Primary Markets

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Questions and Answers

What is the primary purpose of a public issue in the primary market?

To raise funds generally for long-term capital requirements (correct)

To facilitate the buying and selling of existing shares

To distribute dividends to existing shareholders

To raise short-term capital for immediate operational costs

Which of the following intermediaries is NOT typically involved in the process of a public issue?

Merchant Banker

Registrar to the Issue

Investment Advisor (correct)

Underwriter

Who is considered an issuer in the context of the primary market?

Banks providing loans for the issuance

Intermediaries facilitating the sale of securities

Corporate entities or government companies issuing new securities (correct)

Investors purchasing securities

What can be a major constraint for entrepreneurs seeking to expand their businesses?

Limited access to personal savings from family and friends Signup and view all the answers

Which financial instruments can be issued in the primary market?

Equity, debt, and other forms of securities Signup and view all the answers

What is typically included in the offer document issued by the promoter?

Full details about the company's track record and business model Signup and view all the answers

In what manner can securities be issued in the primary market?

At face value, or at a discount or premium Signup and view all the answers

What is a key feature of the primary market?

Securities are issued directly by the company to investors Signup and view all the answers

What is a key requirement imposed by SEBI regarding capital issues?

All companies must disclose all facts and risk factors. Signup and view all the answers

How has SEBI encouraged Initial Public Offers (IPOs) in the primary market?

By allowing companies to set their own share premiums. Signup and view all the answers

What has contributed to the rapid growth of the private placement market?

Ease of structuring investments and lower costs. Signup and view all the answers

What condition remains in force when underwriting is optional as per SEBI's guidelines?

Full amount collected must be returned if 90% is not reached. Signup and view all the answers

What is the purpose of the due diligence certificate issued by lead managers?

To provide assurance regarding the accuracy of the offer document. Signup and view all the answers

What changes has SEBI made regarding application sizes for public issues?

The minimum application size has been raised. Signup and view all the answers

What is the role of SEBI in merchant banking according to the new regulations?

Merchant bankers must now be authorized by SEBI. Signup and view all the answers

Which of the following is NOT a regulatory measure introduced by SEBI for capital issues?

Mandatory prior approval for all public issues. Signup and view all the answers

What is the purpose of the compulsory deposit imposed by SEBI on companies making public issues?

To induce companies to comply with listing agreement provisions Signup and view all the answers

Which category of investors is required to submit a margin when bidding in the book building process?

Qualified institutional buyers (QIBs) Signup and view all the answers

What regulatory action has been taken regarding UTI in relation to mutual funds?

UTI is now under the regulatory jurisdiction of SEBI Signup and view all the answers

What is one of the recent reforms regarding mutual funds permitted by the Government?

Mutual funds are allowed to apply for firm allotments in public issues Signup and view all the answers

Why does SEBI vet offer documents for companies looking to list shares?

To ensure all disclosures are made by the company Signup and view all the answers

Which of the following is NOT a category of investors in the primary market?

Corporate bondholders Signup and view all the answers

What is one of the objectives of the guidelines and regulatory measures set by SEBI for capital issues?

To promote efficient functioning of the issue market Signup and view all the answers

Which of the following statements about mutual funds is accurate?

They are permitted to underwrite public issues Signup and view all the answers

Which of the following is NOT categorized as a Qualified Institutional Buyer (QIB) by SEBI?

Public sector undertakings Signup and view all the answers

What is the minimum corpus required for provident funds to be classified as QIBs?

25 crore Signup and view all the answers

What percentage of the total public issue must be reserved for non-institutional investors?

15 percent Signup and view all the answers

Which types of investors are classified as retail investors?

Individual investors applying up to 2 lakh Signup and view all the answers

What does an Initial Public Offering (IPO) signify?

First time shares are offered to the public Signup and view all the answers

Which of the following statements about IPOs is TRUE?

IPOs allow companies to raise capital without repayment. Signup and view all the answers

According to the guidelines, what must be included in public/rights issue application forms?

PAN number Signup and view all the answers

Which of the following types of public issues is aimed at unlisted companies?

Initial Public Offering (IPO) Signup and view all the answers

What is the primary method for disinvestments by government entities?

Offer for sale Signup and view all the answers

Which type of securities can be involved in a private placement?

Debt or equity securities Signup and view all the answers

What differentiates an IPO from an FPO in terms of the issuing company?

An FPO is issued by a listed company. Signup and view all the answers

Which of the following statements is true regarding the risk associated with IPOs and FPOs?

IPOs are associated with high risk, while FPOs have comparatively lower risk. Signup and view all the answers

What is the main objective of an Initial Public Offering (IPO)?

To raise capital through public investment for the first time. Signup and view all the answers

Which type of offering is typically considered more predictable?

FPO Signup and view all the answers

In what way can equity shares differ from preferred shares during disinvestment?

Preferred shares represent ownership without voting rights. Signup and view all the answers

What is a significant characteristic of book building in the issuance of securities?

It allows underwriters to discuss pricing with investors. Signup and view all the answers

Study Notes

Introduction to Primary Market

Entrepreneurs often start or expand businesses by pooling personal savings and contributions from friends and family, but this may be insufficient for capital-intensive projects.
To raise substantial funds, promoters can issue shares to the public, inviting investment through an offer document that details the company's track record, project nature, and business model.
The primary market allows corporate entities to issue new securities for long-term capital requirements, with intermediaries like Merchant Bankers, Bankers to the Issue, Underwriters, and Registrars involved.
Issuers in the primary market can offer securities at various values, including face value, discount, or premium and can operate in domestic or international markets.

Regulatory Measures for Primary Market

SEBI mandates disclosure of all material facts regarding projects, including risk factors and basis for premium calculations.
Initial Public Offers (IPOs) have gained encouragement with companies allowed to set share par values and use "Book Building" methods for share reservations.
The private placement market has popularity due to fewer entry barriers and lower costs, leading to rapid growth.
Underwriting of issues is optional, although non-compliance with the 90% funds collection rule results in refunds to investors.
Lead managers must issue a due diligence certificate, which is part of the offer document.
SEBI regulates the minimum application size and allocation proportions for institutional investors.
Merchant banking is now regulated by SEBI, ensuring accountability in offer documents.
Companies making public issues must deposit 1% of the issue amount to ensure compliance with regulations.
Fresh regulations now allow private mutual funds to operate under SEBI's jurisdiction, improving their investment capabilities.

Types of Investors

The primary market attracts varied investors, including retail, non-institutional investors, and qualified institutional buyers (QIBs).
QIBs include mutual funds, banks, and other large financial institutions. They must now pay margins during bidding to prevent manipulative practices.
Non-institutional investors encompass a range of entities such as individuals and trusts with applications exceeding ₹2 lakh, with at least 15% of the total issue reserved for them.
Retail investors apply for issues valued up to ₹2 lakh, with 35% of the issue reserved for them, requiring PAN disclosure.

Types of Public Issues

Initial Public Offering (IPO): This marks the first public share offering by an unlisted company, allowing it to be listed on the Bombay Stock Exchange (BSE) or National Stock Exchange (NSE).
IPOs enable companies to raise capital without repayment obligations, while government entities can utilize them for disinvestment.
Private Placement: An alternative to public issuance, where debt or equity securities are sold to a select few investors instead of the general public.

Difference Between IPO and FPO

IPO (Initial Public Offering):
- The first public offering by a company.
- Issued by unlisted companies.
- Higher risk and profit potential.
- Less predictable revenue generation.
FPO (Follow-on Public Offering):
- A subsequent public offering by a listed company.
- Lower risk and profit expectations compared to IPOs.
- More predictable due to established performance history.

Book Building

Book Building is a process used during IPOs where the issuer collects bids from institutional investors to establish the appropriate price and size of the issuance.

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Description

Explore the fundamentals of primary markets in this quiz. Understand how entrepreneurs pool personal savings and contributions to fund new business ventures. Learn about the significance of equity in capital-intensive projects.

Primary Markets - Unit II