NISM Series IIA Short Notes – Part 4: Public Offer of Securities (IPO, FPO, Book Building & Allotment)
Welcome to Part 4 of our NISM Series IIA short notes series on PassNISM.in. This is one of the most important chapters for the NISM IIA certification exam, covering Public Offer of Securities, Private Placements, IPO processes, book building, ASBA, and buy-back of shares.
Series Navigation: ← Part 3: Mutual Funds & SEBI Regulations | Part 5: Roles & Responsibilities in a Public Issue → Chapter VII – Public Offer of Securities Ways to Raise Equity Capital
A company may raise equity capital at different times from different types of investors. Capital issuance can be categorised in three ways:
| Basis of Classification | Types |
|---|---|
| Based on Timing | Initial Public Offer (IPO) | Follow-on Public Offer (FPO) |
| Based on Category of Investors | Private Placement | Preferential Allotment | Qualified Institutional Placement (QIP) | Rights Issue |
| Based on Method of Issue | Fixed Price Offer | Book-Building Offer |
Public Offer of Shares – What It Means
In a public offer, a company issues shares to a large number of new investors from the general public. This is the primary market — the first-time issuance of shares.
- After a public issue, the proportional holding of promoters and large investors gets diluted
- SEBI and the Companies Act regulations protect retail investors through requirements for:
- Relevant disclosures at time of issue and periodically thereafter
- Allotment in dematerialised (demat) form
- Listing on a stock exchange to provide liquidity
- Promoter participation through a lock-in on their holdings
- The issue price is decided by the company in consultation with the Lead Manager (BRLM)
Initial Public Offer (IPO)
An IPO is the first-ever public offer of shares by a company whose shares are not yet listed on any stock exchange.
- After the IPO, shares must be compulsorily listed and made available for trading
- An IPO can be either a fresh issue (new shares) or an Offer for Sale (OFS) by existing shareholders
- A fresh issue increases the company's share capital; OFS does not — it only transfers existing shares from old to new investors
Eligibility Criteria for Public Issue (SEBI Requirements)
| Criterion | Requirement |
|---|---|
| Net Tangible Assets | At least ₹3 Crore in each of the preceding 3 full years; not more than 50% in monetary assets |
| Average Pre-tax Operating Profit | Minimum ₹15 Crore (restated, consolidated) in 3 most profitable years out of the last 5 years |
| Minimum Net Worth | At least ₹1 Crore in each of the preceding 3 full years |
| Issue Size Limit | Total issue + all other capital raised that year must NOT exceed 5 times the pre-issue net worth |
Follow-on Public Offer (FPO)
A Follow-on Public Offer is made by a company that is already listed on a stock exchange and now wants to raise additional capital from the public.
- May be through fresh issue of new shares or through an Offer for Sale
- Exempt from promoter contribution and lock-in requirements if the company has been listed for at least 3 years and has a dividend payment track record for immediately preceding 3 years
Reservations in Public Issues
A book-building public issue can include reservations for certain categories of investors:
- Employees of the issuer
- Specified shareholders
- Depositors, bondholders, or subscribers to services of the issuer
- Retail individual investors (in specified categories)
Shares may be offered at different prices to different categories (differential pricing), subject to SEBI norms.
Categories of Investors in a Public Issue
| Category | Who | Key Feature |
|---|---|---|
| Retail Individual Investors (RII) | Investors applying for less than ₹2,00,000 | Allowed to bid at cut-off price in book built issues; must pay full amount upfront |
| Non-Institutional Investors (NII/HNI) | Investors applying for ₹2,00,000 or more | Also called High Net Worth Individuals (HNIs) |
| Qualified Institutional Buyers (QIBs) | Mutual funds, financial institutions, scheduled commercial banks, FIIs | Largest allocation category in book-built issues |
| Anchor Investors | QIBs applying for ₹10 Crore or more | Allotted shares before issue opens; provides confidence to other investors |
| Qualified Foreign Investors | Foreign individuals investing in Indian markets | Specific category permitted under SEBI norms |
Prospectus and Red Herring Prospectus Prospectus
The Prospectus is the official document issued during a fixed-price public offer. It contains all relevant information an investor needs to make an investment decision. The content and format are prescribed by SEBI.
Red Herring Prospectus (RHP)
Used in book-built issues.
| Document | Filed With | Contains |
|---|---|---|
| DRHP (Draft Red Herring Prospectus) | SEBI (for vetting) | All statutory disclosures except the price |
| RHP (Red Herring Prospectus) | Registrar of Companies (before bid opening) | All disclosures including issue dates; still no final price |
| Prospectus (Final) | Registrar of Companies (after price discovery) | Complete details including issue price |
Methods of Making a Public Issue 1. Fixed Price Issue
The company and lead manager decide on a fixed price before the issue opens. Investors apply at this price.
2. Book Building Issue
The objective is to discover the market price through investor demand.
- The company specifies a floor price or a price band
- Investors bid within the price band
- After the issue closes, the demand is assessed and a cut-off price is determined
- Only retail investors (RIIs) are allowed to bid at the cut-off price
Underwriting
SEBI regulations require an issue to receive a minimum of 90% subscription of the net offer. If the subscription is less than 90%, the company must refund the entire amount collected.
To protect against undersubscription, companies enter into underwriting agreements with institutions who agree to subscribe to any unsubscribed portion.
- Underwriters are paid a commission for this commitment
- Underwriting is mandatory for public issues in India
Green Shoe Option (GSO)
- An optional mechanism to stabilise the share price after listing
- Company can allot additional shares up to 15% of the issue size to investors
- Shares are allotted in the same ratio as the main issue reservations
Chapter VIII – Private Placement of Shares What is Private Placement?
A private placement is when a company issues shares to a select group of investors (not the general public), regardless of whether the company is listed or not.
For a listed company, private placement is called a Preferential Allotment of Shares, and must comply with SEBI and Companies Act regulations.
Qualified Institutional Placement (QIP)
- Private placement by a listed company to Qualified Institutional Buyers (QIBs)
- Company shares must have been listed for at least 1 year before QIP
- Issue price: Not less than the average of the weekly high and low closing prices for the 2 weeks preceding the relevant date
Rights Issue (Recap)
- Fresh capital offered to existing investors in proportion to current holdings
- Fractional entitlements — decision is at Board's discretion
- If all investors subscribe, proportional holdings remain unchanged
Buy-Back of Securities
A buy-back is when a company repurchases its own shares from existing shareholders.
Key Requirements for Buy-Back
- Requires a Board Resolution
- A public notice must be given in a nationwide newspaper with details of: reasons, number and percentage of shares, price, process, funding, specified date, and timetable
Methods of Buy-Back
| Method | Key Point |
|---|---|
| Tender Offer | Maximum buyback price must be disclosed. If promoters are tendering, 6-month transaction history must be disclosed. |
| Through Stock Exchange | Merchant banker must be appointed. Only exchanges with nation-wide trading terminals can be used. |
| Book Building Process | Only listed companies; merchant banker must be appointed; book building process details in public notice. |
ASBA – Applications Supported by Blocked Amount
ASBA is the mandatory payment mechanism for all categories of investors in public issues from January 1, 2016.
- Investor authorises their bank (Self Certified Syndicate Bank – SCSB) to block the application money in their account
- Funds are not transferred — they remain in the investor's account until allotment is finalised
- After allotment, the registrar instructs the bank to debit only the allotted amount and unblock the balance
ASBA Process Flow
- Investor submits application to SCSB (physically or electronically)
- SCSB blocks the application money in investor's account
- Funds remain blocked till allotment is finalised or issue is withdrawn
- After allotment: Registrar instructs debit of allotted amount; balance is unblocked/refunded
Internal Links
- ← Part 3: Mutual Funds & SEBI Regulations
- Part 5: Roles and Responsibilities in a Public Issue →
- Free NISM IIA Mock Test
- NISM Exam Registration & Fees
FAQs – Public Offer of Securities What is the minimum subscription required in a public issue?
A minimum of 90% of the net offer to the public must be subscribed. If this threshold is not met, the company must refund all subscription amounts received.
Who are Anchor Investors?
Anchor Investors are Qualified Institutional Buyers (QIBs) who apply for shares worth ₹10 Crore or more in a book-building public issue. Their participation ahead of the issue opening signals investor confidence.
What is the Green Shoe Option?
The Green Shoe Option allows a company to issue additional shares up to 15% of the issue size to stabilise the share price in the secondary market after listing.
What is ASBA and why was it introduced?
ASBA (Applications Supported by Blocked Amount) was introduced to ensure that investor funds are not transferred from their accounts until share allotment. It protects investors from losing interest on application money during the allotment process and became mandatory for all investor categories from January 1, 2016.
Continue to Part 5 – Roles and Responsibilities in a Public Issue & Depository Services. Full series available at PassNISM.in.