Unit study guide · NISM Series II-A
Modes of allotment of shares other than Public Offers
10 questions in this unit
What this unit covers
- Which description best identifies a private placement of shares rather than a public offer?
- Which investor group is the intended eligible group for a qualified institutions placement, called a QIP?
- What does an employee stock option normally give an employee before it is exercised?
- A rights issue offers two new shares for every five held. What is the entitlement on 750 eligible existing shares?
- An investor accepts 240 rights shares at ₹75 each. The stated application payment is 40% of the price. What initial payment is required?
- An employee’s options become exercisable only after completing a stated service period. What does meeting this condition normally achieve?
- A rights entitlement is expressly renounceable under its issue terms. The holder does not wish to subscribe. What may the holder do?
- A ₹2,000 debenture converts 60% of its principal into equity at ₹120 per share. How many shares arise from one debenture?
- A share trades at ₹120 before a one-for-four rights issue at ₹80. Assuming full subscription and no other change, what is its theoretical ex-rights price?
- Of 500 employee options, 300 are vested and exercisable at ₹80. The share value is ₹125. What is the exercise benefit on vested options before costs?
Key ideas
From the practice bank · 1
Which description best identifies a private placement of shares rather than a public offer?
A private placement is an offer to identified eligible persons through the prescribed private-placement process, not an unrestricted public invitation. Remember: Private placement depends on a restricted offer process, not simply a small issue size.
Hint Focus on how recipients are selected and the process used for the offer. Common mistake: Assuming any small share issue is automatically a private placement.
II-A-071From the practice bank · 2
Which investor group is the intended eligible group for a qualified institutions placement, called a QIP?
A QIP is directed to qualified institutional buyers, subject to the applicable issue rules. Remember: QIP eligibility follows the qualified institutional buyer category.
Hint The placement route is designed for a defined institutional category. Common mistake: Treating a QIP like a retail public-offer application.
II-A-072From the practice bank · 3
What does an employee stock option normally give an employee before it is exercised?
An employee stock option gives a conditional right to acquire shares under the scheme, rather than immediate ownership of those shares. Remember: An option is not the same as an allotted share.
Hint An option grant and an actual share allotment are different events. Common mistake: Counting all granted options as shares already owned.
II-A-073From the practice bank · 4
A rights issue offers two new shares for every five held. What is the entitlement on 750 eligible existing shares?
The rights entitlement is 300 shares. Calculation: 750 ÷ 5 × 2 = 300 shares. Remember: A rights ratio states new shares offered relative to existing shares held.
Hint Apply both parts of the new-share-to-existing-share ratio. Common mistake: Reversing the numerator and denominator in a rights ratio.
II-A-074From the practice bank · 5
An investor accepts 240 rights shares at ₹75 each. The stated application payment is 40% of the price. What initial payment is required?
The initial payment is ₹7,200. Application amount per share = ₹75 × 40% = ₹30. Total initial payment = 240 × ₹30 = ₹7,200. Remember: Partly payable rights issues separate the initial payment from later amounts due.
Hint Work out the amount payable now on each accepted share. Common mistake: Paying or recording the full subscription amount when only the stated instalment is due.
II-A-075From the practice bank · 6
An employee’s options become exercisable only after completing a stated service period. What does meeting this condition normally achieve?
Meeting the stated service condition normally causes eligible options to vest, after which exercise must still follow the scheme’s terms. Remember: Vesting and exercise are separate steps in an employee option scheme.
Hint Distinguish earning eligibility to exercise from actually exercising or selling. Common mistake: Treating vested options as already exercised shares.
II-A-076From the practice bank · 7
A rights entitlement is expressly renounceable under its issue terms. The holder does not wish to subscribe. What may the holder do?
The holder may transfer a renounceable entitlement through the permitted process instead of subscribing personally. Remember: Renunciation transfers the subscription opportunity rather than the original shareholding.
Hint The entitlement and the existing shares are different assets. Common mistake: Confusing transfer of a rights entitlement with sale of the existing shares.
II-A-077From the practice bank · 8
A ₹2,000 debenture converts 60% of its principal into equity at ₹120 per share. How many shares arise from one debenture?
One debenture produces 10 shares. Convertible amount = ₹2,000 × 60% = ₹1,200. Shares = ₹1,200 ÷ ₹120 = 10. Remember: Part conversion leaves some debt outstanding rather than converting the whole principal.
Hint Only the portion specified for conversion becomes equity. Common mistake: Using full principal when only part of a debenture converts.
II-A-078From the practice bank · 9
A share trades at ₹120 before a one-for-four rights issue at ₹80. Assuming full subscription and no other change, what is its theoretical ex-rights price?
The theoretical ex-rights price is ₹112. Value of four old shares = 4 × ₹120 = ₹480. Add ₹80 for one rights share to get ₹560. Divide by five total shares to get ₹112. Remember: Theoretical ex-rights pricing weights both old shares and new subscription money.
Hint Combine the value of the old shares with the new subscription money before spreading it across all shares. Common mistake: Averaging the two prices without using the rights ratio.
II-A-079From the practice bank · 10
Of 500 employee options, 300 are vested and exercisable at ₹80. The share value is ₹125. What is the exercise benefit on vested options before costs?
The exercise benefit on vested options is ₹13,500. Benefit per option = ₹125 − ₹80 = ₹45. Vested benefit = 300 × ₹45 = ₹13,500, before costs or taxes. Remember: Exercise economics apply to the eligible options and include the exercise payment.
Hint Use only exercisable options and subtract the exercise payment from the share value. Common mistake: Including unvested options in an immediately exercisable benefit.
II-A-080