Detailed, Step-by-Step NCERT Solutions for 12 Business Studies Chapter 10 Financial Management Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.
Financial Management NCERT Solutions for Class 12 Business Studies Chapter 10
Financial Management Questions and Answers Class 12 Business Studies Chapter 10
Multiple Choice Questions
(i) Primary and Secondary Markets …………
(a) Compete with each other
(b) Complement each other
(c) Function Independently
(d) Control each other
(c) Function Independently.
(ii) Total number of Stock Exchanges in India are
(iii) The settlement cycle in NSE is
(a) T + S
(b) T + 3
(c) T + 2
(d) T + 1
(a) T + 5.
(iv) National Stock Exchange of India was recognised as stock exchange in the year
(v) NSE commenced future trading in the year
(vi) Clearing and settlement operations of NSE is carried out by
(vii) OTCEI was started on the lines of
(d) NSE .
(viii) To be listed on OTCEI, the minimum capital requirement for a company is
(a) Rs. 5 crores
(b) Rs. 3 crores
(c) Rs. 6 crores
(d) Rs. 1 crores.
(b) Rs. 3 Crores
(ix) Treasury Bills are basically
(a) An intrument to borrow short term funds
(b) An instrument to borrow long term funds
(c) An instrument of Capital market
(d) None of the above.
(a) An intrument to borrow short term funds.
(x) REPO is ………..
(a) Repurchase Agreement
(b) Reliance Petroleum
(c) Read and Process
(d) None of the above.
(a) Repurchase Agreement.
Short Answer Type Questions
What are the functions of financial markets?
Financial markets play an important role in the allocation of scare resources in an economy by performing the following four important functions.
(1) Mobilization of savings and channeling them into the most productive uses : A financial market facilitates the transfer of savings from savers to investors. It gives savers the choice of different investments and thus helps to channelise surplus funds into the most productive use.
(2) Facilitate price discovery : We all know that the forces of demand and supply help to establish a price for a commodity or service in the market. In the financial market, the households are suppliers of funds and business firms represent the demand. The interaction between them helps to establish a price for the financial asset which is being traded in that particular market.
(3) Provide liquidity to financial assets : Financial markets facilitate easy purchase and sale of financial , assets. In doing so they provide liquidity to financial assets, so that ‘ they can be easily converted into cash whenever required. Holders of assets can readily sell their financial assets through the mechanism of the financial market.
(4) Reduce the cost of transactions : Financial markets provide valuable information about securities being traded in the market. It helps to save time, effort and money that both buyers and sellers of a financial asset would have to otherwise spend 😮 try and find each other. The financial market is thus a common platform where buyers and sellers can meet for fulfillment of their individual needs.
“Money Market is essentially Market for short terms funds”. Discuss.
Money Market : The money market is a market for short term funds which deals in monetary assets whose period of maturity is upto one year. These assets are close substitutes for money. It is a market where low risk, unsecured and short term debt instruments that are highly liquid are issued and actively traded everyday.
It has no physical location but is an activity conducted over the telephone and through the internet. It by selling a security “held on a spot (scady) basis and repurchasingthe same on a forward basis. Reverse repo is a mirror image of repo as in the case of former, securities are acquired with a simultaneous commitment to resell.
Subsequent to the irregularities in securities transaction, repos were initially allowed in the Central Government. Treasury billstand dated securities created by converting some of the treasury bills. In order to activate the repos market essentially to be an equilibrating .
force between the money market and the government securities market, the Reserve bank gradually extended repos facilities to all central government dated securities and treasury bills of all maturities. Recently, while the state government securities were made eligible for repos, the Reserve Bank also allowed all non-banking entities with its Mumbai office, to undertake repos (including revenue ‘ repos). Furthermore, it has been decided to make PSU bonds and private corporate securities eligible for repos to broaden the repos market.
The Reserve Bank also undertakes repo-reverse repo operations with PDs and scheduled Commercial Banks, as part of its open market operations. It also provides liquidity support to SDs and 100 percent gilt mutual funds through reverse repos. There is no limit on the tenure of repos.
The Reserve bank initially conducted repo operations for a period of 14 days. Since November 1996, the Reserve Bank has been conducting 3-4 days repo auctions, synchronizing with working day and weekend liquidity conditions, in order to modulate short-term liquidity. With the introduction of liquidity Adjustment Facility (LAF) from June 5,2000. the Reserve Bank has been injecting liquidity into the system through reverse rgpos and absorbing liquidity from the system through repos on a dally basis.
These operations are conducted on all- working days except on Saturdays, through uniform price auctions and are restricted to scheduled Commercial Banks and PDs. This is apart from the liquidity support extended by the Reserve Bank to PDs through refinance/reverse repo facility at a fixed price. Repos have often been used to provide banks an avenue to part funds
generated by capital inflows to provide a floor to the call money market. During times of foreign exchange market volatility, repos have been used to prevent speculative activity as the funds tend to flow from the money market to the foreign exchange market, for instance, a fixed rate repo auction system was instituted in November 1997 with a view to ensuring an effective floor for the short-term interest rates in order to ward off the spread of contagion during the South-East Asian crisis. The repo rates were reduced with the return of capital flows, which imported stability to the foreign exchange market.
Distinguish between Capital Market and Money market.
Distinction between Capital Market and Money Market:-
Both the money market and the capital market are the centres which arrange for the transfer of funds from the suppliers of funds to the users of funds. They differ, however, in regard to the maturity periods of the financial assets created and dealt with you effecting the transfer of funds. Money market arranges for short term and capital market provides for medum to long term funds. The time length in respect of short term funds is less than and upto one year.
What are the functions of Stock Exchange?
Stock Exchange : A stock exchange is an institution whiclrprovides a platform for buying and selling of existing securities. As a market, the stock exchange facilitates the exchange of a security (share, debenture etc.) into money and vice-versa. Stock exchanges help companies raise finance, provide liquidity and safety of investment to the investors and enhance the credit worthiness of individual companies.
Meaning of Stock Exchange
According to Securities Contacts (Regulation) Act 1956, Stock Exchange means any body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying and selling or dealing in securities.
Functions of a Stock Exchange : The efficient functioning of a Stock Exchange creates a conducive climate for an active and growing primary market for new issues. An active and healthy secondary market in existing securities leads to positive environment among investors.
The following are some of the important functions of a stock exchange.
1. Providing Liquidity and Marketability to Existing Securities : The basic function of a stock exchange is the creation of a continuous market where securities are bought and sold. It gives investors the chance to invest and reinvest. This provides both liquidity and easy marketability to already existing securities in the market.
2. Pricing of Securities : Shares prices on a stock exchange are determined by the forces of demand and supply. A stock exchange is a mechanism of constant valuation through which the prices of securities are determined. Such a valuation provides important instant information to both buyers and sellers in the market.
3. Safety of Transaction : The membership of a stock exchange is well regulated and its dealings are well defined according to the existing legal framework. This ensures that the investing public gets a safe and fair deal on the market.
4. Contributes to Economic Growth : A stock exchange is a market in which existing securities are resold or traded. Through this process of disinvestment and reinvestment savings get channelised into their most productive investment avenues. This leads to capital formation and economic growth.
5. Spreading of equity cult : The stock exchange can play a vital rote in ensuring wider share ownership by regulating new issues, better trading practices and taking effective steps in educating the public about investments.
6. Providing scope for speculation : The stock exchange provides sufficient scope within the provision of low for speculative activity in a restricted and controlled manner. It is generally accepted that a certain degree of healthy speculation is necessary to ensure liquidity and price continuity in the stock market.
What are the objectives of SEBI.
The overall objective of SEBI is to protect the interests of investors and to promote the development of, and regulate the securities market. Following are tHe objectives of SEBI
(1) To regulate stock exchanges and the securities industry to promote their orderly functioning.
(2) To protect the rights and interests of investors, particularly individual investors and to guide and educate them.
(3) To prevent trading malpractices and ach ieve a balance between self-regulation by the securities industry and its statutory regulation.
(4) To regulate and develop a code of conduct and fair practices by intermediaries like brokers, merchant bankers etc. with a view to making them competitive and professional.
What are the objectives of NSE?
Objectives of NSE
NSE was set up with the following objectives
(a) Establishing a nation wide trading facility for all types of securities.
(b) Ensuring equal access to investors all over the country through an appropriate communication network.
(c) Providing a fair, efficient and transparent securities market using electronic trading system.
(d) Enabling shorter settlement cycles and book entry settlements.
(e) Meeting international benchmarks and standards.
Within a span of ten years, NSE has been able to achieve its objectives for which it was setup. It has been playing a leading role as a change agent in transforming the Indian capital market. NSE has been able to take the stock market to the door step of the investors.
It has ensured that technology has been harnessed to deliver the services to the investors across the country at the lower cost. It has provided a nation wide screen based automated trading system with a high degree of transparency and equal access to investors irrespective of geographical location.
What is OTCEI?
Over The Counter Exchange of India (OTCEI) : The OTCEI is a company incorporated under the Companies Act 1956. It was setup to provide small and medium companies an access to the capital market for raising finance is a cost effective manner. It was also meant to provide investors with a convenient, transparent and efficient avenue for capital market investment.
It is fully computerized, transparent, single window exchange which commenced tracing in 1992. This exchange is established on the lines of NASDAQ (National Association of Securities Dealers Automated Quotations) the OTC exchange in USA. It has been promoted by UTI, ICICI, IDBI, IFCI, LIC, GIC, SBI Capital markets and can Bank
Over the counter market may be defined as a place where buyers seek sellers and vice versa and then attempt to arrange terms and conditions for purchase/sale acceptable to both the parties. It is a negotiated market place that exists anywhere as apposed to the auction market place, represented by the activity on securities exchanges.
Thus in the OTC exchange, trading takes place when a buyer or seller walks up to an OTCEI counter, taps on the computer screen, finds quotes and effects a purchase or sale depending on whether the prices meet their targets. There is no particular market place in the geographical sense.
The objectives of OTCEI are to provide quicker liquidity to securities at a fixed and fair price, liquidity for less traded securities or that of small companies, a simplified process of buying and selling and easy and cheaper means of market, public sale of new issue.
Advantages of OTCI Market
(1) It provides a trading platform to smaller and less liquid companies as they are not eligible for listing on a regular exchange.
(2) It is a cost effective method for corporates as there js a lower cost of new issues and lower expenses of servicing the investors.
(3) Family concerns and closely hold companies can go public through OTC.
(4) Dealers can operate both in new issues and secondary market at their option.
(5) It gives greater freedom of choice to investors to choose stocks by dealers for market making in both primary and secondary markets.
(6) It is a transparent system of trading with no problem of bad or short deliveries.
(7) Information flows are free and more direct from market makers to customers since there is close contact between them.
Long Answer Type Questions
Explain the various Money Market Instruments?
(a) Commercial Paper : Commercial paper is a short term unsecured promissory note, negotiable and transferable by endorsement and delivery with a fixed maturity period. It is used by large and creditworth companies to raise short term funds at lower rates of interest than market rates.
It usually has a maturity period of 15 days to one year. The insurance of commercial paper is an alternative to bank borrowing for large companies that are generally considered to be financially strong. It is sold at a discount and reedeemed at par.
The original purpose of commercial paper was to provide short terms funds for seasonal and working capital needs. For example companies use this instruments for purposes such as bridge financing Example Suppose a company needs long term finance to buy some machinery.
In order to raise the long term funds in the capital market the company will have to incur floatation costs (costs assciated with floating of an issue such as are brokerage, commission, printing of applications and advertising etc.). Funds raised through commercial paper are used to meet the floatation costs. This is known as Bridge Financing.
(b) Call Money : Call money is short term finance repayable on demand, with a maturity period of one day to fifteen days, used for inter-bank transactions. Commercial banks have to maintain a minimum cash balance known as cash reserve ratio. The Reserve Bank of India changes the cash reserve ratio from time to time which in turn affects the amount of funds available to be given as loans by commercial banks.
Call money is a method by which banks borrow from each other to be able to maintain the cash reserve ratio. The interest rate paid on call money loans is known as the call rate. It is a highly volatile rate that varies from day to day and sometimes even from hour to hour.
There is an inverse relationship between call rates “and Other short term money market instruments such as certificates of deposit and commercial paper. A rise in call money rates makes other sources of finance such as commercial paper and certificates of deposit cheaper in comparision for banks raise funds from these sources.
(c) Certificate of Deposit : Certificate of deposit are unsecured, negotiable short term instruments in bearer form, issued by commercial banks and development financial institutions. They can be issued to individuals, corporations and companies during periods of tight liquidity when the deposit growth of banks is slow but the demand for credit is high. They help to mobilize a large amount of money for short periods.
(d) Commercial Bills : A commercial bill is a bill of exchanges used to finance the working capital requirements of business firms. It is a short term, negotiable, self liquidating instrument which is used to finance the credit sales of firms. When goods are sold on credit, the buyer becomes liable to make payment on a specific date in future.
The seller could wait till the specified date or make use of bill of exchange. The seller of the goods draws the bill and the buyer accepts it. On being accepted, the bill becomes a marketable instrument and is called a trade bill. These bills can be discounted with a bank if the seller needs funds before the bill matures. When a trade bill its accepted by a commercial bank it is known as the commercial bill.
What are the methods of floatation in Primary Market?
The primary market is also known as the new issue market. It deals with new securities being issued for the first time. The essential function of a primary market is to facilitate the transfer of investible funds from savers to entrepreneurs seeking to establish new enterprises or to expand existing ones through the issue of securities for the first time.
The investors in this market are banks, financial institutions, insurance companies, mutual funds and individuals. A company can raise capital through the primary market in the form of equity shares, preference shares debenture, loans and deposits. Funds raised may be for setting up new projects, expansion, diversification, modernization of existing projects, merges and takeovers etc.
Methods of Floatation
These are various methods of floating new issues in the primary market
(a) Offer Through Prospectus : Offer through prospectus is the most popular method of raising funds by public companies in the primary market. This involves inviting subscription from the public through issue of prospectus. A prospectus makes a direct appeal to investors to raise capital, through an advertisement in newspapers and magazine.
The issues may be underwritten and also are required to be listed on at least one stock exchange. The contents of the prospectus have to be in accordance with the provision of the Companies Act and SEBI disclosure and investor protection guidelines.
(b) Offer for Sale : Under this method securities are not issued directly to the public but are offered for sale through intermediaries like issuing houses or stock brokers. In this case, a company sells securities enblock at an agreed price to brokers who, in turn, resell them to the investing public.
(c) Private Placement : Private placement is the allotment of securities by a company to intitutional investors and some selected individuals. It helps to raise capital more quickly than a public issue. Access to the primary market . can be expensive on account of various mandatory and non-mandatory expenses. Some companies, therefore cannot afford a public issue and choose to use private placement.
(d) Rights Issue : “B is is a privilege given to existing shareholders to subscribe to a new’issue of shares according to the terms and conditions of the company. The shareholders are offered the ‘right’ to buy new shares in proportion to the number of shares they already possess.
(e) E-IPOs : A company proposing to issue capital to the public through the on-line system of the stock exchange has to enter into an agreement with the stock exchange. SEBI registered brokers have to be appointed for the purpose of accepting applications and placement orders with the company.
The issuer company should also appointed a registrar to the issue having electronic connectivity with the exchange. The issuer company can apply for listing of its securities on any exchange other than the exchange through which it has offered its securities. The lead manager coordinates all the activities amongst intermediaries connected with the issue.
Explain the Capital Market reforms in India’.
Recent Capital Market Reforms : Policy initiative and Developments : The Indian capital market which has a long history spanningwer 100 years, is currently passing through the most radical phase. Although the Indian Capital market witnessed some significant changes during the eighties, both the primary and the secondary segment – continued to suffer from some serious deficiencies.
Many unhealthy practices prevailed in the primary market to attract the retail investors. Another disturbing features was the high cost of new issues. Although over the years, a number of agencies came into existence offering different types of services in connection with the new issues of capital, their activities were not overseen by any regulatory authorities.
The problem were even more serious in the secondary market, the general functioning of stock exchange was not satisfactory. The exchanges were governed by their internal buy laws and managed by their govering bodies, which were dominated by elected member brokers.
Trading members were also not adequately capitalised. Indian trading was rampant and was one of the major causes of excessive speculative activity, leading to default by stock brokers, frequent payment crises and disruption of market activity. The stock exchanges followed inefficient and outdated trading systems. This,,in turn, led to lack of transparency in trading operations, besides resulting in long and uncertain settlement cycles.
The risk management system in the market was also not satisfactory. Though the margin system was operative, the margins were inadequate and the system of collection of margins was not enforced strictly. Post-trade settlement procedure also suffered from some serious drawbacks, such as, high share of bad deliveries, delayed settlements, same times clubbing of settlements, etc. The procedures relating to investors protection were also not satisfactory.
Some measures were initiated to reform the capital market in the’90’s. .
Primary Market Developments
(i) The freedom to issue debt security without listing equity, hitherto granted to infrastructure companies and municipal corporation, has been extented to all companies. This is subject to certain conditions issues below Rs. 100 crore shall carry an investment grade creditrating; issues above Rs. 100 crore shall carry an investment grade credit rating from two credit rating agencies, the issuer shall company with the provisions of Rule 19(2)
(b) of the Securities Contracts (regulation) Act (SCRA), 1956 regarding the size of the public offer, and the promotors shall bring in the equity contribution of 20 per cent and lock in the same for three years.
(ii) The SEB1 : DIP (Disclosure and Investor Protection) guidelines, 2000 were amended. The main provisions include: Permission to foreign venture capital investors (FVCIs) registered with SEBI and State Industrial Development Corporation to participate in public issues through the book building route as qualified Institutional Buyers (QIBs); no lock-in requirements for the pre-issue share capital of an unlisted company held by venture capital funds (VCFs) and FVCIs; removal of exemption for public offer requirement in view of reduction in quantium from 25 per cent to 10 per cent and removal of the restriction of a minimum public issue size of Rs. 25 crore in respect of a IPO through the book building route.
(iii) Since a substantial proportion of the non-SLR securities are issued via the private placement market. RBI issued guidelines to banks in June 2001, which relate, inter alia, to prudential limits on investments, due diligence, and internal ratings in respect of unrated issues.
Further guidelines are proposed to be issued by RBI with a view to strengthening the internal rating system, fixing sub-limits for privately placed securities, and diselosoures regarding issuer composition and non-performing assets.
Secondary Market Developments
(i) SEBI notified the SEBI (investment advice by intermediatiaries) (Amendment) Regulation 2001. The main provisions are appointment of a compliance officer by market intermediaries (like Bankers to an issue, Credit Rating Agencies, Debenture trustees, stock brokers and mutual funds) to independently report to SEBI on non-compliance with rules/regulatioris issued by Government and regulators and restrictions on investment advice by intermediaries and their employees on any security in the publicity accessible media.
(ii) Government constituted a National Advisory Committee on accounting standard to be adopted by the companies under the Companies Act.
(iii) All scripts include intheALBM/BLESS or MCFS in any stock exchange or in the BSE 200 list were brought under rolling settlement with effect from july 2,2001. This raised the total number of scripts under rolling settlement to 414. The remaining securities have come under rolling settlement with effect from December 31,2001.
(iv) With effect from March 8,2001 all sales transaction were to be backed by delivery unless the sale transaction was preceded by a purchase position of at least an equivalent amount in the name of the same client in the same or any other exchange. This was applicable to proprietery trading by member.
(v) Restrictions on short sales were withdrawn with effect from July 2,2001.
(vi) Stock exchanges were allowed (subject to conditions) to use the Settlement Guarantee funds (SGFs) for meeting shortfalls caused by non-fulfillment/partial fulfillment of obligations by members before declaring them defaulters.
SEBI’s group on Risk Management for equity Market discussed the issues concening risk management is rolling settlement and based on the discussion, SEBI took the following decisions.
For the newly added 266 scrips, including the 15 scrips under deferral products, the stock exchange will calculate scrip-wise var and index-based var and will apply the higher or the two as the margin percentage. For the 148 scrips already in the rolling settlement, the margin is 3 timed the daily index VaR.
The minimum daily index VaR has been fixed at 5 percent of the cases, an additional margin has been prescribed to address the 1 percent of the cases, and this has been fixed at 12 percent based on the historical data of individual stock VaRs.
(vii) Government amended the securities contracts (Kejulation Rules, 1957 to standardise listing requirements tin stock exchanges. The main provisions are : a public company seeking listing of its securities in a stock exchange is required to satisfy the exchange that the lest 10 percent of each class-kind of Securities issued by it was offered to the public or subcription through advertisement in newspapers for a period of not less than two days and applicants in pursuance of such offers were allotted securities.
This requirement is subject to the following conditions minimum 20 lakh securities (excluding reservation, firm allotment, and promoters’ contribution) was offered to the public; the size of the offer to the public (offer price multiplied by number of securities offered to the public) was a minimum Rs. 100 crore; and the issue was made only through the book-building route with allocation of 60 percent of issue size to the qualified institutional buyers as specified by SEBI/ If a company is unable to fulfill the above conditions it has to satisfy the exchange that atleast 25 percent of each class-kind of securities issued by it was offered to the public for subscription through advertisement in newspapers for a period of not less than two days and that the applications in pursuances of such offer were alloted securities.
Explain the objectives and functions of SEBI?
Securities and Exchange Board of India (SEBI) : The Securities and Exchange Board of India was established by the Government of India on 12th April, 1988 as an interim administrative body to promote orderly and healthy growth of securities market and for investor protection.
It was to function under the overall administrative control of the Ministry of Finance of the Government of India.The SEBI was given a statutory status on 30th January, 1992 through an ordinance. The ordinance was later replaced by an Act of Parliament known as the Securities and Exchange Boards of India Act, 1992.
Reasons for The Establishment of SEBI
The capital market has witnessed a tremendous growth during 1980’s characterized particularly by the increasing participation of the public. This ever expanding investors population and market capitalization led to a variety of malpractices on the part of companies, brokers, merchant bankers, investment consultants and others involved in the securities market.
The glaring examples of these malpractices include existence of self-styled merchant bankers unofficial private placements, rigging of prices, unofficial premium on new issue, non-adherence of provisions of the Companies Act, violation of rules and regulations of stock exchanges and listing requirements, delay in . deliveryof shares etc.
These malpractices and unfair trading practices have eroded investor confidence and multiplied investor grievances. The government and the stock exchanges were rather helpless in redressing the investor’s problems because of lack of proper penal provisions in the existing legislation. In view of the above, the government of India decided to set up a separate regulatory body known as Securities and Exchange Board of India.
Purpose and Role of SEBI :
The basic purpose of SEBF is to create an environment to facilitate efficient mobilization and allocation of resources through the securities markets. It also aims to stimulate competition and encourage innovation. This environment includes rules and regulations, institutions and their inter relationships, instruments, practices, infrastructure and policy framework.
This environment aims at meeting the needs of’the three groups which basically constitute the market, viz, the issues of securities, the investor and the market intermediaries.
- To the issuers, it aims to provide a market place in which they can confidently look forward to raising finances they need in an easy, fair and efficient manner.
- To the investors, it should provide protection of their rights and interests through adequate, accurate and authentic information and disclosure of information on a continuous basis.
- To the intermediaries, it should offer a competitive, professionalized and expanding market with adequate and efficient infrastructures so that they are able to render better service to the investor and issuers.
Objectives of SEBI
The overall objective of SEBI is to protect the interests of investors and to promote the development of, and regulate the securities market.
This may be elaborated as follows
(1) To regulate stock exchanges and the securities industry to promote their orderly functioning.
(2) To protect the rights and interests of investors, particularly individual investor’s and to guide and educate them.
(3) To prevent trading malpractices and achieve a balance between self regulation by the securities industry and its statutory regulation.
(4) To regulate and develop a code of conduct and fair practices by intermediaries like brokers, merchant bankers etc, with a view to making them competitive and professional.
Functions of SEBI
Keeping in mind the emerging nature of the securities market in India SEBI was entrusted with the twin task of both regulation and development of the securities market.
(1) Registration of brokers and sub-brokers and other players in the market.
(2) Registration of collective investment schemes and mutual funds.
(3) Regulation of stocks Bankers and portfolio exchanges, and merchant bankers.
(4) Prohibiton of fraudulent and unfair trade practices.
(5) Controlling insider trading and takeover bids and imposing penalties for such practices.
(6) Calling for information by undertaking inspection, conducting enquires and audits of stock exchanges and intermediaries.
(7) Levying fee or other charges for carrying out the purpose of the Act.
(8) Performing and exercising such power under SCR Act 1956, as may be delegated by the Government of India.
(1) Investor education
(2) Training of intermediaries.
(3) Promotion of fair practices and code of conduct of all SRO’s.
(4) Conducting research and publishing information useful to all market participants.
Explain the various segments of NSE.
National Stock Exchange of India (NSE) : The National Stock Exchange is the latest, most modern and technology driven exchange. It was incorporated in 1992 and was recognized as a stock exchange in April 1993. It started operations in
1994, was trading on the wholesale debt market segment.
Subsequently, it launched the capital market segment in November 1994 as a trading platform for equities and the futures and options segment in June 2000 for various dervative instruments. NSE has set up a nationwide fully automated screen based trading system.
The NSE was set up by leading financial institutions, bank, insurance companies and Other financial intermediaries, it is managed by professionals, who do not directly or indirectly trade on the exchange.
The trading rights are with the trading members who offer their services to the investors. The board of NSE comprises of senior executives from promotor institutions and eminent professional, without having any representation from trading members.
Market Segments of NSE
The exchange provides trading in the following three segments
Whole Sale Debt Market Segment: This segment provides a trading platform for a wide range of fixed income securities that include central government securities, treasury bills, state development loans, bonds issued by public sector undertakings, floating rate bonds, zero coupon bonds, index bonds, commercial paper, certificate of deposit corporate debentures and mutual funds.
Capital Market Segment: The capital-market segment of NSE provides an efficient and transparent platform for trading in equity, preference, debentures, exchange traded funds as well as retail government securities. O Futures and options segment.
Projects and Assignments
Collect the information about the companies that have mobilised resources through primay market.
As suggested, the students are required to collect various informations about the companies to mobilised resources through primary market. For their convenience a brief introduction regarding primary market and dealing in it is hereby give. Primary market is that market in which shares, debentures and other securities are sold for the first time for collecting long term capital. Market is mainly concerned with new issue of capital through Initial Public Offer (IPO).
Collect the information on various measures taken by – SEBI to protect the interests of investors since its inception.
In order to answer this question, students are advised to read in detail the SEBI and its objectives and functions. Briefly mentioning, the main functions of SEBI to protect the interests of investors are the followings
(1) to check unfair trade practices like supply of misleading statements to investor.
(2) to check the insiders role in trading in securities i.e; role of Directors, promotors etc. who have secret information about the company may not take the advantages of such information.
(3) to provide education to investor relating to dealing in securities.
Send a group of students to a trading terminal in your city to gain first hand information on securities trading and prepare a report.
As mentioned in the question, kindly form a group of 4-5 students in order to get first hand information from nearby Securities Exchange or a terminal dealing in such securities and prepare a report.
Collect date abou the movements in SENSEX and NIFTY during the last one month. Find out whether the two move in same or opposite direction.
SENSEX and NIFTY are the indices of stock exchange which provides information on the trend of shares and securities in a market. The students may consult the web-site or viewed T.V. channels like ‘ CNBC, Profit etc to update the movement in SENSEX and NIFTY and compare the data so collected,
Collect information about SEBI action for Investor Protection taken during last two years.
The students are advised to visit the Stock-Exchange located nearby to your city along with the teacher and collect the various literature available there on these topics. The students may also make a habit to check the newspapers daily (specifically business pages) in order to obtain the requisite informations.
Collect information about e-IPO’s in the Indian Market in the last one year.
Students may obtain information with the help of web-sites, the informations about e-IPO (electronic initial public offer) with the help of internet.
Try and solve this crossword
Clues to the Crossword Across
1. Commission Agent who transacts in securities on behalf of
non members or members (6).
2. Changes in the price of securities in the stock market. (12)
3. Inclusion of securities in the official trade list of securities in stock market. (7)
4. Place of trade I securities. (6)
5. Result of selling shares at a price loyer than the purchase price. (4)
6. An independent dealer in securities (6)
7. Includes-shares, scripts, bonds, debentures (10)
8. Speculator who expects the prices to go down (4)
9. Buying and selling of securities to manipulate the market (7)
10. Speculator who deals in new securities only (4)
1. Speculator expecting a rise in the prices. (4)
2. Means ‘with’ (3)
3. Means a part or fraction of capital (6)
4. Fraction of profit paid to govt. (3)
5. Illegal, game based on chance (8)
6. Official statement of securities- in the stock market (5)
7. Those who buy and sell securities with objective of profit (10)
8. Money invested in business (7)
9. Return on shares out of profits. (8)
10. Instrument acknowledging a debt (9)
11. Govt, document acknowledging a debt (5)
12. Profit or yield (4)
Answers to the crossword
Case Problem -1
‘R’ Limited is a real estate company which was formed in 1950. In about 56 years of its existence the company has managed to carve out a niche for itself in this sector. Lately this sector in witnessing a boom due to the fact that the Indian economy is on the rise. The incomes of middle class are rising. More people can afford to buy homes for themselves due to easy availability of loans and accompanying tax concessions.
To expand its business in India and abroad the company is weighing various options to raise money through equity offerings in India. Whether to tap equity or debt, market whether to raize money from domestic market or international market or combination of both? Whether to raize the necessary finance form money market or capital market.
It is also planning to list itself in New York Stock exchange to raise money through ADR’S. To make its offerings attractive it is planning to offer host of financial plans products to its stakeholders and investors and also expand it’s listing at NSE after complying with the regulations of SEBI.
What benefits will the company derive from listing at NSE?
In the above case, Company ‘R’ Limited a real estate company in order to expand its business and options to raise money through equity offering must registered itself with NSE (National Stock exchange of India) With the help of NSE, Company enjoyed various benefits as under
(1) Placing the order for buying and selling of securities by the investor.
(2) Accepting the order after matching process completed with the help of computer which provides a list on the computer screen. This information tells at what rate, time and with what party one’s order has been transacted.
(3) Delivery and payment are also made with the help of NSE after the transactions has been settled.
What are the regulations of SEBI that the company must comply with ?
SEBI (Securities and Exchange Board of India) made certain regulations which the company should complied with
(1) to register brokers, sub-brokers, transfer-agents merchant banks, underwriters etc.
(2) to register and regulate credit rating agency.
(3) to register and regulate venture capital fund.
(4) to carry out audit of the share markets.
(5) to publish different kinds of information for the convenience of all the parties operating in the capital market.
How does the SEBI exercise control over ‘R’ Limited in f the interest of investors?
In the case of’R’ Limited, SEBI can control over brokers, sub-brokers and agents by keeping an eye on the activities of such middlemen. r Another important step to be taken is the transparency in transactions by the company which increases the confidence of investors. SEBI may alsocheck that the company should not delay transfers, and-ensure timely , payment of interest and dividend to investors.
Case Problem – II NSE Indices
Last updated Mar 14,2007, 12:00:00 hours 1ST (Source – www.nesindia.com on 14th march 2007 at 10.50 PM)
The above figures are taken from the website of national stock exchange of India. They illustrate the movement ofNSE stock indices as well as world stock indices on the date indicated.
What do you mean by a stock index? How is it calculated?
Case problem clearly mentioned that students themselves with the help of teacher solve these questions. They may visit the websites to collect the relevant material and make themselves understable regarding the stock market. A brief answer of the above questions for the convenience of students are hereby given.
A stock index is a barometer of market behaviour. It measures overall market seniment through a set of stocks that are representative of all the market. It reflects market direction and indicates day-to-day fluctuations in stock prices. It is calculated on the basis of net assest method, Earning capacity method or dividend yield method of company’s assest and profits available in a current year.
What conclusions can you draw from the various movements of NSE stock indices?
NSE has been playing a leading role as a change agent in Indian capital market. It has ensured that technology has been harnessed to deliver the services to the investors across the country at the lowest cost. It has provided a nation wide screen based automatic trading system with a high degree of transparency and equal access to investor irrespective of the locations are certain concluding factors for the success of NSE stock indices movements.
What factors affect the movement of stock indices? Elaborate on the nature of these factors.
Various factors like savings, forces of demand and supply in commodity or service market, likely suppliers of funds and users of fund are the household and firms in the financial market, liquidity of financial assests and cost of transactions are the factors responsible for movement of stock indices. An ideal market is one where finance is available at reasonable cost.
What relationship do you see between the movement of indices in world markets and NSE indices?
With the help of internet or electronic trading system adopted by NSE provides a fair, efficient and transparent securities transactions. The gap between Indian stock market and international stock indices are bridged by NSE. NSE is meeting international benchmarks and standards which makes, the indices of both Indian and international securities are almost equal with a slight movement due to differences in exchange rates.
Give details of all the indices mentioned above. You can -> find information on the web or business magazines.
As per mentioned in the questions students are advised to visit the Website or Consult business magazines like “Business Today” “Business Management,” “Economic Review” etc.
(The teacher should help the students in answering these questions. They can look at the website mentioned above and also website of SEBI i.e. www.sebi.gov.in for educational material. This exercise will help the students in understanding the sock markets clearly and also create interest therein.)
Study the website of Mumbai Stock exchange i.e. www.besindia.com and compile information which you find useful. Discuss it in your class and find out how it can help you should you decide to invest in the stock market. Prepare a report on your findings with the help of your teacher.
The students are advised to download the data from web¬site mentioned on the problem, i.e. www.bseindia.com. Such informations will help the students to gain know ledge about the trends and growth of various securities in the market, which will help in selecting the investment opportunities. A regular and frequent visit to website will provide current overview of the market.
Prepare a report on the role of SEBI in regulating the Indian stock market. You can get this information on its website namely www.sei.gov.in. Do you think something else should be done to increase the number of investors in the stock market?
Again in order to overcome the problem, students should visit another Website i.e. www.sebi.gov.in to collect various informations regarding the role of SEBI and proposed amendments helpful to regulate the Indian Stock Market in a more comprehensive and lucid manlier.