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CS Executive Capital Market & Securities Laws study materials
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CS Executive Capital Market & Securities Laws practice questions

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Question 1Capital Markets: Structure, Participants and Instruments

Under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, an initial public offer by an unprofitable company that does not meet the profitability track record must generally rely on which route to price discovery?

  1. Book building with a 100% retail reservation
  2. Pure auction without any price band
  3. Book building with a mandatory anchor investor allocation Correct answer.
  4. Fixed price issue at par value

Explanation

Companies that cannot demonstrate the required profitability track record typically access the market through the book-building route, where anchor investors are allotted a portion a day before the issue opens. This anchor allocation lends price credibility to issues lacking an earnings history.

Question 2Capital Markets: Structure, Participants and Instruments

In the Indian securities market, the National Securities Clearing Corporation Limited (NSCCL) primarily performs which function?

  1. Maintaining the register of demat accounts for depositories
  2. Conducting investor awareness programmes for SEBI
  3. Acting as the central counterparty for trades executed on the NSE Correct answer.
  4. Regulating mutual fund distributors

Explanation

NSCCL is the clearing corporation for the National Stock Exchange and interposes itself as central counterparty, guaranteeing settlement of trades. This novation reduces counterparty risk for members.

Question 3Capital Markets: Structure, Participants and Instruments

A company listed on a recognised stock exchange wishes to issue equity shares to its promoters on a preferential basis. Which pricing floor must it respect under SEBI ICDR?

  1. The price at which the last public issue was made
  2. The lowest closing price in the preceding 90 trading days
  3. The face value of the shares
  4. The higher of the average of weekly high and low of closing prices over the preceding 26 weeks or the preceding 2 weeks Correct answer.

Explanation

Preferential allotment pricing under ICDR must not be below the higher of the 26-week average or the 2-week average of weekly high and low closing prices. This ensures the promoter does not acquire shares below prevailing market benchmarks.

Question 4Capital Markets: Structure, Participants and Instruments

Which of the following best describes a 'participatory note' issued by a registered foreign portfolio investor?

  1. A derivative instrument issued offshore against underlying Indian securities held by the FPI Correct answer.
  2. A government security issued under the market stabilisation scheme
  3. An instrument issued by an Indian company to foreign investors
  4. A promissory note issued by a bank to its depositors

Explanation

Participatory notes are offshore derivative instruments issued by registered FPIs to overseas investors, referencing Indian securities held by the FPI. They allow foreign exposure without direct registration of the end investor.

Question 5Capital Markets: Structure, Participants and Instruments

An investor buys a stock in the cash segment on the NSE. Under the T+1 settlement cycle now applicable, settlement of funds and securities is completed on which day?

  1. Two working days after the trade
  2. Three working days after the trade
  3. The same day as the trade
  4. The next working day after the trade Correct answer.

Explanation

India moved the cash segment to a T+1 cycle, so settlement occurs on the first working day after the trade date. The earlier T+2 convention has been phased out for equities.

Question 6Capital Markets: Structure, Participants and Instruments

Which body is empowered under the SEBI Act, 1992 to hear appeals against orders passed by SEBI's adjudicating officers?

  1. The Ministry of Corporate Affairs
  2. The Supreme Court of India directly
  3. The Reserve Bank of India's appellate board
  4. The Securities Appellate Tribunal Correct answer.

Explanation

The Securities Appellate Tribunal, constituted under the SEBI Act, hears appeals against SEBI orders, including those of adjudicating officers. Further appeal lies to the Supreme Court.

Question 7Capital Markets: Structure, Participants and Instruments

A mutual fund scheme is described as an 'open-ended' scheme. What does this imply for investors?

  1. The scheme must be listed on an exchange for any redemption
  2. Redemption is allowed only during a specified window each year
  3. Units are available for continuous subscription and redemption at NAV Correct answer.
  4. Units may be redeemed only after the scheme matures

Explanation

Open-ended schemes allow continuous subscription and redemption at net asset value, providing liquidity to investors. There is no fixed maturity for redemption purposes.

Question 8Capital Markets: Structure, Participants and Instruments

Which of the following instruments is a money market instrument with an original maturity of up to one year?

  1. A 10-year government bond
  2. A convertible debenture
  3. An equity share
  4. A commercial paper Correct answer.

Explanation

Commercial paper is an unsecured short-term promissory note issued by corporates with maturity up to one year, making it a money market instrument. Bonds, equity and convertible debentures are longer-term or capital market instruments.

Question 9Capital Markets: Structure, Participants and Instruments

An issuer is making a public issue of non-convertible debentures and must appoint a debenture trustee. Under SEBI regulations, which requirement must the trustee satisfy?

  1. It must be registered with SEBI and hold a minimum net worth as prescribed Correct answer.
  2. It must be an associate of the issuer
  3. It must be a scheduled commercial bank only
  4. It must be a foreign institutional investor

Explanation

Debenture trustees must be registered with SEBI and comply with net worth and eligibility norms under the Debenture Trustees Regulations. Independence from the issuer is also required.

Question 10Capital Markets: Structure, Participants and Instruments

A stockbroker collects margins from clients in the cash segment. Which of the following is a legitimate component of the margin framework?

  1. Only the securities transaction tax
  2. Value at risk margin and extreme loss margin Correct answer.
  3. Only the stamp duty collected
  4. Only the brokerage charged to the client

Explanation

The exchange margin framework for the cash segment comprises value at risk margin and extreme loss margin, computed on the client's position. Brokerage, STT and stamp duty are transaction costs, not margins.

Question 11Capital Markets: Structure, Participants and Instruments

Which of the following is the primary role of a depository participant in the Indian securities market?

  1. Determining the listing price of a new issue
  2. Opening demat accounts and processing dematerialisation for investors Correct answer.
  3. Guaranteeing settlement of trades on the exchange
  4. Conducting the audit of listed companies

Explanation

Depository participants act as intermediaries between investors and depositories, opening demat accounts and processing dematerialisation and transfer instructions. They do not guarantee settlement or price issues.

Question 12Capital Markets: Structure, Participants and Instruments

An issuer makes a rights issue to existing shareholders. Which pricing rule under SEBI ICDR generally applies to the issue price?

  1. The price must be freely determined by the issuer, subject to disclosure Correct answer.
  2. The price must be at par value
  3. The price must equal the 52-week high
  4. The price must be approved by the stock exchange

Explanation

In a rights issue, the issuer may freely determine the price, though it must disclose the basis and justification. There is no prescribed floor or ceiling as in preferential allotment.

Question 13Capital Markets: Structure, Participants and Instruments

Which of the following best defines 'dematerialisation' in the Indian context?

  1. Conversion of physical securities into electronic form held with a depository Correct answer.
  2. Reduction of the face value of a share
  3. Conversion of debt into equity
  4. Conversion of equity into preference shares

Explanation

Dematerialisation is the process by which physical certificates are cancelled and the equivalent securities are credited in electronic form to the investor's demat account. It does not alter the nature or face value of the security.

Question 14Capital Markets: Structure, Participants and Instruments

A foreign portfolio investor wishes to invest in Indian government securities. Which regulator's registration and limits govern this investment?

  1. The Ministry of External Affairs
  2. The Insurance Regulatory and Development Authority
  3. The Competition Commission of India
  4. SEBI, under the FPI Regulations, along with RBI limits Correct answer.

Explanation

FPIs are registered with SEBI under the FPI Regulations and are subject to debt investment limits notified in consultation with RBI. G-sec exposure is monitored within those limits.

Question 15Capital Markets: Structure, Participants and Instruments

Which of the following is a characteristic feature of a 'perpetual bond' issued by a bank for capital adequacy purposes?

  1. It has no maturity date but may carry a call option after a minimum period Correct answer.
  2. It must be redeemed within one year
  3. It is repayable on demand by the holder
  4. It has a fixed maturity of 10 years

Explanation

Perpetual bonds have no fixed maturity and qualify as additional tier-1 capital, with a call option permitted only after the minimum period prescribed by RBI. This structure supports loss absorption.

Question 16Capital Markets: Structure, Participants and Instruments

An investor holds shares in a company that announces a 1:2 bonus issue. What is the effect on the investor's holding and the share price, all else equal?

  1. Number of shares doubles and price approximately halves Correct answer.
  2. Number of shares halves and price approximately doubles
  3. Number of shares doubles and price remains unchanged
  4. Number of shares and price remain unchanged

Explanation

A 1:2 bonus issue gives one additional share for every two held, increasing the holding by half, and the market price adjusts proportionately downward. The investor's total value is theoretically unchanged.

Question 17Capital Markets: Structure, Participants and Instruments

Under the SEBI (Prohibition of Insider Trading) Regulations, which of the following best describes 'unpublished price sensitive information'?

  1. Any information about a company that has been published in the annual report
  2. Historical financial data available on the exchange website
  3. Information relating to a company that is not generally available and may affect the price of its securities Correct answer.
  4. Rumours circulating in the market about a company

Explanation

UPSI is information that is not generally available and which, if published, would materially affect the price of securities. Published annual reports and historical data are generally available and thus excluded.

Question 18Capital Markets: Structure, Participants and Instruments

Which of the following best describes the role of a merchant banker in a public issue?

  1. Providing loans to retail investors to buy shares
  2. Guaranteeing the issuer's profitability
  3. Insuring the issue against market failure
  4. Managing the issue, conducting due diligence and ensuring regulatory compliance Correct answer.

Explanation

Merchant bankers lead-manage public issues, perform due diligence and ensure compliance with SEBI ICDR. They act as intermediaries between the issuer and the market.

Question 19Capital Markets: Structure, Participants and Instruments

An issuer wants to list its securities on a recognised stock exchange. Which of the following is a prerequisite under the SEBI (Listing Obligations and Disclosure Requirements) Regulations?

  1. Obtaining a credit rating from a rating agency
  2. Appointing a debenture trustee
  3. Registering with the RBI
  4. Entering into a listing agreement with the stock exchange Correct answer.

Explanation

Listing requires execution of a listing agreement with the exchange and compliance with LODR obligations. Credit rating, debenture trusteeship and RBI registration are not universal listing prerequisites.

Question 20Capital Markets: Structure, Participants and Instruments

A company is required to constitute an audit committee under LODR. Which of the following is a mandated function of that committee?

  1. Approving the company's marketing budget
  2. Selecting the company's advertising agency
  3. Reviewing financial statements and internal controls Correct answer.
  4. Fixing the salary of the chief executive officer

Explanation

The audit committee reviews financial statements, internal controls and related-party transactions, and interacts with statutory and internal auditors. Marketing and executive compensation decisions are outside its remit.

Question 21Capital Markets: Structure, Participants and Instruments

Which of the following is the correct sequence in a book-built public issue?

  1. Allotment, bidding period, listing, price discovery
  2. Price discovery, listing, bidding period, allotment
  3. Bidding period, price discovery, allotment, listing Correct answer.
  4. Listing, bidding period, allotment, price discovery

Explanation

In a book-built issue, investors bid within a price band, the book is built and the cut-off price is discovered, allotment is made and then the securities are listed. Listing follows allotment, not the reverse.

Question 22Capital Markets: Structure, Participants and Instruments

A SEBI-registered investment adviser provides advice to retail clients. Which of the following is consistent with the Investment Advisers Regulations?

  1. Charging a fee based on a percentage of the client's assets in all cases
  2. Entering into an agreement with the client specifying the terms of advice and fees Correct answer.
  3. Guaranteeing a minimum return on investments recommended
  4. Trading in the same securities on the adviser's own account without disclosure

Explanation

Investment advisers must enter into a written agreement with clients specifying the nature of advice and fee terms. Guaranteed returns and undisclosed personal trading conflict with the regulations.

Question 23Capital Markets: Structure, Participants and Instruments

Which of the following best explains why a stock exchange imposes circuit breakers on index movements?

  1. To guarantee profits for retail investors
  2. To increase trading volumes during volatile periods
  3. To fix the price of every listed security
  4. To provide a cooling-off period and contain excessive volatility Correct answer.

Explanation

Market-wide circuit breakers halt trading when the index moves beyond prescribed thresholds, providing a cooling-off period to contain panic and volatility. They do not fix individual security prices or guarantee returns.

Question 24Capital Markets: Structure, Participants and Instruments

An issuer seeks to raise funds through an issue of units by a real estate investment trust. Which regulator's framework primarily governs such a public issue?

  1. SEBI, under the REIT Regulations Correct answer.
  2. PFRDA, under the pension regulations
  3. IRDAI, under the Insurance Act
  4. RBI, under the Foreign Exchange Management Act

Explanation

Public issues of REIT units are governed by SEBI's REIT Regulations, which prescribe eligibility, disclosure and listing norms. RBI and IRDAI frameworks do not govern REIT public offerings.

Question 25Capital Markets: Structure, Participants and Instruments

A client places a 'stop-loss' order with a broker in the cash segment. What is the essential feature of this order?

  1. It guarantees execution at the trigger price
  2. It becomes a market or limit order once a specified trigger price is reached Correct answer.
  3. It can be placed only for delivery-based trades
  4. It is executed only at the closing price of the day

Explanation

A stop-loss order rests with the broker and converts into a market or limit order when the trigger price is touched. Execution at the exact trigger price is not guaranteed because of price movement.

Question 26Capital Markets: Structure, Participants and Instruments

In the Indian securities market, which of the following is the primary regulator responsible for protecting investors and promoting the development of the securities market?

  1. Securities and Exchange Board of India (SEBI) Correct answer.
  2. Reserve Bank of India (RBI)
  3. Ministry of Corporate Affairs (MCA)
  4. Insurance Regulatory and Development Authority of India (IRDAI)

Explanation

SEBI was established under the SEBI Act, 1992, with a statutory mandate to protect investors, regulate the securities market, and promote its development. RBI regulates banking and monetary policy, IRDAI regulates insurance, and MCA administers company law, so none of these has SEBI's securities-market mandate.

Question 27Capital Markets: Structure, Participants and Instruments

Which of the following best describes a 'primary market' transaction?

  1. An investor purchases shares of a listed company on a recognised stock exchange.
  2. An investor subscribes to shares in a company's initial public offer (IPO). Correct answer.
  3. An investor buys and sells futures contracts on a stock exchange.
  4. An investor sells shares back to the company under a buyback offer.

Explanation

The primary market is where securities are issued for the first time and the issuer receives the proceeds. Subscribing to an IPO is a primary market transaction because funds go to the company, whereas trading on an exchange or in derivatives is secondary market activity.

Question 28Capital Markets: Structure, Participants and Instruments

A company wants to list its equity shares on a recognised stock exchange. Under SEBI regulations, which of the following is a prerequisite for listing?

  1. The company must appoint a SEBI officer as its compliance officer.
  2. The company must have a minimum of 1,000 shareholders before listing.
  3. The company must obtain prior approval from the Reserve Bank of India.
  4. The company must enter into a listing agreement with the stock exchange. Correct answer.

Explanation

Listing requires the issuer to sign a listing agreement with the recognised stock exchange, under which it undertakes to comply with listing obligations and disclosure requirements, including the SEBI LODR Regulations. A minimum shareholder count, a SEBI officer as compliance officer, and RBI approval are not listing prerequisites.

Question 29Capital Markets: Structure, Participants and Instruments

An investor wants to buy shares of a company listed on a stock exchange. Which market participant is licensed to execute the order on behalf of the investor?

  1. A stockbroker registered with SEBI Correct answer.
  2. A credit rating agency
  3. A merchant banker
  4. A registrar and transfer agent

Explanation

Only a SEBI-registered stockbroker (trading member) is authorised to execute buy and sell orders on a stock exchange on behalf of clients. Merchant bankers manage issues, registrars maintain shareholder records, and credit rating agencies assign ratings, but none executes trades.

Question 30Capital Markets: Structure, Participants and Instruments

An issuer is making a public issue of equity shares and appoints a merchant banker. Which of the following best describes the merchant banker's role in the issue?

  1. Guaranteeing the issuer a minimum subscription amount regardless of investor response.
  2. Managing the issue, including due diligence, drafting the offer document, and coordinating with SEBI and the exchange. Correct answer.
  3. Providing a secondary market quote for the shares after listing.
  4. Acting as the depository for dematerialised shares of the issuer.

Explanation

A merchant banker acts as the lead manager to the issue, conducting due diligence, preparing the offer document, and coordinating regulatory filings and allotment. It does not guarantee subscription, make secondary market quotes, or act as a depository.

Question 31Primary Markets: IPOs, FPOs, Rights Issues and Disclosure

Under SEBI (ICDR) Regulations, what is the minimum subscription threshold that a public issue must receive before allotment can be made, expressed as a percentage of the issue size?

  1. 100% of the issue size
  2. 50% of the issue size
  3. 75% of the issue size
  4. 90% of the issue size Correct answer.

Explanation

Regulation 45 of the ICDR Regulations requires that a public issue be subscribed to at least 90% of the offer size, failing which the entire subscription money must be refunded. This threshold protects investors by ensuring the issuer raises a meaningful minimum corpus. The 90% test applies to the net offer, computed excluding the promoters' contribution.

Question 32Primary Markets: IPOs, FPOs, Rights Issues and Disclosure

In a book-built public issue, the portion reserved for retail individual investors is determined by which criterion?

  1. Application size not exceeding Rs 50,000
  2. Application size not exceeding Rs 2 lakh Correct answer.
  3. Application size not exceeding Rs 5 lakh
  4. Application size not exceeding Rs 10 lakh

Explanation

A retail individual investor is defined in the ICDR Regulations as an individual who applies for securities for an amount not more than Rs 2 lakh, either in a single or multiple applications. The retail category in book-built issues is sized and allotted on this definition. SEBI has kept this threshold stable for several years.

Question 33Primary Markets: IPOs, FPOs, Rights Issues and Disclosure

Which document must an issuer file with SEBI and the stock exchanges before opening a public issue, after incorporating the observations of SEBI?

  1. Draft Red Herring Prospectus
  2. Abridged Prospectus
  3. Prospectus Correct answer.
  4. Red Herring Prospectus

Explanation

After SEBI issues its observations on the draft offer document, the issuer files a prospectus with the Registrar of Companies and the exchanges before the issue opens. The prospectus contains the final price and all material disclosures. The Red Herring Prospectus is filed when the price band is not yet decided.

Question 34Primary Markets: IPOs, FPOs, Rights Issues and Disclosure

An issuer makes a rights issue to its existing shareholders. Under the Companies Act, 2013, what is the minimum period for which the offer must remain open?

  1. 15 days Correct answer.
  2. 7 days
  3. 21 days
  4. 30 days

Explanation

Section 62 of the Companies Act, 2013 requires that a rights offer remain open for a minimum of 15 days and a maximum of 30 days from the date of the offer. This gives shareholders adequate time to decide whether to subscribe. The company may send the offer by registered post, speed post, courier, or electronic mode.

Question 35Primary Markets: IPOs, FPOs, Rights Issues and Disclosure

In an IPO, the anchor investor portion is available only to qualified institutional buyers and is subject to what maximum allocation of the QIB portion?

  1. 45%
  2. 60% Correct answer.
  3. 30%
  4. 75%

Explanation

Under the ICDR Regulations, up to 60% of the qualified institutional buyer portion may be allocated to anchor investors. Anchor investors must be QIBs and are subject to a lock-in on a portion of their holding. The remaining QIB portion is available to other institutional bidders.

Question 36Primary Markets: IPOs, FPOs, Rights Issues and Disclosure

Which of the following best describes a Further Public Offer (FPO) by a listed company?

  1. An offer of securities by an already listed company to the public Correct answer.
  2. An offer of securities by an unlisted company to the public for the first time
  3. A preferential allotment to a select group of investors
  4. An offer of securities to existing shareholders on a pro-rata basis

Explanation

An FPO is a public offer of securities by a company whose securities are already listed on a recognised stock exchange. It follows the same SEBI ICDR framework as an IPO but is made by an issuer with an existing listing history. It may be a fresh issue of shares or an offer for sale by existing shareholders.

Question 37Primary Markets: IPOs, FPOs, Rights Issues and Disclosure

Which of the following is a mandatory disclosure in the 'Risk Factors' section of a draft offer document?

  1. The personal income tax returns of the promoters
  2. The names of the merchant bankers and their fees
  3. The internal risk factors specific to the issuer and its business Correct answer.
  4. The historical share price of peer companies

Explanation

The ICDR Regulations require the offer document to disclose all internal and external risk factors that are material and specific to the issuer's business and industry. These must appear prominently at the beginning of the document. Generic boilerplate risk factors are discouraged; specificity is expected.

Question 38Primary Markets: IPOs, FPOs, Rights Issues and Disclosure

Under SEBI regulations, what is the maximum period within which an issuer must complete allotment and refund in a public issue after the closure of the issue?

  1. 6 days Correct answer.
  2. 4 days
  3. 10 days
  4. 15 days

Explanation

The ICDR Regulations require that allotment be made and refunds be initiated within six working days from the date of closure of the issue. Failure to do so attracts interest on the refund amount at a prescribed rate. This timeline is central to investor protection in primary market issuances.

Question 39Primary Markets: IPOs, FPOs, Rights Issues and Disclosure

A company listed on a recognised stock exchange wants to raise funds through a preferential allotment. Which pricing rule applies to the floor price?

  1. The face value of the shares
  2. The closing price on the date of the board meeting
  3. The average of the daily closing prices for the preceding 10 trading days
  4. The average of the weekly high and low of the closing prices for the 26 weeks preceding the relevant date Correct answer.

Explanation

For a preferential allotment by a listed company, SEBI requires the floor price to be not less than the higher of the average of the weekly high and low of closing prices during the 26 weeks preceding the relevant date, or the average of the daily closing prices during the two weeks preceding the relevant date. This protects minority shareholders from dilution at below-market prices.

Question 40Primary Markets: IPOs, FPOs, Rights Issues and Disclosure

Which of the following is the primary purpose of the 'Objects of the Issue' section in a prospectus?

  1. To list the names of the underwriters
  2. To disclose the intended use of the proceeds and the estimated costs of each object Correct answer.
  3. To describe the company's historical financial performance
  4. To describe the dividend policy of the company

Explanation

The objects of the issue section must disclose the specific purposes for which the net proceeds will be used, along with the estimated costs and the schedule of deployment. It enables investors to assess whether the capital will be deployed productively. Proceeds cannot be used for purposes not disclosed without shareholder approval.

Question 41Primary Markets: IPOs, FPOs, Rights Issues and Disclosure

An issuer wants to make a public issue of convertible debt instruments. Which SEBI regulation primarily governs such an issue?

  1. SEBI (Prohibition of Insider Trading) Regulations, 2015
  2. SEBI (LODR) Regulations, 2015
  3. SEBI (ICDR) Regulations, 2018 Correct answer.
  4. SEBI (SAST) Regulations, 2011

Explanation

Public issues of convertible debt instruments are governed by the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, which prescribe eligibility, disclosure, and allotment norms. The LODR Regulations govern ongoing obligations of listed entities, while SAST governs takeovers. Insider trading regulations address trading by insiders, not issue mechanics.

Question 42Primary Markets: IPOs, FPOs, Rights Issues and Disclosure

A company making an IPO must have a minimum track record of distributable profits. For an issuer without a track record, which alternative eligibility route under the ICDR Regulations is available?

  1. The issuer can rely on the net worth route only if it has positive net worth for one year
  2. The issuer must be a listed subsidiary of a company with a three-year listing history
  3. The issuer must have a minimum of 1,000 shareholders before the issue
  4. The issuer must have at least 25% of the post-issue capital held by qualified institutional buyers Correct answer.

Explanation

An issuer without the three-year distributable profit track record may still access the public market if at least 25% of its post-issue capital is held by qualified institutional buyers. This alternative route recognises institutional due diligence as a substitute for a profit track record. The QIB holding is subject to a lock-in of one year.

Question 43Primary Markets: IPOs, FPOs, Rights Issues and Disclosure

In a rights issue, if a shareholder does not subscribe to the offer, what happens to the unsubscribed portion?

  1. It may be allowed to be renounced in favour of a nominee Correct answer.
  2. It is automatically allotted to the promoters
  3. It is refunded to the company
  4. It is transferred to the Investor Education and Protection Fund

Explanation

Section 62 of the Companies Act, 2013 permits a shareholder to renounce the rights entitlement in favour of another person, either wholly or in part. The board may also decide to dispose of the unsubscribed portion in a manner not disadvantageous to the shareholders. This renunciation right is a defining feature of a rights issue.

Question 44Primary Markets: IPOs, FPOs, Rights Issues and Disclosure

Which of the following statements about the 'Green Shoe Option' in a public issue is accurate?

  1. It is a mandatory discount offered to retail investors
  2. It is an over-allotment option that allows the stabilising agent to buy shares in the market to stabilise the post-listing price Correct answer.
  3. It is a tax incentive given to anchor investors
  4. It is a mechanism to convert debt into equity

Explanation

The green shoe option, or over-allotment option, permits the stabilising agent to allot up to a specified percentage beyond the issue size and use the proceeds to buy shares in the secondary market if the price falls below the issue price. It aims to stabilise the post-listing price. The option must be disclosed in the offer document.

Question 45Primary Markets: IPOs, FPOs, Rights Issues and Disclosure

Under the ICDR Regulations, what is the lock-in period applicable to the minimum promoters' contribution in an IPO?

  1. Three years Correct answer.
  2. One year
  3. Six months
  4. Two years

Explanation

The minimum promoters' contribution, which must be at least 20% of the post-issue capital, is subject to a lock-in of three years from the date of allotment. This ensures that promoters retain skin in the game. The remaining promoter holding is locked in for one year.

Question 46Primary Markets: IPOs, FPOs, Rights Issues and Disclosure

A merchant banker is preparing an offer document. Which of the following must be certified by the statutory auditor in relation to the objects of the issue?

  1. The names of the proposed independent directors
  2. The estimated costs of the objects and the means of financing them Correct answer.
  3. The share price of the issuer on the unlisted market
  4. The dividend history of the issuer

Explanation

The ICDR Regulations require a certificate from the statutory auditor confirming that the estimated costs of the objects of the issue and the means of financing them are accurate and based on the issuer's books. This adds credibility to the deployment plan disclosed to investors. The certificate is included in the offer document.

Question 47Primary Markets: IPOs, FPOs, Rights Issues and Disclosure

Which of the following is a key difference between a public issue and a private placement of securities?

  1. A public issue is made to the public at large, while a private placement is made to a select group of identified investors Correct answer.
  2. A private placement must be listed on a stock exchange immediately
  3. A public issue can only be made by unlisted companies
  4. A public issue requires no regulatory filings, while a private placement requires a prospectus

Explanation

A public issue invites subscription from the general public and requires a prospectus and SEBI filings, whereas a private placement is made to a limited number of identified investors under Section 42 of the Companies Act, 2013. The two routes differ in investor base, disclosure obligations, and regulatory oversight. Private placement does not involve a public offer document.

Question 48Primary Markets: IPOs, FPOs, Rights Issues and Disclosure

In a book-built IPO, the 'price band' must be disclosed at least how many days before the issue opens?

  1. Two days Correct answer.
  2. Three days
  3. One day
  4. Five days

Explanation

The ICDR Regulations require the price band to be disclosed at least two working days before the issue opens, along with the floor price and cap price. This gives investors time to evaluate pricing and prepare bids. Any revision to the band must also comply with the notice requirement.

Question 49Primary Markets: IPOs, FPOs, Rights Issues and Disclosure

Which of the following statements about an 'offer for sale' component in an IPO is correct?

  1. The offer for sale is prohibited in a book-built issue
  2. The proceeds are credited to the issuer's capital reserve
  3. The proceeds go to the selling shareholders, not to the issuer company Correct answer.
  4. The offer for sale must be subscribed only by retail investors

Explanation

In an offer for sale, existing shareholders sell their shares to the public, and the sale proceeds accrue to those selling shareholders rather than to the company. The issuer does not receive any funds from this component. This distinguishes it from a fresh issue, where proceeds go to the company.

Question 50Primary Markets: IPOs, FPOs, Rights Issues and Disclosure

An issuer has filed a draft offer document with SEBI. Within what period must SEBI issue its observations, and what happens if it does not?

  1. SEBI has no time limit and the issue cannot proceed without observations
  2. SEBI must issue observations within 60 days, failing which the issue may proceed Correct answer.
  3. SEBI must issue observations within 90 days, failing which the issue may proceed
  4. SEBI must issue observations within 30 days, failing which the issue may proceed

Explanation

Under the ICDR Regulations, SEBI is required to issue its observations on the draft offer document within 60 days of receipt. If no observations are received within that period, the issuer may proceed with the issue. This timeline provides certainty while preserving regulatory oversight.