CBSE Class 12 Business Studies Financial Markets Worksheet Set C

Key Concepts in nutshell: 

Instruments:

1. Treasury Bill (T-bills): It is basically an instrument of short-term borrowing by the Government of India maturing in less than one year. They are also known as Zero Coupon Bonds.

2. Commercial Paper: It is a short-term unsecured promissory note, negotiable and transferable by endorsement and delivery with a fixed maturity period. It is issued by large and creditworthy companies to raise sort-term funds at lower rates of interest than market rates. It usually has a maturity period of 15 days to one year.

3. Call Money: It is a short-term finance repayable on demand, with a maturity period of one day to fifteen days, used for inter-bank transactions. It is a method by which banks borrow from each other to be able to maintain the cash reserve ratio.

4. Certificate of Deposit (CD): It is a unsecured, negotiable short-term instruments in bearer form, issued by commercial banks and development financial institutions. It can be issued to individuals, corporations and companies.

5. Commercial Bill (Trade Bill): It is a short-term , negotiable, self-liquidating instrument which is used to finance the credit sales of firms. The bill can be discounted with a bank if the seller (drawer) needs funds before the bill maturity. 

Differences between Capital Market and Money Market 

Primary Market: It is also known as the new issues market. It deals with new securities being issued for the first time. A company can raise capital through the primary market in the form of equity shares, preference shares, debentures, loans and deposits.

Secondary Market: It is also know as stock market or stock exchange or second-hand market.
It is a market for the purchase and sale of existing securities.

Difference between Primary Market and Secondary Market 

Methods of Floatation:

• 1. Public issue through prospectus: under this method the company wanting to raise capital issues a prospectus to inform and attract the investing public. It invites prospective investors to apply for the securities.

• 2.Offer for sale: under this method the sale of securities takes place in two steps. In the first step the company sells the entire lot of shares to the intermediary firms of stock brokers at an agreed price .In the second step, the intermediary resells these shares to investors at a higher price.

• 3. Private placement: In private placement the entire lot of new securities is purchased by an intermediary at a fixed price and sold not to the public but to selected clients at a higher price.

• 4.Rights issue (for existing companies: This is the offer of new shares (additional shares) by an existing company to the existing shareholders. The shareholder may either accept the offer for himself or assign to another. A rights issue to the existing shareholders is a mandatory requirement.

• 5. 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. This is called an Initial Public Offer (IPO). The issuer company should also appoint a registrar to the issue having electronic connectivity with the exchange. 

STOCK EXCHANGE

• Meaning and definition of Stock exchange: The stock exchange is a market in which existing securities are bought and sold.

• The securities contract (regulation) act, 1956 defines “a stock exchange as an association, organization, body of individuals, whether incorporated or not, established for the purpose of assisting, regulating and controlling of business in buying, selling and dealing in securities”.

Functions of stock exchange

1. Providing Liquidity and Marketability to Existing Securities: It gives investors the chance to disinvest and re-invest. This provides both liquidity and easy marketability to already existing securities in the market.

2. Pricing of Securities: Share 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.

3. Safety of Transactions: The membership of a stock exchange is well regulated and its dealings are well defined according to the existing legal frame work. 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 re-sold or traded. Through this process of disinvestment and re-investment savings get channelized into their most productive investment avenues. This leads to capital formation and economic growth.

5. Spreading of Equity Cult: The exchange can play a vital role 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 in the provisions of law for speculative activity in a restricted and controlled manner. 

NATIONAL STOCK EXCHANGE: 

The National Stock Exchange of India is the latest, most modern and technology driven exchange and was incorporated in 1992.

OVER THE COUNTER EXCHANGE OF INDIA 

It was incorporated in 1992 to provide listing facility for small companies with paid-up capital of less than 3 crores.

Differences between NSEI and OTCEI 

• SEBI‟S CHAIRMAN MR. U. K. SINHA
• It was set up in 1988 to regulate the functions of the securities markets with a view to promoting their orderly and healthy development, to provide adequate protection to investors and thus to create an environment to facilitate mobilization of adequate resources through the securities market.
• 1st May, 1992 SEBI was granted legal status. It is a body corporate having a separate legal existence and perpetual succession

Functions of SEBI
• It was set up in 1988 to regulate the functions of the securities markets with a view to promoting their orderly and healthy development, to provide adequate protection to investors and thus to create an environment to facilitate mobalisation of adequate resources through the securities market.
1st May, 1992 SEBI was granted legal status. It is a body corporate having a separate legal existence and perpetual succession .

Protective Functions:
(i) SEBI prohibits fraudulent and unfair trade practices in the securities market such as
(a) Price Rigging – Making manipulations with the sole objective of inflating or depressing the market price of securities.
(b) Misleading statements: SEBI prohibits misleading statements which are likely to induce the sale or purchase of securities.
(ii) SEBI Prohibits insider trading. An insider is a person connected with the company who is reasonably expected to have access to price sensitive information in respect of securities of a company which is not available to public at large. Directors, promoters etc., are considered as insiders when they make use of privileged information to make individual profits by buying or selling of the securities o the company is called insider trading.
(iii) SEBI undertakes steps to educate investors through investors, camps, T.V, News papers etc.,
(iv) SEBI promotes fair practices and code of conduct in securities market such as
a) Companies cannot roll over the debenture holders, funds unilaterally and cannot change terms - term.
b) SEBI is empowered to investigate cases of insider trading and has provisions for still fine and imprisonment.
c) SEBI has stopped the practice of making preferential allotment of shares at lower prices than market price.
(v) SEBI issues timely guidelines clarifications to investors during stock market UP‟s and downs.

Development Function:
i. SEBI promotes training of intermediaries of the securities market such as brokers, sub – brokers etc.,
ii. SEBI has permitted internet trading in a limited way through registered stock brokers.
iii. In order to reduce the cost of issue, SEBI has made under – writing optional.
iv. SEBI has accepted the system of using the stock exchanges to market IPO‟s
v. All intermediaries including collecting banks here to register with SEBI
vi. Registration of foreign Institutional investors (FIIs) allowed for the development and growth of Indian markets.
vii. PSU bonds brought under SEBI‟s purview
viii. Private mutual funds are allowed for the benefit of small investors.
ix. Debenture trustees to be registered by SEBI etc.

Regulatory Functions:
i. SEBI registers and regulates the working of mutual funds.
ii. SEBI regulates takeover of companies
iii. SEBI conducts inquires and audit of the stock exchange.
iv. SEBI registers and regulates the working of stock – brokers, Sub – Brokers, Brokers to an issue, registrars to an issue, share transfer agents and such other intermediaries in the stock market.
v. SEBI regulates the business in stock exchanges and securities market.
vi. SEBI has notified rules and regulations and a code of conduct to regulate the intermediaries in the securities market such as underwriters, merchants, brokers etc., vii. Levying fee or other charges for carrying out the purposes of the Act.

FUNCTIONS OF FINAICIAL MARKET

1. Mobilization of savings and channeling them into the most productive uses: A financial market facilitates the transfer of savings from savers to investors (industries)

2. Facilitate price discovery: In the financial market, the households are suppliers of funs 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.

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.

REFERENCE MATERIAL

Trading procedure on a Stock Exchange
Before understanding the procedure of trading and settlement, it is important to have an overview of changes that have taken place in Indian securities market in last ten years. Three most noticeable changes which have taken place are 1) Dematerialization, 2) Introduction of screen based trading and 3) Shortening of trading and settlement cycles. The Depositories Act was passed by the parliament in 1995 and this paved the way for conversion of physical securities into electronic. With establishment of National Stock Exchange, there was a significant change in the level of technology used for the operation of stock market. It led to introduction of Screen Based Trading thereby removing the earlier system of open outcry where prices of securities were quoted by symbols. Now all the transactions happen on computer which is spread across country and connected to National Stock Exchange through VSAT. These two factors combined together helped in reducing the trading and settlement cycle in Indian securities market which got reduced from as long as 22 days to 2 days currently.
Presently in India, stock exchanges follow T+2 days settlement cycle. Under this system, trading happens on every business day, excluding Saturday, Sunday and exchange notified holidays. The trading schedule is between 9.55 a.m. in the morning to 4.00 p.m. in the evening. During this period, shares of the companies listed on a particular stock exchange can be bought and sold. The SEBI has made it mandatory that only brokers and sub-brokers registered with it can buy and sell shares in the stock exchange. A person desirous of buying or selling shares on the stock market needs to get himself registered with one of these brokers / sub-brokers. There is a provision for signing of broker/sub-broker - client agreement form. Brokers/sub brokers ask their clients to deposit money with them known as margin based on which brokers provide exposure to the clients in the stock market.
However signing of client-broker agreement is not sufficient. It is also essential for a person to open a demat account through which securities are delivered and received. This demat account can be opened with a depository participant which again is a SEBI registered intermediary. Some of the leading depositories in the country are Stock Holding Corporation of India Ltd., ICICI Bank, HDFC Bank etc. If an individual buys shares, it is in the demat account that credit of shares are received. Similarly when a person sells shares, he has to transfer shares to the brokers account through his demat account. All the brokers/sub-brokers also essentially have a demat account.
Shares can be bought and sold through a broker on telephone. Brokers identify their clients by a unique code assigned to a client. After the transaction is done by a client broker issues him contract note which provides details of transaction. Apart from the purchase price of security, a client is also supposed to pay brokerage, stamp duty and securities transaction tax. In case of sale transaction, these costs are reduced from the sale proceeds and then remaining amount is paid to the client. Trading of securities happen on the first day, while settlement of the same happens two days after. This means that a security bought on Monday will be received by the client earliest on Wednesday which is called pay out day by the exchange. However there is provision which allows a broker to transfer securities till 24 hours after pay out receipt. Hence the broker may transfer shares latest by Thursday for a security bought on Monday. Any transfer after Thursday would invite penalty for the broker. If a person has bought security then he is supposed to pay money to the broker before pay in deadline which is two days after trading day but the second day is considered till 10:30 a.m. Only. Hence the client must pay money to the broker before 10:30 a.m. On T+2 day.

Objectives of NSE:
a. Establishing a nationwide trading facility for all types of securities.
b. Ensuring equal access to investors allover 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.

ADVANTAGES OF OTC 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 is a lower cost of new issues and lower expenses of servicing the investors.
3. Family concerns and closely held 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.

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 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.

Sub Topic: Depository Services and Demat Account
Depository services

‘Depository’ is an institution / organization which holds securities (e.g. shares, debentures, bonds, mutual funds etc.) in electronic form, in which trading is done. The services provided by a Depository are termed as ‘Depository Services’. At present there are two depositories in India: NSDL (National Securities Depository Ltd.) and CDSL (Central Depository Services Ltd.).

Services provided by Depository
• Dematerialisation (usually known as demat) is converting physical certificates to electronic form
• Rematerialisation, known as remat, is reverse of demat, i.e. getting physical
certificates from the electronic securities
• Transfer of securities, change of beneficial ownership
• Settlement of trades done on exchange connected to the Depository

Demat Account
Demat account is the abbreviation of 'Dematerialized Account'. Demat (Dematerialized) account refers to an account which an Indian citizen must open with the depository participant (banks, stockbrokers) to trade in listed securities in electronic form wherein one can hold shares of various companies in the Dematerialized {electronic} form.

Benefits of Depository Services and Demat Account
• Sale and Purchase of shares and stocks of any company on any stock exchange.
• Saves time
• No paperwork.
• Lower transaction costs.
• Ease in trading.
• Transparency in transactions.
• No counterfeiting of security certificate.
• Physical presence of investor is not required in stock exchange.
• Risk of mutilation and loss of security certificate is eliminated.

Very Short Answer

Question. Name the two major alternative mechanisms through which allocation of funds can be done. 
Answer: (i) Banks
(ii) Financial markets

Question. State any one consequence of a well performed 'allocation function of financial market. 
Answer: The rate of return offered to households/investors would be higher.

Question. Give two examples of Floatation Costs. 
Answer: (i) Brokerage and
(ii) Underwriting Commission

Question. Name any two buyers of Commercial Papers. 
Answer: (i) Banks and
(ii) Insurance Companies.

Question. List any two characteristics of secondary market.
Answer: (i) It creates liquidity.
(ii) It has a particular place.

Question And Answers

Question. A company with a paid up capital of Rs.2.5 crore seeks your advice regarding listing of its shares. What is your advice? 
Answer: OTCEI

Question. Explain the segments of Capital market.
Answer: Primary Market and Secondary Market

Question. Explain the scope of capital market. 
Answer:
i) Uses of funds ii) Suppliers of funds iii) Capital market instruments iv) Financial intermediaries.

Question. Explain the procedure of trading on a stock exchange. 
Answer:  i) Selection of broker ii) Placing the order iii) Executing the order iv) Settlement

Question. “SEBI is the regulatory authority of the securities market”. Do you agree? Give any four reasons in support of your answer.
Answer: Existing shareholders have right to buy subsequent issue of shares by the same company.

Question. “ SEBI is the watch dog of the securities market” .
Answer: Yes, Regulatory Functions of SEBI

Question. Explain the Organisational Structure of SEBI and objectives of its committees.
Answer: The Organisational Structure of SEBI:
i) SEBI is working as a corporate sector
ii) Its activities are divided into five departments. Each department is headed by an executive director.
iii) The head office of SEBI is at Mumbai and it has branch offices at Kolkata, Chennai and Delhi
iv) SEBI has formed two advisory committees to deal with primary and secondary markets.
v) These committees consist of market players, investors associations and eminent persons.
Objectives of the two Committees are:
i) To advise SEBI to regulate intermediaries
ii) To advise on issues related to development of primary market in India.
iii) To advise SEBI on disclosure requirements of companies
iv) To advise for changes in the legal framework for simplification and transparency in the primary market.
v) To advise the board on matters relating to regulation and development of secondary market in India.