Primary Markets for NISM certification
The primary market is where companies and governments raise fresh money. This chapter follows an issue from the decision to raise capital, through the rules and the people involved, to allotment and listing.
Operations & MarketsSeries XII64 MCQs4 lessons19 flashcards5 memory tricks
What you'll learn
- What the primary market does and who is involved
Explain the functions of the primary market and the roles of the issue's intermediaries. - Rules for an IPO
Apply the main ICDR eligibility, contribution, lock-in and public shareholding rules. - Pricing, applying and allotment
Compare fixed price and book building, and follow an application through ASBA to allotment. - Rights issues, debt issues and private placements
Describe rights issues, public issues of debt, QIPs and the electronic book for debt.
Concepts explained
Book building
Book building discovers an issue's price from investors' bids within a price band.
What it means
- Issuer sets a price band or floor price.
- Investors bid quantity and price, or choose cut-off.
- Demand is visible during the issue.
- Final cut-off price is where the issue is fully subscribed.
- 5,000 shares offered in a band of ₹120–₹144
- Bids at ₹144 and ₹140 total 3,000 shares; with bids at ₹135, the total reaches 5,000
- Cut-off price = ₹135
Answer: Everyone bidding ₹135 or more pays ₹135
Related terms
- Red herring prospectus: offer document without the final price
- Cut-off option: bidder accepts whatever final price is fixed
Exam tip: Bidders below the cut-off get nothing; those above it still pay only the cut-off price.
ASBA and UPI
ASBA blocks the application money in the investor's own account until allotment instead of sending it to the issuer.
What it means
- Mandatory for all public issue applicants.
- Money keeps earning interest while blocked.
- Debited only for the shares allotted; the rest is unblocked.
- Individuals can use UPI for bids up to ₹5 lakh.
- Bid ₹30,000 for 200 shares
- Allotted 100 shares worth ₹15,000
- ₹15,000 debited, ₹15,000 unblocked
Answer: No refund cheques needed
Related terms
- SCSB: self-certified syndicate bank that offers ASBA
Promoters' contribution and lock-in
Promoters must keep a minimum stake for a minimum time after an IPO, so they have skin in the game.
What it means
- Minimum promoters' contribution: 20% of post-issue capital.
- Locked in for 18 months (3 years if most proceeds fund capex).
- Excess over minimum: 6 months (1 year for capex).
- Other pre-IPO holders: 6 months.
- Minimum contribution = 20% × 500 = ₹100 crore
- That ₹100 crore of shares can't be sold for 18 months
Answer: Promoters stay committed
Related terms
- Skin in the game: owners' own money at risk alongside investors
Green shoe option
A green shoe option lets an issuer over-allot up to 15% more shares and use the money to support the price after listing.
What it means
- Over-allotment up to 15% of the issue size.
- A stabilising agent buys shares if the price falls below the issue price.
- Stabilisation lasts 30 days from listing.
- Issue price ₹100; price falls to ₹95 after listing
- Stabilising agent buys shares in the market with the over-allotment money
- Buying supports the price
Answer: Price stabilised in the first 30 days
Related terms
- Over-allotment: allotting more shares than the base issue size
Memory tricks
Retail ≥ 35%, NII ≥ 15%, QIB ≤ 50%.
Public issue period rules.
Minimum contribution and its lock-in.
Green shoe: up to 15% over-allotment, 30-day stabilisation.
Rights issue period.
Try 3 NISM-style questions
Q1. In a retail category 2 times oversubscribed, an investor who applied for 200 shares will receive about
- 100 shares
- 200 shares
- 400 shares
- 50 shares
Show answer
Answer: (1) 100 shares
200 ÷ 2 = 100 shares, proportionately.
Q2. Under ASBA, the application money
- Is transferred to the company on application
- Stays in the investor's account, blocked until allotment
- Is paid in cash at the exchange
- Is held by SEBI
Show answer
Answer: (2) Stays in the investor's account, blocked until allotment
The amount is blocked and debited only for allotted shares.
Q3. In a fixed price issue,
- The price is announced before the issue opens
- The price is discovered from bids
- Investors must bid within a price band
- The price is set after allotment
Show answer
Answer: (1) The price is announced before the issue opens
Fixed price means the price is known in advance.
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