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GNDU Question Paper-2023
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. Write short notes on:
(a) Acceptance houses
(b) Discount houses
2. What is Money Market? Discuss the recent trends in Indian Money Market.
SECTION-B
3. What is over the counter exchange? How market-makers operate to buy and sell the
securities in OTCEI?
4. Explain the composition of National Stock Exchange (NSE) in India.
SECTION-C
5. What is mutual fund? Explain its types and their benefits in detail.
6. Discuss the scope and functions of Securities and Exchange Board of India.
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SECTION-D
7. Explain the rights and obligations of depositories as per Depositories Act, 1996.
8. How the introduction of depository system took away the limitations of traditional
system? Briefly discuss.
GNDU Answer Paper-2023
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. Write short notes on:
(a) Acceptance houses
(b) Discount houses
Ans: A New Starting Point: Imagine You’re on a Busy Street in Old London
Picture yourself walking through the bustling financial district of London about a hundred
years ago. Horse carriages are rattling by, bankers are rushing in and out of tall stone
buildings, and traders are carrying stacks of papers instead of smartphones. Every street
corner smells of ink and paper because bills, drafts, and contracts are the lifeblood of
business.
Now, in the middle of all this, two very special kinds of institutions stand tall: Acceptance
Houses and Discount Houses. They may sound like dry technical terms, but in reality, they
were the “invisible hands” that kept trade and finance running smoothly. Without them,
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merchants would struggle to trust one another, and traders might run out of cash even
when business was booming.
Let me unfold their story one by one, in the simplest way possible, so you’ll not only
understand them but also enjoy the journey.
(a) Acceptance Houses – The Guardians of Trust
Think about a small merchant in India in the early 1900s who wants to sell jute to a trader in
England. The merchant is nervous: “What if the trader doesn’t pay me after I send the
goods?” On the other hand, the trader also worries: “What if the merchant doesn’t deliver
the jute as promised?”
Here comes the Acceptance House, like a powerful referee in the middle.
What is an Acceptance House?
An Acceptance House is a special type of merchant banking institution that would “accept”
a bill of exchange (a kind of promise to pay). By stamping its acceptance, it guaranteed that
payment would be made on the due date, no matter what.
Think of it like this:
• Without acceptance houses, business was like playing a cricket match with no
umpire—lots of doubts and quarrels.
• With acceptance houses, everyone trusted the game because a strong, reliable
“umpire” was ensuring fairness.
🛡 Why Were They Important?
1. Boosting International Trade: Merchants from different countries trusted each
other because an acceptance house stood behind the promise of payment.
2. Creating Confidence: Small traders could do business with big importers/exporters
because the acceptance house’s name carried weight.
3. Low Risk, High Trust: If an acceptance house promised, “This bill will be paid,” then
banks and investors were willing to buy that bill or lend money against it.
⚙ How Did It Work?
1. A trader drew a bill of exchange (say, “I will pay $10,000 in 90 days”).
2. Instead of just relying on his own shaky reputation, he took it to an acceptance
house.
3. The acceptance house stamped it, meaning: “Don’t worry, if he fails to pay, we will.”
4. Suddenly, that piece of paper was as good as cash!
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Real-Life Example
If you’re familiar with brands like Rothschild or Barings Bank, they began as acceptance
houses. Their acceptance carried so much prestige that merchants around the world felt
safe doing trade just because their name was written on a bill.
(b) Discount Houses – The Lifesavers of Liquidity
Now let’s cross the street and enter another story. Imagine you’re a banker with lots of bills
of exchange in your vault. Each bill will be paid in 3 or 6 months, but you need cash today
because customers are lining up to withdraw money.
Who can help you? That’s where the Discount House enters the scene.
What is a Discount House?
A Discount House is like a “money market shop” that specialized in buying and selling short-
term bills of exchange. They didn’t just hold bills—they actively traded them. By doing this,
they provided quick cash (liquidity) to banks and businesses.
You can think of them like a pawn shop for bills—except instead of pawning jewelry, banks
pawned bills of exchange.
🛡 Why Were They Important?
1. Quick Cash for Banks: If banks needed money urgently, they sold bills to discount
houses.
2. Smooth Money Market: They kept the flow of cash steady in the economy by acting
as middlemen between banks, businesses, and even the central bank.
3. Safe Haven for Investors: People with extra cash invested in bills through discount
houses, earning safe returns.
⚙ How Did It Work?
1. A bank had a bill worth ₹1,00,000, payable after 3 months.
2. The discount house bought it immediately but at a slightly lower price, say ₹98,000.
3. After 3 months, the discount house collected the full ₹1,00,000.
4. The ₹2,000 difference was its profit, known as the discount.
This way, banks got instant cash, and discount houses made steady earnings.
Real-Life Role
In London, discount houses were famous because they had a close relationship with the
Bank of England. Whenever the Bank of England wanted to control money supply, it dealt
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directly with these houses. They were like the “thermostat” of the financial market—cooling
things down or heating them up as needed.
Acceptance Houses vs. Discount Houses – A Quick Contrast
Feature
Acceptance Houses 🛡
Discount Houses
Main Role
Guarantee payment of bills
Provide liquidity by buying/selling
bills
Trust Factor
Gave confidence in international
trade
Gave banks cash when needed
Core
Activity
“Accepting” bills of exchange
“Discounting” bills of exchange
Impact
Strengthened trade relations
Kept the money market smooth
Famous For
Merchant banking, prestige
Liquidity, link with central bank
Why Should You Care Today?
Now you may be wondering: “All this is history. Why do I need to remember it?”
Well, modern banking systems—letters of credit, trade finance, money markets—are built
on the backbone of what acceptance and discount houses did. They taught us how to:
• Build trust in trade, even across oceans.
• Keep money flowing smoothly, even when payments take time.
So, understanding them is like understanding the ancestors of our current financial heroes.
Final Words
Acceptance Houses and Discount Houses may sound like technical institutions, but in reality,
they were the pillars of trust and liquidity in the old financial world. Acceptance houses
acted as the guardians of promises, ensuring that traders across continents could deal with
confidence. Discount houses acted as the lifesavers of liquidity, making sure banks and
businesses never ran dry of cash while waiting for payments.
Together, they kept the engine of trade and money markets running smoothly. Without
them, international commerce in the 18th, 19th, and even early 20th centuries would have
been full of doubts, delays, and breakdowns.
And that, in the simplest human way, is why these two institutions deserve a special place in
the history of banking and finance.
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2. What is Money Market? Discuss the recent trends in Indian Money Market.
Ans: Scene 1: Understanding the Money Market
In simple words:
The Money Market is a segment of the financial market where short-term funds (with
maturities of up to one year) are borrowed and lent, usually through highly liquid and
low-risk instruments.
It’s not a physical marketplace like a stock exchange floor — it’s a network of banks,
financial institutions, corporations, and the government, all connected through electronic
systems, phone lines, and now, digital platforms.
Purpose of the Money Market
• Liquidity Management: Helps banks and institutions manage short-term cash needs.
• Efficient Fund Allocation: Surplus funds from one participant flow to those who
need them.
• Monetary Policy Implementation: The Reserve Bank of India (RBI) uses it to control
liquidity and interest rates.
• Safe Investment Avenue: For investors with temporary surplus funds.
Key Instruments
Think of these as the “products” traded in the money market:
• Call Money / Notice Money — Overnight to 14-day interbank loans.
• Treasury Bills (T-Bills) — Short-term government securities (91, 182, 364 days).
• Commercial Paper (CP) — Unsecured short-term debt by corporates.
• Certificates of Deposit (CD) — Negotiable term deposits issued by banks.
• Repos and Reverse Repos — Collateralised short-term borrowing/lending.
• Money Market Mutual Funds — Pooled investments in money market instruments.
Scene 2: The Indian Money Market — A Quick Character Sketch
The Indian money market has two main “wings”:
1. Organised Sector — Regulated by the RBI; includes banks, primary dealers, mutual
funds, and other financial institutions.
2. Unorganised Sector — Indigenous bankers, moneylenders, chit funds; largely
outside RBI’s direct control.
Over the last two decades, reforms have strengthened the organised sector, modernised
trading systems, and improved transparency.
Scene 3: Recent Trends in the Indian Money Market
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Now, let’s step into the “live feed” and see what’s been changing in recent years.
1. Digital Transformation and Online Platforms
• Trading in money market instruments has moved almost entirely to electronic
platforms.
• RBI’s Negotiated Dealing System – Order Matching (NDS-OM) and other digital
interfaces have made transactions faster, more transparent, and accessible.
• Mobile banking and fintech integration allow even smaller institutions to participate
efficiently.
Impact: Reduced settlement times, better price discovery, and lower operational risks.
2. Greater Role of the RBI in Liquidity Management
• RBI actively uses repo and reverse repo operations to manage short-term liquidity.
• Introduction of Variable Rate Reverse Repo (VRRR) auctions to absorb excess
liquidity.
• Fine-tuning operations (overnight, 7-day, 14-day) to respond quickly to market
conditions.
Impact: More dynamic control over inflation and interest rates.
3. Rise in Government Securities (G-Secs) Trading
• T-Bills remain a preferred instrument for banks and mutual funds due to their safety
and liquidity.
• Increased participation by retail investors through RBI’s Retail Direct Scheme.
• Secondary market activity in short-term G-Secs has grown, improving liquidity.
4. Growth of Commercial Paper and Certificates of Deposit
• Corporates increasingly use CPs for working capital needs due to competitive rates.
• Banks issue CDs to manage seasonal liquidity mismatches.
• Post-pandemic, CP and CD markets have rebounded strongly as credit demand rises.
5. Impact of Monetary Policy Shifts
• During the COVID-19 pandemic, RBI reduced policy rates and injected massive
liquidity.
• In the post-pandemic recovery, RBI has gradually tightened liquidity to control
inflation.
• Money market rates now respond quickly to policy changes, reflecting improved
transmission.
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6. Integration with Global Markets
• Foreign Portfolio Investors (FPIs) have limited but growing access to certain money
market instruments.
• Global interest rate trends (like US Fed rate hikes) influence Indian short-term rates
through capital flows.
7. Push for Financial Inclusion
• RBI and government initiatives aim to connect more participants — including smaller
NBFCs and cooperative banks — to the organised money market.
• Digital KYC and simplified onboarding have lowered entry barriers.
8. Increased Regulatory Oversight
• SEBI and RBI have tightened norms for mutual funds investing in money market
instruments to reduce credit and liquidity risks.
• Enhanced disclosure requirements for issuers of CPs and CDs.
9. Shift Towards Shorter Maturities
• In uncertain economic conditions, participants prefer shorter-term instruments to
reduce interest rate risk.
• Overnight and 7-day repos have seen higher volumes compared to longer maturities.
10. Emphasis on Transparency and Risk Management
• Real-time reporting of trades.
• Centralised clearing through Clearing Corporation of India Ltd. (CCIL) to reduce
counterparty risk.
• Stress testing and scenario analysis by major participants.
Scene 4: A Mini Story — A Day in the Modern Indian Money Market
It’s 10:00 a.m. on a Tuesday.
• A public sector bank, flush with deposits, lends ₹500 crore in the call money market
to a private bank that needs to meet reserve requirements.
• A mutual fund invests ₹200 crore in 91-day T-Bills through the RBI’s online platform.
• A large corporate issues Commercial Paper to raise ₹100 crore for inventory
purchases; a bank and an NBFC subscribe.
• RBI conducts a 7-day VRRR auction to absorb excess liquidity from the system.
By 5:00 p.m., all trades are settled electronically, and the day’s liquidity flows are balanced
— quietly ensuring that the broader economy runs without a hitch.
Scene 5: Why These Trends Matter
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• For Investors: More options, better access, and safer systems.
• For Corporates: Flexible, cost-effective short-term funding.
• For the Economy: Efficient liquidity management supports growth and stability.
• For Policymakers: A responsive money market improves monetary policy
effectiveness.
Exam-Ready Summary
Money Market:
• Market for short-term funds (maturity ≤ 1 year), high liquidity, low risk.
• Instruments: Call/Notice Money, T-Bills, CP, CD, Repos, MMMFs.
• Participants: RBI, banks, mutual funds, corporates, NBFCs, government.
Recent Trends in Indian Money Market:
1. Digital trading platforms (NDS-OM, fintech integration).
2. Active RBI liquidity operations (repo, reverse repo, VRRR).
3. Growth in G-Secs trading and retail participation.
4. Expansion of CP and CD markets.
5. Quick rate response to monetary policy changes.
6. Gradual integration with global markets.
7. Financial inclusion of smaller players.
8. Stricter regulatory oversight.
9. Preference for shorter maturities.
10. Stronger transparency and risk management.
Final Takeaway: The Indian money market has transformed from a largely manual,
limited-access network into a tech-driven, transparent, and responsive system. It’s now a
vital, real-time control room for the economy’s liquidity — quietly ensuring that money
flows where it’s needed, when it’s needed, and at the right cost.
SECTION-B
3. What is over the counter exchange? How market-makers operate to buy and sell the
securities in OTCEI?
Ans: Scene 1: The Birth of OTCEI — A Market for the Underserved
Back in the early 1990s, India’s capital markets were dominated by big companies. Small and
medium-sized enterprises (SMEs) often couldn’t meet the strict listing requirements of the
Bombay Stock Exchange (BSE) or the newly emerging National Stock Exchange (NSE).
The result?
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• They had limited access to public capital.
• Investors had fewer opportunities to invest in promising smaller companies.
To bridge this gap, the Over The Counter Exchange of India (OTCEI) was incorporated in
1990 and began operations in 1992. It was modelled on the NASDAQ in the USA — a fully
computerised, screen-based, transparent trading system without a centralised trading floor.
Scene 2: What is an Over The Counter Exchange?
In simple words:
An Over The Counter (OTC) exchange is a decentralised marketplace where securities are
traded directly between parties, often through a network of dealers, rather than on a
centralised physical exchange floor.
For OTCEI specifically:
• It’s an electronic stock exchange for small and medium companies.
• Trading happens through OTCEI counters located across the country.
• Investors can see live quotes on a computer screen and place buy/sell orders.
• Settlement is handled electronically, reducing paperwork and delays.
Objectives of OTCEI
1. Provide Capital Access to SMEs — Let smaller companies raise funds from the public
at lower costs.
2. Offer Liquidity to Investors — Allow easy buying and selling of SME shares.
3. Ensure Transparency — Use a screen-based system to display real-time prices.
4. Reduce Costs and Paperwork — Fully electronic trading and settlement.
5. Encourage Wider Participation — Reach investors in smaller towns through OTCEI
counters.
Scene 3: How OTCEI Works — The Investor’s Journey
Imagine you’re an investor in Amritsar in 1995:
1. You walk into an OTCEI counter run by a registered dealer.
2. On the screen, you see a list of companies, their current buy and sell quotes, and the
names of market-makers for each.
3. You decide to buy 500 shares of “ABC Electronics Ltd.” at the quoted price.
4. The dealer executes the trade electronically.
5. Settlement happens quickly, and your demat account is credited.
No shouting brokers, no physical share certificates — just a clean, tech-driven process (quite
advanced for its time in India).
Scene 4: Who Are Market-Makers?
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Here’s where the story gets interesting.
In any market, liquidity is key — you need someone willing to buy when others want to sell,
and sell when others want to buy. In OTCEI, this role is played by market-makers.
Definition:
A market-maker is a registered dealer who continuously quotes both a buy price (bid) and a
sell price (ask) for a particular security, and is committed to buying and selling that security
in specified minimum quantities.
Why They’re Needed in OTCEI:
• Many SME shares don’t trade frequently.
• Without market-makers, an investor might struggle to find a counterparty.
• Market-makers ensure there’s always a two-way market — providing liquidity and
price stability.
Scene 5: How Market-Makers Operate in OTCEI
Let’s step into the shoes of a market-maker for “XYZ Textiles Ltd.”:
1. Appointment and Commitment
• You’re appointed as the market-maker for XYZ Textiles.
• You commit to holding a certain minimum inventory of its shares.
• You agree to quote both buy and sell prices during trading hours.
2. Continuous Two-Way Quotes
• On the OTCEI screen, you display:
o Bid Price: ₹48 (you’re willing to buy at this price).
o Ask Price: ₹52 (you’re willing to sell at this price).
• These prices are visible to all investors.
3. Executing Trades
• An investor wants to sell 1,000 shares — you buy them at ₹48.
• Another investor wants to buy 500 shares — you sell them at ₹52.
• You earn the spread (₹4 per share in this example) as your profit margin.
4. Inventory Management
• You maintain enough shares to meet selling demand.
• You also keep enough funds to buy shares when investors want to sell.
• If your inventory gets too high or low, you adjust your quotes to balance it.
5. Obligations of Market-Makers
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• Maintain Liquidity: Always be ready to buy/sell in minimum specified lots.
• Quote Fair Prices: Reflect market conditions; avoid manipulation.
• Transparency: Display quotes clearly on the OTCEI system.
• Stability: Avoid sudden, unjustified price changes.
6. Benefits to the Market
• For Investors: Confidence that they can enter or exit positions easily.
• For Companies: More attractive to investors if their shares are liquid.
• For the Exchange: Smooth trading and better price discovery.
Scene 6: A Mini Story — Market-Maker in Action
It’s Thursday afternoon.
• The market-maker for “Sunrise Agro Ltd.” notices there’s more selling pressure
today — farmers are cashing in after a good harvest season.
• He lowers his bid price slightly to ₹95 and his ask price to ₹99 to encourage buyers.
• By end of day, he’s bought 5,000 shares and sold 4,800 — keeping the market active
and prices stable.
Without him, sellers might have had to wait days to find buyers, and prices could have
swung wildly.
Scene 7: Why OTCEI and Market-Makers Mattered
For small companies:
• OTCEI was a gateway to public capital.
• Market-makers made their shares more attractive by ensuring liquidity.
For investors:
• OTCEI offered access to emerging companies.
• Market-makers reduced the risk of being “stuck” with illiquid shares.
Exam-Ready Summary
Over The Counter Exchange of India (OTCEI):
• Meaning: Electronic stock exchange for SMEs, started in 1992, modelled on
NASDAQ.
• Purpose: Give small companies access to capital; provide investors with transparent,
low-cost trading.
• Features: No physical floor; trading via OTCEI counters; screen-based quotes;
electronic settlement.
Market-Makers in OTCEI:
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• Definition: Registered dealers who continuously quote buy and sell prices for a
security and are committed to trading in it.
• Role: Provide liquidity, ensure two-way market, stabilise prices.
• Operation:
1. Appointed for specific securities.
2. Maintain inventory and funds.
3. Display continuous two-way quotes.
4. Execute trades at quoted prices.
5. Manage inventory to balance supply and demand.
• Benefits: Liquidity for investors, attractiveness for companies, smoother market
functioning.
Final Takeaway: Think of OTCEI as a specialised marketplace for smaller companies, and
market-makers as the shopkeepers who always have stock on the shelves and cash in the till
— ready to buy from you or sell to you at fair prices. Together, they made sure that even the
“smaller stalls” in India’s capital market could stay open, active, and welcoming to investors.
4. Explain the composition of National Stock Exchange (NSE) in India.
Ans: Once upon a time, in the early 1990s, India’s financial markets were facing a big
problem. The stock market was dominated by old-style trading floors—brokers shouting
bids and offers, deals happening on pieces of paper, and very little transparency. Scams and
manipulations made small investors nervous.
At that point, the Government of India and financial regulators decided that India deserved
a modern, transparent, and technology-driven stock exchange that could match
international standards. This vision gave birth to the National Stock Exchange (NSE) in 1992,
which officially started trading in 1994.
So, NSE wasn’t just another stock exchange. It was India’s answer to creating a fair,
computerized, and nationwide platform where anyone, from a small investor in a village to
a giant corporation in Mumbai, could buy and sell shares with equal opportunities.
But here’s where the story gets interesting: NSE is not just a building or a website—it’s an
organization with different parts, like organs in a body, working together to keep it alive
and efficient. This is where the “composition” comes into play.
The Backbone: Ownership and Promoters
When NSE was first set up, it needed strong institutions to back it. Unlike the Bombay Stock
Exchange (BSE), which was broker-driven, NSE was designed to be institutional-driven.
The key promoters included:
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• IDBI (Industrial Development Bank of India)
• LIC (Life Insurance Corporation of India)
• SBI (State Bank of India) and its subsidiaries
• IFCI (Industrial Finance Corporation of India)
• ICICI Bank
• Other public sector financial institutions
These institutions weren’t just investors—they were the guardians of NSE, ensuring that it
would operate with integrity, professionalism, and without the dominance of a few brokers.
This is what made NSE different right from day one.
The Governing Council: The “Brain” of NSE
Every organization needs a brain to make decisions. For NSE, this is the Board of Directors
and the Governing Council.
The Governing Council is carefully structured so that no single group can dominate. It
includes:
1. Public representatives – These are professionals from finance, law, or academia who
bring an outsider’s independent view.
2. Nominees of institutional investors – Since institutions promoted NSE, they get
seats on the council.
3. Professional full-time directors – Experts who run the day-to-day business.
4. Regulatory nominees – Sometimes, nominees from the SEBI (Securities and
Exchange Board of India) keep an eye on functioning.
This structure ensures transparency. It’s almost like having a “mini-parliament” inside NSE
that debates, decides, and guides how the exchange must work.
NSE’s Unique Composition: The Divisions Inside
Think of NSE as a large house with different rooms, each serving a purpose. These rooms
(divisions) together form the composition of NSE:
1. Capital Market Segment
o This is the most well-known part where shares of companies are bought and
sold.
o For example, when you hear that Reliance’s share price is rising or Infosys is
falling—that trading happens in this segment.
2. Wholesale Debt Market (WDM) Segment
o Here, big institutions trade in government securities, bonds, and debt
instruments.
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o Common investors rarely step into this room, but it is crucial for the economy
because the government raises funds here.
3. Derivatives Segment
o This segment deals with futures and options—contracts that allow people to
trade based on predictions of future prices.
o For instance, if you think Nifty will go up next month, you can buy a futures
contract.
4. Currency Derivatives Segment
o Introduced later, this allows trading in foreign currency pairs like USD/INR,
EUR/INR, etc.
o It’s important for exporters, importers, and investors who want to manage
currency risk.
5. Mutual Fund Service System (MFSS)
o A platform that helps in buying and selling mutual funds through brokers.
6. Debt Segment for Retail
o This is where smaller investors can directly buy government bonds and
corporate bonds in smaller quantities.
So, NSE is not just a “share market”; it is a multi-asset exchange where equities, debt,
derivatives, and currencies are traded under one roof.
The Nervous System: Technology Backbone
One of the most powerful elements in NSE’s composition is its technology. Remember,
when it started in the 1990s, NSE introduced something unheard of in India—screen-based
trading.
Instead of shouting in a crowded hall, brokers now clicked on computer screens.
Transactions were recorded automatically, leaving little scope for manipulation. Today,
NSE’s technology is so advanced that it handles millions of trades per second, making it one
of the fastest stock exchanges in the world.
Clearing and Settlement: The Heartbeat
What happens after you buy a share? You must get it in your account, and the seller must
receive money. This is where NSE’s clearing corporation comes in—the National Securities
Clearing Corporation Limited (NSCCL).
• NSCCL guarantees that trades are settled, meaning even if a buyer or seller defaults,
the system ensures no one loses money unfairly.
• This creates trust. Without this system, no one would dare trade.
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The Watchdog: Regulatory Framework
NSE doesn’t operate independently like a king. It is always under the watchful eyes of SEBI.
The exchange must follow strict rules to ensure fair play, prevent insider trading, and
protect small investors.
Additionally, NSE has its own surveillance team that monitors suspicious activities and
unusual price movements. Think of it as the “CCTV camera” of the exchange.
Subsidiaries of NSE
Over time, NSE has created specialized arms (subsidiaries) to manage its various roles. Some
of them are:
• NSCCL (for clearing and settlement)
• NSEIT (technology solutions)
• NSE Academy (investor education and training)
• NSE Indices Ltd. (manages indices like Nifty 50)
These subsidiaries are like the children of NSE, each handling a specific responsibility.
NSE’s Indices: The Face of NSE
When people talk about NSE, they often mention Nifty 50. This is an index made up of the
top 50 companies listed on NSE. It acts like a mirror of the Indian economy. But NSE has
many more indices—banking, IT, pharma, mid-cap, small-cap, etc.
So, indices are another important part of NSE’s composition, as they provide benchmarks
for investors.
Putting It All Together
If we visualize the composition of NSE:
• Promoters & Institutions → The backbone
• Governing Council & Board → The brain
• Technology → The nervous system
• Clearing Corporation → The heart
• Segments (Equity, Debt, Derivatives, Currency) → The rooms of the house
• Regulations & Surveillance → The watchdog
• Indices & Subsidiaries → The face and family of NSE
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Together, these parts make NSE not just a marketplace but an ecosystem that supports
India’s financial growth.
Conclusion: NSE as a Living Story
The National Stock Exchange is not a lifeless institution; it’s almost like a living organism
with a brain, heart, nervous system, and watchful eyes. From being a bold idea in the 1990s,
it has grown into India’s largest stock exchange and one of the most respected exchanges
globally.
Its composition—covering promoters, governance, technology, divisions, clearing systems,
subsidiaries, and indices—is what makes it unique and trustworthy.
So, whenever you hear the word NSE, don’t just imagine people buying and selling shares.
Picture a giant, well-structured organization where every part has a role to play, just like
characters in a story. That’s the real beauty of its composition.
SECTION-C
5. What is mutual fund? Explain its types and their benefits in detail.
Ans: What is a Mutual Fund?
A mutual fund is an investment vehicle that collects money from many investors and invests
that pooled amount into a diversified portfolio of assets — such as shares, bonds, money
market instruments, or a mix of these — according to a defined investment objective.
The fund is managed by a professional fund manager (or a team) working for an Asset
Management Company (AMC).
• Investors don’t directly own the underlying securities; instead, they own units of the
mutual fund.
• The value of each unit is called the Net Asset Value (NAV), which changes daily
based on the market value of the fund’s holdings.
Mutual funds in India are regulated by the Securities and Exchange Board of India (SEBI),
ensuring transparency, investor protection, and fair practices.
How It Works — Step by Step
1. Pooling of Money — Investors buy units of the fund by contributing money.
2. Professional Management — The fund manager invests this money in line with the
fund’s stated objective.
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3. Diversification — The fund spreads investments across multiple securities to reduce
risk.
4. NAV Calculation — NAV = (Total value of assets – liabilities) ÷ number of units.
5. Returns — Investors earn through:
o Capital gains (when securities are sold at a profit)
o Dividends or interest from the securities held
6. Liquidity — In open-ended funds, investors can redeem units at the current NAV.
Types of Mutual Funds
Mutual funds can be classified in several ways — by asset class, structure, or investment
objective. Let’s explore the main categories in a simple, relatable way.
1. Based on Asset Class
a) Equity Funds
• Invest primarily in shares of companies.
• Aim for capital appreciation over the long term.
• Higher risk, higher potential returns.
• Sub-types:
o Large-Cap Funds — Invest in top 100 companies by market capitalisation;
relatively stable.
o Mid-Cap Funds — Invest in mid-sized companies; more growth potential,
more volatility.
o Small-Cap Funds — Invest in smaller companies; highest growth potential,
highest risk.
o Multi-Cap Funds — Invest across large, mid, and small caps.
o Sectoral/Thematic Funds — Focus on specific sectors like IT, pharma,
banking.
b) Debt Funds
• Invest in fixed-income instruments like government securities, corporate bonds,
debentures, and money market instruments.
• Aim for regular income and capital preservation.
• Lower risk than equity funds, but returns are also generally lower.
• Sub-types:
o Liquid Funds
o Short-Term and Long-Term Bond Funds
o Gilt Funds (invest in government securities)
c) Hybrid Funds
• Invest in a mix of equity and debt.
• Aim to balance risk and return.
• Sub-types:
o Aggressive Hybrid (more equity)
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o Conservative Hybrid (more debt)
o Balanced Advantage/Dynamic Asset Allocation Funds
d) Other Categories
• Index Funds — Track a market index like Nifty 50 or Sensex.
• Exchange Traded Funds (ETFs) — Like index funds but traded on stock exchanges.
• Solution-Oriented Funds — For specific goals like retirement or children’s education.
• Fund of Funds — Invest in other mutual funds.
2. Based on Structure
a) Open-Ended Funds
• Investors can buy or sell units at any time at the prevailing NAV.
• No fixed maturity.
b) Close-Ended Funds
• Have a fixed maturity period.
• Units are issued only during the initial offer period and are traded on exchanges.
3. Based on Investment Objective
• Growth Funds — Aim for capital appreciation.
• Income Funds — Aim for regular income.
• Tax-Saving Funds (ELSS) — Equity-linked savings schemes with tax benefits under
Section 80C.
Benefits of Mutual Funds
Mutual funds have become popular because they offer a combination of advantages that
appeal to both beginners and seasoned investors.
1. Professional Management
• Fund managers are experienced professionals who analyse markets, select
securities, and manage the portfolio.
• Saves investors the time and effort of researching and monitoring investments
themselves.
2. Diversification
• Even a small investment is spread across many securities, reducing the impact if one
performs poorly.
• “Don’t put all your eggs in one basket” — mutual funds make this easy.
3. Liquidity
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• In open-ended funds, you can redeem units any business day and receive money in
your bank account within a few days.
4. Accessibility
• Low entry barriers — you can start with as little as ₹500 in some schemes.
• Systematic Investment Plans (SIPs) allow disciplined, regular investing.
5. Transparency
• Regular disclosures of portfolio holdings, NAV, and performance.
• Regulated by SEBI, ensuring investor protection.
6. Variety
• Wide range of funds to suit different risk appetites, time horizons, and goals.
7. Tax Benefits
• ELSS funds offer tax deductions under Section 80C.
• Debt and equity funds have different capital gains tax treatments, which can be
planned for efficiency.
8. Convenience
• Easy to invest, track, and redeem online.
• Automatic reinvestment of dividends if desired.
An Illustrative Example
Suppose you invest ₹10,000 in an equity mutual fund.
• The fund pools your money with thousands of other investors.
• The fund manager invests in, say, 50 different company shares.
• Over a year, some shares rise, some fall, but overall the portfolio grows by 12%.
• Your investment is now worth ₹11,200 (minus expenses).
• You didn’t have to pick the shares yourself, yet you enjoyed the benefit of a
diversified, professionally managed portfolio.
Why Mutual Funds Suit Many Investors
They are ideal for:
• Beginners who want expert management.
• Busy professionals who can’t track markets daily.
• Investors with small amounts to invest.
• Those seeking diversification without large capital.
• People with specific goals — retirement, education, wealth creation.
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Mutual funds are not risk-free — their value can go up or down with market conditions —
but they offer a structured, regulated, and accessible way to participate in financial markets.
By choosing the right type of fund based on your goals, time horizon, and risk tolerance, you
can make them a powerful tool in your wealth-building journey.
6. Discuss the scope and functions of Securities and Exchange Board of India.
Ans: The Story of SEBI: The Watchdog of Indian Securities Market
Imagine you are visiting a grand marketplace. In this market, traders are buying and selling
not vegetables or clothes but something more valuable — shares, bonds, mutual funds, and
other financial instruments. This market is called the securities market.
Now, in such a huge and complicated market, what do you think might go wrong if there
were no rules?
• Some traders might cheat investors.
• Big companies might manipulate prices for their own benefit.
• Small investors might get scared and stop participating.
• The market might lose credibility and collapse like a house of cards.
To prevent such chaos, India needed a watchdog, someone who could make rules, enforce
discipline, protect investors, and ensure fair play. This is where SEBI — the Securities and
Exchange Board of India — enters the story.
SEBI was established in 1988 (initially as a non-statutory body) and later given full legal
power through the SEBI Act, 1992. Since then, it has acted as the guardian of India’s
securities market.
Let’s now unfold the scope and functions of SEBI in a way that makes sense like a well-told
tale.
Scope of SEBI: The Wide Arms of the Watchdog
The word “scope” simply means — how wide is SEBI’s responsibility, what areas does it
cover, and where does its power extend? Think of SEBI’s scope as the circle within which it
can act.
1. Regulating the Securities Market
SEBI’s first and foremost scope is to regulate the securities market of India. This
includes stock exchanges like NSE and BSE, the trading of shares, bonds, and
derivatives. It ensures that the market runs smoothly, transparently, and without
unfair practices.
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2. Protecting Investors
Imagine a small investor putting his savings into shares. He may not have full
knowledge about the complex tricks of the market. SEBI’s scope covers investor
protection, ensuring that such small investors do not get exploited by big market
players.
3. Regulating Market Participants
The securities market has many participants: brokers, sub-brokers, merchant
bankers, mutual funds, portfolio managers, investment advisers, and credit rating
agencies. SEBI keeps all of them under its umbrella, making sure they follow rules.
4. Promoting Healthy Market Development
SEBI’s scope isn’t just about punishing wrongdoers. It also promotes positive
development of the securities market by introducing new products (like derivatives,
ETFs), upgrading technology, and creating awareness among investors.
5. Balancing Growth and Fairness
SEBI walks a fine line. On one side, it has to encourage companies to raise funds
through markets. On the other side, it has to protect investors from unfair
exploitation. Its scope lies in balancing these two responsibilities.
In short, SEBI’s scope extends across regulation, protection, supervision, and development
of the entire securities market in India.
Functions of SEBI: What Exactly Does the Watchdog Do?
Now that we know SEBI’s scope, let’s break down its functions — or in simple words, the
“day-to-day work” SEBI does. These functions can be grouped into three main categories:
1. Protective Functions
These are like a shield, where SEBI safeguards investors from exploitation. Some of the key
protective functions are:
• Prohibiting unfair trade practices: SEBI keeps a check on price rigging, insider
trading, and misleading advertisements. For example, if a company secretly leaks
sensitive information to a few investors, SEBI can punish it.
• Educating investors: Through investor awareness programs, SEBI spreads financial
literacy so that investors can make informed decisions.
• Refunds and compensation: In case of fraud, SEBI ensures that investors get justice
through refunds, penalties, or settlements.
2. Regulatory Functions
These are like rules and laws that SEBI enforces to keep the market disciplined:
• Registration of participants: Brokers, mutual funds, and credit rating agencies must
get registered with SEBI. This ensures accountability.
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• Regulating stock exchanges: SEBI sets rules for listing, delisting, and trading on
exchanges to maintain transparency.
• Corporate governance: SEBI ensures that companies disclose all material
information (profits, losses, directors’ details) so investors are not kept in the dark.
• Overseeing mergers and takeovers: Whenever big companies merge or acquire
others, SEBI supervises the process to prevent manipulation.
3. Developmental Functions
These are like growth activities, where SEBI helps the securities market evolve and improve:
• Introducing new products: SEBI has encouraged the introduction of modern
financial instruments like derivatives, ETFs, and REITs.
• Improving technology: Online trading, electronic record-keeping (demat), and digital
KYC are results of SEBI’s push for modernization.
• Training and research: SEBI promotes training programs for intermediaries and
funds research projects to strengthen market knowledge.
SEBI’s Powers: The Strength Behind Its Work
You might wonder, how does SEBI actually enforce its functions? Does it really have the
strength to punish wrongdoers? The answer is yes. Under the SEBI Act, SEBI has wide
powers such as:
• The power to conduct inquiries, audits, and inspections.
• The power to impose penalties and fines.
• The power to suspend or cancel registrations of intermediaries.
• The power to pass orders restraining companies or individuals from accessing the
market.
This means SEBI is not a mere advisory body but a strong regulator with teeth.
Why is SEBI Important?
Let’s connect the dots with a real-life perspective. Suppose there was no SEBI:
• Big industrialists could easily manipulate share prices.
• Ordinary investors might lose trust and stop investing.
• Companies might hide their financial weaknesses.
• The securities market might collapse under fraud and chaos.
Thanks to SEBI, India’s securities market has gained credibility, transparency, and investor
confidence. In fact, the growth of the Indian economy is strongly linked with the trust SEBI
has built over the years.
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Conclusion
The story of SEBI is essentially the story of a guardian who stands in the middle of a bustling
financial market. Its scope spreads across regulation, protection, supervision, and
development of the securities market. Its functions include protective, regulatory, and
developmental roles — each equally important.
By setting rules, punishing wrongdoers, protecting investors, and promoting growth, SEBI
ensures that India’s securities market remains strong, fair, and trustworthy.
So, if we think of the securities market as a huge game of chess, SEBI is like the referee —
making sure everyone plays fairly, no one cheats, and the game continues smoothly.
Without SEBI, the market would be a jungle. With SEBI, it becomes an organized playground
of opportunities.
SECTION-D
7. Explain the rights and obligations of depositories as per Depositories Act, 1996.
Ans: Understanding the Depository’s Role
A depository is like a bank, but instead of holding money, it holds securities in
dematerialised form. In India, there are two main depositories:
• NSDL — National Securities Depository Limited
• CDSL — Central Depository Services (India) Limited
They work through Depository Participants (DPs) — agents like banks, brokers, or financial
institutions — who interact directly with investors.
Rights of a Depository under the Depositories Act, 1996
These rights are like the “powers” given to the vault keeper so it can do its job efficiently.
1. Act as Registered Owner for Transfer Purposes
In the company’s official records, the depository’s name appears as the registered owner of
the securities.
• This makes it easier to transfer ownership electronically when trades happen.
• But this is only for transfer purposes — the depository does not get voting rights,
dividend rights, or any other benefits. Those remain with the beneficial owner (the
real investor).
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2. Enter into Agreements with Participants
A depository can appoint one or more DPs to act as its agents. It has the right to:
• Decide the terms of these agreements.
• Set service standards for 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. This simplifies transfers and
eliminates the risk of handling individual paper certificates.
4. Receive Information from Issuers
The depository can demand necessary information from companies whose securities it
holds — for example, details of bonus issues, rights issues, or corporate actions — so it can
update investor accounts.
5. Levy Fees for Services
It can charge fees for services like dematerialisation, rematerialisation, transfers, and
pledging of securities, as per SEBI guidelines.
6. Make Bye-Laws
A depository can frame its own bye-laws (internal rules) for smooth functioning, subject to
SEBI’s approval.
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, fraud, or wilful misconduct.
Obligations of a Depository under the Depositories Act, 1996
These are the strict duties the depository must follow to protect investors and maintain
trust in the system.
1. Maintain a Register of Beneficial Owners
Even though the depository’s name is on the company’s register, it must keep a detailed,
accurate, and up-to-date register of the real owners and their holdings.
2. Provide Services Only Through Participants
Depositories cannot deal directly with investors. They must operate through authorised DPs,
ensuring standardised service and accountability.
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3. Ensure Prompt Transfer and Settlement
When securities are bought or sold, the depository must ensure:
• Timely transfer in electronic form.
• Settlement within the prescribed time (e.g., T+1 or T+2 cycles).
4. Safeguard Interests of Beneficial Owners
The depository must:
• Protect investor holdings from misuse.
• Ensure corporate benefits (dividends, bonus shares, rights issues) reach the
beneficial owners promptly.
5. Facilitate Dematerialisation and Rematerialisation
On request, the depository must:
• Convert physical certificates into electronic form (dematerialisation).
• 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
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, it 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.
Rights and Obligations — Side by Side
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Rights
Obligations
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
A Simple Illustration
Suppose you buy 100 shares of “ABC Ltd.” through your broker (a DP).
• The depository’s name is recorded as the registered owner in ABC Ltd.’s books.
• You are recorded as the beneficial owner in the depository’s register.
• When ABC Ltd. declares a dividend, the company sends the money directly to you —
not to the depository.
• If you sell the shares, the depository updates its records and transfers ownership
electronically to the buyer, while ensuring settlement is completed on time.
Throughout this process, the depository uses its rights (to act as registered owner, to
receive information from the issuer) and fulfils its obligations (to safeguard your interests,
maintain accurate records, and ensure prompt settlement).
Why This Matters
The rights give the depository the authority to operate efficiently. The obligations ensure it
uses that authority responsibly, with investor protection at the core. Together, they make
the depository system one of the most trusted pillars of India’s modern capital market —
enabling paperless, fast, and secure trading for millions of investors.
8. How the introduction of depository system took away the limitations of traditional
system? Briefly discuss.
Ans: Imagine this: it’s the 1980s in India. Stock markets are buzzing, traders are shouting
across the floor, files of papers are stacked like mini mountains, and every investor carries a
bundle of physical share certificates. Buying and selling shares feels less like investment and
more like standing in a crowded railway station—confusing, slow, and prone to mistakes.
Investors often faced nightmares: What if the certificate got torn? What if the post office
lost it? What if someone forged your signature? And most frustratingly, the entire process
of transferring shares from one owner to another could take months!
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Now, fast forward to the 1990s. Technology is growing, and with it comes a revolutionary
idea: the Depository System. Just like banks keep your money safe in electronic form,
depositories were created to keep your shares safe in digital form. This was the turning
point that swept away the heavy baggage of the traditional system.
To understand how, let’s compare both worlds—the traditional paper-based system and the
modern depository system—and see how the new one solved the old problems.
1. The Problem of Paper Certificates
In the traditional system, shares were issued in the form of paper certificates. Investors had
to physically hold them, sign transfer deeds, and send them to companies for name changes
whenever shares were sold.
• Limitation: Paper certificates could be lost, stolen, forged, or damaged. Imagine
losing a certificate worth lakhs of rupees! It meant endless legal procedures,
affidavits, and stress.
• How Depository Solved It: With depositories, shares exist only in electronic form,
just like your money in a digital bank account. There’s nothing to lose, nothing to
tear, and no fear of forgery. The investor only needs a Demat account, and all shares
are safely stored online.
Think of it this way: earlier, you kept cash under your pillow and worried about theft; now
you keep it in a bank, safe and secure.
2. The Speed of Transfer
Earlier, transferring ownership of shares was painfully slow. When you bought shares, you
had to:
1. Fill in a transfer deed.
2. Attach the share certificate.
3. Send it to the company’s registrar.
4. Wait weeks, sometimes months, for the new certificate in your name.
• Limitation: Delays in transfer made investors frustrated. Sometimes, by the time the
transfer was complete, the market situation had completely changed.
• Depository Solution: In the depository system, transfer of ownership happens
instantly through electronic entries. If you sell today, your Demat account reflects
the change immediately.
It’s like comparing posting a letter by traditional post versus sending an email. Both deliver
messages, but one takes weeks, the other seconds.
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3. The Cost Factor
Handling physical certificates wasn’t just time-consuming—it was expensive. Printing,
stamping, handling paperwork, and paying transfer fees made the process heavy on
investors’ pockets.
• Limitation: Investors had to pay stamp duty on transfer of physical shares.
• Depository Solution: Electronic transfers removed the need for physical stamp duty.
Costs came down drastically, making investing accessible to more people.
Imagine paying extra charges every time you sent a WhatsApp message—that’s how the old
system felt. Depositories made investing much cheaper and smoother.
4. Risk of Bad Delivery
In the traditional system, many transfers failed because of errors: mismatched signatures,
wrong details, fake certificates, or incomplete paperwork. Such cases were called bad
deliveries. Resolving them meant disputes, delays, and even court cases.
• Limitation: High risk of rejection and disputes.
• Depository Solution: With electronic shares, there are no signatures, no mismatched
details, and no fake certificates. Everything is standardized and automatic. The
chances of error are almost zero.
It’s like online shopping. Earlier, if you bought something from a local shop and details didn’t
match, you ended up arguing. Today, with Amazon or Flipkart, your order is tracked and
error-free.
5. Liquidity and Investor Confidence
When shares took weeks to transfer, investors hesitated to trade frequently. This reduced
liquidity in the market. Also, frauds and paper-related risks made small investors nervous.
• Limitation: Low liquidity and weak investor confidence.
• Depository Solution: The depository system made trading fast, secure, and reliable.
Investors could buy and sell with confidence, knowing their money and shares were
safe. Liquidity improved, and more people started participating in the stock market.
It’s like people preferring digital wallets today—transactions are instant, safe, and
trustworthy, so more people use them.
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6. Corporate Benefits
Even companies faced trouble in the traditional system. Maintaining registers, printing
certificates, handling transfer requests, and dealing with investor complaints consumed
enormous time and manpower.
• Limitation: Companies had to spend heavily on administrative tasks.
• Depository Solution: With depositories, companies no longer need to issue paper
certificates or maintain bulky registers. Dividends, bonuses, and rights issues can be
credited directly to investors’ accounts with just a click.
This not only reduced costs but also improved transparency and efficiency in corporate
governance.
7. Global Integration
Earlier, India’s paper-based system looked outdated compared to global markets. Foreign
investors hesitated to invest because of paperwork and delays.
• Limitation: Lack of global competitiveness.
• Depository Solution: With electronic trading, India aligned with global standards.
Foreign Institutional Investors (FIIs) found it easier to invest, bringing more money
into the Indian markets.
Think of it like upgrading from an old landline phone to a smartphone—you suddenly
become part of a bigger, global network.
8. Settlement Efficiency
In the traditional system, settlement (exchange of money and securities) used to take
weeks, called the “account period system.” This created uncertainty and speculative risks.
• Limitation: Slow and risky settlement process.
• Depository Solution: The depository system introduced rolling settlement (T+2 or
T+1), meaning settlement happens within 1 or 2 working days. It reduced risks and
increased market stability.
Wrapping It Up: A Revolution in Disguise
The introduction of the Depository System wasn’t just a small change—it was a complete
revolution in the way India’s stock market worked. It solved nearly every limitation of the
traditional paper-based system:
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• It removed the risk of loss, theft, and forgery.
• It made transfers instant and hassle-free.
• It reduced costs and eliminated stamp duty.
• It wiped out the problem of bad deliveries.
• It boosted liquidity and investor confidence.
• It made companies’ work easier and more efficient.
• It opened India’s doors to global investors.
• It made settlement faster and safer.
In short, it transformed the stock market from a crowded, chaotic paper jungle into a
smooth, digital superhighway.
Final Thought
If the traditional system was like traveling in a bullock cart—slow, risky, and tiring—the
depository system is like zipping through on a high-speed train: fast, safe, and reliable. It
didn’t just take away the limitations; it redefined how Indians think about investing.
And that’s why, even today, the depository system is hailed as one of the biggest milestones
in the modernization of India’s financial markets.
“This paper has been carefully prepared for educational purposes. If you notice any mistakes or
have suggestions, feel free to share your feedback.”
