Primary vs Secondary Market & IPOs

Q1 (10 marks)

Bridge (2): IPO is the first sale of shares by the company to the public (primary market event); once listed, those same shares trade among investors on the exchange (secondary market). Thus the IPO is the one-time crossover point where a share moves from primary issuance to perpetual secondary trading.

Q2 (12 marks)

(a) Subscription multiple [3] Shares demanded = $1{,}20{,}000 \times 15 = 18{,}00{,}000$. Shares available = $4{,}00{,}000$. $\text{Multiple} = \frac{18{,}00{,}000}{4{,}00{,}000} = 4.5\times \text{ (oversubscribed)}$ (demand 1; available 1; ratio 1)

(b) Why not all get a lot + count [4] Minimum allotment = 1 lot = 15 shares. Max lots that can be distributed = $4{,}00{,}000 / 15 = 26{,}666.67 \Rightarrow 26{,}666$ full lots (1 mark: integer floor because a partial lot cannot be allotted). Applicants = 1,20,000 but only 26,666 lots exist ⇒ impossible to give everyone even one lot (2 marks reasoning). Therefore 26,666 applicants receive one lot each (1 mark).

(c) Lottery mechanism [3] When a category is oversubscribed such that even the minimum one lot cannot be given to all applicants, SEBI mandates allotment by a computerised random lottery/draw (1). Every valid applicant is treated equally with equal probability (1); winners get exactly one lot, the rest get full refund/unblock of ASBA funds (1).

(d) Listing gain per lot [2] $(\$134-\$100)\times 15 = \$34 \times 15 = \$510 \text{ per lot}$ (gain per share 1; ×15 = 1)

Q3 (10 marks)

Pseudocode [6] (award for: sorting descending, cumulative aggregation, threshold return)

def discover_cutoff(bids, shares_available):
    # bids: list of (price, quantity)
    # sort by price DESCENDING (highest willingness first)
    bids.sort(key=lambda b: b[0], reverse=True)
    cumulative = 0
    for price, qty in bids:
        cumulative += qty
        if cumulative >= shares_available:
            return price          # highest price at which issue fully subscribed
    return None                   # under-subscribed: no valid cut-off

Marks: correct descending sort (2), cumulative demand aggregation (2), return highest price meeting full subscription (2).

Fixed-price contrast [4]: In a fixed-price issue the price is declared upfront in the prospectus by the issuer/merchant banker; investors simply accept or reject it and full application money is paid at that single price. Demand is only known after the issue closes, whereas book-building discovers the price from the bid book within a band before finalisation.

Q4 (10 marks)

(a) Four DRHP sections [6] — 1.5 each (section + decision):

• Objects of the Issue → how the raised money will be used; decides if capital use is value-creating.
• Risk Factors → business/regulatory/financial risks; decides risk appetite fit.
• Financial Statements / Restated Financials → revenue, profit, margins, debt; decides valuation reasonableness.
• Promoter & Management / Shareholding → who controls the company, promoter holding post-issue; decides governance trust. (Also acceptable: Capital Structure, Legal Proceedings, Industry Overview, Basis for Issue Price.)

(b) Underwriting + red herring [4]:

• Firm-commitment (2): underwriter buys the entire issue and resells, bearing the risk of unsold shares.
• Best-efforts (1): underwriter only agrees to try to sell; unsold portion returns to the issuer, no purchase obligation.
• Red herring / price not fixed (1): a "red herring" prospectus omits the final price/number of shares (price band only); the exact price is set post book-building, hence still preliminary.

Q5 (10 marks)

(i)/(ii) table [8] — 2 marks each:

OFS non-dilution [2]: In an OFS, existing shares merely change hands from promoter to buyer — total share count is unchanged, so EPS/ownership % is not diluted. An FPO fresh-issue creates new shares, increasing total count and diluting existing holders' proportional stake.

Q6 (8 marks)

(a) Anchor investors [4]:

• Purpose: large institutional investors are allotted shares 1 day before the IPO opens, at a fixed price, to build confidence and signal quality/demand to retail (2).
• Lock-in logic: anchor shares carry a mandatory lock-in (part 30 days, part 90 days under current SEBI norms) so anchors cannot immediately dump shares on listing, protecting retail from a supply crash (2).

(b) GMP calc [4]: Implied listing price = 100 + 45 = \145$(1). Expected$= \dfrac{45}{100}\times 100 = 45%$ (1). Why not guaranteed (2): GMP is an unofficial, unregulated price traded in an informal (grey) market before listing; it reflects sentiment/speculation, has no legal backing, can swing sharply, and actual listing price frequently differs.

[
  {"claim":"Retail subscription multiple = 4.5x", "code":"demanded=120000*15; available=400000; result=(demanded/available==Rational(45,10))"},
  {"claim":"Number of applicants getting a lot = 26666", "code":"lots=400000//15; result=(lots==26666)"},
  {"claim":"Listing gain per lot at 134 vs 100 = 510", "code":"result=((134-100)*15==510)"},
  {"claim":"GMP implied listing price=145 and gain=45%", "code":"lp=100+45; pct=Rational(45,100)*100; result=(lp==145 and pct==45)"}
]