Equity Market – Issuance & Post-Issuance Activities

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Introduction

In the period prior to 1990’s, when the Controller of Capital Issues (CCI) was the authority for approving the IPO, a fixed price mechanism was in place for sourcing funds. In the era of free pricing, when the companies were allowed to price their issues based on investor sentiments, there had been many occasions when investors suffered due to over pricing. After the issue was completed, there were instances when the share price of the issuing company traded even below par value (or face value). This resulted in huge losses for investors. Due to this inefficient functioning of the primary markets system, an alternative method generally called the “book building” method was introduced in the Indian capital markets. Book building is a mechanism whereby; the offer price is determined based on investor demand. It is a transparent process where investors can access the actual demand for shares being built by the market. The final offer price is determined by the demand for shares at various price points. International markets use book building method for price determination at the time of new equity issuance.

After the submission of the required documents SEBI provides the final ratification for either going ahead with the IPO or rejection of the issue. The SEBI gives its comments on the draft offer document. The changes, if any, as suggested by the SEBI in its offer document are to be incorporated and resubmitted to SEBI for approval. After obtaining the final approval, the company then fixes the period for which its public issue would remain open to investors for subscription. In the case of a book building issue, the company receives bids for subscription at different prices falling within the price band. In the case of a fixed price issue, subscription is received at the issue price fixed by the company. After the issue closes, in the case of a book-building issue, the company fixes the issue price in consultation with the lead manager to the issue. In the case of a fixed price issue, the allotment of securities should be made within 30 days from the date of closure of the issue, whereas in the case of a book-building issue/rights issue, the allotment is to be made within 15 days from the date of closure of the issue. In case there is over-subscription, the basis of allotment is finalized by the company in consultation with the Designated Stock Exchange. The company, lead manager and the registrars to the issue are responsible for ensuring that the basis of allotment is in accordance with the prescribed rules and regulations. Thereafter, the company must ensure that all steps for completion of the necessary formalities for listing and commencement of trading on all the Stock Exchanges are taken within 7 working days from the finalization of the basis.

The issuing company needs to appoint a lead manager for managing the book building issue. This lead manager is also known as the “Book Running Lead Manager” (BRLM). The details of the lead-managers to the issue need to be included in the draft prospectus. The issuing company needs to obtain permission from the stock exchange, which has capability to accept online offer for shares issued. The exchange system should also have the features to communicate effectively, the rights, duties, responsibilities and obligations pertaining to the issuing company and its merchant banker, lead managers, registrar and transfer agents and other agencies involved in the issue process. A dispute resolution mechanism also needs to be in place. The lead book runner(s) is (are) required to submit the due diligence certificate(s) to SEBI. The primary responsibility for building the book is that of the lead manager. The issuing company may appoint more than one BRLM.

The book runners may appoint SEBI registered intermediaries as “underwriters” to the issue. The book runners also appoint SEBI registered broker-members of the stock exchange who are financially capable of honoring commitment arising out of obligations made by their clients. This is ensured by the brokers collecting payment for every order placed by their clients. Such brokers are paid a commission for their distribution services.

We have discussed the lead manager to the issue which is a merchant banker needs to submit the finalized draft prospectus of the issue top SEBI. In this prospectus, the total size of the issue needs to be mentioned. The lead manager mayor may not disclose the fixed price (in case of fixed price issue) or the floor and cap price (in case of book-built issue) at which the new equity issuance is made. In case of non-disclosure of floor and cap price, adequate undertaking needs to be given in the form of a statement that the floor/cap price would be disclosed l-day before the opening of the IPO. Also, the names and editions of-the newspapers/websites where the IPO advertisement would be published needs to be provided.

The Lead Manager has to arrange for distribution of public issue stationery to various collecting banks, brokers, investors, etc.

The issuance process can also be classified based on the approach or mechanism of the share issue. Approach of issuing spares is defined in terms of pricing the issue. Regulations do not play any role in price fixation. Pricing of issues is in coordination with the merchant bankers.

Pricing of Equity Issuance and Book Building Process

This section discusses in detail, the mechanism and steps leading to book building method, final pricing of the issue, marketing as well as final price fixation and allotment of shares.

Pricing

An issuer may determine the price of specified securities in consultation with the lead merchant banker or through the book building process. An issuer may determine the coupon rate and conversion price of convertible debt instruments in consultation with the lead merchant banker or through the book building process. The issuer shall undertake the book building process in a manner.

Differential Pricing

An issuer may offer specified securities at different prices, subject to the following:

Retail individual investors or retail individual shareholders may be offered specified securities at a price lower than the price at which net offer is made to other categories of applicants: Provided that such difference shall not be more than ten per cent of the price at which specified securities are offered to other categories of applicants.
In case of a book-built issue, the price of the specified securities offered to an anchor investor shall not be lower than the price offered to other applicants.
In case of a composite issue, the price of the specified securities offered in the public issue may be different from the price offered in rights issue and justification for such price difference shall be given in the offer document.

Price and Price Band

The issuer may mention a price or price band in the draft prospectus (in case of a fixed price issue) and floor price or price band in the red herring prospectus (in case of a book built issue) and determine the price at a later date before registering the prospectus with the Registrar of Companies: Provided that the prospectus registered with the Registrar of Companies shall contain only one price or the specific coupon rate, as the case may be. If the floor price or price band is not mentioned in the red herring prospectus, the issuer shall announce the floor price or price band at least two working days before the opening of the bid (in case of an initial public offer) and at least one working day before the opening of the bid (in case of a further public offer), in all the newspapers in which the pre issue advertisement was released. The announcement shall also contain relevant financial ratios computed for both upper and lower end of the price band and also a statement drawing attention of the investors to the section titled “basis of issue price” in the prospectus. The cap on the price band shall be less than or equal to one hundred and twenty per cent of the floor price. The floor price or the final price shall not be less than the face value of the specified securities. The “cap on the price band” includes cap on the coupon rate in case of convertible debt instruments.

Face Value of Equity Shares

Subject to the provisions of the Companies Act, 1956, the Act and these regulations, an issuer making an initial public offer may determine the face value of the equity shares in the following manner:

If the issue price per equity share is five hundred rupees or more, the issuer shall have the option to determine the face value at less than ten rupees per equity share, provided that the face value shall not be less than one rupee per equity share.
If the issue price per equity share is less than five hundred rupees, the face value of the equity shares shall be ten rupees per equity share: Provided that nothing contained in this sub-regulation shall apply to initial public offer made by any government company, statutory authority or corporation or any special purpose vehicle set up by any of them, which is engaged in infrastructure sector.

The disclosure about the face value of equity shares (including the statement about the issue price being “X” times of the face value) shall be made in the advertisements, offer documents and application forms in identical font size as that of issue price or price band.

Book Building Process

SEBI defines “Book Building” as a process undertaken by which, a demand for the securities proposed to be-issued by a corporate is elicited, “built-up” and the price for such securities is assessed for the determination of the quantum of such securities to be issued by means of a notice, circular, advertisement, document or information, memoranda or offer document.

Book building is a process used for making a public offer for issue of equity shares of a company, by collecting bids from investors. This provides an indicative price range, popularly known as price band. The issue price is fixed after the analyzing the bids. The issuer company appoints a lead merchant banker to act as a book runner to the issue. A syndicate comprising of capital market intermediaries (eligible brokers, merchant bankers or even mutual funds) is appointed to underwrite issue. The book runner builds an order book comprising of bids from various investors which shows the demand for the shares of the company at various prices. Based on this feedback, the issue price is fixed. Corporate Issuers can issue equity shares, bonds and money market instruments by the book building process.

The steps leading to an issue of equity shares using the booking building process is enumerated as follows:

The issuing company appoints a lead manager which is also the book runner. This entity is a SEBI registered merchant banker.
The book running lead manager prepares and submits the draft documents (such as prospectus, due diligence certificate, board resolution, shareholder approval for raising capital, etc.) to SEBI and obtains acknowledgement for the same.
The issuer and book runner may decide to offer shares within a specified price band (range). If the range is not specified along with the prospectus, then sufficient undertaking may be provided to disclose the same at least one day before the IPO opening date.
Quotes for the shares are invited from different “syndicate members” – consisting of eligible brokers, merchant bankers, underwriters, financial institutions, mutual funds and others. This is the actual book building process, to identify the price floor and cap, depending on demand of shares from investors.
The IPO advertisement needs to be published in leading publications. The opening and closing date of the book building process is disseminated. The book building bods are usually accepted (open) for five business days. After the floor and cap (price range) is determined by the book building method, the final IPO advertisement for the public issue portion may carry the price range that has been determined by the syndicate members.
Based on the bids received, the issuer finalizes the cut-off rate and the final allocation of shares in consultation with the book runner and lead manager.
The issuer and the book runner may impose restrictions on the number of shares allotted to any particular investor – to prevent a possible takeover threat.
The final prospectus is filed by the company through the book runner, to the Registrar of Companies (RoC), along with the procurement agreement.
The placement portion opens for subscription only after the prospectus is filed with the RoC.
The placement portion closes a day before the opening of the public issue portion.
Finally, the public portion opens, and the allotment and listing of this portion is done. The price determined in the book building process is also applicable to the public portion. If the public portion is oversubscribed, then allotment is made on proportional basis. If the public portion remains undersubscribed, the shortfall is distributed amongst those who have opted for placement, as well as the underwriters.

In a book building process, a red herring prospectus which does not have details of either the price or number of shares being offered or the amount of issue, is filed with the Registrar of Companies. The underwriter of the issue collects information from potential buyers and attempts to build interest in the issue. Road shows are conducted, whereby the underwriter visits prospective investors in most major cities, regarding the company and the issue. Such road shows involve press release, broker-analyst meet or an investor meet.

Book Building Options

There are two types of book building involved:

Open Book: Online display of demand for the issued securities is available.
Closed Book: The bids are not made public.

SEBI allows issuing companies to follow a 100% book building, whereby, the entire process is completed in the first phase, without a mandatory fixed price offer after the completion of the book building issue. This requires a minimum issue size of Rs. 25 crores. In case an issuer company makes a 100% book building, then the following criterion for proportional allotment needs to be adhered:

At least 35% of the net offer to the public shall be available for allocation to Retail Individual Investors (RII).
At least 15% of the net offer to the public shall be available for allocation to Non-Institutional Investors (NII).
Not more than 50% of the net offer to the public shall be available for allocation Qualified Institutional Buyers (QIB).

A 75% book building issue is a two-stage process, with a partial offer of 75% of the issue through book building whereby, a price is discovered by the usual bidding process and the balance 25% is offered to the public through a fixed price offer – which is determined based on the initial book building process.

In case of companies that are unlisted and do not satisfy the profitability criteria laid down by SEBI, at least 50% of the offer to public should be allotted to Qualified Institutional Buyers (QIB), failing which the full subscription amount should be refunded.

In the special case of the companies not adhering to the Section 19(2)(b) guidelines of the Securities Contract Regulation Rules (SCRR), 1957, then the issuing company needs to allocate at least (mandatory) 60% of the public issue to QIB, not exceeding 30% to Retail Individual Investors and balance 10% to NII.

Disclosure of Pricing

The issuing company may mention a price or price band in the draft prospectus (in case of a fixed price issue) and floor price or price band in the red herring prospectus (in case of a book-built issue) and determine the price at a later date before registering the prospectus with the Registrar of Companies. If the floor price or price band is not mentioned in the red herring prospectus, the issuer shall announce the floor price or price band at least two working days before the opening of the bid (in case of an initial public offer) and at least one working day before the opening of the bid (in case of a further public offer), in all the newspapers in which the pre issue advertisement was released. The announcement should also contain relevant financial ratios computed for both upper and lower end of the price band and also a statement drawing attention of the investors to the section titled “basis of issue price” in the prospectus. The cap on the price band shall be less than or equal to one hundred and twenty per cent of the floor price. The floor price or the final price shall not be less than the face value of the specified securities.

Benefits of Book Building Method

Book building method enables issuers to reap benefits arising from discovery of the share price based on actual demand from investors. This is a much better method than arbitrarily fixing a price by either the issuer or the regulator. The chance of full subscription is much better with a book-built offer, because of the transparency involved. The main objective of the book building process is to ensure low chances of undersubscription and avoiding devolvement of the issue. The process is also simplified. The investors also have a reliable pricing benchmark, because the syndicate members have subscribed to the issue during the book building process.

Limitations of book building issue

In developed markets such as in the US, the book building process takes place in a few hours time. In this period, the lead manager provides a 2-way quote to ensure that market-making is done. This system is not available in India. The Indian model is different and is adapted version of the international book building process. Because of this, in the book building process in India, reputation and peer pressure have a larger role to play, in order to avoid default. The number of syndicate members is also limited. This also has a cascading effect in that, the price suitable for the institutional investors comprising of the syndicate – who have long-term investment aspirations “-may not be in conjunction with the retail investors. Hence, sometimes the price in the placement portion may not be attracting participation in the public issue.

The share price of a new equity issue may also be decided by the fixed price method.

Fixed Price Issue

Issuing companies themselves offer directly to the general public, a fixed number of shares at a stated price. The price is fixed by the merchant banker in consultation with the company. The price may be at the premium or discount to the face value of the share. Corporate Issuers can issue equity shares by fixed price.

In case of Fixed Price Issue

Minimum 50% of the net offer of securities to the public shall initially be mane to RII.
The balance allotment to Individual applicants other than RII, and other investors including corporate bodies/institutions irrespective of the number of securities applied for.

Face Value of Equity Shares

An issuer making an initial public offer may determine the face value of the equity shares in the following manner:

If the issue price per equity share is five hundred rupees or more, the issuer shall have the option to determine the face value at less than ten rupees per equity share, provided that the face value shall not be less than one rupee per equity share.
If the issue price per equity share is less than five hundred rupees, the face value of the equity shares shall be ten rupees per equity share, provided that nothing contained in this sub-regulation shall apply to initial public offer made by any government company, statutory authority or corporation or any special purpose vehicle set up by any of them, which is engaged in infrastructure sector.

Differential Pricing

An issuing company may offer specified securities at different prices. It may offer shares to retail individual investors or retail individual shareholders at a price lower than the price at which net offer is made to other categories of applicants such as noninstitutional investors or qualified institutional buyers. But this difference should not be more than ten per cent of the price at which the specified securities are offered to other categories of applicants. In the case of a book-built issue, the price of the specified securities offered to an anchor investor shall not be lower than the price offered to other applicants. In the context of a composite issue, the price of the specified securities offered in the public issue may be different from the price offered in rights issue and justification for such price difference shall be given in the offer document.

Role and Responsibilities in Book Building Process

The intermediaries involved in the book building issue shall comply with the requirements as follows:

The issuer shall appoint one or more merchant banker(s) as book runner(s) and their name(s) shall be disclosed in the draft red herring prospectus.
The lead merchant banker shall act as the lead book runner and shall be primarily responsible for the book building.
There shall be only one lead book runner and other merchant bankers appointed, if any, shall either be co-book runners or syndicate members.
Other terms such as joint lead merchant bankers etc. shall not be used.
In case of appointment of more than one lead merchant banker or book runner, the rights, obligations and responsibilities of each shall be delineated in the inter-se allocation of responsibility.
The book runner(s) may appoint syndicate members.
The lead book runner and co-book runners shall compulsorily underwrite the issue, and the syndicate members shall sub-underwrite with the lead book runner/co-book runners.
The lead book runners/ syndicate members shall enter in to underwriting/sub-underwriting agreement on the date of allocation and furnish details forthwith to the Board.
The details of final underwriting arrangement indicating actual numbers of shares underwritten shall be disclosed and printed in the Prospectus before it is registered with the Registrar of Companies.
In case of an under subscription in an issue, the shortfall shall have to be made good by the book runner(s) to the issue and the same shall be incorporated in the inter-se allocation of responsibility as specified in Schedule II.
The issuer shall enter into an agreement with one or more of the stock exchanges which have the system of on-line offer of securities. The agreement shall specify inter-alia, the rights, duties, responsibilities and obligations of the issuer and recognized stock exchange(s) inter se.
The agreement may also provide for a dispute resolution mechanism between the issuer and the stock exchange.
The book runner(s)/syndicate members shall appoint stock brokers who are members of the recognized stock exchange and registered with the Board, for the purpose of accepting bids, applications and placing orders with the issuer and ensure that the stock brokers so appointed are financially capable of honoring their commitments arising out of defaults of their clients/investors, if any; Provided that in case of Application Supported by Blocked Amount, Self Certified Syndicate Banks shall also accept and upload the details of such applications in electronic bidding system of the stock exchange(s). The stockbrokers and Self Certified Syndicate Bank accepting applications and application monies shall be deemed as “bidding/collection centers”.
The issuer shall pay to the book runners/syndicate members/stockbrokers/ Self Certified Syndicate Banks a commission/fee for the services rendered by them.
The stock exchange shall ensure that any stockbroker does not levy a service fee on his clients/investors in lieu of his services in this regard.
Where the issue size is specified the red herring prospectus may not contain the price and the number of specified securities.
The draft red herring prospectus containing all the disclosures including total issue size, if applicable, as specified in Schedule VIII, except that of price and the number of specified securities to be offered through it shall be filed with the Board by the lead merchant banker.
Provided that in case of a fast-track issue the draft red herring prospectus shall not be filed with the Board.
Subject to the provisions of regulation 30 and the provisions of this clause, the issuer may mention the floor price or price band in the red herring prospectus. where the issuer opts not to make the disclosure of the price band or floor price in the red-herring prospectus, the following shall also be disclosed in the red-herring prospectus:
- A statement that the floor price or price band, as the case may be, shall be disclosed at least two working days (in case of an initial public offer) and at least one working day (in case of a further public offer) before the opening of the bid.
- A statement that the investors may be guided in the meantime by the secondary market prices (in case of a further public offer); names and editions of the newspapers where the announcement of the floor price or price band would be made.
- Names of websites (with address), journals or other media in which the said announcement will be made.
Where the issuer decides to opt for price band instead of floor price, the issuer shall also ensure compliance with the following conditions:
- The cap of the price band should not be more than 20% of the floor of the band, i.e., cap of the price band shall be less than or equal to 120% of the floor of the price band.
- The price band can be revised during the bidding period in which case the maximum revision on either side shall not exceed 20% i.e., floor of price band can move up or down to the extent of 20% of floor of the price band disclosed in the red herring prospectus and the cap of the revised price band will be fixed in accordance with clause (I) above.
- Any revision in the price band shall be widely disseminated by informing the stock exchanges, by issuing press release and also indicating the change on the relevant website and the terminals of the syndicate members.
- In case the price band is revised, the bidding period shall be extended as per provisions of sub-regulation (2) of regulation 46.
- The manner in which the shortfall, if any, in the project financing, arising on account of lowering of price band to the extent of 20% will be met shall be disclosed in the red herring prospectus. It shall also be disclosed that the allotment shall not be made unless the financing is tied up.
The issuer shall provide the application-cum-bidding forms to the syndicate members and Self Certified Syndicate Banks.
The issuer shall make arrangement for collection of the applications-cum-bidding from mandatory collection centers as provided in sub-regulation (6) of regulation 5.
For the purpose of ‘bidding’ the document should be printed and circulated as “Red Herring Prospectus” The same nomenclature shall be used throughout the document.
Under “Red Herring Prospectus”, add “Please read Section 60B of the Companies Act, 1956”.
‘Bid’ should be defined as ‘indication to make an offer and not as ‘an offer’.
State the manner of bidding by corporate bodies and submission/deposit of supporting documents at the time of bidding. In the case of bids/ applications by HUF, state the manner of making application and that HUF would be considered as ‘individual’.
Ensure that the application-cum-bidding form meant for Applications Supported by Blocked Amount or otherwise, provides for all the relevant information including the one specified in this regard in the relevant Acts/ Regulations.
The application-cum-bidding form, other than the form meant for Applications Supported by Blocked Amount, shall satisfy the following conditions:
- The bidding form shall be standard to ensure uniformity in bidding and accuracy.
- The bidding form shall contain information about the investor, the price and the number of securities that the investor wishes to bid.
- Before being issued to the investors the bidding form shall be serially numbered, and date and time stamped at the bidding centers.
- The serial number may be system generated or stamped with an automatic numbering machine.
- The bidding form shall be issued in duplicate signed by the investor and countersigned by the syndicate member, with one form for the investor and the other for the syndicate member(s)/book runner(s).

The application-cum-bidding form for Applications Supported by Blocked Amount shall contain all the relevant details and shall be uniform for all ASBA investors.

Anchor Investor

An Anchor Investor shall make an application of a value of at least Rs. 10 crores in the public issue. Allocation to Anchor Investors shall be on a discretionary basis and subject to a minimum number of 2 such investors for allocation of up to Rs. 250 crore and 5 such investors for allocation of more than Rs. 250 crores. Up to thirty per cent of the portion available for allocation to qualified institutional buyers shall be available to anchor investor(s) for allocation/allotment (“anchor investor portion”). One-third of the anchor investor portion shall be reserved for domestic mutual funds. The bidding for Anchor Investors shall open one day before the issue opening date. Anchor Investors shall pay a margin of at least 25% on application with the balance to be paid within two days of the date of closure of the issue. Allocation to Anchor Investors shall be completed on the day of bidding by Anchor Investors. If the price fixed as a result of book building is higher than the price at which the allocation is made to Anchor Investor, the Anchor Investor shall bring in the additional amount. However, if the price fixed as a result of book building is lower than the price at which the allocation is made to Anchor Investor, the excess amount shall not be refunded to the Anchor Investor, and the Anchor Investor shall take allotment at the price at which allocation was made to it.

The number of shares allocated to Anchor Investors and’ the price at which the allocation is made, shall be made available in public domain by the merchant banker before opening of the issue. There shall be a lock-in of 30 days on the shares allotted to the Anchor Investor from the date of allotment in the public issue. Neither the merchant bankers nor any person related to the promoter/promoter group/merchant bankers in the concerned public issue can apply under Anchor Investor category. The parameters for selection of Anchor Investor shall be clearly identified by the merchant banker and shall be available as part of records of the merchant banker for inspection by the Board.

The applications made by qualified institutional buyers under the Anchor Investor category and under the Non-anchor Investor category may not be considered as multiple applications.

Margin Money

The margin collected from categories other than Qualified Institutional Buyers shall be uniform across the book runner(s)/syndicate members /Self Certified Syndicate Banks for each such investor category. An amount of not less than ten per cent of the application money in respect of bids placed by qualified institutional buyers and not less than twenty five percent of the application money from the Anchor investors shall be taken as margin money. An amount to the extent of entire application money as margin money may be collected from the applicants before they place an order on their behalf. Amount of margin charged from an investor shall be entered and printed in the TRS. The payment accompanied with any revision of Bid, shall be adjusted against the payment made at the time of the original bid or the previously revised bid. Bids for specified securities beyond the investment limit prescribed under relevant laws shall not be accepted by the syndicate members/stockbrokers from any category of clients/ investors. The stockbrokers shall collect the money from their client for every order placed by them and in case the clients/investors fail to pay for specified securities allocated as per these regulations, the stock brokers shall pay such amount; Provided that in case of Applications Supported by Blocked Amount, the Self Certified Syndicate Banks shall follow the procedure specified in this regard by the Board.

Bidding Process

Bidding process shall be only through an electronically linked transparent bidding facility provided by recognized stock exchange (s). The lead book runner shall ensure the availability of adequate infrastructure with syndicate members for data entry of the bids in a timely manner. The syndicate members shall be present at the bidding centers so that at least one electronically linked computer terminal at all the bidding centers is available for the purpose of bidding. During the period the issue is open to the public for bidding, the applicants may approach the stockbrokers of the stock exchange/s through which the securities are offered under on-line system or Self Certified Syndicate Banks, as the case may be, to place an order for bidding for the specified securities. Every stockbroker shall accept orders from all clients/investors who place orders through him and every Self Certified Syndicate Bank shall accept Applications Supported by Blocked Amount from ASBA investors. Applicants who are qualified institutional buyers shall place their bids only through the stockbrokers who shall have the right to vet the bids. The bidding terminals shall contain an online graphical display of demand and bid prices updated at periodic intervals, not exceeding thirty minutes. At the end of each day of the bidding period, the demand including allocation made to anchor investors, shall be shown graphically on the bidding terminals of syndicate members and websites of recognized stock exchanges offering electronically linked transparent bidding facility, for information of public. The investors (except ASBA investors) may revise their bids. The qualified institutional buyers shall not withdraw their bids after closure of bidding. The identity of qualified institutional buyers making the bidding shall not be made public. The stock exchanges shall continue to display on their website, the data pertaining to book built issues in a uniform format, inter alia giving category-wise details of bids received, for a period of at least three days after closure of bids.

Determination of Price

The issuer shall, in consultation with lead book runner, determine the issue price based on the bids received.
On determination of the price, the number of specified securities to be offered shall be determined (i.e., issue size divided by the price to be determined).
Once the final price (cut-off price) is determined, all those bidders whose bids have been found to be successful (i.e., at and above the final price or cut-off price) shall be entitled for allotment of specified securities.
Retail individual investors may bid at “cut off” price instead of their writing the specific bid price in the bid forms.
The lead book runner may reject a bid placed by a qualified institutional buyer for reasons to be recorded in writing provided that such rejection shall be made at the time of acceptance of the bid and the reasons therefore shall be disclosed to the bidders.

Necessary disclosures in this regard shall also be made in the red herring prospectus. The final prospectus containing all disclosures in accordance with the provisions of these regulations including the price and the number of specified securities proposed to be issued shall be registered with the Registrar of Companies.

Allotment of Book Built Issues

Allotment to retail individual investors, non-institutional investors and qualified institutional buyers other than anchor investors shall be made proportionately.
In case of under subscription in any category, the undersubscribed portion in that category shall be allocated to the bidders as per disclosures made in the red herring prospectus, provided: that the unsubscribed portion in qualified institutional buyer category shall not be available for subscription to other categories, in case the book building process is undertaken for the purpose of compliance of eligibility conditions for public issue.
On receipt of the sum payable on application for the amount towards minimum subscription, the issuer shall allot the specified securities to the applicants as per these regulations.

Application for listing

Subject to the provisions of these regulations, the issuer may apply for listing of specified securities on a stock exchange other than the stock exchange through which it offers its specified securities to public through the on-line system.

Maintenance of Books and Records

A final book of demand showing the result of the allocation process shall be maintained by the lead book runner.
The book runner/s and other intermediaries associated in the book building process shall maintain records of the book building prices.
The Board shall have the right to inspect the records, books and documents relating to the book building process and such person shall extend full cooperation.

Reverse Book Building

Reverse book building process is exactly the opposite of the book building process. If a company wants to delist its shares or expresses its desire to buy back its own shares, then a reverse auction is conducted, whereby, investors are asked to quote the price at which they want to exit the scrip. This is no longer applicable in Indian markets, due to regulatory concerns for possible price manipulation.

Distribution, Allocation and Listing

Minimum offer to public

Subject to the provisions of sub-clause (b) of clause (2) of rule 19 of Securities Contracts (Regulations) Rules, 1957, the net offer to public:

In case of an initial public offer, shall be at least ten per cent or twenty-five per cent of the post issue capital, as the case may be and
In case of a further public offer, shall be at least ten per cent or twenty-five per cent of the issue size, as the case may be.

This shall not apply if the issuer is:

A government company or statutory authority or corporation or any special purpose vehicle set up and controlled by anyone or more of them, which is engaged in infrastructure sector.
An infrastructure company fulfilling the following conditions:
1. Its project has been appraised by one or more public financial institutions.
2. Not less than fifty per cent. of the project cost is financed by one or more such institutions, jointly or severally, by way of loan or subscription to equity shares or a combination of both, irrespective of whether they appraise the project or not.

The term “infrastructure company” means, an enterprise wholly engaged in the business of (i) developing or (ii) operating and maintaining or (iii) developing, operating and maintaining any infrastructure facility.

Monitoring Agency

If the issue size exceeds Rupees 500 Crores, then the issuer shall make arrangements for the use of proceeds of the issue to be monitored by a public financial institution or by one of the scheduled commercial banks named in the offer document as bankers of the issuer. The monitoring agency shall submit its report to the issuer in the format specified in Schedule IX on a half yearly basis, till the proceeds of the issue have been fully utilized.

Allotment, Refund and Payment of Interest

The issuer and merchant bankers shall ensure that specified securities are allotted and/or application moneys are refunded within fifteen days from the date of closure of the issue.

If specified securities are not allotted. and/or application amount is not refunded within the period stipulated in sub-regulation, the issuer shall undertake to pay interest at such rate and within such time as disclosed in the offer document.

Distribution

Success of an issue depends on the issues being distributed to the investing public. The sale of securities to ultimate investors is called as distribution. It is a specialist job which can be performed by brokers and dealers in securities, who maintain regular and direct contact with the ultimate investor. In IPQ distribution, the marketing / networking effort is the key, which enables Distributor to carry out the vigorous exercise of:

Putting the banners of the IPO on its website all across the branches.
Sending SMS to all its potential customers/investors.
Making available the IPO application forms, in all branches.
Sending the e-mails to all investors about the impending IPOs and the product note.

Reservation on competitive basis

In case of an issue made through the book building process, the issuer may make reservation on competitive basis out of the issue size excluding promoters’ contribution and net offer to public in favor of the following categories of persons:

Employees of the issuer including employees of the promoting companies in case of a new issuer.
Shareholders (other than promoters) of: Listed promoting companies, in case of a new issuer; and Listed group companies, in case of an existing issuer: Provided that if the promoting companies are designated financial institutions or state and central financial institutions, the shareholders of such promoting companies shall not be eligible for the reservation on competitive basis.
Persons who, as on the date of filing the draft offer document with the Board, are associated with the issuer as depositors, bondholders or subscribers to services of the issuer making an initial public offer: Provided that the issuer shall not make the reservation to the issue management team, syndicate members, their promoters, directors and employees and for the group or associate companies of the issue management team and syndicate ‘members and their promoters, directors and employees.

In case of an issue made other than through the book building process, the issuer may make reservation on competitive basis out of the issue size excluding promoters’ contribution and net offer to public in favor of the following categories of persons:

Employees of the issuer including employees of the promoting companies in case of a new issuer.
Shareholders (other than promoters) of:
- Listed promoting companies, in the case of a new issuer.
- listed group companies, in the case of an existing issuer.

Provided that if the promoting companies are designated financial institutions or state and central financial institutions, the shareholders of such promoting companies shall not be eligible for the reservation on competitive basis.

In case of a further public offer (not being a composite issue), the issuer may make reservation on competitive basis out of the issue size excluding promoters’ contribution and net offer to public in favor of retail individual shareholders of the issuer.

The reservation on competitive basis shall be subject to following conditions:

The aggregate of reservations for employees shall not exceed ten per cent of the issue size.
Reservation for shareholders shall not exceed ten per cent. of the issue size.
Reservation for persons who as on the date of filing the draft offer document with the Board, have business association as depositors, bondholders and subscribers to services with the issuer making an initial public offer shall not exceed five per cent of the issue size.
No further application for subscription in the net offer to public category shall be entertained from any person (except an employee and retail individual shareholder) in favor of whom reservation on competitive basis is made.
Any unsubscribed portion in any reserved category may be added to any other reserved category and the unsubscribed portion, if any, after such inter-se adjustments among the reserved categories shall be added to the net offer to the public category.
In case of under-subscription in the net offer to the public category, spill-over to the extent of under-subscription shall be permitted from the reserved category to the net public offer category.

In the case of reserved categories, a single applicant in the reserved category may make an application for a number of specified securities which exceeds the reservation.

The term “reservation on competitive basis” means reservation wherein specified securities are allotted in proportion of the number of specified securities applied for in respect of a particular reserved category to the number of specified securities reserved for that category. The term “new issuer” means an issuer which has not completed twelve months of commercial operation and its audited operative results are not available.

Allocation in net offer to public

No person shall make an application in the net offer to public category for that number of specified securities which exceeds the number of specified securities offered to public. In an issue made through the book building process, the allocation in the net offer to public category shall be made as follows:

Not less than thirty-five per cent to retail individual investors.
Not less than fifteen per cent to non-institutional investors.
Not more than fifty per cent to qualified institutional buyers, five per cent of which shall be allocated to mutual funds.

In an issue made through the hook building process, the issuer may allocate up to thirty per cent of the portion available for allocation to qualified institutional buyers to an anchor investor in accordance with the conditions specified in this regard in the Book Building Process.

In an issue made other than through the book building process, allocation in the net offer to public category shall be made as follows: minimum fifty per cent. to retail individual investors; and remaining\ to:

Individual applicants other than retail individual investors.
Other investors including corporate bodies or institutions, irrespective of the number of specified securities applied for; the unsubscribed portion in either of the categories specified above may be allocated to applicants in the other category.

If the retail individual investor category is entitled to more than fifty per cent on proportionate basis, the retail individual investors shall be allocated that higher percentage.

Safety-net arrangement

An issuer may provide for a safety-net arrangement for the specified securities offered in any public issue in consultation with the merchant banker after ascertaining the financial capacity of the person offering the safety-net arrangement, subject to disclosures specified in this regard. Provided that any such arrangement shall provide for an offer to purchase up to a maximum of one thousand specified securities per original resident retail individual allottee at the issue price within a period of six months from the last date of dispatch of security certificates or credit of demat account. The term “safety net arrangement” means an arrangement provided by the issuer under which a person offers to purchase specified securities from the original resident retail individual allottees at the issue price.

Listing Process

The listing formalities to be completed in this regard are as under:

The Exchange should be advised as soon as the subscription list is closed. In the event of under subscription, it should be confirmed that the underwriters or their nominees have taken up the balance of the issue remaining unsubscribed. Copies of the Basis of Allotment of the equity shares including allotment to QIB’s should be filed. The company should submit a certified true copy of its board resolution for allotment of company’s shares as per the basis of allotment approved by the Designated Stock Exchange. The date of allotment of the shares should also be intimated to the Exchange. The company must submit the copy of advertisement of Basis of Allotment. If not published, the draft copy of the advertisement.
It should be confirmed that the allotment of securities offered to the public has been made within 15 days (30 days for fixed price issue) from the date of closure of the public issue.
If the allotment has not been made and/or the refund orders have not been dispatched to the investors within 15 days (30 days for fixed price issue) from the date of the closure of the issue, specified interest per annum is being paid.
The Auditor of the Company/practicing Company Secretary should-certify that:
- In the event of. over-subscription, the allotment of shares has been made as agreed upon with the Stock Exchange concerned.
- For shares under lock-in, the share certificates have been properly enfaced with respect to their non-transferability, and the necessary corporate action has been executed to have the shares marked as non-transferable in the depository’s record.
- Allotment of shares from the employees’ quota has been made to permanent/regular employees of the company and of the promoter companies, as on the date of the opening of the public issue and who are entitled to such allotment.
- The allotment of shares from the promoters’ quota has been made correctly to those entitled to and nobody else.

The Initial Listing fee and Annual Listing Fee as per the Exchange regulations for the year should be paid. The company should submit certificate/s from its banker/s to the issue stating that the application monies collected are lying in the separate account and that the said amount has not been utilized by the company so far. A Listing Agreement should be executed; Detailed Letter of Application & Listing Application should be submitted; Distribution Schedule of the equity shares (pre-issue, issue and post issue separately) should be filed. The company should send the share-holding pattern (pre-issue, issue and post-issue) form duly filled in.

Category wise (Physical & Demat) distinctive numbers of the shares should be submitted. A certificate from the Registrars.to the issue should be submitted confirming the exact date of credit of shares allotted in demat form in both the depositories i.e. NSDL and CDSL. In case there is any delay in giving credit to any of the depository, the reason for the same should also be mentioned. Letter of credit from both the depositories i.e., NSDL & CDSL indicating the quantity and date of credit must be submitted. The same should also indicate the quantity of demat shares under lock-in with the date up to which the same is under lock-in. A statement signed by the Chief Executive Officer of the company should be submitted stating the date of completion of posting of letters of allotment/share certificates (including NRI’s) and refund orders. A copy of the Registrars certificate in this respect should also be filed. An undertaking should be filed with the Exchange to the effect that the company will be returning the share certificates issued for the entire holding, duly split within a week’s time as and when such requests are received from the shareholders. The date(s) of book closure of the register of members or record date fixed in the current year and reason/s for it should be intimated. A copy of the SEBI Acknowledgement card should be submitted. Due diligence certificate from the Lead Manager to the issue together with a statement showing inter-se allocation of responsibility amongst Lead Managers should be filed with the Exchange.

Other submissions include:

A declaration to the exchange that the company has not entered into any buy-back agreement or arrangement with any of the applicants/allottees of the shares in its public issue.
An auditor certificate regarding compliance of conditions of Corporate Governance as stipulated in clause 49 of the listing agreement.
The company should also give the composition of various committees as required under the said clause.

The company should also file the Electronic Data Information Filing and Retrieval (EDIFAR) registration with the Exchange.

Green Shoe Option and Concept of Market Maker

A Green Shoe option is an option of allocating shares in excess of the shares included in the public issue and operating a post-listing price stabilizing mechanism for a period not exceeding 30 days. This is granted to a company to be exercised through a Market Maker or a Market Maker. Limit for the Greenshoe option is maximum of 15% of the issue size. This option requires shareholder authorization.

In legal parlance, a green-shoe option is also known as an “over-allotment option”. In a public offering, the issuing company sells its shares to investors, which gets listed on a stock exchange for subsequent trading. When the issuing company opts for a Greenshoe option, it gives the issuer company a right to sell more shares to investors than originally planned in their public offering. This is possible only if the demand situation requires such an action after the listing.

The green-shoe option can greatly help in stabilizing the prices after listing. For public offerings in the Indian stock market, a company interested in using the greenshoe option has to follow the guidelines prescribed by SEBI. The size of excess allotment or the green-shoe option should not exceed 15% of the total issue size.

A company wanting to use a greenshoe option has to first and foremost appoint a “stabilizing agent” or a “market maker” by entering into an agreement with one of its merchant bankers managing the public offering. The market maker plays a crucial role in the working of a greenshoe option during the stabilization period. For its services, the market maker earns a fee from the company. According to SEBI guidelines, the stabilization period shall not exceed 30 days from the date when trading permission was given by the stock exchanges.

As discussed, the process of a greenshoe option works on over-allotment of shares. For example, if a company is planning to issue only 1,000,000 shares, but in order to utilize the greenshoe option, it actually issues 1,150,000 shares, in which case the over-allotment would be 150,000 shares. The company does not issue any new shares for the overallotment.

The 150,000 shares used for the over-allotment are actually borrowed from the pre-issue existing shareholders and promoters with whom the stabilizing agent enters into a separate agreement. For the subscribers of a public issue, it makes no difference whether the company is allotting shares out of the freshly issued 1,000,000 shares or from the 150,000 shares borrowed from the promoters. Once allotted, a share is just a share for an investor.

For the company, however, the situation is totally different. The money received from the over- allotment is required to be kept in a separate bank account. The main job of the market maker begins only after trading in the share starts at the stock exchanges. In case the shares are trading at a price lower than the offer price, the market maker commences buying the shares by using the funds lying in the separate bank account. In this manner, by buying the shares when others are selling, the market maker tries to keep the share prices from decreasing below the issue price. The shares so bought from the market are handed over to the promoters from whom they were borrowed. In case the newly listed shares start trading at a price higher than the offer price, the market maker does not buy any shares. Instead, at the end of the stabilization period of 30 days, the company exercises its greenshoe option and issues new shares to the market maker. These are in turn handed over to the promoters from whom the shares were borrowed.

Thus, the green shoe option is a win-win situation both for the company as well as investors. The company gets to source funds in excess of its original plan, if the market price is sustained above the listing price. Investors are also benefitted because if the company’s share price if above the issue price, then they make a profit. If the company share price is decreasing, then their downside is completely protected, because the market maker keeps buying shares, to protect against the share price decreasing below the issue price.

It may be noted that the market maker has the discretion to buy shares at its discretion. It may also decide the actual timing of the purchase, quantity and price to ensure stabilization. The market maker may purchase directly from institutional shareholders, or from the market itself. The market maker cannot purchase more than 15% of the issue size – which is also the limit for the green shoe option. The stabilizing measure cushions the impact due to adverse market volatility.

The green shoe option is a post listing measure to ensure price stabilization. This protects the small investors. The underwriters make larger profits in when the issuing company opts for Greenshoe option. This is because, usually the listing price is greater than the issue price – due to the positive impact of the market maker who is expected to stabilize the prices. In a bullish market scenario, underwriters will opt for additional allotment of 15% due to index moving upwards. The post-listing price is usually higher in a bull market. In a bearish market, the underwriting option may not be exercised due to the market maker’s presence, or underwriters may purchase the shares at a price lower than the issue price.

Procedure for Over Allotment and Stabilization

The allotment of the Over Allotment Shares shall be done pro rata with respect to the proportion of Allotment in the Issue to various categories.
The monies received from the Bidders for Equity Shares in the Issue against the over-allotment shall be kept in the green-shoe option Bank Account distinct and separate from the Issue Account and shall be used only for the purpose of buying shares from the market during the Stabilization Period for the stabilization of the post listing price of the Equity Shares.
Upon such allotment, the Market Maker shall transfer the Over Allotment Shares from the green shoe option Demat Account to the respective depository accounts of the successful Bidders.
For the purpose of purchasing the Equity Shares, the Market Maker shall use the funds lying to the credit of green-shoe option Bank Account.
The Market Maker shall determine the timing of buying the Equity Shares, the quantity to be bought and the price at which the Equity Shares are to be bought from the market for the purposes of stabilization of the post listing price of the Equity Shares.
The Equity Shares purchased from the market by the Market Maker, if any, shall be credited to the green-shoe option Demat Account and shall be returned to the Green Shoe Lender within two working days from the expiry of the Stabilization Period.
On the expiry date of the stabilization period, if the number of equity shares in the green-shoe option Demat Account is less than the additional shares (due to the green shoe option), then new Equity Shares will be issued for the number equal to such shortfall. This will be credited into the green-shoe option Demat Account within five days of the expiry of the stabilization period. The newly issued equity shares shall be returned by the Market Maker to the Green Shoe Lender in lieu of the over-allotment shares. This needs to be completed within two business days of the shares being credited into the green-shoe option Demat Account.
Upon the return of Equity Shares to the Green Shoe Lender, the Market Maker shall close the green-shoe option Demat Account.
The Equity Shares returned to the Green Shoe Lender shall be subject to remaining lock-in period, if any, as provided in the SEBI Guidelines.

The Market Maker shall remit to the issuer from the green-shoe option Bank Account, an amount, in Rupees, equal to the number of Equity Shares allotted by the issuer to the green-shoe option Demat Account at the Issue Price. The amount left in this account, if any, after this remittance and deduction of expenses and net of taxes, if any, shall be transferred to the investor protection fund of the Stock Exchanges in equal parts. Upon transfer of monies as above, the green-shoe option Bank Account shall be closed by the Market Maker.

SEBI on Market Making

An issuer making a public issue of specified securities may provide green shoe option for stabilizing the post listing price of its specified securities, subject to the following:

The issuer has been authorized, by a resolution passed in the general meeting of shareholders approving the public issue, to allot specified securities to the stabilizing agent, if required, on the expiry of the stabilization period.
The issuer has appointed a merchant banker or book runner, as the case may be, from amongst the merchant bankers appointed by the issuer as a stabilizing agent, who shall be responsible for the price stabilization process.
Prior to filing the draft offer document with the Board, the issuer and the stabilizing agent have entered into an agreement, stating all the terms and conditions relating to the green shoe option including fees charged and expenses to be incurred by the stabilizing agent for discharging his responsibilities.
Prior to filing the offer document with the Board, the stabilizing agent has entered into an agreement with the promoters or pre-issue shareholders or both for borrowing specified securities from them in accordance with clause (g) of this sub-regulation, specifying therein the maximum number of specified securities that may be borrowed for the purpose of allotment or allocation of specified securities in excess of the issue size (hereinafter referred to as the “over- allotment”), which shall not be in excess of fifteen per cent of the issue size.
Subject to above clause (d), the lead merchant banker or lead book runner, in consultation with the stabilizing agent, shall determine the number of specified securities to be over-allotted in the public issue.
The draft and final offer documents shall contain all material disclosures about the green shoe option specified in this regard.
In case of an initial public offer pre-issue shareholders and promoters and in case of a further public offer pre-issue shareholders holding more than five per cent specified securities and promoters, may lend specified securities to the extent of the proposed overallotment.
The specified securities borrowed shall be in dematerialized form and allocation of these securities shall be made pro-rata to all successful applicants.

For the purpose of stabilization of post-listing price of the specified securities, the stabilizing agent shall determine the relevant aspects including the timing of buying such securities, quantity to be bought and the price at which such securities are to be bought from the market. The stabilization process shall be available for a period not exceeding thirty days from the date on which trading permission IS given by the recognized stock exchanges in respect of the specified securities allotted in the public issue. The stabilizing agent shall open a special account, distinct from the issue account, with a bank for crediting. the monies received from the applicants against the over-allotment and a special account with a depository participant for crediting specified securities to be bought from the market during the stabilization period out of the monies credited in the special bank account.

The specified securities bought from the market and credited in the special account with the depository participant shall be returned to the promoters or pre-issue shareholders immediately, in any case not later than two working days after the end of the stabilization period. On expiry of the stabilization period, if the stabilizing agent has not been able to buy specified securities from the market to the extent of such securities over-allotted, the issuer shall allot specified securities at issue price in dematerialized form to the extent of the shortfall to the special account with the depository participant, within five days of the closure of the stabilization period and such specified securities shall be returned to the promoters or pre-issue shareholders by the stabilizing agent in lieu of the specified securities borrowed from them and the account with the depository participant shall be closed thereafter.

The issuer shall make a listing application in respect of the further specified securities allotted, to all the recognized stock exchanges where the specified securities allotted in the public issue are listed. The market maker shall remit the monies with respect to the specified securities allotted, to the issuer from the special bank account.

Any monies left in the special bank account after remittance of monies to the issuer under sub regulation and deduction of expenses incurred by the stabilizing agent for the stabilization process shall be transferred to the Investor Protection and Education Fund established by the Board and the special bank account shall be closed soon thereafter. The market maker shall submit a report to the stock exchange on a daily basis during and after the stabilization period.

The stabilizing agent shall maintain a register for a period of at least three years from the date of the end of the stabilization period and such register shall contain the following particulars:

The names of the promoters or pre-issue shareholders from whom the specified securities were borrowed and the number of specified securities borrowed from each of them.
The price, date and time in respect of each transaction effected in the course of the stabilization process.
The details of allotment made by the issuer on expiry of the stabilization process.

January 31, 2026

Equity Market – Issuance & Post-Issuance Activities

Introduction