NISM Series IX Merchant Banking: Chapter 4 – Issue Management: Important Terms (Short Notes)
Chapter 4 of the NISM Series IX syllabus is a glossary chapter that defines all important terms used in issue management. These definitions are frequently tested in the NISM Merchant Banking Certification Exam. Understanding these terms precisely is essential before you study the actual issue management process in Chapter 5.
Also Read: Chapter 3 – Registration, Code of Conduct & General Obligations | NISM Series IX Free Mock Test Types of Public Offerings Initial Public Offer (IPO)
An IPO (Initial Public Offer) is an offer of specified securities by an unlisted issuer to the public for subscription. It includes an offer for sale of specified securities by existing holders in an unlisted company.
When an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities — or both — for the first time to the public, it is called an IPO.
Key Point: The issuer must be unlisted at the time of the IPO.
Further Public Offer (FPO)
A FPO (Further Public Offer) is an offer of specified securities by an already listed issuer to the public for subscription. It includes:
- A fresh issue of securities to the public (other than to existing shareholders), or
- An offer for sale to the public, or both
Made through an offer document, an FPO allows an already-listed company to raise additional funds from the public.
Rights Issue
A rights issue is an offer of specified securities by a listed issuer to its existing shareholders as on the record date fixed for the said purpose. Rights are offered in proportion to existing shareholding.
Rights issues can also be made through the Fast Track Issue (FTI) process, subject to conditions under SEBI ICDR Regulations.
Qualified Institutional Placement (QIP)
A QIP is when a listed issuer issues equity shares or securities convertible into equity shares exclusively to Qualified Institutional Buyers (QIBs), under Chapter VI of SEBI (ICDR) Regulations, 2018.
QIP is a faster and more efficient route for listed companies to raise capital without going through the full public issue process.
Preferential Issue
A preferential issue is an issue of specified securities by a listed issuer to any select person or group of persons on a private placement basis. It does not include:
- Public issue
- Rights issue
- Bonus issue
- Employee stock option scheme (ESOP)
- Employee stock purchase scheme (ESPS)
- QIP
- Sweat equity shares
- Depository receipts issued outside India
Offer for Sale (OFS)
SEBI has allowed promoters to sell their shares through a dedicated Offer for Sale (OFS) window provided by stock exchanges. This mechanism enables existing large shareholders to divest their holdings in a transparent manner.
Net Offer to Public
The net offer to public means an offer of specified securities to the public but excludes reservations made for specific investor categories and securities to be subscribed by the promoter group.
Key Document Terms Offer Document
An offer document is the primary disclosure document containing all relevant information about the company, promoters, projects, financial details, objects of raising money, and terms of the issue. It is used to invite subscription from the public. Different types of offer documents include:
- Draft Offer Document (DRHP) – Filed with SEBI for review before the final offer document
- Red Herring Prospectus (RHP) – Used in book-built issues; price not finalised
- Prospectus – Final offer document with complete details including price
- Abridged Prospectus – A shorter version of the prospectus
- Shelf Prospectus – Valid for up to one year; allows multiple offers without fresh filing
Pricing Mechanisms Book Building Method
In the book-built method, the process aids price and demand discovery. During the period when the book is open, bids are collected from investors at various prices within a specified price band. The final price is determined based on demand.
India follows an open book building system — the demand for securities and all bids are displayed online on stock exchange websites in real time, allowing investors to be guided by ongoing bid movements.
In contrast, closed book building (common in some other countries) does not make bid information public — bidders must price their bids without seeing others' bids.
Fixed Price Issue
In a fixed price issue, the issue price per share is included in the prospectus filed with the Registrar of Companies (RoC). The demand for the issue is only known after the subscription closes — unlike book building where you can see real-time demand.
Differential Pricing
Differential pricing occurs when one category of investors is offered shares at a different price from another category. An issuer can allot shares to retail individual investors at a prescribed discount compared to the price offered to other categories.
Price Band
In book-built issues, a price band is the range of prices within which investors can bid. The lower end is the floor price and the upper end is the cap price. The cap price cannot be more than 120% of the floor price.
Underwriting Terms Hard Underwriting
In hard underwriting, the underwriter agrees to buy their commitment at the earliest stage — guaranteeing a fixed amount to the issuer regardless of the public response. The underwriter's liability is fixed from the beginning.
Soft Underwriting
In soft underwriting, the underwriter's liability arises only at a later stage based on investor response. If the public response to the issue is not sufficient, the underwriter must take up the unsubscribed portion (devolvement = underwriting commitment minus procurement).
Green Shoe Option (Price Stabilisation Mechanism)
As per SEBI ICDR Regulations, a green shoe option is an option of allotting equity shares in excess of the equity shares offered in the public issue, by a maximum of 15%, as a post-listing price stabilising mechanism.
From an investor's perspective:
- Higher probability of getting shares allotted
- Post-listing price stability — the stabilising agent buys shares from the market if price falls below issue price
Application and Payment Terms ASBA – Application Supported by Blocked Amount
ASBA means an application for subscribing to a public or rights issue, along with an authorisation to a Self-Certified Syndicate Bank (SCSB) to block the application money in the investor's bank account.
Key features:
- Application money remains in the investor's account earning interest until allotment
- Only the allotted amount is debited
- Unallotted amounts are automatically released (unblocked)
- ASBA is now the mandatory mode for retail investors in public issues
UPI – Unified Payments Interface
UPI is an immediate real-time payment system that transfers funds between two bank accounts instantly. UPI is built over the IMPS infrastructure using a Virtual Payment Address (VPA) that uniquely identifies a person's bank account.
SEBI introduced UPI as a payment mechanism with ASBA for retail individual investors from January 2019 through intermediaries like syndicate members, registered stock brokers, RTAs, and depository participants.
Categories of Investors
Investors in public issues are classified into four main categories:
1. Retail Individual Investors (RIIs)
Individual investors (Indian or NRI) who apply for securities worth ₹2 lakh or less in an issue. The allotment cap for retail investors is ₹2 lakh.
2. Qualified Institutional Buyers (QIBs)
QIBs are sophisticated institutional investors including:
- Mutual Funds
- Foreign Portfolio Investors (FPIs)
- Scheduled Commercial Banks
- Insurance Companies
- Venture Capital Funds / AIFs
- State Industrial Development Corporations
- National Investment Fund maintained by Government of India
- Insurance funds set up by Army/Navy/Air Force
3. Non-Institutional Investors (NIIs)
NIIs (also called High Net-worth Individuals or HNIs) are investors who apply for shares worth more than ₹2 lakh but are not QIBs. They include companies, individuals, and trusts.
4. Anchor Investors
Anchor investors are QIBs who apply for shares in the public issue at a price decided before the issue opens. They must apply for at least ₹10 crore. Up to 60% of the QIB portion can be allocated to anchor investors. They have a 30-day lock-in period after allotment.
Other Important Terms Designated Stock Exchange
The designated stock exchange is the stock exchange chosen by the issuer where its securities are proposed to be listed. If one or more exchanges have nationwide trading terminals, the issuer must choose one of them as the designated stock exchange.
Employee (for ESOP purposes)
An employee means a permanent employee, working in India or outside India, of the issuer or its promoters or subsidiary, or a director of the issuer (whole-time or not). It does NOT include:
- Promoters
- Persons belonging to the promoter group
- Directors who hold more than 10% of the outstanding equity shares (directly or indirectly)
Specified Securities
Specified securities means equity shares and convertible securities. The word "Securities" is defined in the Securities Contracts (Regulation) Act (SCRA), 1956.
Fast Track Issue (FTI)
SEBI introduced Fast Track Issues (FTI) to enable well-established and compliant listed companies to access the Indian primary market in a time-effective manner, without going through the full 30-day public comment period for the draft offer document.
Quick Reference Table – Investor Categories in IPO Allocation
| Category | Application Limit | Book Built (Reg 6(1)) | Book Built (Reg 6(2)) |
|---|---|---|---|
| Retail Individual Investors (RIIs) | Up to ₹2 lakh | At least 35% | Up to 10% |
| Non-Institutional Investors (NIIs) | More than ₹2 lakh | At least 15% | Up to 15% |
| QIBs (including Anchor) | No limit | Not more than 50% | At least 75% |
| Anchor Investors (subset of QIBs) | Minimum ₹10 crore | Up to 60% of QIB portion | Up to 60% of QIB portion |
Frequently Asked Questions – NISM Series IX Chapter 4 What is the difference between IPO and FPO?
An IPO is made by an unlisted company issuing securities to the public for the first time. An FPO is made by an already listed company issuing additional securities to the public. The key difference is the listing status of the issuer at the time of the offer.
What is the Green Shoe Option?
The green shoe option allows the issuer to allot up to 15% additional equity shares over the issue size as a post-listing price stabilisation mechanism. If the share price falls below the issue price after listing, the stabilising agent buys shares from the market to support the price.
What is ASBA and how does it work?
ASBA (Application Supported by Blocked Amount) allows investors to apply for public issue shares while keeping the application money in their own bank account. The money is blocked (not debited) until allotment. Only the allotted amount is deducted; the rest is unblocked.
What is the difference between hard and soft underwriting?
In hard underwriting, the underwriter guarantees to subscribe to unsubscribed shares from the beginning. In soft underwriting, the underwriter's liability to subscribe arises only if the public response is insufficient — the liability is contingent on investor response.
Who are Anchor Investors?
Anchor investors are QIBs who participate in the public issue at a price determined before the issue opens, with a minimum application of ₹10 crore. They are allocated up to 60% of the QIB portion and have a 30-day lock-in period on their shares.
What is a Qualified Institutional Placement (QIP)?
A QIP is a route for listed companies to raise capital by issuing shares exclusively to Qualified Institutional Buyers (QIBs), without going through the full public issue process. It is faster and requires fewer regulatory compliances.
Ready to Test Yourself? Practice these definitions in our NISM Series IX Mock Test. Definitions from Chapter 4 frequently appear as MCQs in the actual exam. Also check out our NISM Study Material section.
Next Chapter: Chapter 5 – Issue Management: Process and Underwriting