NISM Series XII · Unit 3 of 7 · about 15% of the paper
Primary markets: NISM Series XII notes and practice questions
How companies raise money from the public: IPOs, FPOs, rights, QIPs and private placements. The mechanics of book building, categories of investors, and listing are tested closely.
What to know in Unit 3
- IPO process and documents.
- Book building, price band and cut-off price.
- Investor categories and reservation.
- Other routes: rights, QIP, preferential, OFS.
Key terms, examples and exam traps
Initial Public Offer (IPO)
An IPO is the first offer of shares by an unlisted company to the public, after which the company's shares are listed on an exchange.
Example. A private company sells shares to the public for the first time.
Exam trap. This statement is false: An IPO is the sale of already listed shares between investors.
Follow-on Public Offer (FPO)
An FPO is an offer of additional shares to the public by a company that is already listed.
Example. A listed company raises more capital by offering new shares to the public.
Exam trap. This statement is false: An FPO is the first listing of a company.
Draft Red Herring Prospectus (DRHP)
The DRHP is the draft offer document filed with SEBI for observations before an IPO, without final price details.
Example. A company files its draft offer document through a merchant banker before launching its issue.
Exam trap. This statement is false: The DRHP is the final document circulated after listing.
Book building
In book building, the price is discovered through bids within a price band, and the issue price is fixed after the bidding closes based on demand.
Example. Investors bid within a price band and the final price is decided after the issue closes.
Exam trap. This statement is false: In book building the price is fixed by the regulator.
Price band
The price band is the range between the floor and the cap price within which investors can bid in a book-built issue. The cap should not exceed 120% of the floor.
Example. An IPO sets a range of ₹200 to ₹210 for bids.
Exam trap. This statement is false: Investors can bid at any price above the floor with no cap.
Cut-off price
Retail investors can bid at the cut-off price, which means they accept whatever final price is decided within the band.
Example. A retail investor chooses to accept the final price fixed by the issuer.
Exam trap. This statement is false: The cut-off price is the lowest price in the band.
Anchor investors
Anchor investors are qualified institutional investors who are allotted shares before the issue opens, subject to a lock-in, to build confidence.
Example. Institutions are allotted a portion a day before the IPO opens.
Exam trap. This statement is false: Anchor investors are retail individuals.
Retail individual investor
A retail individual investor is one who bids for shares worth up to ₹2 lakh in an issue.
Example. A person applies for ₹1.5 lakh worth of shares in an IPO.
Exam trap. This statement is false: A retail investor can apply for any amount in the retail quota.
Qualified institutional buyer
QIBs are institutions such as mutual funds, banks, insurers and foreign portfolio investors that are considered financially sophisticated.
Example. A mutual fund bids in the institutional category of an IPO.
Exam trap. This statement is false: QIBs are individuals applying for ₹1 lakh.
Minimum subscription
An issue must receive at least 90% subscription of the issue size; otherwise application money is refunded.
Example. An IPO that gets only half the required subscription fails and money is returned.
Exam trap. This statement is false: An IPO can proceed with 10% subscription.
Allotment and listing timeline
Shares are allotted and listed within three working days of the closure of the issue, and unsuccessful applicants are refunded.
Example. The issue closes on Monday and shares list within a few working days.
Exam trap. This statement is false: Listing takes place a month after closing.
ASBA
Application Supported by Blocked Amount means the application money stays blocked in the investor's bank account until allotment, and is debited only for allotted shares.
Example. An investor's funds are blocked, not transferred, while applying to an IPO.
Exam trap. This statement is false: ASBA debits the full amount immediately and refunds later.
Merchant banker
A merchant banker, also called the book running lead manager, manages the issue process, prepares offer documents and ensures regulatory compliance.
Example. A SEBI-registered firm manages the whole IPO process for a company.
Exam trap. This statement is false: A merchant banker buys the shares as a retail investor.
Underwriter
An underwriter agrees to buy the unsubscribed portion of an issue, giving the issuer certainty of raising funds.
Example. A firm promises to take up the shares not bought by the public.
Exam trap. This statement is false: An underwriter guarantees profit to investors.
Registrar to the issue
The registrar to an issue processes applications, finalises allotment, issues refunds and maintains the shareholder records.
Example. An agency handles the allotment and refund process for an IPO.
Exam trap. This statement is false: The registrar fixes the issue price.
Offer for Sale (OFS)
In an OFS, existing shareholders such as promoters sell their shares to the public through the exchange, and the company receives no money.
Example. A promoter sells part of his stake through a stock exchange window.
Exam trap. This statement is false: An OFS brings new capital into the company.
Qualified Institutions Placement (QIP)
A QIP is a route for listed companies to raise capital by issuing shares or convertibles only to qualified institutional buyers.
Example. A listed company issues new shares to institutions at a price near the market.
Exam trap. This statement is false: A QIP is open to retail investors.
Preferential allotment
A preferential allotment is the issue of shares to a select group of investors at a negotiated price, subject to regulatory pricing rules.
Example. A company issues shares to a chosen strategic investor.
Exam trap. This statement is false: A preferential allotment is offered to all shareholders pro rata.
Private placement
In a private placement, securities are offered to a limited number of identified investors rather than the general public.
Example. A company raises debt from a handful of institutions.
Exam trap. This statement is false: A private placement is a public issue.
Promoter lock-in
Promoters' minimum contribution of 20% of the post-issue capital is locked in for 18 months after listing, to show their commitment.
Example. Promoters cannot sell their minimum holding for a period after the listing.
Exam trap. This statement is false: Promoters can sell all their shares on listing day.
SME platform
SME platforms on exchanges allow small and medium enterprises to list with simpler rules but with larger minimum application sizes and higher risk.
Example. A small company raises capital on a dedicated exchange segment.
Exam trap. This statement is false: SME platform issues are the same as main-board IPOs.
Red Herring Prospectus
The RHP is the offer document filed with the registrar before the issue opens; it contains issue details but the final price may not be fixed.
Example. A company files a document with the registrar before the issue opens.
Exam trap. This statement is false: The RHP is filed after the allotment.
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? Application Supported by Blocked Amount means the application money stays blocked in the investor's bank account until allotment, and is debited only for allotted shares.
- Underwriter
- Preference share
- Market participants
- ASBA
Q2. Which statement best describes “Book building”?
- In book building, the price is discovered through bids within a price band, and the issue price is fixed after the bidding closes based on demand.
- Market capitalisation equals the share price multiplied by the number of shares outstanding, and shows the market value of a company's equity.
- EPS is a company's profit after tax divided by the number of shares outstanding.
- A stock exchange is a regulated marketplace where securities are listed and traded, such as the BSE and the NSE.
Q3. Which statement best describes “Private placement”?
- Asset allocation divides investments among asset classes like equity, debt and gold, according to goals, horizon and risk profile.
- The money market deals in short-term debt instruments with a maturity of up to one year, such as treasury bills and commercial paper.
- In a private placement, securities are offered to a limited number of identified investors rather than the general public.
- A risk profile combines a person's ability and willingness to take risk, guiding the choice of investments.
Q4. Which statement best describes “Registrar to the issue”?
- The registrar to an issue processes applications, finalises allotment, issues refunds and maintains the shareholder records.
- A Ponzi scheme pays earlier investors with the money of newer ones and promises unusually high, assured returns, and it collapses when new money dries up.
- A preference share carries a preferential right to a fixed dividend and to repayment of capital ahead of equity holders on winding up, usually with no voting rights.
- SME platforms on exchanges allow small and medium enterprises to list with simpler rules but with larger minimum application sizes and higher risk.
Q5. Which statement best describes “SME platform”?
- A certificate of deposit is a negotiable money-market instrument issued by banks and financial institutions against funds deposited for a fixed period.
- A stop-loss order becomes active when the price reaches a trigger level and is used to limit losses on a position.
- The Net Asset Value is the per-unit value of a mutual fund scheme, calculated as total assets less liabilities divided by the units outstanding.
- SME platforms on exchanges allow small and medium enterprises to list with simpler rules but with larger minimum application sizes and higher risk.
Q6. Which term is described here? In an OFS, existing shareholders such as promoters sell their shares to the public through the exchange, and the company receives no money.
- Offer for Sale (OFS)
- Retail individual investor
- NAV
- Sensex
Frequently asked questions
How much of NISM Series XII comes from Unit 3?
Unit 3 (Primary markets) usually carries about 15% of the questions. The whole exam has 100 questions and the pass mark is 60%.
What should I study in NISM Series XII Unit 3?
IPO process and documents. Book building, price band and cut-off price. Investor categories and reservation. Other routes: rights, QIP, preferential, OFS.
Are these NISM Series XII practice questions free?
Yes. Take the full free mocks to see the correct answer and the reason for every question.
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