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NISM Series IX (Merchant Banking) study materials
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NISM Series IX (Merchant Banking) practice questions

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Question 1Introduction to the Indian Capital Market

Which regulator is the primary statutory authority for the securities market in India, including merchant bankers?

  1. Reserve Bank of India
  2. Pension Fund Regulatory and Development Authority
  3. Securities and Exchange Board of India Correct answer.
  4. Insurance Regulatory and Development Authority of India

Explanation

SEBI was given statutory powers through the SEBI Act, 1992, and regulates the securities market, intermediaries such as merchant bankers, and investor protection. RBI regulates banking and monetary policy, while IRDAI and PFRDA regulate insurance and pensions respectively.

Question 2Introduction to the Indian Capital Market

The Securities Contracts (Regulation) Act, 1956 primarily provides for which of the following?

  1. Regulation of trading in securities and recognition of stock exchanges Correct answer.
  2. Incorporation and winding up of companies
  3. Prohibition of insider trading in listed companies
  4. Regulation of depositories and depository participants

Explanation

The SCRA, 1956 empowers the government and SEBI to recognise and regulate stock exchanges and to regulate contracts in securities. Company incorporation is governed by the Companies Act, while depositories and insider trading are dealt with under the SEBI Act and SEBI regulations.

Question 3Introduction to the Indian Capital Market

Which Act established SEBI as a statutory body with powers to regulate the securities market?

  1. Depositories Act, 1996
  2. Companies Act, 1956
  3. SEBI Act, 1992 Correct answer.
  4. Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002

Explanation

Although SEBI was constituted in 1988 as an administrative body, the SEBI Act, 1992 gave it statutory status and defined its powers over intermediaries and market conduct. The other Acts deal with company law, depositories and enforcement of security interests respectively.

Question 4Introduction to the Indian Capital Market

In the Indian primary market, a merchant banker acting as lead manager to a public issue is primarily responsible for which activity?

  1. Providing post-issue trading liquidity on the exchange
  2. Underwriting every shortfall in subscription
  3. Managing the issue process, including due diligence and drafting of the offer document Correct answer.
  4. Guaranteeing the issue will be fully subscribed

Explanation

The lead manager conducts due diligence, prepares and files the offer document, and coordinates marketing and allotment of the issue. A merchant banker does not guarantee subscription unless separately acting as an underwriter, and market making is a separate function.

Question 5Introduction to the Indian Capital Market

Which of the following is a characteristic that distinguishes the primary market from the secondary market?

  1. Securities are issued for the first time and proceeds go to the issuer Correct answer.
  2. Securities are traded between investors with proceeds going to the seller
  3. Only debt securities can be issued
  4. Prices are determined only by the exchange's closing session

Explanation

In the primary market, new securities are issued and the funds raised flow to the issuing company, which is why it is also called the new issue market. In the secondary market, existing securities change hands between investors and the issuer receives no fresh funds.

Question 6Introduction to the Indian Capital Market

A company wants to raise capital from the public by issuing equity shares. Under SEBI's ICDR framework, which document must be filed with SEBI and the stock exchanges before the public issue opens?

  1. Annual return
  2. Draft red herring prospectus Correct answer.
  3. Board resolution under Section 179
  4. Form MGT-7

Explanation

A draft red herring prospectus is filed with SEBI and the exchanges for public comments before the issue opens, and it contains most disclosures but omits the price and issue size. Annual returns and board resolutions are corporate compliance documents, not public issue documents.

Question 7Introduction to the Indian Capital Market

Which of the following best describes a book-building process in an Indian public issue?

  1. The issue price is set by the stock exchange after listing
  2. A fixed price is announced and investors apply at that price only
  3. Bids are invited within a price band and the final price is discovered from demand Correct answer.
  4. Shares are allotted only to institutional investors

Explanation

In book building, the issuer announces a price band, investors bid at various prices, and the final price is determined based on demand, subject to SEBI rules. A fixed price issue has a single pre-determined price, and exchange-set pricing after listing is not part of the process.

Question 8Introduction to the Indian Capital Market

An initial public offer by an unlisted company is regulated primarily by which SEBI regulation?

  1. SEBI (Mutual Funds) Regulations, 1996
  2. SEBI (Stock Brokers) Regulations, 2022
  3. SEBI (Portfolio Managers) Regulations, 2020
  4. SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 Correct answer.

Explanation

The ICDR Regulations, 2018 lay down eligibility norms, disclosure requirements and pricing for public issues, rights issues and preferential allotments. The other regulations govern brokers, mutual funds and portfolio managers respectively.

Question 9Introduction to the Indian Capital Market

In a public issue, which category of investors is described as Qualified Institutional Buyers (QIBs)?

  1. Promoters and their relatives
  2. Mutual funds, banks, insurers and foreign portfolio investors registered with SEBI Correct answer.
  3. Employees of the issuer company
  4. Retail individual investors applying for small amounts

Explanation

QIBs are institutional investors such as mutual funds, banks, insurers, provident funds and registered foreign portfolio investors, as defined in the ICDR Regulations. Retail investors, promoters and employees form separate categories with distinct allotment rules.

Question 10Introduction to the Indian Capital Market

Which of the following instruments is a hybrid security that carries both debt-like and equity-like features and is commonly issued in the Indian market?

  1. Treasury bill
  2. Fully convertible debentures Correct answer.
  3. Certificate of deposit
  4. Commercial paper

Explanation

Fully convertible debentures are hybrid instruments that convert into equity shares, combining debt servicing before conversion with eventual equity participation. Commercial paper, certificates of deposit and treasury bills are short-term money market instruments with no equity feature.

Question 11Introduction to the Indian Capital Market

Which of the following is the primary function of a stock exchange in the Indian capital market?

  1. Issuing new securities on behalf of companies
  2. Providing a platform for trading in listed securities with price discovery and transparency Correct answer.
  3. Regulating merchant bankers
  4. Guaranteeing returns to investors

Explanation

A recognised stock exchange provides a regulated marketplace where listed securities are traded, facilitating price discovery, liquidity and transparency. New issues are managed by merchant bankers, returns are not guaranteed, and merchant bankers are regulated by SEBI.

Question 12Introduction to the Indian Capital Market

What is the role of a depository in the Indian securities market?

  1. Setting the price band for initial public offers
  2. Holding securities in electronic form and enabling transfer through book entry Correct answer.
  3. Approving the prospectus of a public issue
  4. Underwriting public issues

Explanation

A depository holds securities in dematerialised form and effects transfers through electronic book entries, working through depository participants. Pricing, underwriting and prospectus approval are functions of issuers, merchant bankers and SEBI respectively.

Question 13Introduction to the Indian Capital Market

Which Act governs the process of dematerialisation of securities and the rights and obligations of depositories?

  1. SEBI Act, 1992
  2. Companies Act, 2013
  3. Indian Contract Act, 1872
  4. Depositories Act, 1996 Correct answer.

Explanation

The Depositories Act, 1996 provides the legal framework for dematerialised securities, the rights of beneficial owners and the regulation of depositories. The SEBI Act deals with SEBI's powers, while the Companies Act and Contract Act address corporate and contractual matters.

Question 14Introduction to the Indian Capital Market

Which of the following is a money market instrument rather than a capital market instrument?

  1. Rights issue of equity shares
  2. Non-convertible debentures with a ten-year tenor
  3. Equity shares
  4. Commercial paper Correct answer.

Explanation

Commercial paper is a short-term unsecured debt instrument with a maturity of up to one year, making it a money market instrument. Equity shares and long-tenor debentures are capital market instruments, and a rights issue is a primary market equity offering.

Question 15Introduction to the Indian Capital Market

In the context of the Indian capital market, what does the term 'anchor investor' refer to in a book-built public issue?

  1. A stock broker who places bids on behalf of clients
  2. The promoter of the issuer company
  3. A retail investor who applies on the first day of the issue
  4. A qualified institutional buyer allotted shares before the issue opens, subject to a lock-in Correct answer.

Explanation

Anchor investors are qualified institutional buyers who are allotted shares a day before the issue opens, within the QIB portion, subject to a lock-in period. This gives the issue some early institutional confidence but does not replace the general bidding process.

Question 16Introduction to the Indian Capital Market

Which of the following statements about the Securities Appellate Tribunal (SAT) is accurate?

  1. It issues licences to merchant bankers
  2. It hears appeals against orders passed by SEBI and certain other financial regulators Correct answer.
  3. It sets the monetary policy of the country
  4. It is a division of the Supreme Court of India

Explanation

SAT is a statutory tribunal that hears appeals against orders of SEBI and specified financial sector regulators, providing an appellate remedy before further judicial review. It does not grant merchant banking licences or set monetary policy.

Question 17Introduction to the Indian Capital Market

A company listed on a recognised stock exchange wishes to make a preferential allotment of equity shares to select investors. Which SEBI regulation principally governs the pricing and conditions of such an allotment?

  1. SEBI (Prohibition of Insider Trading) Regulations, 2015
  2. SEBI (Research Analysts) Regulations, 2014
  3. SEBI (Intermediaries) Regulations, 2008
  4. SEBI (ICDR) Regulations, 2018 Correct answer.

Explanation

Preferential allotments by listed companies are covered by the ICDR Regulations, 2018, which prescribe pricing formulae, lock-in and disclosure requirements. The insider trading regulations, intermediaries regulations and research analyst regulations address different aspects of market conduct.

Question 18Introduction to the Indian Capital Market

Which of the following best describes the term 'green shoe option' in an Indian initial public offering?

  1. A guarantee of minimum subscription by the underwriter
  2. An option allowing the issuer to allot additional shares in case of oversubscription Correct answer.
  3. A penalty imposed on defaulting allottees
  4. A discount offered to retail investors

Explanation

The green shoe option, or oversubscription option, permits the issuer to allot additional shares beyond the original issue size when there is excess demand, subject to SEBI limits. It is not a retail discount, penalty or underwriting guarantee.

Question 19Introduction to the Indian Capital Market

Which of the following is a valid reason why a company might prefer a rights issue over an initial public offer?

  1. It can raise capital from existing shareholders without diluting control to new investors Correct answer.
  2. It guarantees that the issue will be fully subscribed
  3. It allows the company to avoid shareholder approval altogether
  4. It avoids the need for any regulatory filing

Explanation

A rights issue offers shares to existing shareholders in proportion to their holding, allowing the company to raise funds while preserving control and avoiding dilution to outsiders. It still requires compliance with SEBI and Companies Act requirements and does not guarantee full subscription.

Question 20Introduction to the Indian Capital Market

Which of the following statements about the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) is accurate?

  1. Both are depositories registered under the Depositories Act
  2. Both are recognised stock exchanges regulated by SEBI Correct answer.
  3. Both are primary dealers in government securities
  4. Both are owned and operated by the Reserve Bank of India

Explanation

NSE and BSE are recognised stock exchanges under the SCRA and are regulated by SEBI as market infrastructure institutions. They are not owned by RBI, are not primary dealers, and depositories such as NSDL and CDSL are separate entities.

Question 21Introduction to the Indian Capital Market

A merchant banker is approached by an unlisted company seeking to raise funds through a private placement of non-convertible debentures to institutional investors. Which of the following is the most relevant compliance consideration?

  1. Approval of the Monetary Policy Committee of RBI
  2. Compliance with SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 if the debentures are to be listed Correct answer.
  3. Compliance only with the Companies Act, 2013, as SEBI rules do not apply
  4. Mandatory underwriting by the merchant banker

Explanation

Where debt securities are to be listed, the issue and listing must comply with the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021, alongside Companies Act provisions. SEBI rules apply to listed debt, RBI's Monetary Policy Committee does not approve issues, and underwriting is not mandatory.

Question 22Introduction to the Indian Capital Market

What is the significance of the 'listing agreement' between a company and a stock exchange?

  1. It guarantees a minimum share price after listing
  2. It transfers ownership of the company to the exchange
  3. It obliges the company to comply with ongoing disclosure and corporate governance norms Correct answer.
  4. It exempts the company from SEBI regulations

Explanation

The listing agreement, now largely operationalised through SEBI's LODR Regulations, requires a listed company to make continuous disclosures and follow corporate governance standards. It does not guarantee prices, exempt the company from regulation, or transfer ownership.

Question 23Introduction to the Indian Capital Market

Which of the following statements about the difference between a 'draft red herring prospectus' and a 'red herring prospectus' is correct?

  1. The draft red herring prospectus is issued only to institutional investors
  2. The draft red herring prospectus is filed for public comments and does not contain the price or issue size Correct answer.
  3. The red herring prospectus contains the final allotment list
  4. The red herring prospectus is filed after allotment is completed

Explanation

The draft red herring prospectus is filed with SEBI and the exchanges for public comments and omits the price and size of the issue. The red herring prospectus is the offer document used during the bidding period, while the final prospectus is filed after the issue price is determined.

Question 24Introduction to the Indian Capital Market

Which of the following is an example of a market intermediary regulated by SEBI in the Indian capital market?

  1. District cooperative bank
  2. Insurance agent
  3. Regional rural bank
  4. Merchant banker Correct answer.

Explanation

Merchant bankers are SEBI-registered intermediaries under the SEBI (Merchant Bankers) Regulations, 1992. District cooperative banks and regional rural banks fall under the RBI's regulatory ambit, and insurance agents are regulated by IRDAI.

Question 25Introduction to the Indian Capital Market

Which of the following statements about the 'shelf prospectus' concept in Indian securities regulation is accurate?

  1. It is valid indefinitely without any filing requirement
  2. It applies only to rights issues by listed companies
  3. It permits an issuer to avoid filing any offer document
  4. It allows an issuer to raise funds in multiple tranches over a period from a single filed prospectus, subject to SEBI conditions Correct answer.

Explanation

A shelf prospectus permits certain issuers, such as banks and specified entities, to make multiple offerings over a defined period using one filed document, with an information memorandum for each tranche. It does not eliminate filing requirements, is not confined to rights issues, and is not valid indefinitely.

Question 26Introduction to the Indian Capital Market

A merchant banker is explaining the regulatory architecture of the Indian securities market to a new client. Which body is the statutory regulator of the securities market, established under the SEBI Act, 1992, with powers to investigate and penalise market violations?

  1. The Pension Fund Regulatory and Development Authority
  2. The Securities and Exchange Board of India Correct answer.
  3. The Reserve Bank of India
  4. The Insurance Regulatory and Development Authority of India

Explanation

SEBI was given statutory status by the SEBI Act, 1992, which empowers it to regulate the securities market, register and supervise intermediaries, investigate violations and impose penalties. The RBI regulates banking and monetary policy, IRDAI regulates insurance, and PFRDA regulates pensions, so none of them is the securities market regulator.

Question 27Introduction to the Indian Capital Market

Which of the following is classified as a capital market instrument rather than a money market instrument?

  1. A non-convertible debenture with a five-year maturity issued by a company Correct answer.
  2. A 91-day treasury bill issued by the Government of India
  3. A certificate of deposit issued by a commercial bank
  4. A commercial paper programme of a large manufacturing company

Explanation

Capital market instruments have original maturities of more than one year, so a five-year non-convertible debenture belongs to the debt segment of the capital market. Treasury bills, certificates of deposit and commercial paper are all short-term instruments with maturities of up to one year and therefore sit in the money market.

Question 28Introduction to the Indian Capital Market

Which of the following is the principal regulator of the Indian commodity derivatives market following the merger of the Forward Markets Commission with SEBI in 2015?

  1. The Securities and Exchange Board of India Correct answer.
  2. The Ministry of Consumer Affairs, Food and Public Distribution
  3. The Ministry of Finance, Department of Revenue
  4. The Reserve Bank of India

Explanation

The Forward Markets Commission was merged with SEBI with effect from 28 September 2015, after which SEBI regulates commodity derivatives exchanges and intermediaries. The Ministry of Consumer Affairs previously oversaw the commodity market but no longer acts as its statutory regulator.

Question 29Introduction to the Indian Capital Market

An issuer wants its securities admitted to trading on a recognised stock exchange. Which of the following best describes the purpose of the listing agreement or listing regulations with the exchange?

  1. It fixes the minimum dividend the company must declare each year
  2. It imposes continuing disclosure and corporate governance obligations on the listed entity Correct answer.
  3. It guarantees the issue price of the securities to investors
  4. It exempts the company from SEBI's takeover regulations

Explanation

Listing obligations require the entity to make continuous disclosures, follow corporate governance norms and comply with exchange requirements on an ongoing basis after admission to trading. The agreement does not guarantee prices, fix dividends, or exempt the company from any SEBI regulation.

Question 30Introduction to the Indian Capital Market

A domestic company wants to raise capital by issuing securities to investors outside India in the international market. Which SEBI regulation governs such an issue of securities by Indian companies in foreign jurisdictions?

  1. SEBI (International Financial Services Centres) Guidelines, 2015 Correct answer.
  2. SEBI (Foreign Portfolio Investors) Regulations
  3. SEBI (Issue of Capital and Disclosure Requirements) Regulations
  4. SEBI (Issue and Listing of Non-Convertible Securities) Regulations

Explanation

SEBI's International Financial Services Centres Guidelines, 2015, along with related amendments, set out the framework for Indian companies issuing securities in IFSCs such as GIFT City, which serves as the route for offshore issuance. The ICDR Regulations govern domestic public issues, while the FPI Regulations govern investment by foreign portfolio investors in Indian securities.

Question 31Introduction to the Indian Capital Market

Which of the following best describes the role of a stock broker in the Indian secondary market?

  1. The broker settles funds between banks in the interbank market
  2. The broker underwrites the initial public offer of a company
  3. The broker executes buy and sell orders for clients on a recognised stock exchange as a registered trading member Correct answer.
  4. The broker acts as the issuer's compliance officer for listing obligations

Explanation

A stock broker is registered with SEBI and is a trading member of a recognised stock exchange, executing orders on behalf of clients and on its own account. Underwriting and issue management are functions of merchant bankers, while interbank settlement is handled in the banking system.

Question 32Introduction to the Indian Capital Market

In the Indian capital market, which of the following statements correctly distinguishes a 'primary market' from a 'secondary market'?

  1. The primary market trades only government securities, while the secondary market trades corporate securities
  2. The primary market deals in new issues of securities, while the secondary market deals in already issued securities Correct answer.
  3. The primary market is regulated by the RBI, while the secondary market is regulated by SEBI
  4. The primary market trades only debt, while the secondary market trades only equity

Explanation

The primary market is where securities are issued for the first time and the issuer receives the proceeds, while the secondary market is where existing securities change hands between investors. Both segments are regulated by SEBI, and both can involve equity as well as debt instruments.

Question 33Introduction to the Indian Capital Market

A company's shares are listed on two recognised stock exchanges. In the context of the Indian capital market, what does 'delisting' mean?

  1. Removal of the company's securities from trading on a recognised stock exchange, either voluntarily or compulsorily Correct answer.
  2. Transfer of the company's shares from one depository to another
  3. Conversion of equity shares into preference shares
  4. Temporary suspension of trading in the shares for one trading session

Explanation

Delisting is the permanent removal of a company's securities from trading on a recognised stock exchange and is governed by SEBI's delisting regulations. It is distinct from a temporary trading suspension, a depository transfer, or a change in the class of shares.

Question 34Introduction to the Indian Capital Market

Which of the following best describes the 'over-the-counter' (OTC) market in the Indian context?

  1. Trading that takes place only during the pre-open session of a stock exchange
  2. Trading that is permitted only for government securities on the RBI's electronic platform
  3. Trading of securities on the exchange's electronic order matching platform
  4. Trading of securities directly between parties, with terms negotiated bilaterally and without a central exchange order book Correct answer.

Explanation

OTC trading involves direct bilateral transactions in which the parties negotiate price and settlement terms, without the anonymity and order matching of an exchange. Exchange trading takes place on the electronic order book, and OTC markets are not confined to government securities.

Question 35Introduction to the Indian Capital Market

An investor holds shares in dematerialised form with a depository participant. Which of the following statements about the depository system in India is accurate?

  1. The depository guarantees the price at which the investor buys or sells shares
  2. The depository holds securities in electronic form and transfers them between accounts on the investor's instructions Correct answer.
  3. The depository acts as the issuer of the company's shares
  4. The depository holds the physical share certificates on behalf of the investor

Explanation

A depository holds securities in electronic, fungible form and effects transfers between beneficial owner accounts through depository participants, on the basis of instructions. It does not hold physical certificates, guarantee prices, or issue the company's shares.

Question 36Introduction to the Indian Capital Market

A merchant banker is advising a client on the difference between a 'public issue' and a 'private placement' of securities. Which of the following is the key distinguishing feature?

  1. A public issue can be made only to institutional investors, whereas a private placement is open to retail investors
  2. A public issue is made only by listed companies, whereas a private placement is made only by unlisted companies
  3. A public issue does not require a prospectus, whereas a private placement requires a prospectus
  4. A public issue is made to the public at large and is governed by the ICDR Regulations, whereas a private placement is made to a select group of identified persons under the Companies Act framework Correct answer.

Explanation

A public issue is an offer to the public at large requiring a prospectus and compliance with the ICDR Regulations, while a private placement is made to a limited number of identified persons under the Companies Act framework. The other statements reverse or misstate these features.

Question 37Introduction to the Indian Capital Market

Which of the following statements about the Bombay Stock Exchange (BSE) is accurate in the context of the Indian capital market?

  1. It was established in 2015 following the merger of regional exchanges
  2. It was established in 1994 as a subsidiary of the National Stock Exchange
  3. It was established in 1875 and is recognised as Asia's oldest stock exchange Correct answer.
  4. It was established in 1992 as a screen-based exchange

Explanation

The BSE traces its origins to 1875 and is widely regarded as Asia's oldest stock exchange. The NSE was incorporated in 1992 and began screen-based trading in 1994, which is the source of the confusion in the other options.

Question 38Introduction to the Indian Capital Market

A company proposes to issue equity shares through a rights issue to its existing shareholders. Which of the following statements about the pricing of a rights issue is accurate?

  1. The issue price is decided by the board, and the issue may be priced below the prevailing market price Correct answer.
  2. The issue price must always equal the prevailing market price on the record date
  3. The issue price is fixed by SEBI for every rights issue
  4. The issue price must be at least twice the face value of the shares

Explanation

In a rights issue, the board determines the issue price and may price it at a discount to the market price to encourage shareholders to subscribe. SEBI does not fix the price, and there is no requirement that it equal the market price or be a multiple of face value.

Question 39Introduction to the Indian Capital Market

Which of the following is an example of a 'market intermediary' regulated by SEBI in the Indian capital market?

  1. A registrar and share transfer agent handling investor records for a listed company Correct answer.
  2. A cooperative credit society providing agricultural loans
  3. A non-banking financial company engaged only in lending against gold
  4. A scheduled commercial bank accepting fixed deposits from the public

Explanation

Registrars and share transfer agents are SEBI-registered intermediaries that maintain investor records and handle corporate actions for issuers. Banks, NBFCs and cooperative credit societies are regulated by the RBI or under cooperative law, not as securities market intermediaries.

Question 40Introduction to the Indian Capital Market

Which of the following statements about the National Stock Exchange (NSE) is accurate?

  1. It was the first exchange in India to introduce screen-based electronic trading Correct answer.
  2. It was established before the BSE and is the oldest exchange in India
  3. It trades only in government securities and not in equities
  4. It is a government-owned exchange operated by the Ministry of Finance

Explanation

The NSE introduced nationwide screen-based electronic trading in the wholesale debt market in 1994 and in equities shortly thereafter, transforming Indian market microstructure. It is not the oldest exchange, is not government-owned, and trades equities as well as debt.

Question 41Introduction to Merchant Banking

Under the SEBI (Merchant Bankers) Regulations, 1992, which activity requires a mandatory registration certificate from SEBI?

  1. Acting as a merchant banker in a public issue of securities Correct answer.
  2. Publishing research reports on listed companies
  3. Operating a stock broking terminal for institutional clients
  4. Providing portfolio management services to retail clients

Explanation

The 1992 regulations require any person carrying on merchant banking activity, including managing public issues, to hold a certificate of registration from SEBI. Research publication, portfolio management, and broking are governed by separate regulatory frameworks rather than the merchant banker registration.

Question 42Introduction to Merchant Banking

A merchant banker's certificate of registration is granted by SEBI subject to which primary condition relating to capital adequacy?

  1. Maintaining a minimum net worth as specified in the regulations at all times Correct answer.
  2. Maintaining liquid assets equal to twice the annual fee payable
  3. Holding a minimum paid-up equity capital equal to the net worth
  4. Depositing the entire net worth as a fixed deposit with a scheduled bank

Explanation

SEBI requires a registered merchant banker to maintain the prescribed minimum net worth on a continuous basis, and failure to do so can affect the certificate. The requirement is framed as net worth maintenance, not as a fixed deposit, paid-up capital equivalence, or a multiple of fees.

Question 43Introduction to Merchant Banking

Which of the following best describes the traditional role of a merchant banker in an initial public offering?

  1. Guaranteeing the investor a fixed return on the subscribed shares
  2. Managing the issue, including due diligence, documentation, and coordination with regulators Correct answer.
  3. Providing margin funding to investors who subscribe to the issue
  4. Acting as the depository participant for allotment of shares

Explanation

A lead merchant banker manages the public issue end to end, performing due diligence, preparing offer documents, and coordinating with SEBI and stock exchanges. It does not guarantee returns, perform depository participant functions, or fund investor margins.

Question 44Introduction to Merchant Banking

In the context of merchant banking, what does the term 'underwriting' of an issue primarily involve?

  1. Subscribing to the unsubscribed portion of an issue up to a committed amount Correct answer.
  2. Advising the issuer on the pricing band of the offer
  3. Marketing the issue to institutional investors only
  4. Certifying the issuer's financial statements before filing

Explanation

Underwriting is a commitment by the underwriter to take up securities not subscribed by the public, up to the underwritten amount. Pricing advice, marketing, and financial certification are distinct services that do not constitute the underwriting commitment itself.

Question 45Introduction to Merchant Banking

Which function distinguishes a merchant banker's advisory role in a merger from its role in a public issue?

  1. Valuation of the combining entities and advising on the swap ratio Correct answer.
  2. Allotment of securities through the depository system
  3. Listing of the newly issued securities on a stock exchange
  4. Collection of application money from retail investors

Explanation

In merger and acquisition advisory, the merchant banker assesses the entities' value and advises on the exchange or swap ratio, a distinctly transactional advisory function. Application money collection, allotment, and listing are issue-process activities rather than merger advisory work.

Question 46Introduction to Merchant Banking

A company appoints a merchant banker to advise on a rights issue. Which activity falls within the merchant banker's scope in this assignment?

  1. Assisting in determining the issue price and preparing the letter of offer Correct answer.
  2. Extending loans to shareholders who cannot pay for their rights
  3. Guaranteeing the rights entitlement value to existing shareholders
  4. Acting as the registrar to process the allotment

Explanation

For a rights issue, the merchant banker assists with pricing and prepares the letter of offer as part of issue management. It does not guarantee entitlement value, act as registrar, or lend to shareholders to fund their subscriptions.

Question 47Introduction to Merchant Banking

Which of these is a category of registration for merchant bankers under the SEBI framework?

  1. Category I, permitted to act as lead manager for an issue Correct answer.
  2. Category X, permitted only as an underwriter
  3. Category S, permitted only as a syndicate member
  4. Category A, permitted only as a portfolio manager

Explanation

The SEBI merchant bankers framework uses categories, and Category I entities may carry on the full range of merchant banking activities including acting as lead manager. The other labels do not correspond to merchant banker registration categories.

Question 48Introduction to Merchant Banking

What is the principal purpose of the 'due diligence' exercise performed by a lead merchant banker before filing an offer document?

  1. To verify the accuracy and adequacy of disclosures made in the offer document Correct answer.
  2. To obtain tax clearance for the issuer's promoters
  3. To fix the final listing price of the securities
  4. To confirm that the issuer's shares will rise after listing

Explanation

Due diligence is undertaken so the merchant banker can reasonably assure that the offer document contains true, accurate, and adequate disclosures. It cannot predict post-listing price movement, set the listing price, or substitute for tax clearances.

Question 49Introduction to Merchant Banking

A merchant banker advises a client on a private placement of debentures to a select group of institutional investors. Which service is the merchant banker primarily providing?

  1. Depository participant services
  2. Mutual fund distribution
  3. Capital structuring and placement advisory Correct answer.
  4. Commodity derivative clearing

Explanation

Private placement advisory involves structuring the instrument and arranging the placement with identified investors, which is capital structuring and placement advisory work. Depository, mutual fund distribution, and commodity clearing are separate regulated activities.

Question 50Introduction to Merchant Banking

Which of the following best explains why merchant bankers are described as 'financial intermediaries'?

  1. They settle trades on behalf of stock exchange members
  2. They hold client securities in a demat account as custodians
  3. They insure investors against losses in the primary market
  4. They connect issuers seeking capital with investors willing to supply it Correct answer.

Explanation

Merchant bankers act as intermediaries by bringing issuers and investors together and facilitating capital raising. Custody, trade settlement, and insurance are functions belonging to other regulated entities, not the intermediary role itself.