Issuance Conditions & Procedure
PART VIII: ISSUANCE CONDITIONS AND PROCEDURE
Regulation 31. Minimum offer to public
The minimum offer to the public in an IPO must comply with Rule 19(2)(b) of the Securities Contracts (Regulation) Rules, 1957 (SCRR).
The issuer cannot decide the public offer size arbitrarily.
Compliance with this rule is a pre-condition for listing the specified securities on a recognised stock exchange.
Regulation 32. Allocation in the net offer
32(1).
The Net Offer in a Book Built IPO must be allocated among different categories of investors in the prescribed proportions.
(a).
Reservation for Retail Individual Investors
At least 35% of the net offer must be reserved for retail individual investors.
“Not less than 35%” means the allocation cannot be below 35%.
The issuer may reserve more than 35%, but not less.
(b).
Reservation for Non-Institutional Investors
At least 15% of the net offer must be reserved for non-institutional investors.
“Not less than 15%” means the allocation cannot be below 15%.
The issuer may reserve more than 15%, but not less.
(c).
Reservation for Qualified Institutional Buyers
Not more than 50% of the net offer can be allocated to Qualified Institutional Buyers (QIBs).
This means QIB allocation cannot exceed 50% of the net offer.
Out of the QIB portion, 5% must be allocated to mutual funds.
The 5% allocation to mutual funds is within the 50% QIB portion.
Example:
Net offer = 10 lakh shares.
Maximum QIB allocation = 5 lakh shares.
Out of this QIB allocation, 5% = 25,000 shares must be allocated to mutual funds.
Transfer of Unsubscribed Portion
If a portion reserved for retail individual investors under clause (a) remains unsubscribed, it may be allocated to applicants in another category.
If a portion reserved for non-institutional investors under clause (b) remains unsubscribed, it may also be allocated to applicants in another category.
The unsubscribed portion can therefore be shifted from either category to another category.
This allows the entire issue to be subscribed even when one category has insufficient applications.
Example:
35% is reserved for retail individual investors.
Only 30% is subscribed by retail investors.
The remaining 5% may be allocated to applicants from another eligible category.
Additional Allocation to Mutual Funds
Mutual funds are already entitled to 5% allocation out of the QIB portion.
In addition to this 5%, mutual funds can also receive allocation from the remaining QIB portion.
The remaining QIB portion is the balance left after the 5% mutual fund allocation.
Therefore, mutual funds can receive more than the initial 5% allocation.
This additional allocation comes from the portion available to other QIBs.
Example:
Maximum QIB portion = 50% of the net offer.
5% of the QIB portion is specifically allocated to mutual funds.
The remaining QIB portion can also be allotted to mutual funds.
32(2).
The issue is made through the book building process under Regulation 6(2).
In such an issue, the net offer is allocated among different investor categories.
The allocation in the net offer category must be made in the manner prescribed under the regulation.
The manner is as follows:
(a). Not More Than 10% to Retail Individual Investors
Not more than 10% of the net offer can be allocated to retail individual investors.
The retail allocation cannot exceed 10%.
Example:
Net offer = 10 lakh shares.
Maximum retail allocation = 1 lakh shares.
(b). Not More Than 15% to Non-Institutional Investors
Not more than 15% of the net offer can be allocated to non-institutional investors.
The non-institutional allocation cannot exceed 15%.
Example:
Net offer = 10 lakh shares.
Maximum non-institutional allocation = 1.5 lakh shares.
(c). Not Less Than 75% to Qualified Institutional Buyers
At least 75% of the net offer must be allocated to qualified institutional buyers (QIBs).
Out of the QIB portion, 5% must be allocated to mutual funds.
Mutual funds can also receive additional allocation from the remaining QIB portion.
Transfer of Unsubscribed Portion Between Retail and Non-Institutional Categories
If the retail category under clause (a) is not fully subscribed, the unsubscribed portion may be allocated to non-institutional investors.
If the non-institutional category under clause (b) is not fully subscribed, the unsubscribed portion may be allocated to retail individual investors.
The transfer is allowed only between the two categories mentioned in clauses (a) and (b).
Example:
Retail category has a maximum allocation of 10%.
If retail investors subscribe to only 8%, the remaining 2% may be allocated to non-institutional investors.
Similarly, an unsubscribed portion of the non-institutional category may be given to retail investors.
Additional Allocation to Mutual Funds
Mutual funds are entitled to the 5% allocation provided under clause (c).
In addition to this 5%, mutual funds can also receive allocation from the remaining QIB portion.
The remaining QIB portion is the balance available after the specified 5% mutual fund allocation.
Therefore, mutual funds may receive more than 5% of the QIB allocation.
Example:
QIB portion = 75% of the net offer.
5% of the QIB portion is allocated to mutual funds.
Mutual funds can also receive shares from the remaining 95% of the QIB portion.
32(3).
Allocation to Anchor Investors
In a book-built issue, the issuer may allocate up to 60% of the portion available for QIBs to anchor investors.
The 60% limit is calculated only on the portion available for QIB allocation.
This allocation to anchor investors is optional; the issuer may allocate less than 60%.
The allocation must be made according to the conditions prescribed in Schedule XIII.
Example:
QIB portion = 75% of the net offer.
Up to 60% of this QIB portion can be allocated to anchor investors.
Therefore, anchor investors can receive up to 45% of the net offer (60% × 75%).
32(3A).
In a book-built issue, the non-institutional investors’ category is allocated in the manner prescribed under the following provisions.
The allocation within this category is divided according to the investor application size as follows:
(a). One-Third Reserved for Applications Above ₹2 Lakh and Up to ₹10 Lakh
One-third of the portion available to non-institutional investors (NII) shall be reserved for these applicants.
The applicants must have an application size of more than ₹2 lakh.
The application size must not exceed ₹10 lakh.
Therefore, this one-third portion is specifically meant for applications above ₹2 lakh and up to ₹10 lakh.
(b). Two-Third Reserved for Applications Above ₹10 Lakh
Two-thirds of the portion available to non-institutional investors (NII) shall be reserved for these applicants.
The applicants must have an application size of more than ₹10 lakh.
There is no upper application-size limit mentioned in this clause.
Transfer Between NII Sub-Categories
If the sub-category under clause (a) is not fully subscribed, its unsubscribed portion may be allocated to clause (b) applicants.
If the sub-category under clause (b) is not fully subscribed, its unsubscribed portion may be allocated to clause (a) applicants.
The transfer is allowed only between these two NII sub-categories.
The allocation remains within the overall non-institutional investors’ category.
32(4).
Allocation in an Issue Other Than Through Book Building
Where the issue is not made through the book building process, the net offer is allocated according to the following categories.
(i). Minimum 50% to Retail Individual Investors
At least 50% of the net offer must be allocated to retail individual investors.
The retail category can receive more than 50%, but not less.
(ii). Remaining Portion to Other Applicants
The portion remaining after the retail allocation is given to the following categories.
(a). Individual Applicants Other Than Retail Individual Investors
Individual applicants who do not fall within the retail individual investor category can receive the remaining portion.
This covers individual applicants whose application size exceeds the retail limit.
(b). Other Investors Including Corporate Bodies or Institutions
Other investors can also receive the remaining portion.
This includes corporate bodies and institutions.
The allocation applies irrespective of the number of specified securities applied for.
Transfer Between the Remaining Categories
If the category under clause (a) is not fully subscribed, its unsubscribed portion may be allocated to applicants under clause (b).
If the category under clause (b) is not fully subscribed, its unsubscribed portion may be allocated to applicants under clause (a).
The transfer is allowed only between these two categories.
The retail individual investors’ category is not covered by this transfer provision.
Explanation:
Higher Allocation to Retail Individual Investors
Retail individual investors are normally entitled to a minimum of 50% of the issue size.
If a proportionate calculation gives them more than 50%, they must receive that higher percentage.
Therefore, 50% is only the minimum allocation and not a fixed maximum.
The retail category gets the higher percentage when the proportionate entitlement exceeds 50%.
Regulation 33. Reservation on a competitive basis
33(1).
Reservations on a Competitive Basis
The issuer may make reservations on a competitive basis from the issue size.
Promoters’ contribution is excluded while calculating the amount available for such reservations.
Reservations may be made in favour of the following categories of persons.
(a). Employees
A reservation may be made for the employees of the issuer.
Employees can compete for the specified securities reserved for them.
(b). Shareholders of Listed Subsidiaries or Listed Promoter Companies
A reservation may be made for shareholders of listed subsidiaries of the issuer.
A reservation may also be made for shareholders of listed promoter companies.
Promoters and promoter-group entities are excluded from this reservation.
Therefore, only shareholders other than promoters and promoter-group entities can benefit.
Example:
Issue size = ₹100 crore.
Promoters’ contribution = ₹20 crore.
Reservations are calculated from the remaining ₹80 crore, not the full ₹100 crore.
Eligible employees and qualifying shareholders can participate in the respective reserved portions.
No Reservation for Issue Intermediaries and Their Connected Persons
The issuer cannot make any reservation for lead manager(s).
The issuer cannot make any reservation for the registrar to the issue.
The issuer cannot make any reservation for syndicate member(s).
Their promoters, directors and employees also cannot receive such reservations.
Group or associate companies of the lead manager(s), registrar and syndicate member(s) are also excluded.
Promoters, directors and employees of these group or associate companies are also excluded.
The restriction covers all these persons and entities, even though other eligible categories may receive reservations.
Example:
An issuer reserves shares for employees.
An employee of the lead manager cannot claim shares from this employee reservation.
Similarly, a director of the registrar or an employee of a syndicate member cannot receive a reserved allocation.
33(2).
The reservations on a competitive basis shall be subject to the following conditions:
(a).
Limit on Employee Reservation
The total reservation for employees cannot exceed 5% of the issuer’s post-issue capital.
This 5% limit applies to the aggregate reservation for all employees together.
The value of securities allotted to any one employee cannot exceed ₹2 lakh.
Therefore, both the overall reservation limit and individual employee limit must be followed.
Example:
Post-issue capital = 100 lakh shares.
Maximum employee reservation = 5 lakh shares, i.e. 5%.
If the issue price is ₹100 per share, one employee can receive securities worth up to ₹2 lakh, i.e. 2,000 shares.
Higher Employee Allotment in Case of Under-Subscription
If the employee reservation portion is not fully subscribed, the unsubscribed portion may be allotted to employees.
Such additional allotment may result in an employee receiving securities worth more than ₹2 lakh.
The additional allotment must be made on a proportionate basis.
Even after the additional allotment, the total value allotted to one employee cannot exceed ₹5 lakh.
Therefore, the normal ₹2 lakh individual limit can increase to ₹5 lakh only when the employee reservation portion is under-subscribed.
Example:
An employee is initially allotted securities worth ₹2 lakh.
The employee reservation portion remains under-subscribed.
The employee may receive additional securities on a proportionate basis.
The total allotment to that employee can go up to ₹5 lakh, but not beyond ₹5 lakh.
(b).
Limit on Shareholder Reservation
The reservation made for shareholders cannot exceed 10% of the issue size.
This 10% limit applies to the total reservation for all eligible shareholders.
The reservation may be less than 10%, but cannot exceed it.
Example:
Issue size = 10 lakh shares.
Maximum shareholder reservation = 1 lakh shares.
(c).
No Additional Application by Reserved Applicants
A person who receives a reservation on a competitive basis cannot make another application for the net offer.
This restriction applies to all persons receiving such reservation.
An employee is exempt from this restriction.
A retail individual shareholder is also exempt from this restriction.
Therefore, employees and retail individual shareholders can apply under the reserved category and also make an additional application in the net offer.
Example:
A shareholder receives an allotment under the shareholder reservation.
That shareholder cannot make another application in the general net offer.
However, if the shareholder is a retail individual shareholder, the additional application is permitted.
(d).
Transfer of Unsubscribed Reserved Portions
An unsubscribed portion in any reserved category may be transferred to another reserved category.
Such transfers can be made between the different reserved categories.
After making all possible adjustments between the reserved categories, any portion still remaining unsubscribed is added to the net offer category.
The net offer category therefore receives the remaining unsubscribed portion after all inter-se adjustments.
Example:
Employee reservation = 5% and shareholder reservation = 10%.
If the employee category is under-subscribed, its unused portion may be shifted to the shareholder category.
If a portion still remains unsubscribed after this adjustment, it is added to the net offer category.
(e).
Spill-Over from Reserved Category to Net Offer
If the net offer category is under-subscribed, the shortfall may be filled from the reserved category.
The spill-over is allowed only to the extent of the under-subscription in the net offer category.
The reserved category can therefore transfer its unsubscribed portion to the net offer category.
The transfer cannot exceed the actual shortfall in the net offer category.
Example:
Net offer = 10 lakh shares.
Applications received in the net offer = 8 lakh shares.
Under-subscription = 2 lakh shares.
Up to 2 lakh shares from the reserved category may be transferred to the net offer.
33(3).
Application Limit for Reserved Categories
An applicant in a reserved category may apply for any number of specified securities.
There is no minimum number of securities prescribed under this provision.
However, the applicant cannot apply for more securities than the total securities reserved for that category.
The application is therefore capped at the reserved portion available to that category.
Example:
Employee reservation = 50,000 shares.
An eligible employee may apply for 10,000, 20,000 or 50,000 shares.
The employee cannot apply for 60,000 shares under the reserved category.
Regulation 34. Abridged prospectus
34(1).
Contents of the Abridged Prospectus
The abridged prospectus must contain the disclosures specified in Part E of Schedule VI.
All required information under Part E of Schedule VI must be included.
The abridged prospectus must not contain any information unrelated to the contents of the offer document.
Only relevant and necessary information from the offer document should be included.
34(2).
QR Code and Links in Every Application Form
Every application form related to an issue must include a QR code.
The QR code must provide access to the red herring prospectus.
The QR code must also provide access to the abridged prospectus.
The QR code must also provide access to the price band advertisement.
The application form must also contain a link to access these documents.
This requirement applies whether the application form is distributed by the issuer or by any other person.
Example:
An investor receives an IPO application form.
The form must contain a QR code and a link through which the investor can access the red herring prospectus, abridged prospectus and price band advertisement.
Regulation 35. ASBA
Bids Must Be Accepted Through ASBA
The issuer shall accept bids only through the ASBA facility.
ASBA stands for Application Supported by Blocked Amount.
The investor’s application money is blocked in their bank account instead of being immediately transferred to the issuer.
The issuer must follow the manner and procedure specified by SEBI for accepting ASBA bids.
Example:
An investor bids ₹2 lakh in an IPO.
₹2 lakh is blocked in the investor’s bank account.
If shares are allotted, the required amount is debited.
If shares are not allotted, the blocked amount is released.
Regulation 36. Availability of issue material
Availability of Offer Documents Before Issue Opening
The lead manager(s) must ensure that the offer document and other issue materials are available before the issue opens.
Application forms must also be made available to the specified intermediaries.
The required materials must be provided to the stock exchanges.
They must be provided to syndicate members and the registrar to the issue.
They must also be available to registrars and share transfer agents.
Depository participants and stock brokers must have access to the materials.
Underwriters and bankers to the issue must also receive the materials.
Self-certified syndicate banks must also have the required materials.
This availability must be ensured before the opening of the issue.
Regulation 37. Prohibition on payment of incentives
No Incentives for Making an IPO Application
Any person connected with the issue cannot offer incentives to anyone for making an application in the IPO.
The prohibition covers both direct and indirect incentives.
The incentive cannot be offered in cash.
It cannot be offered in kind, such as gifts or other benefits.
It cannot be offered through services or any other form of benefit.
The restriction applies when the incentive is given to induce a person to make an IPO application.
However, genuine fees or commissions for services actually rendered in relation to the issue are permitted.
Example:
Offering an investor ₹5,000 to apply for an IPO is not permitted.
Giving a free product or service to induce an IPO application is also not permitted.
Paying a registrar or intermediary its legitimate fee for services provided in the issue is permitted.
Regulation 39. IPO Grading
The issuer may obtain grading for its initial public offer (IPO).
Obtaining IPO grading is optional, not mandatory.
The grading may be obtained from one or more credit rating agencies.
The credit rating agency must be registered with SEBI.
Therefore, the issuer can obtain grading from multiple SEBI-registered credit rating agencies.
Regulation 40. Underwriting
40(1).
Underwriting in a Non-Book-Built IPO
If the issuer wants protection against under-subscription, it may get the issue underwritten.
This provision applies to an IPO made other than through the book building process.
The issuer must enter into an underwriting agreement before filing the prospectus.
The agreement must be entered into with merchant bankers or stock brokers registered with SEBI.
The merchant bankers or stock brokers will act as underwriters.
The agreement must specify the maximum number of specified securities the underwriters will subscribe to.
The underwriters may subscribe to these securities themselves.
Alternatively, they may procure subscription from other investors.
The price for such underwriting subscription must be predetermined.
The predetermined price cannot be less than the issue price.
The issuer must disclose the existence of the underwriting agreement in the prospectus.
Example:
Issue price = ₹100 per share.
Underwriter agrees to underwrite up to 2 lakh shares.
The predetermined underwriting price can be ₹100 or more, but not ₹95.
If the public subscribes for fewer shares, the underwriter covers the agreed shortfall, subject to the underwriting agreement.
40(2).
Underwriting for Rejected Applications in a Non-Book-Built IPO
The issuer making an IPO other than through the book building process shall enter into an underwriting agreement.
The agreement must be entered into before filing the prospectus.
The agreement must be with merchant bankers or stock brokers registered with SEBI.
These merchant bankers or stock brokers will act as underwriters.
The agreement must specify the number of specified securities the underwriters will subscribe to.
This subscription obligation arises when applications are rejected.
The underwriters may subscribe to the securities themselves.
Alternatively, they may procure subscription from other investors.
The underwriting price must be predetermined.
The predetermined price cannot be less than the issue price.
The issuer must disclose the existence of the underwriting agreement in the prospectus.
Example:
Issue price = ₹100 per share.
Underwriters agree to subscribe to 1 lakh shares if applications are rejected.
The predetermined underwriting price can be ₹100 or more, but not below ₹100.
The underwriters can subscribe themselves or arrange for other investors to subscribe.
40(3).
If the issuer makes a public issue through the book building process then:
(a).
The issue shall be underwritten by the lead manager(s) and syndicate member(s).
So the lead manager(s) and syndicate member(s) take responsibility for the specified portion of the issue if required.
However, a special rule applies to the QIB portion mentioned below.
75% QIB Portion Cannot Be Underwritten
At least 75% of the net offer is required to be compulsorily allotted to QIBs for meeting Regulation 6(2) eligibility conditions.
This 75% portion cannot be underwritten.
Therefore, the compulsory QIB portion must depend on actual subscription from QIBs.
The underwriting requirement applies to the other eligible portion of the issue.
(b).
Underwriting Agreement for Rejected Bids
The issuer must enter into an underwriting agreement before filing the prospectus.
The agreement must be with the lead manager(s) and syndicate member(s).
The agreement must specify the number of specified securities they will subscribe to.
This subscription obligation arises when bids are rejected.
The lead manager(s) and syndicate member(s) may subscribe to the securities themselves.
Alternatively, they may procure subscription from other investors.
The subscription price must not be less than the issue price.
The issuer must disclose the existence of the underwriting agreement in the prospectus.
Example:
Issue price = ₹100 per share.
The underwriters agree to subscribe to 50,000 shares if bids are rejected.
They may subscribe themselves or arrange for other investors to subscribe.
The subscription price cannot be below ₹100 per share.
(c).
Underwriting to Cover Under-Subscription
If the issuer wants protection against under-subscription, it may get the issue underwritten.
The issuer must enter into the underwriting agreement before filing the red herring prospectus.
The agreement must be with the lead manager(s) and syndicate member(s).
They will act as underwriters for the issue.
The agreement must specify the maximum number of specified securities the underwriters will subscribe to.
The underwriters may subscribe to the securities themselves.
Alternatively, they may procure subscription from other investors.
The underwriting price cannot be less than the issue price.
The issuer must disclose the existence of the underwriting agreement in the red herring prospectus.
Example:
Issue price = ₹100 per share.
Underwriters agree to cover up to 1 lakh unsubscribed shares.
They may subscribe themselves or arrange for other investors.
The underwriting price cannot be below ₹100 per share.
(d).
Lead Managers Cover Syndicate Members’ Failure
Syndicate member(s) have underwriting obligations under the issue.
If any syndicate member fails to fulfil its underwriting obligation, the lead manager(s) must fulfil that obligation.
The lead manager(s) therefore become responsible for covering the shortfall caused by the syndicate member’s failure.
Example:
A syndicate member is required to subscribe to 50,000 shares.
The syndicate member fails to fulfil this obligation.
The lead manager(s) must fulfil the obligation for those 50,000 shares.
(e).
Restriction on Subscription by Lead Managers and Syndicate Members
Lead manager(s) and syndicate member(s) cannot subscribe to the issue on their own.
They may subscribe only when fulfilling their underwriting obligations.
Their subscription must therefore arise from their role as underwriters.
They cannot make a separate or additional subscription beyond their underwriting commitment.
Example:
A lead manager has an underwriting obligation for 50,000 shares.
It may subscribe to those 50,000 shares if required to fulfil the underwriting obligation.
It cannot separately apply for additional shares in the issue.
(f).
Minimum Underwriting Obligation of Lead Managers
Every underwritten issue must have minimum underwriting obligations undertaken by the lead manager(s).
The lead manager(s) must undertake these minimum obligations.
The minimum level of underwriting is determined under the SEBI (Merchant Bankers) Regulations, 1992.
Therefore, the lead manager(s) cannot choose an underwriting commitment below the minimum prescribed under those regulations.
(g).
Underwriting Must Cover Minimum Subscription
Where an issue is required to be underwritten, the underwriting obligation must cover at least the minimum subscription.
The underwriters must therefore undertake to subscribe to securities sufficient to meet the minimum subscription requirement.
The underwriting obligation cannot be lower than the amount required for minimum subscription.
Example:
Issue size = ₹100 crore.
Minimum subscription = ₹90 crore.
Underwriting obligations must be at least ₹90 crore.
