NCERT Solutions for Class 12 Business Studies Chapter 10 - Financial Markets

Very Short Answer Type Questions

1. What is a Treasury Bill?

Ans. A treasury bill is an instrument of short term borrowing issued by the RBI on behalf of Government of India and having maturity period of less than one year. They are also known as Zero Coupon Bonds since no interest is earned on them. ‘Treasury bills are issued in the form of a promissory note. They are highly liquid and have assured yield and negligible risk of default. They are issued at a price which is lower than their face value and repaid at part. Treasury bills are available for a minimum amount of ₹25,000 and in multiples thereof.

2. Name the segments of the National Stock Exchange (NSE).

Ans. NSE provides trading in two main segments:
(i) Wholesale Debt Market Segment
(ii) Capital Market Segment

3. State any two reasons why investing public can expect a safe and fair deal in the stock market. (Point w.r.t safety of Transactions – Functions of the Stock Exchange).

Ans. SEBI is set up to protect the interests of the parties involved in the exchange in capital market.

It performs following functions:

(i) Prohibition: Prohibits fraudulent and unfair trade practices. In addition, it prevents the spreading of misleading statements which are likely to affect the functioning of the securities market.

(ii) Checks on insider trading: Insider trading refers to a situation wherein an individual connected with the company leaks out crucial information regarding the company which may adversely affect its share prices. SEBI keeps a strict check on such practices.

4. What is the common name for Beneficiary Owner Account, which is to be opened by the investors for trading in securities?

Ans. The common name of the Beneficiary Account is Dematerialisation or DEMAT account. A
Dematerialisation Account (also known as Demat Account) is a pre-requisite for electronic trading in securities. For example, if a person wants to trade the listed securities in electronic form, then it is mandatory for him/her to open up a Demat account in a depository bank.

5. Name any two details that need to be provided by the investor to the broker while filling a client registration form.

Ans. Client need to furnish an Identity proof- Adhaar number; PAN number and proof of address.

Short Answer Type Questions

1. What are the functions of a Financial Market?

Ans. For the allocation of scarce resources, financial market plays on important role by performing some functions. They are:

(i) Mobilisation of savings and channelising them into the most productive uses: A financial market facilitates the transfer of savings from savers to investors. It gives choice to the saver of different investments and thus, it helps to transmit the surplus funds into the most beneficial use.

(ii) Facilitate Price Discovery: In the financial market, the households are the suppliers of funds and business firms represent the demand. The interaction between them helps to establish a price for the financial asset which is being traded in that particular market.

(iii) Provide Liquidity to Financial Assets: Financial markets facilitate easy purchase and sale of financial assets. Holders of assets can readily sell their financial assets through the mechanism of financial market.

(iv) Reduce the Cost of Transactions: Financial markets provide valuable information about securities being traded in the market. It helps to save time, effort and money that both buyers and sellers of a financial asset would have to spend to try or otherwise find each other.

2. “Money Market is essentially a Market for short term funds.” Discuss.

Ans. The money market refers to the market for short-term funds which deals in monetary assets whose period of maturity ranges from one day to one year. These assets act as a close substitutes for money. It is a market where low risk, unsecured and short term debt instruments that are high in liquidity, are issued and actively traded everyday. It enables the raising of short term funds for earning returns. The major participants in the market are the Reserve Bank of India, Commercial Banks, Non-Banking Finance Companies, State Governments, Large Corporate Houses and Mutual Funds.

3. Distinguish between Capital Market and Money Market.

Ans. Difference between Capital and Money Market are:

Basis Capital Market Money Market
Duration It deals in medium and long term securities. It deals in short term securities.
Instruments used The common instruments like equity shares, preference shares, bonds, debentures are included. The common instruments like commercial, paper, treasury bill, trade bill, certificate of deposit are included
Safety The risk is comparatively high Risk involvement is low.
Expected return Returns on investment expected to be higher. Returns on Investment expected to be lesser.
Participants Individual investors, financial institutions, corporate houses etc. RBI, commercial Banks, financial institutions mutual funds.

4. What are the functions of a Stock Exchange?

Ans. The efficient functioning of a stock exchange creates a conducive climate for an active and growing primary market.

Following are the important functions of a stock exchange:

(i) Provide liquidity and marketability to existing securities: The basic function of a stock exchange is the formation of a continuous market where securities are bought and sold. It gives investors the chance to disinvest and reinvest. This provides both liquidity and easy marketability to the existing securities in the market.

(ii) Pricing of securities: Share prices on a stock exchange are determined by the forces of demand and supply. A stock exchange is a mechanism of constant valuation through which the prices of securities are determined. Such a valuation provides important instant information to both buyers and sellers in the market.

(iii) Safety of transactions: The membership of a stock exchange is well-regulated and its dealings are well defined according to the existing legal framework which ensures that the investing public gets a safe and fair deal on the market by eliminating the problems associated with physical certificates e.g. theft, forgery, bad delivery.

(iv) Contributes to economic growth: A stock exchange is a market in which existing securities are resold or traded. This process of disinvestment and reinvestment savings get channelised into the most productive investment avenues. This leads to capital formation and economic growth.

5. What are the objectives of the SEBI?

Ans. (i) To prevent trading malpractices in the securities markets.
(ii) To protect the rights and interests of investors and to guide and educate them.
(iii) To regulate and develop a code of conduct and fair practices by intermediaries like brokers, merchant bankers, etc., to make them competitive and professional.
(iv) To regulate stock exchanges and the securities market to encourage their orderly functioning.

6. State the objectives of the NSE.

Ans. NSE was setup with the following objectives:
(i) Organising a nationwide trading platform for all types of securities.
(ii) An appropriate communication network, ensures equal access to investors.
(iii) Provides a fair, efficient and transparent security market throught electronic trading system.
(iv) It enables shorter settlement cycles and book entry settlements.
(v) Meeting international benchmarks and standards.

7. Name the document prepared in the process of online trading of securities that is legally enforceable and helps to settle disputes/claims between the investor and the broker.

Ans. A contract note is enforceable under law. This note contains details of the number of shares bought or sold, the price, the date and time of deal, and the brokerage charges.

Long Answer Type Questions

1. Explain the various Money Market instruments.

Ans. Money Market Instruments:

(i) Treasury Bill: A treasury bill is an instrument of short term borrowing issued by the RBI on behalf of the GOI having maturity of less than one year. They are also known as Zero Coupon Bonds. They are issued in the form of a promissory note. They are highly liquid and issued at a price which is lower than their face value and repaid at par. Treasury bills are available for a minimum amount of ₹25,000.

(ii) Commercial Paper: Commercial paper is a short term unsecured promissory note, negotiable and transferable by endorsement and delivery with a fixed maturity period. It is issued by large and creditworthy companies to raise short term funds at lower rates of interest than market rates. Maturity period of it is usually of 15 days to one year. The issuance of commercial paper is an alternative to bank borrowing for large companies that are generally considered to be finally strong. It is sold at a discount and redeemed at par.

(iii) Call Money: Call money is a short term finance repayable on demand, with a maturity period of one day to fifteen days, used for inter-bank transactions to maintain a minimum cash balance known as cash reserve ratio as required by the RBI. Call money is a method by which banks borrow from each other.

(iv) Certificate of Deposit: Certificates of deposit are unsecured, negotiable, short term instruments in bearer form, issued by Commercial Banks and the financial institutions. They can be issued to individuals, corporations and companies during the periods of tight liquidity when the deposit growth of banks is slow but the demand for credit is high. They help to mobilise a large amount of money for short periods.

(v) A Commercial Bill: A commercial bill is a bill of exchange used to finance the working capital requirements of business firms. It is a short term negotiable, self-liquidating instrument which is used to finance the credit sales of firms, when goods are sold on credit, the buyer becomes liable to make payment on a specific date in future.

2. Explain the recent Capital Market reforms in India.

Ans. A capital market refers to the market that deals in the trading of medium and long-term securities. That is, it deals in those securities that have a maturity period of greater than or equal to one year. Capital market contains instruments like equity and preference shares, debentures, bonds, mutual funds, public deposits, etc. A capital market can be further divided in two parts namely, Primary Market and Secondary Market. Primary market deals with issue of new securities. Issue of new securities in the primary market directs funds towards those entrepreneurs who either want to start a new enterprise or wish to expand the existing one. Secondary market, on the other hand, deals in the sale and purchase of the existing securities. That is, it deals in the trading of those securities that were initially issued in the primary market.
The history of capital market in the form of stock exchange dates back to the eighteenth century. The Government of India introduced the Companies Act in 1850 with the aim of generating investor interest in corporate securities. The first stock exchange was set up in India in the year 1875 as 'The Native Share and Stock Brokers Association' in Bombay. Later it was renamed as 'Bombay Stock Exchange' (BSE). In the subsequent years, stock exchanges were developed in Ahemdabad, Calcutta and Madras.
In 1990s, the Indian secondary market only consisted of regional stock exchanges wherein, first being the BSE. However, after the reforms of 1991, the Indian Stock Market acquired a three-tier system. This consisted of Regional Stock Exchanges, National Stock Exchange and Over the Counter Exchange of India (OTCEI).

Regional Stock Exchange: The first Regional Stock Exchange was developed in Ahmedabad as Ahmedabad Stock Exchange (ASE) in 1894. Similarly, in 1908, Calcutta Stock Exchange (CSE) was established. In the later years other regional stock exchanges were established in Calcutta, Madras, Ahmedabad, Delhi, Hyderabad and Indore. Recently, Regional Stock Exchanges were developed in Coimbatore as Coimbatore Stock Exchange and in Meerut as Meerut Stock Exchange. Currently, there are 22 regional stock exchanges in India.

National Stock Exchange: The NSE is the latest technology driven stock exchange which was recognised in 1993. It started its operations in 1994 with trading in money market securities. Later, it also expanded its trading operations in capital market segment. NSE was set up in order to establish a nationwide platform for trading in all types of securities. It ensured the development of fair and efficient securities market. Within the span of its presence, NSE has transformed the Indian capital market and has been able to take the stock market to the investor's door step. It has provided a wide screen-based automated trading system across the nation ensuring equal access to all the investors.

Over the Counter Exchange of India (OTCEI): OTCEI is a company which was set up in 1990 under the Companies Act,1956 but later it was recognised as a stock exchange under the Securities Contracts Regulation Act, 1956. It commenced its operations in trading in 1992 and is modelled along the lines of NASDAQ, the OTC exchange in USA. Its aim is to provide the small companies an easy access to the capital market. OTCEI provides a screen based nationwide trading system, that acts as a place where buyers meet the sellers and negotiate for an acceptable terms of trade. Herein, dealers can trade both in new issue of securities as well as secondary market. It is a single window exchange which provides a convenient, transparent and efficient avenue for capital market investment.

3. Explain the objectives and functions of SEBI.

Ans. Objectives of SEBI: (i) To prevent trading malpractices in the securities markets.
(ii) To protect the rights and interests of investors and to guide and educate them.
(iii) To regulate and develop a code of conduct and fair practices by intermediaries like brokers, merchant bankers, etc., to make them competitive and professional.
(iv) To regulate stock exchanges and the securities market to encourage their orderly functioning.

Functions of SEBI: Acknowledging the emerging nature of the securities market in India, SEBI was entrusted with the twin task of both regulation and development of the securities market. It has certain functions.
Regulatory Functions:
(i) Registration of brokers and sub-brokers and other players in the market.
(ii) Registration of collective investment schemes and mutual funds.
(iii) Regulation of stock brokers, portfolio exchanges, underwriters and merchant bankers and the business in stock exchanges and any other securities market.
(iv) Regulation of takeover bids by companies.
(v) Seeking information by undertaking inspection conducting enquiries and audits of stock exchanges and intermediaries.
(vi) Levying for or other charges for carrying out the purposes of the Act.
(vii) Performing and exercising such power under Securities Contracts Act, 1956, as may be delegated by the Government of India.

Development Functions:
(i) Training of intermediaries of the securities market.
(ii) Conducting research and publishing information useful to all market segments.
(iii) Undertaking measures to develop the capital markets by adopting a flexible approach.

Protective Functions:
(i) Prohibition of fraudulent and unfair trade practices like making misleading statements, manipulations, price rigging etc.
(ii) Controlling insider trading and imposing heavy penalties for such practices.
(iii) Undertaking steps for inv estor protection.
(iv) Promotion of fair practices and code of conduct in securities market.

4. India’s largest domestic investor Life Insurance Corporation of India has once again come to government’s rescue by subscribing 70% of Hindustan Aeronautics’ `4,200-crore initial public offering.
(a) Which market is being reflected in the above case?
(b) State which method of floatation in the above identified market is being highlighted in the case? (Primary Market)
(c) Explain any two other methods of floatation. (Private Placement, Offer through prospectus, offer for sale).

Ans. (a) Primary Market is being discussed above. Primary market is the market that deals with the issue of new securities. It directs funds towards those entrepreneurs who either want to start a new enterprise or wish to expand the existing one.
(b) Right Issue mode of floatation has been mentioned above. Existing shareholders are offered subscription of new shares of the company in proportion to the number of shares possessed by them.
(c) Other methods of floatation are:
(i) Offer through prospectus: Under this method, a prospectus is published in newspapers, magazines, etc., in accordance with the guidelines and rules listed under the Companies Act and SEBI disclosure. The subscriptions are then invited from the public through this prospectus.
(ii) Private Placement: In this method, the securities are sold only to some selected individuals and big institutional investors rather than to the general public. Companies either allot the securities themselves or sell them to intermediaries who in turn sell these securities to selected clients.

5. Lalita wants to buy shares of Akbar Enterprises, through her broker Kushvinder. She has a Demat Account and a bank account for cash transactions in the securities market. Discuss the subsequent steps involved in the screen-based trading for buying and selling of securities in this case.

Ans. Steps involved in the screen based trading of securities:

  1. Enter into an agreement with a registered broker or sub-broker.
  2. Place the order with the broker.
  3. Broker goes online and check for  the best prices.
  4. Once the prices are within the acceptable range, transaction is executed.
  5. Issue of Contract Note (within 24 hours).
  6. Surrender of shares or making payment against contract note immediately (pay-in-day).
  7. Cash paid or securities delivered before T + 2 day (same day).
  8. Exchange delivers or makes payment to the other broker on T+2 day (payout day).
  9. Broker makes delivery of securities in Demat form to investors account.

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