NCERT Solutions for Class 12 Business Studies Financial Market Chapter 10

NCERT Book Solutions for Class 12 Business Studies Financial Market

Takshila Learning’s NCERT Solutions for Business Studies are an advanced and next stage of Class 11 NCERT Solutions in business studies. We provide the basic fundamentals of the subject in Class 11 and then move on to an advanced degree of concepts in Class 12. The business studies topics are related to our practical life and dealt with in an easy way for understanding.

NCERT Solutions for Class 12 Business Studies Financial Market provides us with all-inclusive information on all concepts. As students would have to learn the basics about the subject in class 12, this curriculum for class 12 is a comprehensive study material, which explains the concepts in a great way.

Questions Covered In Financial Market Class 12 Business Studie

Multiple Choice Type:

1. Primary and secondary markets

• (a) Compete with each other
• (b) Complement each other
• (c) Function independently
• (d) Control each other

Ans: (b) Primary and secondary markets complement each other. The primary market is related to the issue of new securities. That is, a company raises capital directly from borrowers through the primary market. On the other hand, the secondary market deals with the purchase and sale of existing securities. That is, once the securities are issued in the primary market, they are traded in the secondary market. It is in this sense that the two markets complement each other.

2. The total number of Stock Exchange in India is

• (a) 20
• (b) 21
• (c) 22
• (d) 23

Ans: (d) The total number of Stock Exchange in India is 23. However, as per the latest updates by SEBI, there are 25 Stock Exchanges in India.

3. The settlement cycle in NSE is

• (a) T+5
• (b) T+3
• (c) T+2
• (d) T+1

Ans: (c) Settlement cycle refers to the time period within which there is a real agreement between the buyers of the shares and the sellers. In other words, it refers to the time period within which the seller of the shares will receive the money and the buyers of the stock will get ownership of the share. The NSE follows a T + 2 settlement cycle. Here, T refers to the transaction date. Thus, T + 2 implies that transactions in the NSE are settled within 2 days of the transaction date.

4. The National Stock Exchange of India was recognized as stock exchange in the year

• (a) 1992
• (b) 1993
• (c) 1994
• (d) 1995

Ans: (b) The National Stock Exchange of India was promoted by financial institutions and was established in 1992 as a public limited company. However, it was recognized as a stock exchange in April, under the ‘1993’ Securities Contracts (Regulation) Act, 1956. It started its operations in the capital market in 1994 and in 2000 started operations in the derivatives market.

5. NSE commenced futures trading in the year

• (a) 1999
• (b) 2000
• (c) 2001
• (d) 2002

Ans: (b) National Stock Exchange started its operations in the year 1994. It commenced ‘trading in future‘ and options market on 12 June, ‘2000′.

6. Clearing and settlement operations of NSE are carried out by

• (a) NSDL
• (b) NSCCL
• (c) SBI
• (d) CDSL

Ans: (b) Clearing and disposal of NSE is done by NSEL. NSCCL (National Securities Clearing Corporation Limited) was incorporated in August 1995 and commenced operations for NSE in April 1996.

7. OTCEI was started on the lines of

• (a) NASDAQ
• (b) NYSE
• (c) NASAQ
• (d) NSE

Ans: (a) OTCEI (Over the Counter Exchange of India) was incorporated in 1990 on the lines of NASDAQ which is OTC in the United States. OTCEI is a fully computerized and transparent stock exchange. It was established with the objective of addressing the needs of small companies and helps maintain the liquidity of their securities.

8. 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 crore

Ans: (b) To be listed on OTCEI, the minimum capital requirement for a company is Rs 3 crores and the maximum is Rs 50 crores.

9. A Treasury Bill is basically:

(a) An instrument to borrow short-term funds

(b) An instrument to borrow long-term funds

(c) An instrument of capital market

(d) None of the above

Ans: (a) A Treasury Bill is an instrument to borrow short term funds by the Government of India. They have a maturity period of less than a year. They are also called Zero-Coupon Bonds. They are issued by the RBI on behalf of the Central Government.

Short Answer Type:

1. What are the functions of a financial market?

Ans: A financial market refers to a market where financial assets such as shares and debentures are created and exchanged. Following are the functions of financial market.(i) Transfer of savings and options for investment: A financial market acts as a link between savers and investors. It provides a platform for transfer of savings from home to investors. It also provides savers with various options for investment and as such, directs funds to the most productive investment.(ii) Establishes Price: Similar to a commodity, the price of a financial asset is established through the forces of demand and supply of money. The financial market provides a platform for negotiating the demand for money (represented by business firms) and the supply of money (represented by households). Thereby, it helps to determine the price of the asset being traded.

(iii) Facilitates liquidity: An asset or security can be easily bought and sold in the financial market. It provides liquidity to assets. That is, assets can be easily converted into cash or cash equivalents through trading in the financial market.(iv) Reduction in transaction costs: By providing information about trading of securities, their price, availability etc. The financial market helps reduce transaction costs in terms of effort, money and time.

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

Ans: Money market refers to the market for trading short-term securities and funds. The maturity period of securities traded in the money market is from one day to one year. Such assets act as a close substitute for cash or money. They are also known as instruments near money instruments’ due to their short maturity period. Money market instruments serve as an important source of finance for working capital requirements. They enjoy a high degree of liquidity. DFHI exempts money market securities and provides ready market for them. In addition, securities traded in the money market are safe and secure because transactions are done in instruments that are issued by financial institutions and companies that are financially sound. Common instruments traded in the money market are treasury bills, commercial paper, call money, certificates of deposit, etc.

3. What is a Treasury Bill?

Ans: The Treasury Bill is a short term promissory note issued by the Central Government by the Reserve Bank of India. They are issued to meet the short term funding requirements of the Government of India. Treasury bills have a maturity period of 14 days to 364 days. These bills are usually brought by commercial banks, LIC, UTI, non-banking financial companies, etc. They are also called zero-coupon bonds. Treasury bills are highly liquid instruments due to the fact that the RBI is always ready to buy these bills. Apart from this, they are also considered the safest instruments as they are issued by RBI.They are available for a minimum amount of Rs 25,000 and in multiples thereof. Treasury bills are issued at a discount i.e. they are issued at a price which is less than the face value and is redeemed at par. In this, the discount (the difference between the issuance and the redemption value) is the interest received at the time of redemption.

4. Distinguish between Capital Market and Money Market.

Ans: The following points highlight the difference between Capital Market and Money Market.

5. What are the functions of a Stock Exchange?

Ans: The stock exchange refers to a market where the buying and selling of existing securities takes place. Following are the main functions of the stock exchange.(i) Provides liquidity and marketability: The stock exchange provides a ready platform for trading of existing securities. In other words, it provides a continuous market for the sale and purchase of securities. Securities can be easily converted into cash whenever necessary, through the stock exchange. In addition, long-term securities can be converted into medium-term and short-term through the stock exchange.

(ii) Determination of prices: A stock exchange helps in setting the price of monetary assets which are traded in that market. It provides a platform for negotiation for buyers and sellers of securities and, thus, helps in determining the prices of securities through the forces of demand and supply. (iii) Fair and Safe Market: Since the stock exchange is a legal and well regulated market. It is defined and traded within the existing legal framework. This ensures safety and fairness in transactions.(iv) Facilitates economic growth: Securities are continuously brought and sold at a stock exchange. This continuous process of disinvestment and reinvestment helps to bring savings and investment to the most productive use. This enhances capital formation and economic development.

(v) Spreading Equity Cult:Through regulation of issues and better trading practices, a stock exchange helps educate people about investing. It encourages and encourages people to invest in proprietary securities.(vi) Acts as an economic barometer: Through changes in share prices, a stock exchange signals a change in economic conditions. For example, a boom (or recession) is reflected in a rise (or fall) in share prices.(vii) Scope for estimation: It is generally believed that some degree of speculation is necessary to maintain better liquidity and demand and supply of securities. The Stock Exchange provides a reasonable and controlled scope of speculation within the provisions of the law.

6. What are the objectives of the SEBI?

Ans: The Securities and Exchange Board of India (SEBI) was established to promote a systematic and healthy development of the securities market in India. The following points highlight the overall objectives of SEBI.(i) Regulation: The basic objective of SEBI is to regulate the functioning of stock exchange and securities market. The aim is to provide a place where the issuers of securities (ie companies) can raise funds in an easy and reliable way.(ii) Protection: SEBI works on educating investors and providing guidelines related to investment. It provides them with sufficient and reliable information about the companies and, thus, helps them to make intelligent and informed investment decisions.(iii) Prevention: The root cause was the establishment of SEBI to deal with malpractices in securities trading. Defects such as insider trading, violation of rules and regulations, non-compliance of Companies Act etc. erode the confidence of investors. The objective of SEBI is to check these practices by striking a balance between self-regulation and legal statutory rules of a business. (iv) Code of Conduct: Through regulation, SEBI develops a code of conduct for fair trade practices by middlemen such as brokers, merchant bankers, underwriters etc. SEBI regulates the activities of these intermediaries and provides them a professional and competitive environment.

7. State the objectives of the NSE.

Ans: The National Stock Exchange of India was incorporated in the year 1929. In 1993, it was recognized as a stock exchange and started operations in 1994. It was founded by leading banks, financial institutions, insurance companies and financial intermediaries. The NSE was established with the following objectives.(i) The objective of NSE is to establish a single nationwide trading system to facilitate trading in all types of securities. Such an arrangement increases investor confidence.(ii) Ensured that all investors in the country have an easy and equal access through a suitable communication network. This increases the liquidity of the securities. Under the system of the regional stock exchange, the number of people involved in the transaction was limited. As opposed to this, the NSE incorporates transactions from investors across the country and thereby increases the liquidity of the securities.One can get information about trading of various securities from local terminals of NSE. This helps in reducing fraud in trading.(iv) One of the objectives of the NSE is to enable shorter settlement cycles and book entry settlements.(v) The purpose of NSE is to meet the international standards and benchmarks of the stock exchange.

8. What is the OTCEI?

Ans: The Counter of India (OTCEI) was incorporated under the Companies Act, 1956 in 1990 and was recognized as a stock exchange under the Securities Contracts Regulation Act, 1956. It started operations in the year 1992. Its purpose is to provide small. Easy access to capital markets to medium companies. OTCEI is a fully computerized and single window exchange system. OTCEI is built on the lines of the OTC exchange in NASDAQ, USA. OTC was promoted by UTI, ICICI, IDBI, LIC, IFCI, GIC and SBI Financial Services. It does not cover geographical areas, but rather trade in its counters or offices through telephones and other means of communication. It serves as a place where buyers meet sellers and negotiate acceptable terms of trade. It provides a convenient, transparent and efficient avenue for capital market investment. It only includes a list of companies with a issued capital of 30 lakh or more, which can be listed in the OTCEI. It provides liquidity to securities along with practicing fair trading systems. It aims to provide cheap and easy means of trade to the public as well as small companies.

Long Answer Type:

1. Explain the various Money Market Instruments.

Ans: Money market refers to the market where short-term money is traded. In this, short-term funds are in the form of monetary assets, with a maximum maturity period of one year. The following are some common money market instruments.(i) Treasury bills (T-bills): Treasury bills refer to an undertaking used by the government for short-term borrowings. They are the most commonly used money market instruments. They are auctioned and released by the Reserve Bank of India on behalf of the central government. T-bills are available in minimum of Rs 25,000 and multiples thereof. Typically, three types of treasury bills are issued 91-day, 182-day and 364-day. T-bills are issued at a discount and redeemed at par. That is, they are issued at a price less than their face value and at the time of redemption, the investor gets an amount equal to the face value. The difference between the price at which they are issued and the redemption value is the interest received on them.For example, if an investor buys an 18-day treasury bill for Rs 50,000 at a face value of Rs 56,000. The investor will get Rs 56,000 at the time of maturity. Thus, the difference of Rs 6,000 (56,000 – 50,000) is the interest receivable on the bill. T-Bills are also called Zero-Coupon Bonds. T-bills are highly liquid bonds. Further, as they are issued by RBI, they have negligible risk and offer assured returns.

(ii) Call Money: Call money is a device used for interbank transactions. Through call money, banks borrow from each other to meet the lack of funds necessary to maintain CRR. That is, any bank has a shortage of funds from another bank with surplus funds. Call money has a very short maturity period ranging from one day to fifteen days. The interest paid on such loans is known as call rate. Call rates are highly volatile and vary from day to day. A negative relationship exists between call rates and other money market instruments such as commercial papers and certificates of deposits. That is, as call rates increase, other instruments of the money market become cheaper and their demand increases. (iii) Commercial Paper (CP): Commercial paper is an unsecured short-term money market instrument. It is a negotiable and transferable undertaking in which the maturity period ranges from a minimum of 15 days to a maximum of one year. They were introduced in India in 1990. CPs are issued primarily by large and creditworthy companies to raise short-term funds. Large companies see commercial paper as an alternative to borrowing through the bank market and the capital market. The rate of interest payable on commercial papers is lower than market rates. Companies usually use commercial papers for bridge financing. That is, to raise the necessary funds to meet the flotation costs incurred on long-term borrowings in the capital market. For example, if a company wishes to raise finance from the capital market to purchase land. For this, it will have to incur costs related to flotation costs such as brokerage, commission, advertisement, etc. The company may issue commercial paper to finance such flotation costs.(iv) Certificate of Deposit (CD): A certificate of deposits is a time deposit which is negotiable and unsecured in nature. They are carrier devices for short and specified time periods ranging from one month to five years. CD is a safe form of investment, issued by commercial banks and development financial institutions to individuals, corporations and companies. In this, higher interest is offered for higher deposits. They are issued to meet the debt demand in the event of tight liquidity. For example, when a person buys a CD by depositing a specific amount, he receives a certificate stating the period of the deposit, the applicable interest rate and the date of maturity.On the date of maturity, the person gets the right to receive the principle amount and the interest earned thereon. (v) Commercial Bill: Commercial bill, also known as bank bill or bill of exchange, refers to the instrument used to meet the working capital requirements of a firm. It is a short-term negotiable instrument. Companies use commercial bills to finance their credit sales. For example, when a person makes a credit sale, the buyer becomes liable to pay on a specified future date. In this, the seller extracts a bill of exchange and assigns the buyer a specific maturity period. Once the bill is accepted by the buyer it becomes a marketable instrument that can be discounted with the bank. For example, if the seller requires the money before the maturity period, he can discount the bill with the commercial bank.

2. What are the methods of floatation in Primary Market?

Ans: Following are the different methods through which new issues can flow.(i) Offer through Prospectus: The most commonly used method for raising funds in the primary market is provided through prospectus. This includes inviting membership from the public by issue of prospectus. A prospectus is published as advertisements in newspapers, magazines, etc. It provides information for the purpose of which the fund is being raised, the company’s background and future prospects, its past financial performance, etc. Such information helps the public and investors. Learn about the company as well as potential risks and earnings. Such issues should be listed on one of the stock exchanges and should be in accordance with the guidelines and rules listed under the Companies Act and SEBI disclosure.

(ii) Offer through sale: As against the offer through prospectus, under the offer through sale method, the company does not issue securities directly to the public, but instead issue them to intermediaries such as brokers, houses, Etc. is released through Through sales, securities are issued in two stages, First the company sells its securities to the middlemen at face value and later the middlemen resell the securities to investors who are investing more than the face value to earn profit. (iii) Private Placement:Under this method, securities are sold to only a select few individuals and large institutional investors rather than the public. Companies either allocate securities themselves or they sell securities to middlemen who in turn sell them to selected customers. This method protects the company from various compulsory or non-mandatory expenses such as the cost of manager fees, commissions, underwriter fees, etc. Thus, companies that cannot afford the huge expenses related to public issues often go for private placements. (iv) Rights issue: Under the Companies Act 1956, the existing shareholders of a company have the right to subscribe to the new shares issued. The existing shareholders are offered membership of the new shares of the company in proportion to the number of shares they hold.(v) E-IPO: It is a system of issuing securities through online system. If a company decides to offer its securities through an online system, then it is necessary to join an agreement with the stock exchange. This is called Initial Public Offer (IPO). The company appoints brokers to accept and order applications. A company can apply to be listed on any stock market, except that it has already offered securities. In this, the chief manager oversees and coordinates various activities.

3. Explain the recent Capital Market reforms in India.

Ans: A capital market refers to a market that deals in the trading of medium and long-term securities. That is, it deals in securities whose maturity period is greater than or equal to one year. Capital market includes instruments like equity and preference shares, debentures, bonds, mutual funds, public deposits, etc. The capital market can be divided into two parts, such as primary market and secondary market. The primary market deals with the issue of new securities. The issue of new securities in the primary market directs money toward entrepreneurs who either want to start a new venture or expand an existing one. The secondary market, on the other hand, deals in the sale and purchase of existing securities. That is, it deals with the trading of securities that were initially issued in the primary market.

The history of capital markets as a stock exchange dates back to the eighteenth century. The Government of India introduced the Companies Act in 1850 with the aim of generating interest of investors in corporate securities. The first stock exchange in India was established in the year 1875 in Bombay as ‘The Native Share and Stock Brokers Association’. It was later renamed the ‘Bombay Stock Exchange’ (BSE). In later years stock exchanges were developed in Ahmedabad, Calcutta and Madras.In the 1990s, the Indian secondary market consisted only of regional stock exchanges, with BSE previously. However, after the 1991 reforms, the Indian stock market acquired a three-tier system. This included the Regional Stock Exchange, the National Stock Exchange and the Over the Counter Exchange of India (OTCEI).Regional Stock Exchange:The first regional stock exchange was developed in Ahmedabad in 1894 as the Ahmedabad Stock Exchange (ASE). Similarly, in 1908, the Calcutta Stock Exchange (CSE) was established. In later years, other regional stock exchanges were established in Calcutta, Madras, Ahmedabad, Delhi, Hyderabad and Indore. Recently, the regional stock exchanges in Coimbatore were developed as the Coimbatore Stock Exchange and the Stock Exchange in Meerut. Currently, there are 22 regional stock exchanges in India. National Stock Exchange: NSE is the latest technology driven stock exchange which was recognized in 1993. It began its operations in 1994 with trading in money market securities. Later, it also expanded its business operations in the capital markets sector. NSE was established to establish a nationwide platform for trading in all types of securities. This ensured the development of a fair and efficient securities market. Within the period of its existence, NSE has transformed the Indian capital market and has been able to take the stock market to the investor’s doorstep. It has provided an elaborate screen-based automated trading system across the country that ensures equal access to all investors. Over the Counter Exchange of India (OTCEI): OTCEI is a company which was established under the Companies Act, 1956 in 1990, but was later recognized as a stock exchange under the Securities Contracts Regulation Act, 1956. 1992 and NASDAQ, built on the lines of the OTC Exchange in the United States. It aims to provide small companies with easy access to the capital market. OTCEI provides a screen-based nationwide trading system, which serves as a place where buyers meet sellers and negotiate acceptable terms of trade. In this, dealers can trade in both the new issue of securities as well as the secondary market. It is a single window exchange that provides a convenient, transparent and efficient avenue for capital market investment.

4. Explain the objectives and functions of the SEBI.

Ans: The Securities and Exchange Board of India was established in 1988 to encourage a systematic and healthy development of the securities market. SEBI was determined with the overall objective of investor protection and to promote the development and regulation of securities market functions. The following are the listed objectives.(i) Regulation: The main objective of SEBI was to regulate the functioning of stock exchange and securities market. The aim is to provide a place where the issuers of securities (ie companies) can raise funds in an easy and reliable way.

(ii) Protection: SEBI educates investors by providing them valuable information regarding various securities and companies. It provides them with guidelines related to efficient investment. It provides them with sufficient and reliable information about the companies and, thus, helps them to make intelligent and informed investment decisions. (iii) Prevention: The root cause of the establishment of SEBI was to deal with malpractices in securities trading. Defects such as insider trading, violation of rules and regulations, non-compliance of Companies Act etc. erode the confidence of investors. The objective of SEBI is to check these practices by striking a balance between self-regulation and legal statutory rules of a business.

(iv) Code of Conduct: Through efficient regulation, SEBI aims to develop a code of conduct for fair trade practices by middlemen such as brokers, merchant bankers, underwriters, etc. This helps to make them competitive and professional.To achieve the above objectives, SEBI3 performs the main functions, regulatory, development and protective functions. Following are the actions executed by SEBI. (i) Regulatory functions:• Registration: One of the regulatory functions performed by SEBI is registration of brokers, sub-brokers, agents and other players in the market. The registration of collective mutual schemes and mutual funds is also done by SEBI.• Regulation of functions: SEBI regulates the work of stock brokers, underwriters, merchant bankers and other market intermediaries. It frames rules and regulations for middlemen to work.SEBI also controls the takeover bid by the companies. It conducts regular inquiries and audits of stock exchanges and middlemen.• Regulation by Legislation: SEBI performs and exercises various other powers delegated by the Government of India under the Securities Contracts (Regulation) Act, 1956. In addition, it levies fees or other fees to meet the objectives of the Act.

(ii) Development work:• Training: SEBI promotes training and development of securities market intermediaries to promote healthy development of securities market.• Research: By conducting research in essential and important areas of the securities market, SEBI publishes useful information. It helps investors and other market players to make investment decisions.• Flexible approach: SEBI has adopted a flexible and adaptive approach such as Internet trading, IPO, etc. Such measures promote the development of capital markets. (iii) Protective functions:• Prohibition: SEBI prohibits fraud and unfair trade practices. This prevents the proliferation of misleading and manipulative statements that are likely to affect the functioning of the securities market. SEBI educates investors by providing them valuable information about various securities and companies so that they can make wise investment decisions.• Investigation on insider trading: Insider trading refers to a situation, Where someone associated with the company leaks important information about the company. Such information may adversely affect its share prices. SEBI keeps a close watch on such insider trading.• Promotion and Protection: SEBI encourages fair trade practices and promotes a code of conduct for middlemen. It takes steps for investor protection and education. It also examines the manipulation of the price of securities.

5. Explain the various segments of the NSE.

Ans: The National Stock Exchange is a technology-driven stock exchange, incorporated in 1992. It was recognized as a stock exchange in 1993 and started operations in the year 1994. NSE provides trading in two main segments namely Whole Sale Debt Market Segment and Capital Market. Segment.

(i) Entire Sale Debt Market Segment: This segment is a platform for trading in fixed income securities such as state development loans, bonds issued by PSUs, corporate debentures, commercial paper, mutual funds, central government securities, zero coupon bonds. Provides. Treasury Bills etc., NSE commenced operations in the Whole Sale Debt Market in June 1994. It is the first fully screen based system for trading in the debt market. This is the first computer based trading system. Trading in the debt market involves two parties – the trading member (who is a recognized broker of NSE) and the partner (ie buyer and seller of securities). Transactions between participants are decided through members. For example, members place an order for the seller of a security that is suitably matched by another member for the buyer of a security wishing to purchase that security. An order remains in the arrangement until it is suitably matched. This segment of the NSE is also known as NEAT (National Exchange for Automatic Trading).

(ii) Capital market segment:

Under this segment, NSE trades in equity shares, preference shares, debentures, exchange-traded funds as well as retail government securities. It provides an efficient and transparent platform for a fair trade system. In November 1995, the Capital Market segment began its operations. The trading system of the NSE Capital Market segment is also known as the National Exchange – Capital Market (NEAT- CM) for automated trading. Trading operations of the capital market segment remain in the whole sale debt market system.