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GNDU Question Paper-2022
Bachelor of Commerce
(B.Com) 5
th
Semester
FINANCIAL MARKET OPERATIONS
Time Allowed: Three Hours Max. Marks: 50
Note: Attempt Five questions in all, selecting at least One question from each section. The
Fifth question may be attempted from any section. All questions carry equal marks.
SECTION-A
1. Explain composition and structure of Money Market.
2. Explain Capital Market in detail.
SECTION-B
3. Write a brief note on Stock Exchange.
4. Explain National Stock Exchange in detail.
SECTION-C
5. What do you mean by SEBI? Explain objectives of SEBI.
6. Explain Mutual Funds and its benefits in detail.
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SECTION-D
7. Explain rights and obligations of Depositories in detail.
8. Explain enquiry and penalty provisions of Depositories Act.
GNDU Answer Paper-2022
Bachelor of Commerce
(B.Com) 5
th
Semester
FINANCIAL MARKET OPERATIONS
Time Allowed: Three Hours Max. Marks: 50
Note: Attempt Five questions in all, selecting at least One question from each section. The
Fifth question may be attempted from any section. All questions carry equal marks.
SECTION-A
1. Explain composition and structure of Money Market.
Ans: Scene 1: Entering the Money Market
Imagine a huge hall divided into two wings. On one side, everything is neat, regulated, and
supervised — the Organised Sector. On the other, things are more informal, traditional, and
unregulated — the Unorganised Sector.
Both wings serve the same purpose:
To provide a platform for short-term borrowing and lending (usually up to one year) in
highly liquid, low-risk instruments.
The money market is like the economy’s liquidity control room — ensuring that those who
have surplus funds can lend them, and those who need short-term funds can borrow them,
quickly and efficiently.
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Scene 2: Composition of the Money Market
The composition refers to who participates and what instruments they use.
A. Participants
1. Reserve Bank of India (RBI) — The central bank, regulator, and the most important
player in the Indian money market. It controls liquidity, sets policy rates, and
manages government borrowing.
2. Commercial Banks — Both public and private sector banks borrow and lend in the
money market to manage their short-term liquidity needs.
3. Co-operative Banks — Smaller banks serving specific communities or regions.
4. Non-Banking Financial Companies (NBFCs) — Borrow short-term funds to finance
their lending operations.
5. Mutual Funds — Especially liquid funds, which invest in money market instruments.
6. Insurance Companies — Park surplus funds in safe, short-term instruments.
7. Corporate Houses — Issue instruments like Commercial Paper to meet working
capital needs.
8. Government — Issues Treasury Bills to raise short-term funds.
9. Foreign Institutional Investors (FIIs) — Participate in certain segments, subject to
regulations.
10. Local Moneylenders and Indigenous Bankers — Active mainly in the unorganised
sector.
B. Instruments of the Money Market
Think of these as the “products” traded in our financial bazaar:
1. Call Money / Notice Money
o Ultra-short-term loans between banks and financial institutions.
o Call Money: Overnight.
o Notice Money: 2–14 days.
o Interest rate is called the call rate.
2. Treasury Bills (T-Bills)
o Short-term government securities (91, 182, or 364 days).
o Issued at a discount, redeemed at face value.
o Risk-free and highly liquid.
3. Commercial Paper (CP)
o Unsecured promissory notes issued by large corporates.
o Maturity: 7 days to 1 year.
o Issued at a discount.
4. Certificates of Deposit (CD)
o Negotiable term deposits issued by banks.
o Maturity: 7 days to 1 year (for banks), up to 3 years (for financial institutions).
5. Repurchase Agreements (Repos)
o Short-term borrowing by selling securities with an agreement to repurchase
them later.
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o Reverse Repo: Lending by buying securities with an agreement to sell them
back.
6. Money Market Mutual Funds (MMMFs)
o Invest in money market instruments, offering liquidity and modest returns to
investors.
7. Bills of Exchange / Commercial Bills
o Short-term negotiable instruments used in trade finance.
Scene 3: Structure of the Money Market
The structure is about how the market is organised — the two main wings we saw earlier.
1. Organised Sector
This is the modern, regulated side of the market, under the supervision of the RBI.
Key Features:
• Participants are licensed and registered.
• Transactions are transparent and follow standardised rules.
• Instruments are well-defined and regulated.
Main Components:
• RBI — Regulates and intervenes to maintain stability.
• Scheduled Commercial Banks — Major lenders and borrowers.
• Co-operative Banks — Smaller but regulated players.
• Development Financial Institutions — Participate in certain segments.
• Primary Dealers — Specialised institutions dealing in government securities.
• Money Market Mutual Funds — Channel retail and institutional funds into the
market.
Sub-Markets in the Organised Sector:
1. Call/Notice Money Market — For very short-term liquidity.
2. Treasury Bill Market — For government short-term borrowing.
3. Commercial Paper Market — For corporate short-term borrowing.
4. Certificate of Deposit Market — For bank and FI short-term deposits.
5. Repo/Reverse Repo Market — For collateralised short-term borrowing/lending.
2. Unorganised Sector
This is the traditional, informal side — largely outside RBI’s direct control.
Key Features:
• Participants are not registered with regulators.
• Practices vary regionally.
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• Often based on personal trust and relationships.
Main Participants:
• Indigenous Bankers — e.g., Shroffs, Chettiars.
• Moneylenders — Operate in rural and semi-urban areas.
• Chit Funds — Rotating savings and credit associations.
• Nidhis — Mutual benefit funds.
Limitations:
• Lack of integration with organised sector.
• Higher interest rates.
• Less transparency.
Scene 4: How the Two Sectors Interact
In India, the organised and unorganised sectors have limited direct contact. The RBI
controls the organised sector closely, using tools like repo rates, CRR, and open market
operations. The unorganised sector operates more independently, but reforms and financial
inclusion efforts are slowly bringing parts of it into the formal system.
Scene 5: Why the Money Market Matters
The money market is not just a place for banks to shuffle funds — it’s vital for the economy
because it:
1. Provides Liquidity — Ensures that short-term fund needs are met quickly.
2. Helps Monetary Policy Implementation — RBI uses it to transmit policy rates.
3. Facilitates Efficient Fund Allocation — Surplus funds flow to where they’re needed.
4. Offers Safe Investment Avenues — For institutions with temporary surpluses.
5. Supports Government Financing — Through T-Bills and other instruments.
6. Acts as a Barometer — Call rates and yields indicate liquidity conditions.
Scene 6: A Day in the Money Market — A Mini Story
It’s Monday morning.
• A commercial bank finds it’s short of ₹500 crore to meet its reserve requirement. It
borrows overnight in the call money market from another bank with surplus funds.
• A corporate giant needs ₹200 crore for 3 months to cover seasonal inventory — it
issues Commercial Paper bought by mutual funds.
• The government needs ₹5,000 crore for short-term expenditure — it auctions 91-day
Treasury Bills.
• An NBFC invests surplus cash in Certificates of Deposit issued by a bank.
By the end of the day, funds have moved smoothly between players, keeping the financial
system running like a well-oiled machine.
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2. Explain Capital Market in detail.
Ans: Imagine you are in a small town, and you notice that everyone has dreams—dreams of
starting businesses, expanding farms, or buying fancy gadgets. But there’s a problem:
money doesn’t grow on trees. Not everyone has the funds to turn their dreams into reality.
Now, picture a huge, magical marketplace where people who have extra money meet those
who need money. This is exactly what the capital market does in the financial world—it
connects the dreamers and the funders, helping the economy grow.
What is a Capital Market?
At its core, a capital market is a place where people and institutions trade long-term
financial instruments like stocks and bonds. Unlike banks, which provide short-term loans,
the capital market deals with long-term funds—usually for more than a year. Think of it as a
bridge: one side has people or companies who need money for growth, and the other side
has investors looking to invest their savings to earn returns.
The capital market is crucial because it helps channel savings into productive investment.
Without it, businesses would struggle to expand, governments would find it hard to fund
large projects, and individuals might find it difficult to grow their wealth.
Components of the Capital Market
To understand the capital market fully, we need to break it down into its main components:
1. Primary Market
The primary market is like a factory where new products are created. Here, companies and
governments raise fresh capital directly from investors by issuing new financial securities.
• Example: A company wants to build a new factory but doesn’t have enough funds. It
issues shares (ownership of the company) or bonds (a type of loan from investors) in
the primary market. Investors buy these securities, and the company gets the money
it needs.
• Initial Public Offering (IPO): When a company sells its shares to the public for the
first time, it’s called an IPO. This is the most famous activity in the primary market.
• Follow-on Public Offer (FPO): Sometimes, even after going public, companies need
more funds. They issue more shares in an FPO.
Key takeaway: The primary market is all about raising fresh capital directly from investors.
2. Secondary Market
Once securities are issued in the primary market, they don’t stay with the original investors
forever. The secondary market is like a bazaar where people buy and sell existing securities
among themselves.
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• Stock Exchanges: Places like the New York Stock Exchange (NYSE) or Bombay Stock
Exchange (BSE) are platforms for secondary market trading.
• Purpose: The secondary market provides liquidity, meaning investors can easily buy
or sell their investments. It also helps determine the market value of securities.
• Example: You buy shares of a company during its IPO. Later, if you want to sell those
shares, you do it in the secondary market.
Key takeaway: The secondary market doesn’t provide money to the company directly but
allows investors to trade and realize profits.
Types of Capital Market Instruments
In the capital market, investors have various tools to invest their money. The two main types
are:
1. Equity Instruments (Stocks or Shares):
o When you buy a share, you become a part-owner of the company.
o Investors earn money through dividends (profit share) and capital gains
(selling the share at a higher price).
o Example: Buying a share of Reliance Industries.
2. Debt Instruments (Bonds, Debentures, etc.):
o When you buy a bond, you are lending money to the company or
government.
o You earn interest at regular intervals, and the principal amount is returned at
maturity.
o Example: Government bonds or corporate debentures.
Other instruments include preference shares, convertible debentures, and derivatives, but
the core of capital markets revolves around stocks and bonds.
Participants in the Capital Market
The capital market is a lively ecosystem with many participants, each playing a unique role:
1. Investors: They provide the money. Can be individuals, companies, mutual funds, or
pension funds.
2. Issuers: Companies or governments that need funds to finance projects.
3. Intermediaries: These include brokers, merchant bankers, and investment banks,
who help in issuing and trading securities.
4. Regulators: To maintain order and trust, bodies like SEBI (Securities and Exchange
Board of India) or SEC (Securities and Exchange Commission) ensure that rules are
followed.
Story analogy: Think of it as a theater. Investors are the audience, issuers are the actors,
intermediaries are directors and stagehands, and regulators are the scriptwriters making
sure everything follows the rules.
Functions of the Capital Market
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The capital market performs several vital functions in an economy:
1. Mobilization of Savings: It collects idle savings from households and channels them
into productive investments.
2. Wealth Creation: Investors can grow their money through dividends, interest, and
capital gains.
3. Price Determination: The market forces of demand and supply decide the price of
securities, reflecting their true value.
4. Liquidity: Investors can buy or sell securities easily in the secondary market.
5. Economic Growth: By providing long-term funds to companies and governments, the
capital market drives industrial and infrastructure growth.
6. Risk Management: Investors can diversify their portfolios across different securities,
industries, and geographies to reduce risk.
Importance of the Capital Market
Imagine trying to grow a business without access to funds—you’d be stuck, right? The
capital market solves this problem and much more:
• Helps companies expand and innovate.
• Enables governments to finance large projects like highways, hospitals, and schools.
• Provides investment opportunities to individuals, creating wealth and financial
security.
• Supports price stability and transparency, as the market is regulated and
information is widely available.
Challenges of the Capital Market
Of course, every magical marketplace has challenges:
1. Market Volatility: Prices can fluctuate widely, sometimes based on rumors or global
events.
2. Risk of Loss: Poor investment decisions can lead to losses.
3. Fraudulent Practices: Without proper regulation, insider trading and scams can
occur.
4. Access to Small Investors: Sometimes small investors find it hard to participate due
to minimum investment limits or lack of knowledge.
Modern Developments
Today, capital markets are more accessible than ever:
• Electronic Trading: Online platforms allow anyone with an internet connection to
trade.
• Globalization: Investors can invest in international markets easily.
• Innovative Instruments: Mutual funds, ETFs, REITs, and derivatives make investment
more flexible.
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Conclusion: The Heartbeat of the Economy
To wrap up, the capital market is like the lifeblood of an economy, connecting savers with
investors, enabling growth, innovation, and wealth creation. Imagine a city without roads,
bridges, or water pipelines—similarly, an economy without a capital market would struggle
to grow.
It’s a marketplace of dreams, a network of opportunities, and a place where risk and reward
dance together. By understanding its workings—primary market, secondary market,
instruments, participants, and functions—we can appreciate its critical role in shaping the
financial health of a country.
So, the next time you hear about the stock market or government bonds, remember: this is
more than numbers on a screen. It’s a real engine driving businesses, jobs, infrastructure,
and dreams, keeping the economy alive and thriving.
SECTION-B
3. Write a brief note on Stock Exchange.
Ans: Scene 1: The Curtain Rises — What Is a Stock Exchange?
Imagine a stage where companies come to raise money, and investors come to buy a piece
of their future. That stage is the Stock Exchange.
In simple words:
A Stock Exchange is an organised marketplace where securities such as shares, debentures,
bonds, and other financial instruments are bought and sold.
It’s not just a building or a website — it’s a system that connects:
• Companies looking for capital.
• Investors looking for returns.
• Regulators ensuring fairness.
• Brokers facilitating trades.
It’s the heart of the capital market — where long-term funds are mobilised, and ownership
changes hands in seconds.
Scene 2: The Origins — A Brief History
The idea of stock exchanges dates back centuries:
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• In the 17th century, the Amsterdam Stock Exchange became the first official
exchange.
• In India, the Bombay Stock Exchange (BSE) was established in 1875 — Asia’s oldest.
• The National Stock Exchange (NSE) came in 1992, bringing electronic trading and
modernisation.
From open-outcry floors to digital platforms, stock exchanges have evolved into high-speed,
tech-driven ecosystems.
Scene 3: The Structure of a Stock Exchange
Let’s break down the key components — like rooms in our financial theatre.
1. Listed Companies
These are the performers on stage — companies that have met the exchange’s listing
requirements and offered their shares to the public.
• They issue shares through Initial Public Offerings (IPOs).
• Once listed, their shares can be freely traded.
2. Investors
The audience — individuals, institutions, mutual funds, foreign investors — who buy and sell
shares based on expectations, analysis, and sometimes emotion.
3. Stockbrokers
The ticket sellers — registered intermediaries who execute trades on behalf of investors.
• Must be registered with the exchange and regulated by SEBI (in India).
• Provide platforms, advice, and access to the market.
4. Trading Platform
The stage itself — a digital system where buy and sell orders are matched.
• Modern exchanges use electronic trading systems.
• Trades happen in milliseconds.
• Prices are determined by demand and supply.
5. Clearing Corporation
The backstage crew — ensures that trades are settled smoothly.
• Matches buyers and sellers.
• Ensures delivery of securities and payment of money.
• Reduces counterparty risk.
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6. Regulators
The directors — ensure the play is fair, transparent, and safe.
• In India, the Securities and Exchange Board of India (SEBI) regulates stock
exchanges.
• Sets rules for listing, trading, disclosures, and investor protection.
Scene 4: Functions of a Stock Exchange
Let’s explore what this theatre actually does — and why it matters.
1. Capital Formation
• Helps companies raise long-term funds by issuing shares and debentures.
• Fuels business expansion, innovation, and job creation.
2. Liquidity
• Investors can buy or sell securities anytime — turning investments into cash.
• Encourages participation and confidence.
3. Price Discovery
• Through continuous trading, the exchange reflects the true market value of
securities.
• Prices adjust based on news, performance, and investor sentiment.
4. Safety and Regulation
• Only listed, compliant companies can trade.
• SEBI ensures transparency, disclosure, and fair play.
5. Investor Protection
• Exchanges provide grievance redressal mechanisms.
• Brokers are monitored.
• Insider trading and manipulation are penalised.
6. Economic Indicator
• Stock indices (like Sensex, Nifty) reflect the health of the economy.
• Rising markets often signal growth; falling markets may indicate trouble.
Scene 5: How a Trade Happens — A Mini Story
Let’s say Rishabh wants to buy 100 shares of “TechNova Ltd.” Here’s what happens:
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1. He logs into his broker’s app and places a buy order.
2. The broker sends the order to the exchange.
3. The exchange matches it with a seller’s order.
4. The trade is executed — price is locked.
5. The clearing corporation ensures Rishabh gets his shares and the seller gets the
money.
6. Within T+2 days (Trade date + 2), the transaction is settled.
All this happens in seconds — seamlessly and securely.
Scene 6: Major Stock Exchanges in India
Let’s meet the stars of the Indian financial theatre:
1. Bombay Stock Exchange (BSE)
• Established in 1875.
• Located in Mumbai.
• Index: Sensex — tracks 30 top companies.
2. National Stock Exchange (NSE)
• Established in 1992.
• First electronic exchange in India.
• Index: Nifty 50 — tracks 50 top companies.
3. Other Exchanges
• Calcutta Stock Exchange, Metropolitan Stock Exchange — smaller, regional players.
Scene 7: Challenges and Reforms
Even the best theatres face challenges:
• Market Volatility — sudden price swings due to global events.
• Insider Trading — unfair advantage through confidential information.
• Speculation — excessive trading without real investment intent.
• Cybersecurity — protecting digital platforms from attacks.
Reforms include:
• Stronger SEBI regulations.
• Investor education.
• Technology upgrades.
• Surveillance systems.
Scene 8: The Role in Your Life
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Whether you’re a student, investor, or entrepreneur, the stock exchange affects you:
• It funds the companies that make your phone, your clothes, your food.
• It offers investment opportunities to grow your wealth.
• It reflects the economic mood — optimism or caution.
Understanding it is like understanding the pulse of the economy.
Exam-Ready Summary
Stock Exchange:
• Organised marketplace for buying and selling securities.
• Connects companies, investors, brokers, regulators.
• Functions: Capital formation, liquidity, price discovery, regulation, investor
protection, economic indicator.
• Structure: Listed companies, investors, brokers, trading platform, clearing
corporation, regulators.
• Major Indian Exchanges: BSE (Sensex), NSE (Nifty).
• Challenges: Volatility, insider trading, speculation, cybersecurity.
• Reforms: SEBI oversight, tech upgrades, investor education.
Final Takeaway: The stock exchange is not just a financial institution — it’s a living
marketplace of trust, ambition, and opportunity. It turns business ideas into public
ownership, savings into investments, and numbers into stories. In this grand theatre, every
trade is a scene, every investor a character, and every company a performer — all playing
their part in the drama of economic growth.
4. Explain National Stock Exchange in detail.
Ans: A Different Beginning:
Imagine a big, busy marketplace in your city. Some people are selling vegetables, others are
buying fruits, and traders are shouting prices. Now, think of a marketplace not for
vegetables or fruits, but for shares of companies. A place where buyers and sellers of stocks
meet, not physically, but electronically, just with the click of a button.
That marketplace in India is none other than the National Stock Exchange of India (NSE).
This is the story of how NSE was born, how it changed the way India trades, and why it has
become the heart of our financial system.
The Birth of NSE – Why Was It Needed?
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Let’s rewind to the early 1990s. Before NSE came, most trading in India used to happen at
the Bombay Stock Exchange (BSE), which was established in 1875. But there were some
problems:
1. Lack of transparency – Prices were not always clearly available to everyone.
2. Paper-based trading – Shares were exchanged in physical form, leading to delays,
frauds, and fake certificates.
3. Closed club – Only a few brokers controlled the system, and small investors often
felt left out.
In short, trading in shares was not very modern or investor-friendly.
That’s when the Government of India and financial institutions decided to create a new,
modern, and fully electronic stock exchange. Thus, in 1992, the National Stock Exchange
(NSE) was established, and by 1994, it started functioning.
It was like introducing a brand-new, high-tech mall where everything was digital, quick, and
open to everyone.
What is NSE Exactly?
The National Stock Exchange (NSE) is India’s largest and most advanced stock exchange,
where buying and selling of financial securities like shares, bonds, derivatives, exchange-
traded funds (ETFs), and currencies takes place.
Think of NSE as a giant online platform that connects:
• Companies (who want to raise money by selling shares)
• Investors (who want to buy those shares and earn profits)
• Traders and institutions (who do buying and selling daily)
The NSE works fully on electronic trading systems, meaning no physical papers, no
middleman shouting, just pure digital transactions.
Structure and Organization of NSE
The NSE is not just one big machine; it has a structured way of working.
1. Promoters – It was set up by leading financial institutions like IDBI, LIC, and SBI to
ensure reliability.
2. Regulation – It is regulated by the Securities and Exchange Board of India (SEBI) to
protect investors.
3. Technology-driven – NSE was the first exchange in India to introduce screen-based
trading where everything is shown on computer screens.
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4. Clearing Corporation – NSE has its own National Securities Clearing Corporation
Limited (NSCCL), which ensures safe settlement of trades.
So, if you buy a share on NSE, you don’t have to worry about fraud or default. The clearing
house guarantees your transaction.
The Benchmarks of NSE – NIFTY 50
You must have heard of NIFTY 50 in the news. It’s the flagship index of NSE.
• Just like a thermometer tells you about the temperature of your body, NIFTY tells
you about the health of the stock market.
• It consists of the top 50 companies listed on NSE from different sectors like banking,
IT, energy, pharma, etc.
• If NIFTY goes up, it means most big companies are doing well. If it falls, it shows a
decline in the overall market.
So, whenever you hear, “NIFTY rises by 200 points today,” remember that it is a snapshot of
India’s corporate performance.
How Does Trading Happen on NSE?
Let’s make it simple with an example.
Suppose Rahul wants to buy 100 shares of Infosys, and Priya wants to sell 100 shares of
Infosys.
1. Rahul places a “Buy Order” through his broker on the NSE system.
2. Priya places a “Sell Order” through her broker.
3. NSE’s electronic system matches both orders instantly.
4. The deal is done within seconds, and NSCCL ensures money and shares are
exchanged securely.
This whole process is super-fast, fair, and transparent—unlike the old paper-based method.
Importance of NSE in India’s Economy
The NSE is not just a stock exchange; it’s like the heartbeat of India’s financial system.
Here’s why:
1. Raises Capital for Companies – Companies get funds for expansion by issuing shares.
2. Wealth Creation for Investors – Ordinary people can invest and grow their savings.
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3. Transparency – Prices are displayed live, so no hidden deals.
4. Economic Indicator – Movements of NSE indices like NIFTY reflect the country’s
economic growth.
5. Global Recognition – NSE is ranked among the world’s largest exchanges by trading
volume.
In short, NSE connects the dreams of entrepreneurs with the savings of millions of people.
Features that Make NSE Special
1. Fully Automated – 100% computerized trading.
2. Nationwide Reach – Anyone across India can trade from their city or even their
phone.
3. Fast Settlement – Trades are usually settled in T+1 day (trade day plus one).
4. Risk Management – NSE has strict rules to protect investors from fraud or sudden
losses.
5. Product Variety – Equities, derivatives, currencies, bonds, mutual funds, and more.
It is like a supermarket for financial products—everything is available under one roof.
Achievements of NSE
• First exchange in India to introduce electronic trading.
• Launched NIFTY 50, which is now one of the most tracked indices globally.
• Provides advanced trading platforms like NSE NOW and mobile apps.
• Played a huge role in increasing financial literacy and investor participation in India.
• Recognized globally for its technology, volume, and efficiency.
Challenges Faced by NSE
Of course, even big institutions like NSE face some problems:
1. Cybersecurity risks – Since everything is digital, cyber-attacks are a concern.
2. Market volatility – Sudden ups and downs can shake investor confidence.
3. Competition – From BSE and other international exchanges.
4. Scams and frauds – Though rare, issues like the “co-location scam” have hurt NSE’s
image.
Still, NSE continues to grow stronger by adopting new technologies and strict regulations.
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Conclusion – NSE as the Nerve Centre of Indian Markets
So, if we look back, the story of NSE is one of innovation, modernization, and trust.
• Before NSE, trading was messy, slow, and limited.
• With NSE, India entered the era of fast, transparent, and fair trading.
• It gave investors confidence, connected the Indian market to the world, and helped
companies raise funds with ease.
Today, the National Stock Exchange is not just a marketplace; it is a symbol of India’s
financial growth. It reflects the aspirations of small investors, the ambitions of big
corporations, and the overall health of our economy.
In short, NSE is like a giant digital bridge that connects savers, investors, and companies,
helping India march forward toward becoming an economic powerhouse.
SECTION-C
5. What do you mean by SEBI? Explain objectives of SEBI.
Ans: What is SEBI?
In simple words:
SEBI is the regulator of India’s securities market. It makes the rules, enforces them, and
ensures that everyone — from giant corporations to small brokers — plays fair.
• Full Form: Securities and Exchange Board of India.
• Established: 12 April 1988 (as a non-statutory body).
• Became Statutory: 30 January 1992, through the SEBI Act, 1992 — giving it full legal
powers.
• Headquarters: Mumbai, with regional offices across India.
Think of SEBI as the referee in the financial stadium — it doesn’t play the game, but it
ensures the rules are followed, fouls are penalised, and the match is fair for all players.
Why SEBI Was Needed — The Backstory
Before SEBI, the Indian capital market was like an unregulated fairground:
• Brokers could manipulate prices.
• Companies could hide or misrepresent information.
• Investors had little protection.
• Insider trading (using confidential company info to trade) was rampant.
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The result?
• Loss of investor trust.
• Market instability.
• Slower growth of the capital market.
SEBI’s creation was a turning point — it brought order to the chaos.
The Triple Role of SEBI
SEBI has to balance the needs of three main groups:
1. Issuers of Securities — Companies that raise funds by issuing shares, bonds, etc. SEBI
ensures they follow disclosure norms and treat investors fairly.
2. Investors — Individuals and institutions who put money into the market. SEBI
protects them from fraud and ensures they get accurate information.
3. Market Intermediaries — Brokers, merchant bankers, mutual funds, etc. SEBI
regulates their conduct and operations.
Objectives of SEBI — The Heart of Its Mission
Let’s walk through SEBI’s objectives as if they’re the pillars holding up the market’s integrity.
1. Protecting the Interests of Investors
This is SEBI’s most important objective.
• Why? Investors are the lifeblood of the market. If they lose trust, the market
collapses.
• How?
o Ensuring companies give true and full disclosure of financial and operational
details.
o Prohibiting insider trading — no one should profit from secret information.
o Preventing price rigging — stopping artificial inflation or deflation of share
prices.
o Providing grievance redressal mechanisms for investors.
o Educating investors about risks and rights.
Example: If a company hides bad financial results and its insiders sell shares before the
news breaks, SEBI can investigate, penalise, and even ban those involved.
2. Regulating the Securities Market
SEBI sets the rulebook for how the market operates.
• Why? Without rules, markets can become playgrounds for manipulation.
• How?
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o Laying down regulations for stock exchanges, brokers, and other
intermediaries.
o Approving and monitoring new products (like derivatives).
o Conducting inspections and audits of market participants.
o Regulating mergers, acquisitions, and takeovers to ensure fairness.
Example: SEBI decides how much margin traders must keep, or how mutual funds must
classify their schemes.
3. Preventing Malpractices
SEBI acts like a security guard against fraud.
• Why? Malpractices hurt investors and damage the market’s reputation.
• How?
o Keeping surveillance on trading patterns to detect suspicious activity.
o Investigating complaints and market rumours.
o Imposing penalties, suspensions, or bans on wrongdoers.
Example: If a group of traders colludes to pump up a stock’s price and then dump it, SEBI
can step in and punish them.
4. Promoting Fair Practices
SEBI ensures that everyone gets a level playing field.
• Why? Fairness attracts more participants and boosts market depth.
• How?
o Developing codes of conduct for intermediaries.
o Ensuring transparent processes for IPO allotments.
o Standardising procedures across exchanges.
5. Developing the Capital Market
SEBI isn’t just a policeman — it’s also a coach.
• Why? A healthy, modern market benefits the whole economy.
• How?
o Introducing new trading technologies (online trading, T+2 settlement).
o Encouraging new investment products (REITs, InvITs).
o Supporting financial literacy programs.
o Facilitating foreign investment with safeguards.
6. Balancing Regulation and Growth
SEBI walks a fine line:
• Too much regulation can choke innovation.
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• Too little can invite chaos.
Its objective is to maintain that balance — protecting investors without stifling market
development.
How SEBI Works — The Structure
SEBI’s governing body includes:
• Chairperson — appointed by the Government of India.
• Members — from the Ministry of Finance, the Reserve Bank of India, and experts in
law, finance, and economics.
It operates through various departments:
• Market Regulation
• Corporate Finance
• Investigation
• Enforcement
• Legal Affairs
• Investor Education
A Day in SEBI’s Life — A Mini Story
It’s Tuesday morning at SEBI headquarters.
• The surveillance team spots unusual trading in a mid-cap stock — prices are rising
without any news.
• The investigation wing starts probing — checking if insiders are leaking information.
• Meanwhile, the corporate finance department reviews a company’s draft IPO
prospectus to ensure all risks are disclosed.
• In another room, the investor education team is hosting a webinar on “How to Read
a Mutual Fund Factsheet.”
By evening, SEBI has:
• Issued a warning to a broker for violating margin rules.
• Approved a new debt ETF for launch.
• Published a circular tightening disclosure norms for listed companies.
Why SEBI Matters to You
Even if you’ve never bought a share, SEBI’s work affects you:
• It keeps the financial system stable.
• It ensures companies you may work for or buy from are accountable.
• It protects the savings of millions, which in turn supports economic growth.
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Exam-Ready Summary
SEBI (Securities and Exchange Board of India):
• Meaning: Statutory regulator of India’s securities market, established 1988,
statutory powers from 1992.
• Purpose: Protect investors, regulate the market, promote development.
• Objectives:
1. Protect investor interests — disclosure, anti-fraud, grievance redressal.
2. Regulate securities market — rules for exchanges, brokers, products.
3. Prevent malpractices — surveillance, investigation, penalties.
4. Promote fair practices — codes of conduct, transparency.
5. Develop capital market — new products, technology, literacy.
6. Balance regulation and growth.
Final Takeaway: SEBI is like the guardian of the Indian securities market — part referee,
part watchdog, part coach. It ensures that the market is a place where companies can raise
funds honestly, investors can participate confidently, and the economy can grow steadily.
Without SEBI, the market could easily slip back into the chaos of the past — with it, we have
a system that strives for fairness, transparency, and trust.
6. Explain Mutual Funds and its benefits in detail.
Ans: Mutual Funds and Their Benefits – Explained Like a Story
Imagine this: You and your group of friends are sitting together, and each of you has some
savings. One has ₹1,000, another has ₹5,000, someone else has ₹10,000. Now, everyone has
the desire to invest in big companies like Reliance, TCS, Infosys, or maybe even in foreign
markets. But the problem is simple – individually, your savings are too small to buy many
shares or manage the risk.
So, what do you all decide?
You pool your money together in a box. Then you hand over this box to a smart, trustworthy
financial expert, who knows exactly how to invest money wisely. This expert carefully
spreads the money into different companies, bonds, and securities, making sure that the
group’s money grows steadily while minimizing the risks.
This story, my friend, is exactly what Mutual Funds are in real life.
What is a Mutual Fund?
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In simple words, a Mutual Fund is a type of investment vehicle where money from many
investors is collected and invested together. The money is managed by a professional expert
called a Fund Manager.
• Just like your group of friends pooled money, in real life, thousands (sometimes
lakhs) of people invest small or big amounts.
• This combined money forms a large pool of funds.
• The fund manager then uses this pool to buy shares of companies, government
bonds, real estate, or even gold – depending on the type of mutual fund.
So, the basic idea is:
Many investors + pooled money + expert management = Mutual Fund.
How Does a Mutual Fund Work?
Let’s extend the story a little.
1. Collection of Money – Investors like you and me put in money in a mutual fund
scheme.
2. Creation of a Pool – All money goes into one big pool.
3. Investment by Experts – A fund manager studies the market and invests the money
in a mixture of stocks, bonds, or other assets.
4. Units Allocation – Each investor gets “units” in proportion to their contribution.
These units represent ownership in the fund.
5. Earnings Distribution – If the value of the investment grows, the unit price (called
NAV – Net Asset Value) increases. Investors then earn profit either by selling their
units at a higher price or by receiving dividends.
In short, mutual funds give ordinary people a chance to invest like big players with the
guidance of professionals.
Types of Mutual Funds
Mutual Funds are not one-size-fits-all. They come in different types depending on goals and
risk levels. Let’s simplify:
1. Equity Funds – Invest mainly in company shares. High risk, high return. Example:
Investing in IT companies, automobile companies, etc.
2. Debt Funds – Invest in bonds, government securities, and fixed-income assets. Lower
risk, stable returns.
3. Balanced or Hybrid Funds – A mix of equity and debt. Balance between risk and
safety.
4. Money Market Funds – Invest in short-term instruments like treasury bills. Safe but
moderate returns.
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5. Index Funds – Simply copy popular stock market indexes like NIFTY or SENSEX.
So, no matter what kind of investor you are – a risk-taker or a safe-player – there’s always a
mutual fund designed for you.
Benefits of Mutual Funds (The Real Magic)
Now let’s get to the heart of the matter – why should anyone invest in Mutual Funds? Here
are the benefits explained like real-life advantages:
1. Professional Management
Most of us don’t have time or deep knowledge to study markets daily. Mutual funds come
with a fund manager, who is like a captain of a ship navigating safely through rough seas. He
uses research, analysis, and experience to invest wisely.
2. Diversification (Don’t put all eggs in one basket)
Imagine investing all your money in one company. If that company fails, your money sinks
too. Mutual funds solve this by spreading investments across dozens of companies and
sectors. This way, if one investment fails, the others balance it out.
3. Small Investment, Big Opportunity
You don’t need lakhs to start. With as little as ₹500 or ₹1,000, you can own a small piece of
big companies through mutual funds.
4. Liquidity (Easy Entry & Exit)
Unlike real estate or fixed deposits that lock your money, most mutual funds allow you to
withdraw anytime. You can buy and sell fund units easily, just like withdrawing money from
your account.
5. Transparency
Mutual fund companies are strictly regulated by SEBI (Securities and Exchange Board of
India). Regular reports, NAV updates, and disclosures keep investors informed.
6. Tax Benefits
Some funds (like ELSS – Equity Linked Saving Scheme) provide tax deductions under Section
80C of the Income Tax Act. So, not only do you grow your money, but you also save on
taxes.
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7. Cost-Effective
If you buy stocks individually, you pay brokerage fees multiple times. In mutual funds, the
costs are shared among all investors, making it cheaper.
8. Systematic Investment Plan (SIP)
This is the most student-friendly benefit! Instead of investing a big amount at once, you can
invest small amounts monthly. Over time, this disciplined approach builds wealth.
Example to Understand Better
Suppose you have ₹1,000. Alone, this money may let you buy just one share of a mid-sized
company. But if 1,000 people like you pool ₹1,000 each, that makes ₹10,00,000. Now the
fund manager can invest in a wide variety of companies – Infosys, Reliance, Tata Motors,
Asian Paints, and even government bonds.
So, by investing just ₹1,000, you indirectly own a slice of all these big companies. That’s the
power of collective investment.
Risks in Mutual Funds
No story is complete without twists, right?
Mutual funds also carry risks:
• Market Risk – If stock markets fall, equity mutual funds also decline.
• Interest Rate Risk – Debt funds may give lower returns when interest rates rise.
• Management Risk – Sometimes even fund managers can make wrong decisions.
But here’s the good part: because mutual funds spread investments across many assets, the
risks are always lower compared to directly buying one or two stocks.
Why Students Should Care?
Even if you are a student, understanding mutual funds is like preparing for your financial
future. The earlier you start, the more wealth you build with time. Starting with SIPs of small
amounts can give you a head start in wealth creation.
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Conclusion
To wrap it up, think of Mutual Funds as a big basket of investments managed by an expert,
created by pooling small contributions from many people.
They bring together professional management, diversification, flexibility, transparency,
and affordability. Yes, risks exist, but compared to direct investing, mutual funds make the
journey safer and easier.
So, whether you are a young student saving pocket money, a middle-class worker securing
the future, or a retiree looking for steady income – mutual funds are like a financial friend
who grows your money silently in the background.
SECTION-D
7. Explain rights and obligations of Depositories in detail.
Ans: Scene 1: What is a Depository?
Before we talk about rights and obligations, let’s set the scene.
A Depository is like a bank for securities.
• Just as a bank holds your money safely and lets you deposit, withdraw, or transfer it,
• A depository holds your shares and other securities in electronic (dematerialised)
form and enables you to buy, sell, or transfer them without handling paper
certificates.
In India, the two main depositories are:
• NSDL — National Securities Depository Limited.
• CDSL — Central Depository Services (India) Limited.
They operate under the Depositories Act, 1996, regulated by SEBI.
Scene 2: Why Depositories Exist — The Backstory
Before depositories, investors had to deal with:
• Physical share certificates.
• Delays in transfer.
• Risks of loss, theft, forgery, or damage.
• “Bad deliveries” — certificates with errors.
The depository system solved these problems by:
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• Dematerialising securities.
• Making transfers electronic.
• Speeding up settlement.
But with great power comes great responsibility — hence the clear rights and obligations
laid down in law.
Scene 3: Rights of a Depository — The Powers of the Vault Keeper
Think of the depository as the registered owner of securities on behalf of investors (called
beneficial owners). Here are its key rights, explained in human terms:
1. Act as Registered Owner for Transfer Purposes
• In the company’s records, the depository’s name appears as the registered owner of
securities.
• This allows it to effect transfers quickly on behalf of beneficial owners.
• Important: Being the registered owner does not give the depository voting rights or
dividend rights — those stay with the beneficial owner.
2. Enter into Agreements with Participants
• A depository can appoint Depository Participants (DPs) — like branches or agents —
to interact with investors.
• It has the right to set terms and conditions in agreements with these DPs.
3. Maintain Securities in Fungible Form
• All securities in the depository are held in fungible form — meaning they are
interchangeable and not identified by certificate numbers.
• The depository has the right to treat all holdings of the same type as part of a
common pool.
4. Receive Information from Issuers
• Depositories can demand necessary information from companies (issuers) to update
their records — for example, when a company issues bonus shares or declares
dividends.
5. Levy Fees for Services
• Just like a bank charges for certain services, a depository can charge fees for
dematerialisation, rematerialisation, transfers, etc., as per SEBI guidelines.
6. Make Bye-Laws
• Depositories have the right to frame bye-laws (internal rules) for smooth
functioning, subject to SEBI approval.
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7. Indemnity in Certain Cases
• If the depository acts in good faith and according to the law, it is protected from
liability for certain actions — unless there’s negligence or fraud.
Scene 4: Obligations of a Depository — The Duties of the Vault Keeper
Now, let’s walk into the “control room” of the vault. Here, the obligations are like strict
operating procedures — non-negotiable rules to protect investors and maintain trust.
1. Maintain a Register of Beneficial Owners
• Even though the depository’s name is on the company’s register, it must keep a
detailed register of the real owners (beneficial owners) and their holdings.
• This register must be accurate, up-to-date, and confidential.
2. Provide Services Only Through Participants
• Depositories don’t deal directly with investors — they must operate through
authorised DPs.
• This ensures standardised service and accountability.
3. Ensure Prompt Transfer and Settlement
• When a beneficial owner buys or sells securities, the depository must ensure timely
transfer in electronic form.
• Settlement cycles (like T+2) must be strictly followed.
4. Safeguard Interests of Beneficial Owners
• The depository must act in the best interest of investors.
• It cannot misuse securities or information.
• It must ensure that corporate benefits (dividends, bonus shares, rights issues) reach
the beneficial owners promptly.
5. Facilitate Dematerialisation and Rematerialisation
• On request, the depository must:
o Convert physical certificates into electronic form (dematerialisation).
o Convert electronic holdings back into physical certificates (rematerialisation).
6. Maintain Confidentiality
• Investor data is sensitive.
• The depository must keep all details confidential and share them only when legally
required.
7. Comply with SEBI Regulations
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• All operations must follow SEBI’s rules, circulars, and inspection requirements.
• Depositories must submit periodic reports to SEBI.
8. Indemnify Loss in Certain Cases
• If an investor suffers a loss due to the depository’s negligence, the depository must
compensate them.
9. Allow Inspection and Audit
• SEBI or other authorised bodies can inspect the depository’s records.
• The depository must cooperate fully and provide all requested information.
10. Educate and Inform Participants
• Depositories must ensure that their DPs are trained, updated on rules, and capable
of serving investors properly.
Scene 5: Rights and Obligations — A Quick Table
Rights of Depository
Obligations of Depository
Act as registered owner for transfer purposes
Maintain register of beneficial owners
Enter agreements with participants
Provide services only through participants
Maintain securities in fungible form
Ensure prompt transfer and settlement
Receive information from issuers
Safeguard interests of beneficial owners
Levy fees for services
Facilitate demat/remat on request
Make bye-laws
Maintain confidentiality
Indemnity in certain cases
Comply with SEBI regulations
—
Indemnify loss due to negligence
—
Allow inspection and audit
—
Educate and inform participants
Scene 6: A Day in the Life — Mini Story
It’s Wednesday morning at “SecureHold Depository Ltd.”
• A DP sends a request to dematerialise 1,000 shares of a listed company for a client.
• The depository checks the details, updates its records, and informs the company to
cancel the physical certificates.
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• Later, a corporate action — a bonus issue — is announced. The depository receives
the details from the company and credits the bonus shares directly into the
beneficial owners’ demat accounts.
• In the afternoon, SEBI inspectors arrive for a routine audit. The depository’s
compliance team provides all requested records.
• By evening, a small investor’s complaint about a delayed transfer is resolved, and the
securities are credited.
Every step reflects the rights (to receive info, to act as registered owner) and obligations (to
protect investors, to ensure timely settlement) working hand in hand.
Scene 7: Why This Matters to You
If you invest in shares, mutual funds, or bonds in demat form:
• Your holdings are safe because the depository is bound by law to protect them.
• You enjoy quick, paperless transactions.
• You have legal recourse if something goes wrong.
The rights give the depository the power to operate efficiently. The obligations ensure it
uses that power responsibly.
Exam-Ready Summary
Rights of Depository:
1. Act as registered owner for transfer purposes (no voting/dividend rights).
2. Enter agreements with participants.
3. Maintain securities in fungible form.
4. Receive information from issuers.
5. Levy fees for services.
6. Make bye-laws (with SEBI approval).
7. Indemnity in certain cases.
Obligations of Depository:
1. Maintain register of beneficial owners.
2. Provide services only through participants.
3. Ensure prompt transfer and settlement.
4. Safeguard interests of beneficial owners.
5. Facilitate demat/remat on request.
6. Maintain confidentiality.
7. Comply with SEBI regulations.
8. Indemnify loss due to negligence.
9. Allow inspection and audit.
10. Educate and inform participants.
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Final Takeaway: A depository is both guardian and gatekeeper of your securities. Its rights
give it the authority to manage and transfer holdings efficiently; its obligations bind it to act
with integrity, transparency, and investor protection at heart. Together, they make the
depository system one of the most trusted pillars of India’s modern capital market.
8. Explain enquiry and penalty provisions of Depositories Act.
Ans: Enquiry and Penalty Provisions of the Depositories Act – Explained Like a Story
Imagine you are playing a big cricket tournament. Everyone has rules to follow – bowlers
can’t overstep, batsmen can’t hit the stumps on purpose, umpires must be fair, and even
the audience must behave. Now, suppose a player breaks the rule: maybe a bowler keeps
bowling no-balls deliberately. What happens? The umpire first makes an enquiry (checks
what’s going on), and if the bowler is found guilty, a penalty is imposed.
This is exactly how the Depositories Act works in the financial world. It is a law that ensures
the smooth, safe, and transparent functioning of the depository system – where investors’
shares and securities are kept in electronic form instead of messy paper certificates.
But like in cricket, not everyone follows the rules honestly. Some companies, depository
participants, or even investors may misuse the system, commit fraud, or simply ignore the
rules. To deal with such situations, the Depositories Act provides a two-step mechanism:
1. Enquiry (Investigation/Checking) – finding out whether someone has broken the
rules.
2. Penalty (Punishment) – ensuring justice by penalizing the wrongdoer.
Let’s break this down in a humanized, detailed way.
Step 1: Enquiry Provisions – The Detective Stage
Think of enquiry as the role of a detective in a movie. When there is a doubt, complaint, or
suspicion, the authorities don’t immediately punish – they first investigate.
Who does the enquiry?
Under the Depositories Act, the Securities and Exchange Board of India (SEBI) is the main
watchdog. SEBI has the power to order an enquiry whenever:
• A depository (like NSDL or CDSL) is suspected of breaking rules.
• A depository participant (like banks, brokers who connect investors with
depositories) does something wrong.
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• A registered person (investor, issuer, or intermediary) violates the Act or SEBI
regulations.
How does enquiry work?
1. Suspicion or Complaint: Imagine an investor complains that her shares disappeared
from her account, or that her broker sold them without permission.
2. Notice: SEBI issues a notice to the suspected person/entity, saying, “We have
received this complaint. Please explain your side.”
3. Hearing: Just like in a courtroom, the accused gets a chance to present their case,
documents, or witnesses.
4. Investigation: SEBI may appoint enquiry officers who dig deeper – checking
transaction records, asking questions, or cross-verifying data.
5. Report: Finally, a report is prepared. If the person is found guilty, the case moves
towards penalty.
Simple Example:
If a depository participant secretly manipulates records to benefit a big investor while
ignoring small investors, SEBI will launch an enquiry. The participant must explain why this
happened. If the explanation is weak, penalties will follow.
So, enquiry is like the referee blowing the whistle, stopping the game, and checking if
someone cheated.
Step 2: Penalty Provisions – The Punishment Stage
Once enquiry proves guilt, penalties come into play. The Depositories Act has very clear
penalty provisions to ensure discipline in the securities market.
Let’s explore them in detail:
1. Penalty for Failure to Furnish Information
If a depository, participant, or issuer fails to provide information, documents, or
explanations when SEBI asks, they can be penalized.
• Penalty: Up to ₹1 lakh for each failure.
Example: If SEBI asks a depository for trading records of a suspicious transaction and the
depository refuses or delays, it will face penalties.
2. Penalty for Failure to Enter into Agreement
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Every issuer of securities must sign an agreement with a depository. If a company issues
shares but doesn’t create such an agreement, it violates the law.
• Penalty: ₹1 lakh for each day of default, up to ₹1 crore.
Example: A company issuing IPO shares without linking to NSDL/CDSL properly may face
this penalty.
3. Penalty for Failure to Redress Investors’ Grievances
One of the most important responsibilities is addressing investors’ complaints quickly. If
ignored, penalties follow.
• Penalty: ₹1 lakh for each day of default, up to ₹1 crore.
Example: If thousands of investors complain about non-receipt of shares after applying
in an IPO and the company or depository doesn’t resolve them, SEBI can impose heavy fines.
4. Penalty for Delay in Dematerialization or Issue of Certificates
When an investor requests to convert physical shares into electronic form (demat) or vice
versa, the depository/participant must do it quickly. Delays are punishable.
• Penalty: ₹1 lakh per day, up to ₹1 crore.
Example: If an investor’s share demat request is pending for months because the
depository participant is careless, they will be penalized.
5. Penalty for Contravention of Rules/Regulations
If any person violates the Depositories Act, rules, or SEBI directions, they can be fined.
• Penalty: ₹1 lakh to ₹25 crore, depending on the severity.
Example: Insider trading, fraudulent manipulation, or misuse of investor accounts fall
under this.
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6. Penalty for Fraudulent or Unfair Trade Practices
If someone intentionally deceives investors – like forging demat statements, manipulating
balances, or running scams – SEBI imposes strict penalties.
• Penalty: Up to ₹25 crore, or three times the amount of gains made, whichever is
higher.
Example: If a participant illegally transfers shares from investors’ accounts to benefit a
company, SEBI can impose a huge penalty.
Why Are These Penalties Important?
Without penalties, rules would just be words on paper. Penalties ensure:
• Discipline: Everyone knows breaking rules has consequences.
• Trust: Investors feel safe that their money and securities are protected.
• Fairness: Big companies or brokers can’t bully small investors.
• Efficiency: Depositories and participants work faster and more carefully.
Putting It All Together – A Story Recap
Think of the Depositories Act as a school classroom.
• The teacher (SEBI) ensures discipline.
• The students (depositories, participants, companies, investors) must follow rules.
• If a student misbehaves, the teacher first enquires (asks what happened, listens to
both sides).
• If guilty, the teacher gives a penalty (warning, fine, or punishment).
This cycle ensures the classroom remains peaceful, fair, and productive. Similarly, the
enquiry and penalty provisions of the Depositories Act ensure that India’s financial market
remains transparent, trustworthy, and investor-friendly.
Conclusion
The enquiry and penalty provisions of the Depositories Act act like the backbone of investor
protection. Enquiry ensures that no one is punished without a fair hearing, while penalties
ensure that guilty parties face real consequences. Together, they build confidence in the
financial system, attract more investors, and prevent fraud.
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In simple words:
• Enquiry is the investigation.
• Penalty is the punishment.
• Together, they create accountability and trust.
And just like cricket without an umpire would be chaotic, the securities market without
enquiry and penalties would collapse into disorder. That’s why these provisions are not just
rules but the very soul of investor protection in India.
“This paper has been carefully prepared for educational purposes. If you notice any mistakes or
have suggestions, feel free to share your feedback.”
