Primary and Secondary Market Quiz
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Questions and Answers

What is the primary function of the new issue market?

  • To determine the market price of securities.
  • To facilitate the sale of existing shares.
  • To regulate trading of securities in the secondary market.
  • To mobilize funds from savers to borrowers. (correct)

Which of the following describes the origination function in the new issue market?

  • The analysis of secondary market trends.
  • The process of selling shares to investors.
  • A preliminary investigation of proposed new projects. (correct)
  • The guaranteeing of shares by underwriters.

What is underwriting in the context of the new issue market?

  • A term for buying and selling existing shares.
  • The method of advising companies on share pricing.
  • A funding mechanism for projects without public subscription.
  • A guarantee that a certain number of securities will be sold. (correct)

Which of the following underwriter methods involves multiple parties?

<p>Consortium method. (C)</p> Signup and view all the answers

What is the significance of the new issue market within the capital market?

<p>It represents a major segment where new securities are issued. (C)</p> Signup and view all the answers

Who typically undertakes the origination function in the new issue market?

<p>Merchant bankers. (A)</p> Signup and view all the answers

What occurs if the public does not fully subscribe to an issue under an underwriting agreement?

<p>The underwriter must buy the remaining shares. (B)</p> Signup and view all the answers

Which role does not participate in the primary market?

<p>Registered investment advisors (D)</p> Signup and view all the answers

What is the main role of the book runner in the book building process?

<p>To prepare the draft red herring prospectus (B), To set the final price of the securities (D)</p> Signup and view all the answers

How long does the book built issue typically remain open for bidding?

<p>3 to 7 working days (D)</p> Signup and view all the answers

What must an issuer specify in the red herring prospectus (RIP)?

<p>The issue size and price band (A)</p> Signup and view all the answers

What is the purpose of syndicate members in the book building process?

<p>To accept bids and place orders (C)</p> Signup and view all the answers

What happens to bids that are below the cut-off price?

<p>They are rejected (D)</p> Signup and view all the answers

What action is taken after evaluating the bids during the book building period?

<p>The final price of the securities is determined (D)</p> Signup and view all the answers

Which document is prepared and filed with SEBI before the book building process begins?

<p>Red herring prospectus (B)</p> Signup and view all the answers

Who is responsible for inputting the orders into the electronic book during the bidding?

<p>Syndicate members and brokers (D)</p> Signup and view all the answers

What is the primary purpose of listing securities on a stock exchange?

<p>To provide marketability and liquidity to securities (B)</p> Signup and view all the answers

What is a mandatory requirement for a company wishing to list its securities?

<p>To apply to the regional stock exchange nearest to its registered office (A)</p> Signup and view all the answers

Which of the following is NOT a responsibility of the company under the Listing Agreement?

<p>To maintain market prices above a minimum threshold (A)</p> Signup and view all the answers

What should a company do before making a public issue of its securities?

<p>Obtain in-principle approval from recognized stock exchanges (D)</p> Signup and view all the answers

Which of the following is a basic norm for listing of securities?

<p>Providing accurate financial statements and reports (C)</p> Signup and view all the answers

Which action is required from companies making public or rights issues before the issue opens?

<p>Deposit 1% of the issue amount with the Designated Stock Exchange (C)</p> Signup and view all the answers

What type of documents must a company send to the stock exchange as part of its listing obligations?

<p>Annual reports and quarterly financial results (C)</p> Signup and view all the answers

How do stock exchanges enforce compliance with listing requirements?

<p>By monitoring compliance through regular reports from the companies (A)</p> Signup and view all the answers

What is the primary goal of arbitrage?

<p>To profit from price differentials in securities (C)</p> Signup and view all the answers

What distinguishes foreign arbitrage from domestic arbitrage?

<p>The location of the markets involved (B)</p> Signup and view all the answers

What is a key characteristic of wash sales?

<p>They create artificial demand for securities. (A)</p> Signup and view all the answers

Why are wash sales prohibited by stock exchange rules?

<p>They can lead to misleading price movements. (A)</p> Signup and view all the answers

What is the purpose of exercising a green shoe option?

<p>To stabilize the share price in case it falls below the issue price. (A)</p> Signup and view all the answers

What does a blank transfer allow in the transfer of shares?

<p>It transfers shares without fees for every transaction. (C)</p> Signup and view all the answers

What is a key characteristic of private placement?

<p>It involves an offering to a select group not exceeding 50 people. (A)</p> Signup and view all the answers

What has contributed to the decline of blank transfers in recent times?

<p>Dematerialization of shares. (B)</p> Signup and view all the answers

What does 'cornering' refer to in the context of securities markets?

<p>Holding the majority supply of a specific security. (B)</p> Signup and view all the answers

Which type of private placement requires a special resolution by shareholders?

<p>Preferential Issue (C)</p> Signup and view all the answers

What does the price determination for a preferential issue depend on?

<p>The average of the weekly high and low closing prices over specific time frames. (A)</p> Signup and view all the answers

What is a consequence of successful arbitrage activity?

<p>Price differentials between markets decrease. (D)</p> Signup and view all the answers

Who are the Qualified Institutional Buyers (QIBs)?

<p>Investors who meet the qualifications as defined by regulatory authorities. (B)</p> Signup and view all the answers

Which statement about Qualified Institutional Placement (QIP) is correct?

<p>It must be managed by a registered merchant banker. (A)</p> Signup and view all the answers

What is one potential source of investors in a private placement?

<p>Family members and friends of the promoters. (A)</p> Signup and view all the answers

What is a requirement for an issuer planning a QIP?

<p>They must have passed a special resolution by shareholders. (C)</p> Signup and view all the answers

What constitutes insider trading as defined by Section 195 of Companies Act 2013?

<p>Selling securities while having prior knowledge of non-public information. (C)</p> Signup and view all the answers

Who qualifies as an insider according to the provided content?

<p>A person connected with the company who has unpublished price sensitive information. (B)</p> Signup and view all the answers

What is considered unpublished price sensitive information?

<p>Information relating to financial results and changes in capital structure. (A)</p> Signup and view all the answers

What are the potential consequences if an insider is found guilty of insider trading under the Companies Act 2013?

<p>Imprisonment for up to five years or a fine ranging from five lakh to twenty-five crore rupees. (D)</p> Signup and view all the answers

What is the role of the compliance officer in relation to insider trading?

<p>To ensure compliance with SEBI regulations regarding insider trading. (D)</p> Signup and view all the answers

How should insiders disclose their holding of the company's securities?

<p>On a continual basis to the compliance officer. (A)</p> Signup and view all the answers

What are connected persons in the context of insider trading?

<p>Persons associated with the company who have access to unpublished information. (B)</p> Signup and view all the answers

What is the purpose of formulating an insider trading policy in a company?

<p>To prevent employees from participating in illegal trading. (A)</p> Signup and view all the answers

Flashcards

Primary Market

A market where companies issue shares for the first time, allowing the public to subscribe.

New Issue Market

The market segment facilitating the issuance of new shares, debentures, etc.

Origination (New Issue Market)

Preliminary investigation and planning for new issues, including project analysis, security type, and pricing.

Underwriting (New Issue Market)

An agreement where an underwriter guarantees the sale of shares, buying any unsold shares if public demand is low.

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Full Underwriting

An underwriting agreement where the underwriter guarantees sales, buying any remaining shares if public demand is insufficient.

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Outright Purchase (Underwriting)

Underwriters buy an entire issue at a set price before selling them to investors.

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Consortium Method (Underwriting)

Several underwriters work together to underwrite large issues.

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Capital Market

A broad market for raising long-term capital (including Primary and Secondary markets).

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Green Shoe Option

Allows underwriters to buy more shares if demand is high or sell shares if price drops below the issue price.

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Private Placement

Distributing shares to a select group of people; not open to the public.

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Preferential Issue

Private placement of securities to a specific person or group, needing shareholder approval.

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Qualified Institutional Placement (QIP)

Listed issuer selling shares to Qualified Institutional Buyers (QIBs).

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Qualified Institutional Buyers (QIBs)

Large institutional investors.

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Merchant Banker

Financial intermediary facilitating share offerings.

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Placement Document

Document containing critical details of a QIP.

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Special Resolution

Shareholder vote required for certain actions, such as QIP/Preferential issue

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Book Building Process

A process where an issuer raises capital by building a book of orders from investors at different price levels.

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Lead Merchant Banker (Book Runner)

The banker that manages and coordinates the entire process to sell the securities.

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Draft Red Herring Prospectus (RIP)

A preliminary document, filed with SEBI (Securities and Exchange Board of India), outlining the offering details.

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Issue Size and Price Band

The amount of securities offered and the range of prices investors can bid for.

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Bidding Period

The time period when investors submit their orders.

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Electronic Book

A digital system that records investors' bids.

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Cut-off Price

The price below which bids are rejected.

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Allocation of Securities

The process of assigning shares to successful bidders.

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Arbitrage

Making profit by buying a security at a lower price in one market and selling it at a higher price in another market.

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Domestic Arbitrage

Arbitrage where the two markets are located within the same country.

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Foreign Arbitrage

Arbitrage where the two markets are located in different countries.

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Wash Sales

Fictitious transactions where a speculator sells and then repurchases securities at a higher price to create an illusion of demand and price increase.

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Blank Transfer

Transferring shares without specifying the transferee's name, allowing for multiple transfers before final registration.

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What is Cornering?

A market condition where a single individual or group controls almost the entire supply of a specific security.

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Speculator

An individual who buys or sells securities to profit from anticipated price fluctuations.

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Bear

A speculator who anticipates a decline in the price of a security, aiming to profit from selling high and buying low.

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What is the purpose of listing securities?

Listing securities aims to offer marketability and liquidity to securities, enabling investors to buy and sell them easily. Additionally, it ensures investor protection by setting quality standards for listed companies.

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What are the requirements for listing securities on a stock exchange?

Companies must meet certain standards established by the stock exchange, such as financial performance, corporate governance, and disclosure requirements. These standards are often documented in the listing agreement.

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Insider Trading

Illegal trading of securities using confidential, non-public information about a company. This can include buying or selling shares based on insider knowledge about financial results, mergers, or other significant events.

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What is a Listing Agreement?

A contract between a company and a stock exchange outlining obligations the company must fulfill for continuous listing. These obligations may include timely reporting of financial data, prompt transfer of shares, and compliance with corporate governance guidelines.

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Insider

Anyone with access to unpublished price-sensitive information about a company, including directors, key managerial personnel, and connected persons.

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Connected Person

Individuals associated with a company and having access to unpublished price-sensitive information, including relatives of insiders.

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What happens before a public issue?

Before a company can offer its shares to the public, it must obtain in-principle approval from recognized stock exchanges (RSEs). This ensures securities meet the listing criteria before they are traded.

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Where must a company list its securities?

While a company can list on multiple exchanges, it's mandatory to list on the regional stock exchange closest to its registered office.

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Unpublished Price-Sensitive Information

Confidential information about a company, not publicly known, that could significantly influence the price of its securities.

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SEBI (Prohibition of Insider Trading) Regulations, 2015

Regulations established by the Securities and Exchange Board of India (SEBI) to prevent and punish insider trading.

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Who monitors the listing requirements?

Stock exchanges are responsible for monitoring compliance with listing agreements. They ensure listed companies meet their obligations and maintain appropriate standards.

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What is the role of SEBI in listing?

SEBI (Securities and Exchange Board of India) sets the listing norms for all exchanges. Companies must comply with SEBI regulations in addition to exchange-specific requirements.

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Insider Trading Policy

A document outlining a company's rules and procedures to prevent insider trading, including communication and disclosure requirements.

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What is the purpose of the 1% deposit?

Companies issuing public or rights issues are required to deposit 1% of the issue amount with the designated stock exchange before the issue opens. This ensures sufficient funds are available for any potential market stabilization or other activities.

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Compliance Officer

A designated individual within a company responsible for overseeing the implementation and enforcement of the insider trading policy.

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Penalty for Insider Trading

Imprisonment for up to five years, a fine of at least five lakh rupees, or three times the amount of profit made from insider trading, whichever is higher.

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Study Notes

Primary Market & Secondary Market

  • Primary market is where companies issue shares for the first time. It facilitates resource transfer from savers to users.
  • Functions include origination, underwriting, and distribution.
  • Origination: Sponsors carefully analyze and process proposed projects, advising on security types, issue numbers, and pricing.
  • Underwriting: A guarantee by underwriters, who agree to subscribe if public doesn't.
  • If public subscribes fully, underwriters have no liability.
  • Distribution: Sale of securities to investors through various methods (public issue, private placement, rights issue, bonus issue).
  • Secondary market facilitates trading of existing securities. Provides liquidity and marketability.
  • Includes stock exchanges, depositories, and market participants.
  • Facilitates price discovery, monitoring company management, and implementing incentive-based contracts.

Types of Issues

  • Public Issue: Primarily Initial Public Offering (IPO) and Further Public Offering (FPO).
    • IPO: First time offering by an unlisted company.
    • FPO: Subsequent offering by a listed company.
  • Private Placement: Issue of securities to a select group of investors (not exceeding 50).
  • Preferential Issue: Issue of securities to a specific group of people.
  • Qualified Institutional Placement (QIP): Private placement with qualified institutional buyers (QIBs).
  • Institutional Placement Program (IPP)
  • Rights Issue: Offered to existing shareholders.
  • Bonus Issue: Offering additional shares to existing shareholders from company reserves.
  • Employee Stock Option Plan (ESOP): Options for employees to purchase company shares.

Forms of Offer Documents

  • Prospectus: Public issue document with details like company's profile, financials.
  • Abridged Prospectus: Contains prospectus's salient features.
  • Red Herring Prospectus (RHP): Document for book-built issues not including price details upfront.
  • Statement in lieu of prospectus: Used when a company doesn't issue a prospectus.
  • Letter of Offer: Used for rights issues and other relevant details.
  • Placement Document: Prepared by merchant bankers for qualified institutional placements.
  • Shelf Prospectus: Allows multiple offerings within a year without filing a new prospectus each time.

Methods of Pricing an Issue

  • Fixed Price Issue: Companies set a firm price for shares.
  • Book Building: Companies set a price band then the market decides what price to sell.

Forms of Stock Exchanges

  • National Stock Exchange (NSE)
  • Bombay Stock Exchange (BSE)
  • Other stock exchanges.

Players in the Market

  • Merchant Bankers
  • Underwriters
  • Registrars & Share Transfer Agents
  • Brokers
  • Bankers to the Issue
  • Syndicate Members
  • Depositories

Derivatives

  • Derivative Instruments: Value derived from underlying assets (commodities, currency, etc).
  • Types of Derivatives: Futures, forwards, swaps, options, and variations.

Securitized Debt Instruments

  • Securities backed by assets (e.g., mortgages, loans) pooled into marketable securities.
  • Types: Mortgage-backed securities, asset-backed securities, collateralized debt obligations (CDOs).

Other Important Securities

  • American Depository Receipts (ADRs)
  • Global Depository Receipts (GDRs)
  • Yankee Bonds
  • Hybrid Instruments
  • Perpetual Bonds
  • Floating Rate Bonds

Secondary Market Characteristics

  • Market for trading existing securities.
  • Facilitates price discovery.
  • Provides liquidity and marketability.

Insider Trading

  • Trading of securities by individuals with access to non-public, price-sensitive information.
  • Prohibited by SEBI regulations.

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Primary Market & Secondary Market PDF

Description

Test your knowledge on the primary and secondary markets, where companies issue and trade securities. This quiz covers the functions, types of issues, and the role of underwriters in these markets. Understand how these processes facilitate liquidity and resource transfer.

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