Book Building and Rights Issues Quiz

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What is the primary function of the book building process?

To collect orders for the proposed issuance of securities. (correct)

To create a marketing strategy for new products.

To determine the interest rates for corporate bonds.

To facilitate mergers and acquisitions.

What are the two prices that comprise the price band in book building?

Average price and peak price.

Initial price and future price.

Minimum price and maximum price. (correct)

Base price and reserve price.

Who primarily participates in the book building process?

Only venture capitalists.

Government agencies only.

Only institutional investors.

QIBs, Non-Institutional Investors, and Retail Investors. (correct)

What role do Book Runners play in the book building process?

They assist and manage the book building process for the issuer. Signup and view all the answers

What is a significant benefit of the book building system for existing companies?

It offers flexibility in price and demand discovery based on past data. Signup and view all the answers

What is the minimum price at which a Qualified Institutional Placement (QIP) should be made?

The average of the weekly high and low closing prices for two weeks prior Signup and view all the answers

What is a key feature of the Institutional Placement Programme (IPP)?

It is limited to qualified institutional buyers only. Signup and view all the answers

What is the primary purpose of a rights issue?

To ensure equitable distribution of shares among existing shareholders. Signup and view all the answers

What is offered to existing shareholders during a rights issue?

Additional shares based on their current ownership. Signup and view all the answers

What is a characteristic of a bonus issue?

Shares are issued from the company's free reserves. Signup and view all the answers

What is meant by 'pre-emptive right' in the context of rights issues?

The right of shareholders to receive additional shares before any new investors. Signup and view all the answers

What is one advantage of a rights issue for the company?

There are no underwriting or brokerage costs involved. Signup and view all the answers

What is a disadvantage of the Institutional Placement Programme (IPP)?

Shares may become concentrated in the hands of a few investors. Signup and view all the answers

What system did BSE introduce in 1995 for fully computerized trading?

BOLT Signup and view all the answers

What is one of the main advantages of screen based trading?

Transactions are executed through a computer terminal. Signup and view all the answers

Which trading method was first introduced in BSE in September 2010?

Mobile-based trading Signup and view all the answers

In screen based trading, how does a broker execute a transaction?

By entering order details into a computer system. Signup and view all the answers

What technology is used to connect NSE members' computers to the central computer?

VSAT Signup and view all the answers

What does online trading allow investors to do?

Buy and sell securities from anywhere using the internet. Signup and view all the answers

What does the term 'offline trading' refer to in this context?

Screen based trading, where trades are executed electronically. Signup and view all the answers

Which of the following statements about trading methods is true?

Public offers and private placements are done through online systems. Signup and view all the answers

Who is primarily responsible for preparing the Draft Red Herring Prospectus?

The lead manager Signup and view all the answers

What is the minimum subscription percentage for a public issue to be considered successful?

90% Signup and view all the answers

Which activity is NOT part of the pre-issue management activities for a merchant banker?

Mailing allotment letters Signup and view all the answers

Which of the following is a role of the Registrar to the issue during the post-issue management?

Finalizing the issue price Signup and view all the answers

What must happen if the minimum subscription is not received in a public issue?

The public issue must be terminated and application money refunded. Signup and view all the answers

Which of the following is NOT a responsibility of merchant bankers in pre-issue management?

Supervision of application forms Signup and view all the answers

What is the role of merchant bankers in a public issue?

Assisting from prospectus preparation to share listing Signup and view all the answers

Which of the following represents a key function of underwriters in a public issue?

Ensuring minimum subscription levels are met Signup and view all the answers

What determines the price in a Fixed Price Issue?

Issuer in consultation with the lead merchant banker Signup and view all the answers

What does a Red Herring Prospectus primarily lack?

Number of shares being offered and price Signup and view all the answers

What is an Abridged Prospectus?

A summary of the prospectus with key features Signup and view all the answers

What is the role of the Statement-in-lieu of Prospectus?

It replaces the prospectus for companies not issuing one Signup and view all the answers

How is the final price determined in a Book Built Issue?

Based on the demand for the issue Signup and view all the answers

Which of the following is NOT a feature of a Prospectus?

It includes details of the company’s board members Signup and view all the answers

In which situation is a Letter of Offer used?

Rights issue of shares Signup and view all the answers

What is typically included in the final prospectus of a Book Built Issue?

Final issue price and issue size Signup and view all the answers

Which stock exchange is recognized as the largest in India?

National Stock Exchange (NSE) Signup and view all the answers

In what year was the National Stock Exchange (NSE) incorporated?

1992 Signup and view all the answers

Who is the lead promoter of the National Stock Exchange (NSE)?

IDBI Signup and view all the answers

What technology does NSE utilize to ensure transparent operations?

Automated screen based trading Signup and view all the answers

What segment of NSE provides trading for debt instruments?

Wholesale Debt Market (WDM) Signup and view all the answers

What is the minimum net worth required to obtain recognition as an NSE member?

₹ 2 crores Signup and view all the answers

Which of the following was introduced by NSE in 2000?

Internet trading and derivatives trading Signup and view all the answers

What major function do the Board of directors and the executive committee serve at NSE?

Board makes key-policy decisions while the executive committee takes operational decisions Signup and view all the answers

Study Notes

Primary Market & Secondary Market

The primary market is where companies issue shares for the first time, allowing the public to subscribe.
It's not a physical location but encompasses all places where initial subscriptions occur.
This market facilitates the transfer of resources from investors (savers) to companies (users) through three main functions: origination, underwriting, and distribution.

Functions of New Issue Market

Origination: This involves investigating and processing proposed projects, advising the company on issuing securities, determining issuing methods, and pricing shares. Merchant bankers typically handle this role.
Underwriting: Underwriters agree to buy unsold shares, ensuring the financing of the project even if public subscription is not complete. They guarantee the marketing of the shares.
Distribution: Marketing and selling the shares to investors via public issues, placements, rights offerings, or bonus issues. This is handled by merchant banks, brokers, agents, and intermediaries.

Methods of Floating New Issues

Public Issue: Includes Initial Public Offering (IPO) and Further Public Offering (FPO), where securities are offered for sale to the public.
- IPO: First-time public offering of securities.
- FPO: Subsequent public offer of securities.
Private Placement: Issue of securities to a select group of investors (no exceeding 50).
- Preferential Issue: Offering securities to a select group.
- Qualified Institutional Placement (QIP): Issuing securities to qualified institutional buyers (QIBs).
- Institutional Placement Programme (IPP): Offering through an institutional program.
Rights Issue: Offering securities to existing shareholders at a discounted price.
Bonus Issue: Issuing additional shares to existing shareholders out of the company's reserves, without additional capital investment.
Employee Stock Option Plan (ESOP): Offering employees options to purchase company shares.

Public Issue

Initial Public Offer (IPO): This involves the initial sale of shares to the public by an unlisted company.
Further Public Offer (FPO): This involves the additional sale of shares to the public. Both offerings can be a "fresh issue" or an "offer for sale."

Forms of Offer Documents

Prospectus: A document containing company details, used for inviting public subscription in a public offering.
Abridged Prospectus: Contains key prospectus details, often accompanying application forms.
Red Herring Prospectus (RHP): A prospectus without complete details (price, amount), but containing issue size and the price range. Useful for book building issues.
Statement in Lieu of Prospectus: When a company with share capital doesn't issue a prospectus, they submit a statement-in-lieu.
Letter of Offer: An offer document used for a rights issue, including details.
Prospectus: A detailed document explaining company details and offering terms, often used in public offerings (IPO or FPO).
Shelf Prospectus: Used for a series of issues within a year, which avoids filing a new prospectus every time.

Secondary Market

A marketplace for trading existing securities (stocks, bonds, etc.).
Main functions include liquidity provision, price discovery, and monitoring of company management.
Includes stock exchanges, depositories, and market participants such as brokers.

Forms of Securities

Non-voting shares: Have no voting rights but are often issued with higher dividend payouts.
Shares with differential voting rights (DVRs): Shareholders have different voting rights for different types of shares in a company.
Floating Rate Bonds: Bonds with interest rates tied to market rates, often for infrastructure or corporate use.

Other Important Players/Participants

Merchant Bankers: Act as managers in executing the issue process. This commonly applies in large public offerings.
Underwriters: Guarantee the sale of shares, protecting the issuer from risk if the public does not subscribe enough.
Brokers: Help in marketing and making contact with prospective investors.
Registrars: Responsible for managing subscription, allotment, and certificate issuance.
Bankers to the Issue: Handle receipt of application forms and payment for investments.
Depositories: Store securities in electronic (dematerialized) form, simplifying transfer of ownership.
Syndicate Members: Help in the underwritings process.

Other Types

Employee Stock Option Plans (ESOPs): Options enabling employees to purchase company shares.
Secured Premium Notes (SPNs): A secured debenture with a detachable warrant.
Depository Receipts (ADRs/GDRs): Certificates representing shares of foreign companies; often traded on local exchanges.
Yankee Bonds: Dollar-denominated bonds issued by non-US corporations in the U.S. market.
Hybrid Instruments: Financial instruments with both equity and debt features.
Infrastructure Bonds: Debt instruments issued to fund infrastructure projects.
Derivative Instruments: Financial instruments whose value depends on another underlying asset (ex. commodities, currency, bonds, etc.).

Trading Mechanisms

Book Building: A sophisticated method used to assess market demand for securities; used for IPOs to determine the optimal initial price.
Screen-based Trading: Traders can execute orders online from their desktops or mobile devices. This significantly broadens the participation in the market.

Stock Exchanges

Act as a platform for trading listed securities.
Ensure efficient management of capital flow.
Establish a standardized process for pricing, trade, and settlement.

Listing Procedures

Companies undertaking IPO often have to fulfil strict conditions imposed by the relevant stock exchange.

Categories of Investors

Retail Individual Investors (RIIs): Individuals investing up to a certain amount, determined by stock exchange rules.
Qualified Institutional Buyers (QIBs): Institutions like financial firms and mutual funds that are allowed to invest above-mentioned amounts.
Non-Institutional Investors (NIIs): An investor other than a retail or qualified institutional buyer.

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Description

Test your knowledge on the book building process and rights issues. This quiz covers essential concepts, definitions, and the roles of participants involved in these financial practices. Understand the benefits and characteristics of various financing options for companies.