CBSE Class 12 Entrepreneurship Resource Mobilization Worksheet Set B

1 State the most important factors for the survival of any business enterprise.

Very Short Answer Type Questions

Question. What is SEBI?
Answer : SEBI is acronym for Securities and Exchange Board of India. It is the regulator of the securities market in India. It was established on 12th April, 1992 through the SEBI Act, 1992. This act was passed by the Indian Parliament.

Question. “Humorously, they were once given the acronym FFF for Angel Investors”.
What is FFF stands for.
Answer : The acronym FFF used while referring to the angel investors stands for Friends, Family and Fools

Question. Name the two players in the capital market.
Answer : The major players in the capital market are
a. Individual investors
b. Stock Exchange
c. Financial Institutions
d. Securities and Exchange board of India (SEBI) etc.

Question. Identify the method of raising additional finance from existing shareholders by offering securities to them on pro-rata basis.
Answer : When additional finance is required, entrepreneurs follow the strategy named Rights issue where in they offer securities to the existing shareholders on a pro-rata basis. In other-words they give right on certain number of shares in proportion to the number of shares held by them currently.

Question. What is Right Issue?
Answer : Rights issue is the method used to raise additional finance from existing shareholders by offering them securities to them. The shares are offered on a pro-rata basis in which the shareholders get the rights to purchase a specific number of shares in proportion to the shares they are holding currently.

Question. Why right issue method of issuing securities is considered to be inexpensive?
Answer : The method of issuing securities through Rights Issue is considered to be inexpensive as it does not involve any
a. Agents
b. Brokers
c. Prospectus
d. Underwriters
e. Enlistment etc.

Question. What is meant by Stock options or offering shares to the employees?
Answer : This is the method in which the employees of a company are offered to own the shares and become the shareholders. This leads to much better growth of the company.

Question. What is a secondary market?
Answer : Secondary market, also known as old securities market or stock exchange, is the market in which the old securities (i.e. the market securities issued earlier) are bought and sold.

Question. In what forms company can raise capital through primary market?
Answer : The following are the forms in which the companies can raise their capital through the capital market.
1. Public issue
2. Rights issue
3. Private Placement
4. Offers to the employees

Short Answer Type Questions

Question. Who manages SEBI?
Answer : SEBI is managed by its member as follows:
a. Chairman nominated by Union Government of India
b. Two members who are officers from Union Finance Ministry
c. One member from The Reserve Bank of India
d. Five members nominated by Union Government of India. Among these five, at-least three should be whole-time members.

Question. What do you understand by venture capital?
Answer : a. Venture capital is a type of private equity capital. It is provided in the form of seed funding to the companies which are early-stage, high potential, high risk, growth up stages. These are also provided to entrepreneurs have very less experience and are in need of funds to implement their ideas.
b. Venture capital is provided to such companies which are new or going to implement very new technologies by entrepreneurs who are professionally or technically qualified. Such companies fail to attract investments from public. Without venture capital they will never be able to take shape.
c. It is equity based investment in small to medium companies that have growth potential.
d. It is through venture capital that the investors support the entrepreneurs who have talent. In return the investors will be able exploit market opportunities and reap long-term capital gains.
e. It is a tool for economic development in many of developing regions. In many of these regions finance is made available to many small and medium enterprises (SMEs) which have difficulties in getting a loan from the banks.

Question. Why are Venture capitalists typically very selective in deciding while doing the investment?
Answer : Venture capitalists will prefer to invest in only selected ventures due to the following reasons.
a. The ventures into which they’re going to invest are early-stage, high risk, growth-up companies started by the entrepreneurs who might have been lacking the necessary experience.
b. The ventures are usually employing new or relatively new technologies which have not yet proven their potential to be successful.
c. The ventures in which they’re going to invest are in still developing regions.
As they’re investing their money they will be very cautious and they won’t proceed if there is more probability of failure.

Question. Give the significance of finance in an enterprise.
Answer : Finance is very important for the business as it helps the business to
a. acquire fixed assets
b. Be prepared to meet the unplanned/unexpected expenses.
c. Conduct Market investigations.
d. Develop the product
e. Encourage management to progress and create value
f. Establish or promote the business
g. Expand, diversify, improve and grow
h. Keep men and machines at work

Question. State the most important factors for the survival of any business enterprise.
Answer : The most important factors for any business to sustain itself are
a. Financing
b. Production
c. Marketing

Question. What do you understand by internal sources of finance?
Answer : Internal source of finance, also known as equity, refers to the owner’s money and is usually small. This is either from owner’s personal savings.

Question. ‘Production’, ‘Marketing’, and Financing’ – deemed as the most important factors for any business’s survival rates. Among these name the most critical element and why?
Answer : Among production, marketing and financing, financing is considered to be the most important factor because the other two i.e. production and marketing can not existing without financing/money.

Long Answer Type Questions

Question. How can an entrepreneur, raises funds by selling the issue mainly to the institutional investors?
Answer : Entrepreneurs use private placement to raise funds from the institutional investors. These institutional investors are very limited in number. Entrepreneurs belonging to both public and private limited sector utilize this option. They issue different varieties of financial instruments to capitalize using private placement. Private placement help the entrepreneurs to keep maintain business information confidentially and keep it from disclosing in the open market.
Different institutional investors are
a. Unit Trust of India
b. Life Insurance Corporation of India
c. General Insurance Corporation
d. Army Group Insurance
e. State Level Financial Corporations

Question. Explain some important sources of raising finance in business.
Answer : The following are the important sources are available for an entrepreneur, to raise funds, to cater to their needs of long-term fund requirements.
1. Capital Markets: A capital market is an organized means meant for effective and smooth mobilization of the money capital or financial resources from the investors to the entrepreneurs. This is known as financial inter-mediation. In capital markets production capital is raised and it is made available to the entrepreneurs to be used in the establishment or operations of their enterprises.
2. Angel investors: Angel investor, also known as business angel or informal investors is a wealthy person who can provide the capital for starting an enterprise or for the initial stage operations of an enterprise. They usually have high-risk, high-return matrix. In return they expect convertible debt or ownership equity in the enterprise.
3. Venture capital: This source is a kind of private equity capital and supplies seed funding while staring up the enterprise. Suitable for high potential, high risk, growth-up enterprises run by the entrepreneurs who are in need of necessary experience
and finances to implement their ideas.
4. Specialized financial institutions: These specialized financial institutions provide the finance to
a. Small and medium sized concerns
b. New enterprises established by the new entrepreneurial groups
c. Specific industries that are in need of finance to implement modernization
d. Enterprises established to implement innovations and new technological developments
e. Enterprises in need of huge funds to sustain long gestation period
f. Enterprises established in backward regions

Question. Explain the powers SEBI has been vested wit for discharging of its functions efficiently.
Answer : To carry out its functions efficiently, the following powers are provided to SEBI 
a. Approve the by-laws of stock exchanges, SEBI.
b. Books of accounts inspection. Inspection of periodical returns from recognized stock exchanges.
c. Compel specific companies to make their shares available in one or more stock exchanges.
d. Delegate powers that can be executed.
e. Enquire the stock exchanges so that they amend their by-laws, as required.
f. Financial intermediaries’ books of accounts inspection
g. Grant licenses to any persons so that they can deal with the securities at specific places.
h. Have the fee and other charges imposed on the intermediaries for executing their functions.
i. Impose monetary penalties
j. Judge after prosecuting the violation of specific provisions of the companies Act., directly.

Question. When can an entrepreneur seek venture capital financing?
Answer : Entrepreneurs will go for raising venture capital funds under the following conditions.
a. When the venture under consideration is in the start-up stage, high risk oriented.
b. When the venture involves the use of new or upcoming technologies which is not yet successfully implemented by others.
c. When the business is such that it fails to attract funds from the investors
d. When the entrepreneurs are looking for partners/mentors who have good business skills and also can provide capital for their start-ups.
e. Seed capital requirements to develop a prototype.
f. When the entrepreneurs are in need of start-up finance.

HOTs Question

Question. Why it is said that “A venture capitalists investments are illiquid”. Give reason.
Answer : Venture capitalists invest in high-risk, high-growth, yet to mature companies having high returns in the future. Their funding goes when the company is about to be started. It takes a huge amount of time before the value of the investment reaches the desired levels.
In addition the entrepreneurs are usually not yet experienced. Due to these reasons it takes lot of time for the investment to reach the desired growth levels. In addition there is risk of the enterprise not becoming successful and subsequently losing their investment. Due to these reasons, the venture capitalists investments are illiquid in other words their investments cannot easily/quickly converted into cash.

Value Based Question

Question. Harish is working as the chief accountant in ABC infrastructure Ltd. He came to know that the company is planning to announce an interim dividend. He purchased 2000 shares of the Co. at the market price of ₹ 215 with the expectation of an appreciation in the market price. When the price increased to ₹ 537 he sold his holdings & made a handsome profit. Name the related concept which social values have been affected here?
Answer : The underlying concept is known as insider trading. Interim dividend is decided in the annual general meeting (AGM) held by the directors. This information is confidential and it is illegal to use such information for personal gains as it results in conflict of interest. Chief accountants have access to this information and it is illegal for them to use this for personal advantage and they are not supposed to disclose it even to their close associates.
The following social values are negatively impacted by the behaviour of the chief accountant.
◆Integrity
◆Ethical behaviour
◆Shareholder Trust
◆Social
◆Reputation of the company

Question. Mr. B the financial Manager of ABC Company purchases 100 shares of the Company just before the rights issue was announced. Is the behaviour of the manager ethical? What would you do as a legal advisor of the company.
Answer : The company announcing the rights issue is confidential information and should not be mis-used by the employees. It is unethical practice to use such information for personal gain.
Companies go for rights issue to gather additional capital/finance from the existing stakeholders. A company going for rights issue means that it is in the path of growth and preference will be given to the existing shareholders to purchase shares on a pro-rata basis.
It is responsibility of the employees from the finance department to keep such information confidential and it should not be used for their personal gains. As the legal adviser of the company, I discourage such practices and advise for a legal action against the manager for breaching the integrity.