Kestrel's IPO Closes at 88.4% and the Anchor Wants Out
Kestrel Engineering Ltd's Rs 300 crore book-built IPO closed on a Thursday. The offer was 1,20,00,000 equity shares at a price band of Rs 240 to Rs 260; the QIB portion was 50%, non-institutional 15% and retail 35%. At the close, bids stood at: QIB 1.6 times (including an anchor book that took 60% of the QIB portion), non-institutional 0.62 times, and retail 0.81 times - an aggregate of 88.4% of the offer. The underwriting agreement records that the lead manager and two syndicate members have underwritten 100% of the offer in agreed proportions. The promoter's adviser calls to say the issue has 'crossed the threshold in spirit' and asks for allotment of the full offer against the underwriters' commitment, with the shortfall devolved to them. Separately, an anchor investor emails that the retail response is poor and it wants its application money back before listing.
1. Has Kestrel met the minimum subscription requirement? What are the merchant banker's options?
Read the worked answer
The test. A book-built public issue may be allotted only if valid bids received equal at least 90% of the offer size. Kestrel has 88.4%. Sentiment, the promoter's expectations and the existence of an underwriting agreement do not change that arithmetic.
What an underwriting agreement does and does not do. Underwriting is a promise to take up and pay for unsubscribed shares if the issue fails to attract enough bids. It does not retroactively convert bids into subscriptions. The merchant banker must therefore:
- Obtain written confirmation from each underwriter that it will take up its specified share of the shortfall and that it has the funds; verify that the lead manager's own commitment stays within its capital adequacy and underwriting limits.
- Confirm that devolvement is completed and money received within the time allowed before the allotment deadline.
- If devolvement happens, the offer is subscribed and allotment can proceed, respecting the category portions - the QIB book cannot simply be scaled up to absorb the retail and non-institutional shortfall.
- If the underwriters do not perform, no allotment may be made and application money must be returned.
'Crossed the threshold in spirit' is not a legal standard. Minute the decision and the basis for it.
2. How should the merchant banker respond to the anchor investor's request to withdraw?
Read the worked answer
Refuse, in writing. The anchor book is a firm, irrevocable commitment made one working day before the issue opens, and the money is committed on that basis. The anchor's shares carry a 30-day lock-in from the date of allotment, which exists precisely so that anchor allocations cannot be used as a sentiment-driven exit. A poor retail book is a commercial disappointment, not a legal ground for withdrawal.
Why allowing withdrawal would be worse than refusing. The anchor allocation reduces the portion that must be raised from the public and is disclosed in the offer documents. If anchors were released after seeing the book, the allotment basis and the pre-issue disclosures would both become misleading, and other bidders would have subscribed on a false picture.
What to do. (1) Reply confirming that the application is irrevocable, that shares will be allotted and that the lock-in applies. (2) Inform the issuer and the exchange of the request and the response. (3) Keep the correspondence on the diligence file. The anchor's legitimate route is to sell after the lock-in, subject to law. If the issue itself fails and is not allotted, the anchor is refunded along with everyone else - but that is a consequence of the issue failing, not of the anchor's request.
3. Assume the underwriters decline to devolve. What must happen to the application money, and who bears what cost?
Read the worked answer
No allotment; money back. If the 90% floor is not met and no devolvement occurs, the issue fails. Under the ASBA mechanism, bidders' banks simply unblock the amounts, so the practical exercise is a release, not a dispatch of refund orders. Any money actually received into the issue account - typically anchor and QIB amounts where payment has been made - must be refunded within the timelines prescribed under the ICDR Regulations (currently 15 days from closure of the issue); delay attracts interest at 15% per annum.
Who bears what.
- The issuer bears the cost of a failed issue: registrar, advertising, exchange and printing costs, and any amounts legitimately due to the lead manager under the mandate. It must also explain the failure to its board and to lenders.
- Underwriters pay nothing if they have not devolved; commission is payable only on shares actually taken up. The merchant banker should check whether the mandate provides for a reduced fee on failure.
- The merchant banker should confirm in writing that it advised against proceeding, and re-examine the basis on which the price band was set - a 35% retail portion priced at the top of the band in a weak market is a design question as much as a market question.