Ramesh Singh Test: Security Market In India - 2


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QUESTION: 1

Consider the following statements about the term 'private placement'.

1. Raising capital by selling shares only to the financial institutions (FIS)

2. This is done through a process of direct negotiations

Which of these statements is/are correct?

Solution:
  • Private Placement: Raising capital by selling shares to a select group of investors, usually financial institutions (FIS) but maybe to individuals also. This is done through a process of direct negotiations (opposite to the public issue).

  • The advantage of this route is the substantial saving a share issuing company makes on marketing expenses (but the risk of shifting loyalties of the investors in this route is also the highest).

QUESTION: 2

Which of the following are correctly matched?

1. Public issue - it is open for all Indian citizens

2. Rights issue - raising capital from the existing shareholders of the company

Which of these statements is/are correct?

Solution:
  • Public Issue: A public offer is open for all Indian citizens, the most broad-based method of raising capital and the most prestigious, too (the Reliance Industries Ltd. is the biggest company of India in this category).

  • Rights Issue: Raising capital from the existing shareholders of a company, it means it is a preferential kind of issue restricted to a specific category of the public only.

QUESTION: 3

Consider the following statements.

1. Scrip Share is a share given to the existing shareholders with minimal charge

2. Sweat Share is a share given to the employees of the company - also known as bonus share

Which of these statements is/are correct?

Solution: Scrip Share is a share given to the existing shareholders without any charge. It is also known as bonus share. Sweat Share is a share given to the employees of the company without any cost.

QUESTION: 4

Which of these statements are correctly matched?

1. Badla - When the buyers want postponement of the transaction

2. Undha Badla - When the sellers want postponement of the transaction —also known as the reverse badla or backwardation

Choose from the following statements.

Solution:
  • Badla - When the buyers want postponement of the transaction.

  • Undha Badla - When the sellers want postponement of the transaction—also known as the reverse badla or backwardation.

QUESTION: 5

Consider the following statements.

1. The difference between the buying and selling prices of a share is called the spread.

2. Higher the liquidity of a share higher it's spread and vice versa.

Which of these statements is/are incorrect?

Solution: The difference between the buying and selling prices of a share is called the spread. Higher the liquidity of a share lowers its spread and vice versa.

QUESTION: 6

Consider the following statements.

1. The Employee Stock Ownership Plan (ESOP) enables a foreign company to offer its shares to shareholders overseas.

2. It was allowed in India provided that the MNC has a minimum 51 per cent holding in its Indian company.

Which of these statements is/are correct?

Solution:
  • The Employee Stock Ownership Plan (ESOP) enables a foreign company to offer its shares to employees overseas.

  • It was allowed in India(February 2005) provided that the MNC has a minimum 51 per cent holding in its Indian company.

  • Earlier permission from the RBI was required for such an option.

QUESTION: 7

What is the correct full form of OFCD context of debentures?

Solution:
  • Debentures are the debt instruments which may be issued by a listed or non-listed firm to raise funds in a security market.

  • They are of many types, viz., Redeemable, Non-redeemable, Partially Convertible and Fully Convertible.

  • In case of 'fully convertible debentures,' an option (that is why the name OFCDs, i.e., Optionally Fully Convertible Debentures) is given to the debenture-holders.

  • They may wish to convert their OFCDs into shares (after the expiry of the period fixed by the debenture issuing firm--known as "lock-in' period).

QUESTION: 8

Which of the following can be called as an underlying asset?

Solution:
  • A derivative is a product whose value is derived from the value of one or more basic variables, called bases (underlying asset, index or reference rate), in a contractual manner.

  • The underlying asset can be equity, forex, commodity or any other investment. For example, wheat farmers may wish to sell their harvest at a future date to eliminate the risk of a change in prices by that date. Such a transaction is an example of a derivative.

QUESTION: 9

Consider the following statements about Indian Depository Receipts.

1. IDR is an instrument in the form of a depository receipt created by the Indian depository in India against the underlying equity shares of the issuing company.

2. In an IDR, foreign companies would issue shares to an Indian depository, which would in turn issue depository receipts to investors in India.

3. The actual shares underlying IDRs would be held by an Overseas Custodian, which shall authorise the Indian depository to issue of IDRs

Which of these statements is/are correct?

Solution:
  • As per the definition given in the Companies (Issue of Indian Depository Receipts) Rules, 2004, IDR is an instrument in the form of a depository receipt created by the Indian depository in India against the underlying equity shares of the issuing company.

  • In an IDR, foreign companies would issue shares, to an Indian depository [say the National Security Depository Limited (NSDL)], which would in turn issue depository receipts to investors in India.

  • The actual shares underlying IDRs would be held by an Overseas Custodian, which shall authorise the Indian depository to issue IDRs.

QUESTION: 10

A derivative is a:

1. Security derived from a secured debt instrument, share or loan

2. Contract, which derives its value from the prices of underlying securities

Which of these statements is/are correct?

Solution:

Securities Contracts (Regulation) Act, 1956 [SC(R)A] defines derivative to include:

(i) A security derived from a debt instrument, share, loan whether secured or unsecured, risk instrument or contract for differences or any other form of security.

(ii) A contract, which derives its value from the prices, or index of prices, of underlying securities.