CBSE Class 12 Case Studies In Business Studies – Financial Markets

FINANCIAL MARKET
Financial Market: Definition
A financial market is a market for the creation (new issue of securities) and exchange (sale of existing securities) of financial assets.

Financial Markets: Purpose
Financial market serves as an intermediary between the surplus sector (households which have savings) and deficit sector (business firms which needs funds).

Functions of Financial Market

  • It performs the allocative function
    by mobilisation of savings and channelising them into the most productive avenues.
  • It helps to determine the price for the financial asset in a particular financial market through the market forces of demand and supply.
  • It provides liquidity to the financial assets by providing ready markets wherein the securities can be easily converted into cash or vice versa.
  • It provides a common platform for exchange of securities thereby reducing the cost of transactions by saving time, effort and money spent by the buyers and sellers in locating each other.

Financial Intermediation: Definition
Financial intermediation refers to the process through which allocation of funds is done by the savers in the household sectors through two main mechanisms; banks and financial markets.
Types / Segments of Financial Market

  • Capital Market
  • Money Market

CAPITAL MARKET
Capital Market: Definition
Capital Market refers to facilities and institutional arrangements through which long term funds, both debt and equity, are raised and invested.
Capital market is a segment of financial market.

Features of Capital Market

  • It is a market for long term funds.
  • The main participants in capital market are banks, financial institutions, corporate bodies, foreign investors and retail investors.
  • Since the cost of securities may be low, investment can be made in the capital market with less capital.
  • The securities in capital market enjoy good liquidity.
  • The instruments in capital market carry high risk as the expected return on them is high.

Main Instruments in Capital Market

  • Equity Shares
  • Preference Shares
  • Debentures
  • Bonds

Types / Segments of Capital Market

  • Primary Market
  • Secondary Market

Constituents of the Capital Market

  • Development Banks
  • Commercial Banks
  • Stock Exchanges

PRIMARY MARKET
Primary Market: Definition
Primary market is also known as new issue market as the securities are issued for the first time by the companies through this market.
Primary Market is a segment of capital market.

Features of Primary Market

  • It is the new issue market.
  • Only buying of securities takes place.
  • Prices of the securities are determined by the company.
  • It involves dealings between the company and investors.
  • There is no fixed location of primary market.

Instruments of Primary Market

  • Shares
  • Debentures
  • Bonds

Methods of Floatation in Primary Market

  • Offer through Prospectus (The company approaches the members of the general public directly by issuing a prospectus)
  • Offer For Sale (The company approaches members of the general public indirectly through intermediaries like issuing houses, stock brokers etc.)
  • Private Placement (The company can raise finance by allotting securities to selective individuals and institutions only)
  • e-IPOs (The investors may subscribe to the securities of a company online)
  • Rights Issue (It is a pre-emptive right given only to the existing shareholders to subscribe to the securities of the company as per its terms and conditions)

SECONDARY MARKET
Secondary Market: Definition
It is a market for old or existing securities
It is a segment of capital market.

Features of Secondary Market / Stock Exchanges

  • It is the market for old/existing securities.
  • Both buying and selling of securities takes place.
  • Prices of the securities are determined by the forces of demand and supply.
  • It involves dealings between two investors.
  • Stock exchanges exist at fixed location.

MONEY MARKET
The money market is a market for short term debt instruments whose period of maturity is upto one year.
It is a segment of financial market.

Features of Money Market

  • It is a market for short term funds.
  • The main participants are institutional investors.
  • Since the cost of securities may be high, investment in the money market may require huge capital outlay.
  • The money market enjoys high liquidity as The Discount Finance House of India works as a compulsory market maker for it.
  • The instruments in money market carry low risk as the expected return is low on

INSTRUMENTS IN MONEY MARKET

Call Money
  • Call money is a short term money market instrument through which one bank may borrow money from another bank to maintain its cash reserve ratio as per the guidelines of RBI.
  • It’s maturity period may range from a single day to a fortnight.
  • The rate at which the interest is paid on call money is called call rate.
Commercial Paper
  • Commercial Papers are the short term money market instrument issued by large and credit worthy companies.
  • The instrument is in the form of an unsecured promissory note and is freely transferable by endorsement.
  • Its maturity period may range from a fortnight to a year.
  • It is sold at discount and redeemed at par.
  • It is used for bridge financing.
Certificate of Deposit
  • Certificate of deposit is a short term money market instrument issued by commercial banks and development financial institutions.
  • It is an unsecured and negotiable instrument in bearer form.
  • It may be issued to individuals, corporations and companies when banks need cash to meet credit needs
Treasury Bills
  • Treasury bills are short term money market instrument which are issued by Reserve bank of India on behalf of the Government of India.
  • They are issued in the form of promissory notes and are very safe instruments.
  • They are sold at discount and redeemed at par.
  • They are also known as zero-coupon-discount bonds.
  • The minimum value of their purchase is ? 25,000 and in multiples thereof.
Commercial Bill
  • Commercial bill is a short term money market instrument.
  • A business firm may draw a bill of exchange in favour of another in lieu of credit purchases.
  • On acceptance by the drawee (buyer) it becomes a trade bill.
  • When the trade bill is accepted by a commercial-bank for discounting it is called commercial bill.
  • A bill of exchange is a freely negotiable instrument.
  • It is usually drawn for a period of 3 months.

 STOCK EXCHANGE
Stock Exchange: Definition
According To Securities Contracts (Regulation) Act 1956, “Stock Exchange means any body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying and selling or dealings in securities.”

Functions of Stock Exchange

  • Ensures liquidity and marketability of existing securities by a providing a ready and continuous market for the sale and purchase of securities.
  • Helps in determining the prices of the securities through the forces of demand and supply.
  • It promotes the habit of saving and investment among the general public.
  • It provides a legal framework for fair and safe dealings.
  • It helps the companies in raising finance thus facilitating capital formation and economic growth.
  • It provides scope for healthy speculation in a controlled and restricted way.

Dematerialisation: Definition
Dematerialisation refers to the process of holding securities in electronic form.

Depository: Definition
Depository is the organisation with which an investor has to open a D-Mat account to hold securities in electronic form.
In India there are two depositories:

  • National Secuities Depository Limited (NSDL)
  • Central Depository Services Limited (CDSL)

The depository participant serves as a link between the investor and the depository i.e. either NSDL or CDSL.

Screen Based Trading: Definition
Screen-based trading refers to the process of buying or selling securities on-line.

Advantages of Screen-based Trading

  • As the investors get an access to the stock market during real time, there is complete transparency and in the dealings.
  • It provides a common platform for exchange of securities thereby increasing the efficient transactions by saving time, effort and money.
  • This virtual market has a very wide reach hence it increases its liquidity.

STEPS IN THE TRADING AND SETTLEMENT PROCEDURE

  1. The investor approaches a registered broker or sub-broker for trading.
    The investor has to sign a broker-client agreement and a client registration form.
    • The investor has to furnish certain details and information about himself including PAN number which is mandatory, date of birth, bank account details, income details etc.
    • A broker acts as an intermediary between the buyers and sellers.
    • After the completion of the above formalities, the broker opens a trading account in the name of the investor.
  2. The investor has to open a demat account with a depository participant and a bank account for trading transactions in cash.
  3. The investor then places an order to buy or sell shares with the broker:
    • By giving clear instructions about the desired quantity and price.
    • The broker will then make the investor aware about the feasibility of the order.
    • The broker will issue an order confirmation slip to the investor.
  4. The broker will then execute the order through screen based trading by considering the best available deal.
  5. The broker will issue a trade confirmation slip to the investor.
  6. Within 24 hours after the deal is executed the broker issues a contract note.
    • A contract note contains details about the deal i.e. the number of securities bought/sold, price, date and time of transaction etc.
      The contract note includes a unique order code generated by the stock exchange for that transaction.
    • A contract note is a legal which may be used to settle the claims between the investor and the broker.
  7. Since the settlement cycle is T +2 therefore, within two days of receiving the Contract Note, the investor has to pay cash or deliver shares sold as the case may be. The broker can then forward it to the exchange. This is called pay-in-day.
  8. On the T+2 day, cash will be paid or shares will be delivered as the case may be by the exchange to the other broker. This is called pay-out-day. Then, in case of sale of shares, the broker has to make the payment to the investor within 24 hours.
  9. However, in the case of purchase of securities, the amount will be transferred electronically to the investor’s demat account.

SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)
The Securities and Exchange Board of India (SEBI) is the regulator for the securities market in India.

  • It was established in the year 1988 by the Government of India. It was to function under the overall administrative control of Ministry of Finance of the Government of India.
  • It was given statutory powers on 30th January 1992 through an ordinance.
  • The ordinance was later on replaced by an Act of Parliament known as the SEBI Act, 1992.

The Organisation Structure of SEBI

  • The various activities undertaken by SEBI are now divided into five operational departments.
  • Each department is headed by an executive director.
  • The head office of SEBI is located at Mumbai.
  • Besides, regional offices have been set up in Kolkata, Chennai and Delhi to attend to consumers complaints and maintain liaison with the issuers, intermediaries and stock exchanges in the concerned regions.
  • SEBI has also formed Primary Market Advisory Committee and Secondary Market Advisory Committee to assist in the process of SEBI’S policies formation.
  • These two committees consist of the market players, the investor’s association recognised by SEBI and the eminent persons in the capital market.

Objectives of SEBI

  • To prevent trading malpractice in thesecurities markets.
  • To protect the rights and interest of investors, and to guide and educate them.
  • To regulate and develop a code of conduct and fair practices by intermediaries like brokers, merchant bankers, etc. with a view to making them competitive and professional.
  • To regulate stock exchanges and the securities market to promote their orderly functioning.

Purpose and Role of SEBI
SEBI has to be responsive to the needs of three groups, which constitue the market namely:

  • The issuers of securities so as to provide them a platform for raising capital in an easy, effective and efficient manner.
  • The investors so as to protect their interests in securities by keeping them abreast about the developments through true and appropriate information.
  • The market intermediaries in order to provide them a framework so as to enable them to perform their functions effectively and efficiently.

Objectives of Advisory Committees Formed by SEBI

  • To advise SEBI on matters relating to regulation of intermediaries for ensuring investor protection in the primary market.
  • To advise SEBI on issues related to development of primary market in India.
  • To advise SEBi on matters required to be taken by for changes in legal framework to introduce simplification and transparency in the primary market.
  • To advise SEBI on disclosure requirements for companies.
  • To advise the board in matters relating to the development and regulation of secondary market in the country.

FUNCTIONS OF SEBI
Protective Functions of SEBI

  • SEBI prohibits fraudulent and unfair trade practices in the securities market
  • Promotion of fair practices and code of conduct in securities market
  • Undertaking steps for investor protection
  • Controlling insider trading and imposing penalties for such malpractices.

The Preamble of the Securities and Exchange Board of India describes the basic functions of the Securities and Exchange Board of India as “…to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto”

Developmental Functions of SEBI

  • Ensuring training of intermediaries of securities market
  • Conducting research and publishing information useful to all market participants
  • Facilitating flexibility in the working of capital markets.

Regulatory Functions of SEBI

  • Registration and regulation of of brokers, sub-brokers and other players in the financial market.
  • Registration of collective investment schemes and Mutual Funds.
  • Conducting enquiries and audits of stock exchanges & intermediaries.
  • Regulation portfolio exchanges, underwriters, merchant bankers and the dealings in the stock exchanges.
  • Regulation of take over bids by the companies

MIND MAP
cbse-class-12-case-studies-in-business-studies-financial-markets-1
cbse-class-12-case-studies-in-business-studies-financial-markets-2

LATEST CBSE QUESTIONS

Question 1.
Meca Ltd. a reputed automobile manufacturer needs Rupees ten crores as additional capital to expand its business. Atul Jalan, the CEO of the company wanted to raise funds through equity. On the other hand the Finance Manager, Nimi Sahdev said that the public issue may be expensive on account of various mandatory and non-mandatory expenses. Therefore, it was decided to allot the securities to institutional investors.
Name the method through which the company decided to raise additional capital. (CBSE, Delhi 2017)
Answer:
Private placement is method through which the company decided to raise additional capital.

Question 2.
These days, the development of a country is also judged by its system of transferring finance from the sector where it is in surplus to the sector where it is needed most. To give strength to the economy, SEBI is undertaking measures to develop the capital market. In addition to this there is another market in which unsecured and short-term debt instruments are actively traded everyday. These markets together help the savers and investors in directing the available funds into their most productive investment opportunity.

  1. Name the function being performed by the market in the above case.
  2. Also, explain briefly three other functions performed by this market. (CBSE, Delhi 2017)

Answer:

  1. Mobilisation of funds is the function being performed by the financial market in the above case. It performs the allocative function by mobilisation of savings and channelising them into the most productive avenues.
  2. The other three functions being performed by the financial market are outlined below:
    • It helps to determine the price for the financial asset in a particular financial market through the market forces of demand and supply.
    • It provides liquidity to the financial assets by providing ready markets wherein the securities can be easily converted into cash or vice versa.
    • It provides a common platform for exchange of securities thereby reducing the cost of transactions by saving time, effort and money spent by the buyers and sellers in locating each other.

Question 3.
These days, the development of a country is also judged by its system of transferring finance from the sector where it is in surplus to the sector where it is needed the most. To give strength to the economy, SEBI is undertaking measures to develop the capital market. In addition to this, there is another market in which unsecured and short-term debt instruments are actively traded every day. These markets together help the savers and investors in directing the available funds into their most productive investment opportunity.

  1. Name the function being performed by the market in the above case.
  2. Name the market segment other than the capital market segment in which unsecured and short-term debt instrument are traded. Also, give any three points of difference between the two. (CBSE, OD 2017)

Answer:

  1. Mobilisation of funds is the function being performed by the financial market in the above case. It performs the allocative function by mobilisation of savings and channelising them into the most productive avenues.
  2. Money market is the other segment of market.
    The difference between capital market and money market is given below:
    S.No Basis Capital Market Money Market
    1. Participants The main participants in capital market are banks, financial institutions , corporate bodies, foreign investors and retail investors. The main participants are institutional investors.
    2.

    Investment
    outlay

    		 Since, the cost of securities may be low, investment can be made in the capital market can be with less capital. Since, the cost of securities may be high, investment in the money market requires huge capital outlay.
    3. Liquidity The securities in capital market enjoy good liquidity. The securities in money market enjoy high liquidity as The Discount Finance House of India works as a compulsory market maker.

Question 4.
ABC Ltd. issued prospectus for the subscription of its shares for Rs. 500 crores in 2008. The issue was oversubscribed by 20 times. The company issued shares to all the applicants on pro-rata basis. Later SEBI inspected the prospectus and found some misleading statement about the management of the company in it. SEBI imposed a penalty of Rs. 5 crores and banned its three executive directors for dealing in securities market for three years. Identify the function and its type performed by SEBI in the above case. (CBSE, Sample Paper, 2017)
Answer:
Protective function has been performed by SEBI in the above case. And the type of Protective function is Prohibition of fraudulent and unfair trade practices.

Question 5.
“Money market is essentially a market for short-term funds’. In the light of this statement state any three features of money market.
(CBSE, Sample Paper, 2017)
Answer:
The three features of money market are described below:

  • It is a market for short term funds whose maturity period is upto one year.
  • The main participants are institutional investors.
  • Since the cost of securities may be high, investment in the money market requires huge capital outlay.

Question 6.
“Unicon Securities Pvt. Ltd” was established to deal in securities. It was registered as a stock broker with National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) to trade in securities listed at these exchanges. It is also a depository participant with CDSL and NSDL. In the first three years, it developed its business successfully. After that the composition of Board of Directors changed. Some customers complained to the customer care centre of the company that shares purchased by them and for which the payment has been duly made, were not transferred to their D’mat Accounts by “Unicon securities Pvt. Ltd” . The executive of customer care centre promised the aggrieved customers that their shares will be transferred to their respective D’mat Accounts very soon. But the company delayed the matter and didn’t transfer the shares of the customers to their D’mat Accounts. This eroded investors confidence and multiplied, their grievances.

  1. Identify the step of trading procedure in a stock exchange which has not been followed by “Unicon Securities Pvt. Ltd” .
  2. Name the Apex statutory body of capital market to whom customer can complain to redress their grievances.
  3. Write two values not followed by Unicon Security Pvt. Ltd.(CBSE, Sample Paper, 2017)

Answer:

  1. The step of trading procedure in a stock exchange which has not been followed by “Unicon Securities Pvt. Ltd” is settlement i.e. the delivery of shares through the D’mat Account of the broker to D’mat account of the investors.
  2. The Securities and Exchange Board of India (SEBI) is the Apex statutory body of capital market to whom customer can complain to redress their grievances.
  3. The two values not followed by Unicon Security Pvt. Ltd are’:
    • Truthfulness
    • Fair practices

Question 7.
Reshu’s father has gifted her the shares of a large cement company with which he had been working. The securities were in physical form. She already has a bank account and does not possess any other forms of securities.
She wished to sell the shares and approached a registered broker for the purpose. Mention one mandatory detail which she will have to provide with the broker. (CBSE, Sample Paper, 2016)
Answer:
Reshu will have to give her Permanent Account Number (PAN) to the broker as it is mandatory as per law.

Question 8.
Squib Ltd. is a large creditworthy company operating in the Kashmir Valley. It is an export- oriented unit, dealing in exclusive embroidered shawls. The floods in the Valley have created many problems for the company. Many craftsmen and workers have been dislocated and raw material has been destroyed. The firm is therefore, unable to get an uninterrupted supply of raw materials and the duration of the production cycle has also increased. To add to the problems of the organisation, the suppliers of raw materials who were earlier selling on credit are asking the company for advance payment or cash payment on delivery. The company is facing a liquidity crisis. The CEO of the company feels that taking a bank loan is the only option with the company to meet its short-term shortage of cash.
As a finance manager of the company, name and explain the alternative to bank borrowings that the company can use to resolve the crisis. (CBSE, Sample Paper 2016)
Answer:
Commercial Papers may be used by Squib Ltd. as it is a popular short term instrument which is issued by large and credit worthy companies. The instrument is an unsecured promissory note and is freely transferable by endorsement. Its maturity period may range from a fortnight to a year. It is sold at discount and redeemed at par.

Question 9.
Mr. Sanjay Nehra was the Chairman of Taran Bank. The bank was earning good profits. Shareholders were happy as the bank was paying regular dividends. The market price of their shares was also steadily rising. The bank was about to announce taking over the ‘Vena Bank.’ Mr. Sanjay Nehra knew that the share price of Taran Bank would rise on this announcement. Being a part of the bank, he was not allowed to buy shares of the bank. He called one of his rich friends Sudhir and asked him to invest Rs.5 crores in shares of his bank promising him the capital gains.
As expected, the share prices went up by 40% and the market price of Sudhir’s shares was now ? 7 crores. He earned a profit of Rs. 2 crores. He gave Rs. 1 crore to Mr. Sanjay Nehra and kept Rs. 1 crore with himself. On regular inspection and by conducting enquiries of the brokers involved, the Securities and Exchange Board of India (SEBI) was able to detect this irregularity. The SEBI imposed a heavy penalty on Mr. Sanjay Nehra.
By quoting the lines from the above paragraph, identify and state any two functions that were performed by SEBI in the above case
Answer:
The two functions performed by SEBI in the given case are stated below:

  • Regulatory function is being performed by SEBI: “On regular inspection and by conducting inquires of the brokers involved.”
  • Protective function is performed by SEBI: “The SEBI imposed a heavy penalty on Mr. Sanjay Nehra.”

Question 10.
Mr. Vikas Mehra was the Chairman of IBM Bank. The bank was earning good profits. Shareholders were happy as the bank was paying regular dividends. The market price of their shares was also steadily rising. The bank was about to announce the taking over of ‘UK Bank’. Mr. Vikas Mehra knew that the share price of IBM Bank, would rise on this announcement. Being a part of the bank, he was not allowed to buy shares of the bank. He
called one of his rich friends Mukand and asked him to invest Rs. 4 crores in the shares of his bank promising him the capital gains.
As expected, after the announcement, the share prices went up by 50% and the market price of Mukand’s shares was now Rs. 6 crores. Mukand earned a profit of Rs. 2 crores. He gave Rs. 1 crore to Vikas Mehra and kept Rs. 1 crore with him. On regular inspection and by conducting enquiries of the brokers involved, the Securities and Exchange Board of India (SEBI) was able to detect this irregularity. SEBI imposed a heavy penalty on Vikas Mehra.
Quoting lines from the above paragraph, identify and state any two functions performed by the SEBI in the above case. (CBSE, OD 2016)
Answer:
The two functions performed by SEBI in the given case are stated below:

  • Regulatory function is being performed by SEBI: “on regular inspection and conducting inquires of the brokers involved.”
  • Protective function is performed by SEBI: “The SEBI imposed heavy penalty on Mr.Vikas Mehra.”

Question 11.
Supriya’s grandmother who, was unwell, called her and gave her a gift packet. Supriya opened the packet and saw many crumpled share certificates inside. Her grandmother told her that they had been left behind by her late grandfather.
As no trading is now done in physical form, Supriya wants to know the process by adopting which she is in a position to deal with these certificates.

  1. Identify and state the process.
  2. Also, give two reasons to Supriya why dealing with shares in physical form has been stopped. (CBSE, Sample Paper 2015)

Answer:

  1. Dematerialisation refers to the process of holding securities in electronic form.
  2. The two problems of holding shares in physical form are as follows:
    • When the shares certificates are held in physical form, there is danger of loss or theft.
    • There is risk of forgery, as the buyer may be delivered fake certificates .

Question 12.
Mission Coach Ltd. is a large creditworthy company that manufactures coaches for the Indian Railways. It now wants to export these coaches to other countries and decides to invest in new hi-tech machines. Since the investment is large, it requires long-term finance. It decides to raise funds by issuing equity shares. The issue of equity shares involves huge floatation cost. To meet the expenses of floatation cost, the company decides to tap the money market.

  1. Name and explain the money-market instrument the company can use for the above purpose.
  2. What is the duration for which the company can get funds through this instrument?
  3. State any other purpose for which this instrument can be used. (CBSE, OD 2015)

Answer:

  1. Commercial Papers can be used for Bridge financing by Mission Coach Ltd. as it is issued by large and credit worthy companies. The instrument is in the form of an unsecured promissory note and is freely transferable by endorsement. It is sold at discount and redeemed at par.
  2. Its maturity period may range from a fortnight to a year.
  3. It is also used to meet the short term seasonal and working capital requirements of a business enterprise.

Question 13.
Ganesh Steel Ltd. is a large and creditworthy company that manufactures steel for the Indian market. It now wants to cater to the Asian market and decides to invest in new hi-tech machines. Since the investment is large, it requires long-term finance. It decides to raise funds by issuing equity shares. The issue of equity shares involves huge floatation cost. To meet the expenses of floatation cost, the company decides to tap the money market.

  1. Name and explain the money-market instrument the company can use for the above purpose.
  2. What is the duration for which the company can get funds through this instrument?
  3. State any other purpose for which this instrument can be used. (CBSE, Delhi 2015)

Answer:

  1. Commercial Papers can be used for Bridge financing by Ganesh Steel Ltd. as they are issued by large and credit worthy companies. The instrument is in the form of an unsecured promissory note and is freely transferable by endorsement. It is sold at discount and redeemed at par.
  2. Its maturity period may range from a fortnight to a year.
  3. It is also used to meet the short term seasonal and working capital requirements of a business enterprise.

ADDITIONAL QUESTIONS

Question 1.
Incorporated in 1990, Raju Dairy Ltd., is one of the leading manufacturers and marketers of dairy-based branded foods in India. In the initial years, its operations were restricted only to collection and distribution of milk. But, over the years it has gained a reasonable market share by offering a diverse range of dairy based products including fresh milk, flavoured yogurt, ice creams, butter milk, cheese, ghee, milk powders etc. In order to raise capital to finance its expansion plans, Raju Dairy Ltd. has decided to approach capital market through a mix of Offer for sale of Rs. 4 crore shares and a public issue of Rs. 2 crore shares.
In context of the above case:

  1. Name and explain the segment of capital market being approached by the company.
  2. Identify the two methods of floatation used by the company to raise the required capital. Give one difference between them.

Answer:

  1. Primary market is the segment of capital market being approached by the company. It is also known as the new issue market as the securities are issued for the first time by the companies through this market.
  2. The two methods of floatation used by the company to raise the required capital are – Issue through prospectus and Offer for sale.
    In case of issue through prospectus, the company approaches the members of the general public directly by issuing a prospectus whereas in case of Offer for sale, the company approaches members of the general public indirectly through intermediaries like issuing houses, stock brokers etc.

Question 2.
The SEBI has imposed a penalty of Rs. 7,269.5 crore on Pearls Agrotech Corporation Limited (PACL) and its four directors — Tarlochan Singh, Sukhdev Singh, Gurmeet Singh and Subrata Bhattacharya who had mobilised funds from the general public through illegal collective investment schemes in the name of purchase and development of agriculture land. While imposing the penalty, the biggest in its history, Securities and Exchange Board of India (SEBI) said the company deserved “maximum penalty” for duping the common man. Its Prevention of Fraudulent and Unfair Trade Practices Regulations provides for “severe to severe penalties” for dealing with such violations. As per SEBI norms, it can impose a penalty of Rs. 25 crore or three times of the profit made by indulging in fraudulent and unfair trade practices and in the present case, the regulator has imposed a fine equivalent to three times of the illicit gains.
In the context of the above case:

  1. State the objectives of setting up SEBI.
  2. Identify the type of function performed by SEBI by quoting lines from the paragraph.

Answer:

  1. The objective of setting up SEBI are outlined below:
    • To prevent trading malpractice in the securities markets.
    • To protect the rights and interest of investors, and to guide and educate them.
    • To regulate and develop a code of conduct and fair practices by intermediaries like brokers, merchant bankers, etc. with a view to making them competitive and professional.
    • To regulate stock exchanges and the securities market to promote their orderly functioning.
  2. Protective function is performed by SEBI: “The SEBI has imposed a penalty of Rs. 7,269.5 crore on Pearls Agrotech Corporation Limited.”

Question 3.
Harsh works as a manager in a software company. He opened a Demat account with a broking house in order to trade in securities with the money he received as his first performance bonus. Since then he has been very active in stock trading under the guidance of a stock broker. However, when he was hospitalised for a few days this year, his wife received several calls from the his stock broker for permission to transact on Harsh’s behalf. Though she told him to wait till her husband had recovered, the stock broker went ahead and executed the transactions. When Harsh got home from hospital, he discovered that the unauthorised transactions had led to a loss for him.
Harsh complained to the broking house, but they claimed he had authorised the transactions. Keeping in view, the guidelines issued by the National Stock Exchange that he had read in the national newspaper Harsh demanded proof and threatened to file a complain. Since, the broking house had no evidence that the deals had been authorised they made good the loss that Harsh had incurred due to the transactions.
In the context of the above case:

  1. What is a Demat account?
  2. Who is acting as the depository participant for Harsh?
  3. Name the document that is legally enforceable and helps to settle the claims between the investor and the broker.

Answer:

  1. A Demat account is an account used for holding securities in electronic form.
  2. The Broking house is acting as the depository participant for Harsh.
  3. A contract note is a legally enforceable document that helps to settle the claims between the investor and the broker.

Question 4.
Make Good Technologies Ltd. is one of the top suppliers of security software products and solutions in India with a market share of over 20% in the retail segment. Its customers includes people all sections of the society i.e. both households and corporates. Its unique threat detection system works to detect security threats including virus attacks in real time to protect users’ IT assets across varied platforms and devices. The company has an established track record of growth and financial performance. At present the company operates only through its website. The company now intends to launch a range of computer accessories and plans to market it by opening its own retail outlets. So, the board of directors of the company have decided to only raise capital for the first time through an issue of shares, but at the same time they do not wish to get into the hassles of launching a public issue of shares.
In context of the above case:

  1. Name and explain the way through which the company can raise finance by allotting securities to selective individuals and institutions only.
  2. Can the company also raise capital through a right issue? Why or why not? Give a reason to justify your answer.

Answer:

  1. The company can raise finance by allotting securities to selective individuals and institutions only through Private Placement. It is a relatively economical way of raising money as it helps to save time, cost and money involved in the process of issuing securities.
  2. No, the company cannot raise capital through a right issue as it is issuing securities for the first time. A rights issue is a pre-emptive right given only to the existing shareholders to subscribe to the securities of the company as per its terms and conditions.

Question 5.
After doing a course in online trading, Arsh started an online portal for stock trading under the name ‘Investment Guru’. He met his school friend Ajay after a long time in a bank where Ajay had come to open a D-Mat account. Arsh urged Ajay to invest in the forthcoming IPO of a blue chip companies whereas Ajay was inclined to buy existing securities of the other companies to build his investment portfolio.
In context of the above case:

  1. Identify the two different types of capital market being referred to by quoting lines from the para.
  2. State any four differences between the two different types of capital markets as identified in part (1).

Answer:

  1. The two different types of capital market being referred to are-
    • Primary Market: “Arsh urged Ajay to invest in the forthcoming IPO of a blue chip companies.”
    • Secondary Market: “Ajay was inclined to buy existing securities of the other companies to build his investment portfolio.”
  2. Differences between Primary Market and Secondary Market:
    S. No BASIS PRIMARY MARKET SECONDARY MARKET
    1. Meaning It is the new issue market. It is the market for old securities.
    2. Aspects Only buying of securities takes place. Both buying and selling of securities takes place.
    3. Price Prices of the securities are determined by the company. Prices of the securities are determined by the forces of demand and supply.
    4.

    Parties
    involved

    		 It involves dealings between the company and investors It involves dealings between the two investors.

Question 6.
Ketan won a cash prize of Rs. 20,000 in the National level Robotics Competition. On the advise of his father, he visits a nearby bank to open a Fixed deposit account in his name with the prize money. His sister Suhasini accompanied him to the bank. On reaching the bank, he notices big banners which are placed within the premises containing information about the various arrangements through which corporates may raise their capital through the bank. Being a finance graduate, Suhasini explains to Ketan that banks play the role of the financial intermediary by helping in the process of channelizing the savings of the households into the most profitable business ventures.
In context of the above case: .

  1. Name another financial intermediary that helps in the process of channelizing the savings of the households into the most productive use.
  2. Also, outline any two functions of another financial intermediary as identified in part (1).

Answer:

  1. Financial markets is the other financial intermediary that helps in the process of channelizing the savings of the households into the most productive use.
  2. The two functions of financial market are as follows:
    • It helps to determine the price for the financial asset in a particular financial market through the market forces of demand and supply.
    • It provides liquidity to the financial assets by providing ready markets wherein the securities can be converted into cash or vice versa easily.

Question 7.
Ragu works as a waiter in a five star hotel in Mumbai. While serving the customer he overhears him at the table saying that the he has made profits higher than expected by investing in securities market. So, Ragu also decides to make a nominal investment from his savings in the stock market in pursuit of higher gains.
In context of the above case:
As a financial consultant, apprise him of the steps involved in the working of a Demat system.
Answer:
Ragu will have to initiate the following steps for trading through a Demat system:

  • He will have to first open a Demat account with a depository participant (DP) who may either be a bank, broker or financial services company by furnishing certain details and information about himself including PAN number, date of birth, bank account details, income details etc.
  • If he plans to buy shares through a public offer he will have to give details of his Demat account, bank account etc. On allotment the shares will be directly credited to his account.
  • If he decides to buy shares otherwise, he will have to instruct his broker with the details about the name of the company, number of shares, price etc. The transaction will be executed through the depository participant and he will have to make payment for them within T + 2 days.
  • On contrary, whenever he decides to sell shares, he will have to instruct his broker with the details about the name of the company, number of shares, price etc. The transaction will be executed through the depository participant and his account will be debited accordingly. He will receive the payment in T + 2 days.

Question 8.
The Bombay Stock Exchange (BSE) is Asia’s first stock exchange and the world’s 11th largest stock exchange. It became the first stock exchange to be recognized by the Indian Government under the Securities Contracts Regulation Act. Its automated, screen-based trading platform called BSE On-Line Trading (BOLT) had a capacity of 8 million orders per day. The BSE has also introduced a centralized exchange-based internet trading system, BSEWEBx.co.in to enable investors anywhere in the world to trade on the BSE platform.
In context of the above case:

  1. Name the organisation that regulates the working of stock exchanges in India.
  2. State any three functions performed by stock exchanges.
  3. Give any two advantages of screen-based trading.

Answer:

  1. Securities And Exchange Board of India (SEBI) regulates the working of stock exchanges in India.
  2. Three functions performed by stock exchanges are as follows:
    • Ensures liquidity and marketability of existing securities by a providing a ready and continuous market for the sale and purchase of securities.
    • Helps in determining the prices of the securities through the forces of demand and supply.
    • It provides a legal framework for fair and safe dealings.
  3. Two advantages of screen-based trading are as follows:
    • As the investors get access to the stock market during real time, there is complete transparency in the dealings.
    • It provides a common platform for exchange of securities thereby increasing the efficient transactions by saving time, effort and money.

Question 9.
Ragunath Ahuja is one of the Promoter-Director of Vishwas Ltd. The company is engaged in the real estate sector, which has recently witnessed a steady fall in its revenue and the value of its assets due to a downward trend persisting in the market in specific and the economy in general. The periodical financial results of the company were to be declared in a fortnight time. Ragunath Ahuja, being an insider, had access to unpublished price sensitive information related to it. Consequently, he sells a major portion of his holdings in an anticipation of a fall in the market price of the shares of the Company subsequent to the announcement of periodical financial results of the company. Moreover, he doesn’t inform The Securities and Exchange Commission (SEC) about the dealings.
On conducting a probe, Securities and Exchange Board Of India (SEBI) finds Ragunath Ahuja guilty of insider trading. As per law, company directors, officials or any individual with a stake of 10% or more in the company are considered to be insiders and they are required to report their insider transactions within two business days of the date the transaction occurred.
In context of the above case:

  1. State the purpose of setting up SEBI.
  2. Identify the type of function performed by SEBI by quoting lines from the paragraph.

Answer:

  1. SEBI has to be responsive to the needs of three groups, which constitute the market namely:
    • The issuers of securities so as to provide them a platform for raising capital in an easy, effective and efficient manner.
    • The investors so as to protect their interests in securities by keeping them abreast about the developments through true and appropriate information.
    • The market intermediaries in order to provide them a framework so as to enable them perform their functions effectively and efficiently.
  2. Regulatory function is being performed by SEBI: “On conducting a probe Securities and Exchange Board of India (SEBI) finds Ragunath Ahuja guilty of insider trading.”

Question 10.
Sumita is a professor in a reputed business institute. While explaining the procedure of stock exchange trading, she shared with her students that many years back she had bought 200 shares of a leading automobiles company. As per the settlement procedure she paid for the shares and received the share certificates in physical form. However, when she had sent those certificates to the company to get them endorsed in her name, she was informed by the company that those certificates were duplicate.
Therefore, in order to protect the investors from many such malpractices, now only screen-based trading is done and dematerialisation is compulsory.
In context of the above case:

  1. What is screen based trading?
  2. Give the meaning of ‘dematerialisation’. State any two of its advantages.

Answer:

  1. Screen-based trading refers to the process of buying or selling securities online.
  2. Dematerialisation refers to the process of holding securities in electronic form. The two advantages of Dematerialisation as follows:
    • The securities in the demat account can be offered as security to raise loans.
    • Since the shares certificates are not held in physical form, there is no danger of loss, theft or forgery.

Question 11.
Madhav’s is one of the India’s most trusted brands in Indian sweets and snacks segment. The company has manufacturing plants in Kota, Kanpur, New Delhi, and Mumbai. Madhav’s has its own retail chain stores and a range of restaurants in these cities. Now, the company plans to extend its business in 12 more cities in India. In order to raise the funds, its directors have decided to float a public issue through prospectus. Besides, it intends to raise money to meet the floatation costs in terms of brokerage, underwriting commission, advertising etc.
In context of the above case:

  1. What is the other name used for the funds required to meet floatation costs?
  2. Describe briefly the short term instrument popularly used by the companies to raise for the funds required to meet floatation costs. Who can issue them?
  3. Distinguish between the two types of financial markets that the company intends to approach to meet its financial needs.

Answer:

  1. Bridge financing is the other name used for the funds required to meet floatation costs.
  2. Commercial Papers issued by large and credit worthy companies. The instrument is in the form of an unsecured promissory note and is freely transferable by endorsement. It is sold at discount and redeemed at par. Its maturity period may range from a fortnight to a year. It is also used to meet the short term seasonal and working capital requirements of a business enterprise. For example it is used for the purpose of bridge financing.
  3. Capital Market and Money Market.
    Differences between Primary Market and Secondary Market:
    Differences between Capital Market and Money Market:

    S. No

    		 Basis Capital Market Money Market

    1.

    		 Duration It is a market for long term funds. It is a market for short term funds whose maturity period is upto one year.
    2. Participants The main participants in capital market are banks, financial institutions, corporate bodies, foreign investors and retail investors. The main participants are institutional investors.
    3.

    Investment
    outlay

    		 Since, the cost of securities may be low, investment can be made in the capital market can be with less capital. Since the cost of securities may be high, investment in the money market requires huge capital outlay.
    4. Liquidity The securities in capital market enjoy good liquidity. The securities in money market enjoy high liquidity as The Discount Finance House of India works as a compulsory market maker.
    5. Risk and return The instruments in capital market carry high risk as the expected return is high on them. The instruments in money market carry low risk as the expected return is low on them.

Question 12.
During navratras ,Varun finalises a deal to buy a new house. So, he visits a nearby branch of ‘Subh Bank’ to withdraw Rs. 10 lakhs from his account in order to pay the token money to the seller. In the bank he observes that a large number of customers are present to make cash with drawls, probably because it is an auspicious time to make purchases. After sometime, he overhearsone of the bank staff members telling his colleague that, “Today ‘Subh Bank’ is likely to fall short of cash and to make up for the deficit and maintain its cash reserve ratio it will have to approach another bank.”
In context of the above case:

  1. Identify the instrument that ‘Subh Bank’ will use to meet its short term requirements of funds.
  2. State any three feature of the instrument as identified in part (1).

Answer:

  1. Call money is the instrument used by ‘Subh Bank’ to meet its short term requirements of funds.
  2. Three features of call money are as follows:
    • Call money is an instrument through which one bank may borrow money from another bank to maintain the cash reserve ratio as per the guidelines of RBI.
    • Its maturity period may be from a single day to a fortnight.
    • The rate at which the interest is paid on call money is called call rate.

Question 13.
The stock market regulator, Securities and Exchange Board of India (SEBI), has initiated a certification programme for all market intermediaries. Under this programme, people associated with stock markets in any way, will have to obtain a qualifying certificate from the regulator.The National Institute of Securities Market (NISM), a trust formed by SEBI, is tasked with the certification programme.
In the context of the above case:

  1. Identify the type of function performed by SEBI.
  2. Outline any two reasons for setting up SEBI.

Answer:

  1. Developmental function is being carried out by SEBI by starting a certification programme for all market intermediaries.
  2. SEBI was set up as a regulatory body by the government for the following reasons:
    • To curb malpractices in the financial market.
    • To enhance the confidence of the investors by ensuring fair, efficient and transparent dealings.

Case Studies in Business StudiesBusiness Studies Case StudiesBusiness StudiesCommerce

Posted in CBSE  •