[AHSEC Class 12, Business Studies Notes, Revised Syllabus, 2022 Exam, Financial Markets]
Class 12 Business Studies Notes
Unit – X:
Financial Markets
OBJECTIVE QUESTIONS (1 mark)
1. What is a financial market? Mention
its components.
Ans: It refers to the market which creates and exchanges financial
assets. It is divided into two parts: Money market and capital market.
2. What are financial assets?
Ans: It refers to the financial instruments or securities. For
e.g. shares, debentures, treasury bills, commercial paper etc.
3. What is floatation cost?
Ans: The expenditure incurred in issuing the securities is called
floatation cost.
4. Mention two methods of floating
securities by a company.
Ans: Initial Public offer, Books building method
5. What are the components of capital
market?
Ans: Primary market or New issue market and Secondary Market and
Stock exchange.
6. Name the market where new
securities are issued for the first time.
Ans: Primary Market or new issue market
7. Name the market which facilitates
purchases and sale of old or existing securities.
Ans: Secondary Market or stock exchange
8. What is a zero coupon bond?
Ans: It is a financial instrument for which no interest is paid
but is issued at a discount redeemable at par.
9. What type of trade-off function is
performed by the money market?
Ans: The money market establishes a balance between short term
financial supply and short term financial demand.
10. Name the instruments that are
traded in money market. 2013
Ans: Call money, Commercial Papers, Certificates of deposits, Bills
of exchange.
11. Name the instruments that are
traded in capital market.
Ans: Stocks, Shares, Debentures, Bonds, GDR (Global Depository
receipts)
12. Name the institutions operating in
the money market.
Ans: Central Bank, Commercial banks, Non-bank financial
institutions.
13. Name the institutions operating in
the capital market.
Ans: IDBI, IFCI, ICICI, Stock exchanges.
14.
In which year NSEI, BSE and OTCEI were
established?
2015, 2018
Ans: NSEI – In
1991 and BSE – In 1875. But, NSEI was recognized in 1992. OTCEI was established
in 1990.
15. With which stock exchanges the
Benchmark ‘Sensex’ and ‘nifty’ are associated?
Ans: Bombay stock exchange – Sensex, National Stock exchange -
nifty
16. Which is the oldest stock exchange
in India?
Ans: Bombay stock exchange
17. Mention the statutory body for
regulation of stock exchanges in India.
Ans: SEBI (Securities and Exchange Board of India)
18. When was SEBI established? 2017
Ans: It was established in 1988 but was given statutory status in
1992.
19. State the segments of NSEI.
Ans: a) Wholesale debt market b) Capital market segment
20. State one development function of
SEBI
Ans: to carry out research work.
21. Money market is a market for short
terms funds i.e. for one year and capital market is a market for long
term funds i.e. for more than one year.
Ans: Given statement is true.
22. What are various types of
operators in stock exchange?
Ans: Brokers, jobbers, bulls, bears and stag.
23. Write the full form of NSEI, BSE
and OTCEI.
Ans: NSEI – National stock exchange of India (Nifty), BSE – Bombay
Stock Exchange (Sensex), OTCEI – Over the Counter Exchange of India.
24. State two promoters of NSEI.
Ans: a) Industrial development bank of India (IDBI) b) Life
insurance corporation of India (LIC)
25. How many stock exchanges are there
in India?
Ans: There are 24 recognised stock exchanges in India. Whereas at
national level there are two major stock exchange. These are: a) NSEI and b)
OTCEI.
26. Name two advisory committees set
up by SEBI.
Ans: a) Primary market Advisory committee. b) Secondary market
advisory committee.
27. Mention some specific features of
Treasury bills.
Ans: Treasury bill: It is also known as zero coupon bonds as no
interest is paid.
28. Name two buyers of Commercial paper.
Ans: a) Banks b) Insurance companies.
29. What is meant by “Near Money?”
Ans: All very short term securities are called near money for e.g.
marketable securities.
30. What is price rigging?
Ans: It refers to the manipulation of prices of the securities by
agents/company for their own profits.
31. On what lines was OTCEI started?
Ans: It was started on the lines of NASDAQ (National Association
of securities Dealers Automated Quotation)
32. Name the system where there is
electronic book entry form of holding and transferring the securities.
Ans: Dematerialisation.
33. What is ‘Demutualisation of
securities?’
Ans: It separates the ownership and control of stock exchanges
from trading rights.
34. State four features of Commercial
paper.
Ans: a) Commercial paper is
debt instrument issued for a period of 15 days to one year
b) These are issued in the form of unsecured
promissory note.
c) These are transferable by mere endorsement
and delivery.
d) These are issued by large and creditworthy
companies.
35. State three features of Treasury
bills.
Ans: a) Treasury bills are instruments of money market issued by
the Government of India. They are freely transferable.
b) They are issued in the multiples of 25000.
c) These are in the form of Zero coupon bond
that is issued at a discount redeemable at par. No interest is given on such
securities.
36. What is Sensex and Nifty?
Ans: Sensex: It is a Market Capitalisation Weighted index of 30
stocks representing a sample of large, well-established and financially sound
companies. It is the oldest index in India.
Nifty: It is diversified weighted index of 50 stock from 23
sectors of the economy. It is used for benchmarking fund portfolios, index
based derivatives and index funds.
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ALSO READ (AHSEC ASSAM BOARD CLASS 12)
1. AHSEC CLASS 12 BUSINESS STUDIES CHAPTERWISE NOTES
2. AHSEC CLASS 12 BUSINESS STUDIES QUESTION PAPERS (FROM 2012 TILL DATE)
3. AHSEC CLASS 12 BUSINESS STUDIES SOLVED QUESTION PAPERS (FROM 2012 TILL DATE)
4. AHSEC CLASS 12 BUSINESS STUDIES IMPORTANT QUESTIONS
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SHORT AND LONG ANSWERS TYPE QUESTIONS (5/8
marks)
Q.N.1. What is financial market? What
are its components? Mention its functions. 2015
Ans: Meaning of Financial
Market: Financial market is simply a link between the savers and
borrowers. It can be defined as an institution that facilitates exchange of
financial instruments and credit instruments such as cheques, bills, deposits,
loans, corporate stocks, government bonds, etc. The main participants of
financial markets are financial institutions, agents, dealers, brokers,
borrowers and savers.
According to Brigham "The place where people and organizations
wanting to borrow money, are brought together, with those having surplus funds
is called a financial market".
This definition makes it clear that a financial market is a place where
those who need money and those who have surplus money are brought together.
They may come together directly or indirectly through brokers and dealers.
Types of
Financial Markets (sub-markets)
Every
firms, individuals and institutions need finance for its expansion and day to
day operating activities. Financial needs may be of two types – short term or
long term. Based on these needs, financial markets are divided into two
categories:
a) Money market – Market for short term funds
b) Capital market - Market for long term funds
Role and Functions of financial market
a) Mobilisation of savings: Financial market
encourages savings habits amongst the individuals. It mobilizes savings of
savers into most appropriate uses.
b) Channelization of
savings: It meets the various credit needs of the business houses by
channelizing the savings of savers towards the entrepreneurs.
c) Liquidity: It provides liquidity of financial assets by providing ready market for
buying and selling of securities.
Securities can be easily converted into cash in financial market.
c) Price discovery: It
facilitates price discovery. Prices of securities in financial market are
decided by the forces of demand and supply of financial assets in financial
market.
e) Economic development:
It assists in the process of economic development of a country. it helps in
balanced regional and sectoral distribution of investible funds.
Q.N.2. What is money market? Explain
its nature and functions. 2015,
2018, 2020
Ans:
Money
market is a place where money and short term financial assets which are close
substitutes of money are traded. It mainly deals in cash or near money or
liquid assets of short-term nature. It also deals in treasury bills (TBs),
Commercial bills, Commercial paper (CP), ADRs, GDRs, Call and Short money
market etc.
According
to the RBI, "The money market is the centre for dealing mainly of
short character, in monetary assets; it meets the short term requirements of
borrowers and provides liquidity or cash to the lenders. It is a place where
short term surplus investible funds at the disposal of financial and other
institutions and individuals are bid by borrowers, again comprising
institutions and individuals and also by the government."
From the
above explanation, we can say that money market is a market for short term
funds meant for use for a period of one year or less. The major participants of
money market consist of the government, commercial banks, Life insurance
companies, Mutual funds, Non-banking finance companies, stock exchange brokers
etc.
Features
of Money Market: The salient features of money market are as
follows: 2020
a) Flow of short-term funds: The money market brings together the
lenders who have surplus funds for short-term and the borrowers who are in need
of short-term funds.
b) No fixed geographical location: There is no fix geographical
location of money market. Different name is given to money market located in
different areas.
c) Participants: The major participants of money market consist of
the government, commercial banks, Life insurance companies, Mutual funds,
Non-banking finance companies, stock exchange brokers etc.
d) Instruments: It deals in
money or instruments which are a close substitute of money such as treasury
bills (TBs), Commercial bills, Commercial paper (CP), ADRs, GDRs, Call and
Short money market etc.
e) Sub-markets or components: Money market consists of many
sub-markets such as call money market, collateral loan market, acceptance
market, bill market, treasury bills market etc.
f) Reasonable access: Money market provides reasonable access to
users of short-term funds to meet their requirements on reasonable terms or
rates of interest.
g) Source of working capital: Money market constitutes a major source
of working capital finance for borrowers.
Significance/Functions of Money Market
The major
functions of money market are given below:
(a) Economic Development: The money market helps in economic
development of a country by providing short term funds to both public and
private institutions without any discrimination.
(b) Funds for government: Money market helps the government in
borrowing short term funds at very low interest rate. This can be done by
issuing treasury bills.
(c) Return on idle funds: Money market helps the lenders to earn
return on their idle or surplus funds for short period.
(d) Implementation of Monetary Policy: Money market helps in
implementing monetary policy of the central bank of any country.
(e) Mobilisation of funds: The money market helps in transferring
funds from one sector to another. The development of trade, commerce and
industry depends on the mobilisation of financial resources.
(f) Connecting link between various financial market: Money market
acts as a connecting link between all the segments of financial market like
capital market, foreign exchange market etc.
Q.N.3. Explain the various Money
market instruments. 2013, 2015, 2017
Ans: Money market is the short term security market. Following are
the instruments dealt in money market.
a) Treasury bills: T-bills short term
government security ranging from 14 days to 364 days issued by RBI on behalf of
the government to meet its short-term financial needs. No fixed interest in
payable on Treasury bills. Normally TBs are issued at the lowest interest rate
agreed on competitive bidding. These bills are negotiable instruments and
freely transferable.
b) Commercial Paper: Commercial papers are
unsecured promissory notes issued by highly creditworthy companies to raise
funds for short term. It usually has a maturity period of 15 days to one year.
CPs are normally issued at a discount and redeemed at par. The commercial banks and mutual funds are the
main investors of commercial papers.
c) Call money and short notice money: Call
money refers to money given for a very short period ranging from 1 day to 7
days. Surplus funds of the commercial banks and other institutions are usually
given as call money. Banks are the borrowers as well as lenders for the call
funds. If the loan is given for one day and can be called back on demand, it is
called money at call but if the loan cannot be called back on demand and will
require 3 days notice, it is called money at short notice. Money at short
notice can be of maximum 14 days.
d) Certificate of deposit (CD): Certificate of
deposit is a time deposit having a maturity period from 91 days to 12 months.
CDs are issued only by a bank. It is a bearer certificate which is freely
transferable and can be sold in secondary market. Banks are not allowed to
discount these documents.
e) Commercial bills: These are the trade bills
which are drawn at the time of credit sales by the Drawer (Supplier) and
accepted by the Drawee (Debtor). It is an acknowledgment of debt normally
having a maturity period of 90 days. It is a negotiable instrument and can also
be endorsed from one person to another.
It can also be discounted with the bank before maturity.
Q.N.4. What is Capital Market? What
are its components? Explain its importance. 2016
Ans: Capital
Market is generally understood as the market for long-term funds. This market
supplies funds for financing the fixed capital requirement of trade and
commerce as well as the long-term requirements of the Government. The long-term
funds are made available through various instruments such as debentures,
preference shares and equity shares. The capital market can be local, regional,
national, or international. 99, 04, 08,09,11,14
The capital market is classified into two
categories (Components), namely,
(i)
Primary market or new issue market, and
(ii)
Secondary market or stock exchange.
Features of Indian Capital Market 2015,
2018, 2020
a) Dealing in Securities: It deals in long-term marketable securities
and non-marketable securities.
b) Segments: It included both primary and secondary market. Primary
market is meant for issue of fresh shares and secondary market facilitates
buying and selling of second hand securities.
c) Investors: It includes both individual investors and institutional
investors such as Mutual funds, banks, Insurance companies etc. It also includes
foreign institutional investors.
d) Link between savers and investment opportunities: Capital market
is a crucial link between saving and investment process. It facilitates flow of
long term capital from those who have surplus capital to those who need
capital.
e) Intermediaries: It acts through intermediaries which includes
bankers, brokers, underwriters etc.
f) Government rules and regulations: The capital market operates
freely but under the guidance of government policies. These market functions
within the framework of government rules and regulations.
Importance of Capital Market
a) Availability
of funds: Capital market helps to raise long term funds from both domestic and
as well as foreign institutional investors.
b) Mobilization
of savings: Capital market mobilizes the savings of individuals and
institutions to productive channels. It facilitates flow of long term capital
from those who have surplus capital to those who need capital.
c) Industrial
growth: it plays a significant role in the economic development of a country.
It facilitates increase in production and productivity in the economy and hence
enhances the economic welfare of the society.
d) Liquidity:
It provides liquidity to investors in capital market. The securities issued
through the primary market are traded in the secondary market which provides
liquidity to the investors and also short-term as well as long-term yields on
their investments.
e) Balance
between demand and supply: It bring about balance between demand and supply of
capital by creating a link between those who demand capital and those who
supply capital.
f) Attracting
foreign capital: Capital market helps in attracting foreign investments. The
Indian capital market provides the channel through which foreign institutional
investors and NRIs ca invest their funds in the securities of Indian companies.
Q.N.5. Distinguish between Capital
market and Money market. 2012, 2014,
2018, 2019, 2020
Ans: Difference between capital market and money market
|
Basis
of Distinction |
Capital Market |
Money Market |
|
1)
Period |
Capital market is a market for medium and
long term funds. |
Money market is a market for short term
funds. |
|
2)
Constituents |
These include new issue market, stock
market, stock brokers and intermediaries. |
These include call money market, bill market
and discounting market. |
|
3)
Participants |
Individual and institutional investors
operate in the capital market. |
Only the institutional investors operate in
the money market. |
|
4)
Instruments |
The instruments in the capital market
include shares, debentures, bonds etc. |
Trade bills, certificate of deposits,
commercial papers etc. are the instruments of money market. |
|
5)
Liquidity |
The instruments of capital market always
take time to convert into cash. |
The instruments of money market have very
high degree of liquidity. |
|
6)
Safety |
Investments are unsecured due to high
volatility in market. |
Investment are safe as compared to capital
market. |
|
7)
Regulation |
Capital market is primarily regulated by the
Securities and Exchange Board of India (SEBI) |
Money market is regulated by the Reserve
Bank of India (RBI) |
Q.N.6. What is primary and secondary
market? State four differences between primary market and secondary market.
2013, 2014, 2017
Ans: Primary market (2014,2016) which is also called new issue
market represents a market where new securities i.e. shares, debentures and
bonds that have never been previously issued are offered. It is a market of
fresh capital. The main function of this market is to facilitate the transfer
of funds from willing investors to the entrepreneurs who need funds. but with
the changing time, the nature of primary market is also changing. There exist
two types of primary market:
a) Market where firms issue securities for the first time through
Initial Public Offer (IPO).
b) Market where firms which are already trading in secondary market
raise additional capital through Seasoned Equity Offering (SEO).
Secondary market also called stock exchange
represents a market where existing securities i.e. shares and debentures are
traded. Its main function is to create a link between the buyers and sellers of
securities so that investments can change hands in the quickest and cheapest
manner.
According to Securities Contract (Regulation)
Act, 1956, the term stock exchange has been defined as, “an association,
organisation or body of individuals, whether incorporated or not, established
for the purpose of assisting, regulating and controlling business in buying,
selling and dealing in securities.”
Thus, a stock market is a market where
dealings in the listed securities are made by the members of the exchange on
their own behalf or on behalf of others.
From the above explanation it is clear that
there are some differences between primary and secondary market which are given
below:
|
Basis |
Primary Market |
Secondary
Market |
|
1. Meaning |
It is the market where the securities are
issued for the first time. It is also referred as New issue market. |
It is the market where the existing
securities are traded. It is also called stock Exchange. |
|
2. Price determination |
The prices of the securities are determined
by the company. |
The prices of the securities are determined
by the forces of demand and supply of the securities. |
|
3. Buying and selling |
Here, only buying of the securities take
place. |
Here, buying and selling of the securities,
both take place. |
|
4. Participants |
Securities are sold by the company directly
to the investors. |
Securities are traded by the investors.
Company is not involved in trading. |
|
5. Purpose |
Purpose of primary market is to provide
capital for setting new business. |
The main purpose of secondary market is to
provide liquidity to the investors. |
|
6. Capital formation |
Primary market promotes capital formation
directly. |
Capital market promotes capital formation
indirectly. |
Q.7. What is stock exchange? Mention
its features. “Stock exchange is the barometer of the economy” In the light of
the statement, discuss the functions of the stock exchange. 2012,
2016, 2020
Ans: STOCK EXCHANGE (2013):
A stock exchange is highly organised financial market where the second hand
securities can be bought and sold. Its main functions are to create a link
between the buyers and sellers of securities so that investments can change
hands in the quickest, cheapest and fairest manner. Under the Securities
Contract (Regulation) Act, 1956, the term stock exchange has been defined as
“as association, organisation or body of individuals, whether incorporated or
not, established for the purpose of assisting, regulating and controlling
business in buying, selling and dealing in securities”.
FEATURES
OF STOCK EXCHANGE
The important features of stock exchange are
as follows:
a)
Stock exchange is a market where dealings take
place in shares, debentures and bonds issued by the company’s corporations,
government, etc.
b)
Only those securities could be traded that are
included in the official list of stock exchange.
c)
It also deals in government securities.
d)
Stock exchange is organisation in the form of
an association or a company or a body of individuals.
e)
It is a common meeting place of buyers and
sellers of second hand securities.
f)
In stock exchanges, brokers serve as a link
between the buyers and sellers.
g)
Stock exchanges frame their rules and
regulations.
h)
The areas of operations of stock exchange or
geographical jurisdiction is well defined.
i)
In India, stock exchanges operate as per
guidelines issued by the Securities and Exchange Board of India.
Functions
of stock exchange
As the barometer measures the atmospheric
pressure, the stock exchange measures the growth of the economy. It performs
the following vital functions:
1.
Ready market and liquidity: Stock exchange
provides a ready and continuous market where investors can convert their money
into securities and securities into money easily and quickly. It provides a
convenient meeting place for buyers and sellers of securities.
2.
Evaluation of securities: Stock exchange helps
in determining the prices of various securities that reflect their real worth.
The forces of demand and supply act freely in the stock exchange and help in
the valuation of securities.
3.
Mobilisation of savings: Stock exchange helps
in mobilising surplus funds of individuals and institutions for investment in
securities. In the absence of facilities for quick and profitable disposal of
securities, such funds may remain idle.
4.
Capital formation: Stock exchange not only
mobilises the existing savings but also induces the public to save money. It
provides avenue for investment in various securities which yield higher
returns. It helps in allocation of available funds into the most productive
channels.
5.
Regulation of corporate sector: Stock
exchanges frame their rules and regulations. Every company which wants its
securities to be dealt in at the stock exchange has to follow the rules framed
by the stock exchange in this regard.
6.
Economic barometer: Stock exchange is very
sensitive barometer of business conditions in the country. Booms, depressions
and other important events affect prices of securities. Price trends on the
stock exchange reflect the economic climate in the country. One can easily
analyse the cause of change in the business climate by the ups and downs on the
stock exchange.
7.
Encourages Industrialization: The stock
exchange provides capital to industry and commerce. They provide finance to the
Govt.
8.
Helps government in the Policy Formulation:
All the government policies have their clear reflection on the national science
through stock exchange whether they are economic policies or monetary or fiscal.
Q.N.8. Explain the services provided
by Stock Exchanges.
Ans: SERVICES PROVIDED BY EXCHANGES: Stock
exchanges provide services to investors, corporate sector and the society.
These services are discussed as follows:
(a)
Services to Investors
a) Information about Securities. Stock exchanges provide information
such as the securities listed their, the prices at which traded, the list of
authorised brokers etc. The investors can take investment decisions after
studying that information.
b) Offering Liquidity for Securities. The exchange provide ready
market for purchasing and selling of securities. Any investor needing cash can
sell his shares at the exchange.
c) Protection Against Exploitation. The exchanges prescribe various
rules and regulations under which trading is to be done. The investors are
provided protection under various rules and regulations. They can also approach
exchange authority if investors feel aggrieved on any account.
d) Better Use of Funds. Exchanges provide a mechanism for investors
for making better use of their funds. The investors are provided proper
information about the companies in whose shares the investor wants to invest.
e) Protection from Bad Deliveries. The securities are listed after
proper scrutiny only. It prevents trading in duplicate or forged securities.
(b) Services to Corporate Sector
a) Providing
Market for New Securities. A stock exchange provides a wide market for trading
of securities. The securities can be listed and then traded at the exchanges.
It provides an opportunity to companies to raise funds for capital issues.
b) Increases
Goodwill of the Company. The listing of a security at an exchange adds goodwill
to the company. The securities are listed only after the scrutiny of financial
position of a company.
c) Helps
in Growth of Companies. The stock exchanges provide ready markets for the
purchase and rate of securities. Besides new companies, the existing companies
also need to issue shares at the time of expansion and diversification. The
facility of raising funds encourages the growth of corporate sector.
d) Creating
Confidence in Investors. Those who invest in shares are confident of getting a
ready market for their securities. The exchanges provide liquidity to
securities. When investors are not sure of getting ready market for their
shares then they will hesitate to invest.
e) Financial
Information Available. The corporate sector can get information regarding
trends of investment, investors, choice and priorities etc. from stock
exchanges on regular basis. On the basis of his information, companies can plan
their future issue.
(c) Services to Society
a) Investment
Opportunities. Stock exchanges provide opportunities for investing surplus
funds to general public. Anybody can invest in shares or other securities
whenever they have funds. The securities can be sold through the exchanges on
the choice of the investors.
b) Productive
Use for Funds. The exchanges provide a productive channel for investment of
funds. The amount invested in shares is used for setting up new units or for
expanding and diversifying existing ones. This is the best productive use of
surplus funds.
c) Pulse
of Economy. The business transacted at the exchanges and the indexes of prices
show the growth of the economy in any country. The fluctuations in prices at
exchange help in understanding the pulse of the economy.
d) Investments
in Foreign Securities. The shares of good foreign companies are also traded at
stock exchanges. Those who are interested in investing in foreign securities
can safely invest through stock exchanges. The investments will be safe since
shares of genuine companies are traded at exchanges.
Q.N.9. “SEBI is the watchdog of the
securities market” Do you agree? Give four reasons to support your Answer. 2013, 2014, 2018, 2020
Ans:
SECURITIES AND EXCHANGE BOARD OF INDIA:
With
the growth in the dealings of stock markets, lot of malpractices also started
in stock markets such as price rigging, ‘unofficial premium on new issue, and
delay in delivery of shares, violation of rules and regulations of stock exchange
and listing requirements. Due to these malpractices the customers started
losing confidence and faith in the stock exchange. So government of India
decided to set up an agency or regulatory body known as Securities Exchange
Board of India (SEBI). Securities Exchange Board of India (SEBI) was set up
in 1988 but legal status is granted in May 1992. SEBI is a body
corporate having a separate legal existence and perpetual succession.
Purpose and Role of SEBI: SEBI was set up with the main purpose of keeping a check on
malpractices and protect the interest of investors. It was set up to meet the
needs of three groups.
1. Issuers: For issuers it provides a market
place in which they can raise finance fairly and easily.
2. Investors: For investors it provides protection
and supply of accurate and correct information.
3. Intermediaries: For
intermediaries it provides a competitive professional market.
Functions
of SEBI: The SEBI performs functions to meet its
objectives. To meet three objectives SEBI has three important functions. These
are:
i. Protective functions 2018
ii. Developmental functions 2018
iii. Regulatory functions.
1. Protective Functions: These
functions are performed by SEBI to protect the interest of investor and provide
safety of investment. As protective functions SEBI performs
following functions:
(i) It Checks Price Rigging. SEBI
prohibits such practice because this can defraud and cheat the investors.
(ii) It Prohibits Insider trading. SEBI
keeps a strict check when insiders are buying securities of the company and
takes strict action on insider trading.
(iii) SEBI prohibits fraudulent and
Unfair Trade Practices. SEBI does not allow the companies to make
misleading statements which are likely to induce the sale or purchase of securities
by any other person.
(iv) SEBI undertakes steps to educate
investors so that they are able to evaluate the securities of various companies
and select the most profitable securities.
(v) SEBI promotes fair practices and
code of conduct in security market by taking following steps:
(a) SEBI has issued guidelines to protect the
interest of debenture-holders wherein companies cannot change terms in midterm.
(b) SEBI is empowered to investigate cases of
insider trading and has provisions for stiff fine and imprisonment.
(c) SEBI has stopped the practice of making
preferential allotment of shares unrelated to market prices.
2. Developmental Functions: These
functions are performed by the SEBI to promote and develop activities in stock
exchange and increase the business in stock exchange. Under developmental
categories following functions are performed by SEBI:
(i) SEBI promotes training of intermediaries
of the securities market.
(ii) SEBI tries to promote activities of stock
exchange by adopting flexible and adoptable approach in following way:
(a) SEBI has permitted internet trading
through registered stock brokers.
(b) SEBI has made underwriting optional to
reduce the cost of issue.
(c) Even initial public offer of primary
market is permitted through stock exchange.
3. Regulatory Functions: These
functions are performed by SEBI to regulate the business in stock exchange. To
regulate the activities of stock exchange following functions are performed:
(i) SEBI has framed rules and regulations and
a code of conduct to regulate the intermediaries such as merchant bankers,
brokers, underwriters, etc.
(ii) These intermediaries have been brought
under the regulatory purview and private placement has been made more
restrictive.
(iii) SEBI registers and regulates the working
of stock brokers, sub-brokers, share transfer agents, trustees, merchant
bankers and all those who are associated with stock exchange in any manner.
(iv) SEBI registers and regulates the working
of mutual funds etc.
(v) SEBI regulates takeover of the companies.
(vi) SEBI conducts inquiries and audit of
stock exchanges.
Q.N.10. State five objectives of
SEBI. 2012, 2014
Ans: Objectives of SEBI: The overall objectives of SEBI are to
protect the interest of investors and to promote the development of stock
exchange and to regulate the activities of stock market. The objectives of SEBI
are:
a) To regulate stock exchanges and the
securities industry and to promote their orderly functioning.
b) To protect the rights of investors and
ensuring safety to their investment.
c) To prevent fraudulent and malpractices by
having balance between self regulation of business and its statutory
regulations.
d) To regulate and develop a code of conduct
for intermediaries such as brokers, underwriters, etc.
e) To Regulate Mutual fund agencies and
collective Investment schemes.
Q.N. 11. State three objectives of
NSEI. 2019
Ans: National Stock
Exchange of India was established in 1992 and started working in 1994. The main
objectives of NSE was stated below:
a) To ensure equal access to investors all
over the world.
b) To provide fair, efficient and transparent
trading of the securities electronically.
c) To provide facilities of international
standards.
d) To enable shorter settlement cycles and
book entry settlement.
e) To provide nationwide trading facility for
all types of securities.
Q.N.11. State three advantages of
OTCEI.
Ans: Over the counter
exchange of India (OTCEI) was incorporated in 1990 but trading was started in
1992. It is established on the lines of NASDAQ and promoted by UTI, IDDI and
LICI. It was established with the object to provide electronic trading facility
to small investors.
Advantages of OTCEI
a) To provide a trading platform to smaller
and less liquid companies.
b) It is economical in nature as it involves
low cost of new issue.
c) It is a transparent system of trading with
no problems of bad deliveries.
d) it is suitable for family concerns and
closely held companies.
Q.N.12. State the common features of
NSEI and OTCEI.
Ans: The common features of NSEI and OTCEI are:
a) Nationwide coverage
b) Screen based trading
c) Transparency in transactions
d) Incorporated entities backed by financial
institutions.
Q.N.13. Explain the trading procedure
on NSEI. OR Explain the procedure of trading on the stock exchange.
Ans: The selling and the buying process of securities on the NSEI
are as under:
a) Placing the order: First of all, the person
buying or selling the security places an order. He mentions the company whose
securities are to be traded, quantity and time period.
b) Conveying the message to computer: As soon
as the terminal operator receives the order from the customer, he feeds it on
the computer. All the terminal operators simultaneously feed their orders
online.
c) Matching: The computer matches the orders.
Whenever the computer matches a suitable buying and selling order, it shows the
list on the computer.
d) Accepting the order: After obtaining the
correct match, the order is accepted by both the parties.
e) Delivery and payment: After the transaction
is settled, it payment is done as per the regulations of NSEI.
Q.N.14.
Distinguish between NSEI and OTCEI.
Ans:
Difference between NSEI and OTCEI
|
Basis |
NSEI |
OTCEI |
|
Establishment |
It was
established in 1992 and started working in 1994. |
It was established in 1990 but trading was
started in 1992 |
|
Objective |
Nationwide
transparent exchange for capital as well as money market. |
A nationwide
transparent exchange for small companies. |
|
Paid up capital |
Paid up capital
of NSEI is Rs. 3 crores. |
Paid up capital
of OTCEI is Rs. 30 lakhs. |
|
Securities
traded |
All securities
of capital and money market are traded. |
Only capital
market securities are traded. |
Q.N.15.
Explain various mode of raising capital in the Primary Market.
Ans:
Mode of raising capital in the Primary market
1. Public issue/Prospectus: Securities are issued to the general
public. This is the most popular method of raising long term fund. In this
method securities are offered to the public by issuing prospectus.
2. Right issue: The equity shares of a company are issued to the
existing equity shareholders in the form of right issue. In this issue
additional securities are offered to the existing shareholders.
3. Private placement: Under private placement the shares of a company
are sold among the selected group of persons.
4. Offer for Sale Method: Under this method, instead of offering shares directly to the
public by the company itself, it offers through the intermediary such as issue
houses / merchant banks / investment banks or firms of stock brokers.
5. Other Methods of Issuing Securities: Apart from the above methods, there are some other methods of
issuing securities. They are:
a. Tender method: Under tender method, the issue price is not predetermined. The
company announces the public issue without indicating the issue price. It
invites bids from various interested parties. The parties participating in the
tender submit their maximum offers indicating the maximum price they are
willing to pay. They should also specify the number of shares they are interested
to buy. The company, after receiving various offers, may decide about the price
in such a manner that the entire issue is fairly subscribed or sold to the
parties participating in the tender.
b. Issue of bonus shares: Where the accumulated reserves and surplus of profits of a company
are converted into paid up capital, it is called bonus issue. It simply refers
to capitalization of existing reserves and surpluses of a company.
c. Offer to the employees: Now a days companies issue shares on a preferential basis to
their employees (including whole time directors). This attracts, retains and
motivates the employees by creating a sense of belonging and loyalty. Generally
shares are issued at a discount. A company can issue shares to their employees
under the following two schemes: (a) Employee stock option scheme and (b)
employee stock purchase scheme.
d. Offer to the creditors: At the time of reorganization of capital, creditors may be
issued shares in full settlement of their loans.
e. Offer to the customers: Public utility undertakings offer shares to their customers.
Q.N. 16.
Mention various types of operators in stock exchange.
Ans: Types
of operators in Stock Exchange
1. Brokers: A broker is a member of
the stock exchange who buys and sells securities on behalf of investors. He
charges brokerage or commission for his services.
2. Jobber: A jobber also known as
Tarawaniwala is a member of the stock exchange who is specialised in one type
of security and buys and sells securities on his own behalf.
3. Bulls: A bull is a speculator who
buys securities expecting higher prices in future.
4. Bears: A bear is a speculator who
sells securities expecting fall in prices in near future.
5. Stag: A stag is a speculator who applies for new securities in expectation that prices will rise by the time of allotment and he can sell them at premium.