Level 4 — ApplicationPrimary vs Secondary Market & IPOs

Primary vs Secondary Market & IPOs

⏱ 60 minutes50 marksprintable — key stays hidden on paper

Level: 4 (Application — novel problems, no hints) Time limit: 60 minutes Total marks: 50

Answer all questions. Show all working. Use ₹ for currency where relevant.

Question 1 — IPO Structure & Fund Flow (10 marks)

"TechNova Ltd" launches an IPO of a total offer size of ₹800 crore. The offer comprises:

A fresh issue of ₹500 crore
An Offer for Sale (OFS) of ₹300 crore by an existing promoter.

The price band is ₹380–₹400, and the company aims to raise capital for expansion.

(a) Explain which portion of the ₹800 crore actually reaches the company's bank account for expansion, and which does not. State the reason. (3)

(b) The promoter's cost of acquisition for the OFS shares was ₹120 per share. If the OFS is fully sold at the cut-off price of ₹400, compute the number of shares the promoter sold and the promoter's gross gain. (4)

(c) A friend argues "this OFS is a primary market transaction because it happens during the IPO." State whether this is fully correct and justify. (3)

Question 2 — Book Building, Allotment & Oversubscription (12 marks)

An IPO uses book building with a price band of ₹90–₹95 and a lot size of 150 shares. The retail category receives applications as follows:

Category	Shares offered	Shares applied
Retail (RII)	30,00,000	1,50,00,000

(a) Calculate the retail oversubscription ratio. (2)

(b) Under SEBI's proportionate/lottery mechanism for retail when oversubscribed, explain in one line how allotment is decided and estimate the probability that a single-lot applicant receives an allotment. (3)

(c) An applicant bids for 3 lots at the cut-off price. The IPO discovers a cut-off price of ₹95. Compute the amount blocked in the applicant's account at application (ASBA) and the final amount debited if allotted 1 lot. (4)

(d) Contrast how the "cut-off price" option would behave differently in a fixed-price IPO versus this book-built IPO. (3)

Question 3 — Listing Gains & Grey Market (10 marks)

An IPO is priced at ₹250 (cut-off). On listing day:

The Grey Market Premium (GMP) one day before listing was ₹75.
The stock actually opens at ₹340 and closes the listing day at ₹298.

An investor was allotted 2 lots; lot size is 60 shares.

(a) Compute the theoretical listing price implied by GMP and the listing-day opening percentage gain (actual). (4)

(b) Compute the investor's profit if they sold at the opening price versus at the closing price. (3)

(c) Explain why GMP is not a reliable predictor, referencing the difference between the GMP-implied price and actual open here. (3)

Question 4 — Fund-Raising Route Selection (10 marks)

For each scenario, identify the most appropriate route from: {IPO, FPO, OFS, QIP, Private Placement, Anchor Investor allocation}. Justify each in one sentence.

(a) An already-listed company wants to raise fresh capital quickly from institutional buyers without a lengthy prospectus process. (2)

(b) A listed company's government promoter must reduce its stake to meet minimum public shareholding norms, using the stock exchange mechanism. (2)

(d) Large institutional investors are allotted shares one day before the IPO opens to the public, with a lock-in. (2)

(e) A listed company issues additional shares to the public to fund a new plant. (2)

Question 5 — DRHP Interpretation (8 marks)

You are handed the following extract from a company's DRHP:

"Objects of the Issue: (i) Repayment/prepayment of borrowings — ₹200 cr; (ii) General corporate purposes — ₹90 cr. The issue is 100% Offer for Sale. Risk Factor: The company has reported negative operating cash flow in two of the last three financial years."

(a) Identify the internal contradiction between "Objects of the Issue" and "100% Offer for Sale." Explain. (3)

(b) State two concrete red flags an investor should weigh from this extract. (3)

Answer keyMark scheme & solutions

Question 1 (10)

(a) Only the fresh issue of ₹500 crore reaches the company. (1) Fresh issue = new shares created, proceeds go to the company for expansion. (1) The ₹300 crore OFS is the sale of existing shares by the promoter, so that money goes to the selling shareholder, not the company. (1)

(b) Shares sold = ₹300 cr ÷ ₹400 = 75,00,000 shares. (2) Gain per share = ₹400 − ₹120 = ₹280. (1) Gross gain = 75,00,000 × ₹280 = ₹210 crore. (1)

(c) Not fully correct. (1) In an OFS, no new shares are issued — ownership merely transfers from promoter to public. This is a secondary-market-type transfer of existing shares even though it is bundled in the IPO. (1) Only the fresh-issue portion is a true primary-market transaction. (1)

Question 2 (12)

(a) Oversubscription = 1,50,00,000 ÷ 30,00,000 = 5 times. (2)

(b) When retail is oversubscribed, allotment is by lottery/draw of lots (each applicant is either allotted a minimum of 1 lot or nothing — proportionate at lot level). (1) Probability ≈ shares offered ÷ shares applied = 30,00,000/1,50,00,000 = 1/5 = 20% chance. (2)

(c) Cut-off bid ⇒ applicant agrees to pay the discovered price. Bid = 3 lots × 150 = 450 shares. Amount blocked at application (at ceiling ₹95 since cut-off charged at highest) = 450 × ₹95 = ₹42,750. (2) Allotted 1 lot = 150 shares × ₹95 = ₹14,250 debited; remaining ₹28,500 unblocked. Final debited = ₹14,250. (2)

(d) In a fixed-price IPO there is a single fixed price — "cut-off" as a concept does not apply since there is no price band/discovery; the applicant simply pays the fixed price. (1.5) In a book-built IPO, choosing cut-off means accepting whatever price is discovered within the band, ensuring the bid stays valid. (1.5)

Question 3 (10)

(a) GMP-implied listing price = ₹250 + ₹75 = ₹325. (2) Actual opening gain % = (340 − 250)/250 × 100 = 36%. (2)

(b) Shares held = 2 × 60 = 120. Sold at open: (340 − 250) × 120 = ₹10,800. (1.5) Sold at close: (298 − 250) × 120 = ₹5,760. (1.5)

(c) GMP is an unofficial, unregulated over-the-counter estimate. (1) Here GMP implied ₹325 but the stock actually opened at ₹340 — the divergence shows GMP failed to predict the actual price. (1) It is driven by sentiment/speculation and can be manipulated, so it is not reliable. (1)

Question 4 (10)

(a) QIP — a listed company raising fresh capital fast from Qualified Institutional Buyers without a full prospectus. (2)

(b) OFS (Offer for Sale) — exchange-based mechanism used by promoters to dilute stake to meet minimum public shareholding. (2)

(c) Private Placement — an unlisted company raising from a small select group of investors, not the public. (2)

(d) Anchor Investor allocation — institutional investors get allotment a day before the IPO with lock-in, boosting confidence. (2)

(e) FPO (Follow-on Public Offer) — an already-listed company issuing additional shares to the public. (2)

Question 5 (8)

(a) A 100% OFS raises no money for the company — proceeds go to selling shareholders. So the stated "Objects of the Issue" (repaying company borrowings and general corporate purposes) cannot be funded by an OFS. (2) The objects section contradicts the OFS structure. (1)

(b) Red flags (any two, 1.5 each): (i) Negative operating cash flow in two of the last three years — poor cash generation. (ii) Large debt repayment need (₹200 cr) indicating leverage/financial stress; also the fact that promoters are exiting via OFS may signal reduced confidence. (3)

(c) Called "red herring" because it is a preliminary prospectus filed with SEBI that omits the final issue price (or price band) and exact number of shares/total issue size, which are added later. (2)

[
  {"claim":"Q1b: OFS shares sold and promoter gross gain", "code":"shares=300e7/400; gain=shares*(400-120); result=(shares==7500000) and (gain==2100000000)"},
  {"claim":"Q2a: oversubscription ratio = 5", "code":"ratio=15000000/3000000; result=ratio==5"},
  {"claim":"Q2c: blocked amount and final debit", "code":"blocked=3*150*95; final=150*95; result=(blocked==42750) and (final==14250)"},
  {"claim":"Q3a: GMP implied price and opening gain percent", "code":"implied=250+75; gain=(340-250)/250*100; result=(implied==325) and (gain==36)"},
  {"claim":"Q3b: profit at open vs close for 120 shares", "code":"open_p=(340-250)*120; close_p=(298-250)*120; result=(open_p==10800) and (close_p==5760)"}
]