Business Studies Class 12 Chapter 10 Financial Market Case Studies With Solutions
Class 12 Business Studies Chapter 10 Question Answer
ESSENTIAL POINTS TO SOLVE CASE STUDIES
Financial Markets
Financial market is a link between savers and investors, which mobilises savings from the households to the business firms.
Creation and exchange of financial assets take place in the financial market.
Allocation Function. Through this function (Allocation function) Financial market directs available funds into their most productive use (when funds are finally utilised by business firms, they reach their maximum utilisation).
Financial market creates two outcomes:
- Rate of return to households is higher
- Household savings reach business firms which create maximum possible outcome from these funds leading to increased productivity for the economy.
Functions of Financial Market
- Mobilisation of household savings and directing them towards maximum productivity.
- Prices of the securities are discovered through supply and demand.
- Financial assets can be converted into cash and vice versa.
- Reduces cost of transactions as time and effort are saved as the buyers and sellers get a common meeting platform.
Types of Financial Markets
I. MONEY MARKET
- Duration. No physical location. Deals in short-term funds.
- Major participants. RBI, Non-Banking financial companies, Large credit companies, Commercial banks, etc.
- Instruments. Treasury bills, Commercial Bills, Commercial Papers, Call money and Certificates of Deposit.
- Investment outlay. Transactions involve huge amounts of money.
- Liquidity & safety. Between prestigious big financial institutions therefore easy liquidity and absolutely safe.
- Expected Return .Very low as it helps in meeting temporary shortages of funds.
Types of Money Market Instruments
- Treasury Bill:
- Also known as zero coupon bonds
- Issued by RBI on behalf of government of India.
- Promissory notes
- Issued at discount and redeemed at par.
- Commercial paper:
- Negotiable Instrument
- Maturity period from 15 days to 1 year.
- Issued at discount and redeemed at par like treasury bill.
- Call money:
- Maturity period from 1 to 15 days.
- The rate at which it is borrowed is Call rate.
- Call rate fluctuates not only in matter of days but also hours.
- Banks borrow from each other through Call money.
- Commercial Bill:
- Bill of exchange used for meeting short-term fund requirements of companies.
- Drawn by the seller on buyer. It can be discounted from a bank by the seller in case the seller needs funds before the lapse of maturity period.
- Firms finance their credit sales through trade bills.
- The moment these trade bills are accepted by a third party like commercial banks, they become Commercial bills.
- Certificate of Deposit:
- Issued by Commercial banks and Development banks.
- When banks come in a situation of tight liquidity (shortage of cash) they issue Certificates of deposit to meet the high demand of credit.
II. CAPITAL MARKET
Capital market constitutes all the institutional arrangements and the facilities provided by them, to raise and invest long term sources of funds like Debt and Equity.
Nature Of Capital Market:
- Duration. Deals in medium and long term securities.
- Participants. Commercial firms, Development banks, Financial institutions, Foreign investors, etc.
- Instruments. Equity shares, Preference shares, Bonds, Debentures, etc.
- Investment Outlay. Value of individual securities is low for example ?50, ?200 etc. So the investment outlay is not huge.
- Liquidity. The securities of Capital market are less liquid in comparison to those of Money market.
- Safety. The instruments are risky in terms of returns.
- Expected return. The instruments of capital market give higher returns than instruments of Money market.
Stock Exchange
An institutional platform for buying and selling of existing securities.
Functions of Stock Exchange
- Providing liquidity and marketability to existing securities as it provides a platform for sale and purchase of securities.
- Helping in determination of prices of securities through market driven by supply and demand.
- Contributing to economic growth through the allocative function.
- Ensuring safety of transactions as all these transactions are electronic and take place Under the knowledge of SEBI.
- Spreading of equity cult as the Stock exchanges do whatever is possible to induce as many people as investors in stocks of companies. For example: education of investors, transparency of transactions, etc.
- Providing scope for speculation but in a limited manner as limited dose of healthy speculation is good for activating the market.
Trading Procedure on a Stock Exchange
- Step 1. Selecting the Broker
- Step 2. Opening the demat account
- Step 3. Placing the Order
- Step 4. Connecting to the Stock Exchange
- Step 5. Executing the Order
- Step 6. Issuing of Contract note
- Step 7. Delivery of Cash/Securities —> Pay-in day
- Step 8. Settlement before T+2
- Step 9. Delivery of security/cash —> Pay-out day
- Step 10. Delivery of security in demat form.
Depository
Depository is an organisation which keeps the reservoir of securities in electronic form through depository participants (DPs). The securities belong to the investors who use the services of depository participants to get their securities updated in their account with the Depository in the demat form.
The two Depositories in India are
- National Securities Depository Ltd. (NSDL)
- Central Depository Service Ltd. (CDSL)
Dematerialisation
Conversion of physical form of securities into electronic form and saving them in the Depository in the form of demat account through the involvement of a depository participant (DP).
Dematerialisation process
- Step I. Filling of demat request form and giving physical share certificates to the depository participant (DP).
- Step II. DP contacts the Depository and updates them about the request of the investor.
- Step III. DP submits all these documents to the Registrar of the concerned issuer company.
- Step IV. Registrar confirms the request.
- Step V. Registrar dematerialises the certificates and documents.
- Step VI. Registrar after having done the updation of certificates informs the Depository.
- Step VII. Depository does updation of its accounts and informs DP.
- Step VIII.Finally demat account is updated by the DP.
SEBI
Established in 1988 as interim body. In 1992, formed as a statutory body by SEBI Act, 1992.
Objections of SEBI (Securities and Exchange Board of India)
- Prevention of various malpractices like price rigging, insider trading, etc.
- Devising and maintaining a code of conduct of the investors, brokers and issuers.
- Protecting the vulnerable investors.
- Developing the Stock exchanges by monitoring and improving various aspects connected with them.
Functions of SEBI
- Development functions:
- Developing the capital markets by considering the improvement of all possible aspects connected with it.
- Doing timely research and undertaking publishing of the outcomes of research, as and when required.
- Training the intermediaries (who act as a vital link between investors and issuers).
- Regulatory functions:
- Registration of brokers and sub-brokers.
- Registration and regulation of Mutual funds.
- Regulation of take-over bids.
- Conducting inspections, enquiries and audits of Stock exchanges.
- Levying fee, as and when required.
- Regulation of Underwriters, Stock brokers, etc.
- Protective functions:
- Protecting the interests of the investors.
- Checking malpractices like insider trading, price rigging, etc.
- Taking care of entire code of conduct in the Securities market.
- Promotion of ethical and fair practices.
- Imposing penalties, as and when required.
CASE STUDIES
Question 1.
A very famous article was published in a finance magazine. A portion of that article is present here:
Financial market is not a usual market where you buy commodities but a special place where one can have all the necessary information about the different securities traded in the market. The buyers on the one hand get to know about the securities and they get a place where securities are sold helping reduce the wastage of time, effort and money. The financial experts say otherwise the job of the people involved in the securities transactions would have been really difficult. Securities get a buyer on the one hand and the seller on the other hand on a common platform—this helps in easy conversion of securities into cash. In the economies where there is no stock exchange the funds remain blocked. The money trapped in the houses should come out and flow in the economy and when they are invested in the shares of a company they have the capability to attain the maximum value. People would always like to sell securities on their own conditions. No government intervention can predict the price of securities. The stock market is a place which runs on the forces of demand and supply thus giving a security its price depending upon its demand. One wonders how the economy of a company can grow without the existence of financial market.
Identify explain the functions of financial market discussed in the above case.
Answer:
The various functions of financial market highlighted in the above case are:
- Financial market reduces the cost of transactions. The buyers on the one hand get to know about the securities and they get a place where securities are sold helping reduce the wastage of time, effort and money.
- Financial market provides liquidity to financial assets. Securities get a buyer on the one hand and the seller on the other hand on a common platform-this helps in easy conversion of securities into cash.
- Financial market helps in mobilization of savings and channelises them to the most productive use. The money trapped in the houses should come out and flow in the economy and when they are invested in the shares of a company they have the capability to attain the maximum value.
- Financial market helps in facilitating price discovery of financial assets. The stock market is a place which runs on the forces of demand and supply thus giving a security its price depending upon its demand.
Question 2.
A bank named ‘Dhan Sangraha Karta’ allows Kapoor family to deposit their money time and again in it. It gives a definite return to this family which is in the form of interest. To get this interest the money stored in the household of Kapoor family gets entry into this bank. Nearby there is a stock exchange, Mr. Raj an Kapoor, who is the head of the family, goes there and buys securities. He says that in this way more return in earned by him on his saved money though the risk is also there.
- Identify the process in above case performed by the bank and the stock exchange.
- What are the roles of the bank and the stock exchange with respect to each other?
- Name a condition for the bank to perform its role in this process.
- Name a condition for the stock market to perform its role in this process.
Answer:
- The process performed by the bank and the stock exchange is ‘Financial Intermediation.
- The bank and the stock exchange are competing intermediaries in the financial system. The household is making a choice between the bank and the stock exchange and this choice is given by the financial system to them.
- The bank should provide a higher rate of return to the household saving then what it would get by lying passive in the household itself. Since the money will only decrease in value there will be no return.
- The stock exchange will help the household invest money in a company’s security. The chances of growth of money could be highest here as the money is generally invested in companies which show the chances of the best possible growth.
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.
- Name the function being performed by the market in the above case.
- Name the market segment other than the capital market segment in which unsecured and short-term debt instruments are traded. Also, give any three points of difference between the two.
Answer:
- Allocative function.
- Money market.
Difference between Capital and Money market:
Basis Capital-market Money-market (i) Participants The participants are financial institutions, banks, corporates, foreign investors and retail investors. The participants are RBI, financial institutions, banks and corporates. (ii) Instruments Instruments traded are Shares, Debentures and Bonds. Instruments traded are Treasury bills, Commercial papers, Certificates of deposit, Call money and Commercial bills. (iii) Investment Outlay Investment outlay is small. Investment outlay is large. (iv) Duration Capital Market deals in medium term and long-term securities. Money market deals in shortterm securities. (v) Liquidity Capital market securities are comparatively less liquid. Money market securities are comparatively more liquider.
Question 4.
Ramesh buys a financial asset from the RBI. This financial asset is an instrument of short term borrowing. He has bought it because he doesn’t want to take
risk and wants an assured return. This instrument is a promissory note. It is highly liquid. This instrument is also known as Zero Coupon Bond. On this instrument is written T-91.
- Which financial asset is indicated in the above case?
- On whose behalf does the RBI issue this instrument?
- Why is this instrument called as the Zero Coupon Bond?
- What does T-91 denote here?
- What is the minimum amount for which this instrument is available?
Answer:
- The financial asset which is indicated in the above case is ‘Treasury Bill’.
- The RBI issues this instrument on the behalf of the Government of India.
- The instrument is called as Zero Coupon Bond because the interest rate given by the bank is not given openly. The interest in fact comes in the form of discount which is given on the face value. The instrument is redeemed at par (on the written face value). So the instrument is issued at discount.
- T-91 here denotes the maturity period of the Treasury bill which is here 91 days.
- The minimum amount for which T- Bills are available is ?25,000. For a higher value it is given in the multiples of ,?25,000.
Question 5.
A company uses a financial instrument for bridge financing. The instrument here is short term, low risk, unsecured and highly liquid. It needed to buy machinery for which it issued equity. This turned out to be expensive as this issue involved floatation costs. The company is a large and creditworthy and this method has come up as a great help to it.
- Which financial instrument is indicated in the above case?
- Which type of instrument is this?
- Name the types of floatation costs which are generally involved?
- How has this method helped the company?
- Name two money market instruments which are issued at discount and redeemed at Par.
Answer:
- The financial instrument indicated in the above case is ‘Commercial Paper’.
- This is a money market instrument.
- The types of floatation costs involved here are:
- Brokerage.
- Publishing costs.
- Advertising costs.
- Underwriter’s commission.
- This method has helped the company by providing short-term funds for its seasonal and working capital needs.
- The two money market instruments which are issued at discount and redeemed at par are:
- Treasury bill
- Commercial paper.
Question 6.
‘Ganesh Steel Ltd.’ is a large and creditworthy company manufacturing 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.
- Name and explain the money-market instrument the company can use for the above purpose.
- What is the duration for which the company can get funds through this instrument?
- State any other purpose for which this instrument can be used.
Answer:
- The company can use Commercial Paper.
Commercial paper. It is a short-term unsecured promissory note which is negotiable and transferable by endorsement and delivery having a fixed maturity period. It is an instrument issued by large and creditworthy companies to raise short term funds at lower interest rates. - The maturity period of commercial paper is from 15 days to one year.
- It can be used to raise short term funds for seasonal needs or to finance working capital requirements of the business.
Question 7.
‘Dhan Samudra’ is a bank, which needs immediate cash. This has been the situation since the RBI chose to increase the CRR (Cash Reserve Ratio). It is looking for other banks to meet its cash requirements by borrowing from other banks in the industry. However, it resorts to a very expensive source of fund. This source of fund has an inverse relationship with other sources of funds like commercial paper and certificates of deposit.
- Which financial instrument is highlighted In the above case?
- How does increased CRR change the cash requirements by banks?
- Why this financial instrument considered an expensive source of finance?
- What type of inverse relationship exists between this instrument and commercial paper or certificates of deposit?
Answer:
- The financial instrument highlighted in the above case is ‘Call Money’.
- The increase in CRR (Cash Reserve Ratio) makes a bank keep a definite amount of cash. For example, if CRR is 5% then bank will have to keep 5% of its money as the cash reserve which it will not touch. Thus the ability of the bank to give loans is reduced thus reducing liquidity in the market.
- Call Money is considered an expensive source of finance because it is made available to the banks at a very short notice. The interest paid by the banks seeking call money is call rate. The call rate is highly volatile and changes on an hourly basis.
- The inverse relationship which exists between call money and these instruments is that with the rise in the call money rates these sources become cheaper. So the banks have the option of raising funds from these sources in a comparatively cheaper manner.
Question 8.
A developmental financial institute issues a money market instrument. It is issued by the financial institute during the time of tight liquidity. This helps the firm to mobilize large amount of funds in a short period of time.
- Which money market instrument is highlighted in the above case?
- What are the characteristics of a money market instrument?
- Which other type of body can issue this money market instrument? When?
Answer:
- The money market instrument which is highlighted in the above case is ‘Certificate of Deposit’.
- A money market instrument is short-term, highly liquid, unsecured and involves low risk.
- The other type of body which can issue certificate of deposit is ‘Commercial Bank’. It issues certificate of deposit when the deposit growth is slow and the demand for credit is high.
Question 9.
A business firm issues a money market instrument to finance its working capital requirements. In order to finance the credit sales of the firm it issues this instrument. A textile firm which is taking goods on credit from this firm promises to buy on the 25th of the next month. The selling business firm makes use of this instrument when the’ date arrives.
- Which money market instrument is highlighted in the above case?
- What is the role of commercial bank in the above process?
- Explain the above process in detail.
Answer:
- The money market instrument which is highlighted in the above case is ‘Commercial Bill’.
- When the trade bill is accepted by a commercial bank it becomes a commercial bill.
- When the goods are sold on credit the buyer has to make payment on a specific date in the future. The seller now has an option either to make payment on the specified date or make use of bill of exchange. Here the seller is known as the drawer (he draws the bill) . and the buyer is known as the drawee (he accepts the bill). As soon as the bill is accepted it becomes a trade bill. These bills can be given to a bank or these bill could be discounted with the bank which makes it a commercial bill as soon as it accepts it. Here onwards the bank takes the responsibility of taking money from the buyer. The seller gets a little less than the actual value. The bills receivable are handed over to the bank.
Question 10.
Identify the type of financial market in the following cases:
- The value of securities issued by a company is low. It has not set up a huge financial outlay. Mr. Manuj has purchased 100 units of shares with the value of ?8G each. Though he has small savings yet he is able to invest money in this financial market.
- A financial market deals only in short term securities. The securities in the market may even be issued for a single day.
- A financial market deals in medium and long term securities such as equity shares and debentures.
- The participants in this financial market are institutions like banks, corporations, large sized companies and members of the public.
- The securities in this financial market yield low rate of return.
- The securities return in this market is riskier in relation to both the returns as well as principal amount. The reason is the performance of the issuing companies. When these companies perform well there are chances of high return but when the other way round happens the returns may go down and result in loss of money to the investors.
- In this financial market there is a higher degree of liquidity of the financial instruments available to the investors as there is an institute which takes guarantee of this action. The name of this institute is DFHI (Discount Finance House of India).
- There is minimum risk of default in this financial market. There is shorter duration of investment and this provides financial stability to the investors. The issuing houses have a very good history of creditworthiness.
Answer:
The type of financial market in the above mentioned cases are:
- Capital Market
- Money Market
- Capital Market
- Capital Market
- Money Market
- Capital Market
- Money Market
- Money Market
Question 11.
In the above Question 10 find the ‘basis’ on which these distinctions between ‘Capital Market’ and ‘Money Market’ have been made.
Answer:
- Investment Outlay
- Duration
- Duration
- Participants
- Expected return
- Safety
- Liquidity
- Safety
Question 12.
Ramesh the CEO of a company thinks of going with the most popular method of raising funds used by the public companies. He discussed this option with his immediate subordinates. After discussion he realises that since his company is a private company he should think of some other option. Then they think of issuing the securities through intermediaries like issuing houses or stock brokers. When his nephew comes to know about his decision, he decides to suggest his uncle another way. He advises him to involve institutional investors which will help him raise funds more quickly and reduce many mandatory and non-mandatory expenses. After a lot of discussion the option suggested by his nephew is chosen as final.
- In the above case identify the various methods of floatation highlighted.
- Which method do you think will be applicable in the primary market?
- In which type of capital market trading of only existing shares is done?
- In which type of capital market only buying of securities is possible as securities can’t be sold here?
- Which type of capital market doesn’t have fixed geographical location?
Answer:
- The various methods of floatation highlighted in the above case are:
- Offer through prospectus. Ramesh the CEO of a company thinks of going with the most popular method of raising funds used by the public companies.
- Offer for sale. Then they think of issuing the securities through intermediaries like issuing houses or stock brokers.
- Private placement. He advises him to involve institutional investors which will help him raise funds more quickly and many mandatory and non-mandatory expenses could be avoided.
- The method which will be applicable in the primary market will be ‘offer through prospectus’.
- The type of capital market in which trading of only existing share is done is ‘Secondary Market (Stock Exchange)’.
- Primary Market
- Primary Market
Question 13.
Meca Ltd. a reputed automobile manufacturer needs Rupees ten crore as additional capital to expand its business. Atul Jaian, the CEO of the company wanted to raise funds through equity. On the other hand the Finance Manager, Nimi Sachdev 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
Answer:
Private Placement.
Question 14.
Sika Ltd., a reputed industrial machines manufacturer, needs Rupees twenty crores as additional capital to expand the business. Mr. Amit Joshi, the Chief Executive Officer (CEO) of the company wants to raise funds through equity. The Finance Manager, Mr. Narinder Singh, suggested that the shares may be sold to investing public through intermediaries, as the same will be less expensive.
Name the method through which the company decided to raise additional capital.
Answer:
Offer for Sale.
Question 15.
Raman who is a broker in a stock exchange has to face fchallenging questions from society. His own family sometimes asks him to think about his decision to become a broker. He however, has full faith in the stock exchange. He knows that the membership of a stock exchange is properly regulated abiding the legal system and the public doing investment is safe in making deals. His children one day asked him the reason behind the ups and downs in the stock market. He clarified their doubt by telling them that forces of supply and demand decide the prices of securities in the secondary market. Off late he has decided to write a book on the functioning of stock exchange and its significance in the Indian economy. He is trying to highlight in his book how through the process of investment and disinvestment existing securities are sold and resold and savings are channelized into the most productive opportunities. Definitely Raman is justifying his presence in his job.
- What is the meaning of Stock Exchange?
- Identify and briefly explain the functions of Stock Exchange discussed in the above case.
- What is an e-IPO?
Answer:
- Stock exchange is a collection of individuals, formed as a body or not, constituted for the objective of helping, controlling and regulating the dealings related to buying and selling of securities.
- The different functions of Stock Exchange highlighted in the above case are:
- Ensures safety of transaction. He knows that the membership of a stock exchange is properly regulated abiding the legal system and the public doing investment is safe in making deals.
- Helps in deciding pricing of securities. He clarified their doubt by telling them that forces of supply and demand decide the prices of securities in the secondary market.
- Helps in contributing to the economic growth. He is trying to highlight in his book how through the process of investment and disinvestment existing securities are sold and resold and savings are channelized into the most productive opportunities.
- When a company proposes to issue capital to the public with the help of on-line system of the stock exchange and enters into an agreement with it. This method of issuing of capital to the public is known as e-IPOs.
Question 16.
Rajni Auto manufacturers have decided to give a special privilege to the existing shareholders to subscribe to the new issue of shares where they will be given shares according to the proportion of shares held by them. The company always gives special treatment to loyal stakeholders. Last year the company was dealing through the capital market where both the buying and selling of securities were taking place. The owner of the company is a man of ethical business. He recently wrote an article about the watchdog of stock market. The article gained a lot of popularity and now is part of the curriculum of MBA students.
- Which method of floatation was used by Rajni Auto manufacturers?
- Which type of capital market was this company dealing in?
- Which watchdog of the capital market has been referred to in the above case?
- Name two regulatory functions of this above referred organisation?
Answer:
The method of floatation used by the company is ‘Rights Issue’. Rajni Auto manufacturers have decided to give a special privilege to the existing shareholders to subscribe to the new issue of shares where they will be given shares according to the proportion of shares held by them.
- The company was dealing with the ‘Secondary Market’.
- Last year the company was dealing through the capital market where both the buying and the selling of securities were taking place.
- The watchdog of the stock market referred to in the above case is ‘SEBI’ (Securities and Exchange Board of India).
- The two regulatory functions of SEBI are:
- SEBI regulates registration of brokers and sub-brokers in the market.
- SEBI does the regulation of takeover bids by different companies.
Question 17.
Nishant is a big supporter of the vital role played by the stock exchange in securing wider circulation of ownership of companies to the common people and supports the education of the common public about the positive effects of making investments. However, he knows nothing spreads very fast in public and takes its own time. He knows that it is only due to the presence of the stock markets that a continuous market is made available to the buying and selling of the securities. People don’t want late results; they want everything instant. True investor knows that there should be knowledge before the habit of making investments. The knowledge about the companies participating should be there before any big decision is taken. Most of the people however, get attracted to the stock market as it allows speculative activity within limits which helps in liquidity of the shares in the stock market. We have different news papers which give a lot of news these days about strictness in the stock market. All this is happening today because scams took place in the 80s. But now everything takes place in legal framework providing safe and fair deal in the market. It can be expected that in the future days to come things are going to get better for investors and issuers, not to mention the intermediaries.
Identify and explain the functions of stock exchange discussed in the above para.
Answer:
The different types of functions of stock exchange highlighted in the above case are:
- Stock exchange helps in the spreading of the equity cult. Nishant is a big supporter of the vital role the stock exchange plays in securing wider circulation of ownership of companies to the common people and supports the education of the common public about the positive effects of making investments.
- Stock exchange helps in providing liquidity and marketability to the traded securities. He knows that it is only due to the presence of the stock markets that a continuous market is made available to the buying and selling of the securities.
- Stock exchange attracts the investor by providing scope for speculation. Most of the people however, get attracted to the stock market as it allows speculative activity with the healthy limits which help in liquidity of the shares in the stock markets.
- Stock exchange secures safety of transaction of the securities. But now everything takes place in legal framework providing safe and fair deal in the market.
Question 18.
Ashish selects a person who is authenticated to buy or sell securities on his behalf. He is registered by SEBI. Then through this person Ashish opens an account with a bank. Then he takes the next step. He gives this person an order in which he specifies the number and types of securities to be bought or sold. The process moves forward. After getting the instructions from Ashish the selected person buys and issues d’ paper. The paper contains the name and price of securities, brokerage charges and the name of the parties involved. Then comes the concluding stage of the process. Here, the trading of securities is done by the selected persons on behalf of Ashish.
- Identify the process highlighted in the above case.
- Which type of account is being indicated here?
- What is the role of bank here?
- What is the role of the person he has chosen?
- What one condition should be met when giving orders for the purchase of securities?
- What is the name of the paper highlighted above?
- What is the last stage of the process called? Does it have any specific feature?
Answer:
- The process highlighted in the above case is ‘Trading procedure on a Stock Exchange’.
- The type of account indicated here is ‘Demat Account’.
- The bank is the ‘Depository Participant’.
- The person chosen here is the ‘Broker’.
- The condition which must be met is that the securities traded should be of the listed companies.
- The name of the paper which is highlighted above is ‘Contract Note’.
- The last stage of the process is called ‘Settlement’. The specific feature is the T+2 rolling settlement feature. It means that the trading of security taking place on a particular day will get settled after two days. For example trading taking place on Wednesday will be settled by Friday.
Question 19.
Identify the type of function of SEBI in the following cases:
- Rajeev was unwilling to buy shares in the stock market as he was told by someone that stock market is a place where various malpractices take place. He decides to discuss the matter with his friend who explains to him how SEBI takes care of the interests of the investors.
- Pankaj wants to become a stock broker. When he approaches people and asks them to get started as investor through him they ask for a certificate which the SEBI must have given him. He becomes aware of the fact that in order to function as a stock broker he will have to get registered with SEBI.
- Kirti Steels already has issued shares in the stock market and is a well known name among the people. Recently it issued shares but had to go through the proper audition process and thorough inspection about the various requirements to be fulfilled as an issuer.
- Recently some people were caught in some of the malpractices like insider trading. The SEBI has decided to take strict action and cancel their candidature. Further penalties are also to be imposed on them.
- A magazine has published a report on how SEBI is serious about training of the intermediaries and deciding their code of conduct. A lot of research has been going on in various related areas and the information of use is being published so that various participants can get useful results from it.
- Some workshops are being organized to create awareness among the investors. The programme will not stop here. There is going to be a proper education of the investors. After the workshop is over a test will be conducted to check the knowledge and applicative ability of the investors.
Answer:
- Protective function
- Regulatory function
- Regulatory function
- Protective function
- Development function
- Development function
Question 20.
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 of ‘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 ?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 77 crores. He earned a profit of ?2 crores. He gave ?1 crore to Mr. Sanjay Nehra and kept ?1 crore with himself. On regular inspection and by conducting enquiries of the brokers involved, 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 para identify and state any two functions that were performed by SEBI in the above case.
Answer:
Function | Lines from the para |
Regulatory function | ‘On regular inspection and by conducting enquiries of the brokers involved Securities and Exchange Board of India (SEBI) was able to detect this irregularity. ’ |
Protective function | ‘The SEBI imposed a heavy penalty on Mr. Sanjay Nehra.’ |
Question 21.
Rajesh is the CEO of a leading petrochemical company. Recently the company issued equity to meet some costs. However to meet the floatation costs incurred to issue equity the company decided to do Bridge Financing. So it decided to issue a type of money market instrument. The requirement of the company was met intelligently by good decision of its wise CEO. Three months later the company decided to issue a new equity again for the first time in the primary market. According to the method of floatation it involved it decided to go for the method adopted mostly by the public companies and made an appeal to the masses by directly approaching them. Again the success comes the way of the company and its objectives are achieved. However when the same type of attempt was made by the company again after another three months the company had a lot of problem. The problem was about deciding one key aspect related to the new issued security. The company would not have cared much about this key aspect if the same process would have taken place in the secondary market.
- Which type of money market instrument was issued by the company m the earlier part?
- Which method of floatation was adopted by the company three months later?
- What key aspect the company would not have cared about in the secondary market?
Answer:
- The type of money market instrument issued by the company in the earlier part is ‘Commercial Paper’ as it involves bridge financing. However to meet the floatation costs incurred to issue equity the company decided to do Bridge Financing.
- The method of floatation adopted by the company three months later is ‘Offer through Prospectus’.
- The key aspect about which the company should not have cared in the secondary market is about the pricing of the securities as the prices are decided by the demand and supply of the securities whereas in the primary market it is decided by the management.
Question 22.
A company wanted to raise funds so it reached out to facilities an institutional arrangements through which long term funds (debt + equity) were raised and invested. A lot of thinking was done whether the company should have gone for debt or equity. Finally, it decided to go for equity. The owner of the company decided to follow the guidelines of SEBI.
- Which concept of financial market is highlighted in the starting of the case?
- Name two objectives of SEBI.
Answer:
- The concept of financial market which is highlighted in the above case is ‘Capital Market’. A company wanted to raise funds so it reached out to facilities and institutional arrangements through which long term funds (debt + equity) were raised and invested,
- The two objectives of SEBI are:
- SEBI regulates the security industry and the stock exchanges. It ensures their proper functioning.
- SEBI ensures investors’ protection by taking various steps against malpractices in stock market.
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