NISM Series XI · Unit 3 of 9 · about 17% of the paper
Primary markets: NISM Series XI notes and practice questions
IPOs and other issuance routes from the broker's perspective: eligibility, process, categories and allotment.
What to know in Unit 3
- IPO process and categories.
- Book building and allotment.
- Rights issue, OFS, QIP, buyback.
Key terms, examples and exam traps
SEBI ICDR Regulations
The Issue of Capital and Disclosure Requirements Regulations govern how companies raise capital, including eligibility and disclosures.
Example. The rules that govern IPO eligibility and contents of the offer document.
Exam trap. This statement is false: The ICDR regulations govern brokerage rates.
Initial public offer
An IPO is the first sale of shares to the public by an unlisted company, followed by listing on exchanges.
Example. A company sells shares to the public for the first time.
Exam trap. This statement is false: An IPO is a sale of shares to existing shareholders only.
Draft offer document
The draft red herring prospectus is filed with SEBI, which examines it and issues observations before the issue is launched.
Example. A company files a draft document through a merchant banker.
Exam trap. This statement is false: SEBI approves the price in the draft document.
Book building
In book building, investors bid within a price band and the issue price is determined based on the demand.
Example. Demand at different prices decides the final price.
Exam trap. This statement is false: The price is fixed before any bids come in.
Price band
The price band specifies the floor and cap for bids; the cap cannot exceed 120% of the floor.
Example. Bids can be made between ₹200 and ₹240.
Exam trap. This statement is false: A price band has no cap.
Bid lot
The minimum bid lot is the smallest number of shares that can be applied for, set so that the application value is within a prescribed range.
Example. An investor must apply for at least 50 shares.
Exam trap. This statement is false: Investors can bid for one share in any IPO.
Retail individual investor
A retail individual investor applies for shares worth up to ₹2 lakh in an issue.
Example. An investor applies for ₹1.8 lakh worth of shares.
Exam trap. This statement is false: A retail investor can apply for ₹5 lakh in the retail category.
Non-institutional investor
NIIs apply for more than ₹2 lakh and are not QIBs, usually high-net-worth individuals and corporates.
Example. An investor bids for ₹10 lakh of shares.
Exam trap. This statement is false: NIIs bid for less than ₹2 lakh.
Qualified institutional buyer
QIBs are institutions such as mutual funds, insurers, banks and FPIs, treated as sophisticated investors.
Example. A mutual fund bids in the QIB category.
Exam trap. This statement is false: QIBs are retail individuals.
Anchor investor
Anchor investors are QIBs who bid a day before the issue opens for at least ₹10 crore, subject to a lock-in on their shares.
Example. Institutions are allotted shares before the public issue opens.
Exam trap. This statement is false: Anchor investors are small retail investors.
Basis of allotment
If an issue is oversubscribed, allotment is made proportionately or by lottery in the retail category, so some applicants may get nothing.
Example. A retail investor applies and receives no shares due to oversubscription.
Exam trap. This statement is false: Every applicant always gets the full number of shares applied.
UPI in IPO
Retail and certain other investors apply through UPI, where the money is blocked in the investor's account until allotment.
Example. An investor approves a mandate on her UPI app.
Exam trap. This statement is false: UPI mandates debit the money immediately and never release it.
Listing timeline
Allotment and listing must be completed within three working days of the closure of the issue.
Example. The issue closes and shares list within a few days.
Exam trap. This statement is false: Listing takes place within a month.
Promoter contribution and lock-in
Promoters must contribute at least 20% of the post-issue capital, which is locked in for 18 months.
Example. Promoters' minimum stake is locked for a period after listing.
Exam trap. This statement is false: Promoters may sell their stake on the listing day.
Greenshoe option
A greenshoe option allows the issuer to allot extra shares up to 15% of the issue to stabilise post-listing prices.
Example. The stabilising agent can support the price after listing.
Exam trap. This statement is false: A greenshoe option reduces the issue size.
Offer for sale
In an OFS, existing shareholders sell their shares in the issue and the company receives no proceeds.
Example. Promoters sell part of their holding through a public offer.
Exam trap. This statement is false: The company receives proceeds from an OFS.
Rights issue
A rights issue offers existing shareholders the right to subscribe to new shares in proportion to their holding.
Example. A company offers one new share for each four held.
Exam trap. This statement is false: A rights issue is offered to new investors only.
QIP
A Qualified Institutions Placement lets a listed company issue shares only to QIBs without a full public offering.
Example. A listed company sells shares to institutions at a price near the market.
Exam trap. This statement is false: A QIP is available to retail investors.
Preferential issue
A preferential issue allots shares to a selected group at a price determined as per SEBI's pricing rules.
Example. A company issues shares to a strategic investor.
Exam trap. This statement is false: A preferential issue is offered to all shareholders equally.
Buyback
A buyback is the repurchase by a company of its own shares, reducing outstanding shares, via tender offer or open market.
Example. A company repurchases shares at a premium.
Exam trap. This statement is false: A buyback increases the number of shares.
SME IPO
SME exchanges allow smaller companies to raise money with lighter norms but with larger lots and more risk.
Example. A small firm lists on a dedicated platform.
Exam trap. This statement is false: SME IPOs follow the same rules as main-board IPOs.
Merchant banker
A merchant banker manages the issue process, due diligence and regulatory filings, and is registered with SEBI.
Example. The lead manager of an IPO.
Exam trap. This statement is false: A merchant banker is the registrar who allots shares.
Underwriting
An underwriter commits to subscribe to the unsubscribed portion of an issue, giving certainty to the issuer.
Example. A firm promises to take up shares not subscribed by the public.
Exam trap. This statement is false: An underwriter guarantees a profit to investors.
6 practice questions
Read each question and choose your answer before opening the free mock, which shows the correct answer and the reason.
Q1. Which term is described here? Retail and certain other investors apply through UPI, where the money is blocked in the investor's account until allotment.
- UPI in IPO
- Honest communication
- Additional surveillance measure
- Insider trading regulations
Q2. Which term is described here? The price band specifies the floor and cap for bids; the cap cannot exceed 120% of the floor.
- UPI in IPO
- Price band
- Margin shortfall penalty
- Market manipulation
Q3. Which statement best describes “Preferential issue”?
- Brokers must provide periodic statements of accounts and holdings and maintain records for the specified period.
- If an issue is oversubscribed, allotment is made proportionately or by lottery in the retail category, so some applicants may get nothing.
- Disputes between clients and brokers can be referred to the exchange's arbitration mechanism within the prescribed period.
- A preferential issue allots shares to a selected group at a price determined as per SEBI's pricing rules.
Q4. Which statement best describes “QIP”?
- Brokers must disclose brokerage, charges, risks, and the grievance process clearly to clients.
- A Qualified Institutions Placement lets a listed company issue shares only to QIBs without a full public offering.
- The Sensex is the BSE's 30-stock benchmark, weighted by free-float market capitalisation.
- In the trade-for-trade segment, each trade must be settled by delivery, and intraday squaring off is not allowed.
Q5. Which term is described here? An underwriter commits to subscribe to the unsubscribed portion of an issue, giving certainty to the issuer.
- Code of conduct
- Underwriting
- SCORES and ODR
- Preferential issue
Q6. Which statement best describes “Rights issue”?
- QIBs are institutions such as mutual funds, insurers, banks and FPIs, treated as sophisticated investors.
- A rights issue offers existing shareholders the right to subscribe to new shares in proportion to their holding.
- Turnover is the total value of securities traded in a period, showing market activity and liquidity.
- Pay-in is the delivery of securities and funds to the clearing corporation, and pay-out is the release to the buyer and seller.
Frequently asked questions
How much of NISM Series XI comes from Unit 3?
Unit 3 (Primary markets) usually carries about 17% of the questions. The whole exam has 100 questions and the pass mark is 50%.
What should I study in NISM Series XI Unit 3?
IPO process and categories. Book building and allotment. Rights issue, OFS, QIP, buyback.
Are these NISM Series XI practice questions free?
Yes. Take the full free mocks to see the correct answer and the reason for every question.
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