NISM Series IX Merchant Banking Study Notes: Chapter VI – Issue Management: General Obligations and Due Diligence (Part 2 of 3)

This study guide represents Part 2 of our 3-part comprehensive series covering Chapter VI: Issue Management — General Obligations of Merchant Bankers and Due Diligence. Having established the fundamentals of issue planning, legal structures, and initial due diligence in Part 1, we now focus on the post-issue obligations of lead managers.

This part examines the critical responsibilities that arise after the subscription window closes, including grievance redressal frameworks, reporting pipelines, coordination with registrars, promoter contribution assessments, and mandatory disclosure verifications.

1. Redressal of Investor Grievances and the SCORES Framework

Managing investor grievances is a vital duty of the post-issue lead merchant banker. Under SEBI regulations, a structured mechanism is established to ensure all public complaints are tracked, processed, and resolved systematically.

Regulatory Jurisdiction of SEBI

SEBI directly handles complaints that arise out of issues covered under the following statutes and frameworks:

• The SEBI Act, 1992
• The Securities Contracts (Regulation) Act, 1956 (SCRA)
• The Depositories Act, 1996
• Rules and regulations framed under the above Acts
• Provisions covered under Section 26 of the Companies Act, 2013 (concerning prospectus matters)

The SCORES Grievance Platform

For efficient tracking, SEBI utilizes an online platform known as SCORES (SEBI Complaints Redress System).

• Daily Monitoring Mandate: Each registered merchant banker is assigned a unique user ID and password to access the SCORES portal. Intermediaries are legally required to log in to the website on a daily basis to check for new investor complaints uploaded by SEBI.
• Action Plan & Timeline: Upon discovering a grievance, the merchant banker must immediately initiate steps to resolve the issue.
• Action Taken Report (ATR): The merchant banker is mandatory-bound to submit an Action Taken Report (ATR) in the prescribed electronic format for every single complaint logged against the issue.

Statutory Penalties for Redressal Failures

To ensure intermediaries do not ignore investor complaints, the SEBI Act provides for strict financial penalties:

• Section 15C Penalty: This section prescribes a statutory penalty applicable to a listed company or any registered market intermediary who fails to redress investor grievances after being directed to do so in writing by SEBI within a specified timeframe.

2. Post-Issue Reporting Obligations and Public Announcements

The closing of the subscription list initiates a series of time-bound compliance filings and public disclosures that the lead manager must execute.

The Dual Reporting Pipeline

To maintain transparency, the lead merchant banker must file structured post-issue reports directly with SEBI:

1. Initial Post-Issue Report: This report must be compiled and filed with SEBI within 3 days from the formal closure of the public issue.
2. Final Post-Issue Report: This report must be submitted to SEBI within 15 days of the date of finalization of the basis of allotment, or within 15 days of refunding the subscription money to investors if the issue fails to meet minimum requirements.

Mandatory Post-Issue Advertisements

The merchant banker responsible for post-issue activities must release a public advertisement detailing the performance of the issue.

• Content Requirements: The advertisement must contain highly specific operational details, including:
  • The total extent of oversubscription.
  • The approved basis of allotment.
  • The total value and percentage of all applications received.
  • The value and percentage of successful allottees across all application categories.
  • The exact date of completion of dispatch of refund orders, or the date when electronic instructions were sent to banks.
• Media and Language Rules: The post-issue advertisement must be released within the prescribed timeframe in at least:
  • One English national daily newspaper with wide circulation.
  • One Hindi national daily newspaper with wide circulation.

3. Post-Issue Intermediary Coordination and Process Oversight

A public issue involves a large network of intermediaries. The post-issue lead merchant banker acts as the primary coordinator, ensuring that all parties perform their duties in accordance with the law.

Critical Oversight Areas

Under Regulation 15 of the SEBI Merchant Banker Regulations, the lead manager's post-issue oversight covers:

• Allotment Verification: Supervising how shares are allocated to ensure compliance with the net offer terms.
• Refund Management: Monitoring banks to confirm that blocked application funds under the ASBA (Application Supported by Blocked Amount) system are unblocked, or that physical refund orders are sent.
• Dispatch Operations: Ensuring the timely dispatch of physical share certificates or electronic credit to demat accounts.
• SCSB & Syndicate Coordination: Issuing clear post-close operational instructions to all Syndicate Members, Self-Certified Syndicate Banks (SCSBs), and collection centers.

Mandatory Deputation of Officers

To prevent processing errors, the merchant banker cannot manage the allotment process from a distance:

• The Rule: The post-issue lead merchant banker is required to maintain close coordination with the Registrars to the Issue.
• On-Site Monitoring: The lead manager must arrange to depute its own officers to the offices of the Registrars and other key intermediaries at regular intervals after the closure of the issue.
• The Objective: This on-site presence enables the post-issue merchant banker to actively monitor the physical flow and electronic processing of investor applications.

4. Disclosures: Promoter Identification, Group Companies, and Litigation

The lead manager must carry out an exhaustive validation of the disclosures printed in the Offer Document to protect investors from misrepresentation.

A. Identification of Promoters and Promoter Group

The lead manager must verify who exercises actual control over the corporate issuer. Under SEBI ICDR Regulations, the Promoter and Promoter Group includes:

1. Any person or persons who are in direct or indirect control of the issuer.
2. Any person or persons who are instrumental in the formulation of the plan or program under which the specified securities are being offered to the public.
3. Any person or persons explicitly named as promoters in the offer document.

B. Group Companies Disclosures

To prevent the concealment of corporate stress, the lead merchant banker is required to review and retain a complete repository of verification certificates, confirming:

• The legal constitution of the promoter group and all affiliated group companies.
• The exact shareholding patterns and board compositions of corporate promoters and group entities.
• Any history of disassociation by promoters from other ventures in the preceding 3 years.
• The litigation histories of all associated group companies.

C. Litigation Due Diligence and Ongoing Disclosure Updates

Verifying litigation is a critical aspect of due diligence, as legal disputes can severely impact an issuer's financial stability:

• Legal Counsel Collaboration: The legal counsel actively assists the Lead Merchant Banker in executing the diligence process, reviewing all litigation-related files, court notices, and arbitration documents.
• Continuous Update Mandate: The issuer company is legally required to immediately inform the Lead Managers about any new litigation filed against the company, its promoters, or group entities, as well as any new developments or judgments on previously disclosed litigation matters.
• General Information Document (GID): In line with SEBI's circular dated October 23, 2013, the lead manager must ensure that all components of the General Information Document (GID) are strictly compiled and verified.

5. Promoters' Contribution, Lock-in Rules, and Pledging Provisions

To ensure that promoters remain committed to the company after raising public funds, SEBI enforces strict minimum contribution and lock-in requirements.

A. Minimum Promoters' Contribution

The SEBI (ICDR) Regulations specify the minimum financial contribution that promoters must hold in a public issue or a composite issue of convertible securities.

• Staged Implementation Rule: If a corporate project is structured to be implemented in stages, the promoters' contribution must be calculated with respect to the total equity participation required up to that respective stage.

B. Lock-in Period Rules

To prevent promoters from offloading their shares immediately after listing, their holding is subject to a mandatory freeze:

• Minimum Promoter Lock-in: The minimum promoter's contribution (which includes contribution made by Alternative Investment Funds) must be locked-in for a period of three years.
• Commencement of Lock-in: The three-year lock-in period begins from the date of commencement of commercial production or the date of allotment in the public issue, whichever is later.

C. Inscription and Recording Requirements

To prevent the unauthorized transfer of locked-in securities:

• Physical Share Certificates: The physical certificates of specified securities subject to lock-in must contain a clear, bold inscription stating "non-transferable" along with the exact lock-in expiry date.
• Dematerialised Securities: If the locked-in shares are held in demat form, the issuer is responsible for ensuring that the lock-in restriction is officially recorded in the registry of the depository (NSDL or CDSL).

D. Exceptions to Lock-in Transferability (The Pledging Rule)

Promoters are permitted to pledge their locked-in shares, but only under highly restricted conditions:

• Approved Institutions: Locked-in securities held by promoters may be pledged as collateral security for loans, but only if the loan is granted by a scheduled commercial bank or a public financial institution (PFI).
• The Purpose: The pledge must be created as collateral for a loan granted by such bank or institution, subject to the conditions specified under SEBI regulations.

6. Corporate Governance and Board Composition Compliance

A company cannot access the public markets unless its internal management structure complies with modern governance standards.

Board and Committee Meetings

Both the Companies Act, 2013 and SEBI regulations lay down strict rules governing:

• The frequency and conduct of Board of Directors meetings.
• The composition and meetings of vital board committees (e.g., Audit Committee, Nomination and Remuneration Committee).
• The statutory resolutions that must be passed in these meetings to authorize a public issuance.

The Role of the Compliance Officer

Every registered merchant banker must appoint a dedicated Compliance Officer to oversee these requirements.

• Verification Duty: The Compliance Officer must verify that all meetings were held in accordance with the law, and that all necessary information and disclosures were provided to the Board of Directors.
• Grievance Handling: The Compliance Officer serves as the primary liaison for resolving investor grievances and ensuring adherence to the Code of Conduct.

Reservations in IPOs

While managing an Initial Public Offer (IPO), an issuer is permitted to make reservations of shares for specific categories of persons:

• Exclusion Rule: These allocations must be calculated excluding the promoters' contribution and the net offer to the public.

7. Summary Tables: Post-Issue Timeline and Promoter Obligations

Table 1: Post-Issue Timelines and Reporting Deadlines

Table 2: Promoter Contribution & Lock-in Requirements

8. Formula Overview: Promoter Calculations

The following formulas are used to calculate staged contributions and net public offerings.

• Staged Promoter Contribution = Total Equity Participation required up to Stage N
• Net Public Offer = Gross Issue Size - (Promoter Contribution + Approved Reservations)

9. Key Terms & Concepts for the Exam

• SCORES: SEBI’s centralized, web-based platform for receiving, tracking, and redressing investor complaints against listed companies and intermediaries.
• Action Taken Report (ATR): A mandatory electronic report submitted by the merchant banker detailing the steps taken to resolve an investor grievance.
• Post-Issue Lead Merchant Banker: The lead manager specifically designated to coordinate allotment, process refunds, publish stats, and submit post-issue reports to SEBI.
• Lock-in: A regulatory freeze during which specified shares held by promoters cannot be sold, transferred, or traded, ensuring skin in the game.
• Staged Equity Participation: A regulatory mechanism where promoter contribution is tied to project progress milestones rather than the entire future project cost.

10. Key Takeaways for Students & Professionals

1. Post-issue oversight is as demanding as pre-issue planning. The lead manager remains legally responsible for the transaction until refunds are completed, shares are credited, and the final post-issue report is accepted by SEBI.
2. SCORES requires active, daily engagement. Intermediaries cannot afford to ignore complaints. Daily logins are required, and unresolved grievances can lead to severe penalties under Section 15C.
3. Promoter lock-in is strictly enforced. The three-year freeze is absolute, with physical share certificates marked "non-transferable" or electronic demat accounts flagged. Pledging is only permitted to obtain loans from commercial banks or PFIs.