NIOS Class 12 Business Studies Chapter 18 Indian Financial Market

NIOS Class 12 Business Studies Chapter 18 Indian Financial Market Solutions to each chapter is provided in the list so that you can easily browse throughout different chapters NIOS Class 12 Business Studies Chapter 18 Indian Financial Market and select need one. NIOS Class 12 Business Studies Chapter 18 Indian Financial Market Question Answers Download PDF. NIOS Study Material of Class 12 Business Studies Notes Paper 319.

NIOS Class 12 Business Studies Chapter 18 Indian Financial Market

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Also, you can read the NIOS book online in these sections Solutions by Expert Teachers as per National Institute of Open Schooling (NIOS) Book guidelines. These solutions are part of NIOS All Subject Solutions. Here we have given NIOS Class 12 Business Studies Chapter 18 Indian Financial Market, NIOS Senior Secondary Course Data Business Studies for All Chapter, You can practice these here.

Indian Financial Market

Chapter: 18

Module – 6 : BUSINESS FINANCE

INTEXT QUESTIONS 18.1

Q. 1. Define financial market. 

Ans: It is market that facilitates transfer of funds between investors/lenders and borrowers/users. It deals in financial instrument like bills of exchange. shares, debentures, bonds etc. 

Q. 2. Complete the table given below:

(a) Distinction between Primary Market and Secondary Market.

Ans: 

(b) Differentiate between Money Market and Capital Market.

Ans:

INTEXT QUESTIONS 18.2

Q. 1. Enumerate the main characteristics of a stock exchange.

Ans: The main characteristics of a stock exchange are:

1. It is an organised market.

2. It provides a place where existing and approved securities can be bought and sold easily.

3. In a stock exchange, transactions take place between its members or their authorised agents. 

4. All transactions are regulated by rules and by laws of the concerned stock exchange. 

5. It makes complete information available to public in regard to prices and volume of transactions taking place every day.

Q. 2. Identify which the following statements about stock exchanges are ‘True’ or ‘False’.If the statement is ‘False’, rewrite it in the correct form.

(a) Stock Exchange provides a ready market for sale and purchase of gold and silver.

Ans: False: Stock Exchange provides a ready market for sale and purchase of various shares, debentures, bonds and government securities.

(b) In the stock exchange, transactions take place between companies and their shareholders directly. 

Ans: False: In the stock exchange, transactions take place between its members or their authorised agents.

(c) Stock exchange transactions facilitate flow of funds from less profitable to more profitable enterprises.

Ans: True.

(d) It becomes difficult for investors to raise loans from banks against collateral of their holdings in securities traded at the stock exchange.

Ans: False: It becomes easy for investors to raise loans from banks against collateral of their holdings in securities traded at the stock exchange.

(e) Speculation is the same thing as gambling. 

Ans: False: Speculation is different from gambling. 

Q. 3. State two limitations of stock exchanges.

Ans: (a) Excessive speculation.

(b) Fluctuation in security prices due to unpredictable political, social and economic factors as well as on account of rumours spread.

INTEXT QUESTIONS 18.3

Q. 1. State any three main objectives for which SEBI was granted statutory recognition in 1992.

Ans: (a) Protecting interest of investors.

(b) Promoting development of securities market.

(c) Regulating the securities market.

Q. 2. Give a specific term/name for the following: 

(a) The prominent stock exchange enjoying nation wide coverage that commenced operations in 1994. 

Ans: National Stock Exchange (NSE)

(b) The stock exchange that specially caters to small and medium-sized companies.

Ans: Over the Counter Exchange of India (OTCEI)

(c) The first organised stock exchange in India. 

Ans: Bombay Stock Exchange (BSE)

(d) The Act passed in the year 1956 for providing recognition of stock exchanges by the central government. 

Ans: Securities Contracts (Regulation) Act.

(e) The regulatory body of stock exchanges in our country granted statutory recognition in the year 1992.

Ans: Securities and Exchange Board of India (SEBI). 

Q. 3. List any three primary market reforms initiated by SEBI. 

Ans: (i) Improved disclosure standards in public issue documents.

(ii) Introduction of prudential norms. 

(iii) Simplification of the issue procedures.

Q. 4. Multiple Choice Questions:

(i) NSDL is the name of ______________.

(a) Depository. 

(b) Company.

(c) Investor.

(d) None of the above.

Ans: (a) Depository.

(ii) Investor who wants to keep his securities in electronic form opens a ____________ account with a Depository Participant.

(a) Savings.

(b) Current.

(c) Demat.

(d) Both (a) and (b).

Ans: (c) Demat.

TERMINAL EXERCISE

Very Short Answer Type Questions:

Q. 1. What do you mean by ‘Financial Market’?

Ans: Financial market is the market that facilitates transfer of funds between investors/lenders and borrowers/ users. It deals in financial instruments like bills of exchange, shares, debentures, bonds, etc. It provides security to dealings in financial assets, liquidity to financial assets for investors and ensures low cost of transitions and information.

Q. 2. Give four examples of credit instruments of money market.

Ans: Money market refer to the network of financial institutions dealing in short term funds through instruments like bills of exchanges, promissory notes, commercial papers, treasury bills etc.

Q. 3. State the meaning of capital market.

Ans: Capital Market is institutional an arrangement for borrowing medium and long-term funds and which provides facilities for marketing and trading of securities. So it constitutes all long-term borrowings from banks and financial institutions, borrowings from foreign markets and raising of capital by issue of various securities such as shares debentures, bonds, etc.

Q. 4. List any two advantages of stock exchanges to companies.

Ans: Advantages of stock exchange to the Companies: 

(i) The companies whose securities have been listed on a stock exchange enjoy a better goodwill and credit-standing than other companies because they are supposed to be financially sound.

(ii) The market for their securities is enlarged as the investors all over the world become aware of such securities and have an opportunity to invest.

(iii) As a result of enhanced goodwill and higher demand, the value of their securities increases and their bargaining power in collective ventures, mergers, etc. is enhanced.

(iv) The companies have the convenience to decide upon the size, price and timing of the issue. 

Q. 5. Mention the organisations that are part of the organised money market in India.

Ans: Reserve Bank of India and Life Insurance Corporation.

Q. 6. What do you mean by ‘Depository”? 

Ans: Depository is like a bank in which an investor can deposit and withdraw his shares. Depository Participant (DP) is an agent of the depository. Investors interact only with DPs. Any financial institution can become DP after registration with SEBI. The company whose shares are to be transacted in electronic form must be registered with a depository.

Q. 7. Give the full form of NSDL. 

Ans: National Securities Depository Ltd.

Q. 8. State the full form of CDSL. 

Ans: Central Depository Services Ltd.

Short Answer Type Questions:

Q. 9. Define money market and explain its importance in a modern economy.

Ans: The money market is a market for short-term funds, which deals in financial assets whose period of maturity is upto one year. It should be noted that money market does not deal in cash or money as such but simply provides a market for credit instruments such as bills of exchange, promissory notes, commercial paper, treasury bills, etc. These financial instruments are close substitute of money. These instruments help the business units, other organisations and the Government to borrow the funds to meet their short-term requirement.

Money market does not imply to any specific market place. Rather it refers to the whole networks of financial institutions dealing in short-term funds, which provides an outlet to lenders and a source of supply for such funds to borrowers. Most of the money market transactions take place on telephone, fax or Internet. The Indian money market consists of Reserve Bank of India, Commercial banks, Co-operative banks, and other specialised financial institutions. The Reserve Bank of India is the leader of the money market in India. Some Non-Banking Financial Companies (NBFCs) and financial institutions like LIC, GIC, UTI, etc. also operate in the Indian money market.

Q. 10. What is capital market? How does it differ from money market?

Ans: Capital Market may be defined as a market dealing in medium and long-term funds. It is an institutional arrangement for borrowing medium and long-term funds and provides facilities for marketing and trading of securities. So it constitutes all long-term borrowings from banks and financial institutions, borrowings from foreign markets and raising of capital by issue various securities such as shares debentures, bonds, etc.

Capital Market differs from money market in many ways. Firstly, while money market is related to short-term funds, the capital market is related to long term funds. Secondly, while money market deals in securities like treasury bills, commercial paper, trade bills, deposit certificates, etc., the capital market deals in shares, debentures, bonds and government securities. Thirdly, while the participants in money market are Reserve Bank of India, commercial banks, non-banking financial companies, etc., the participants in capital market are stock brokers, underwriters, mutual funds, financial institutions, and individual investors. Fourthly, while the money market is regulated by Reserve Bank of India, the capital market is regulated by Securities Exchange Board of India (SEBI).

Q. 11. Distinguish between primary market and secondary market. 

Ans: The main points of distinction between the primary market and secondary market are as follows:

1. Function: While the main function of primary market is to raise long-term funds through fresh issue of securities, the main function of secondary market is to provide continuous and ready market for the existing long-term securities.

2. Participants: While the major players in the primary market are financial institutions, mutual funds, underwriters and individual investors, the major players in secondary market are all of these and the stock brokers who are members of the stock exchange.

3. Listing Requirement: While only those securities can be dealt within the secondary market, which have been approved for the purpose (listed), there is no such requirement in case of primary market.

4. Determination of prices: In case of primary market, the prices are determined by the management with due compliance with SEBI requirement for new issue of securities. But in case of secondary market, the price of the securities is determined by forces of demand and supply of the market and keeps on fluctuating.

Q. 12. How does the stock exchange helps in mobilizing savings and capital formation?

Ans: Efficient functioning of stock market creates a conducive climate for an active and growing primary market. Good performance and outlook for shares in the stock exchanges imparts buoyancy to the new issue market, which helps in mobilising savings for investment in industrial and commercial establishments. Not only that, the stock exchanges provide liquidity and profitability to dealings and investments in shares and debentures. It also educates people on where and how to invest their savings to get a fair return. This encourages the habit of saving, investment and risk-taking among the common people. Thus, it helps mobilising surplus savings for investment in corporate and government securities and contributes to capital formation.

Q. 13. Describe the measures taken by SEBI to regulate the secondary market.

Ans: Following are the measures taken by SEBI to regulate the secondary market:

(i) SEBI regulates the business in securities market. SEBI has notified rules and regulations and code of conduct to regulate the intermediaries in the securities market.

(ii) SEBI registers and regulates the working of stock brokers, registrars, merchant bankers, portfolio managers etc. who may be associates with securities markets. 

(iii) SEBI registers and regulates the working of mutual funds. 

(iv) SEBI conducts inquiries and audits of the stock exchanges.

(v) SEBI undertakes steps to educate investors.

(vi) SEBI promotes fair practices and code of conduct in securities market.

Q. 14. What is meant by a ‘Demat’ account?

Ans: Investors who want to get securities in electronic form opens a Demat Account. Demat account is the abbreviation of dematerialised account. Demat account refers to an account which an Indian citizen must open with the DPs to trade in listed securities in electronic form. From this account one can hold shares of various companies in the dematerialised/electronic form.

Q. 15. Anil wants to invest money in share market. As a financial advisor what will you suggest him to do?

Ans: Anil should follow the following procedure:

(a) Selection of broker: First he has to choose a registered broker through whom he will deal in securities.

(b) Placement of order: The next step is to place the order stating the name of the company, number of shares to be traded along with the price.

(c) Trade by the broker: Broker makes the deal either on cash basis or carry over basis if the desired price is quoted by any buyer/seller in his computer.

(d) Information to Investor: The buyer arranges payment after getting the information about the deal from the broker.

(e) Settlement: All the transactions are settled through electronic book entry. 

Long Answer Type Questions:

Q. 16. Define stock exchange and explain its functions.

Ans: Stock Exchange: Stock exchange is the term commonly used for a secondary market, which provide a place where different types of existing securities such as shares, debentures and bonds, government securities can be bought and sold on a regular basis.

Functions of a Stock Exchange: The functions of stock exchange can be enumerated as follows:

1. Provides ready and continuous market: By providing a place where listed securities can be bought and sold regularly and conveniently, a stock exchange ensures a ready and continuous market for various shares, debentures, bonds and government securities. This lends a high degree of liquidity to holdings in these securities as the investor can encash their holdings as and when they want.

2. Provides information about prices and sales: A stock exchange maintains complete record of all transactions taking place in different securities every day and supplies regular information on their prices and sales volumes to press and other media. In fact, now-a-days, you can get information about minute to minute movement in prices of selected shares on TV channels like CNBC, Zee News, NDTV and Headlines Today. This enables the investors in taking quick decisions on purchase and sale of securities in which they are interested. Not only that, such information helps them in ascertaining the trend in prices and the worth of their holdings. This enables them to seek bank loans, if required.

3. Provides safety to dealings and investment: Transactions on the stock exchange are conducted only amongst its members with adequate transparency and in strict conformity to its rules and regulations which include the procedure and timings of delivery and payment to be followed. This provides a high degree of safety to dealings at the stock exchange. There is little risk of loss on account of non-payment or non-delivery. Securities and Exchange Board of India (SEBI) also regulates the business in stock exchanges in India and the working of the stock brokers.

4. Helps in mobilisation of savings and capital formation: Efficient functioning of stock market creates a conducive climate for an active and growing primary market. Good performance and outlook for shares in the stock exchanges imparts buoyancy to the new issue market, which helps in mobilising savings for investment in industrial and commercial establishments.

5. Barometer of economic and business conditions: Stock exchanges reflect the changing conditions of economic health of a country, as the shares prices are highly sensitive to changing economic, social and political conditions. It is observed that during the periods of economic prosperity, the share prices tend to rise. Conversely, prices tend to fall when there is economic stagnation and the business activities slow down as a result of depressions. Thus, the intensity of trading at stock exchanges and the corresponding rise on fall in the prices of securities reflects the investors’ assessment of the economic and business conditions in a country, and acts as the barometer which indicates the general conditions of the atmosphere of business.

6. Better Allocation of funds: As a result of stock market transactions, funds flow from the less profitable to more profitable enterprises and they avail of the greater potential for growth. Financial resources of the economy are thus, better allocated. 

Q. 17. Explain the importance of stock exchanges from the point of view of companies and investors.

Ans: Following points indicate the importance of stock exchange:

(a) To the companies:

(i) The companies whose securities have been listed on a stock exchange enjoy a better goodwill and credit-standing than other companies because they are supposed to be financially sound.

(ii) The market for their securities is enlarged as the investors all over the world become aware of such securities and have an opportunity to invest.

(iii) As a result of enhanced goodwill and higher demand, the value of their securities increases and their bargaining power in collective ventures, mergers, etc. is enhanced. 

(iv) The companies have the convenience to decide upon the size, price and timing of the issue.

(b) To the Investors: 

(i) The investors enjoy the ready availability of facility and convenience of buying and selling the securities at will and at an opportune time.

(ii) Because of the assured safety in dealings at the stock exchange the investors are free from any anxiety about the delivery and payment problems.

(iii) Availability of regular information on prices of securities traded at the stock exchanges helps them in deciding on the timing of their purchase and sale.

(iv) It becomes easier for them to raise loans from banks against their holdings insecurities traded at the stock exchange because banks prefer them as collateral on account of their liquidity and convenient valuation.

Q. 18. Explain the role played by SEBI in protecting investors interests and controlling the business at stock exchange.

Ans: SEBI has been vested with necessary powers concerning various aspects of capital market such as: 

(i) regulating the business in stock exchanges and any other securities market.

(ii) registering and regulating the working of various intermediaries and mutual funds.

(iii) promoting and regulating self regulatory organisations.

(iv) promoting investors education and training of intermediaries.

(v) prohibiting insider trading and unfair trade practices.

(vi) regulating substantial acquisition of shares and take over of companies.

(vii) calling for information, undertaking inspection, conducting inquiries and audit of stock exchanges, and intermediaries and self regulation organisations in the stock market. and

(viii) performing such functions and exercising such powers under the provisions of the Capital Issues (Control) Act, 1947 and the Securities Contracts (Regulation) Act, 1956 as may be delegated to it by the Central Government.

As part of its efforts to protect investors’ interests, SEBI has initiated many primary market reforms, which include improved disclosure standards in public issue documents, introduction of prudential norms and simplification of issue procedures. Companies are now required to disclose all material facts and risk factors associated with their projects while making public issue. All issue documents are to be vetted by SEBI to ensure that the disclosures are not only adequate but also authentic and accurate. SEBI has also introduced a code of advertisement for public issues for ensuring fair and truthful disclosures. Merchant bankers and all mutual funds including UTI have been brought under the regulatory framework of SEBI. A code of conduct has been issued specifying a high degree of responsibility towards investors in respect of pricing and premium fixation of issues. 

To reduce cost of issue, underwriting of issues has been made optional subject to the condition that the issue is not under-subscribed. In case the issue is under-subscribed i.e., it was not able to collect 90% of the amount offered to the public, the entire amount would be refunded to the investors. The practice of preferential allotment of shares to promoters at prices unrelated to the prevailing market prices has been stopped and private placements have been made more restrictive. All primary issues have now to be made through depository mode. The initial public offers (IPOs)can go for book building for which the price band and issue size have to be disclosed. Companies with dematerialised shares can alter the par value as and when they sodesire.

As for measures in the secondary market, it should be noted that all statutory powers to regulate stock exchanges under the Securities Contracts (Regulation) Act have now been vested with SEBI through the passage of securities law (Amendment) Act in 1995. SEBI has duly notified rules and a code of conduct to regulate the activities of intermediaries in the securities market and then registration in the securities market and then registration with SEBI is made compulsory. It has issued guidelines for composition of the governing bodies of stock exchanges so as to include more public representatives. 

Corporate membership has also been introduced at the stock exchanges. It has notified the regulations on insider trading to protect and preserve the integrity of stock markets and issued guidelines for mergers and acquisitions. SEBI has constantly reviewed the traditional trading systems of Indian stock exchanges and tried to simplify the procedure, achieve transparency in transactions and reduce their costs. To prevent excessive speculations and volatility in the market, it has done away with badla system, and introduced rolling settlement and trading in derivatives. All stock exchanges have been advised to set-up clearing corporation / settlement guarantee fund to ensure timely settlements. SEBI organises training programmes for intermediaries in the securities market and conferences for investor education all over the country from time to time.