NCERT Notes for Class 12 business studies Chapter 10 Financial Markets

Class 12 business studies Chapter 10 Financial Markets

Table of Contents

NCERT Notes for Class 12 business studies Chapter 10 Financial Markets, (business studies) exam are Students are taught thru NCERT books in some state boards and CBSE Schools.  As the chapter involves an end, there is an exercise provided to assist students to prepare for evaluation.  Students need to clear up those exercises very well because the questions inside the very last asked from those.

Sometimes, students get stuck inside the exercises and are not able to clear up all of the questions.  To assist students, solve all of the questions, and maintain their studies without a doubt, we have provided step-by-step NCERT Notes for the students for all classes.  These answers will similarly help students in scoring better marks with the assist of properly illustrated Notes as a way to similarly assist the students and answer the questions right.

NCERT Notes for Class 12 business studies Chapter 10 Financial Markets

Class 12 business studies Chapter 10 Financial Markets

Business needs finance for both fixed and working capital requirements. Business can raise these funds from various sources and in different ways though financial markets. Financial markets make possible the transfer of money from the severs to the entrepreneurial borrowers. An economic system consists of two sectors, viz, households and business firms. Households save funds and business firms invest funds. Financial market acts as an intermediary which makes possible the transfer of funds from the savers to the investors. They actually bring together the lenders of funds and borrowers of funds.

Business Firms

Financial market

House hold savings

A financial market is a market for the creation and exchange of financial assets. Financial market offers opportunities for business firms to issue initial shares, debentures etc. and thus create financial assets. They also facilitate their exchange or the purchase and sale of existing financial assets like equity shares, debentures, bonds etc. Thus they create financial assets and also ensure their liquidity. Financial markets exist wherever a financial transaction occurs. Financial markets consists of two major segments-(1) Capital Market (the market for medium and long term funds) and (2) Money market (the market for short term funds)

Financial markets act as an intermediary which makes possible the transfer of funds from the savers to investors. In doing so, it performs an allocation function. Allocation function of financial market refers to allocating funds available for investment into their most productive investment opportunity. It is also known as ‘Financial intermediation’.

 

Functions of financial market

Following four important functions are performed by the financial market.

Mobilising and channelizing the savings into the most productive uses

A financial market facilitates transfer of savings from people (savers) to investors. Financial market offers different investment avenues to savers and help to channelise their savings into most productive use.

Facilitating price discovery

Financial market helps to create of financial assets like shares debentures etc.and also helps in establishing the prices of financial assets. The interaction between the suppliers of funds and business firms (investors) determine the price of financial assets.

Providing liquidity to financial asset

Financial market provides liquidity to financial assets by facilitate easy purchase and sale of financial assets. It helps the investors to convert their securities into cash.

Reducing the cost of transaction

The valuable information about the securities is provided through financial market. It is very helpful for buyers and sellers of financial securities and they can save their time, efforts and money in their dealings. They provide common platform, where buyers and sellers can meet for fulfillment of their individual needs.

Types of financial markets

Financial markets are classified on the basis of maturity of financial instruments traded in them. They are:

Money market

    1. Capital market
  1. Money Market

Money market is a market for short term funds. It deals in monetary assets whose maturity period is up to one year. Treasury bills, commercial paper, call money, certificate of deposits etc.are important financial instruments in money market. RBI, commercial banks, Non-Banking Finance Companies (NBFC), State Goverments, large corporate houses, Mutual Funds etc are the main participants in the Money market. It enables the raising of short-term funds for meeting the temporary shortages of cash and the temporary deployment of excess funds for earning returns. It is a market where low risks, unsecured and short term debt instruments that are highly liquid are issued. Money market instruments yield only a less return.

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Money Market Instruments

Important money market instruments are:

Call Money

Call money is short term finance repayable on demand; with a maturity of one day to 15 days. It is a market for extremely short period loans. The day to day surplus funds, mostly of banks are usually trades as call money. Banks may borrow money from each other to maintain the minimum cash balance, called Cash reserve ratio (CRR), as required by RBI. The interest rate paid for call money loans is known as the call rate. This market is also known as “over the telephone market”

Treasury Bills (T- Bills):-

These Bills are issued by Reserve Bank of India (RBI) on behalf of the Government of India to meet its short term requirements of funds. These are short term credit instruments for a period of less than one year. It is presently issued in three tenors, namely, 91 day, 182 day and 364 day. Treasury bills are negotiable instruments and freely transferable. These are sold to banks and public. Treasury bills are available for a minimum amount of Rs. 25000 and in multiple thereof. It does not carry interest. Treasury bills are also known as ‘Zero Couppon Bonds’ since they do not pay any interest but the issue price is less than their face value and repaid at par. This difference is the interest receivable on them.

For example, a 91 day Treasury bill of ₹100/- (face value) may be issued at say ₹ 98.20, that is, at a discount of say, ₹1.80 and would be redeemed at the face value of ₹100/-. The return to the investors is the difference between the maturity value or the face value (that is ₹100) and the issue price (that is Rs.98.20)

Commercial Paper

Commercial Paper or CP is defined as a short-term, unsecured money market instrument, issued as a promissory note by big business firms having excellent credit ratings. As the instrument is not backed by collateral, only large firms with considerable financial strength are authorized to issue the instrument. It has a maturity period of 15 days to one year. It is sold at a discount and redeemed at par. Interest rate on commercial paper usually be lower than the market rate. The original purpose of commercial paper was to provide short term funds for seasonal and working capital funds. Some company uses this instrument for the purposes such as bridge financing. CP is available for a minimum amount of Rs. 5,00,000 lakh or multiples thereof.

Bridge financing

Suppose a company needs long term finance to acquire another company. In order to raise the long term funds in the capital market (through issue of shares and debentures) the company will have to incur floatation cost (cost of public issue like underwriting commission,brokerage,commission,cost of printing and advertisement etc).Funds raised through commercial paper are used to meet the floatation costs. This is known as bridge financing.

Certificate of Deposit (CD)

A certificate of deposit (CD) is an unsecured, negotiable and short term money market instrument issued by commercial banks or selected financial institutions against the money that is deposited. The period of these deposits ranges between 91 days to one year .It is suitable when the deposit growth of banks is slow but the demand for credit is high .CP is available for a minimum amount of Rs. 1, 00,000 lakh or multiples thereof. The major difference between CD’s and Fixed deposits is that CD’s are transferable and tradable and FD’s are not.

Commercial bill/Trade bill/Bill of Exchange

A commercial bill is a bill of exchange used to finance the working capital requirements of business firms. It is a short term negotiable instrument, which is used to finance the credit sales of the firm. Trade bill is issued by the seller (drawer) on the buyer (drawee) for the value of goods delivered by him. These bills are of 30 days, 60 days or 90 days maturity. The trader who has received a bill can discount it with his bankers. When a trade bill is accepted by a commercial bank it is known as a commercial bill.

Capital Market

Capital market refers to facilities and institutional arrangements through which long term funds; both equity and debt are raised and invested. The maturity period of these securities are more than one year. It consists of a series of channels like stock exchanges, commercial banks, development banks etc. through which savings of the community are made available for industrial and commercial enterprises.

Joint stock companies, stock exchanges, development banks, commercial banks, foreign investors and retail investors are the participants of capital market. Capital market securities are riskier both with respect to returns and principal payment.

A strong capital market is essential for the economic and industrial development of a nation. The capital market can be divided into parts:1) Primary Market 2.)Secondary Market

Difference between Capital Market and Money Market

Basis

Money Market

Capital Market

Meaning

Money Market is the market for

short term funds

Capital Market is the market for long

and medium term funds.

Participants

RBI,commercial banks, NBFC,State Goverments,Large Corporate Houses, Mutual

Funds,etc

Joint stock companies, stock exchanges, development banks, commercial banks, foreign investors

and retail investors

Instruments traded

Treasury bills, Commercial paper, Call money, Certificate of deposits,

Commercial bill

Equity shares, preference shares,debentures,bonds,etc.

Duration of securities traded

Deals in short term securities

having a maximum maturity period of one year

Deals in medium and long term

securities which are for more than one year

Basis

Money Market

Capital Market

Return

Low risk involved leads to less

return

High risk involved leads to high

return

Risk

Low

High

Types of Capital Market

The capital market can be divided into two segment-Primary market and secondary market. Primary market create financial asset by selling shares, debentures, bonds etc. Secondary market provides liquidity to those financial assets. Thus they are interdependent or complement to each other.

Primary market/ New issue market

It is the market, wherein funds are raised through shares, debentures and bonds by industrial enterprises. This is the market which deals in new securities. Here the buyers obtain newly issued shares debentures, bonds etc.Therefore; it is also referred to as New Issue Market. Here company issue securities directly to the investors. Company obtains money and in turn issues shares. Issue mode of this type is called primary issue. Funds raised from primary market are used by companies for setting up new business or for expanding or modernizing existing business.

Capital market is an organized market consisting of suppliers and users of funds and institutions which assist them. Suppliers of funds include investing public, banks, financial institutions, mutual funds, etc.Users of funds are joint stock companies, government agencies etc.Those who are assisting the suppliers and users of funds are underwriters, share brokers, stock exchanges, merchant bankers etc.

Methods of issuing securities in the in Primary Market/ Methods of Floatation in Primary Market

There are various methods of floating new issues in the primary market.

Public issue through prospectus

This is the most popular method of raising funds by public Limited companies in the primary market. Under this method, the company invites the general public to subscribe its shares or debentures through issue of ‘prospectus’. The ‘prospectus’ contains details regarding the purpose of raising funds, past financial performance of the company, if any, back grounds and experience of promoters etc.These details help the public to understand and evaluate the earnings potential and risk in the proposed investment. This method requires bankers, brokers and underwriters to work as intermediaries. It is an expensive method.

Offer for sale

Under this method new securities are not offered directly to the public. Initially the entire lot of securities is sold to an intermediary like issue houses or stock brokers at a fixed price. The intermediary then resells these shares to the investing public at a higher price. Thus the issuing company is saved from the tedious process involved in making public issue.

Private placement

Private placement is the allotment of securities by a company to institutional investors and some selected individuals. These selected clients may be LIC,UTI,FII’s etc.It help to raise capital more quickly than a public issue. Companies which cannot afford a public issue can choose private placement.

e-IPOs

It refers to issuing securities through on-line system of stock exchange.SEBI registered brokers have to be appointed for the purpose of accepting applications and placing orders with the company. The issuing company should also appoint a registrar to the issue having electronic connectivity with the exchang.The issuer company can apply for listing of its securities on any exchange other than the exchange through which it has offered for its securities.

Rights Issue

This is a privilege given to existing shareholders to subscribe to a new issue of shares according to the terms and conditions of the company. The shareholders are offered the ‘right’ to buy new shares in proportion to the number of shares they already possess.

Secondary Market/Stock market

Secondary market is the market for purchase and sale of existing securities. Secondary market merely transfers existing securities between buyers and sellers. The company is not involved in it. Secondary market provides liquidity to existing securities and thereby indirectly promotes capital formation. Here prices are determined by demand and supply of the securities.

Points of difference

Primary Market

Secondary Market

Securities traded

It deals with new securities being issued for the first time

It deals with existing securities

Exchange of securities

Securities are exchanged between company and the investors

Securities are exchanged between the investors

Determination of price

Price of the securities is

determined by the management of the company

Prices are determined by the demand and supply of securities

Capital formation

The flow of fund from savers to

investors, it directly promotes capital formation

It enhances liquidity to existing

securities and thereby indirectly promotes capital formation

Meaning of stock exchange

A stock exchange is a highly organized financial market where existing shares, debentures and bonds can be bought or sold. Its main function is to create a link between the buyers and sellers of securities so that investments can change hands in the quickest, cheapest and fairest manner. It is an organized market where ‘second hand’ securities are bought and sold for investment and speculation. Therefore stock exchange is known as secondary market. These stock exchanges are located in 23 important cities in India.

Functions of a Stock Exchange

Main functions performed by a stock exchange are as follows:

Providing liquidity and marketability to existing securities

Main function of a stock exchange is to provide a ready and continuous market for the sale and purchase of existing securities. This provides both liquidity and easy marketability to the existing securities in the market.

Determines Price of securities

It helps in determining the price of securities through the forces of demand and supply. Under the existing on line screen based electronic trading system, computer screens display constant information on prices of securities.

Safety of transactions

The membership and dealings of a stock exchange are regulated by well defined existing legal frame work. Trading is run through SEBI registered stock brokers only. This ensures safety of transactions.

Enhance economic growth of a country

A stock exchange is a market in which existing securities are bought and sold. It provides liquidity to existing securities. It will attract more investors in capital market and thereby more companies can raise adequate capital through issue of shares and debentures.

Provides scope for speculation

The stock exchange provides scope for speculation in a restricted and controlled manner. A certain degree of healthy speculation is necessary to ensure liquidity and price continuity in the stock market.

Creation of market place for existing securities

Stock exchange creates a location for existing securities, where buyers and sellers of securities are assembled to deal with shares and securities.

Capital formation

An active secondary market is essential for the success of a primary market. Through primary market big business firms raise their capital.

Screen Based Trading System(SBTS) in NSE/BSE

Now a day’s buying and selling of securities (Shares and debentures) are executed through an on-line, screen based electronic trading system. There is transparency in trading and we can

see the execution of our order lively in broker’s computer terminal or in our mobile. A stock exchange has its main computer system with many terminals spread across the country. Share brokers are members of the stock exchange. Trading has shifted from the stock market floor to the broker’s office. Every broker has a computer terminal that is connected to the main stock exchange. In this screen based trading, a member logs on to the site and any information about shares he wishes to buy or sell and the price is fed into the computer. Here orders are match on the basis of time and price priorit.The software is so designed that the transaction will be executed when the matching order is found from a counter party. The whole transaction is carried on the computer system with both the parties being able to see the prices of all shares going up and down at all times during the time that the business is transacted and during business hours of stock exchange. The computer in the broker office is constantly matching the orders at the best bid and offer price. Those that are not matched remain on screen and are open for future matching during the business hours of the day,i.e 9.15 AM to 3.30 PM.

[There was a time when in the open outcry system, securities were bought and sold on the floor of the stock exchange. Under this auction system, deals were struck among brokers, prices were shouted out and the shares sold to the highest bidder.]

Advantages of electronic trading system/screen based trading system

Electronic trading system has certain advantages:

It ensures transparency:

Electronic trading system allows participants to see the prices of all securities in the market while business being transacted. It ensures transparency.

Increases efficiency of information

Computer screens in brokers offices display information on share prices, historical prices, capital market developments that influences share prices etc.This increases the efficiency of information.

Increases efficiency of Operation

Electronic trading system reduces time, cost and risk of error involved in trading of securities. It increases efficiency of operation

Wide coverage improve liquidity

Screen based trading allows people from India and abroad to participate in stock market operations like purchase and sale securities etc.

A single trading platform

Trade takes place in all the trading centres at the same time. Thus all the trading centres spread across the world have been brought into a single platform, i.e, the stock exchange’s server computer.

Steps in Trading and Settlement Procedures

(Steps involved in Screen Based Trading for buying and selling securities)

Selection of a broker and open a trading account with him

The first step is to select a broker and open a trading account with the broker. In stock exchange a person cannot purchase or sell securities directly, it is possible only with the help of an intermediary known as share broker. To open a trading account with share broker a person has to submit the following details

  1. PAN card number
  2. Date of birth and address proof
  3. Bank Account Details
  4. Depository account details
  5. Educational qualification etc.

The broker then opens a trading account in the name of the investor.

Opening Demat account

Demat account is an account that is used to hold shares and securities in electronic format .The investor has to open a ‘Demat’ account with Depository Participant (DP) for holding and transferring securities in the demat form. He should also open a bank account for cash transactions in the securities market.

Placing the order with broker to buy/sell securities

The investor then places an order with the broker to buy or sell shares. Clear instruction has to be given about the number of shares and the price at which the shares should be bought or sold.

Executing the order

The computer in the broker office is constantly matching the orders at the best bid and offer price. When price mentioned arrived in the market, the order will be executed and it will be communicated to the broker’s terminal. After the trade has been executed, the broker issues a ‘Contract Note ‘within 24 hours.

‘Contract Note’ contains details of the number of shares bought or sold, the price, the date and time of deal and the brokerage charges This is an important document as it is legally enforceable and helps to settle disputes between the investor and the broker.

Settlement

In this stage the investor has to deliver the shares sold or he has to pay cash for the shares purchased. This should be done immediately after receiving the contract note or before the day when the broker shall make payment or delivery of shares to the exchange. This is called pay in day.

Cash is paid or securities are delivered on pay in day, which is before the T+2 Day as the deal has to be settled and finalized on the T+2 Day. On the T+2 Day, the exchange will deliver the share or make payment to the other broker. This is called the payout day. The broker then has to make payment to the investor (Client) within 24 hours of the payout day.

The broker can make delivery of shares in demat form directly to the investor’s demat account

NSE( National Stock Exchange)

The National Stock Exchange of India Limited (NSE) is the leading stock exchange of India, located at Mumbai . The NSE was established in 1992 and started trading on November 3, 1994.It is the first electronic exchange in the country. NSE was the first exchange in the country to provide a modern, fully automated screen-based electronic trading system which offered easy trading facility to the investors spread across the country. it is the world’s 12th-largest stock exchange.NSE was set up by a group of leading Indian financial institutions including Life Insurance Corporation of India, State Bank of India, IFCI Limited IDFC Limited and Stock Holding Corporation of India Limited. Nifty 50 is the flagship index of NSE. The settlement cycle on NSE is T+2 day , w.e.f. 1 April 2003.

Important features of NSE

Nationwide coverage

It covers all parts of the country unlike the regional exchange.

No Trading Floor

It has no trading floor. Trading in securities are carried out through network of computers of NSE brokers.

Screen based trading

All transactions are electronically conducted

Uniform prices

Traders wherever they may be, can buy and sell securities at uniform prices.

Own Index

NSE has its own index called NIFTY. It is a dependable indicator of the direction of trading on equities on any particular day.

Transparency

Since NSE is screen based, investors can verify transactions occurred and ascertain the price at which securities are bought or sold. It ensures fair dealings.

Segments

There are three segments of market-Equities Market, Derivative Market and Wholesale Debt Market

Objectives of NSE

NSE was set up with the objectives of:

  1. Establishing a nationwide trading facility for all types of securities;
  2. Ensuring equal access to investors all over the country through an appropriate communication network.
  3. Providing a fair, efficient and transparent securities market using electronic trading system.
  4. Enabling shorter settlement cycles and book entry settlements.
  5. Meeting the international benchmarks and standards.

Market Segments and Products in NSE

NSE provides a trading platform for of all types of securities for investors under one roof – Equity, Corporate Debt, Central and State Government Securities, T-Bills, Commercial Paper (CPs), Certificate of Deposits (CDs), Warrants, Mutual Funds (MFs) units, Derivatives like Index Futures, Index Options, Stock Futures, Stock Options etc., which makes it one of the few exchanges in the world providing trading facility for all types of securities instruments on a single exchange.

NSE provides trading in 3 different segments viz.,

    1. Capital Market (CM) segment
    2. Futures & Options (F&O) segment.
    3. Wholesale Debt Market (WDM) segment

The Capital Market segment

Under this segment NSE deals with equity shares, debentures, preference shares etc.

Futures & Options segment

Futures & Options segment of NSE provides trading in derivatives instruments like Index Futures, Index Options, Stock Options, Stock Futures etc.

Wholesale Debt Market (WDM) segment

The Wholesale Debt Market segment provides the trading platform for trading of a wide range of debt securities which includes State and Central Government securities, T-Bills, PSU Bonds, Corporate debentures, CPs, CDs etc.

BSE (Bombay Stock Exchange)

The Bombay Stock Exchange (BSE) is Asia’s oldest stock exchange. Based in Mumbai,.BSE was established in 1875.Shares of more than 5,000 companies are traded on BSE. Its benchmark index, the Sensitive Index (Sensex) was launched in 1986. Sensex is made up of 30 of the most actively traded stocks in the market. In 1995, the BSE launched its fully automated trading platform called BSE On-Line Trading system (BOLT) which fully replaced the open outcry system. In 2005, the Exchange changed from being simply an association of brokers to become a corporate entity.

Definition of OTCEI

The OTC Exchange Of India was founded in 1990.Over The Counter Exchange of India (OTCEI) can be defined as a stock exchange without a proper trading floor. The OTCEI was started with the objective of providing a market for the smaller companies that could not afford the listing fees of the large exchanges and did not fulfill minimum requirements for listing.

Dematerialisastion

Dematerialisation is the process of converting physical shares into electronic format. An investor who wants to dematerialise his shares needs to open a demat account with Depository Participant (DP). Investor surrenders his physical shares and in turn gets electronic shares in his demat account . It helps in reducing the paper work involved in trade and reduces the risk associated with physical shares such as damaged, theft, delay in delivery due to signature miss match and subsequent misuse of the certificates or fake securities.Depository is the body which is responsible for storing and maintaining investor’s securities in demat or electronic format. . Depository interface with the investors through their agents called Depository participants (DPs). Dematerialisation was introduced in 1996. Now all IPOs are issued in dematerialization form and more than 99% of turnover is settled by delivery in the demat form.

In India there are two depositories i.e. NSDL (National Securities Depositories Ltd) and CDSL (Central Depository Services Ltd). NSDL was promoted by IDBI, UTI, and the National Stock Exchange.CDSL was promoted by the Bombay Stock Exchange and the Bank of India. NSDL is the first Depository in India. Examples for DP-Geojit Securities,Karvy Stock Brokers,Hedge Equities etc

Dematerialisation Process

Dematerialisation is the process of converting physical shares into electronic format .This involves a number of steps:

  1. Investors who want to convert their physical share to demat form, need to fill Demat Request Form (DRF), and submit the same along with physical shares to Depository through DP.
  2. DP informs the Depository about the request
  3. DP submits the physical certificate to the Registrar of issuing company.
  4. Registrar communicates with Depositort to confirm the request.
  5. Dematerialisation of the certificates is done by the Registrar.
  6. Accounts are updated by the Registrar and the depository is informed about the completion of dematerialization.
  7. Accounts are updated by the Registrar and DP is informed about the same.
  8. Demat account of investor is updated by DP.Dematerialisation process completed.

Demat Conversion

Now a days most of the trading in shares takes place in demat format, but there are few investors who still hold shares in paper format. You cannot deal shares in paper (material) form now, so you need to dematerialise them first. In order to dematerialise physical/paper shares,. DRF is available with the DP and you simply need to raise a request for demat conversion with the DP

Distinguish between bank and depository

Bank

Depository

Holds funds in an account

Holds securities in an account

Transfers funds between accounts on the instruction of the account holder

Transfers securities between accounts on the instruction of the BO account holder

Facilitates transfer without having to handle money

Facilitates transfer of ownership without having to handle securities

Facilitates safekeeping of money

Facilitates safekeeping of securities

Parties involved in Depository System-Depository,Depository Participant(DP),Investor Rematerialization

Rematerialization is the process of converting securities held in a electronic form in a demat account in to paper form i.e. physical certificates.

Securities Exchange Board of India (SEBI)

Securities Exchange Board of India (SEBI) was set up in 1988 to regulate the functions of securities market. SEBI promotes orderly and healthy development in the stock market. The main objective of SEBI is to facilitate the growth and development of the capital markets and to ensure that the interests of investors are protected.SEBI is actually the watch dog to observe the activities in the securities market and controlling them. SEBI is a body corporate having a separate legal existence and perpetual succession.

 

SEBI-Watch Dog of Securities Market

Reasons for Establishment of SEBI:

With the growth in the dealings of stock markets, lot of malpractices also started in stock markets such as price rigging, ‘unofficial premium on new issue, and delay in delivery of shares, violation of rules and regulations of stock exchange and listing requirements. Due to these malpractices the customers started losing confidence and faith in the stock exchange. So government of India decided to set up an agency or regulatory body known as Securities Exchange Board of India (SEBI).

Purpose and Role of SEBI:

SEBI was set up with the main purpose of keeping a check on malpractices and protect the interest of investors. It was set up to meet the needs of three groups.

Issuers

For issuers, it provides a market place in which they can raise finance fairly and easily.

Investors

For investors, it provides protection of their rights and supply of accurate and correct information on a continuous basis.

Intermediaries

It provides competitive and professional market with adequate and efficient infrastructure so that they are able to render better service to the investors and issuers.

Objectives of SEBI

The overall objective of SEBI is to protect the interest of investors and to promote the development of , and regulate securities market.The objectives of SEBI are:

  1. To regulate the activities of stock exchange
  2. To protect the rights of investors and ensuring safety to their investments.
  3. To prevent fraudulent and malpractices by applying statutory regulations.
  4. To regulate and develop a code of conduct for intermediaries such as brokers, underwriters,etc.

Functions of SEBI

The SEBI performs functions to meet its objectives. These are:

  • Protective Function
  • Development Function
  • Regulatory function

Protective Function

These functions are performed by SEBI to protect the interest of investor and provide safety to investment. As protective functions SEBI performs the following functions:

It checks price rigging

Price rigging refers to manipulating prices of securities with the main objective of inflating or depressing the market price of securities.SEBI prohibits this practice because this can cheat the investors.

Prohibits insider trading

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Controlling insider trading and imposing penalties for such practices.

Insider Trading: Any person who is connected with a company such as directors, promoters, workers etc are called

 

Insiders. Insiders may get sensitive information which affects the prices of the securities. Insider can use this information for their personal benefits or make a profit from it; such process is known as Insider Trading.

 
  

Example Insider Trading– Managers or Directors of a company may know that company will issue Bonus shares to its shareholders at a particular time and they purchase shares from market to make a profit with bonus issue.

SEBI prohibits fraudulent and Unfair Trade Practices:

SEBI always restricts the companies which make misleading statements which are likely to induce the sale or purchase of securities by any other person.

Educate Investors

SEBI educates investors by conducting online and offline seminars that help investors to get insights on the financial market and money management.

Issues Guidelines

SEBI issues guidelines to protect the interest of investors.SEBI should enforce the laws for stock exchanges to follow.

Development Functions:

Under development categories following functions are performed by SEBI:

Training to intermediaries

SEBI promotes training of intermediaries of the securities market.

Conducting Research

It conducts research and publishes information useful to all market participants.

Stock market Reforms

It undertakes measures to develop the capital markets by adapting flexible approach like

internet trading through registered stock brokers, made under writing as optional etc. Allow private Mutual Funds for the benefit of small investors to provide investment avenues managed by experts.

Regulatory Functions:

These functions are performed by SEBI to regulate the business in stock exchange. To regulate the activities of stock exchange following functions are performed:

Registration of brokers and agents

It register brokers, sub-brokers, transfer agents ,merchant banks etc.and control their activities

Notification of Rules and Regulations

It notifies rules and regulations for the smooth functioning of all intermediaries in the securities market.

Levying of Fees

It levies fees, penalties and other charges for violating its directions and orders.

Regulator of Investment Schemes

It registers and regulates collective investment schemes, portfolio managers and mutual funds.

The Organisational Structure of SEBI:

SEBI was formed in 1988 as a non-statutory body. It was made an Autonomous and Independent Regulatory body after the passing of the Securities and Exchange Board of India Act, 1992 by the Indian Parliament.SEBI functions under the Ministry of Finance.SEBI now has Statutory powers with regards to regulation of the Securities and Commodities market in India. Its activities are divided into five departments. Each department is headed by an executive director. The head office of SEBI is in Mumbai and it has branch office in Kolkata, Chennai and Delhi. SEBI has formed two advisory committees to deal with primary and secondary markets.These committees consist of market players, investors associations and eminent persons.

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