GSEB Class 12 Organization of Commerce and Management Solutions Chapter 9 Financial Market

1. Select The Correct Alternative And Write Answer To The Following Questions:

 

Question 1. Securities market having maturity period of one year or less means
(a) Capital market
(b) Primary market
(c) Money market
(d) Secondary market
Answer: (c) Money market
In simple words: The money market deals with financial assets that mature within a short time, typically one year or less.

Exam Tip: Remember that the key difference between capital and money markets is the maturity period of the instruments traded. Money markets are for short-term funds.

 

Question 2. Who regulates organized money market?
(a) SEBI
(b) State Bank of India
(c) Reserve Bank of India
(d) Financial Institutions
Answer: (c) Reserve Bank of India
In simple words: The Reserve Bank of India (RBI) is the central bank and holds the main responsibility for overseeing and controlling the organized money market in the country.

Exam Tip: Always identify the primary regulatory body for financial markets; the RBI manages the money market, while SEBI oversees the capital market.

 

Question 3. Who issues treasury bills on behalf of Indian Government?
(a) State Bank of India
(b) Reserve Bank of India
(c) Central Bank of India
(d) Financial Institutions
Answer: (b) Reserve Bank of India
In simple words: Treasury bills are short-term government debt instruments, and the Reserve Bank of India (RBI) manages their issuance for the government.

Exam Tip: Treasury bills are crucial short-term borrowing tools for the government, and the RBI acts as the government's banker and debt manager.

 

Question 4. Which statement is false with reference to commercial bills?
(a) Government Security
(b) Origin out of Business Transaction
(c) Discounted by Commercial Banks
(d) Negotiable Instrument
Answer: (a) Government Security
In simple words: Commercial bills come from business transactions and are traded between banks and businesses, not issued by the government as a security.

Exam Tip: Distinguish commercial bills from government securities like treasury bills; commercial bills are private sector instruments.

 

Question 5. Market for sale of new issues securities means
(a) Stock exchange
(b) Primary market
(c) Secondary market
(d) Speculation market
Answer: (b) Primary market
In simple words: The primary market is where companies first sell new shares or bonds to investors to raise capital directly.

Exam Tip: Remember that the primary market deals with new issues (IPOs), while the secondary market (stock exchange) deals with existing securities.

 

Question 6. Whose approval is to be obtained by stock exchange under securities contracts (Regulation) Act, 1956?
(a) Central Government
(b) SEBI
(c) Reserve Bank of India
(d) Finance Minister
Answer: (b) SEBI
In simple words: The Securities and Exchange Board of India (SEBI) is the main regulator that provides approval and oversight for stock exchanges under the relevant act.

Exam Tip: SEBI is the core regulatory body for the securities market in India, ensuring fair practices and protecting investors.

 

Question 7. In which year Depository Act came into existence?
(a) 1991
(b) 1992
(c) 1995
(d) 1996
Answer: (d) 1996
In simple words: The Depository Act was enacted in 1996 to facilitate the electronic holding and transfer of securities, making transactions faster and safer.

Exam Tip: Knowing key dates for important financial regulations helps demonstrate a good understanding of market evolution.

 

Question 8. From whom certificate of registration is to be obtained by a depository before starting its operation?
(a) Stock exchange
(b) Central Government
(c) SEBI
(d) Reserve Bank of India
Answer: (c) SEBI
In simple words: Before any depository can begin operations, it must get a registration certificate from SEBI, which regulates all market intermediaries.

Exam Tip: All entities involved in the securities market, including depositories, require registration and oversight from SEBI to ensure investor protection.

 

Question 9. How many types of orders are there in purchase-sales of securities?
(a) Two
(b) Three
(c) Four
(d) Five
Answer: (a) Two
In simple words: There are generally two main types of orders for buying and selling securities: market orders and limit orders.

Exam Tip: Understanding market and limit orders is fundamental for anyone trading in securities, as they define how and when trades are executed.

 

Question 10. Under which Act, SEBI came into existence?
(a) Companies Act
(b) Securities Contracts (Regulation) Act
(c) National Companies Act
(d) Securities and Exchange Board of India Act (SEBI Act)
Answer: (d) Securities and Exchange Board of India Act (SEBI Act)
In simple words: SEBI was established under its own dedicated act, the Securities and Exchange Board of India Act, which gave it legal authority to regulate the securities market.

Exam Tip: It's important to know that SEBI operates under its specific Act, distinguishing it from general company or contract laws.

 

2. Answer The Following Questions In One Sentence Each:

 

Question 1. What is the time period for the maturity of instruments of money market?
Answer: One year or less
In simple words: Money market instruments are designed for very short-term borrowing and lending, always maturing within one year.

Exam Tip: Clearly state "one year or less" to highlight the short-term nature of money market instruments.

 

Question 2. At what price treasury bills are issued?
Answer: Discounted price
In simple words: Treasury bills are sold for less than their face value, and the difference between the purchase price and face value is the investor's profit at maturity.

Exam Tip: Treasury bills are zero-coupon bonds, meaning they don't pay interest but are issued at a discount.

 

Question 3. Which financial instruments are traded in money market?
Answer: Treasury bill, commercial paper, call money, etc.
In simple words: Common instruments include government treasury bills, commercial papers from companies, and very short-term interbank loans known as call money.

Exam Tip: Provide at least three distinct examples of money market instruments to show comprehensive knowledge.

 

Question 4. When was Bombay Stock Exchange established?
Answer: On 9th July, 1875
In simple words: The Bombay Stock Exchange (BSE), one of India's oldest stock exchanges, began its operations in 1875.

Exam Tip: Include the full date (day, month, year) when asked for specific historical establishment dates.

 

Question 5. By whom are stock exchanges regulated in India?
Answer: Through Security Exchange Board of India (SEBI) and Security Contract Regulation Act.
In simple words: Stock exchanges in India are overseen by SEBI, which enforces rules outlined in the Security Contract Regulation Act to ensure fair and orderly trading.

Exam Tip: Mention both SEBI and the relevant Act to give a complete answer about stock exchange regulation.

 

Question 6. By whom are depository services availed?
Answer: In India, an investor can avail services of depositories through (1) National Securities Depository Limited (NSDL) and (2) Central Depository Services (India) Limited (CDSL).
In simple words: Investors use depository services, primarily through NSDL and CDSL, to hold their securities electronically and manage transactions.

Exam Tip: Name the two main depositories, NSDL and CDSL, to show specific knowledge of India's depository system.

 

Question 7. When did Depository Act come into force?
Answer: In 1996
In simple words: The Depository Act became effective in 1996, enabling the dematerialization of physical shares into electronic form.

Exam Tip: Clearly state the year "1996" as it is a direct factual question.

 

Question 8. When did NSDL establish and start its operation?
Answer: In 1996
In simple words: NSDL, India's first electronic securities depository, was established and began its operations in the year 1996.

Exam Tip: Note the year of establishment for NSDL and its significance as the first depository.

 

Question 9. Which is the first depository of India?
Answer: National Securities Depositories Limited (NSDL)
In simple words: NSDL holds the distinction of being the first and pioneering electronic depository system in India.

Exam Tip: Specify "National Securities Depositories Limited (NSDL)" as the full name and abbreviation.

 

Question 10. By which name screen based trading of National Stock Exchange and Bombay Stock Exchange are known?
Answer: Screen based trading of National Stock Exchange is known as NEAT (National Exchange for Automated Trading). Bombay Stock Exchange is known as BOLT (BSE Online Trading).
In simple words: The National Stock Exchange uses NEAT for screen-based trading, while the Bombay Stock Exchange uses BOLT for its online trading system.

Exam Tip: Provide both acronyms (NEAT and BOLT) and their full forms to demonstrate detailed understanding.

 

Question 11. What is meant by Contract note in the purchase-sales procedure of securities?
Answer: Contract note is a confirmation of the order placed by the investor on a particular day. In other words, contract note is a summary as well as agreement about the traded securities.
In simple words: A contract note is a document that confirms an investor's buy or sell order, detailing all the specifics of the transaction, and serves as a legal record.

Exam Tip: Define a contract note as both a "confirmation" and an "agreement" detailing the trade, emphasizing its importance.

 

3. Answer The Following Questions In Short:

 

Question 1. What is unorganised money market?
Answer: The informal form of money market which is not regulated by a government body is called unorganised money market.
In simple words: The unorganised money market refers to informal lending activities, often involving money lenders, that are not overseen or controlled by the government.

Exam Tip: Focus on the "informal" and "unregulated" aspects when defining the unorganised money market.

 

Question 2. What are the instruments of money market?
Answer:

• Treasury bill,
• Commercial paper,
• Commercial bill,
• Certificate of Deposit,
• Call/Notice money, etc.

In simple words: Key instruments include short-term government treasury bills, commercial papers from companies, and bank certificates of deposit, as well as call/notice money.

Exam Tip: List a variety of instruments to show a broad understanding of the money market's components.

 

Question 3. Which instrument of money market are negotiable?
Answer:
1. Commercial paper,
2. Commercial bill and
3. Certificate of Deposit
In simple words: Negotiable instruments like commercial paper, commercial bills, and certificates of deposit can be easily transferred from one party to another.

Exam Tip: Clearly identify which specific instruments are negotiable, as this distinguishes them from other types.

 

Question 4. What is the main difference between call money and notice money?
Answer: Call money is borrowed for only 1 day whereas notice money is borrowed for minimum 2 days to maximum 14 days.
In simple words: Call money loans are for a single day, while notice money loans are for a slightly longer period, ranging from two to fourteen days.

Exam Tip: Highlight the specific timeframes for each type of money to show understanding of their distinction.

 

Question 5. How does stock exchange provide liquidity element to securities?
Answer: Stock exchange is a ready market in which traders (investors) can buy or sell shares as per their will. This is how stock exchange provides liquidity.
In simple words: Stock exchanges offer a constant market where investors can quickly buy or sell their shares whenever they want, making it easy to convert securities into cash.

Exam Tip: Explain that liquidity means the ease with which an asset can be converted into cash without significant loss of value, and how the stock exchange facilitates this.

 

Question 6. Stock exchange is a mirror indicating economic condition of the country - How?
Answer: Investors invest in share market. This way public savings gets converted as capital for industries and companies. When companies grow by using these funds the investors further invest in the market. The cycle of trade in stock exchange depicts how well or poor is country's economy.
In simple words: The stock exchange shows how well a country's economy is doing because when businesses perform well, share prices go up, reflecting economic growth, and vice versa.

Exam Tip: Link investor confidence and company performance to overall economic health, as reflected in the stock market's movements.

 

Question 7. What is dematerialisation?
Answer: The process of converting physical shares in electronic form is called Dematerialization or demat in short.
In simple words: Dematerialisation, or "demat," is the process of changing physical share certificates into an electronic, digital format.

Exam Tip: Clearly define dematerialisation as the conversion from physical to electronic form, and include the common short term "demat."

 

4. Answer The Following Questions In Brief:

 

Question 1. What is treasury bill?
Answer: Treasury Bills:

• When the central government is in need of funds for short term, it issues treasury bills into the financial market. Anyone willing to buy them such as individuals, firms, etc. can buy these bills.
• Thus, a treasury bill is a short term financial instrument (government security). It is issued by Reserve Bank of India on behalf of Government of India.
• Treasury bill is an important component of money market all over the world.
• Treasury bill is also known as 'T-Bills'.
• The maturity period of these bills is 91 days, 182 days or 364 days.
• The minimum amount of a T-bill is Rs. 25,000/- and then in multiples of Rs. 25,000/-.
• Government does not pay any interest to people who buy T-bills, but sells these bills at a discounted rate. Hence, T-bill is also called 'zero coupon bond'.
• For example, government might sell Treasury bill of Rs. 25,000 at Rs. 23,500 to the investor. The investor would then be paid the actual value i.e. Rs. 25,000 on maturity date. Thus, the difference between the purchase amount and redemption amount becomes the profit for the investor.

In simple words: Treasury bills are short-term government bonds issued by the RBI to raise money for the government. They don't pay interest but are sold at a discount, with the profit coming from the difference between the discounted purchase price and the full value received at maturity.

Exam Tip: When explaining treasury bills, mention their issuer (RBI), purpose (short-term government funding), discount issue, and maturity periods.

 

Question 2. Give the meaning of capital market and clarify its characteristics.
Answer:

• A capital market (locally - share market) is an organized market in which capital is raised by the investment made by general public in the form of shares, debentures, bonds, etc.
• When companies issue equity shares in the market, investors buy them. The money invested becomes the capital for the company who issued the shares. So, the companies and industries get fund through the savings of general public.

Capital market is divided into two markets. They are:

1. Primary market and
2. Secondary Market

• Capital market is a source of long term capital fund for industrial enterprises.
• Long term securities like shares and debentures are traded in capital market.
• Capital market is a market for all types of securities including industrial securities and government securities.
• Since this market mobilizes savings of the community, it boosts economic growth.

Characteristics of capital market:

• Capital market is a market for raising long term capital fund.
• Instruments of capital market include government securities, debt instruments, securities of industrial enterprises like shares and debentures.
• Investment of fund is in long term securities.
• In India, capital market is strictly regulated by Securities and Exchange Board of India (SEBI).
• Ownership of shares and debentures is easily transferrable.
• Provides liquidity to financial assets (securities).
• Capital market is divided into two parts -
1. Primary market and
2. Secondary Market

In simple words: The capital market is an organized place where companies and governments raise long-term money by selling shares, bonds, and other securities to the public. It helps industries grow by converting public savings into investment, and it is regulated by SEBI.

Exam Tip: Clearly define the capital market, describe how it raises long-term funds, mention its two main divisions (primary and secondary), and list its key characteristics such as long-term investment, regulation by SEBI, and liquidity.

 

Question 3. "Primary market means a market of new issued securities” - Explain and state the characteristics of primary market.
Answer:

• When a company publicly sells new stocks or securities and bonds for the first time in the market, the market is called the primary capital market.
• So, primary capital market is the market of newly issued securities.
• Here, the investors buy only newly issued securities as it is a market for new issued securities. The objective of the primary capital market is to raise capital fund for the company issuing the securities.

Characteristics of primary capital market:

• It is a market for newly issued securities.
• The companies issue new securities for investors to buy.
• There are numerous intermediaries in primary market like lead manager, registrar of issue, share broker, etc.
• New capital is issued through prospectus in primary market.

In simple words: The primary market is where new shares or bonds are sold by companies or governments for the very first time. Its main goal is to help companies get capital directly from investors through new issues, often using a prospectus.

Exam Tip: Define the primary market by emphasizing "newly issued securities" and its role in capital formation. When listing characteristics, focus on new issues, intermediaries, and the use of a prospectus.

 

5. Answer The Following Questions In Detail:

 

Question 1. What is money market? State its characteristics.
Answer: Money market:

• Money market refers to a section of financial market where financial instruments (assets) with high liquidity and short-term maturities are traded. It is a market for assets or instruments which are close substitutes for money.
• Financial assets traded in money market include treasury bills, certificate of deposits, call money, money via. money lenders, pawn, indigenous bankers, shroffs, etc.
• Money is borrowed and lent for a short term. Securities or financial assets having a maturity period of one year or less are traded in this market.
• It is important to note that unlike stock exchange, money market is not a physical location, but group of various institutions trading or dealing in money.
• Transaction takes place between two parties. One is lender and the other is borrower.
• Reserve bank, commercial banks, co-operative banks, shroffs, etc. are mainly included in the group of money lenders, while individuals, business enterprises, farmers, traders, state governments, central government are the borrowers of money.

In simple words: The money market is a part of the financial system where short-term funds (maturing in one year or less) are borrowed and lent, often involving highly liquid instruments like treasury bills and commercial papers. It is an institutional network, not a physical place.

Exam Tip: Define the money market by focusing on short-term instruments, high liquidity, and its role as an institutional network. List key participants (lenders and borrowers) and examples of traded instruments.

 

Characteristics Of Money Market:

• Money market is divided into two parts. They are: (a) Organized money market and (b) Unorganized money market.
• Money market is a market for short term assets or instruments, whose maturity period is one year or less.
• Credit worthiness of participants in money market is important so that both the borrower and lender can trade at ease.
• Money market is not a fixed physical location but a collective structure of various institutions like Reserve Bank of India, commercial banks, financial institutions, mutual funds, insurance companies, indigenous bankers, shroffs, etc.
• It is a market of financial instruments which can easily be converted into cash (i.e. are highly liquid). For example, treasury bills, call money, etc.
• Sub-branches of money market also develop with economic and technological development, such as call money market, bond market, treasury bills market, etc.
• Most of the financial instruments are debt instruments. Element of risk is less as compared to other financial instruments.
• The success and operation of money market depends on the banking system and financial institutions.

In simple words: Its characteristics include being a short-term market (under one year maturity), not a physical place, dealing with highly liquid debt instruments, and being divided into organized and unorganized parts, with its success depending on the banking system.

Exam Tip: Emphasize the division into organized/unorganized, the non-physical nature, high liquidity, and reliance on financial institutions as key characteristics.

 

Question 2. What are the characteristics of stock exchange?
Answer: Characteristics of stock exchange (Secondary market):

1. Registered corporate body: Stock exchange is a registered and established corporate body that prepares rules and regulations for the transactions of securities.
2. Approval of government: Stock exchange has to obtain approval of the central government as per the provision of Securities Contracts (Regulation) Act, 1956.
3. Organized market: It is an organized market for dealing in existing listed securities.
4. Membership: Membership of stock exchange must be obtained for dealing transactions in stock exchange.
5. Market of securities: Stock exchange is an approved organized market for buying and selling of securities.
6. Listing of securities: The securities which are listed on stock exchange are transacted in stock exchange.
7. Management: It is administered and managed by board of directors.
8. Strict control over the members: The Board of Directors exercise strict control over the members through their disciplinary powers.
9. Organizational structure: The organizational structure of stock exchange is in the form of public company.
10. Regulation of stock exchange: All the stock exchanges of India are regulated by Securities and Exchange Board of India (SEBI) and Securities Contracts (Regulation) Act.

In simple words: Stock exchanges are officially registered bodies that set rules for trading existing securities, requiring government approval and membership to trade. They act as organized markets for buying and selling listed securities. They are managed by a board of directors who enforce strict rules, operate as public companies, and are regulated by SEBI under the Securities Contracts (Regulation) Act.

Exam Tip: When discussing characteristics, ensure you cover its legal status (corporate body), regulatory oversight (government approval), organized nature, the requirement for membership, the trading of listed securities, management by directors, control over members, its public company structure, and the dual regulation by SEBI and the SCRA.

 

Question 3. What are the functions of stock exchange?
Answer: Functions of Stock Exchange (Secondary market):

1. Liquidity:
   • Stock exchange provides continuous market for purchase and sale of securities. Investors can purchase and sell securities with their free will because stock exchange provides ready trade market.
   • An important function of the stock exchange is to see that the securities remain liquid.
2. Valuation of the securities:
   • The demand and supply of the securities in the market decide their valuation or say price.
   • The valuation of securities is also determined by other factors such as dividend declared by the company, factors affecting money market, etc.
   • Valuation of securities enables the investors to decide whether to purchase or sell the securities.
   • The valuation of securities is also useful to the government and creditors.
3. Conversion of savings into capital:
   • Individuals who wish to invest their savings in the securities can easily do so. This way their savings get converted into capital.
4. Intermediary in the creation of capital:
   • Stock exchange itself does not create capital. It provides platform for the purchase and sale of securities. When the securities are traded the capital gets generated. Thus, the stock exchange plays the role of intermediary for creating capital.
5. Safety of transactions:
   • The securities are traded as per the rules of the stock exchange. Moreover, the stock exchange is governed by SEBI which is a government body.
   • The brokers working in stock exchange perform their role under the regulation of SEBI. Owing to all these things, it can be said that financial transactions are carried out safely in the stock exchange.
6. Growth of capital market:
   • Investors invest in share market. This way public savings gets converted as capital for industries and companies.
   • These units form long term capital. When companies grow by using these funds the investors further invest in the market. This boosts the overall economy. Thus, development of capital market also leads to development of economic development of the country.
7. Facilities to perform activities:
   • Stock exchange enables its members to perform their activities. The members then work to protect the interests of the investors and for healthy growth of the market.
8. Necessary facilities for speculation:
   • Healthy speculation keeps the stock exchange alive.
   • Stock exchange provides necessary facilities for the transactions of speculation within the legal structure.
9. Information provider:
   • Stock exchange provides important information useful to the various parties. For example, information about changes in the price of securities, flow of purchase and sale of securities, etc.
   • Such information serves as an important guide for investors, companies, government, SEBI, etc.
   • The information is useful for the government for formulating economic policy and financial policy.
   • The information also describes the economic condition and growth of company and nation. Hence, the stock exchange is called the barometer of the economic condition of the country.
10. Maintaining stock exchanges as an efficient market:
    • It maintains stability and efficiency of stock exchanges through regulations, restrictions and guidelines.
11. Inspection of books:
    • If necessary, it inspects the books of company that issues securities, depository participant and beneficiary owner.
12. Monitoring and inspection of stock exchange:
    • SEBI can monitor and inspect whether regulations laid down for stock exchange are followed or not, whether stock exchange organization system and its working is followed as per SEBI Act or not.
    • If necessary, it conducts inquiry, inspection and audit of the accounts of the intermediaries.
13. Guidelines:
    • SEBI has issued guidelines time to time for share brokers, and sub-brokers, merchant bankers, trustees of debenture, buy back securities by company, etc.

In simple words: Stock exchanges offer many functions: they provide liquidity by creating a continuous market for securities, help in valuing securities based on demand and supply, convert public savings into capital for companies, and act as an intermediary in capital formation. They also ensure safety in transactions through SEBI's regulation, contribute to the growth of the capital market by channeling savings into industries, provide facilities for members and controlled speculation, and act as important information providers to various stakeholders, making them an economic barometer. Finally, stock exchanges ensure market efficiency, conduct inspections of company books, monitor their own operations, and issue regular guidelines through SEBI to various market participants.

Exam Tip: When listing functions, group related ideas. For example, liquidity and valuation are market-oriented, while conversion and intermediary roles are about capital formation. Don't forget to include the role in transaction safety, capital market growth, facilitating activities, managing speculation, and providing market information. Conclude with the "barometer of economic condition" point. Round off the functions with market efficiency, inspection powers, monitoring, and guideline issuance, highlighting the regulatory environment.

 

Question 4. Write A Note:
(a) National Securities Depository Limited
Answer: The full form of NSDL is National Securities Depository Limited. It was the first electronic securities depository of India. It was established and registered with SEBI in 1996.

• NSDL is a public depository company formed under the Companies Act. Since it is a public company, it is managed by Board of Directors.
• In order to form NSDL, the National Stock Exchange (NSE) and some financial institutions promoted it.
• NSDL appoints several depository participants which then executes the functions of NSDL. These participants work as agents between the investors and NSDL.
• NSDL does not charge any fee from the investors for their investments. NSDL takes this fee from the depository participants.
• Thus, investor has neither to pay any fee, nor any operating charges directly to NSDL. However, depository participant charges some fees from the customer/ investor.

Online Services of NSDL (via. participants):

• Dematerialization and Rematerialization
• Electronic settlement of transactions
• Crediting right and bonus shares in customer's account
• Freezing customer's account, etc.

In simple words: NSDL (National Securities Depository Limited) is India's first electronic depository, established in 1996 by NSE and financial institutions. It allows investors to hold and trade securities electronically through depository participants, offering services like dematerialization and electronic settlement.

Exam Tip: For notes on NSDL, include its full form, year of establishment, role as the first depository, how it operates through DPs, its fee structure, and key services provided.

(b) Central Depository Services Limited
Answer:

• Central Depository Services (India) Limited (CDSL) is the second electronic depository of India.
• It was established in 1999 in Mumbai with collaboration of Bombay Stock Exchange and some banks.
• Just like NSDL, CDSL provides online depository services all over India. It aims at easy and safe services to the investors.
• It publishes the list of its registered depository participants time to time on its website.

In simple words: CDSL (Central Depository Services Limited) is India's second electronic depository, set up in 1999 by BSE and banks. It also offers secure online depository services across India to investors, similar to NSDL.

Exam Tip: When writing about CDSL, state its full name, its role as the second depository, year of establishment, collaboration (BSE), and its primary objective of providing safe online services.

(c) SEBI
Answer:

• Securities and Exchange Board of India (SEBI) came into existence as a statutory body on January 30, 1992 under the Securities and Exchange Board of India Act 1992.
• Its head office is in Mumbai. It has regional offices in Kolkata, Delhi and Chennai. SEBI is a statutory body regulating stock exchanges in India.

Objectives of SEBI:

1. To protect the interest of investors in securities
2. To encourage the development of securities market
3. To regulate the securities market

Functions of SEBI:

1. To regulate business in stock exchange:
   • SEBI regulates the business in stock exchanges and the operations of the stock exchanges. It monitors whether the specified rules and guidelines are followed or not by share brokers, sub-brokers, merchant bankers.
   • It keeps an effective control on the entire working of the stock exchanges.

In simple words: SEBI (Securities and Exchange Board of India) is the main regulatory body for the Indian securities market, established on January 30, 1992. Its goals are to protect investors, develop the market, and regulate it, including overseeing stock exchanges and market intermediaries.

Exam Tip: For a note on SEBI, ensure you mention its full name, date of establishment (and the Act), its statutory nature, its three core objectives, and at least a few key functions, especially its regulatory role over stock exchanges and intermediaries.

 

Question 4. Write a Note :
(c) SEBI
Answer: Securities and Exchange Board of India (SEBI) was established as a statutory body on January 30, 1992, under the Securities and Exchange Board of India Act, 1992. Its head office is in Mumbai, with regional offices in Kolkata, Delhi, and Chennai. SEBI is the main statutory body that regulates stock exchanges in India.

Objectives of SEBI:
1. To protect the interest of investors in securities.
2. To encourage the development of the securities market.
3. To regulate the securities market.

Functions of SEBI:
1. To regulate business in stock exchange:
• SEBI regulates the business and operations of stock exchanges. It monitors whether the specified rules and guidelines are followed by share brokers, sub-brokers, and merchant bankers.
• It keeps effective control over the entire working of stock exchanges.
2. Protection of the interest of the investors:
The main function of SEBI is to protect investors' interests. It ensures that intermediaries follow specific rules and regulations to safeguard investors.
3. Registration and regulation of intermediaries:
• SEBI registers various intermediaries like merchant bankers, share brokers, sub-brokers, and registrars of securities who work in the stock exchange, and it monitors their activities.
• It also plans for the training of these intermediaries.
4. Registration and regulation of mutual funds:
SEBI registers and monitors mutual funds, regulating their operations. It sets specific rules and regulations that mutual funds must follow.
5. To prevent fraudulent trade:
SEBI takes necessary steps to stop fraudulent trading activities in stock exchanges.
6. To cancel registration of brokers:
SEBI can cancel the registration of share brokers who do not follow its rules and guidelines or who fail to provide necessary information.
7. To regulate the merger and take-over of the companies:
SEBI regulates mergers and take-overs of companies to protect the interests of investors. It has issued guidelines to ensure these activities do not harm small investors.
8. Guidelines with reference to public issues:
SEBI has issued different guidelines for capital issues, covering both new companies making their first public offering and existing companies raising new capital in the market.
9. Self-regulation:
SEBI actively promotes self-regulation among stock exchange intermediaries. It encourages these intermediaries to form and promote their professional unions.
10. Maintaining stock exchanges as an efficient market:
SEBI ensures the stability and efficiency of stock exchanges by setting regulations, restrictions, and guidelines.
11. Inspection of books:
When necessary, SEBI inspects the financial records of companies that issue securities, depository participants, and beneficiary owners.
12. Monitoring and inspection of stock exchange:
• SEBI monitors and inspects whether the regulations for stock exchanges are followed and if the stock exchange's organizational system and operations adhere to the SEBI Act.
• If needed, it conducts inquiries, inspections, and audits of the accounts of intermediaries.
13. Guidelines:
SEBI regularly issues guidelines for share brokers, sub-brokers, merchant bankers, debenture trustees, and for the buyback of securities by companies, among others.
14. To obtain annual and periodical reports:
SEBI receives various reports and statements to gather information about the functioning and activities of stock exchanges.
15. Research work:
SEBI conducts research to ensure that all its functions are carried out effectively.
In simple words: SEBI is India's main financial watchdog for stock markets. It makes rules, protects investors, controls brokers and funds, stops bad practices, and keeps the market running smoothly. It ensures fair play and growth in the securities market.

Exam Tip: When describing SEBI, always start with its establishment date and purpose, then categorize its functions (e.g., regulatory, protective, developmental) for a structured answer. Mentioning its role in preventing fraud and ensuring transparency is key.

 

Question 5. Explain the purchase-sale procedure of securities in stock exchange.
Answer: The procedure for buying and selling securities online through a stock exchange involves several steps:
1. Opening a demat account:
• First, an investor must contact a depository participant (DP) and open a demat account. This account is opened under NSDL or CDSL.
• The demat account allows the investor to buy, sell, or hold their shares electronically.
2. Order to buy-sell:
• Once the demat account is active, the investor can trade online.
• An investor who wants to sell securities must place an online order with their broker.
• When buying or selling, the investor needs to clearly state details such as the name of the share and the desired price.

There are two main types of orders for buying and selling securities:
(a) Limited order:
• With a 'limited order', the investor sets a specific price at which they want to buy or sell shares. The purchase or sale price is thus pre-determined.
• This type of order is commonly used by retail investors and large investment funds.
(b) Market order:
If an investor chooses a 'market order', they want to trade at the current prices available in the market. The buying or selling happens at the most recent price displayed on the trading screen at the time the order is placed.
3. Execution of order:
• When the investor places an online order with their broker, the broker then executes this order by placing it on the stock exchange.
• The broker can complete transactions from their office on behalf of their customer (the investor) using online trading systems.
4. Contract note:
• After the broker places the investor's order, they prepare a contract note for the investor.
• The contract note serves as a confirmation of the transaction on that specific day.
• Typically, the broker sends this contract note to the customer within 24 hours of the transaction.
• The contract note includes important details like the name of the security, quantity traded, total transaction amount, order number, brokerage fees, and applicable taxes. It acts as both a summary and an agreement for the traded securities.
5. Settlement of transaction:
• Settlement houses are responsible for finalizing these transactions.
• For transactions made on the Bombay Stock Exchange, the Bombay settlement house handles them.
• For transactions on the National Stock Exchange, NSCCL (National Securities Clearing Corporation Limited) performs the settlement.
• Transactions are typically settled one day after the trade takes place.
6. Payment of amount and delivery of security:
• If an investor buys shares, they must make the payment before the 'pay-in day'. The shares are delivered to the investor on the 'pay-out day'.
• If an investor sells shares, they must deliver the shares before the 'pay-in day'.
• The customer receives money on the 'pay-out day'.
• Pay-in day is when brokers pay or deliver securities to the exchange, and pay-out day is when the exchange makes payment or delivers securities to the broker.
7. Inform customer about settlement of transactions:
• If the investor has sold securities, the broker will transfer the payment directly to the customer's bank account.
• If the investor has purchased securities, the broker will make the payment directly from the investor's bank account.
• The customer is informed about the transaction settlement through their demat account.
In simple words: To buy or sell shares, you first open a demat account. Then, you tell your broker what shares you want to trade and at what price (either a set limit or market price). The broker places your order on the stock exchange. After the trade, the broker sends you a contract note summarizing everything. Finally, the transaction is settled, and you either pay for the shares and receive them, or deliver them and receive your money. All these steps are tracked and confirmed via your demat account.

Exam Tip: When explaining the purchase-sale procedure, use clear, sequential steps. Emphasize the roles of the demat account, broker, and stock exchange, and differentiate between limited and market orders. Remember to include the contract note and settlement process.