Unit study guide · NISM Series IX
Other Merchant Banking Activities – Disinvestment, Buyback of Equity Shares
15 questions in this unit
What this unit covers
- In the public-sector context, what does disinvestment generally mean for the government’s ownership?
- Who purchases a company’s shares in a buyback by that company?
- What does delisting of equity shares primarily change?
- What most directly distinguishes a secured debt security from an unsecured one?
- In an employee stock option plan, what does exercise generally mean?
- What most directly distinguishes strategic disinvestment involving a transfer of control from a minority government stake sale?
- A company buys back 8 lakh shares at ₹250 each. What gross purchase consideration does it pay?
- A company’s shares are delisted from an exchange. Which conclusion does NOT follow solely from that event?
- Which intermediary is appointed to protect debt-security holders’ interests under the terms of a debenture trust arrangement?
- What is the main trading purpose of market making in a small and medium enterprise, or SME, share?
- An applicable framework requires an exit offer to dissenting shareholders after a change in issue objects. What is the offer’s central purpose?
- An alternative investment fund’s placement memorandum describes unleveraged investing, but its operating plan relies on borrowing. What should the merchant banker reviewing it address?
- A company earns ₹18 crore on 90 lakh shares. After a buyback, shares fall to 75 lakh and annual profit falls by ₹1.5 crore. What is the new earnings per share?
- A shareholder owns 18 lakh of 100 lakh shares and does not participate in a buyback. After 10 lakh shares are bought and cancelled, what ownership remains?
- A holder sells 700 shares at ₹180 under a completed delisting exit. Their cost was ₹120 each and the assumed fee is 0.5% of proceeds. What pre-tax gain results?
Key ideas
From the practice bank · 1
In the public-sector context, what does disinvestment generally mean for the government’s ownership?
Disinvestment generally reduces the government’s ownership by selling part or all of its stake. Remember: A disinvestment is a disposal of an existing investment interest.
Hint Common mistake: Assuming disinvestment necessarily means the enterprise stops operating. Focus on whether the existing owner is adding to or selling its investment.
IX-136From the practice bank · 2
Who purchases a company’s shares in a buyback by that company?
In a buyback, the issuing company purchases its own shares under the applicable framework. Remember: The identity of the purchaser distinguishes a company buyback from an outside acquisition.
Hint Common mistake: Calling every purchase of listed shares a buyback. Identify which party pays the purchase consideration.
IX-137From the practice bank · 3
What does delisting of equity shares primarily change?
Delisting changes the shares’ admission to trading on the relevant stock exchange. Remember: Delisting concerns exchange listing status rather than automatically dissolving the company.
Hint Common mistake: Assuming delisted shares and a dissolved company are the same thing. Focus on the relationship between the shares and the exchange.
IX-138From the practice bank · 4
What most directly distinguishes a secured debt security from an unsecured one?
A secured debt security has a specified security interest supporting the debt rather than relying solely on an unsecured claim. Remember: Security supports a debt claim but does not eliminate every recovery risk.
Hint Common mistake: Assuming secured means repayment cannot fail or be delayed. Think about the assets or rights available to support the debt claim.
IX-139From the practice bank · 5
In an employee stock option plan, what does exercise generally mean?
Exercise means using a vested option to acquire shares according to the option’s terms. Remember: Grant, vesting and exercise are separate stages of an employee option arrangement.
Hint Common mistake: Assuming shares are automatically purchased on the date the option is granted. Separate grant, vesting, exercise and later sale.
IX-140From the practice bank · 6
What most directly distinguishes strategic disinvestment involving a transfer of control from a minority government stake sale?
The transfer of management control distinguishes the stated strategic disinvestment from a minority stake sale without control transfer. Remember: Selling some equity and transferring control are separate transaction features.
Hint Common mistake: Assuming every minority stake sale transfers management control. Focus on who can direct the business after the transaction.
IX-141From the practice bank · 7
A company buys back 8 lakh shares at ₹250 each. What gross purchase consideration does it pay?
The gross purchase consideration is ₹20 crore for the accepted shares. Consideration = 8 lakh × ₹250 = ₹20 crore, excluding costs and taxes. Remember: Buyback consideration is based on accepted shares rather than every share originally tendered.
Hint Common mistake: Mixing up lakh and crore when converting the purchase amount. Use the accepted share quantity and the price paid per share.
IX-142From the practice bank · 8
A company’s shares are delisted from an exchange. Which conclusion does NOT follow solely from that event?
Delisting does not by itself mean the company has legally ceased to exist because listing status and corporate existence are separate matters. Remember: A company may continue to exist after its shares are delisted.
Hint Common mistake: Treating delisting as an automatic winding-up or dissolution. Distinguish removal from a trading venue from termination of a legal entity.
IX-143From the practice bank · 9
Which intermediary is appointed to protect debt-security holders’ interests under the terms of a debenture trust arrangement?
The debenture trustee acts to protect debt-security holders’ interests under the trust arrangement and applicable framework. Remember: Issue management and debenture trusteeship are distinct roles.
Hint Common mistake: Assuming the issuer’s lead manager automatically performs every trustee obligation. Identify the intermediary whose role is tied to the debt holders’ collective interests.
IX-144From the practice bank · 10
What is the main trading purpose of market making in a small and medium enterprise, or SME, share?
Market making supports by providing buying and selling quotes rather than guaranteeing investor returns. Remember: Market making facilitates trading but does not eliminate price risk.
Hint Common mistake: Treating a market maker as a guarantor of the issue price or future returns. Distinguish trading support from guarantees about the issuer.
IX-145From the practice bank · 11
An applicable framework requires an exit offer to dissenting shareholders after a change in issue objects. What is the offer’s central purpose?
The exit offer gives eligible dissenting holders a route to sell under the specified terms rather than forcing continued participation. Remember: An exit opportunity protects a choice to leave, not a guaranteed investment outcome.
Hint Common mistake: Assuming the existence of an exit offer guarantees recovery of the original purchase price. Focus on the option given to a shareholder who does not support the change.
IX-146From the practice bank · 12
An alternative investment fund’s placement memorandum describes unleveraged investing, but its operating plan relies on borrowing. What should the merchant banker reviewing it address?
The review should address the strategy-and-leverage inconsistency because it can materially change the risks described to investors. Remember: A fund’s placement disclosures should match its actual proposed structure and strategy.
Hint Common mistake: Treating borrowing plans as irrelevant when the stated strategy describes no leverage. Compare the risk investors are told about with the risk the operating plan actually creates.
IX-147From the practice bank · 13
A company earns ₹18 crore on 90 lakh shares. After a buyback, shares fall to 75 lakh and annual profit falls by ₹1.5 crore. What is the new earnings per share?
New earnings per share are ₹22 because profit falls to ₹16.5 crore and the denominator falls to 75 lakh shares. Profit = ₹18 crore − ₹1.5 crore = ₹16.5 crore. Earnings per share = ₹16.5 crore ÷ 75 lakh = ₹22, assuming the changes apply for the full comparison period. Remember: Buyback analysis should not assume earnings remain unchanged when the question states an income effect.
Hint Common mistake: Reducing only the share denominator while ignoring the stated fall in profit. A buyback can change both the share count and the income remaining after using cash.
IX-148From the practice bank · 14
A shareholder owns 18 lakh of 100 lakh shares and does not participate in a buyback. After 10 lakh shares are bought and cancelled, what ownership remains?
The holder’s ownership rises to 20% because total shares fall to 90 lakh. Remaining total = 100 lakh − 10 lakh = 90 lakh. Ownership = 18 lakh ÷ 90 lakh × 100 = 20%, assuming the cancellation is complete and there are no other changes. Remember: A non-participating holder’s percentage can rise when bought-back shares are cancelled.
Hint Common mistake: Assuming unchanged share quantity always means unchanged ownership percentage. The holder’s share count stays the same while the company’s outstanding shares decline.
IX-149From the practice bank · 15
A holder sells 700 shares at ₹180 under a completed delisting exit. Their cost was ₹120 each and the assumed fee is 0.5% of proceeds. What pre-tax gain results?
The pre-tax gain is ₹41,370 after the stated fee. Gross proceeds = 700 × ₹180 = ₹1,26,000. Cost = 700 × ₹120 = ₹84,000. Hypothetical fee = 0.5% × ₹1,26,000 = ₹630. Gain = ₹1,26,000 − ₹84,000 − ₹630 = ₹41,370. The fee is a case assumption, not a statutory rate. Remember: Exit proceeds are not the same as realised gain after acquisition cost and transaction charges.
Hint Common mistake: Treating the full exit receipt as profit or applying the fee to the wrong base. Deduct both the cost of the shares sold and the fee calculated on the specified base.
IX-150