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Unit study guide · NISM Series IX

Issue Management – Important Terms

15 questions in this unit

What this unit covers

Key ideas

From the practice bank · 1

What does an initial public offer, or IPO, describe for an unlisted company?

An IPO is an unlisted company’s first public equity offer, which can include fresh shares or shares offered by existing holders. Remember: An IPO describes the first public equity offer rather than every later capital issue.

Hint Common mistake: Assuming an IPO must consist only of newly created shares. Check the issuer’s listing status before the offering.

IX-056

From the practice bank · 2

What is a further public offer, or FPO, by an already-listed company?

An FPO is a subsequent public equity offer by a company whose shares are already listed. Remember: The issuer’s existing listed status distinguishes an FPO from an IPO.

Hint Common mistake: Using IPO for every public offer regardless of the issuer’s listing history. The company is already listed before this public offering begins.

IX-057

From the practice bank · 3

Which issue generally offers new shares to existing shareholders in proportion to their holdings?

A rights issue offers existing shareholders new shares in proportion to their holdings, subject to its terms. Remember: Rights issues give existing shareholders a proportionate subscription opportunity.

Hint Common mistake: Confusing an offer to existing holders with a targeted institutional allotment. Think about preserving an existing holder’s opportunity to participate.

IX-058

From the practice bank · 4

What happens to application money under Applications Supported by Blocked Amount, or ASBA, before the relevant debit?

Under ASBA, the application amount remains blocked in the applicant’s bank account until the applicable debit or release. Remember: ASBA uses a block on funds rather than an immediate full transfer to the issuer.

Hint Common mistake: Treating blocked money as already allotted share capital. Think about who holds the account used for the application.

IX-059

From the practice bank · 5

What is the principal purpose of a green shoe option in an equity offering?

A green shoe option supports permitted post-listing price stabilisation through the issue’s specified overallotment mechanism. Remember: A green shoe option is a stabilisation mechanism rather than a return guarantee.

Hint Common mistake: Assuming stabilisation means the share price cannot fall. Think about a permitted mechanism linked to the early trading period.

IX-060

From the practice bank · 6

What does the draft red herring prospectus, or DRHP, principally provide before a book-built public issue?

The DRHP provides draft issue disclosures for review before the offering proceeds to its later stages. Remember: Draft offer documentation is not an allotment or price guarantee.

Hint Common mistake: Treating a filed draft document as confirmation of a completed issue. Identify the stage indicated by the word draft.

IX-061

From the practice bank · 7

What may remain incomplete in a red herring prospectus compared with the final prospectus?

A red herring prospectus may lack complete particulars of the securities’ price or quantity before these are finalised. Remember: A red herring prospectus is incomplete in specified offer particulars, not in every disclosure.

Hint Common mistake: Assuming the term permits broad omission of material business information. Think about information that book building helps finalise.

IX-062

From the practice bank · 8

Which feature most directly distinguishes book building from a fixed-price public issue?

Book building uses investor bids to help discover the issue price rather than announcing a single fixed issue price at the outset. Remember: Book building and fixed-price issues differ principally in price discovery.

Hint Common mistake: Confusing the method of pricing with the later allotment outcome. Focus on how the offer price is determined.

IX-063

From the practice bank · 9

An offer includes ₹120 crore fresh shares and ₹80 crore shares sold by existing holders. What gross amount reaches the issuer?

The issuer receives ₹120 crore because only the fresh-share component raises money for it. Issuer gross proceeds = ₹120 crore. The ₹80 crore offer-for-sale proceeds belong to the selling shareholders, ignoring costs. Remember: The issuer receives fresh-issue proceeds, not selling shareholders’ offer-for-sale proceeds.

Hint Common mistake: Treating the entire advertised offer size as money raised by the company. Separate proceeds from new shares and proceeds from existing shares.

IX-064

From the practice bank · 10

An offer contains 30 lakh shares, including 2 lakh reserved for employees and 3 lakh for shareholders. What is the remaining net public offer?

The remaining net public offer is 25 lakh shares after deducting both reservations. Net offer = 30 lakh − 2 lakh − 3 lakh = 25 lakh shares. Remember: The net offer excludes the reservations specified in the issue structure.

Hint Common mistake: Deducting only one reservation when more than one is stated. Remove every stated reservation once from the total offered shares.

IX-065

From the practice bank · 11

A company issues a ₹10 face-value share at ₹85. What is the issue premium per share?

The issue premium is ₹75 because the issue price exceeds face value by that amount. Premium = ₹85 − ₹10 = ₹75 per share. Remember: Issue price and face value are different concepts.

Hint Common mistake: Calling the full issue price the securities premium. The premium is the part of the issue price above face value.

IX-066

From the practice bank · 12

What does a qualified institutional buyer, or QIB, classification depend on?

QIB classification depends on the investor falling within an eligible institutional category, not merely bidding a large amount. Remember: Investor categories are not interchangeable just because application amounts are large.

Hint Common mistake: Treating a wealthy individual as a QIB solely because of wealth. Distinguish investor eligibility from the size or timing of an application.

IX-067

From the practice bank · 13

What does an eligible investor indicate by submitting a cut-off bid in a book-built issue?

A cut-off bid indicates willingness to subscribe at the issue price finally determined through the process. Remember: A cut-off bid accepts the discovered price but does not assure allotment.

Hint Common mistake: Equating a cut-off bid with a guaranteed full allocation. Separate agreement on the eventual price from certainty of allocation.

IX-068

From the practice bank · 14

A hypothetical price band is ₹240 to ₹264. By what percentage does the cap exceed the floor?

The cap exceeds the floor by 10% because the ₹24 difference is measured against ₹240. Difference = ₹264 − ₹240 = ₹24. Percentage excess = ₹24 ÷ ₹240 × 100 = 10%. This is a hypothetical calculation, not a statement of a regulatory limit. Remember: A percentage price-band spread needs the correct reference price.

Hint Common mistake: Dividing the spread by the upper price rather than the stated lower reference. Identify the lower reference amount before expressing the difference as a percentage.

IX-069

From the practice bank · 15

A holder owns 60 lakh of 100 lakh shares. Others subscribe to 20 lakh new shares and the holder sells 10 lakh existing shares. What ownership remains?

The holder retains 41.67% because its holding falls to 50 lakh while total shares rise to 120 lakh. Remaining holding = 60 lakh − 10 lakh = 50 lakh. Enlarged capital = 100 lakh + 20 lakh = 120 lakh. Ownership = 50 ÷ 120 × 100 = 41.67%. Remember: Fresh issuance and secondary sales affect ownership calculations in different ways.

Hint Common mistake: Reducing total outstanding shares when an existing shareholder sells to another investor. A fresh issue changes the denominator, while a holder’s sale changes that holder’s numerator.

IX-070