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Unit study guide · NISM Series IX

Issue Management – Process and Underwriting

25 questions in this unit

What this unit covers

Key ideas

From the practice bank · 1

Which intermediary primarily processes issue applications and supports allotment records?

The registrar to the issue handles the bid details. It also helps keep the allotment records. Remember: Handling bids is a special job of the registrar.

Hint Common mistake: Mixing up the job of handling bids with marketing or audit. Think about matching bids, bidders and the shares each one gets.

IX-071

From the practice bank · 2

Who coordinates the issue-management work in a book-built offer as its lead merchant banker?

The book running lead manager leads the merchant-banking work for a book-built offer. Remember: The lead manager pulls together the work of all the other experts in the issue.

Hint Common mistake: Thinking some other service provider leads the issue. Find the lead intermediary named for book building.

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From the practice bank · 3

In the ASBA process, which participant performs the actual blocking of money in the applicant’s bank account?

The bank that holds the account blocks the money in it. Remember: Giving the issue instruction and blocking the money in the bank are two separate jobs.

Hint Common mistake: Thinking the registrar holds each bidder’s blocked money. Ask who controls the balance in the bank account.

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From the practice bank · 4

What does underwriting of an issue commit the underwriter to arrange under the regulatory definition?

Underwriting is a promise to buy, or to find buyers for, any securities that are not taken up. Remember: The underwriter’s duty covers the part not taken up, as the agreement says.

Hint Common mistake: Mixing up a promise to fill an issue with cover against later losses. Recall what an agreement to back an issue is for.

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From the practice bank · 5

What does the floor price represent in a stated book-building price band?

The floor price is the lowest price in the book-building band. Remember: The floor and the cap are the low and high ends of the .

Hint Common mistake: Taking the floor price to be the face value or the listing price. Recall the names of the two ends of a price band.

IX-075

From the practice bank · 6

When is an issue described as oversubscribed based on valid demand and the shares available?

An issue is oversubscribed when valid bids are more than the shares on offer, in the offer or in a category. Remember: Oversubscription is measured against the shares on offer.

Hint Common mistake: Calling an issue oversubscribed just because it gets lots of bids. Compare valid demand with the shares on offer.

IX-076

From the practice bank · 7

When must a merchant banker subscribe to securities arising from underwriting devolution under Regulation 22B(3)?

The merchant banker must take up the devolved securities before the basis of allotment is final. Remember: Underwriting devolution must be settled during the issue. It cannot be put off.

Hint Common mistake: Thinking the underwriter’s duty starts after normal trading begins. Place the underwriter’s buy within the steps of allotment.

IX-077

From the practice bank · 8

An issue of 40 lakh shares is fully underwritten at ₹120. Valid public subscriptions cover 36 lakh shares. What subscription amount devolves?

The amount that devolves is ₹4.8 crore, because 4 lakh shares are not taken up. Shortfall = 40 lakh − 36 lakh = 4 lakh shares. Amount = 4 lakh × ₹120 = ₹4.8 crore, if the whole gap is covered and there are no other promises. Remember: Devolution depends on the shares left over and the issue price.

Hint Common mistake: Valuing the part that was taken up and not the gap. First find how many shares are left, then put a value on them.

IX-078

From the practice bank · 9

An underwriting agreement charges 0.8% on ₹50 crore committed, regardless of devolution. What commission is payable if ₹10 crore devolves?

The commission is ₹40 lakh. The agreement charges on the ₹50 crore promised. Commission = 0.8% × ₹50 crore = ₹0.40 crore = ₹40 lakh, leaving out taxes. Remember: The fee may be charged on a different amount from what actually devolves.

Hint Common mistake: Charging the fee only on the shares the underwriter must take up. Read what amount the contract charges on, and do not swap in the gap.

IX-079

From the practice bank · 10

An ASBA application blocks ₹1,00,000. The investor receives 200 shares at ₹120 each. What amount should be released, ignoring charges?

₹76,000 is released. Only ₹24,000 is needed to pay for the shares. Allotment debit = 200 × ₹120 = ₹24,000. Release = ₹1,00,000 − ₹24,000 = ₹76,000. Remember: Only the cost of the shares you get stays debited from the blocked amount.

Hint Common mistake: Mixing up the amount taken for the shares with the amount set free. Keep the cost of the shares apart from the extra that was blocked.

IX-080

From the practice bank · 11

A category offers 12 lakh shares and receives valid demand for 54 lakh shares. What is its subscription multiple?

The multiple is 4.5 times. Valid demand is compared with the shares on offer in the category. Multiple = 54 lakh ÷ 12 lakh = 4.5. Remember: A subscription multiple is valid demand divided by the shares on offer.

Hint Common mistake: Taking away the offered shares before you divide. Use the total valid demand, not just the extra above the offer.

IX-081

From the practice bank · 12

At an issue price of ₹110, bids are 2 lakh shares at ₹120, 3 lakh at ₹110 and 4 lakh at ₹100. What quantity meets the price?

Five lakh shares meet the price. Bids at ₹120 and ₹110 are at or above it. Eligible quantity = 2 lakh + 3 lakh = 5 lakh shares, if all the bids are valid in other ways. Remember: A bid meets the price if it is at or above the final issue price.

Hint Common mistake: Counting lower bids just because they sit in a wider bid range. A bid must pay at least the final price.

IX-082

From the practice bank · 13

An issuer argues that a ₹10 face value proves its proposed ₹300 offer price is fair. What is the main analytical problem?

Face value says nothing about what the business is worth. A fair offer price needs real facts about the business and its value. Remember: A share’s face value is not proof that the offer price is fair.

Hint Common mistake: Using face value as the only yardstick for the issue price. Keep an accounting number apart from a real check of the business’s value.

IX-083

From the practice bank · 14

An issue has a ₹12 crore subscription shortfall. Its only underwriting commitment of ₹9 crore is fully performed. What balance remains uncovered?

₹3 crore is left uncovered after the ₹9 crore of support. Gap left = ₹12 crore − ₹9 crore = ₹3 crore, if the contract is met in full. Remember: Part underwriting does not always cover the whole gap.

Hint Common mistake: Thinking any underwriting means the whole issue is covered. Apply the contract’s cap first, then work out the gap that is left.

IX-084

From the practice bank · 15

What does an in-principle listing approval NOT establish for a prospective investor?

It does not promise any return. An in-principle listing approval is a step in the process. It is not cover for your investment. Remember: Never present an exchange approval as a promise of profit.

Hint Common mistake: Reading a review by the regulator or exchange as a promise of future returns. Keep a step in the process apart from a promise about money.

IX-085

From the practice bank · 16

A material business event occurs after draft disclosures were prepared but before the offer. What should the lead manager do?

The lead manager should look at the event. Then it should update the disclosures fast, so that investors do not rely on facts that are out of date. Remember: Issue disclosures must stay right when key facts change.

Hint Common mistake: Thinking disclosure work ends with the first draft. Ask if the facts still let investors make an informed choice.

IX-086

From the practice bank · 17

The demand summary contains unvalidated bids alongside valid bids. What should the issue team do before reporting usable subscription demand?

The team should first check which bids are valid. Raw records can make demand look bigger than it is. Remember: Make decisions on checked bid data, not on raw totals.

Hint Common mistake: Treating every recorded bid as valid and paid for. Keep interest shown in a system apart from bids that can really lead to allotment.

IX-087

From the practice bank · 18

An offer advertisement highlights possible gains while hiding a major disclosed business risk. What is the appropriate response?

The ad should be changed. What investors are told must not give a puffed-up or false picture. Remember: Marketing must not undo a balanced disclosure.

Hint Common mistake: Thinking a risk can be left out of an ad because it is in the longer document. Think about the picture the whole ad gives.

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From the practice bank · 19

The allotment register shows 1,000 shares for an applicant, but the payment record covers only 800. What should happen before final reconciliation?

The team should look into the gap and fix it, so that the shares and the payments agree. Remember: After the issue, the records must link shares, bidders and money.

Hint Common mistake: Checking the share records and the money records apart, without matching them. Compare what is owed in shares with what is owed in cash.

IX-089

From the practice bank · 20

Several intermediaries participate in an issue. What arrangement best prevents gaps caused by each assuming another will perform a task?

Each task needs a clear owner. That stops gaps, and the conduct rules for merchant bankers ask for it. Remember: An issue with many intermediaries needs clear lines on who does what.

Hint Common mistake: Thinking more intermediaries means every task gets done. Think about naming one owner for each part of the work.

IX-090

From the practice bank · 21

Two underwriters cover 6 lakh and 4 lakh shares. Marked applications are 3 lakh and 2 lakh. Unmarked applications of 2 lakh are credited 60:40. What devolves on the first?

The first underwriter owes 1.8 lakh shares after both credits. Its unmarked credit = 2 lakh × 60% = 1.2 lakh. Devolution = 6 lakh − 3 lakh − 1.2 lakh = 1.8 lakh shares. Assume no firm underwriting or other changes. Remember: Underwriting liability must count each credit set in the agreement.

Hint Common mistake: Taking off the marked bids but forgetting the share of unmarked bids. Take off both the marked bids and the agreed share of the unmarked ones.

IX-091

From the practice bank · 22

A book offers 5 lakh shares. Bids are 2 lakh at ₹130, 2 lakh at ₹120 and 3 lakh at ₹110. What is the highest price filling supply?

₹110 is the highest price that fills 5 lakh shares, if we look at demand alone. Demand at ₹130 is 2 lakh, at ₹120 or above is 4 lakh, and at ₹110 or above is 7 lakh. Only the last level covers the supply. This leaves out category rules and treats all bids as valid. Remember: The clearing price is based on the total demand at or above each price.

Hint Common mistake: Picking the top bid without checking if enough shares are wanted at that price. Add up demand from the top price down until it covers the shares on offer.

IX-092

From the practice bank · 23

A fresh issue raises ₹150 crore and an offer for sale raises ₹50 crore. The issuer bears 2% of its fresh proceeds plus ₹1 crore fixed costs. What remains with it?

The issuer keeps ₹146 crore. Only its fresh proceeds and its own costs count here. Variable cost = 2% × ₹150 crore = ₹3 crore. Net issuer proceeds = ₹150 crore − ₹3 crore − ₹1 crore = ₹146 crore, leaving out taxes. Remember: What the issuer keeps depends on the fresh issue part and on how the costs are split.

Hint Common mistake: Counting the offer for sale money as the issuer’s cash, or charging costs on the wrong amount. Work out whose money it is before you apply the costs.

IX-093

From the practice bank · 24

Two underwriters share a 3 lakh-share shortfall 60:40. The second defaults. The first separately guarantees up to 0.5 lakh of the second’s liability. What is the first’s total commitment?

The first underwriter must cover 2.3 lakh shares in total under these contracts. Its own share = 3 lakh × 60% = 1.8 lakh. The second’s share is 3 lakh × 40% = 1.2 lakh. The extra guarantee covers only 0.5 lakh of that. Total = 1.8 lakh + 0.5 lakh = 2.3 lakh shares. Remember: A backstop with a cap does not pass every unpaid duty to the other underwriter.

Hint Common mistake: Thinking the first underwriter owes nothing extra, or owes all of it, when the contract sets a cap. Work out its own share first, then add the capped guarantee.

IX-094

From the practice bank · 25

An issue allots 8 lakh shares at ₹250 and 2 lakh shares at ₹240. What is the weighted average issue price?

The weighted average price is ₹248. The bigger lot counts for more. Proceeds = 8 lakh × ₹250 + 2 lakh × ₹240 = ₹24.8 crore. Total shares = 10 lakh. Average price = ₹24.8 crore ÷ 10 lakh = ₹248. These prices are made up. They do not show that any discount is allowed. Remember: Weight each issue price by the number of shares sold at it.

Hint Common mistake: Taking a plain average when the lots are not the same size. Weight each price by the number of shares sold at that price.

IX-095
Circuit Limits (Price Bands)

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