PYQ 10

VERY SHORT ANSWER QUESTIONS ( 1 or 2 Marks)

QUESTION 1.
Mecca Ltd. a reputed automobile manufacturer needs Rupees ten crores as additional capital
to expand its business. Atul Jalan, the CEO of the company wanted to raise funds through
equity. On the other hand the Finance Manager, Nimi Sahdev said that the public issue may be
expensive on account of various mandatory and non- mandatory expenses. Therefore, it was
decided to allot the securities to institutional investors. Name the method through which the
company decided to raise additional capital.
Answer. The method of raising the additional capital is ‘Private Placement’.

QUESTION 2.
An investor wanted to invest `20,000 in Treasury Bills for a period of 91days. When he
approached the Reserve Bank of India for this purpose he came to know that it was not
possible.
Identify the reason why the investor could not invest in the Treasury Bill.
Answer
The investor could not invest in the Treasury Bill as treasury bills can be bought for a minimum
amount of Rs 25,000 and in multiples thereof.

QUESTION 3.
1. Name the kind of issue in which shares are offered to existing shareholder.
Answer. Right Issue.

QUESTION 4.
Give example of any two financial intermediaries.
Answer.
a) Banks. b) Financial markets.

QUESTION 5.
Give examples of any two money market instruments.
Answer. a) Commercial Paper. B) Treasury bills.

QUESTION 6.
Sika Ltd., a reputed industrial machines manufacturer, needs Rupees twenty crores as
additional capital to expand the business. Mr. Amit Joshi, the Chief Executive Officer (CEO) of
the company wants to raise funds through equity. The Finance Manager, Mr. Narinder Singh,
suggested that the shares may be sold to investing public through intermediaries, as the same
will be less expensive.
Name the method through which the company decided to raise additional capital.

(CBSE BOARD 2017)

Answer. The method through which the company decided to raise additional capital is 'Offer for
Sale'.

SHORT ANSWER QUESTIONS (3 or 4 Marks)

QUESTION 7.
The Return on Investment (ROI) of a company ranges between 10-12% for the past three years.
To finance its future fixed capital needs, it has the following options for borrowing debt:
Option ‘A’ : Rate of interest 9%
Option ‘B’ : Rate of interest 13%
Which source of debt, ‘Option A’ or ‘Option B’, is better? Give reasons in support of your
answer. Also state the concept being used in taking the decision.

(CBSE BOARD 2018)

Answer:
Option A is better than Option B for the company to finance its future fixed capital needs. Reason:
In Option A, Rate of return on investment (10–12%) > Rate of interest on borrowings (9%)
Concept used: Trading on equity

QUESTION 8.
The director of a newly established company having paid up equity share capital of 25 crores
desires to get its shares traded at all India Level Stock exchange. As finance Manager of the
company, Suggest the name of stock exchange for the purpose. Give any 3 reasons in support
of your answer.
Answer. The company should get its share listed at OTCEI. The main features of OTCEI are the
following-
1) Nation-wide listing, Listing on one exchange one can have transactions with all the counters in
the whole country.
2) Exclusive list of companies, on the OTCEI only those companies are listed whose issued capital
is 30 Lakh or more.
3) Investor’s registration- All the investor doing transactions on the OTCEI have got to register
themselves compulsorily.
4) Transparency in transactions- All the transactions are done in the presence of the investor. The
rates of buying and selling can be seen on the computer screen.

QUESTION 9.
State the protective functions of Securities and Exchange Board of India.
Answer
Protective functions of Securities and Exchange Board of India:
i. One of the major objectives of SEBI is to check malpractices such as insider trading, violation
of rules and non-adherence to the Companies Act.
ii. SEBI provides investors with information about companies as required by them.
iii. SEBI provides guidelines related to investment in securities. In this way, it enables investors
to take well-informed decisions.
iv. SEBI provides a code of conduct for the trade practices of various intermediaries such as
brokers and merchant bankers. It keeps a check on the activities of these intermediaries and
provides them a competitive environment.

QUESTION 10.

'Efficient functioning of stock exchange creates a conducive climate for active and growing

primary market for new issues as well as for an active and healthy secondary market.' In the

light of this statement state any three functions of a stock exchange.

(CBSE BOARD 2015)

Answer. Functions of Stock Exchange are:
(a) It provides liquidity and marketability to existing securities.
(b) It determines the price of securities by the forces of demand and supply.
(c) It ensures safety of transactions as the transactions carried out within an existing legal
framework.
(d) It contributes to economic growth as it indirectly promotes capital formation.
(e) It provides scope for speculation within the provisions of law.

QUESTION 11.

Mr. Aditya Gupta was the chairman of ‘Vandan Bank’. The Bank was earning good profits.

Shareholders were happy as the bank was paying regular dividends. The market price of

their shares was also steadily rising. The bank announced taking over of ‘Karur Bank’. Aditya

Gupta knew that the share price of Vandan Bank would rise on this announcement. Being a

part of the bank, he was not allowed to buy shares of the bank. He called one of his rich friends

Nimesh and asked him to invest Rs 6 crores in the shares of his bank promising him the capital

gain.

As expected, the share prices went up by 40% and the market price of Nimesh’s shares was

now Rs 8.4 crores. He had earned a profit of Rs 2.4 crores. He gave Rs 1.2 crore to Mr. Aditya

Gupta and kept Rs 1.2 crore with him. On regular inspection and by conducting enquires

of the brokers involved, Securities and Exchange Board of India (SEBI) was able to detect this

irregularity. SEBI imposed a heavy penalty on Aditya Gupta. By quoting the lines from the

above para identify and state any two functions that were performed by SEBI in the above case.

(CBSE BOARD 2016)

Answer. The two functions performed by SEBI in the given case are ‘Regulatory Functions’ and
‘Protective Functions’.
The lines from the paragraph which indicate the functions performed are as follows.
Regulatory Functions: ‘On regular inspection and by conducting enquires of the brokers involved’
Protective Functions: ‘SEBI imposed a heavy penalty on Aditya Gupta’

QUESTION 12.
State any four functions of financial market.

(CBSE BOARD 2016)

Answer. A financial market refers to the market where the creation and exchange of financial
assets such as shares and debentures takes place. The following are the functions of a financial
market.
i) Transfer of Savings and Alternatives for Investment: A financial market acts a link between
the savers and the investors. It provides a platform for the transfer of savings from the
households to the investors. It also provides savers various alternatives for investment and
thereby, directs the extra funds to the most productive investments.
ii) Establishes the Price: Similar to a commodity, the price of a financial asset is established
through the forces of demand and supply for funds. Financial market provides a platform for the
interaction of the demand of the funds (represented by the business firms) and the supply of
funds (represented by the households). Thereby, it helps in determining the price of the asset
being traded.
iii) Facilitates Liquidity: An asset or a security can be easily purchased and sold in a financial
market. This renders liquidity to the assets. That is, through trading in the financial market assets
can be easily converted into cash or cash equivalents.
iv) Reduced Cost of Transaction: By rendering information regarding the securities being traded,
their price, availability, etc., a financial market helps in reducing the cost of transaction in
terms of effort, money and time.

QUESTION 13.
These days, the development of a country is also judged by its system of transferring finance
from the sector where it is in surplus to the sector where it is needed most. To give strength to
the economy, SEBI is undertaking measures to develop the capital market. In addition to this
there is another market in which unsecured and short-term debt instruments are actively
traded everyday. These markets together help the savers and investors in directing the
available funds into their most productive investment opportunity.
(a) Name the function being performed by the market in the above case.
(b) Also, explain briefly three other functions performed by this market.

(CBSE BOARD 2017)

Answer. (a) Allocative function
(b) Functions performed by Financial Markets
(i) Establishes the price- It provides a platform for the interaction of the demand and the supply
of funds, thereby helping in determining the price of the asset being traded.
(ii) Facilitates liquidity- It renders liquidity to the assets by trading (sale and purchase of assets)
in the financial market, the assets can easily be converted into cash or cash equivalents.
(iii) Reduces the cost of transaction- It provides useful information about the various securities
that are traded. In this way, it helps in reducing the cost of transaction in terms of time, effort
and money for both the buyers and sellers.

QUESTION 14.
State any four functions of 'Secondary - Market'.

(CBSE BOARD 2016)

Answer. The four functions of secondary market are enlisted below.
1. One of the basic functions of secondary market is to provide liquidity and marketability to the
already existing financial assets and securities. It provides a ready platform for the trading of
existing securities.
2. It enables a constant valuation of the securities and helps in building the demand and supply.
In this way, it helps in determining the price of the securities.
3. It ensures safety and fairness in transactions.
4. It provides a platform for channelizing the savings to the most productive use. In this way, it
facilitates growth and development of the economy.

QUESTION 15.
State any four functions of 'Stock Exchange.'
Answer. Stock Exchange refers to a market where buying and selling of the existing securities
take place. The following are the main functions of a stock exchange.
(i) Provides Liquidity and Marketability: 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. Through stock exchange, securities can be easily converted into cash whenever
required. In addition, long-term securities can be converted into medium-term and short-term
through stock exchange.
(ii) Determination of Prices: A stock exchange helps in establishing the price of the monetary
assets that are traded in the market. It provides a platform for interaction for buyers and sellers
of securities and thereby, helps in the determination of prices of the securities through the forces
of demand and supply.
(iii) Facilitates Economic Growth: In a Stock Exchange the securities are continuously brought
and sold. This continuous process of disinvestment and reinvestment helps in channelising the
savings and the investments for the most productive use. This also enhances capital formation
and economic growth.
(iv) Scope for Speculation: It is generally believed that certain degree of speculation is necessary
for better liquidity and to maintain demand and supply of securities. Stock exchange provides a
reasonable and controlled scope of speculation within the provisions of law.

QUESTION 16.
These days, the development of a country is also judged by its system of transferring finance
from the sector where it is in surplus to the sector where it is needed the most. To give strength
to the economy, SEBI is undertaking measures to develop the capital market. In addition to
this, there is another market in which unsecured and short-term debt instruments are actively
traded everyday. These markets together help the savers and investors in directing the
available funds into their most productive investment opportunity.
(a) Name the function being performed by the market in the above case.
(b) Name the market segment other than the capital market segment in which unsecured and
short-term debt instruments are traded. Also, give any three points of difference between the
two.

LONG ANSWER TYPE QUESTIONS (5 OR 6 MARKS)

QUESTION 17.
Distinguish between money market and capital market on the basis of: (a) Participants
(b) Instruments (c) Safety and (d) Expected return

(CBSE BOARD 2015)

QUESTION 18.
The director of a company wants to modernize its plants and machinery by making a public
issue of Shares. They wish to approach stock exchange, while the finance manager prefers to
approach a consultant for the new public issue of shares. Advice the directors whether to
approach stock exchange or a consultant for new public issue of shares and why? Also advise
about the different methods which the company may adopt for the new public issue of shares.
Answer: The directors should approach the consultant for the new public issue of shares as the
company wish to make new public issue of shares to modernize its plants and machinery.
Following are the methods, which the company may adopt for the new public issue of shares:
i) Right Issue: Since it appears from the question that the company is an existing company, as it
wants to modernize its plant and machinery, the company by statute is required to offer these
shares first to the existing shareholders in proportion to their holdings. If the existing
shareholders do not take these shares then company can resort to other methods as given below.
ii) Public Offer through Prospectus: Under this method, the company can directly offer its shares
to the public at large after issuing prospectus.
iii) Offer for sale: In this case, an intermediary buys all the shares from the company at agreed
price and offers it to the investors at a higher rate.
iv) Private Placement: in this case, also an intermediary buys the shares from the company but
offers it to only a selected few for sale.

QUESTION 19.
Explain the objectives and functions of the SEBI.
Answer:
The Securities and Exchange Board of India was established in 1988 in order to encourage an
orderly and healthy growth of the securities market. SEBI was set with an overall objective of
investor protection and to promote the development and regulation of the functions of the
securities market.
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 investors and to guide
and educate them.
3. To prevent trading malpractices and to 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 of 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.
Regulatory Functions:
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 Stock Bankers and portfolio exchanges, and merchant bankers.
4. Prohibition 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 enquiries and audits of stock
exchanges and intermediaries.
7. Levying fee or other charges for carrying out the purposes of the Act.
8. Performing and exercising such power under Securities Contracts (Regulation) Act 1956, as
may be delegated by the Government of India.
Development Functions:
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.

QUESTION 20.
What is a Treasury Bill?
Answer:
Treasury Bill is a short term promissory note issued by the Reserve Bank of India on behalf of the
Central Government of India. They are issued to fulfil the short-term fund requirements of the
Government of India. Maturity period of Treasury Bills ranges from 14 days to 364 days.
Generally, these bills are brought by commercial banks, LIC, UTI, non-banking financial
companies, etc. They are also called Zero-Coupon Bonds.
Treasury bills are highly liquid instruments because of the fact that the RBI is always ready to
purchase these bills. Moreover, they are also considered to be the safest instrument as they are
issued by the 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 lower than the face
value and are redeemed at par. Herein, the discount (the difference between the price of issue
and the redemption value) is the interest received at the time of redemption.
Objective of issuing T-Bills is to fulfill the short-term money borrowing needs of the government.
T-bills have an advantage over the other bills such as:
1. Zero Risk weightage associated with them. They are issued by the government and sovereign
papers have zero risk assigned to them.
2. High liquidity because 91 days and 364 days are short term maturity.
3. Transparency.
4. The secondary market of T-Bills is very active so they have a higher degree of tradability.

Question 1.
Meca Ltd. a reputed automobile manufacturer needs Rupees ten crores as additional capital to expand its business. Atul Jalan, the CEO of the company wanted to raise funds through equity. On the other hand the Finance Manager, Nimi Sahdev said that the public issue may be expensive on account of various mandatory and non-mandatory expenses. Therefore, it was decided to allot the securities to institutional investors.
Name the method through which the company decided to raise additional capital. (CBSE, Delhi 2017)
Answer:
Private placement is method through which the company decided to raise additional capital.

Question 2.
These days, the development of a country is also judged by its system of transferring finance from the sector where it is in surplus to the sector where it is needed most. To give strength to the economy, SEBI is undertaking measures to develop the capital market. In addition to this there is another market in which unsecured and short-term debt instruments are actively traded everyday. These markets together help the savers and investors in directing the available funds into their most productive investment opportunity.

1.    Name the function being performed by the market in the above case.

2.    Also, explain briefly three other functions performed by this market. (CBSE, Delhi 2017)

Answer:

1.    Mobilisation of funds is the function being performed by the financial market in the above case. It performs the allocative function by mobilisation of savings and channelising them into the most productive avenues.

2.    The other three functions being performed by the financial market are outlined below:

·         It helps to determine the price for the financial asset in a particular financial market through the market forces of demand and supply.

·         It provides liquidity to the financial assets by providing ready markets wherein the securities can be easily converted into cash or vice versa.

·         It provides a common platform for exchange of securities thereby reducing the cost of transactions by saving time, effort and money spent by the buyers and sellers in locating each other.

Question 3.
These days, the development of a country is also judged by its system of transferring finance from the sector where it is in surplus to the sector where it is needed the most. To give strength to the economy, SEBI is undertaking measures to develop the capital market. In addition to this, there is another market in which unsecured and short-term debt instruments are actively traded every day. These markets together help the savers and investors in directing the available funds into their most productive investment opportunity.

1.    Name the function being performed by the market in the above case.

2.    Name the market segment other than the capital market segment in which unsecured and short-term debt instrument are traded. Also, give any three points of difference between the two. (CBSE, OD 2017)

Answer:

1.    Mobilisation of funds is the function being performed by the financial market in the above case. It performs the allocative function by mobilisation of savings and channelising them into the most productive avenues.

2.    Money market is the other segment of market.
The difference between capital market and money market is given below:

S.No	Basis	Capital Market	Money Market
1.	Participants	The main participants in capital market are banks, financial institutions , corporate bodies, foreign investors and retail investors.	The main participants are institutional investors.
2.	Investment outlay	Since, the cost of securities may be low, investment can be made in the capital market can be with less capital.	Since, the cost of securities may be high, investment in the money market requires huge capital outlay.
3.	Liquidity	The securities in capital market enjoy good liquidity.	The securities in money market enjoy high liquidity as The Discount Finance House of India works as a compulsory market maker.

Question 4.
ABC Ltd. issued prospectus for the subscription of its shares for Rs. 500 crores in 2008. The issue was oversubscribed by 20 times. The company issued shares to all the applicants on pro-rata basis. Later SEBI inspected the prospectus and found some misleading statement about the management of the company in it. SEBI imposed a penalty of Rs. 5 crores and banned its three executive directors for dealing in securities market for three years. Identify the function and its type performed by SEBI in the above case. (CBSE, Sample Paper, 2017)
Answer:
Protective function has been performed by SEBI in the above case. And the type of Protective function is Prohibition of fraudulent and unfair trade practices.

Question 5.
“Money market is essentially a market for short-term funds’. In the light of this statement state any three features of money market.
(CBSE, Sample Paper, 2017)
Answer:
The three features of money market are described below:

·         It is a market for short term funds whose maturity period is upto one year.

·         The main participants are institutional investors.

·         Since the cost of securities may be high, investment in the money market requires huge capital outlay.

Question 6.
“Unicon Securities Pvt. Ltd” was established to deal in securities. It was registered as a stock broker with National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) to trade in securities listed at these exchanges. It is also a depository participant with CDSL and NSDL. In the first three years, it developed its business successfully. After that the composition of Board of Directors changed. Some customers complained to the customer care centre of the company that shares purchased by them and for which the payment has been duly made, were not transferred to their D’mat Accounts by “Unicon securities Pvt. Ltd” . The executive of customer care centre promised the aggrieved customers that their shares will be transferred to their respective D’mat Accounts very soon. But the company delayed the matter and didn’t transfer the shares of the customers to their D’mat Accounts. This eroded investors confidence and multiplied, their grievances.

1.    Identify the step of trading procedure in a stock exchange which has not been followed by “Unicon Securities Pvt. Ltd” .

2.    Name the Apex statutory body of capital market to whom customer can complain to redress their grievances.

3.    Write two values not followed by Unicon Security Pvt. Ltd.(CBSE, Sample Paper, 2017)

Answer:

1.    The step of trading procedure in a stock exchange which has not been followed by “Unicon Securities Pvt. Ltd” is settlement i.e. the delivery of shares through the D’mat Account of the broker to D’mat account of the investors.

2.    The Securities and Exchange Board of India (SEBI) is the Apex statutory body of capital market to whom customer can complain to redress their grievances.

3.    The two values not followed by Unicon Security Pvt. Ltd are’:

·         Truthfulness

·         Fair practices

Question 7.
Reshu’s father has gifted her the shares of a large cement company with which he had been working. The securities were in physical form. She already has a bank account and does not possess any other forms of securities.
She wished to sell the shares and approached a registered broker for the purpose. Mention one mandatory detail which she will have to provide with the broker. (CBSE, Sample Paper, 2016)
Answer:
Reshu will have to give her Permanent Account Number (PAN) to the broker as it is mandatory as per law.

Question 8.
Squib Ltd. is a large creditworthy company operating in the Kashmir Valley. It is an export- oriented unit, dealing in exclusive embroidered shawls. The floods in the Valley have created many problems for the company. Many craftsmen and workers have been dislocated and raw material has been destroyed. The firm is therefore, unable to get an uninterrupted supply of raw materials and the duration of the production cycle has also increased. To add to the problems of the organisation, the suppliers of raw materials who were earlier selling on credit are asking the company for advance payment or cash payment on delivery. The company is facing a liquidity crisis. The CEO of the company feels that taking a bank loan is the only option with the company to meet its short-term shortage of cash.
As a finance manager of the company, name and explain the alternative to bank borrowings that the company can use to resolve the crisis. (CBSE, Sample Paper 2016)
Answer:
Commercial Papers may be used by Squib Ltd. as it is a popular short term instrument which is issued by large and credit worthy companies. The instrument is an unsecured promissory note and is freely transferable by endorsement. Its maturity period may range from a fortnight to a year. It is sold at discount and redeemed at par.

Question 9.
Mr. Sanjay Nehra was the Chairman of Taran Bank. The bank was earning good profits. Shareholders were happy as the bank was paying regular dividends. The market price of their shares was also steadily rising. The bank was about to announce taking over the ‘Vena Bank.’ Mr. Sanjay Nehra knew that the share price of Taran Bank would rise on this announcement. Being a part of the bank, he was not allowed to buy shares of the bank. He called one of his rich friends Sudhir and asked him to invest Rs.5 crores in shares of his bank promising him the capital gains.
As expected, the share prices went up by 40% and the market price of Sudhir’s shares was now ? 7 crores. He earned a profit of Rs. 2 crores. He gave Rs. 1 crore to Mr. Sanjay Nehra and kept Rs. 1 crore with himself. On regular inspection and by conducting enquiries of the brokers involved, the Securities and Exchange Board of India (SEBI) was able to detect this irregularity. The SEBI imposed a heavy penalty on Mr. Sanjay Nehra.
By quoting the lines from the above paragraph, identify and state any two functions that were performed by SEBI in the above case
Answer:
The two functions performed by SEBI in the given case are stated below:

·         Regulatory function is being performed by SEBI: “On regular inspection and by conducting inquires of the brokers involved.”

·         Protective function is performed by SEBI: “The SEBI imposed a heavy penalty on Mr. Sanjay Nehra.”

Question 10.
Mr. Vikas Mehra was the Chairman of IBM Bank. The bank was earning good profits. Shareholders were happy as the bank was paying regular dividends. The market price of their shares was also steadily rising. The bank was about to announce the taking over of ‘UK Bank’. Mr. Vikas Mehra knew that the share price of IBM Bank, would rise on this announcement. Being a part of the bank, he was not allowed to buy shares of the bank. He
called one of his rich friends Mukand and asked him to invest Rs. 4 crores in the shares of his bank promising him the capital gains.
As expected, after the announcement, the share prices went up by 50% and the market price of Mukand’s shares was now Rs. 6 crores. Mukand earned a profit of Rs. 2 crores. He gave Rs. 1 crore to Vikas Mehra and kept Rs. 1 crore with him. On regular inspection and by conducting enquiries of the brokers involved, the Securities and Exchange Board of India (SEBI) was able to detect this irregularity. SEBI imposed a heavy penalty on Vikas Mehra.
Quoting lines from the above paragraph, identify and state any two functions performed by the SEBI in the above case. (CBSE, OD 2016)
Answer:
The two functions performed by SEBI in the given case are stated below:

·         Regulatory function is being performed by SEBI: “on regular inspection and conducting inquires of the brokers involved.”

·         Protective function is performed by SEBI: “The SEBI imposed heavy penalty on Mr.Vikas Mehra.”

Question 11.
Supriya’s grandmother who, was unwell, called her and gave her a gift packet. Supriya opened the packet and saw many crumpled share certificates inside. Her grandmother told her that they had been left behind by her late grandfather.
As no trading is now done in physical form, Supriya wants to know the process by adopting which she is in a position to deal with these certificates.

1.    Identify and state the process.

2.    Also, give two reasons to Supriya why dealing with shares in physical form has been stopped. (CBSE, Sample Paper 2015)

Answer:

1.    Dematerialisation refers to the process of holding securities in electronic form.

2.    The two problems of holding shares in physical form are as follows:

·         When the shares certificates are held in physical form, there is danger of loss or theft.

·         There is risk of forgery, as the buyer may be delivered fake certificates .

Question 12.
Mission Coach Ltd. is a large creditworthy company that manufactures coaches for the Indian Railways. It now wants to export these coaches to other countries and decides to invest in new hi-tech machines. Since the investment is large, it requires long-term finance. It decides to raise funds by issuing equity shares. The issue of equity shares involves huge floatation cost. To meet the expenses of floatation cost, the company decides to tap the money market.

1.    Name and explain the money-market instrument the company can use for the above purpose.

2.    What is the duration for which the company can get funds through this instrument?

3.    State any other purpose for which this instrument can be used. (CBSE, OD 2015)

Answer:

1.    Commercial Papers can be used for Bridge financing by Mission Coach Ltd. as it is issued by large and credit worthy companies. The instrument is in the form of an unsecured promissory note and is freely transferable by endorsement. It is sold at discount and redeemed at par.

2.    Its maturity period may range from a fortnight to a year.

3.    It is also used to meet the short term seasonal and working capital requirements of a business enterprise.

Question 13.
Ganesh Steel Ltd. is a large and creditworthy company that manufactures steel for the Indian market. It now wants to cater to the Asian market and decides to invest in new hi-tech machines. Since the investment is large, it requires long-term finance. It decides to raise funds by issuing equity shares. The issue of equity shares involves huge floatation cost. To meet the expenses of floatation cost, the company decides to tap the money market.

1.    Name and explain the money-market instrument the company can use for the above purpose.

2.    What is the duration for which the company can get funds through this instrument?

3.    State any other purpose for which this instrument can be used. (CBSE, Delhi 2015)

Answer:

1.    Commercial Papers can be used for Bridge financing by Ganesh Steel Ltd. as they are issued by large and credit worthy companies. The instrument is in the form of an unsecured promissory note and is freely transferable by endorsement. It is sold at discount and redeemed at par.

2.    Its maturity period may range from a fortnight to a year.

3.    It is also used to meet the short term seasonal and working capital requirements of a business enterprise.

ADDITIONAL QUESTIONS

Question 1.
Incorporated in 1990, Raju Dairy Ltd., is one of the leading manufacturers and marketers of dairy-based branded foods in India. In the initial years, its operations were restricted only to collection and distribution of milk. But, over the years it has gained a reasonable market share by offering a diverse range of dairy based products including fresh milk, flavoured yogurt, ice creams, butter milk, cheese, ghee, milk powders etc. In order to raise capital to finance its expansion plans, Raju Dairy Ltd. has decided to approach capital market through a mix of Offer for sale of Rs. 4 crore shares and a public issue of Rs. 2 crore shares.
In context of the above case:

1.    Name and explain the segment of capital market being approached by the company.

2.    Identify the two methods of floatation used by the company to raise the required capital. Give one difference between them.

Answer:

1.    Primary market is the segment of capital market being approached by the company. It is also known as the new issue market as the securities are issued for the first time by the companies through this market.

2.    The two methods of floatation used by the company to raise the required capital are – Issue through prospectus and Offer for sale.
In case of issue through prospectus, the company approaches the members of the general public directly by issuing a prospectus whereas in case of Offer for sale, the company approaches members of the general public indirectly through intermediaries like issuing houses, stock brokers etc.

Question 2.
The SEBI has imposed a penalty of Rs. 7,269.5 crore on Pearls Agrotech Corporation Limited (PACL) and its four directors — Tarlochan Singh, Sukhdev Singh, Gurmeet Singh and Subrata Bhattacharya who had mobilised funds from the general public through illegal collective investment schemes in the name of purchase and development of agriculture land. While imposing the penalty, the biggest in its history, Securities and Exchange Board of India (SEBI) said the company deserved “maximum penalty” for duping the common man. Its Prevention of Fraudulent and Unfair Trade Practices Regulations provides for “severe to severe penalties” for dealing with such violations. As per SEBI norms, it can impose a penalty of Rs. 25 crore or three times of the profit made by indulging in fraudulent and unfair trade practices and in the present case, the regulator has imposed a fine equivalent to three times of the illicit gains.
In the context of the above case:

1.    State the objectives of setting up SEBI.

2.    Identify the type of function performed by SEBI by quoting lines from the paragraph.

Answer:

1.    The objective of setting up SEBI are outlined below:

·         To prevent trading malpractice in the securities markets.

·         To protect the rights and interest of investors, and to guide and educate them.

·         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.

·         To regulate stock exchanges and the securities market to promote their orderly functioning.

2.    Protective function is performed by SEBI: “The SEBI has imposed a penalty of Rs. 7,269.5 crore on Pearls Agrotech Corporation Limited.”

Question 3.
Harsh works as a manager in a software company. He opened a Demat account with a broking house in order to trade in securities with the money he received as his first performance bonus. Since then he has been very active in stock trading under the guidance of a stock broker. However, when he was hospitalised for a few days this year, his wife received several calls from the his stock broker for permission to transact on Harsh’s behalf. Though she told him to wait till her husband had recovered, the stock broker went ahead and executed the transactions. When Harsh got home from hospital, he discovered that the unauthorised transactions had led to a loss for him.
Harsh complained to the broking house, but they claimed he had authorised the transactions. Keeping in view, the guidelines issued by the National Stock Exchange that he had read in the national newspaper Harsh demanded proof and threatened to file a complain. Since, the broking house had no evidence that the deals had been authorised they made good the loss that Harsh had incurred due to the transactions.
In the context of the above case:

1.    What is a Demat account?

2.    Who is acting as the depository participant for Harsh?

3.    Name the document that is legally enforceable and helps to settle the claims between the investor and the broker.

Answer:

1.    A Demat account is an account used for holding securities in electronic form.

2.    The Broking house is acting as the depository participant for Harsh.

3.    A contract note is a legally enforceable document that helps to settle the claims between the investor and the broker.

Question 4.
Make Good Technologies Ltd. is one of the top suppliers of security software products and solutions in India with a market share of over 20% in the retail segment. Its customers includes people all sections of the society i.e. both households and corporates. Its unique threat detection system works to detect security threats including virus attacks in real time to protect users’ IT assets across varied platforms and devices. The company has an established track record of growth and financial performance. At present the company operates only through its website. The company now intends to launch a range of computer accessories and plans to market it by opening its own retail outlets. So, the board of directors of the company have decided to only raise capital for the first time through an issue of shares, but at the same time they do not wish to get into the hassles of launching a public issue of shares.
In context of the above case:

1.    Name and explain the way through which the company can raise finance by allotting securities to selective individuals and institutions only.

2.    Can the company also raise capital through a right issue? Why or why not? Give a reason to justify your answer.

Answer:

1.    The company can raise finance by allotting securities to selective individuals and institutions only through Private Placement. It is a relatively economical way of raising money as it helps to save time, cost and money involved in the process of issuing securities.

2.    No, the company cannot raise capital through a right issue as it is issuing securities for the first time. A rights issue is a pre-emptive right given only to the existing shareholders to subscribe to the securities of the company as per its terms and conditions.

Question 5.
After doing a course in online trading, Arsh started an online portal for stock trading under the name ‘Investment Guru’. He met his school friend Ajay after a long time in a bank where Ajay had come to open a D-Mat account. Arsh urged Ajay to invest in the forthcoming IPO of a blue chip companies whereas Ajay was inclined to buy existing securities of the other companies to build his investment portfolio.
In context of the above case:

1.    Identify the two different types of capital market being referred to by quoting lines from the para.

2.    State any four differences between the two different types of capital markets as identified in part (1).

Answer:

1.    The two different types of capital market being referred to are-

·         Primary Market: “Arsh urged Ajay to invest in the forthcoming IPO of a blue chip companies.”

·         Secondary Market: “Ajay was inclined to buy existing securities of the other companies to build his investment portfolio.”

2.    Differences between Primary Market and Secondary Market:

S. No	BASIS	PRIMARY MARKET	SECONDARY MARKET
1.	Meaning	It is the new issue market.	It is the market for old securities.
2.	Aspects	Only buying of securities takes place.	Both buying and selling of securities takes place.
3.	Price	Prices of the securities are determined by the company.	Prices of the securities are determined by the forces of demand and supply.
4.	Parties involved	It involves dealings between the company and investors	It involves dealings between the two investors.

Question 6.
Ketan won a cash prize of Rs. 20,000 in the National level Robotics Competition. On the advise of his father, he visits a nearby bank to open a Fixed deposit account in his name with the prize money. His sister Suhasini accompanied him to the bank. On reaching the bank, he notices big banners which are placed within the premises containing information about the various arrangements through which corporates may raise their capital through the bank. Being a finance graduate, Suhasini explains to Ketan that banks play the role of the financial intermediary by helping in the process of channelizing the savings of the households into the most profitable business ventures.
In context of the above case: .

1.    Name another financial intermediary that helps in the process of channelizing the savings of the households into the most productive use.

2.    Also, outline any two functions of another financial intermediary as identified in part (1).

Answer:

1.    Financial markets is the other financial intermediary that helps in the process of channelizing the savings of the households into the most productive use.

2.    The two functions of financial market are as follows:

·         It helps to determine the price for the financial asset in a particular financial market through the market forces of demand and supply.

·         It provides liquidity to the financial assets by providing ready markets wherein the securities can be converted into cash or vice versa easily.

Question 7.
Ragu works as a waiter in a five star hotel in Mumbai. While serving the customer he overhears him at the table saying that the he has made profits higher than expected by investing in securities market. So, Ragu also decides to make a nominal investment from his savings in the stock market in pursuit of higher gains.
In context of the above case:
As a financial consultant, apprise him of the steps involved in the working of a Demat system.
Answer:
Ragu will have to initiate the following steps for trading through a Demat system:

·         He will have to first open a Demat account with a depository participant (DP) who may either be a bank, broker or financial services company by furnishing certain details and information about himself including PAN number, date of birth, bank account details, income details etc.

·         If he plans to buy shares through a public offer he will have to give details of his Demat account, bank account etc. On allotment the shares will be directly credited to his account.

·         If he decides to buy shares otherwise, he will have to instruct his broker with the details about the name of the company, number of shares, price etc. The transaction will be executed through the depository participant and he will have to make payment for them within T + 2 days.

·         On contrary, whenever he decides to sell shares, he will have to instruct his broker with the details about the name of the company, number of shares, price etc. The transaction will be executed through the depository participant and his account will be debited accordingly. He will receive the payment in T + 2 days.

Question 8.
The Bombay Stock Exchange (BSE) is Asia’s first stock exchange and the world’s 11th largest stock exchange. It became the first stock exchange to be recognized by the Indian Government under the Securities Contracts Regulation Act. Its automated, screen-based trading platform called BSE On-Line Trading (BOLT) had a capacity of 8 million orders per day. The BSE has also introduced a centralized exchange-based internet trading system, BSEWEBx.co.in to enable investors anywhere in the world to trade on the BSE platform.
In context of the above case:

1.    Name the organisation that regulates the working of stock exchanges in India.

2.    State any three functions performed by stock exchanges.

3.    Give any two advantages of screen-based trading.

Answer:

1.    Securities And Exchange Board of India (SEBI) regulates the working of stock exchanges in India.

2.    Three functions performed by stock exchanges are as follows:

·         Ensures liquidity and marketability of existing securities by a providing a ready and continuous market for the sale and purchase of securities.

·         Helps in determining the prices of the securities through the forces of demand and supply.

·         It provides a legal framework for fair and safe dealings.

3.    Two advantages of screen-based trading are as follows:

·         As the investors get access to the stock market during real time, there is complete transparency in the dealings.

·         It provides a common platform for exchange of securities thereby increasing the efficient transactions by saving time, effort and money.

Question 9.
Ragunath Ahuja is one of the Promoter-Director of Vishwas Ltd. The company is engaged in the real estate sector, which has recently witnessed a steady fall in its revenue and the value of its assets due to a downward trend persisting in the market in specific and the economy in general. The periodical financial results of the company were to be declared in a fortnight time. Ragunath Ahuja, being an insider, had access to unpublished price sensitive information related to it. Consequently, he sells a major portion of his holdings in an anticipation of a fall in the market price of the shares of the Company subsequent to the announcement of periodical financial results of the company. Moreover, he doesn’t inform The Securities and Exchange Commission (SEC) about the dealings.
On conducting a probe, Securities and Exchange Board Of India (SEBI) finds Ragunath Ahuja guilty of insider trading. As per law, company directors, officials or any individual with a stake of 10% or more in the company are considered to be insiders and they are required to report their insider transactions within two business days of the date the transaction occurred.
In context of the above case:

1.    State the purpose of setting up SEBI.

2.    Identify the type of function performed by SEBI by quoting lines from the paragraph.

Answer:

1.    SEBI has to be responsive to the needs of three groups, which constitute the market namely:

·         The issuers of securities so as to provide them a platform for raising capital in an easy, effective and efficient manner.

·         The investors so as to protect their interests in securities by keeping them abreast about the developments through true and appropriate information.

·         The market intermediaries in order to provide them a framework so as to enable them perform their functions effectively and efficiently.

2.    Regulatory function is being performed by SEBI: “On conducting a probe Securities and Exchange Board of India (SEBI) finds Ragunath Ahuja guilty of insider trading.”

Question 10.
Sumita is a professor in a reputed business institute. While explaining the procedure of stock exchange trading, she shared with her students that many years back she had bought 200 shares of a leading automobiles company. As per the settlement procedure she paid for the shares and received the share certificates in physical form. However, when she had sent those certificates to the company to get them endorsed in her name, she was informed by the company that those certificates were duplicate.
Therefore, in order to protect the investors from many such malpractices, now only screen-based trading is done and dematerialisation is compulsory.
In context of the above case:

1.    What is screen based trading?

2.    Give the meaning of ‘dematerialisation’. State any two of its advantages.

Answer:

1.    Screen-based trading refers to the process of buying or selling securities online.

2.    Dematerialisation refers to the process of holding securities in electronic form. The two advantages of Dematerialisation as follows:

·         The securities in the demat account can be offered as security to raise loans.

·         Since the shares certificates are not held in physical form, there is no danger of loss, theft or forgery.

Question 11.
Madhav’s is one of the India’s most trusted brands in Indian sweets and snacks segment. The company has manufacturing plants in Kota, Kanpur, New Delhi, and Mumbai. Madhav’s has its own retail chain stores and a range of restaurants in these cities. Now, the company plans to extend its business in 12 more cities in India. In order to raise the funds, its directors have decided to float a public issue through prospectus. Besides, it intends to raise money to meet the floatation costs in terms of brokerage, underwriting commission, advertising etc.
In context of the above case:

1.    What is the other name used for the funds required to meet floatation costs?

2.    Describe briefly the short term instrument popularly used by the companies to raise for the funds required to meet floatation costs. Who can issue them?

3.    Distinguish between the two types of financial markets that the company intends to approach to meet its financial needs.

Answer:

1.    Bridge financing is the other name used for the funds required to meet floatation costs.

2.    Commercial Papers issued by large and credit worthy companies. The instrument is in the form of an unsecured promissory note and is freely transferable by endorsement. It is sold at discount and redeemed at par. Its maturity period may range from a fortnight to a year. It is also used to meet the short term seasonal and working capital requirements of a business enterprise. For example it is used for the purpose of bridge financing.

3.    Capital Market and Money Market.
Differences between Primary Market and Secondary Market:
Differences between Capital Market and Money Market:

S. No	Basis	Capital Market	Money Market
1.	Duration	It is a market for long term funds.	It is a market for short term funds whose maturity period is upto one year.
2.	Participants	The main participants in capital market are banks, financial institutions, corporate bodies, foreign investors and retail investors.	The main participants are institutional investors.
3.	Investment outlay	Since, the cost of securities may be low, investment can be made in the capital market can be with less capital.	Since the cost of securities may be high, investment in the money market requires huge capital outlay.
4.	Liquidity	The securities in capital market enjoy good liquidity.	The securities in money market enjoy high liquidity as The Discount Finance House of India works as a compulsory market maker.
5.	Risk and return	The instruments in capital market carry high risk as the expected return is high on them.	The instruments in money market carry low risk as the expected return is low on them.

Question 12.
During navratras ,Varun finalises a deal to buy a new house. So, he visits a nearby branch of ‘Subh Bank’ to withdraw Rs. 10 lakhs from his account in order to pay the token money to the seller. In the bank he observes that a large number of customers are present to make cash with drawls, probably because it is an auspicious time to make purchases. After sometime, he overhearsone of the bank staff members telling his colleague that, “Today ‘Subh Bank’ is likely to fall short of cash and to make up for the deficit and maintain its cash reserve ratio it will have to approach another bank.”
In context of the above case:

1.    Identify the instrument that ‘Subh Bank’ will use to meet its short term requirements of funds.

2.    State any three feature of the instrument as identified in part (1).

Answer:

1.    Call money is the instrument used by ‘Subh Bank’ to meet its short term requirements of funds.

2.    Three features of call money are as follows:

·         Call money is an instrument through which one bank may borrow money from another bank to maintain the cash reserve ratio as per the guidelines of RBI.

·         Its maturity period may be from a single day to a fortnight.

·         The rate at which the interest is paid on call money is called call rate.

Question 13.
The stock market regulator, Securities and Exchange Board of India (SEBI), has initiated a certification programme for all market intermediaries. Under this programme, people associated with stock markets in any way, will have to obtain a qualifying certificate from the regulator.The National Institute of Securities Market (NISM), a trust formed by SEBI, is tasked with the certification programme.
In the context of the above case:

1.    Identify the type of function performed by SEBI.

2.    Outline any two reasons for setting up SEBI.

Answer:

1.    Developmental function is being carried out by SEBI by starting a certification programme for all market intermediaries.

2.    SEBI was set up as a regulatory body by the government for the following reasons:

·         To curb malpractices in the financial market.

·         To enhance the confidence of the investors by ensuring fair, efficient and transparent dealings.

Q. 1. Supriya’s grandmother who was unwell, called her and gave her a gift packet. Supriya
opened the packet and saw many crumpled share certificates inside. Her grandmother told
her that they had been left behind by her late grandfather.
As no trading is now done in physical form, Supriya wants to know the process by adopting
which she is in a position to deal with these certificates.
1. Identify and state the process.
2. Also give two reasons to Supriya
3. why dealing with shares in physical form had been stopped. (3
Marks)
Ans.
1. Dematerialization – It is a process where securities held by the investor in physical
form are cancelled and the investor gives an electronic entry or number so that
she/he can hold it as an electronic balance in an account
2. Problems with dealing in physical form - (any
two)
1. Theft
2. Fake/forged transfers
3. Transfer delays
4. Paper work associated with share certificates or debentures held in physical form.

Q. 2. The directors of a company want to modernize its plant and machinery by making a
public issue of shares. They wish to approach the stock exchange, while the finance
manager prefers to approach a consultant for the new public issue of shares. Advise the
directors whether to approach the stock exchange or a consultant for new public issue of
shares and why. Also advise them about different methods which the company may adopt
for the new public issue of shares. (3
Marks)
Ans. The directors should approach a consultant for new public issue of shares. The stock
exchanges deal with sale and purchase of existing securities only, not in new issue of
securities.
Different methods which the company may adopt for the new public issue of shares:
1. Offer through prospectus
2. Offer for sale
3. Private placement
4. Rights issue
5. E-IPOs.

Q. 3. Reshu’s father has gifted her shares of a large cement company, with which he had
been working. The securities were in physical form. She already has a bank account and
does not possess any other forms of securities.
She wished to sell the shares and approached a registered broker for the purpose. Mention
one mandatory detail which she will have to provide with the broker. (1 Mark)
Ans. Permanent account Number (PAN)

Q. 4. Saqib Ltd. is a large credit worthy company operating in the Kashmir Valley. It is an
export oriented unit, dealing in exclusive embroidered shawls. The floods in the valley have
created many problems for the company. Many craftsmen and workers have been
dislocated and raw material has been destroyed. The firm is therefore, unable to get an
uninterrupted supply or raw material, and the duration of the production cycle has also
increased. To add to the problems of the organization, the suppliers of raw material who
were earlier selling on credit are asking the company, for advance payment or cash
payment on delivery. The company is facing a liquidity crisis. The CEO of the company
feels that taking a bank loan is the only option with the company to meet its short term
shortage of cash. As a finance manager of the company name and explain the alternative
to bank borrowing that the company can use to resolve the crisis. (3
Marks)
Ans. 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 short term funds at low companies tht are generally
considered to be financially strong.

Q. 5. ‘Ganesh Steel Ltd.’ is a large and credit-worthy company manufacturing steel for the
Indian market. It now wants to cate to the Asian market and decides to invest in new hi-tech
machines. Since the investment is large, it requires long-term finance. It decides to raise
funds by issuing equity shares.
The issue of equity shares involves huge floatation cost. To meet the expenses of floatation
cost the company decides to tap the money market.
1. Name and explain the money-market instrument the company can use for the above
purpose.
2. What is the duration for which the company can get funds through this instrument?
3. State any other purpose for which this instrument can be used. (4
Marks)
Ans.
1. Commercial paper
2. 15 days to one year
3. It can also be used for seasonal and working capital needs.

Q. 6. The Trading Procedure on Stock Exchange has been replaced by on-line screen
based electronic trading system. This is mainly done to eliminate problems like theft,
fake/forged transfers, transfer delays and paper work associated with share certificates or
debentures in physical form. This is a process where securities held by the investor in the
physical form are cancelled and the investor is given an electronic entry or number so that
he/she can hold it as an electronic balance in an account. This has increased the equity cult
among the people.
1. Identify and state the process mentioned above.
2. What is the most important requirement for the process identified in (a)? State.
3. State any two values which you think have enhanced the equity cult in the society.
Ans.
1. Dematerialization – It is the process of holding securities in an electronic form.
2. For this, the investors has to open a ‘Demat account’ with a depository participant
(DP) for holding and transferring securities in the demat form. He / She will also have
to open a bank account for cash transactions in the securities market.
3. Values:
● Fair dealings (i.e., no danger of loss, theft or forgery of share certificates)
● Transparency (i.e., participants can see the prices of all securities during real time)
● Increased efficiency of information (i.e., computer screens displays information on
prices)
● Increased efficiency of operations (i.e., reduction in time, cost and risk error) (any two)

Q. 7. Sakshi Ltd, a well known real estate company has managed to carve a niche for itself
in this sector. Recently, it was revealed that the directors of the company have used price
sensitive information for their own personal interest Adequate public disclosures were also
not made. SEBI is considering action against these directors.
1. Name the term used for trading malpractice done by the directors of this company.
2. Identify any two values that the company should have adhered to in order to gain the
trust of its investors.
Ans.
1. Insider trading
2. Values:
● Protection and promotion of investors’ interests
● Transparency
● Efficiency of information
● Efficiency of operations (any two)

Q. 8. ‘R’ Limited is a real estate company which was formed in 1950. In about 56 years of
its existence the company has managed out from a niche for itself in this sector. Lately this
sector is witnessing a boom due to the fact that the Indian economy is on the rise. The
income of middle class are rising. More people can afford to buy homes for themselves due
to easy availability of loans and accompanying tax concession.
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
raise money from domestic market or international market or combination of both? Whether
to raise the necessary finance from money market or capital market. It is also planning to
list itself in New York Stock Exchange to raise money through ADR.
To make its offering attractive it is planning to offer lots of financial plans, products to its
stakeholders and investors and also explain its listing at NSE after complying with the
regulations of SEBI.
1. What are the regulation so SEBI that company must comply with?
Ans. Explain regulatory functions,

Q. 9. A company require Rs. 2 crore for inventory, payment of wages, salaries, maintaining
bank balance, etc.
1. Suggest which financial market company may approach and why?
2. State the instruments to raise finance in that market.
Ans.
1. Money market is the market from where it can raise money to fulfill its requirement.
The reason is company require money for working capital i.e. maximum for 1 year
and market for short-term is money market.
2. The instrument to raise money in money market are:
1. Call money
2. Treasury bill
3. Commercial bill
4. Commercial paper
5. Certificate of deposit.

Q. 10. Few years ago, there were many malpractices, unfair trade practices and frauds and
scams were taking place in stock Exchange. All these affected investor’s confidence, faith
and trust in Stock Exchange. The Government of India decided to set up a separate body
for this purpose who was given control of stock exchange. This separated ownership and
control of stock exchange.
1. Name the concept which separate the ownership and control of stock exchange.
2. Name the body set up by the government of India to contract the stock exchange.
3. State the objectives of that regulating body.
Ans.
1. The concept which separate ownership and control is called as demutualization.
2. The regulatory body set up by government of India is “SEBI” Securities Exchange
Board of India.
3. The objectives of SEBI are:
The overall objectives of SEBI are to protect the interest of investors and to promote the
development of stock exchange and to regulate the activities of stock market.The objectives
of SEBI are:

Q. 11. Mr. Vikas Mehra was the Chairman of IBM Bank. The bank was earning good profits.
Shareholders were happy as the bank was paying regular dividends. The market price of
their shares was also steadily rising. The bank was about to announce the taking over of
‘UK Bank’. Mr. Vikas Mehra knew that the share price of IBM Bank would rise on this
announcement. Being a part of the bank, he was not allowed to buy shares of the bank. He
called one of his rich friends Mukand and asked him to invest Rs. 4 crores in the shares of
his bank promising him the capital gains.
As expected, after the announcement, the share prices went up by 50% and the market
price of Mukand’s shares was now Rs. 6 crores. Mukand earned a profit of Rs. 2 crores.
He gave Rs. 1 crore to Vikas Mehra and kept Rs. 1 crore with him. On regular inspection
and by conducting enquiries of the brokers involved, the Securities and Exchange Board of
India (SEBI) was able to detect this irregularity. SEBI imposed a heavy penalty o Vikas
Mehra.
Quoting lines from the above paragraph, identify and state any two functions performed by
the SEBI in the above case.
Ans. The two functions performed by SEBI in the given case are stated below:
1. Regulatory function is being performed by SEBI: “on regular inspection and
conducting inquiries of the brokers involved.”
2. Protective function is performed by SEBI: “The SEBI imposed heavy penalty on Mr.
Vikas Mehra.

Q. 12. Mission Coach Ltd. is a large creditworthy company that manufactures coaches for
the Indian Railways. It now wants to export these coaches to other countries and decides to
invest in new hi-tech machines. Since the investment is large, it requires long-term finance.
It decides to raise funds by issuing equity shares. The issue of equity shares involves huge
floatation cost. To meet the expenses of floatation cost, the company decides to tap the
money market.
1. Name the explain the money-market instrument the company can use for the above
purpose.
2. What is the duration for which the company can get funds through this instrument?
3. State any other purpose for which this instrument can be used.
Ans.
1. Commercial Papers can be used for Bridge financing by Mission coach Ltd. as it is
issued by large and credit worthy companies. The instrument is in the form of an
unsecured promissory note and it freely transferable by endorsement. It is sold at
discount and redeemed at par.
2. It maturity period may range from a fortnight to a year.
3. It is also used to meet the short term seasonal and working capital requirements of a
business enterprise.

Q. 13. Incorporated in 1990. Raju Dairy Ltd., is one of the leading manufacturers and
marketers of dairy-based branded foods in India. In the initial years, its operations were
restricted only to collection and distribution of milk. But, over the years it has gained a
reasonable market share by offering a diverse range of dairy based products including fresh
milk, flavoured yogurt, ice creams, butter milk, cheese, ghee, milk powders etc. in order to
raise capital to finance its expansion plans. Raju Dairy Ltd. has decided to approach capital
market through a mix of Offer for sale of Rs. 4 crore shares and a public issue of Rs. 2 crore
shares.
In context of the above case:
1. Name and explain the segment of capital market being approached by the company.
2. Identify the two methods of floatation used by the company to raise the required
capital. Give one difference between them.
Ans.
1. Primary market is the segment of capital market being approached by the company.
It is also known as the new issue market as the securities are issued for the first time
by the companies through this market.
2. The two methods of floatation used by the company to raise the required capital are –
Issue through prospectus and Offer for sale.
In case of issue through prospectus, the company approaches the members of the general
public directly by issuing a prospectus whereas in case of Offer for sale, the company
approaches members of the general public indirectly through intermediaries like issuing
houses, stock brokers etc.

Q. 14. Harsh works as a manager in a software company. He opened a Demat account with
a broking house in order to trade in securities with the money he received as his first
performance bonus. Since then he has been very active in stock trading under the guidance
of a stock broker. However, ,when he was hospitalized for a few days this year, his wife
received several calls from the his stock broker for permission to transact on Harsh’s behalf.
Though she told him to wait till her husband had recovered, the stock broker went ahead
and executed the transactions. When Harsh got home from hospital, he discovered that the
unauthorized transactions had led to a loss for him.
Harsh complained to the broking house, but they claimed he had authorized the
transactions. Keeping in new, the guidelines issued by the National Stock Exchange that he
had read in the national newspaper Harsh demanded proof and threatened to file a
complain. Since, the broking house had no evidence that the deals had been authorized
they made good the loss that Harsh had incurred due to the transaction.
In the context of the above case?
1. What is a Demat account?
2. Who is acting as the depository participant for Harsh?
3. Name the document that is illegally enforceable and helps to settle the claims
between the investor and the broker.
Ans.
1. A Demat account is an account used for holding securities in electronic form.
2. The Broking house is acting as the depository participant for Harsh.
3. A contract note is a legally enforceable document that helps to settle the claims
between the investor and the broker.

Q. 15. Ketan won a cash prize of Rs. 20,000 in the National level Robotics Competition. On
the advise of his father, he visits a nearby bank to open a Fixed deposit account in his name
with the prize money. His sister Suhasini accompanied him to the bank. On reaching the
bank, he notice big banners which are placed within the premises containing information
about the various arrangements through which corporates may raise their capital through
the bank. Being a finance graduate, Suhasini explains to Ketan that banks play the role of
the financial intermediary by helping in the process of channelizing the savings of the
households into the most profitable business ventures.
In context of the above case:
1. Name another financial intermediary that helps in the process of channelizing the
savings of the households into the most productive use.
2. Also, outline any two functions of another financial intermediary as identified in part
(a)
Ans.
1. Financial markets is the other financial intermediary that helps in the process of
channelizing the savings of the households into the most productive use.

Q. 16. Ragu works as a waiter in a five star hotel in Mumbai. While serving the customer he
overhears him at the table saying that the he has made profits higher than expected by
investing in securities market. So, Ragu also decides to make a nominal investment from
his savings in the stock market in pursuit of higher gains.
In context of the above case:
As a financial consultant, apprise him of the steps involved in the working of a Demat
system.
Ans. Ragu will have to initiate the following steps for trading through a Demat system:

Q.17. Sumita is a professor in a reputed business institute. While explaining the procedure
of stock exchange trading, she shared with her students that many years back she had
bought 200 shares of a leading automobiles company. As per the settlement procedure she
paid for the shares and received the share certificates in physical form. However, when she
had sent those certificates to the company to get them endorsed in her name, she was
informed by the company that those certificates were duplicate.
Therefore, in order to protect the investors from many such malpractices, now only screen –
based trading is done and dematerialization is compulsory.
In context of the above case:
1. What is screen based trading?
2. Give the meaning of ‘dematerialization’. State any two of its advantages.
Ans.
1. Screen – based trading refers to the process of buying or selling securities online.

Q. 18. Madhav’s is one of the India’s most trusted brands in Indian sweets and snacks
segment. The company has manufacturing plants in Kota, Kanpur, New Delhi, and Mumbai.
Madhav’s has its own retail chain stores and a range of restaurants in these cities. Now, the
company plans to extend its business in 12 more cities in India. In order to raise the funds,
its directors have decided to float a public issue through prospectus. Besides, it intends to
raise money to meet the floatation cost in terms of brokerage, underwriting commission,
advertising etc.
In context of the above case:
1. What is the other name used for the funds required to meet floatation costs?
2. Describe briefly the short term instrument popularly used by the companies to raise
for the funds required to meet floatation costs. Who can issue them?
3. Distinguish between the two types of financial markets that the company intends to
approach to meet its financial needs.
Ans.
1. Bridge financing is the other name used for the funds required to meet floatation
costs.
2. Commercial Papers
3. Capital Market and Money Market.

Q. 19. During navratras, Varun finalizes a deal to buy a new house. So, he visits a nearby
branch of ‘Subh Bank’ top withdraw Rs. 10 lakhs from his account in order to pay the token
money to the seller. In the bank he observes that a large number of customers are present
to make cash with drawls, probably because it is an auspicious time to make purchases.
After sometime, he overhears one of the bank staff members telling his colleague that,
“Today ‘Shubh Bank’ is likely to fall short of cash and to make up for the deficit and maintain
its cash reserve ratio it will have to approach another bank.”
In context of the above case:
1. Identify the instrument that ‘Shubh Bank’ will use to meet its short term requirements
of funds.
2. State any three feature of the instrument as identified in part (a).
Ans.
1. Call money is the instrument used by ‘Subh Bank’ to meet its short term requirements
of funds.
2. Three features of call money.