NISM Series IX Merchant Banking: Chapter 6 – General Obligations of Merchant Bankers and Due Diligence (Short Notes)

Chapter 6 covers the detailed general obligations of merchant bankers in the context of issue management. It also includes in-depth provisions on preferential issues, QIPs, rights issues, and Indian Depository Receipts (IDRs). This chapter builds directly on the framework established in Chapter 5 and contains many exam-relevant specifics.

Also Read: Chapter 5 – Issue Management: Process and Underwriting | NISM Series IX Free Mock Test General Obligations of Merchant Bankers in Issue Management 1. Prohibition of Payment of Incentives

No person connected with the issue shall offer any incentive — whether direct or indirect, in cash, kind, services, or otherwise — to any person for making an application for allotment of specified securities. This prohibition ensures that investor decisions are not influenced by improper means.

2. Public Communications and Research Reports

All public communications including advertisements, publicity materials, and research reports must comply with Schedule IX of SEBI ICDR Regulations. Specific rules:

Any communication by the issuer, its associates, lead managers, or connected intermediaries must contain only information as contained in the DRHP/offer document
All public communications issued from the date of the board meeting approving the issue till the date of filing the DRHP with SEBI must be consistent with past practices
The issuer must make a prompt, true, and fair disclosure of all material developments between the date of filing the offer document and the date of allotment, through public notices in all newspapers where pre-issue advertisements were published

3. Publicly Available Document

The lead merchant banker and issuer must ensure that the content of offer documents hosted on websites is exactly the same as the printed copies filed with the RoC, SEBI, and stock exchanges. Investors may request copies of the draft or final offer document from both the lead merchant banker and the stock exchange.

4. Redressal of Investor Grievances

The post-issue lead merchant banker must actively monitor:

Allotment and refund processes
Dispatch of allotment letters and refund orders
Instructions to syndicate members, SCSBs, and other intermediaries
Timely redressal of all investor grievances arising from the issue

5. Post-Issue Reports

As per Regulation 55, the lead manager(s) must submit a final post-issue report (as per Part A of Schedule XVII) along with a due diligence certificate within:

Seven days of the date of finalisation of basis of allotment, or
Seven days of refund of money in case of issue failure

6. Post-Issue Advertisements

The lead manager must publish a post-issue advertisement within 10 days of completing post-issue activities. This must include:

Subscription details
Allotment basis
ASBA processing data
Refund dates
Credit of securities to demat accounts
Listing application filing details

The advertisement must be published in widely circulated English, Hindi, and regional newspapers and also uploaded on stock exchange websites.

7. Co-ordination with Other Intermediaries

The post-issue merchant banker must maintain close coordination with registrars to the issue and depute its officers to the offices of various intermediaries at regular intervals after closure. This enables monitoring of:

Flow of applications from collecting bank branches and SCSBs
Processing of applications including ASBA forms
Other related matters until the basis of allotment is finalised

8. Miscellaneous Responsibilities

The merchant banker must ensure that all information in the offer document and the audited financial statements in the offer document are not more than 6 months old from the issue opening date.

9. Promoters' Contribution

SEBI ICDR Regulations, 2018 specifies the minimum promoter's contribution in public issues. In a public or composite issue of convertible securities, minimum promoters' contribution is as prescribed by the regulations. If the project is to be implemented in stages, the promoters' contribution shall be calculated with respect to total equity participation till the respective stage versus the debt raised through the public issue.

10. Lock-in of Promoters' Contribution (Restriction on Transferability)

In a public issue, specified securities held by promoters shall be locked in for the period specified in ICDR regulations. Key points:

Certificates for locked-in securities must carry the inscription "non-transferable" along with the lock-in period
For dematerialised securities, the issuer must ensure lock-in is recorded by the depository
Pre-IPO shares held by non-promoters are typically locked in for six months
Shares lent under a green shoe option are exempt from lock-in during the lending period
Locked-in shares may be pledged under specific conditions and transferred only if the lock-in continues with the new holder

11. Corporate Governance and Board Composition

Both the Companies Act 2013 and SEBI regulations specify rules for board and committee meetings and the resolutions to be passed. The compliance officer ensures that all laws for conducting these meetings are complied with.

12. Reservation in IPOs

Issuers may make reservations for certain categories of persons (outside the promoters' contribution and net offer to the public). These include reservations for:

Shareholders of the parent company (in case of subsidiary IPOs)
Employees
Existing shareholders of group/associate companies

Different rules apply for rights issues, FPOs, and SME IPOs.

13. Identification of Promoters and Promoter Group

Under SEBI ICDR, a "promoter" is someone:

Named in offer documents
Who has control over the issuer's affairs
Whose guidance the board generally follows

Excluded from the definition: those acting solely in professional roles and large institutional investors whose status as promoter is not based solely on shareholding.

The "promoter group" includes the promoter, their immediate relatives, and entities linked through shareholding or control. Institutional investors are not deemed part of the promoter group merely due to shareholding unless they have promoted or sponsored the entity.

14. Disclosures Relating to Group Companies

The lead merchant banker must review and retain certificates confirming:

Constitution of the promoter group and group companies
Shareholding and board composition of corporate promoters
Litigation history
Disassociation by promoters in the last 3 years
Non-compete agreements and family settlement agreements (if any)

15. Disclosures Relating to Litigation

The legal counsel helps assess and review litigation documents. The issuer company must immediately inform lead managers about any new development in disclosed litigation matters or any new litigation arising during the issue process.

16. General Information Document (GID)

SEBI has issued guidelines for the General Information Document (GID) — a standardised document that contains common information relevant to all issues. Lead managers must ensure its proper inclusion and accuracy in the offer document.

Preferential Issue – Key Provisions

A listed company can make a preferential issue only if certain conditions are met:

Eligibility Conditions

Shares being fully paid-up
Shareholder approval through special resolution
Shares in dematerialised form
Compliance with stock exchange listing norms
Obtaining PAN of all proposed allottees

Restrictions on Preferential Issues

Not allowed if recent share transfers or lapses in warrant conversion have occurred
Not allowed if promoters/directors are fugitive economic offenders or have unresolved dues

Pricing of Preferential Issues

Pricing is based on Volume-Weighted Average Price (VWAP) over:

10 trading days, or
90 trading days preceding the relevant date

Whichever is higher shall be the floor price. Special provisions apply for infrequently traded shares and QIBs.

Allotment Timeline

Allotment must be done within 15 days of passing the special resolution, except where regulatory approvals or open offer timelines under SEBI SAST apply. Allotments must be in demat form.

Lock-in for Preferential Issues

For promoters: 18 months for up to 20% of capital; 6 months for the rest
For others: generally 6 months; 1 year for unlisted convertible securities
Pre-allotment holdings are locked in for 90 trading days

Qualified Institutional Placement (QIP) Eligible Securities for QIP

"Eligible securities" for QIP include equity shares, non-convertible debt instruments with warrants, and other convertible securities (except standalone warrants).

Conditions for QIP

Must pass a special resolution (valid for 365 days)
Equity shares must have been listed for at least one year before the notice
None of the promoters or directors should be a fugitive economic offender
All securities must be listed on the same stock exchange where equity is listed
Another QIP cannot be made within two weeks of a prior one

QIP Merchant Banker Role

The merchant banker must submit a due diligence certificate confirming QIP compliance. The issuer must also submit the placement document and declarations to stock exchanges for in-principal listing approval.

Monitoring Agency for QIP

If the issue size (excluding OFS by selling shareholders) exceeds ₹100 crore, the issuer must arrange for the use of proceeds to be monitored by a SEBI-registered credit rating agency. This requirement does not apply to banks, public financial institutions, or insurance companies.

QIP Pricing

The price for a QIP must be at least the average of the weekly high and low closing prices over the two weeks before the relevant date. A maximum 5% discount is allowed with shareholder approval.

Minimum Allottees in QIP

At least 2 allottees if issue size is ₹250 crore or less
At least 5 allottees if issue size exceeds ₹250 crore
No single allottee can receive more than 50% of the issue

Convertible or exchangeable securities via QIP must have a tenure of no more than 60 months. Such securities cannot be sold for one year from allotment (except on a recognised stock exchange).

Rights Issue – Key Provisions Core Conditions

None of the issuer's promoters, promoter group, or directors should be debarred from capital markets by SEBI
Equity shares must be reserved for holders of compulsorily convertible debt instruments in proportion to their holdings
The abridged letter of offer must accompany every application form and be sent to shareholders in advance
ASBA is the only payment method allowed for eligible applicants in a rights issue
Issue price cannot be below face value

Withdrawal Restriction

Once the record date for a rights issue is announced, the issue cannot be withdrawn. If the issuer fails to proceed after the record date, it faces listing restrictions for 12 months (except for prior-issued securities).

Payment Terms

Shareholders must be offered either full payment or part payment (minimum 25%) with the balance payable in calls.

Pre-Issue Advertisement for Rights Issue

Before opening a rights issue, the issuer must advertise in English, Hindi, and regional newspapers near its registered office and notify stock exchanges at least two days in advance. The advertisement must disclose:

When the abridged letter of offer and application forms were dispatched
Where duplicate forms can be obtained
That shareholders who haven't received forms can apply on plain paper
That both an application form and plain paper used simultaneously will both be rejected

Utilisation of Rights Issue Funds

The issuer shall utilise funds collected in rights issues only after finalisation of the basis of allotment.

Indian Depository Receipts (IDRs) What are IDRs?

Indian Depository Receipts (IDRs) allow domestic investors to invest in foreign companies listed on global stock exchanges. IDRs are issued by a domestic depository on behalf of the foreign issuing company. Each IDR represents a certain number of underlying shares of the foreign company.

Reference Date for IDRs

An issuer making a public issue of IDRs must satisfy conditions as on the date of filing the draft offer document with SEBI and also as on the date of filing the offer document with the Registrar of Companies.

Minimum Subscription for IDRs

The minimum subscription required is at least 90% of the offer through the offer document — same as for regular public issues.

Key Numbers – Chapter 6 Summary

Provision	Key Number/Rule
Post-issue report submission	Within 7 days of allotment/refund
Post-issue advertisement	Within 10 days of completion
Financial information maximum age	6 months from issue opening
Preferential issue allotment deadline	15 days from special resolution
Promoter lock-in (up to 20% of capital)	18 months
Promoter lock-in (balance)	6 months
Non-promoter pre-IPO lock-in	6 months
Pre-allotment holding lock-in (preferential)	90 trading days
QIP special resolution validity	365 days
QIP listing requirement	At least 1 year of listing
Gap between two QIPs	Minimum 2 weeks
QIP monitoring agency trigger	Issue size > ₹100 crore
QIP minimum allottees (≤ ₹250 crore)	2 allottees
QIP minimum allottees (> ₹250 crore)	5 allottees
QIP max single allottee share	50% of issue
QIP security tenure limit	60 months
QIP post-allotment lock-in for sale	1 year (except on exchange)
Rights issue pre-advertisement notice	2 days to stock exchange
Rights issue withdrawal penalty	Listing restriction for 12 months
IDR minimum subscription	90% of offer

Frequently Asked Questions – NISM Series IX Chapter 6 What is the lock-in period for promoters' contribution in an IPO?

For promoters in a preferential issue: 18 months for up to 20% of post-issue capital; 6 months for the balance. For pre-IPO shares of non-promoters, the lock-in is typically 6 months.

What is the minimum number of allottees required for a QIP?

At least 2 allottees if the issue size is ₹250 crore or less, and at least 5 if it exceeds ₹250 crore. No single allottee can receive more than 50% of the issue.

Can a rights issue be withdrawn after the record date is announced?

No. Once the record date is announced, the rights issue cannot be withdrawn. Failure to proceed results in listing restrictions for 12 months for the issuer.

What is an Indian Depository Receipt (IDR)?

An IDR is a financial instrument issued by a domestic Indian depository on behalf of a foreign company listed on an overseas stock exchange. It allows Indian investors to invest in foreign companies. Each IDR represents a certain number of underlying shares of the foreign issuer.

What are the pricing rules for a preferential issue?

Pricing is based on the Volume-Weighted Average Price (VWAP) over 10 or 90 trading days preceding the relevant date — whichever is higher serves as the floor price.

Test Your Knowledge! Chapter 6 is packed with numbers and rules that appear in the NISM Series IX Exam. Take our Free Mock Test to check how well you know them. Also explore Chapter 7 – Mergers, Acquisitions and Takeovers.

Next Chapter: Chapter 7 – Other Merchant Banking Activities: Mergers, Acquisitions and Takeovers