Part A
Q1: Who is Merchant banker? Elucidate the services rendered by merchant bankers.
Q2: Discuss the role of registrars in the new issue. State the obligations & responsibilities of an underwriter.
Q3: Explain Book Building Mechanism in detail.
Q4: Comment over role of financial services in economic development & present evolution of financial services sector.
Q5: Write short notes on:
Q5a: Green shoe option
Q5b: Offer for sale
Q5c: Private Placement
Q5d: Red Herring Prospectus
Q6. Discuss the major functions and services rendered by merchant bankers as regards credit syndication.
Q7. Comment over performance evaluation of Merchant Bankers.
Q8. Write a detailed note on pre-issue management activities.
Case
Reliance Power Ltd has announced that the Board of Directors of the Company at its meeting held on February 24, 2008, has approved a proposal for issuing free bonus shares to all categories of shareholders, excluding the promoter group ( comprising of reliance Energy Ltd. And the ADA Group), in the ratio of 3 shares for every 5 shares held, subject to necessary approvals. The proposed bonus offering will result in reduction of the cost of reliance power shares below the IPO price as follows: Rs 269 per share for retail investors, 40% lower than the IPO price of Rs 430. Rs 281 per share for other investors, 37% lower than the IPO price of Rs 450. In a related development, Mr. Anil D Ambani, chairman, Reliance ADA group, on February 24, 2008 simultaneously announced a voluntary contribution of 2.6% of his shareholding in Reliance Power to Reliance energy Ltd., to protect the Company from any dilution of its existing 45% stake in Reliance Power, as a result of the bonus proposal. Accordingly, Reliance Energy’s stake in Reliance Power will be maintained at the existing level of 45%, and the revised shareholding pattern of Reliance Power will be as follows:
Previous Existing
Anil D Ambani 45% 40%
Reliance Energy 45% 45%
Public shareholding 10% 15%
The reduction of Mr. Ambani’s shareholding in Relaince Power by 5% from 45% to 40%, represents a contribution of nearly Rs 5,000 crore (US$ 1.2 billion) by him, in favor of nearly 6 million investors in Reliance Energy and Reliance Power. Coomenting on the move, Mr. Ambani said, “I have been personally concerned by the notional losses arising to millions of long term investors in reliance Power, as a result of a dramatic adverse change in sentiment in global and domestic capital markets, subsequent to the pricing of our IPO.
An over view of Reliance Power IPO:
Reliance Power IPO has been issued by Reliance Power Limited. Reliance Power IPO was issued on 15th January, 2008 and closed on 18th January, 2008. Reliance Power Ltd Company is planning to generate capital worth Rs. 11,700 crores through the IPO. This makes it the largest IPO in the country as on 17th January, 2008. the price band of the equity shares of Reliance Power IPO has been fixed at Rs. 405-450 per equity share. The total size of Reliance Power IPO is around 26 crores equity shares. Reliance Power IPO will be listed on the national stock exchange (NSE) and also on the Bombay Stock Exchange (BSE). The lead bankers of Reliance Power IPO are Enam securities, Kotak Mahindra capital Co, ABN Amro Rothschild, ICICI securities, JP Morgan chase & Co, UBS AG.
Reliance Power IPO Analysis
Reliance Power Ltd. IPO details:
Price band: Rs. 405-450 per share
Issue opened between: January 15-18, 2008
Book running lead managers: Kotak, UBS, Enam, I-sec and others
To list on: NSE & BSE
Market cap post-listing: Rs. 1017 billion (based on the cap price)
Highlights:
Reliance Power Limited (Relaince Power), part of RADAG has been set up to develop, construct and operate power projects domestically and internationally. It aims to develop 13 power projects with an aggregated generation capacity of 28, 200 MW.
Suggestion:
Open 138.00
High 141.90
Low 133.05
Last price 135.05
Please go through the Reliance Power IPO case study and give your conclusion on the following points:
Q1: Understand the affect of Reliance Power IPO on Indian share market.
Q2: Factors responsible for the fall in price of Reliance Power equity.
Q3: Perception of a retail investor toward Reliance Power before listing of IPO.
Part C
1. The securities that a fund invests in depend upon its ________.
a. Fund value
b. Time period
c. Investment objective
d. Issuing company
2. The type of expenses that can be charged to a fund and the limit is decided by _______.
a. Issuing company
b. SEBI
c. Merchant banker
d. underwriter
3. A mutual fund cannot have ________ liabilities on its balance sheet.
a. Short term
b. Long term
c. Medium term
d. None of the above
4. Mutual funds have lower risks because of ________ & _______.
a. Portfolio diversification
b. Professional management
c. Portfolio diversification & Professional management
d. None of the above
5. The first contribution of equity capital is made by the___________.
a. Issuer company
b. Promoters
c. Leas Manager
d. Registrars
6. A company has to follow the guidelines laid down by _______for the issue of capital.
a. Issuer company
b. Merchant banker
c. SEBI
d. All of the above
7. A/An ____________ is a method of issue of shares to the public where the money raised does not add to the equity of the company.
a. Fresh issue
b. Book built method
c. Offer for sale
d. IPOs
8. The shares have to be ___________ after a public issue of shares.
a. Listed
b. Unlisted
c. Both of the above
d. None of the above
9. A ________ issue can be made only by a listed company.
a. FPOs
b. IPOs
c. Private Placement
d. None
10. The purpose of financial markets is to:
a. Increase the price of common stocks
b. Lower the yield on bonds.
c. Allocate savings efficiency
d. Control inflation.
11. Both Debentures and Term Finance Certificates are usually issued by:
a. Public Companies
b. Private Companies
c. Listed Companies
d. Non listed companies
12. Who decides the date of the issue?
a. Issuer company
b. SEBI
c. Banker to issue
d. Lead manger
13. Who decides the Price Band?
a. Company with help of lead managers
b. SEBI
c. Lead manager only
d. Issuer company
14. If you buy stock from a corporation newly-formed by your sibling when the firm makes its initial public offering (IPO), you would be engaged in:
a. direct primary financing.
b. long-term debt financing.
c. pari-mutuel financing.
d. short term equity financing.
15. A corporation acquires new funds only when its securities are sold in the:
a. secondary market by an investment bank.
b. primary market by an investment bank.
c. international money market by a stock exchange broker
d. secondary market by a commercial bank.
16. Security transactions that do not yield flows of funds to the issuers of the financial instruments traded are financial investments involving:
a. brokerage services by investment bankers.
b. initial public offerings [IPOs]
c. secondary markets.
d. new issues of seasoned instruments.
17. Financial instruments issued by government agencies or corporations that promise to pay certain amounts of money to the holder on specific future dates are called:
a. Liens.
b. Preferred stock.
c. Chattel.
d. bonds.
18. Book Building is a
a. Price Discovery mechanism
b. Secondary market operation
c. Offer of shares to public
d. None of the above
19. A private placement of shares by a listed company is called a ____________ of shares.
a. Fresh issue
b. Private placement
c. Preferential allotment
d. Fixed price issue
20. Privately placed shares are locked-in for ______ .
a. 10 months
b. 12 months
c. 6 months
d. 3 months
21. A QIP can be only made by a company that has been listed on a stock exchange for ________.
a. 5 years.
b. 1 years.
c. 3 years
d. 2 years
22. A _______ issue of shares is made to existing share holders.
a. Fresh issue
b. Right issue
c. Both
d. Offer for sale
23. A 3:4 rights issue of shares means the investor is entitled to
_____________.
a. Three shares for every four shares held
b. Four shares for every three shares held
c. Three shares for every seven shares held
d. None of the above
24. The due diligence certificate is signed by ____________.
a. Registrar
b. Banker to issue
c. Issuer company
d. Lead manger
25. company must make a minimum public issue of __________
a. 15% of the post issue capital
b. 25% of the post issue capital
c. 50% of the post issue capital
d. 10% of the post issue capital
26. A company has to refund the monies collected in a public issue if the issue does not garner _______ subscription in the issue.
a. 50%
b. 70%
c. 90%
d. 75%
27. SEBI’s rules for underwriting and minimum subscription does not apply to __________
a. Private placement
b. IPO
c. FPO
d. Offer for sale
28. The two ways a company can conduct a public issue of shares are _______ and ________.
a. Private Placement & fixed price issue
b. Book built issue & fixed price issue
c. Fixed price issue & Book built issue
d. Right issue & private placement
29. Changes in stock prices
a. affect people’s wealth and their willingness to spend.
b. affect firm’s decisions to sell stock to finance investment spending.
c. are characterized by considerable fluctuations.
d. all of the above.
30. Financial markets and institutions
a. involve the movement of huge quantities of money.
b. affect the profits of businesses.
c. affect the types of goods and services produced in an economy.
d. do all of the above.
31. Markets in which funds are transferred from those who have excess funds available to those who have a shortage of available funds are called
a. commodity markets.
b. fund-available markets.
c. derivative exchange markets.
d. financial markets.
32. Economists group commercial banks, savings and loan associations, credit unions, mutual funds, mutual savings banks, insurance companies, pension funds, and finance companies together under the heading financial intermediaries. Financial intermediaries
a. Act as middlemen, borrowing funds from those who have saved and lending these funds to others.
b. produce nothing of value and are therefore a drain on society’s resources.
c. help promote a more efficient and dynamic economy.
d. do only (A) and (C) of the above.
33. Economists group commercial banks, savings and loan associations, credit unions, mutual funds, mutual savings banks, insurance companies, pension funds, and finance companies together under the heading financial intermediaries. Financial intermediaries
a. Act as middlemen, borrowing funds from those who have saved and lending these funds to others.
b. Play an important role in determining the quantity of money in the economy.
c. help promote a more efficient and dynamic economy.
d. do all of the above.
34. Banks are important to the study of money and the economy because they
a. Provide a channel for linking those who want to save with those who want to invest.
b. have been a source of rapid financial innovation that is expanding the alternatives available to those wanting to invest their money.
c. are the only financial institution to play a role in determining the quantity of money in the economy.
d. do only (A) and (B) of the above.
35. Capital Adequacy for Category II Merchant banker is:
a. Rs. 5 crore
b. Rs. 50 Lakh
c. Rs. 20 Lakh
d. Nil
36. Right issue is:
a. issue of securities by issue of prospectus to the public
b. Securities are issued through some selected investors.
c. Selling securities in the primary market by issuing rights to the existing shareholders.
d. None of the above
37. Book Building Process is completed with the help of a
a. Book runner
b. Underwriter
c. Registrar
d. Lead manager
38. In a book built issue a ______ investor can bid at cut-off price.
a. QIBs
b. Employees of the issuer company
c. Retail
d. Financial institution
39. Financial intermediation is, broadly, the process of:
a. lending money out at interest.
b. spending funds faster than revenues are acquired.
c. channeling funds from savers to dissavers, and to investors in economic capital.
d. buying and selling currencies in international money markets.
40. A financial system’s major economic purpose is to:
a. channel savings to more efficient and productive uses.
b. print money to support the government.
c. determine the prime nominal rate of interest.
d. increase the value of the money multiplier.
e. ensure that entrepreneurs make economic profits
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