Fresh issue proceeds differ from an offer for sale
Series IX practice case · 4 questions · 1 mark each
Question 1 of 4Case practice
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Cedar Machines has 80 lakh existing equity shares. Its offering comprises 20 lakh newly issued shares and an offer for sale of 10 lakh existing shares, all at ₹100 per share. All fresh shares and all offered existing shares are bought by new investors. The 10 lakh shares offered for sale belong to the original shareholders. That sale does not create new shares. The issuer bears ₹1 crore of expenses deducted entirely from the fresh-issue proceeds. Ignore taxes and any expenses of selling shareholders. No other shares are issued or cancelled. The merchant banker must explain issuer cash raised and the original shareholders’ retained percentage after the offering.
All issue quantities, prices and expenses are hypothetical.
No statutory offer-size, eligibility or allocation rule is asserted.
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The case and its answers
Every question of this case, with its answer and why each other option is wrong.
Cedar Machines has 80 lakh existing equity shares. Its offering comprises 20 lakh newly issued shares and an offer for sale of 10 lakh existing shares, all at ₹100 per share. All fresh shares and all offered existing shares are bought by new investors. The 10 lakh shares offered for sale belong to the original shareholders. That sale does not create new shares. The issuer bears ₹1 crore of expenses deducted entirely from the fresh-issue proceeds. Ignore taxes and any expenses of selling shareholders. No other shares are issued or cancelled. The merchant banker must explain issuer cash raised and the original shareholders’ retained percentage after the offering.
All issue quantities, prices and expenses are hypothetical.
No statutory offer-size, eligibility or allocation rule is asserted.
Q1How many equity shares are outstanding after the offering?
Option A. 110 lakh shares
Why it is wrong: This incorrectly treats the 10 lakh offer-for-sale shares as new shares.
Option B. 90 lakh shares
Why it is wrong: This subtracts the offered existing shares, which still exist after transfer.
Option C. 100 lakh shares — Correct answer
Option D. 80 lakh shares
Why it is wrong: This ignores the fresh issue.
Answer: C. Post-issue shares = 80 lakh + 20 lakh = 100 lakh. An offer for sale transfers ownership of existing shares. Remember: Separate creation of new shares from transfer of old shares.
Hint, shown before you answer in practice mode: Only the fresh issue increases the number of shares.
IX-P-C01-Q1easynumerical
Q2How much net cash does the issuer receive?
Option A. ₹9 crore
Why it is wrong: This starts from offer-for-sale proceeds instead of the fresh issue.
Option B. ₹20 crore
Why it is wrong: This omits the specified issuer expenses.
Option C. ₹29 crore
Why it is wrong: This improperly includes offer-for-sale proceeds received by selling shareholders.
Option D. ₹19 crore — Correct answer
Answer: D. Fresh proceeds = 20 lakh × ₹100 = ₹20 crore. Deduct ₹1 crore expenses to obtain ₹19 crore. Remember: The issuer receives fresh capital, not the selling shareholders’ sale proceeds.
Hint, shown before you answer in practice mode: Calculate the fresh issue proceeds and deduct only the stated issuer costs.
IX-P-C01-Q2mediumnumerical
Q3What are the selling shareholders’ gross offer-for-sale proceeds?
Option A. ₹9 crore
Why it is wrong: This allocates the issuer’s ₹1 crore expense to sellers contrary to the stated terms.
Option B. ₹10 crore — Correct answer
Option C. ₹20 crore
Why it is wrong: This is the gross fresh-issue proceeds.
Option D. ₹30 crore
Why it is wrong: This combines fresh issue and offer for sale.
Answer: B. Gross offer-for-sale proceeds = 10 lakh × ₹100 = ₹10 crore. They go to the selling shareholders. Remember: An offer for sale changes ownership and pays the seller.
Hint, shown before you answer in practice mode: The sale comprises 10 lakh existing shares at ₹100.
IX-P-C01-Q3mediumnumerical
Q4What percentage of post-issue shares do all original shareholders retain together?
Option A. 87.5%
Why it is wrong: This divides the remaining 70 lakh by the old 80 lakh share count.
Option B. 80%
Why it is wrong: This accounts for fresh-issue dilution but ignores their sale of 10 lakh shares.
Option C. 70% — Correct answer
Option D. 63.64%
Why it is wrong: This wrongly treats the offer for sale as creating additional shares.
Answer: C. They retain 80 − 10 = 70 lakh shares out of 100 lakh outstanding, or 70%. Both the fresh issue and their sale affect their retained stake. Remember: Ownership percentages require both a correct numerator and denominator.
Hint, shown before you answer in practice mode: Use retained original holdings over the new total share count.
IX-P-C01-Q4hardnumerical
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