Chapter 8: (3 marks) Financial Markets

Question 1

The FCA is responsible for the UK Listing Authority

What is this?

Answer 1

This establishes the requirements that need to be met by companies looking to list on the London Stock Exchange (LSE).

Question 2

8.1.3: What is the UK Corporate Governance Code

Question 3

To remember for exam:

Answer 3

Directors of FTSE 350 companies to be re-elected annually.

Boards to be evaluated every 3 years.

For any transactions made on a London-based exchange over and above £10,000 then a PTM levy of £1.00 is charged.

Question 4

8.1.4: Panel on Takeovers and Mergers (POTAM)

What is it?

The code comprises 6 principles. Make sure you learn these for the J12 exam!

Answer 4

Panel on Takeovers and Mergers ensure the fair treatment of shareholders in the event of a takeover or merger.

POTAM are an independent body whose main role is to regulate and monitor any takeovers to ensure they comply with the Takeover Code.

Question 5

8.1.5: Exchange membership and rules

Exchanges in the UK must be recognised by the FCA and assessed as being ‘fit and proper’

Answer 5

A similar requirement exists for clearing houses that must be recognised by the PRA.

Question 6

8.1.6: Trade associations and professional bodies

Firms need to be authorised by the FCA if they are conducting regulated activities within the financial services sector.

Answer 6

To conduct regulated business without proper authorisation is known as a ‘contravention of the general prohibition’.

Question 7

What is The International Capital Market Association (ICMA)

Answer 7

It is a self-regulatory organisation that represent the interests of banks, asset managers, exchanges, law firms and other advisers.

Question 8

8.2: Issuing Equities

What is the primary market

What is the secondary market

Answer 8

The stock exchanges act in 2 ways: the primary market and the secondary market.

Primary Market = Where shares/bonds are first issued by companies, and is where the company raises the capital

Secondary Market = Where securities can be traded.

Question 9

Being listed or quoted on the LSE.
Floating on the stock market.
Going public.
An Initial Public Offering (IPO).

What do all these have in common?

Answer 9

Where a company decides to list on an exchange

Question 10

Why do companies decide to list in the first place?

Answer 10

There are several reasons.

Cash: they get to raise money that they need for expansion or development costs without having to pay it back.

Profile: it raises the profile of the company if they are listed on an exchange. Even more so if they become part of the elite FTSE 100 companies.

Liquidity: it improves the liquidity of the company’s shares as there is now a marketplace where it is easy to buy and sell.

Value: it places a value on the company.

Employees: it enables the company to offer shares schemes to employees which helps to incentivise them.

Takeovers: it increases the company’s ability to acquire shares in other companies with the ultimate aim of a takeover.

Question 11

When a company decides to float (list on an exchange) they typically follow a 5 step process

Get advice
List criteria
Types of IPO
Offer Process
Subsequent Issues

Answer 11

8.2.2: Get advice

A company approaches a ‘sponsor’ which is an approved stock broker or investment bank. It is their job to ensure that the company is suitable for listing and that they meet the requirements that are set out by the UKLA

The company also employs a broker
Their job is to liaise with investors and help set an initial price

The sponsor and the broker may well be the same company. Their role does not stop at the IPO stage. They will continue to ensure the company meets their continuing obligations with the exchange and ensure liquidity in the shares

Question 12

8.2.3: Listing criteria

To list on the main market of the LSE, firms must apply to the UKLA to be admitted to the Official List and to the LSE to be admitted to the Main Market.

Firms can choose either a premium listing or a standard listing. (there are more stringent requirements for a premium listing than for a standard listing.)

What is the difference?

Question 13

Requirements

Minimum market capitalisation of £30 million (£700,000 for closed- or open-ended investment companies).
Minimum 10% shares available to the public (known as the free float).
No one shareholder can have > 30% of the voting rights.
Three years of audited accounts.
Shareholders must be given pre-emptive rights for any further issuance of shares (unless a special resolution has been passed).
For equity listings, an FCA authorised sponsor must be appointed.

(Regardless of a premium or standard listing on the LSE, firms must comply with all of the above requirements to list on the LSE. It is essential that you learn these, as they do come up frequently in the J12 exam.)

These requirements are pretty hefty! For a small company that is looking to list its shares, this may be nigh on impossible. This is where the AIM market comes in.

Question 14

What is the AIM market?

The AIM market (formerly the Alternative Investment Market) enables smaller companies to list their shares without the onerous requirements that are needed for a listing on the LSE.

Answer 14

Firms need:

No minimum market capitalisation.
No prior trading history.
No minimum free float.

Question 15

LSE listing requirements

AIM listing requirements

Answer 15

AIM =
No minimum market capitalisation.
No prior trading history.
No minimum free float.
No need for sponsor, but do need a NOMAD (nominated adviser who will advise the company on the contents of the prospectus and the AIM rules)

LSE =

Minimum market capitalisation of £30 million (£700,000 for closed- or open-ended investment companies).
Minimum 10% shares available to the public (known as the free float) (THIS ALSO MUST BE MAINTAINED)
No one shareholder can have > 30% of the voting rights.
Three years of audited accounts.
Shareholders must be given pre-emptive rights for any further issuance of shares (unless a special resolution has been passed).
For equity listings, an FCA authorised sponsor must be appointed.

Question 16

8.2.4: What are the Types of IPO

Once granted approval for listing, the company then need to decide the method to be used to issue their shares.

4 main types:

offers for sale (Most common)
offers for subscription
placing
introduction

Answer 16

Offer for sale =
The company will issue its shares via an investment bank (or group of banks known as the syndicate). The bank will market and advertise the shares to its investor base, in exchange for a fee. For large companies, this will be done on a fixed price offer basis. This means that shares are offered to investors at a predetermined price.

offers for subscription =
Used by investment trusts
Similar to a tender offer, the issuer invites subscribers to bid for shares above a minimum ‘subscription’ level. The key difference is that if sufficient demand is not met, the issuer does not have to go through with the issue and can abort it. This is because these issues are only partially underwritten by the banks, i.e. the banks are not going to mop up any extra shares that are left over. This method is often used for raising funds for new ventures such as a new investment trust.

placing =
With a placing, the issuer and their advisers approach large institutional investors (e.g. pension funds) and pitch the sale of the shares to them directly. The issuer decides on the price of the shares. This it makes it a cost-effective way of issuing shares. Only a simplified prospectus is required due to the financial sophistication of the investors, and no marketing, printing or underwriting costs will be incurred. It is a quick and easy method, and is often used alongside a traditional offer for sale. 

Introductions =
Large companies that already have a listing on another exchange (the primary listing) may seek a further listing on another exchange (the secondary listing).
The new exchange will need to check the company and ensure they comply with the listing requirements. The shares can then be introduced on to their exchange. With this method, however, no new shares are issued, and no capital is raised by the issuer. The benefit to them is that they have a wider investor base able to access their shares.

Question 17

A company decides to use the offers to sale type of IPO

the investment bank underwrites the issue too

What does this mean?

Answer 17

USED FOR LARGER COMPANIES

The bank will buy any excess shares that have not been sold to investors at the fixed price, in return for a fee. That way, the company has certainty that they will be able to sell all their shares and raise the desired amount of capital.

The price is usually set just below the optimum price. This way investors will be encouraged to buy the shares which should put upward pressure on the price.

With smaller companies, however, it may be trickier to ascertain an offer price for the shares on issue. In these cases, a tender offer may be used instead.

Question 18

What is a tender offer?

Question 19

What is Dual listing?

Advantages / disadvantages

Answer 19

The process of having shares listed on more than one exchange is known as a dual listing. The exchanges could be in the same country, e.g. they could be listed on the NYSE and the NASDAQ or they could be in different countries. For example, HSBC have a primary listing on the LSE as well as listings on the Hong Kong Stock Exchange, Bermuda Stock Exchange and NYSE.

Advanatges = The benefits are that they have access to a wider investor base.

However, there are several disadvantages:

Additional costs are incurred, due to listing on multiple exchanges.
Harder to communicate information to shareholders, process voting entitlements and process corporate actions.

Question 20

Special share issues

There are two types of special share issue for J12

Privatisations
Demutualisation

Answer 20

Privatisations
Where government-owned assets are sold off to help pay off government debt. Think British Gas, British Rail, British Telecom.
These companies did not have a typical company structure; there were no shareholders for example.
During the privatisation process, the assets were passed to the new company. Shares were then issued in the new company via an offer for sale and / or placing, with some of the shareholder funds raised being passed to the government, which they could use to repay debt.

Demutualisation
When mutual organisations such as building societies convert to public limited companies.
Mutual companies are owned by their members. They have no shareholders and do not pay any dividends, paying their members high returns or bonuses instead.

Question 21

8.2.5: The offer process

Question 22

True or false

If the listing is large, then the sponsor will ask other banks to join them to manage the issue. The original bank is called the lead manager and the group of banks is known as the syndicate

Answer 22

True

The lead manager may appoint a co-lead manager, especially for international issues. Members of the syndicate are known as co-managers. (The process is known as book building)

Question 23

Sometimes following an issue (which is unsuccessful) share prices may fall

Why is this bad and what process are in place to prevent any issues?

Answer 23

Sometimes, share prices fall and that is bad news all round. The risk is if the share price falls below the offer price, then investors will panic and there will be large scale selling, causing the price to fall further.

To prevent this, price stabilisation may take place.

The sponsor agrees to buy back the newly issued shares if the price of the shares falls below a predetermined price.

Now, why would they want to do that if everyone is selling? The answer is in the greenshoe option

Question 24

What is the greenshoe option?

Answer 24

Sometimes, share prices fall and that is bad news all round. The risk is if the share price falls below the offer price, then investors will panic and there will be large scale selling, causing the price to fall further.

To prevent this, price stabilisation may take place.

The sponsor agrees to buy back the newly issued shares if the price of the shares falls below a predetermined price.

Now, why would they want to do that if everyone is selling? Surely the risk is that shares will fall further, and they will lose money?

The sponser will then use the greenshoe option

This allows the sponsor to initially ‘over-allot’ the issue by up to 15%.

In other words, if a company was issuing 100 million shares, the sponsor could actually sell 115 million.

This would mean that they are effectively ‘short’ 15 million shares at the offer price. If the price then falls below the offer price then they will be happy to buy them back at the cheaper price, which has the effect of stabilising the price.

If, however, the share price was to rise, then that would result in a loss for the sponsor. So, to counteract that, the sponsor can exercise his greenshoe option which allows him to buy the shares from the issuing company at the offer price

Stabilisation could be construed as a form of market manipulation, so there are very strict rules surrounding its use. It can only be undertaken over a period of 30 days from issue and the issuer must disclose to the market that stabilisation is taking place.

Question 25

Certainly! Here’s a practical example of how the greenshoe option works in an IPO:

Example: TechCorp IPO
Initial Offering Terms:

TechCorp plans to issue 10 million shares at an IPO price of $20 per share.
The underwriters include a greenshoe option allowing them to sell up to 1.5 million additional shares (15% of the original offering) if demand is strong.
Scenario 1: Strong Demand (Option Exercised):

On the IPO day, investor demand is high, and all 10 million shares sell out quickly. The underwriters exercise the greenshoe option to sell the additional 1.5 million shares at $20 each.
Outcome:
TechCorp raises $230 million (10 million shares + 1.5 million greenshoe shares × $20/share).
The underwriters stabilize the stock price by matching the high demand with more shares.
Scenario 2: Weak Demand (No Option Exercised):

On the IPO day, demand is weaker than expected, and the stock price falls below $20.
The underwriters do not exercise the greenshoe option. Instead, they buy back shares on the open market (likely at a discount, e.g., $19/share) to stabilize the price.
Outcome:
TechCorp raises the original $200 million.
The underwriters stabilize the price and avoid oversupplying the market with shares.

Question 26

8.2.6: Subsequent issues

If a listed company wants to raise more capital at a later date, then they can do so via a follow-on or secondary offering.

What are rights issue?
What are open offers
What are subscriptions
What are resales with subscriptions
What are closed offers

Answer 26

Rights issue =
The issuing company offers shares to existing shareholders to buy pro rata their existing holdings.
The subscription price is lower than the current share price. Shareholders can sell or keep hold

Open offers =
Similar to a rights issue except shareholders are not able to sell their rights and so if they do not take it up it lapses.

Subscriptions =
The issuing company gives the shareholder the right to buy shares at a set price on set dates.
An example would be a warrant or subscription shares.

resales with subscriptions =
A select group of investors are invited to subscribe to the resale. New shares are issued via an open offer with subscription to the select group.
The select group then sells the shares via an open offer to other investors.

Closed offers =
Only a select group of investor(s) are invited to buy the shares.

Question 27

8.3: Issuing Government Bonds

The majority of government bonds are issued via a competitive auction system.

Governments don’t issue the bonds themselves. They usually use an agent to do so for them and a team of primary dealers to help them distribute the bonds.

Answer 27

In the UK, government bonds are issued on behalf of the government by the Debt Management Office or DMO. They are an executive agency of HM Treasury.

Process:

The chancellor will inform the DMO of the amount that they intend to raise via gilt issuance.

The DMO publishes the issuance calendar just ahead of the start of the financial year (usually in March).

It will then be updated every quarter with exactly which gilts will be issued on each date, with the size of the issue being announced a week before the issue.

Question 28

What is the role of the 8.3.2: Gilt-Edged Market Makers (GEMMs)?

Tell me the obligations of the GEMMs and what unique privileges they receive in return for this?

Answer 28

The GEMMs are the primary dealers for the UK gilt market. They are LSE member firms that are authorised by the FCA.

They essentially act as the eyes and the ears for the DMO in the gilt market, helping to ensure a smooth-running market.

They have a number of obligations that they must undertake but in return are granted certain privileges.

Anyone wanting to bid competitively in the auction must do so via a GEMM.

Question 29

8.3.3: Gilt issuance

As we have seen, gilts are issued at least once a week by the DMO by a variety of methods. The most common method is via an outright auction.

What is this

Answer 29

Outright auction

Where the bonds are issued via an auction process with market participants bidding to be allocated stock.

Bids can be on a competitive or non-competitive basis.

Competitive bids must be for a minimum nominal amount of £1 million. (Anyone wanting to bid competitively in the auction must do so via a GEMM.

LOOK AT ACTIVITY 8.1

non-competitive bids. (WHAT THE GEMMS ARE OFFERED AS A PRIVILEDGE)
This is where bids are allocated at the weighted average price of successful
competitive bids. 15% of the auction amount is set aside by the DMO and divided equally among the GEMMs for conventional gilts

Question 30

The DMO also has an Approved Group of retail investors who can also bid non-competitively for up to £500,000 (so less than the ‘standard’ £1,000,000) nominal of either conventional or index-linked stock.

Gilts issuance can also be conducted via a syndicate, similar to the way in which corporate bonds are issued (see section 8.4 Issuing corporate bonds).

Question 31

A successful gilt auction is measured by its bid to cover ratio.

Answer 31

This measures the ratio of the total amount of bids to the amount being issued. The higher the number the better, with anything over 2 signalling a successful auction. The example below shows the results from the gilt auction on 25 July 2023.

Question 32

8.3.4: Treasury Bill issuance

Answer 32

The DMO is also responsible for issuing T-Bills, which are issued in the form of tenders. They work in a similar way to the gilt auctions, through a network of primary participants, who act in a similar capacity to the GEMMs. Tenders take place once a week, usually on a Friday (the last business day of the week). Bids are for a minimum size of £500,000 nominal.

Each quarter, the DMO announces the maturity of T-bills to be issued the following quarter. The size and maturity of the T-bills on offer the following week are announced with each tender.

Question 33

8.4: Issuing Corporate Bonds

Answer 33

The process is very similar to the issuance of equities.

The company will consult an investment bank (corporate finance division) who will advise them on the best way to raise capital; equity or debt.
Once the decision has been made to issue debt, the issuer will invite several investment banks to bid for the mandate to lead the issue. This is known as pitching.
The banks will indicate the price that they believe they will be able to successfully issue the bonds.
The issuer will choose the bank that they believe is most likely to be successful, based on the indicative price and the reputation of the bank in the market.
Once the mandate has been granted, the lead manager will prepare a prospectus so that investors can make an informed decision before buying the bonds.
This will give details of the company and the bond issue itself.
The lead manager may then form a syndicate of other banks to help them sell the issue in the same way as for equities.
Smaller issues may be placed by just the lead manager, but larger issues will typically use a large syndicate of banks.
They may also agree to underwrite the issue.
Banks will charge the issuer for the issuance with fees ranging from 0.25% to 0.75%.
The size of the fee will depend on the complexity of the issue along with the size and maturity.

The process that follows from there is:

Announcement day: details of the issue are announced, and banks are invited to join the syndicate.
Pricing day: The final terms of the bond are decided and issued to syndicate members who must accept or reject the terms within 24 hours.
Offering day: bonds are formally offered to the syndicate members who legally commit to buy.
Closing day: secondary market trading begins with price stabilisation. Bonds must be paid for 14 days later.

Question 34

Other ways in which corporate bonds can be issued are:

Bought Deal
Pre-Priced Offering
Auction

Question 35

8.4.2: Seniority

The price of a corporate bond will depend on its seniority. The more senior a bond, the less risky it will be. It follows that investors will demand lower yields for less risky bonds.

Corporate bonds are categorised according to their seniority. The main categories are:

Senior
Subordinated
Mezzanine (riskiest)

Question 36

8.4.3: Pricing corporate bonds

Corporate bonds will be priced at a yield spread to a benchmark.

The amount of the spread will depend on the maturity, seniority, credit rating and liquidity risk of the bond. The greater the risk, the greater the spread.

The spread is expressed in basis points where 1 basis point (bp) = 0.01%.

Typical benchmarks are:

Government Bonds
Benchmark rates
Swap rates

Question 37

8.4.4: MTN programmes

Medium Term Notes or MTNs (as we discovered in chapter 3.3) are regular bonds that are issued in a slightly different way from how corporate bonds are issued.

The standard issuance process discussed above can take several months between initial discussions with the investment bank to the bond actually being issued. Over that time, conditions in the market may have changed. For example, interest rates may have risen, meaning investors will require a higher return or yield.

Answer 37

MTN programmes enable issuers to issue bonds on a regular basis with comparative ease. A programme is established whereby the issuer is able to issue a certain amount of bonds over a finite period. This is known as shelf registration.

Why MTN programs are good:
This means that issuers do not have to go through the lengthy process to issue bonds, as long as they have spare capacity within the MTN programme, enabling them to take advantage of any favourable market conditions. It also means that they can issue bonds on a regular basis. This may be particularly useful if the issuer does not need all the funds immediately.

Question 38

What are Reverse enquiries in relation to corporate bond issuance?

Answer 38

Where investors request a bond issue with specific characteristics from the issuer

Question 39

8.5: Takeovers

What is a stake
What is a Notifiable interest

Question 40

When investors buy shares in a company then they are said to have a WHAT in that company.

Answer 40

Stake

Stakes can be built by investors for 3 reasons:

As a simple investment to participate in dividends and profit from capital gains.

As a strategic stake to prevent the company from being taken over by another company such as a competitor.

As an acquisition by buying more than 50% of the shares and having a controlling vote.

Question 41

8.5.2: Notifiable interest

This is a frequently asked question, so let’s look at an example to clarify this.
Learn about connected parties, who are expempt, what the thresholds are

Answer 41

An investor has a notifiable interest and must inform the company when:
They hold 3% or more of the company’s shares or voting rights
Once the holding is above 3% it rises or falls through a full percentage point
Their stake falls below 3%

A collective investment/fund manager must notify the company when:
Their shareholdings exceed 5%, then 10% and then every percentage point above 10%.

Question 42

The notifiable interest doesn’t just apply to individuals, it applies to connected parties as well. What does this mean?

Answer 42

Well, let’s say you own 2% of the shares of a particular company and your spouse also owns 2%. Individually, you own less than 3% and so you do not need to inform the company. But together you own 4% and because you and your spouse are connected, this means that it becomes a notifiable interest.

Connected parties include:

Children of investor

Companies controlled by the investor
Spouse of investor

Concert Parties (Where 2 or more people get together and agree to buy shares with the purpose of being able to influence the company. They are acting ‘in concert’)

If this combined holding is greater than 3%, then it becomes a notifiable interest, as it would do for an individual holding.

Question 43

Shareholdings that are exempt from the notifiable interest requirement are:

Market makers in their normal course of business, provided the shareholdings do not exceed 10%.
Custodians or bare nominees, who ultimately are not the beneficial owner and are not entitled to the voting rights anyway.
Shares held as collateral.
Shares held under a stock lending agreement.
Shares held for clearing and settlement within a settlement cycle ending at the close of the third day.

Question 44

What is a Companies Act s793 letter

Answer 44

Companies are required to maintain records of all notifiable interests.

There may be occasions, however, where people hold shares under a nominee company, with the express purpose of disguising the true amount of their holdings to the company.

In these cases, where the company suspects that someone may be a shareholder, they can send them a written notice under section 793 of the Companies Act, asking them to confirm whether they hold any shares in the company and, if so, how many.

The shareholder must reply in writing within a reasonable timescale; if the letter is ignored then the firm will apply to the courts to have the shares owned by that individual frozen, leaving them unable to vote, sell their shares or receive any dividends.

Question 45

What are 8.5.3: Mandatory Offers?

Answer 45

If a shareholder acquires more than 30% of the shares or voting rights or increases their holding from 30% or more to less than 50%, then a mandatory offer must be made.

This means that shareholder must make an offer to buy up all the other shares in the company, known as the minority interests. They must pay cash for the shares (or a cash alternative) and cannot pay less than the highest price the shares have traded at during the previous year.

Question 46

8.5.4: Takeovers

Takeovers can be hostile or friendly. The company looking to take over the other company is known as the predator; the company being taken over is the target

Answer 46

When a predator company deals in the shares of the target company, then these dealings must be disclosed to the takeover panel by midday the following business day.

That includes things like options as well as the shares.

Anyone else that owns more than 1% of the shares must also notify the panel of any dealings.

Obviously, the predator will have to fund the takeover. This can be done by raising money either via a follow-on offer of shares or via a conventional or convertible bond issue.

Question 47

Regulations

The Companies Act sets out the various duties of directors.
The main duties are the fiduciary duty, the duty of skill and care, and statutory duties.
Directors must act in the best interests of the firm and have the necessary skills to carry out their role.
The FCA regulates and supervises forms within the financial services industry.
They oversee the listing requirements and continuing obligations for public limited companies.
The UK Corporate Governance Code ensures that companies are run by effective boards.
At least half of the directors of a listed company should be independent non-executive directors.
All directors of FTSE 350 companies must be re-elected annually and there should be regular reviews undertaken by the chairperson of all directors.
The Panel on Takeovers and Mergers sets out six general principles in its Code.
Its main aim is to ensure that all shareholders are treated fairly and equivalently.
Exchanges are recognised and supervised by the FCA; clearing houses by the PRA.
Exchanges set their own rules, which member firms must abide by.
Issuing equities

The primary market is for issuing securities for the first time; the secondary market is for subsequent trading of securities.
Issuing equities for the first time is known as going public, listing, floating or an IPO.
The FCA (UKLA) sets out the listing rules that companies must abide by to list on the LSE.
Firms can choose a standard or premium listing on the LSE.
A premium listing will require the expertise of a sponsor, broker, accountant, and lawyers.
The sponsor will form a syndicate to sell the issue on, frequently underwriting it.
Smaller firms will list on the AIM market with the help of a NOMAD and nominated broker.
Different methods of IPO include; an offer for sale, a tender offer, offers for subscription, placings and introductions.
Dual listing is where companies are listed on more than one exchange.
Subsequent capital raising is done via a rights issue, open offer, subscription, resale, or closed offer.
Issuing Government bonds

UK gilts are issued by the DMO on behalf of HM Government.
Most are issued via an auction process, but some will be issued via a syndicate.
A network of primary dealers known as GEMMs bid for the bonds in the auctions and ensure a smooth-running liquid bond market.
Conventional gilts are issued to the highest bidders, who pay the price they bid; index linked bonds are all allocated at the lowest accepted price.
T-Bills are issued every Friday via auction through primary participants.
Issuing corporate bonds

Corporate bonds are usually issued via a lead manager and syndicate who decide on the details of the issue and sell it on to investors.
Corporate bonds have different levels of seniority. Senior bonds will be lower risk than subordinated and mezzanine bonds.
Corporate bonds are issued at a spread to a benchmark, which will be a government bond, a benchmark rate such as SONIA, or a swap rate.
The riskier the company issuing the bond, the higher the spread.
The issuance process is made up of pitching followed by announcement day, pricing day, offer day and closing day.
MTN programmes allow bonds to be issued at regular intervals up to a maximum size over a set period.
Takeovers

A stake is a holding of shares in another company.
Acquisition of a company occurs when the stake is greater than 50%.
Investors must notify the company and FCA if their holding exceeds 3%, or changes by a full percentage point (either up or down) or falls back below 3%.
For asset managers, the threshold is 5% then 10% and then every full percentage point above this.
Market makers with holdings less than 10% and custodians are exempt.
Anyone with a holding over 30% or increases from 30% to less than 50% must make a mandatory offer to buy out the minority interests.

Question 48

A company is applying for admission to trading on the AIM market. In order to do so, they must appoint a:

sponsor.

nominated adviser.

corporate broker.

GEMM.

Answer 48

nominated adviser.

The nominated adviser (NOMAD) advises the directors of their responsibilities in complying with the AIM rules and the content of the prospectus. Sponsors and corporate brokers are used for listings on the LSE and GEMMs are used in the issuance of UK gilts.

Question 49

XYZ plc is a FTSE 350 member. This means that:

it can only have 2 independent non-executive directors on the board.

the chairperson must be re-elected every 3 years.

all directors must be re-elected every year.

all directors must be independent

Answer 49

all directors must be re-elected every year

All directors of FTSE 350 companies must be re-elected annually.

Boards must comprise half executive and half independent non-executive directors – small companies (not in the FTSE 350) must have at least 2 non-exec directors.

The board must be evaluated once every 3 years but the chair and the other director must be elected every year.

Question 50

The requirements for a company seeking a full listing on the main market include:

a minimum market capitalisation of £25 million.

a minimum free float of 15%.

no one shareholder to hold 30% or more of the company’s ordinary voting shares.

trading history of 5 years.

Answer 50

no one shareholder to hold 30% or more of the company’s ordinary voting shares.

The correct figures for the other requirements are minimum market cap of £30 million, a free float of 10% and trading history of 3 years.

Question 51

A company is looking to list on the LSE. They invite investors to bid for the shares. Once the offer closes, a single strike price is determined, above which all subscriptions are allotted in full. This is an example of a:

tender offer.

offer for sale.

offer for subscription.

placing.

Answer 51

tender offer.

An offer for sale is usually set a fixed price, an offer for subscription is similar to a tender offer except the company does not have to commit to go through with the issue, and a placing is where the shares are sold directly to large institutions.

Question 52

The role of the Debt Management Office is to:

issue bonds on behalf of the UK government.

buy gilts from the GEMMs.

act as a primary dealer for the UK gilt market.

act as an interdealer broker.

Answer 52

issue bonds on behalf of the UK government.

The role of the DMO is to issue UK gilts on behalf of the UK government. They are issued via bids placed for gilts from the GEMMs who are the primary dealers in the UK gilt market.

Question 53

A gilt auction takes place for £3,000,000,000 nominal stock. Bids are received from 3 GEMMs.

• GEMM A bids £95.75 for £2,000,000,000
• GEMM B bids £95.70 for £3,000,000,000
• GEMM C bids £95.60 for £1,000,000,000

Who is allocated gilts either in part or full?

Answer 53

GEMM A & B

GEMM A have bid the highest price, so they will get a full allocation of gilts. GEMM B have bid the next highest price but cannot be allocated the full amount as that would take the issuance amount over the £3 billion that the DMO are looking to raise. They will get a partial allocation of £1 billion. GEMM C will get nothing.

Question 54

Which bond has the highest claim in the event of a liquidation?

Senior secured.

Senior unsecured.

Senior subordinated.

Mezzanine.

Answer 54

Senior secured.

Senior secured is the highest security bond that can be issued as it will be secured on the company’s assets. Next comes senior unsecured and then senior subordinated (as it has a claim that is subordinate to other bonds). Mezzanine has the lowest claim of all bonds.

Question 55

XYZ plc offers a bond as part of a Medium-Term Note programme. This means:

The bond must have a maturity of 5 years.

All the bonds issued in the programme will be the same.

The bonds cannot be FRNs.

The bonds will be offered continuously over a set period of time up to a maximum agreed limit.

Answer 55

The bonds will be offered continuously over a set period of time up to a maximum agreed limit.

MTNs are issued on an ongoing basis as part of a programme up to a maximum agreed limit over a set period. The bonds can be any maturity and of any type and do not have to be the same.

Question 56

Anna buys 3.1% of the shares in ABC plc. Robert increases his holding from 1.5% to 2.5%. Sacha decreases his holding from 4.5% to 3.5%.

Who has a notifiable interest?

Anna only.

Anna and Sacha only.

Anna and Robert only.

Robert and Sacha only.

Answer 56

Anna and Sacha only.

A notifiable interest is where a holding reaches 3% or more and then subsequently rises or falls through a full percentage point or falls back below 3%. Robert’s holding is the only one that does not qualify as his holding is below 3%.

Question 57

James buys 25% of the shares in XYZ plc. Miranda increases her holding from 25% to 35% of the shares in ABC plc. Simone holds 30% and increases her holding to 45% of share in JKL plc.

Who must make a mandatory offer to the minority shareholders?

James only.

Miranda only.

Simone only.

Miranda and Simone only.

Answer 57

Miranda and Simone only.

A mandatory offer must be made if any person acquires shares that take their holding above 30% or increase their holding from 30% to below 50%. Miranda and Simone must therefore make a mandatory offer.