the exact floor and ceiling percentages for book-built issues under the standard route: RII \(\ge\) 35%, NII \(\ge\) 15%, QIB \(\le\) 50%.
- Alternative Route Allocations: Memorize the allocation structure under the alternate route (often used by companies without a profitability track record): RII \(\le\) 10%, NII \(\le\) 15%, QIB \(\ge\) 75%.
- Mutual Fund Allocation: Note that 5% of the QIB portion is strictly reserved for Mutual Funds across both routes.
- Anchor Investor Qualification: Remember the two parameters: minimum application value of Rs. 10 crores and application timing of one day before the issue opens.
- Anchor Investor Cap: The maximum portion of the QIB quota that can be allotted to Anchor Investors is 60%.
- Minimum Subscription Rule: Memorize the 90% threshold of the total offer size. Failure to reach 90% triggers mandatory refunds of all application money.