FCCB

1. [Module] Suppose a company ‘A’ issues bonds with following terms –

Issue Price of the Bond Rs. 1000
Coupon rate 2%
Maturity 2 years
Convertible into equity shares @ Rs.800 per share

Now suppose an investor subscribes to 4 of these bonds. Thus, the total investment is
Rs.4000. On this investment, he is entitled to get an interest @ 2% for 2 years. On the
maturity date, i.e., after 2 years, the investor will have an option – to either claim full
redemption of the amount from the company or get the bonds converted into fully paid equity
shares @ Rs. 800 per share. Thus, if he goes for the conversion, he will be entitled to 5
(4000/800) equity shares. The choice he makes will depend on the market price of the share
on the date of conversion.

If the shares of the company ‘A’ is trading at lower than Rs.800, let’s say Rs.500, the investor
will be better off by claiming full redemption of his bonds and buying the shares from the
market. In this case, he will get 8 (4000/500) equity shares as against 5 which he was getting
on conversion. Similarly, if the market price of the share is higher than Rs. 800, the investor
will benefit by getting its shares converted. Thus, on the day of maturity, an investor will
seek full redemption if the conversion price is higher than the current market price, and will
go for conversion if the conversion price is less than the current market price.

2. [June 2021] Aruna Steel Ltd. issued Bonds with the following terms:
Issue price of the Bond : `1000
Coupon rate : 3%
Maturity : 5 years
Convertible into equity shares @ `500 per share
Ivan had purchased 20 bonds. At the time of maturity, the market price of the
equity shares was `400.
What are the options available to Ivan on the maturity date and which option he
should prefer?

Ivan purchased 20 bonds @`1000 per bond

Total amount invested `20,000. He will get interest for 5 years on the date of maturity.
After five years, he has the following options:
i. He may claim redemption and get the bonds converted into fully paid equity
shares@ 500 each.
Thus on conversion, he will get 40 equity shares (`20000 / `500)
ii. As the equity shares are also traded in stock exchange, he may buy from
market at the prevailing market price of `400. Therefore, from the maturity
proceed of `20000, he can buy 50 equity shares (`20000/`400) from the market.
It is clear from the above two options; Ivan should choose option (ii) as he will get
more equity shares than conversion from company.
 BOOK BUILDING:
1. [Module]

2. [June 2021]
 FUTURES AND OPTIONS

1. [Module] If an investor is of the opinion that a particular stock say “Ray

Technologies” is currently overpriced in the month of February and hence expect that
there will be price corrections in the future. However, he doesn’t want to take a chance,
just in case the prices rise. So, the best option for the investor
would be to take a Put option on the stock.
Let’s assume the quotes for the stock are as under:
Spot Rs. 1040
May Put at 1050 Rs.10
May Put at 1070 Rs. 30
So, the investor purchases 1000 “Ray Technologies” Put at strike price of Rs.1070 and
Put price of Rs. 30/-. The investor pays Rs. 30,000 as Put premium.

The position of investor in two different scenarios have been discussed below:
1. May Spot price of Ray Technologies = Rs. 1020
2. May Spot price of Ray Technologies = Rs. 1080
In the first situation you have the right to sell 1000 “Ray Technologies” shares at Rs.1,070/-
the price of which is Rs. 1020/-. By exercising the option, the investor earns Rs. (1070-1020)
=Rs.50 per Put, which amounts to Rs. 50,000/. The net income in this case is Rs. (50000-
30000) =Rs. 20,000.

In the second price situation, the price is more in the spot market, so the investor will not sell
at a lower price by exercising the Put. He will have to allow the Put option to expire
unexercised. In the process the investor only loses the premium paid which is Rs. 30,000.

While buyer of an options has limited risk (Premium Amount), seller of an option has very
high rick (Market Price-Strike Price or Strike Price - Market Price), as the case may be,
depending on whether it is a call or put option.

2. [Dec 2018] Naman had executed following trades on Gama Ltd. stock:
(i) Purchased one 3-month call option with a premium of `25 at an exercise
price of `530.
(ii) Purchased one 3-month put option with a premium of `5 at an exercise
price of `430.
The lot size is 100 share per lot and the current price of Gama Ltd. stock is
`500. Determine Naman’s profit or loss, if the price of Gama Ltd. stock after 3
months is:
(a) `500
(b) `350.

(i) Total premium paid on purchasing a call and put option:

= (`25 per share x 100 shares) + (`5 per share x 100 shares)
In this case, Naman neither exercises the call option nor the put option, as both
will result in a loss for him.
Ending value: ` - 3000 + Nil gain
i.e., Net Loss: `3000
(ii) The price of stock is below the exercise price of the call, the call will not be
exercised but put is valuable and is exercised.
Total premium paid: `3000 is calculated above
Ending value: ` - 3000 + [(`430 - `350) x 100 shares
Net Gain: ` 5000

3. [June 2019] (a) What are the Option contracts? You are required to compute the
profit/loss for each investors in below option contracts:
(i) Mr. X writes a call option to purchase share at an exercise price of `60 for
a premium of `12 per share. The share price rises to `62 by the time the
option expires.
(ii) Mr. Y buys a put option at an exercise price of `80 for a premium of `8.50
per share. The share price falls to `60 by the time the option expires.
(iii) Mr. Z writes a put option at an exercise price of `80 for a premium of `11 per
share. The price of the share rises to `96 by the time the option expires.
(iv) Mr. XY writes a put option with an exercise price of `70 for a premium of `8
per share. The price falls to `48 by the time the option expires.
4. [Dec 2020] The Nifty Index was trading at 11025 on 1st February, 2019 on NSE. The
put option of 10800 with expiry date of 28th February, 2019 was available at `50 per lot
and the call option of 11300 with same expiry date was available at `30 per lot. The size
of one lot of Nifty is 75.
Ganesh who is regular trader in stock market purchased 2 lots of put options of 10800
and one lot of call option of 11300. On 22nd February, 2019, the Nifty Index was trading
at 10850. Ganesh decided to square off all these transactions.
At the time of squaring off, the call option of 10800 could be sold at `80 and put option
could be sold at `5.
Calculate the Net gain/loss from this transaction considering the transaction charges
including brokerage is fixed at `100 per lot (buy or sale).
5. [June 2021] Akshay buys 500 shares of PQR Limited @ `210 per share on the stock
exchange platform. In order to hedge the position, he sells 300 futures of
PQR Limited @ `195 each. Due to fall in the share and futures price by 5%
and 3% respectively on next day, Akshay closes his position by counter
transactions. Find out his profit or loss.

Profit or loss in case of buying 500 shares of PQR Ltd.

Buying Cost = 500 x ` 210 = `1,05,000
Selling price = 500 x [`210 – (5% of ` 210)] = `99,750
Loss= (`1,05,000 – `99,750) = `5,250
Profit or Loss in case of Future 300 shares of PQR Ltd.
Selling Value= 300 x `195 = `58,500
Buying Value = 300 x [`195 – (3% of `195)] = `56,745
Profit = (`58,500 – `56745) = `1,755
Net Loss = `5,250 –`1,755 = `3,495

GREEN SHOE OPTION

1. [Dec 2018] A listed company, Nishan Hitech Ltd. issued 10 lakh equity shares at a
price of `150 per share. The company provided Green shoe option for stabilizing the
post listing price of the shares. On the day of listing of shares, the news of trade war
between the two developed countries flashes and the price of shares of company fall to
`110. Decide how many shares can be purchased by the stabilizing agent to control the
price? State the provisions for balance money lying in the special account for green shoe
option.

As per regulation 45 (1) of the SEBI (ICDR) Regulations, 2009, the maximum number
of securities that may be borrowed for the purpose of allotment or allocation of securities
in excess of issue size shall not be more than 15% of the issue size. Therefore stabilizing
agent can purchase only 1.5 lakh equity shares to control the price.
The stabilizing agent shall remit the monies with respect to the specified securities
allotted to the issue from the special bank account known as GSO Bank A/c. Any
money left in the special bank account after remittance of monies to the issuer for
securities allotted and deduction of expenses incurred by the stabilizing agent for the
sterilization process shall be transferred to the Investor Protection and Education Fund
established by the SEBI and the special bank account shall be closed soon thereafter.

2. [Dec 2020] Raman Ltd. issued 50 Lakh equity shares at a price of `200 per share. The
company provided Green Shoe Option for stabilizing the post listing price of the shares.
The issue was oversubscribed and it was decided that stabilizing agent would borrow
maximum number of shares permitted by SEBI (ICDR) regulations.
Due to rise in price during Green Shoe Option period, only 5 Lakh shares could be
bought back at the price of `180. You are required to :
(i) Calculate the number of shares that the stabilizing agent needs to borrow in
this case at the time of allotment and explain the same with relevant
provisions.
(ii) Explain the responsibility of Issuer Company in the above case with respect
to shortfall while exercising Green Shoe Option.
(iii) Calculate the amount if any, to be transferred to Investor Protection and
Education Fund.

(i) As per SEBI (ICDR) Regulations, 2018, the maximum number of shares that
can be borrowed by the stabilizing agent shall not be in excess of 15% of the
issue size.
In the given case, stabilizing agent can borrow 7.5 Lakh shares (15% of 50 Lakh
shares).
(ii) The issuer company would allot the differential 2.5 Lakhs shares into the Green
Shoe Demat Account to cover up the shortfall, and the Stabilising Agent would
discharge his obligation to the lending shareholder(s) by returning the 7.5 Lakhs
shares that had been borrowed from them.
The issuer company would need to apply to the exchanges for obtaining listing/
trading permissions for the incremental shares allotted by them, pursuant to the
Green Shoe mechanism.
(iii) The Amount which should be transferred to Investor Protection and Education
Fund will be calculated as follows:
= 5,00,000 (200-180) = `1,00,00,000

3. [June 2021] Good Luck Finance Ltd., a listed company issued 20 lakh equity shares
of `180 each. The Company provided Green Shoe Option and Nishan was nominated
as Stabilising Agent. On the date of listing, Corona Virus threat spread across the globe.
Consequently, post listing, the share price of the company falls to `150.
From the above:
(i) Compute the quantum of shares that can be bought by Nishan.
(ii) State the provisions for balance of shares lying in the special account for
Green Shoe Option.

Green Shoe Option is a post listing price stabilising mechanism. Good Luck Finance
Ltd. issued 20 lakh equity shares@`180 each. As per SEBI (ICDR) Regulations, 2018,
the maximum number of securities that can be borrowed for the purpose of allotment/
allocation of securities in excess of issue size shall not be more than 15% of the issue
size.
Hence, Nishan (Stabilising agent) can purchase 3,00,000 equity shares (15% of
20,00,000 equity shares) to stabilise the price.
Having bought back all of the 300000 equity shares, these shares would be temporarily
held in a special depository account with the depository participant (Green Shoe Demat
Account), and would then be returned back to the lender shareholders, within a maximum
period of two days after the stabilisation period.
Any surplus lying in the Green Shoe Escrow Account would then be transferred to
the Investor Protection and Education Fund established by SEBI.

4. [Module] Consider a company planning an IPO of say, 100,000 shares, at a book-built

price of Rs. 100/-, resulting in an IPO size of Rs. 100,00,000. As per the ICDR
Regulations, the over-allotment component under the Green Shoe mechanism could be
up to 15% of the IPO, i.e. up to 15,000 shares, i.e. Green Shoe shares. Prior to the IPO,
the stabilising agent would borrow such number of shares to the extent of the proposed
Green Shoe shares from the pre-issue shareholders. These shares are then allotted to
investors along with the IPO shares. The total shares issued in the IPO therefore stands
at 115,000 shares. IPO proceeds received from the investors for the IPO shares, i.e.
Rs.100,00,000–100,000 shares at the rate of Rs.100 each, are remitted to the Issuer
Company, while the proceeds from the Green Shoe Shares (Rs.15,00,000/-, being 15,000
shares x Rs.100/-) are parked in a special escrow bank account, i.e. Green Shoe Escrow
Account. During the price stabilisation period, if the share price drops below Rs.100,
the stabilising agent would utilise the funds lying in the Green Shoe Escrow Account to
buy these back shares from the open market. This gives rise to the following three
situations:
– Situation #1 - where the stabilising agent manages to buyback all of the Green Shoe
Shares, i.e.,15,000 shares;
– Situation #2 - where the stabilising agent manages to buyback none of the Green Shoe
Shares;
– Situation #3 - where the stabilising agent manages to buy-back some of the Green
Shoe Shares, say 10,000 shares.

Let us examine each of these situations separately:

Situation #1 – Where all Green Shoe Shares are bought back: In this situation, funds in the
Green Shoe Escrow Account (Rs.15,00,000, in this case) would be deployed by the
stabilising agent towards buying up shares from the open market. Given that the prices
prevalent in the market would be less than the issue price of Rs. 100, the stabilising agent
would have sufficient funds lying at his disposal to complete this operation. Having bought
back all of the 15,000 shares, these shares would be temporarily held in a special depository
account with the depository participant (Green Shoe Demat Account), and would then be
returned back to the lender shareholders, within a maximum period of two days after the
stabilisation period.

Situation #2 – Where none of the Green Shoe Shares are bought back: This situation would
arise in the (very unlikely) event that the share prices have fallen below the Issue Price, but
the stabilising agent is unable to find any sellers in the open market, or in an event where the
share prices continue to trade above the listing price, and therefore there is no need for the
stabilising agent to indulge in price stabilisation activities.
In either of the above-said situations, the stabilising agent is under a contractual obligation to
return the 15,000 shares that had initially been borrowed from the lending shareholder(s).
Towards meeting this obligation, the issuer company would allot 15,000 shares to the
stabilising agent into the Green Shoe Demat Account (the consideration being the funds lying
the Green Shoe Escrow Account), and these shares would then be returned by the stabilising
agent to the lending shareholder(s), thereby squaring off his responsibilities.

Situation #3 – Where some of the Green Shoe Shares are bought back, say 10,000 shares:
This situation could arise in an event where the share prices witness a drop in the initial
stages of the price stabilisation period, but recover towards the latter stages.
In this situation, the stabilising agent has a responsibility to return 15,000 shares to the
lending shareholder(s), whereas the stabilising activities have yielded only 10,000 shares.
Similar to the instance mentioned in Situation #2 above, the issuer company would allot the
differential 5,000 shares into the Green Shoe Demat Account to cover up the shortfall, and
the Stabilising Agent would discharge his obligation to the lending shareholder(s) by
returning the 15,000 shares that had been borrowed from them.

Both in Situation #2 and #3, the issuer company would need to apply to the exchanges for
obtaining listing/ trading permissions for the incremental shares allotted by them, pursuant to
the Green Shoe mechanism.

Any surplus lying in the Green Shoe Escrow Account would then be transferred to the
Investor Protection and Education Fund established by SEBI, as required under ICDR
Regulations and the account shall be closed thereafter.

WARRANTS

1. If the conversion price of the warrant is Rs. 70/-and the current market price is Rs.110/-,
then the investor will convert the warrant and enjoy the capital gain of Rs.40/-. In case the
conversion is at Rs.70/- and the current market price is Rs.40/-, then the investor will simply
let the warrant lapse without conversion.

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