← Back to Study Notes

NISM Series IX Merchant Banking: Chapter 5 – Issue Management: Process and Underwriting (Short Notes)

12 Apr 2026 • NISM-Series-9: Merchant Banking Mock Tests

NISM Series IX Merchant Banking: Chapter 5 – Issue Management: Process and Underwriting (Short Notes)

Chapter 5 is the heart of the NISM Series IX Merchant Banking Certification Exam. It covers the complete process of how a public issue is managed — from appointing intermediaries to listing on the stock exchange. It also covers underwriting, pricing, allotment, and post-issue obligations. Expect multiple questions from this chapter in the exam.

Also Read: Chapter 4 – Issue Management: Important Terms | NISM Series IX Free Mock Test Role of Merchant Banker in Issue Management

In the overall process of issue management, the merchant banker plays multiple critical roles:

  • Expert Advisor – Provides strategic advice to the management of the issuer company
  • Due Diligence Performer – Conducts thorough due diligence on the company and its disclosures
  • Event Manager and Coordinator – Ensures timely completion of all issue-related milestones
  • Statutory Compliance Watchdog – Ensures all regulatory requirements are met
  • Fiduciary Representative – Acts in the best interests of investors
  • SEBI Interface – Acts as the primary point of contact between the issuer and SEBI during the issue

Merchant bankers are expected to guard against conflicts of interest at every stage of the issue process.

Scope of SEBI ICDR Regulations in Issue Management

The SEBI ICDR Regulations provide the framework for the following types of issues:

  • Initial Public Offers (IPOs) on the Main Board
  • Rights issues by listed companies (aggregate value ≥ ₹50 crore)
  • Further Public Offers (FPOs) by listed issuers
  • Preferential issues by listed issuers
  • Qualified Institutional Placements (QIPs) by listed issuers
  • Initial public offers of Indian Depository Receipts (IDRs)
  • Rights issues of IDRs
  • IPOs by Small and Medium Enterprises (SMEs)
  • Listings on the Innovators Growth Platform (with or without an issue)
  • Bonus issues by listed companies

IPO Eligibility Requirements (Main Board)

An issuer must satisfy the following financial conditions as on the date of filing the Draft Offer Document (DRHP) with SEBI and also as on the date of registering the offer document with the Registrar of Companies (RoC):

Financial Eligibility (Standard Route)

  • Net Tangible Assets: At least ₹3 crore in each of the last three years (with limits on monetary assets)
  • Average Operating Profit: At least ₹15 crore over the three preceding years
  • Net Worth: At least ₹1 crore in each of the last three years
  • Name Change Rule: If the company changed its name in the past year, at least 50% of recent revenue must come from the renamed business

Alternative Route (Book Building with 75% QIB Allocation)

If the above financial criteria are not met, the company can still make an IPO via book building, provided at least 75% of the net offer is allocated to QIBs. If the minimum 75% QIB subscription is not received, the issue must be withdrawn and all money refunded.

Mandatory Conditions for All IPOs

  • The issuer, its promoters, directors, or selling shareholders must not be debarred by SEBI
  • Must not be wilful defaulters, fraudulent borrowers, or fugitive economic offenders
  • No outstanding convertible securities (exceptions: ESOPs, or converted before filing prospectus)
  • Apply for listing with a stock exchange
  • All shares must be in demat (dematerialised) form
  • No partly paid-up equity shares
  • For project financing: 75% of required funds (excluding IPO proceeds) must be arranged through verifiable means
  • Funds for general corporate purposes and unidentified acquisitions together: cannot exceed 35% of issue proceeds

Offer for Sale Conditions in IPO

  • Only fully paid-up shares held for at least one year can be offered for sale
  • Shareholders with more than 20% holding may offer up to 50% of their holding
  • Shareholders with less than 20% holding may offer up to 10% of their holding

Appointment of Merchant Bankers and Other Intermediaries

As per Regulations 23 and 69 of SEBI ICDR for IPO and Rights Issue respectively:

  • An issuer shall appoint one or more SEBI-registered merchant bankers as lead manager(s) to the issue
  • A compliance officer must be appointed to monitor securities law compliance and handle investor grievance redressal

Other intermediaries appointed for an issue include:

  • Registrar to the Issue (RTA)
  • Bankers to the Issue
  • Underwriters
  • Self-Certified Syndicate Banks (SCSBs)
  • Legal Counsels
  • Statutory Auditors
  • Credit Rating Agencies (for debt issues)
  • Debenture Trustees (for debt issues)

Due Diligence and Preparation of Offer Document What is Due Diligence?

There is no legal definition of "due diligence" in Indian securities law, but it is a critical step in every investment-related transaction. In the context of a merchant banker's function, the objective of due diligence is to:

  • Collect comprehensive information about the issuer company
  • Verify the accuracy of disclosures in the offer document
  • Ensure compliance with all applicable regulations

The Lead Manager and issuer are assisted during due diligence by:

  • Legal Counsels – For legal documentary due diligence and offer document preparation
  • Statutory Auditors – For financial due diligence
  • Industry Experts – For specialised sector knowledge, if required

Offer Document Preparation – Key Rules

  • Regulation 24 of ICDR specifies that the offer document must contain all material disclosures that are true and adequate to enable applicants to make informed investment decisions
  • The information and financial statements in the offer document must be not more than six months old from the issue opening date

Filing of Offer Document with SEBI

The process of filing the Draft Offer Document (DRHP) with SEBI:

  • The issuer files three copies of the DRHP with SEBI's regional office through the lead manager, along with the required fee
  • The lead manager submits certificates confirming agreements and due diligence
  • For convertible debt issues, a certificate from the debenture trustee is also needed
  • The DRHP is also filed with the proposed stock exchange(s), including promoter details
  • SEBI may issue observations within 30 days of key trigger dates
  • Any required changes must be incorporated, and an updated DRHP filed
  • Final offer documents are submitted to SEBI, exchanges, and the Registrar of Companies (RoC), in both physical and soft copy

Public Availability of Draft Offer Document

  • The DRHP must be made available to the public for at least 21 days on the websites of SEBI, proposed stock exchanges, and the lead manager(s)
  • Within two days of filing, the issuer must publish a public notice in widely circulated English, Hindi, and regional newspapers, inviting public comments
  • After the 21-day period, the lead manager must submit all public comments received and resulting changes to SEBI

Security Deposit

Before opening the subscription list, the issuer must deposit with the designated stock exchange an amount equal to 1% of the issue size available for public subscription. This deposit is refundable or forfeitable as specified by SEBI.

Opening, Closing and Listing of an Issue Issue Open Period

  • A public issue must open within 12 months of SEBI's observations under Regulation 25
  • In a book-built issue, the red herring prospectus must be filed at least three working days before the issue opens
  • In a fixed price issue, the full prospectus must be filed at least three working days before opening

Issue Duration

  • An IPO must remain open for at least 3 and not more than 10 working days
  • If the price band is revised during the issue, it must remain open for at least 3 additional working days (within the 10-day limit)
  • In force majeure events or banking strikes, the issue can be extended by a minimum of one working day

Listing Timeline

Subject to listing approval and execution of the listing agreement, securities must be listed within T+3 days after the issue closes (where T is the closing date). SEBI plans to further shorten this timeline with the wider adoption of UPI.

Shelf Prospectus

Companies eligible under SEBI rules may file a shelf prospectus valid for up to one year from the date the first offer opens. For subsequent offers during this period, no new prospectus is needed. An information memorandum must be filed before each subsequent offer, disclosing material changes.

Pricing of Issue

Pricing in IPOs is based on:

  • Fundamentals of the company (future business prospects, past financial performance)
  • Prevailing market valuations for comparable companies (peer comparison)
  • In FPOs, market factors like past scrip performance and current market valuations carry additional weight

The lead managers make an initial assessment of the indicative price during the due diligence process.

Face Value Disclosure

The face value of equity shares must be disclosed in the draft offer document, offer document, advertisements, and application forms in identical font size alongside the price band or issue price.

Underwriting in Public Issues Underwriting Agreement

After the repeal of the SEBI Underwriters Regulation, SEBI amended the SEBI (Merchant Bankers) Regulations to require that every merchant banker acting as an underwriter must enter into an agreement with the body corporate on whose behalf it is underwriting.

Key Underwriting Rules

  • A merchant banker acting as underwriter must receive only the agreed commission or brokerage — no other benefits
  • Total underwriting commitments across all agreements cannot exceed 20 times their net worth
  • If called upon, the underwriter must subscribe to underwritten securities within 45 days of notification
  • In book-built public issues, the issue must be underwritten by lead managers and syndicate members
  • However, 75% of the net offer reserved for QIBs (to meet eligibility norms) cannot be underwritten
  • Underwriting agreements must be entered into before filing the prospectus
  • If syndicate members fail to meet obligations, the lead manager must step in

Issuance Conditions and Allocation in Book-Built Issues Standard Book-Built Issues (Regulation 6(1))

  • At least 35% to retail individual investors (RIIs)
  • At least 15% to non-institutional investors (NIIs)
  • Not more than 50% to QIBs (with 5% of QIB portion reserved for mutual funds)

QIB-Dominated Book-Built Issues (Regulation 6(2))

  • Up to 10% to retail investors
  • Up to 15% to non-institutional investors
  • At least 75% to QIBs (with 5% reserved for mutual funds)

Anchor Investor Allocation

The issuer can allocate up to 60% of the QIB portion to anchor investors, subject to conditions.

Non-Institutional Sub-Categories

Within the non-institutional category:

  • One-third reserved for applicants applying between ₹2 lakh to ₹10 lakh
  • Two-thirds for applicants applying for more than ₹10 lakh

Non-Book-Built Issues

For issues not made through book building, at least 50% of the net offer must go to retail investors. The remaining portion is divided among other categories.

Minimum Subscription

The minimum subscription in an issue shall be at least 90% of the offer (through the offer document), except in case of an offer for sale. In a composite offer (fresh issue + offer for sale), the minimum subscription is calculated only with respect to the fresh issue portion.

Allotment, Refund and Interest Obligations Minimum Allottees

An issuer cannot proceed with allotment if there are fewer than 1,000 prospective allottees.

Allotment Rules

  • Allotment must not exceed the number of securities offered (minor rounding off permitted)
  • In oversubscription, up to 1% of the net offer may be additionally allotted to accommodate minimum lots
  • For retail investors, the value of allotted securities cannot exceed ₹2 lakhs
  • For eligible employees, the value cannot exceed ₹5 lakhs
  • Retail investors must receive at least the minimum bid lot
  • Non-institutional investors must receive at least the minimum application size

Interest Payable on Delay

If there is a delay in allotment, the issuer must pay interest at 15% per annum to investors. Similarly, if listing is rejected, the issuer must refund within four days; delays beyond this attract 15% annual interest.

Post-Issue Functions and Compliance Post-Issue Monitoring

Lead managers must coordinate with registrars after issue closure to monitor:

  • Application flows and ASBA processing
  • Allotment of securities
  • Credit of securities to demat accounts
  • Refund or unblocking of application funds

Underwriter Devolvement

In case of underwriter devolvement, lead managers must issue notices within 10 days of the issue closing and report any failure to meet obligations to SEBI.

Post-Issue Advertisement

Must be published within 10 days of completion of post-issue activities. It must include details on subscription, allotment basis, ASBA data, refund dates, credit of securities, and listing application filing. It must be published in widely circulated English, Hindi, and regional newspapers and uploaded on stock exchange websites.

Final Post-Issue Report

Lead managers must submit a final post-issue report and due diligence certificate within seven days of the date of allotment finalisation or within seven days of refund of money (in case of issue failure).

Key Numbers to Remember – Chapter 5

Rule/Requirement Key Number
Minimum IPO open period 3 working days
Maximum IPO open period 10 working days
Listing timeline after issue close T+3 days
Issue must open within 12 months of SEBI observations
DRHP public comment period 21 days
Security deposit by issuer 1% of issue size
SEBI observations timeline 30 days
Minimum subscription required 90% of the offer
Maximum underwriting commitment 20 times net worth
Underwriter must subscribe within 45 days of notification
Interest on allotment delay 15% per annum
Post-issue advertisement deadline Within 10 days of completion
Final post-issue report submission Within 7 days
Minimum allottees required 1,000
Retail investor allotment cap ₹2 lakh
Employee allotment cap ₹5 lakh
Green shoe option max 15% of issue size

Frequently Asked Questions – NISM Series IX Chapter 5 How many days can an IPO remain open?

An IPO must remain open for a minimum of 3 working days and a maximum of 10 working days. If the price band is revised, it must remain open for at least 3 additional working days.

What is the minimum subscription requirement for an IPO?

The minimum subscription required is 90% of the offer through the offer document. In a composite offer (fresh issue + offer for sale), the 90% requirement applies only to the fresh issue component.

Within how many days must an issue be listed after closing?

Securities must be listed within T+3 days from the closure of the issue (subject to listing approval and execution of listing agreement).

What happens if an issuer delays allotment?

The issuer must pay interest at 15% per annum to investors for any delay in allotment or refund beyond the stipulated timelines.

What is the total underwriting limit for a merchant banker?

The total underwriting commitments of a merchant banker across all agreements cannot exceed 20 times their net worth.

Master Issue Management! Take our NISM Series IX Mock Test focusing on Chapter 5 topics. These numbers appear frequently in the actual exam. Also visit our Chapter 6 notes on General Obligations of Merchant Bankers.

Next Chapter: Chapter 6 – Issue Management: General Obligations of Merchant Bankers and Due Diligence