Short Answer Type Question- Resource Mobilization | Entrepreneurship Class 12 - Commerce PDF Download

Stock Market – Raising Funds

Question.1: Why are Capital Markets important for entrepreneurs ?

Capital Market may be defined as an organised mechanism meant for effective and smooth transfer of money capital from investors to the entrepreneurs.

Importance:

1. Moblise the financial resources on a nationwide scale.
2. Secure the required foreign capital and knowhow to promote economic growth.
3. Ensure effective allocation of mobilized financial resources.

Question.2: What is meant by Capital Market? Explain its types.

Capital market may be defined as an organized mechanism meant for effective and smooth transfer of money capital or financial resources from the investors to the entrepreneurs.

The two types are:

1. Primary market: It basically transfers resources from savers to the entrepreneurs who seek funds.
2. Secondary market: Deals with buying and selling of old securities.

Question.3: Give the significance of finance in an enterprise ?

The significance of finance in an enterprise is that it acts as a lubricant in the process of production. It assists in the formation of new businesses and allows businesses to take advantage of opportunities to grow and expand.

Question.4: State any six drawbacks of “Public Issue”.

Drawbacks: While there are benefits to going public, it also means additional obligations and reporting requirements such as:

1. Increasing accountability to public shareholders.
2. Need to maintain dividend and profit growth trends.
3. Becoming more vulnerable to an unwelcome takeover.
4. Need to observe and adhere strictly to the rules and regulations by governing bodies.
5. Increasing costs in complying with higher level of reporting requirements.
6. Relinquishing some control of the company following the public offering.
7. Suffering a loss of privacy as a result of media interest.    (Any Six)

Question.5: Explain the importance of stock exchange from view point of society.

1. Rapid capital formation: People get tempted to invest in securities when they study the trends of necessary prices of shares of good  companies. This habit leads to investment of savings in corporate and government securities. The income from these securities may further be invested in buying more securities. This flow of funds leads to rapid capital formation.
2. Economic development: Through easy funds mobilization the boosted production fetches more capital, enhancing economic development.
3. National projects: As stock exchange promotes the capital formation rate, the projects which brings National Prosperity can be easily undertaken.

Question.6: State any two points of importance of Stock–Exchange from the view point of entrepreneurs.

1. Dissemination of useful information.
2. Ready Market.
3. Investors interests protected.
4. Genuine guidance about the securities listed.
5. Barriers of distance removed.
6. Knowledge of profit and loss on investments.

Question.7: State six points of importance of Stock Exchange from the investors’ point of view.
OR

State any three points of importance of stock exchange from the viewpoint of investors.
OR
“For the smooth and orderly functioning of the corporate sector in a free market economy, stock exchanges are indispensable because of different roles played by them for different groups”. Explain the importance of stock exchange to investors in the light of this statement.

Following are the importance of stock exchange from the investors point of view:

1. They publish useful information regarding price lists, quotations, etc., of securities through newspapers and journals.
2.  It provides a ready market for converting shares into cash.
3. Stock exchanges formulate rules and regulations so that members may not exploit
4. the investors.
5. The investors can safely depend upon the information provided by the stock exchanges.
6. They remove the barriers of distance with regard to securities listed in a stock exchange.
7. Stock exchange helps the investor in calculating profit or loss on investments.

Question.8: Define Capital Market.

It is an organized mechanism meant for effective and smooth transfer of money capital or financial resources from the inventory to the entrepreneur.

Question.9: This is a market where there is an option to sell and buy new and old financial instruments. It facilitates the transferring of financial resources from surplus units to deficit units.
(i) Identify and define the market.
(ii) Name the function of transferring of financial resources from surplus units to deficit units.

(i) Capital Market : A capital market may be defined as an organized mechanism meant for effective and smooth transfer of money capital or financial resources from the investors to the entrepreneurs. Here, productive capital is raised and made available for industrial purposes.

(ii) Financial Intermediation.

Question.10: State any four powers of the Securities and Exchange Board of India.

For the discharge of its functions efficiently, SEBI has been vested with the following powers:

1. To approve by-laws of stock exchanges, SEBI
2. To enquire the stock exchange to amend their by-laws.
3. Inspect the books of accounts and call for periodical returns from recognized stock exchanges.
4. Inspect the books of accounts of financial intermediaries.
5. Compel certain companies to list their shares in one or more stocks exchanges.
6. Levy fees and other charges on the intermediaries for performing its functions.
7. Grant license to any person for the purpose of dealing in certain areas.
8. Delegate powers exercisable by it.
9. Prosecute and judge directly the violation of certain provisions of the Companies Act.
10. Power to impose monetary penalties.

Question.11: State any three features of Stock Exchange.

Features of Stock Exchange:

(i) It is an association of persons which may be registered or unregistered.

(ii) It requires recognition from the Central Government.

(iii) Stock exchange is a market, where securities of corporate bodies, government and semi-government bodies are bought and sold.

(iv) It deals in second hand securities.

(v) It regulates trade in securities.

(vi) It allows dealings only in listed securities.

(vii) Transactions can be effected only through members.

(viii) Working as per SEBI guidelines.

(ix) It has a specific location.

(x) They are the financial barometers and development indicators of national economy of the country.

Question.12: Manika Ltd. an Indian company registered under the Companies Act, 1956 started functioning in the year 2000. The company got a banking license in 2015 and the process of conversion from a non-banking financial body into a bank started immediately. It came in news that two of its directors were charged with insider trading and misappropriation of the funds of the company. It severely affected the share prices of the company and the securities market. Securities Exchange Board of India ordered for an inquiry and on being the charges proved imposed heavy monetary penalty of ₹5 crore on the company.
(a) State the function being performed by SEBI.
(b) Where can Manika Ltd. appeal against SEBI’s decision? What will be the way out if the appeal is not granted?

(a) Quasi-executive and Quasi-Judicial.

(b) Securities Appellate Tribunal and Supreme court.

Question.13: Explain briefly the three functions of SEBI rolled into one body.

SEBI has three functions rolled into one body: Quasi-legislative, Quasi-judicial and Quasi executive.
It drafts regulations in its legislative capacity, it conducts investigation and enforcement action in its executive function and it passes an order in its judicial capacity.

Question.14: How stock options lead to enable employees to become shareholders and share the profits of the company?

Stock options lead to enable employees become shareholders and share the profits of the company as in this method shares are offered to employees at a price lower than the market price.

Question.15: Explain the importance of stock exchange from the view point of companies.

(i) Recognition: The market values of companies’ shares are published in important dailies. This enhances the reputation of good companies/entrepreneurs.

(ii) Wide market: The securities of some companies are listed in some stock exchanges. The Market for the securities of such companies is considerably widened. Thus, larger amounts of capital may be raised from different types of investors.

(iii) Higher share values: People have a tendency to buy shares that have some premium value. Demand of such shares increases. This leads to further increase in the price of such shares

Question.16: State any three functions of a stock exchange.

Functions of stock exchange are:

1. Continuous and ready market for securities: It provides ready and continuous outlet for buying and selling of securities.
2. Facilitates evaluation of securities: It publishes price quotation of the shares of the companies that have been listed with them after thorough analysis of demand and supply position.
3. Checks on brokers: Stock exchanges control the activities of brokers and protect the investors from being deceived.
4. Provides safety and security: Activities of the stock exchange are controlled by the provisions of the Securities Control (Regulation) Act. Fraudulent practices stand checked effectively ensuring safety, security and justice in dealings.
5. Regulates company management: Listed companies have to comply with rules and regulations of concerned stock exchange.
6. Intensifying capital formation: Stock exchange accelerates the process of capital

   formation through creating the habit of saving, investing and risk taking among the

   investing class by converting their savings into profitable, safe investments.

7. Facilitates rising of new capital: Because of stock exchange the need for more capital by the existing companies is easily met out.

8. Facilitates public borrowing: It enables government to raise public debt easily and
   quickly.

9. Facilitates healthy speculation: Excessive speculation is undesirable as it is dangerous  to investors and the growth of corporate sector.

10. Serves as economic barometer: Stock exchange indicates the state of health of companies and the national economy.

11. Facilitates bank lending: Banks offer loans to customers against corporate securities.

Question.17: What do you understand by pro-rata allotment of securities ?

Pro-rata allotment of securities means giving existing shareholders a right to a certain number of shares in proportion to the shares they are holding. In case they are not ready to subscribe, they can renounce the same in favour of another person.

Angel Investors and Venture Capital Funds

Question.1: State the benefits and drawbacks of angel investors.

1. Benefits: The Angel Investors provide cash to kick the enterprise to next stage or to start up the enterprise. They also provide mentoring service with their experiences and since their money is involved they will already seek success of the business. 
2. Drawback: There is a loss of 10 to 50% control over own business as angel investors provide cash against equity and in future there is a chance of being out from the self-created company.

Question.2: Nishtha, a professionally qualified entrepreneur decided to start ‘kids furniture’ a website of designer furniture. It was relatively an untried area involving high risk. She lacked the necessary funds and experience to give shape to her idea. She knew that if she failed to get investment from the public her idea would die down before it is tried. So, she made a detailed business plan and presented her idea to ‘FiFa Finance Ltd’ a company run by a group of professional investors. They were impressed by her business plan and decided to fund her start-up in exchange for an equity stake in the business.

(i) Identify the source of finance used by Nishtha.

(ii) Also explain how this source of finance is different from raising debt.

1. Source of finance used by Nishtha is Venture Capital. Venture Capital is a type of private equity capital provided as seed funding to early-stage, high potential, high risk growth up companies/entrepreneurs who lack the necessary experience and funds to give shape to their ideas.
2. This source is different from debts in following ways:
   • It is a permanent capital in business where as debt capital is to be repaid on maturity.
   • To pay regular dividend of fixed amount is not compulsory whereas in debt, a fixed rate of interest has to be paid regularly irrespective of profits or losses.

Question.3: Give the meaning of Affiliated Angel Investors. Name the parties who act as affiliated angels for the entrepreneur.

An affiliated angel is someone who has some sort of contact with entrepreneurial firms and are familiar with entrepreneur or the business.
Affiliated Angels can be any one from the following:

1. Professional
2. Business associates like vendors, employees, competitors, etc.

Question.4: Angel investor and venture capital are two sources of raising finance for an entrepreneur. Explain the concept of both the sources stating one distinguishing feature of each.

1. Angel investor: It an affluent individual who provides capital for a business start-ups and early stage companies using a high-risk, high return matrix usually in exchange for convertible debt or ownership equity.
2. Venture capital: It a type of a private equity capital provided as seed funding to early stage, high potential, high risk, growth up companies/entrepreneurs.
3. Distinguishing feature: Angel investors participate in the management of the business but venture capitalists do not take part in the management of the business.

Question.5: State any two points which a venture capital must consider before extending venture capital to an entrepreneur.

1. Due diligence to investigate the merits of a project or size and growth characteristic of venture market, technical feasibility, etc.
2. Cost of venture capital : The venture funds investor generally demands larger stake in equity in earlier stage than later stage.

Question.6: What is meant by seed capital financing? What the entrepreneur has to do to convince the investor to get money ?

It refers to the capital required by an entrepreneur for conducting research at pre commercialization stage.

Question.7: Ganga Dhar was working as the production manager in a German company. The company was producing remote operated high-end kitchen equipments. He resigned from his job and returned to his hometown, Patna. In Patna, he met his old friend Aditya, who had been managing his factory producing steel utensils with old technology. Ganga Dhar encouraged Aditya for the production of high-end kitchen equipments. He also promised to help Aditya by providing funds and expertise so that the production unit run by Aditya can develop into a big production house and its investors may get high returns on investment.

Identify the kind of ‘source of capital’ provided by Ganga Dhar to Aditya and explain the features of the same.
OR
Bhushan and Vinay were pursuing Electrical Engineering from a prestigious engineering college. During their third year they developed a solar LED bulb which can be used indoors. The bulb had a small panel which had to be charged at a stretch for 10 hours in the sun and it would last for 200 hours of usage. The idea was risky as there was a possibility that the market might not accept such a product, but if they do so, then, there would be a revolution in the power industry as it would lead to saving of power in every household. The prototype was made but to manufacture and distribute the same, they required around `5 crores. Both Bhushan and Vinay approached some affluent individuals who were ready to invest in their business in exchange for a convertible debt. Identify the type of investors and state any two features of the same.

Angel investors

Features:

1. They are current or retired executives, business owners or high net worth individuals who have the knowledge, experience and funds.
2. They bear extremely high risk and expect a very high return.
3. They provide proactive advice, guide about industry connections and mentor start-ups in its early days.
4. Their objective is to create great companies by providing value creation.
5. They have a sharp inclination to keep themselves abreast with current developments in a particular business arena.

Question.8: Enlist some venture capital fund suppliers.

1. Subsidiaries of large financial institutions and banks.
2. Private independent specialised firms

Question.9: Raghav is a very creative person and has always been working on innovating products and services that can make living healthy and hygienic. He developed a design of an air conditioner with an inbuilt air purifier as well. Since he did not get any financial support from any bank, he approached Nirvana Vent (VC), a venture capitalist firm. Though VC liked the idea but it refused to help Raghav at the seeding stage and asked him to come again if needed during second round financing. Why was seed capital not given by VC when it was ready to fund the second round financing?

Venture capitalists are typically very selective in deciding what to invest in and as a rule of thumb:

1. They may invest in one in four hundred opportunities presented to it,
2. Looks for the extremely rare, yet sought after qualities, such as:
   (a) innovative technology,
   (b) potential for rapid growth,
   (c) a well developed business model
   (d) an impressive management team.
3. Looks for an “exit” in the time frame of typically 3-7 years.
4. Is inclined towards ventures with exceptionally high growth potential.
   The VC do not fund for seed capital as its result and return both are not sure.