Indirect Questions - Financial Market | Business Studies (BST) Class 12 - Commerce PDF Download

Ans: The directors should approach a consultant (merchant banker/issue manager) to handle a new public issue of shares rather than the stock exchange. A consultant helps with regulatory compliance (preparing the prospectus, SEBI filings), pricing and underwriting, coordinating with registrars and bankers, marketing the issue to investors, and managing allotment and listing formalities. The stock exchange's role comes later - it provides a marketplace for trading and listing after the issue, but it does not manage the issue process itself.
Different methods for raising a new issue of shares:
- Initial Public Offering (IPO): Issue of shares to the public for the first time; can be on a fixed-price basis or through book-building.
- Offer for Sale (OFS): Existing shareholders sell shares to the public through intermediaries.
- Rights Issue: Existing shareholders are offered new shares in proportion to their holdings (not a primary public offer but a method to raise fresh capital from existing investors).
- Private Placement: Shares offered to selected institutional or corporate investors (not a public offer).
- Bonus Issue: Shares issued to existing shareholders by capitalising reserves (does not raise fresh funds).
For a public fundraising aimed at modernisation, the usual routes are an IPO (fixed price or book-building) or, in some cases, a combination of IPO and institutional placements arranged by the consultant.

Ans: Capital market and money market are different. Four clear differences are:
- Maturity of Instruments: Money market deals in short-term instruments (usually up to one year) like treasury bills and commercial paper; capital market deals in long-term instruments such as equity shares and debentures.
- Purpose: Money market meets short-term working capital and liquidity needs; capital market provides long-term finance for expansion and capital formation.
- Risk and Return: Money market instruments are generally low-risk with lower returns; capital market instruments carry higher risk and potentially higher returns.
- Participants and Instruments: Money market participants include banks, RBI, and financial institutions trading in call money, T-bills, etc.; capital market involves investors, companies, stock exchanges and deals in shares, bonds and mutual funds.

Ans: Yes, SEBI acts as the watchdog of the securities market. Reasons include:
- Investor Protection: SEBI frames regulations to protect investors from fraud, mis-statements and unfair practices.
- Regulation of Intermediaries: It registers and supervises market intermediaries such as brokers, merchant bankers, registrars and depositories.
- Market Regulation and Surveillance: SEBI monitors trading to prevent market manipulation, insider trading and other malpractices.
- Developmental Role: It promotes fair practices, transparent disclosures, investor education and efficient market mechanisms (for example, dematerialisation and electronic trading). Together these powers make SEBI the regulatory watchdog ensuring orderly functioning of securities markets.

Ans: Yes, the stock exchange performs many vital functions. Four important functions are:
- Liquidity and Marketability: It enables investors to buy and sell securities easily, converting investments into cash when needed.
- Price Discovery: Continuous trading on the exchange helps discover fair market prices through supply and demand.
- Mobilisation of Savings: By offering varied investment avenues, it channels household and institutional savings into productive uses.
- Safety and Transparency: Regulated trading, disclosure requirements and surveillance protect investors and ensure orderly transactions.

Ans: Primary market contributes directly to capital formation because companies issue new securities (shares, bonds) and receive fresh funds from investors; these funds are used for expansion, new projects and productive investment, thereby increasing the economy's capital stock. Secondary market contributes indirectly: by providing liquidity and market valuation it encourages investors to buy securities knowing they can sell them; this makes investing more attractive, which raises overall savings and assists companies in raising fresh capital in the primary market. In short, the primary market supplies fresh funds; the secondary market supports that process by improving liquidity, price discovery and investor confidence.

Ans: This statement is generally true. Money market instruments (for example, treasury bills, commercial paper, call money) are short-term, highly marketable and carry low price risk, so they can be converted into cash quickly with little loss. Capital market instruments (equity, debentures) are long-term and subject to price fluctuations, so while many shares may be liquid on active exchanges, they still carry greater market and timing risk. Therefore, money market instruments are typically more liquid and safer for short-term investment needs.

Ans: The stock market does impart liquidity to investments. By providing a continuous marketplace where buyers and sellers meet, the exchange allows investors to convert securities into cash quickly. Mechanisms such as listing, market makers, organised trading platforms and transparent price quoting reduce transaction costs and uncertainty, making investment more attractive. Greater liquidity reduces investors' holding risk and thus encourages wider participation in capital markets.

Q8. "Stock market quotations contribute to better allocation of capital and promoting the habits of savings and investments". Explain.
Ans: Stock market quotations (market prices) signal the relative value and performance of companies. This price information helps investors choose where to put their funds - directing capital to firms with better prospects - and thus improves allocation of scarce resources. Visible and tradable quotations also make investment outcomes clear and accessible, encouraging households to save and invest rather than hold idle cash. In addition, transparent prices and returns build investor confidence, supporting a culture of regular saving and long-term investment.