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GNDU Question Paper-2021
Bachelor of Business Administration
BBA 3
rd
Semester
INDIAN FINANCIAL SYSTEM
Time Allowed: Three Hours Max. Marks: 50
Note:- Question paper is divided into four sections A. B,C and D. Each section has two
questions. Candidates are required to attempt five questions, 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. Give an overview of Indian Financial System.
2. Discuss the role of SEBI as a regulatory body of financial markets.
SECTION-B
3. Examine the framework of Secondary Market in India.
4. Write a detailed note on Non Banking Financial Companies.
SECTION-C
5. Discuss the role of custodians, trustees and sponsors in mutual funds.
6. Throw light upon the IRDA Act of Insurance Companies.
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SECTION-D
7. Discuss in detail various instruments of Capital market.
8. "FII's and FDI's play an important role in the economic development of a
country." Explain.
GNDU Answer Paper-2021
Bachelor of Business Administration
BBA 3
rd
Semester
INDIAN FINANCIAL SYSTEM
Time Allowed: Three Hours Max. Marks: 50
Note:- Question paper is divided into four sections A. B,C and D. Each section has two
questions. Candidates are required to attempt five questions, 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. Give an overview of Indian Financial System.
Ans: The Grand Stage: What Is the Indian Financial System?
The Indian Financial System (IFS) is essentially the country’s money circulation network. It’s
the collection of institutions, markets, instruments, and services that help move money
from those who have surplus (savers, investors) to those who need funds (businesses,
governments, individuals). Think of it like a bridge that links money-givers with money-
users, ensuring both can benefit: savers earn returns and borrowers get the funds to grow.
Four Pillars Holding the System Together
To understand the IFS, let’s picture it as a grand palace built on four strong pillars. Each
pillar plays a unique role, but together they hold up the entire structure.
󷃆󷃊 Financial Institutions – The Service Providers
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These are the heart and muscle of the system. They take in funds, channel them, and help
the economy breathe.
They can be divided into:
• Banking Institutions (Organized Sector):
o Commercial Banks (SBI, HDFC, ICICI, etc.) – accept deposits, provide loans,
manage payments.
o Cooperative Banks – serve rural areas, farmers, and small businesses.
o Regional Rural Banks (RRBs) – focus on rural financing.
• Non-Banking Financial Institutions (NBFCs):
o Provide loans and financial services without being full-fledged banks (e.g.,
Bajaj Finance, Muthoot Finance).
• Development Financial Institutions (DFIs):
o Created for long-term funding in specific sectors (e.g., NABARD for
agriculture, SIDBI for small industries).
Role: They are like the “money stations” where funds are stored, borrowed, or invested.
󷃆󷃋 Financial Markets – The Meeting Grounds
Imagine a grand trading hall where buyers and sellers of money instruments meet. Financial
markets are where money is mobilized and allocated.
Types of markets:
• Money Market (short-term funds, less than 1 year):
o Instruments: Treasury Bills, Commercial Papers, Certificates of Deposit.
o Participants: Banks, RBI, Corporates.
o Role: Meets short-term liquidity needs.
• Capital Market (long-term funds):
o Primary Market – new securities are issued (like IPOs).
o Secondary Market – existing securities are traded (stock exchanges like NSE,
BSE).
• Forex Market:
o Exchange of different currencies for trade, travel, or investment.
• Credit Market:
o Deals with borrowing and lending in various forms.
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Role: Markets are like the “theatres” where financial actors perform deals every day.
󷃆󷃌 Financial Instruments – The Products
If markets are meeting grounds, instruments are the goods being exchanged. These are the
contracts or documents representing a claim to payment or ownership.
Categories:
• Debt Instruments – Treasury bills, bonds, debentures (you lend money and earn
interest).
• Equity Instruments – Shares (you own a part of the company).
• Hybrid Instruments – Convertible debentures, preference shares.
• Derivatives – Futures, options (value depends on underlying assets).
They differ in maturity, risk, and return — like items on a menu with varying flavours and
prices.
󷃆󷃍 Financial Services – The Facilitators
These are the helpful tools and support systems that make the financial world smoother.
Examples:
• Investment services (portfolio management, stockbroking).
• Insurance services (life, health, general).
• Credit rating services (CRISIL, ICRA).
• Merchant banking (helping companies raise funds).
If the IFS is a city, these are like its transport, cleaning, and guidance systems — not the
buildings, but the services that make it livable.
The Big Maestro: Reserve Bank of India (RBI) 󷩳󷩯󷩰󷩱󷩲
In our marketplace story, the RBI is like the city’s mayor, traffic controller, and safety
inspector rolled into one.
Functions:
• Controls inflation and money supply.
• Regulates banks and ensures financial stability.
• Manages foreign exchange.
• Acts as the banker to the Government of India.
Without the RBI’s constant watch, the system could fall into chaos.
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Why the Indian Financial System Matters
1. Mobilizes Savings: Converts idle money into productive investments.
2. Promotes Investments: Channels funds to businesses, infrastructure, and
innovation.
3. Facilitates Trade: Provides mechanisms for payments and settlement.
4. Supports Government: Helps in borrowing for development projects.
5. Generates Employment: Through business growth and industrial expansion.
6. Ensures Stability: Acts as a shield in financial crises.
The Modern Touch – Technology & Inclusion 󹲙󹲚󹲛󹲜󹲝󹲞󹶯󹶲󹶳󹶰󹶱󹶴
Today, the Indian Financial System is no longer limited to physical banks or paper
documents. Digital payments (UPI, mobile wallets), online trading platforms, and
microfinance initiatives are transforming it.
Government drives like Jan Dhan Yojana have brought millions into the formal financial fold,
ensuring that even the smallest trader in a distant village has access to banking and
insurance.
A Quick Flight Through Its Evolution 󽄌󽄍󽄎󽄏
• Pre-independence: Primarily agricultural credit societies and a few banks.
• Post-independence: Nationalization of banks, setup of DFIs.
• 1990s Liberalization: Entry of private banks, globalization of capital markets.
• 2000s–present: Digital revolution, fintech boom, financial inclusion drives.
Closing the Story – The Marketplace That Never Sleeps
Our Indian Financial System is like that giant marketplace which never sleeps — it evolves,
grows, and adapts to storms and sunshine alike. It’s a mix of tradition (age-old cooperative
credit) and innovation (blockchain-based payments). It’s the lifeline that fuels India’s
economy, ensuring that every rupee finds its way to where it’s most needed — from a small
farmer buying seeds to a tech startup raising millions.
Just like in our story, the balance and health of this financial city determine how smoothly
the entire nation’s economic river flows. And that is why understanding it is not just for
bankers or economists — it’s for anyone who wants to navigate India’s economic heartbeat.
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2. Discuss the role of SEBI as a regulatory body of financial markets.
Ans: The Role of SEBI as a Regulatory Body of Financial Markets
Imagine you are entering a huge marketplace. This market is not for vegetables or clothes
but for something far more powerful—money itself. Here, thousands of buyers and sellers
are shouting prices, companies are raising funds, investors are hoping to make profits, and
brokers are running around making deals.
Now, in such a busy and money-driven place, don’t you think some people might try to
cheat?
• What if a company shows fake profits to attract investors?
• What if a broker tricks small investors by hiding information?
• What if powerful players manipulate prices to earn at the expense of common
people?
If there is no watchdog, the market will turn into chaos. Ordinary people will lose trust,
scams will rise, and the very purpose of the financial market—helping businesses raise
money and allowing investors to grow their savings—will collapse.
This is exactly why SEBI (Securities and Exchange Board of India) was born. It is like the
referee of the financial playground, ensuring that every player follows the rules, plays fair,
and the game remains safe and trustworthy.
A Little Backstory – Why SEBI Was Needed
Before 1980s, the Indian stock market was almost like an “open ground” without much
supervision. There were scams, insider trading (using secret company information to earn
illegal profits), and manipulation of stock prices. Small investors often felt cheated.
Then came the infamous Harshad Mehta scam of 1992, where loopholes in the system were
exploited, and thousands of crores were misused. This shook the faith of investors and
forced the government to strengthen the financial market laws.
SEBI, which was initially set up in 1988, was given full legal powers in 1992. From then
onwards, SEBI became the guardian angel of investors and the police of stock markets in
India.
The Role of SEBI – Explained Like a Story
Let’s imagine the financial market as a big school. In this school:
• Companies are like students who want to showcase their talent (profits and growth)
to win prizes (investments).
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• Investors are the parents who put in money (fees) expecting good results (returns).
• Brokers and intermediaries are the teachers who connect students and parents.
• And finally, SEBI is the Principal of this school, ensuring discipline, fairness, and
growth.
Now, let’s see how SEBI plays its role:
1. Protecting Investors – The Shield
The first and most important role of SEBI is to protect the small investors. Just like a
principal ensures no student is bullied, SEBI ensures that investors are not cheated by
companies or brokers.
How does it do this?
• It makes rules that companies must share correct and complete information before
selling shares to the public.
• It punishes frauds, insider trading, and price manipulation.
• It introduces systems like Investor Protection Funds to safeguard small investors.
For example, when a company wants to issue shares in an IPO (Initial Public Offering), SEBI
ensures that all financial details are transparently disclosed so that investors know exactly
what they are investing in.
2. Regulating the Market – The Umpire
Imagine a cricket match without an umpire. Players will fight, cheat, and the game will
collapse. Similarly, SEBI acts as an umpire in the financial market.
• It sets the rules for stock exchanges, mutual funds, brokers, and companies.
• It makes sure everyone plays by the same rules.
• It keeps an eye on unfair practices.
For example, SEBI introduced rules for Takeovers and Mergers, ensuring that big companies
cannot secretly buy smaller ones without informing shareholders.
3. Promoting Fair Practices – The Teacher
A good teacher not only punishes but also guides students to do better. Similarly, SEBI
doesn’t just punish wrongdoers; it also educates and guides.
• SEBI organizes investor awareness programs so people know how to invest wisely.
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• It promotes digital trading systems to reduce fraud.
• It encourages fair play and ethical practices in markets.
Think of SEBI as a teacher who gives students extra classes to prepare better for exams—it
wants investors and companies to grow together in a healthy environment.
4. Regulating Intermediaries – The Gatekeeper
In the market, there are many middlemen like brokers, mutual fund houses, merchant
bankers, etc. SEBI keeps an eye on them as a strict gatekeeper.
• It registers them, checks their qualifications, and gives them licenses.
• If anyone is caught cheating or misguiding investors, SEBI cancels their license.
This ensures that only honest and qualified players can act as middlemen in the financial
market.
5. Developing the Market – The Builder
Apart from protecting and regulating, SEBI also develops the market. It introduces new
products, modern technologies, and transparent systems so that India’s financial market
becomes stronger and more attractive globally.
For example:
• It promoted online trading platforms.
• It introduced derivatives and mutual funds as investment options.
• It ensures India’s markets match international standards.
In short, SEBI is not only a policeman but also a builder who wants India’s financial market
to grow bigger and better.
Why SEBI’s Role is So Important
Without SEBI, the financial market would be like a jungle where the strong eat the weak.
People would lose faith, companies would struggle to raise funds, and economic growth
would slow down.
Because of SEBI:
• Investors feel safe to put money in shares, bonds, and mutual funds.
• Companies get funds to grow their business.
• The economy gets stronger, as the flow of money increases.
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In simple words, SEBI is like oxygen for financial markets—without it, the system cannot
survive.
Conclusion – The Guardian of Trust
If we look closely, SEBI is not just a regulator; it is the guardian of trust in Indian financial
markets. By protecting investors, regulating companies, guiding intermediaries, and
developing the market, SEBI ensures that India’s financial playground remains safe, fair, and
growth-oriented.
Just like we trust traffic lights to manage the chaos on roads, we trust SEBI to manage the
complexity of financial markets. And remember—without trust, no market can exist.
SECTION-B
3. Examine the framework of Secondary Market in India.
Ans: The Story Behind the Stage
Before a share ever reaches this marketplace, it first arrives via the Primary Market — when
a company issues shares for the first time (like an IPO). Once those shares are in public
hands, they start their second journey — and this journey unfolds in the Secondary Market.
Here, no money goes directly to the company. Instead, one investor sells to another. It’s a
marketplace that ensures you can turn your investments into cash at any time — the
lifeblood of an efficient financial system.
The Backbone of the Indian Secondary Market
The Secondary Market in India has a structured framework, almost like a well-
choreographed play. Every character knows their role, and every scene is regulated for
fairness, transparency, and safety. Let’s break it down.
󷃆󷃊 The Stock Exchanges – The Grand Arenas
If the secondary market is a play, stock exchanges are the stages. They provide the platform
where the buying and selling happen.
• Major Exchanges:
o BSE (Bombay Stock Exchange): Established in 1875, Asia’s oldest exchange,
known for its benchmark index SENSEX.
o NSE (National Stock Exchange): A modern, fully electronic exchange founded
in 1992, home to NIFTY 50.
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Role: They bring together buyers and sellers through an order-matching system, ensuring
speed and transparency.
󷃆󷃋 SEBI – The Market’s Watchful Guardian 󺫨󺫩󺫪
The Securities and Exchange Board of India (SEBI) is like the vigilant guard of this market.
Created in 1992, it ensures that everyone follows the rules, that information flows freely,
and that no one manipulates prices.
Functions in the Secondary Market:
• Regulates intermediaries (brokers, merchant bankers).
• Monitors trades for unfair practices.
• Protects investors by enforcing disclosure norms.
󷃆󷃌 Participants – The Cast of Characters 󷗛󷗜
Every marketplace needs its people, and here’s who you’ll meet:
• Retail Investors – individuals like you and me, investing savings.
• Institutional Investors – mutual funds, insurance companies, pension funds.
• Foreign Institutional Investors (FIIs) / FPIs – overseas entities investing in Indian
stocks.
• Brokers & Sub-brokers – intermediaries who execute buy/sell orders.
• Market Makers – entities who provide continuous buy and sell quotes to ensure
liquidity.
󷃆󷃍 Trading Systems – The Invisible Machinery 󼿝󼿞󼿟
Gone are the days of open shouting on trading floors. Today, India’s secondary market is
screen-based and fully automated.
• Order-Driven Market: Orders are matched automatically by computers based on
price-time priority.
• T+1 Settlement Cycle: Trade completed today is settled the next working day — one
of the fastest settlement cycles globally.
• Dematerialized Shares: Thanks to depositories like NSDL and CDSL, shares exist as
digital entries, not physical certificates.
󷃏󷃎 The Two Faces of the Secondary Market 󷗛󷗜
The secondary market has two segments, each with its own style:
a) Spot Market (Cash Segment)
• Trades are settled on the spot (T+1).
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• Involves actual delivery of shares.
• Example: Buying 100 shares of Infosys and having them credited to your Demat
account by the next day.
b) Derivatives Market
• No actual shares change hands immediately.
• Contracts are made for the future (Futures and Options).
• Used for hedging, speculation, and arbitrage.
󷃆󷃐 Regulatory Framework – The Rulebook 󹵅󹵆󹵇󹵈
To keep this complex play running smoothly:
• SEBI Act, 1992 – Empowers SEBI to regulate markets.
• Securities Contracts (Regulation) Act, 1956) – Governs listing and trading of
securities.
• Depositories Act, 1996 – Legal framework for dematerialization of securities.
Why the Secondary Market Matters 󹰤󹰥󹰦󹰧󹰨
Let’s go back to our “Bazaar of Shares.” Imagine if investors couldn’t sell their shares easily
— they’d hesitate to buy them in the first place. That’s why the secondary market is
essential.
1. Liquidity:
Investors can convert investments into cash quickly.
2. Price Discovery:
Daily trading reflects the true market value of a security, based on demand and supply.
3. Encourages Investment in Primary Market:
Knowing they can later sell their holdings makes investors more willing to buy in IPOs.
4. Economic Indicator:
Indices like SENSEX and NIFTY act as barometers of economic health.
5. Resource Allocation:
Capital flows to sectors and companies performing well, signaling where future investments
should go.
The Journey of a Trade – A Mini Story Inside the Story 󹵅󹵆󹵇󹵈
Rahul logs into his trading account and decides to buy 50 shares of TCS.
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1. He places an order through his broker’s app.
2. The order goes to the stock exchange (say NSE).
3. The exchange’s system finds a seller with a matching offer.
4. Trade is executed instantly.
5. NSDL/CDSL ensures that the shares move from the seller’s Demat account to Rahul’s,
and payment flows the other way.
6. Within one working day (T+1), Rahul officially owns those 50 shares.
This swift, seamless process is possible because the secondary market’s framework is like
clockwork.
Modern Trends Shaping the Indian Secondary Market
• Algorithmic Trading: Computer programs execute trades in milliseconds.
• Increased Retail Participation: Thanks to mobile trading apps and low-cost brokers.
• Global Integration: Indian markets are influenced by foreign trends and vice versa.
• Sustainability & ESG Investing: More focus on socially responsible stocks.
Closing the Curtain 󷗐󷗑󷗒󷗓󷗔󷗕󷗖󷗗󷗘󷗙󷗚
The secondary market in India is more than just a trading floor — it’s a living, breathing
ecosystem. Its framework is built on strong institutions, clear regulations, advanced
technology, and a wide cast of participants.
In our “Bazaar of Shares,” every deal struck is a tiny story — of risk, reward, trust, and
opportunity. The market’s efficiency gives confidence to investors, fuels the primary market,
and ultimately powers India’s economic growth.
In our “Bazaar of Shares,” every deal struck is a tiny story — of risk, reward, trust, and
opportunity. The market’s efficiency gives confidence to investors, fuels the primary market,
and ultimately powers India’s economic growth.
4. Write a detailed note on Non Banking Financial Companies.
Ans: Picture a cloth merchant in Amritsar, a farmer in Punjab, and a young entrepreneur
starting a small salon. They all need funds — but their needs are a bit different, urgent, and
sometimes too small or too unconventional for the big, formal banks to cater to quickly. This
is where Non-Banking Financial Companies (NBFCs) quietly step in, becoming the unsung
heroes of the financial world.
So, What Exactly Are NBFCs?
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In simple words, NBFCs are financial institutions that provide banking-like services without
being banks. They can lend money, invest in stocks and bonds, help you lease a car, or
finance your insurance premiums — but they cannot accept demand deposits (like a savings
account) or issue cheques drawn on themselves.
The Reserve Bank of India (RBI) regulates NBFCs to ensure they operate safely, even though
they aren’t technically banks.
Why NBFCs Came Into Existence
Imagine our merchant from the story. He has no large collateral, needs funds fast, and
doesn’t have weeks to fill out endless paperwork. Banks, with their stricter procedures, may
turn him away. NBFCs evolved to fill that access gap — offering quicker, more flexible, and
often more personalized financial solutions.
Functions of NBFCs – The Many Hats They Wear 󷖸󷖹󷖺
NBFCs operate like versatile problem-solvers in finance. Their key roles include:
1. Providing Loans and Credit
o Personal loans, consumer durables loans, gold loans, vehicle loans,
microfinance.
o Often faster approval and simpler documentation than banks.
2. Asset Financing
o Leasing and hire purchase for machinery, equipment, and vehicles.
3. Investment Activities
o Investing in shares, bonds, debentures, and government securities.
4. Insurance and Risk Management
o Many NBFCs operate in partnership with insurers to offer financial products.
5. Microfinance
o Small-ticket loans to low-income households and self-help groups.
Types of NBFCs in India – The Different Characters in Our Story
Like characters in a novel, each NBFC plays a different role:
󷃆󷃊 Asset Finance Company (AFC)
• Specializes in financing physical assets like cars, tractors, or industrial machines.
• Example: Financing a farmer’s tractor purchase.
󷃆󷃋 Loan Company
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• Gives loans for business, personal, or other purposes not related to asset finance.
󷃆󷃌 Investment Company
• Invests in securities to earn returns.
󷃆󷃍 Infrastructure Finance Company (IFC)
• Provides funding for infrastructure projects like highways, power plants, airports.
󷃏󷃎 Micro Finance Institution (MFI)
• Offers small loans without collateral, mostly to rural and semi-urban borrowers.
󷃆󷃐 Housing Finance Company (HFC)
• Specializes in loans for buying, building, or renovating houses.
How NBFCs Differ from Banks – The Subtle but Important Gaps
While they often feel like banks to customers, there are key differences:
Aspect
Banks
NBFCs
Deposit Taking
Can accept demand deposits
(savings/current a/c)
Cannot accept demand
deposits
Payments
Offer cheque/withdrawal facilities
No cheque-issuing powers
Regulation
Regulated under Banking
Regulation Act
Regulated under RBI Act, 1934
(and other laws)
CRR/SLR
Requirements
Mandatory for banks
Not applicable to NBFCs
(though some norms apply)
This lighter structure allows NBFCs more operational flexibility — one reason they can often
move faster.
Importance of NBFCs in India – Why They Matter
NBFCs are like the network of smaller bridges that connect parts of the economy not served
by the main highway (banks). Their significance is huge:
1. Financial Inclusion – Bringing formal finance to rural and remote areas.
2. Credit Availability – Offering loans to segments overlooked by banks.
3. Supporting Infrastructure Growth – Funding large projects and real estate.
4. Boosting Consumption – Consumer durable financing encourages spending.
5. Generating Employment – By supporting SMEs and entrepreneurs.
The Regulatory Umbrella – RBI’s Watchful Eye
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NBFCs are regulated by the Reserve Bank of India (RBI) under Chapter III-B of the RBI Act,
1934.
RBI’s regulations focus on:
• Minimum Net Owned Funds requirement.
• Fair lending practices.
• Capital adequacy ratios.
• Prudential norms for asset classification.
This ensures NBFCs maintain stability and protect customer interests while still enjoying
their operational agility.
Challenges NBFCs Face – Storms in the Journey 󽀥󽀦󽀧
Just like any business character in our story, NBFCs face hurdles:
1. Liquidity Crunch – Difficulty in raising funds during financial stress.
2. Credit Risk – Lending to unbanked sectors carries a higher default risk.
3. Regulatory Tightening – Increasing scrutiny can limit their flexibility.
4. Competition from Banks and Fintechs – Especially in urban areas.
5. Economic Slowdowns – Reduce loan demand and increase defaults.
The 2018 IL&FS Crisis – A Plot Twist That Changed the Industry
In 2018, the Infrastructure Leasing & Financial Services (IL&FS), a major NBFC, defaulted on
payments. This triggered a liquidity crisis across the NBFC sector — much like one big
market stall suddenly collapsing, making others cautious in lending and borrowing.
RBI and the government responded with:
• Liquidity support schemes.
• Stricter supervision.
• Encouragement for NBFC-bank partnerships.
The Road Ahead – How NBFCs Are Evolving 󺚽󺚾󺛂󺛃󺚿󺛀󺛁
NBFCs are adapting quickly:
• Going Digital – Mobile-based loan approvals, online KYC.
• Partnering with Fintechs – For data analytics and faster credit decisions.
• Focusing on Niche Markets – Microfinance, rural markets, electric vehicle loans.
• Green Financing – Funding renewable energy projects.
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The sector’s future lies in combining its agility with the technological edge of digital finance.
Closing the Story – The Unsung Pillars of Indian Finance
Think of the Indian financial system as a big, beautiful palace. Banks are the grand halls
everyone sees. But NBFCs? They are the secret corridors, side doors, and hidden staircases
that make the palace accessible to everyone — even those far from the main gates.
From financing a farmer’s sowing season to funding a startup’s first machine, NBFCs keep
India’s economic heartbeat steady in places where banks might hesitate to go. They prove
that in finance, speed, flexibility, and reach can be just as important as size and tradition.
From financing a farmer’s sowing season to funding a startup’s first machine, NBFCs keep
India’s economic heartbeat steady in places where banks might hesitate to go. They prove
that in finance, speed, flexibility, and reach can be just as important as size and tradition.
SECTION-C
5. Discuss the role of custodians, trustees and sponsors in mutual funds.
Ans: 󷃆󷃊 The Sponsor – The Visionary Captain Who Starts the Journey 󼩎󼩏󼩐󼩑󼩒󼩓󼩔
In any great expedition, someone has to dream it up, plan the route, and fund the
preparation. That’s the Sponsor in the mutual fund world.
• Who are they? The sponsor is the person, group, or company that takes the initiative
to set up a mutual fund. In India, SEBI (Securities and Exchange Board of India)
mandates that the sponsor must have a good track record, financial soundness, and
experience in financial services.
• Role in our voyage: The sponsor doesn’t personally sail the ship every day but brings
it into existence. They apply to SEBI to register the mutual fund and contribute to its
initial capital.
• Key responsibilities:
1. Conceptualizing the mutual fund: Deciding what kind of schemes it will offer.
2. Setting up the trust: Mutual funds in India are set up as trusts under the
Indian Trusts Act, 1882.
3. Appointing the Trustees and AMC (Asset Management Company): The
sponsor hires professionals to manage the actual operations.
4. Maintaining credibility: Sponsors must show integrity, competence, and a
solid financial background because they’re the face behind the fund’s
creation.
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• Analogy in our story: Think of the Sponsor as the bold captain who draws the map,
gathers the crew, and commissions the ship, but hands over day-to-day steering to
trained navigators.
󷃆󷃋 The Trustees – The Guardians of the Treasure Chest 󺫨󺫩󺫪
Once the ship is ready to sail, you need someone to watch over the treasure to ensure no
foul play happens. That’s the role of the Trustees.
• Who are they? Trustees can be individuals or a trustee company appointed by the
sponsor. Legally, the mutual fund’s assets are held in trust for the benefit of the unit
holders (investors), and the trustees are responsible for protecting these investors’
interests.
• Role in our voyage: They act like the “security council” on board — making sure the
navigators (AMC) follow all laws, rules, and ethics. They don’t decide which stocks to
buy or sell — that’s the AMC’s job — but they oversee and check if everything is fair
and legal.
• Key responsibilities:
1. Supervision of the AMC: Ensuring the Asset Management Company complies
with SEBI regulations and the trust deed.
2. Investor protection: Acting in the best interest of unitholders at all times.
3. Compliance checks: Approving all schemes before they are launched.
4. Monitoring performance: Regularly reviewing the activities of the AMC,
including investment decisions, disclosures, and expenses.
5. Reporting to SEBI: They must provide periodic reports about the mutual
fund's functioning and flag any violations.
• Analogy in our story: Trustees are like vigilant guards who ensure no crew member
cheats, no detour is taken for personal gain, and that all operations keep the
investors’ treasure safe.
󷃆󷃌 The Custodian – The Safe-Keeper of the Cargo 󹵲󹵳󹵴󹵵󹵶󹵷
A ship’s cargo — your gold, jewels, and goods — must be stored securely until it reaches the
destination. In the mutual fund ecosystem, the Custodian is that safe keeper.
• Who are they? A custodian is an entity registered with SEBI that is responsible for
holding and safeguarding the securities (shares, bonds, etc.) bought by the mutual
fund.
• Role in our voyage: While the AMC decides to buy, say, 1,000 shares of a company,
the custodian ensures these shares are actually held securely, recorded properly,
and transferred when sold.
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• Key responsibilities:
1. Safekeeping of securities: Holding physical or dematerialized securities on
behalf of the mutual fund.
2. Settlement of trades: Ensuring timely transfer of securities and money during
buying and selling.
3. Corporate actions: Handling dividends, bonus shares, rights issues on behalf
of the fund.
4. Record keeping: Maintaining accurate records of all holdings.
5. Segregation: Keeping the fund’s assets separate from its own to avoid any
mix-up.
• Analogy in our story: The custodian is like the locked vault master who makes sure
that the gold coins you buy are counted, stored, and accounted for — and returned
exactly when sold.
How They Work Together – A Coordinated Voyage 󼿀
Picture this chain of trust:
• The Sponsor gives birth to the mutual fund idea and sets up the structure.
• The Trustees guard the integrity of the ship’s operations, watching over the crew and
route.
• The Custodian protects the actual cargo — your investments — making sure they are
safe and sound.
Together, they create a system where:
• Investors’ interests are always first.
• Operations follow legal and ethical standards.
• Assets are handled securely and transparently.
Why These Roles Matter for Investors 󹰤󹰥󹰦󹰧󹰨
Without these checks and balances, investing in a mutual fund would be like handing over
your life savings to strangers and hoping for the best. This tripartite structure ensures:
1. Trust – Investors know their money is in a regulated environment.
2. Transparency – Clear separation of duties prevents misuse of funds.
3. Security – Assets are physically and legally protected.
4. Accountability – Each party is answerable to SEBI and to investors.
Closing the Story – Safe Arrival at the Port 󷨞󷨟󷨠󷨡󷨢󷨣
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At the end of our voyage, the mutual fund delivers — not just returns, but also peace of
mind. The Sponsor’s vision launched the journey, the Trustees ensured fair and lawful
travel, and the Custodian guarded the treasure through every wave and storm.
For you as an investor, understanding these roles is like knowing the ship’s crew before you
sail — it builds confidence that your financial voyage is on a safe and well-charted course.
6. Throw light upon the IRDA Act of Insurance Companies.
Ans: The Birth of the IRDA Act – Opening the Gates
The Insurance Regulatory and Development Authority Act, 1999 (commonly called the IRDA
Act) was passed by the Indian Parliament to create an independent authority that would
regulate, promote, and ensure the orderly growth of the insurance sector.
Before this Act, the insurance industry was governed mainly by the Insurance Act of 1938.
While that law laid the foundation, it wasn’t equipped to handle liberalisation, private
players, and foreign investments. The IRDA Act became the bridge between old-world
monopoly and a new era of diversity, transparency, and customer-centric services.
The Main Characters in the Story
Think of the IRDA Act as the script that brings new actors to the insurance stage and gives
them clear roles and rules. The hero here is the Insurance Regulatory and Development
Authority of India (IRDAI) — an autonomous body created by the Act.
󷃆󷃊 The Purpose
The IRDAI was tasked with:
• Protecting policyholders’ interests.
• Regulating the insurance industry.
• Promoting competition to enhance customer choice and service.
Key Provisions – What the IRDA Act Did
Just like a well-written play has several acts and scenes, the IRDA Act introduced a
structured framework.
1. Establishment of the IRDAI
• The Act formally set up the IRDAI as an autonomous authority headquartered in
Hyderabad.
• It consists of a Chairperson, not more than 5 full-time members, and not more than
4 part-time members, all appointed by the Government of India.
• This independence allows it to act impartially — like a referee in a sports match.
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2. Licensing of Insurance Companies
• No company can carry on insurance business in India without IRDAI’s registration.
• To qualify, insurers must meet minimum capital requirements (e.g., ₹100 crore for
life/general insurance, ₹200 crore for reinsurance).
• Foreign investment limits are regulated — initially set at 26%, now increased over
time to 74% (as of recent reforms).
3. Regulating the Market Players
• Covers life insurance, general insurance, health insurance, and reinsurance.
• Ensures only financially sound companies enter and stay in the market.
• Regulates agents, brokers, surveyors, and other intermediaries.
4. Protecting Policyholders
The Act mandates that insurers must:
• Provide clear policy terms.
• Process claims promptly.
• Avoid misleading advertisements.
• Maintain solvency margins to ensure they can meet claims.
5. Promoting Competition
By allowing private and foreign participation, the Act opened doors for:
• Diverse product offerings.
• Better service quality.
• Improved efficiency in claims and underwriting.
6. Investment and Solvency Norms
Insurers must invest policyholder funds in approved avenues to ensure safety and
reasonable returns. Solvency norms ensure they have enough assets to meet liabilities.
Why the IRDA Act Was a Game-Changer
Imagine going from a one-lane road to a multi-lane expressway — that’s what this Act did
for insurance in India.
Before IRDA Act:
• Only public insurers.
• Limited products.
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• Low penetration of insurance.
• Weak grievance redressal.
After IRDA Act:
• Entry of private and joint-venture companies.
• Innovations like unit-linked insurance plans (ULIPs), microinsurance.
• Quicker claims, stronger consumer rights.
• Insurance reaching rural and semi-urban areas.
IRDAI’s Powers Under the Act
1. Issuing, renewing, and cancelling licenses of insurers and intermediaries.
2. Specifying qualifications for agents and brokers.
3. Regulating premium rates for certain products.
4. Inspecting companies’ books and premises.
5. Levying fees and penalties for violations.
6. Promoting efficiency and professional conduct in the industry.
How It Impacts You as a Policyholder 󼪺󼪻
Thanks to the IRDA Act:
• You can choose from dozens of insurers and hundreds of plans.
• Your rights as a customer are safeguarded by regulations.
• If your claim is unfairly rejected, you can approach the IRDAI’s grievance cell or the
Insurance Ombudsman.
• Products are more transparent, with standardised information brochures.
A Quick Timeline – The Journey So Far
• 1993: Malhotra Committee recommends reforms in the insurance sector.
• 1999: IRDA Act passed; IRDA set up.
• 2000: Private insurers and foreign partners allowed.
• 2015 onwards: Reforms increase foreign investment limits and digitise processes.
Challenges and Future Path
While the IRDA Act has transformed the insurance landscape, challenges remain:
• Low insurance penetration in rural areas.
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• Need for more awareness about different types of insurance.
• Tackling mis-selling and complex products.
• Keeping pace with insurtech innovations like AI-driven underwriting.
The IRDAI continues to evolve its regulations, issuing guidelines on everything from
cybersecurity norms to health insurance portability.
The Act as a Living Guardrail
One of the most remarkable things about the IRDA Act is that it isn’t static. Over the years, it
has been amended to adapt to India’s changing economic realities, global trends, and
technological shifts.
Think of it as a sturdy yet flexible bridge — strong enough to support heavy traffic
(increasing insurers, customers, and investments) but adaptable enough to widen lanes or
strengthen pillars when needed.
Closing the Story – From a Fortress to a Freeway
When the IRDA Act came into play, it was like flinging open the gates of a walled city and
letting in fresh ideas, innovation, and healthy competition — all under the watch of a
responsible guardian. Today, whether you’re insuring your life, your health, your home, or
your business, the IRDAI’s framework ensures that the company you deal with is regulated,
solvent, and answerable.
In short, the IRDA Act turned insurance from a monologue into a dialogue — where the
customer has choice, voice, and protection. And in the grand narrative of India’s financial
reforms, it stands as a chapter that reshaped not just an industry, but the way millions of
Indians think about security and the future.
SECTION-D
7. Discuss in detail various instruments of Capital market.
Ans: Let’s step into a grand financial “supermarket” — not filled with fruits and groceries,
but with baskets of investment products, each designed to cater to different tastes,
budgets, and goals. 󷨕󷨓󷨔󷃆󹲕
This is the Capital Market — the place where long-term funds are raised and traded. And
just like a supermarket has many aisles, the capital market has different instruments you
can choose from. These instruments are the “products” investors buy and sell — each with
its own flavour of risk, return, and purpose.
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Today, we’ll stroll through these aisles together, exploring the various instruments of the
capital market, making the tour so clear and engaging that you can almost “see” each one in
action.
Capital Market in a Nutshell
Before we start picking products off the shelves, let’s understand the store itself.
• What it is: The capital market is a network of institutions, investors, and instruments
that deal in long-term securities — those with maturities longer than one year.
• Purpose: To channel money from savers and investors to businesses, governments,
and other organizations for productive use.
• Two Segments:
1. Primary Market – where new securities are issued for the first time (like a
product launch).
2. Secondary Market – where existing securities are traded among investors
(like reselling a product).
The instruments we’ll see today can be found in both these segments — some debut in the
primary market and then continue life in the secondary market.
Aisle 1: Equity Shares – Owning a Slice of the Pie 󻑒󻑓󻑔󻑕
Imagine you’re not just buying a cake, but a slice of the bakery itself. That’s equity.
• Definition: Equity shares represent ownership in a company. If you own equity
shares, you are literally part-owner.
• Features:
o Voting rights at the company’s annual general meeting.
o Returns in the form of dividends (if declared) and capital gains.
o High risk, but potentially high reward.
• Example: Buying shares of Infosys or Reliance in the stock market.
• Analogy: Equity is like planting a tree — your returns grow as the tree grows, but
there’s always a risk from storms.
Aisle 2: Preference Shares – The Special Pass Holders 󷕿󷖀󷖃󷖁󷖂
Some investors like a VIP seat — and that’s what preference shares offer.
• Definition: Shares that get priority over equity in dividend payments and repayment
of capital if the company winds up.
• Features:
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o Fixed dividend rate.
o No voting rights (except in special situations).
o Safer than equity but usually with lower returns.
• Types: Cumulative, non-cumulative, redeemable, convertible.
• Analogy: You’re like a preferred guest at a concert — you may not control the
playlist, but you always get your seat and refreshments first.
Aisle 3: Debentures – Lending Instead of Owning 󹱼󹱽󹱿󹲀󹱾
Not everyone wants to be an owner; some prefer to be lenders.
• Definition: Debentures are long-term debt instruments issued by companies to
borrow money.
• Features:
o Fixed interest payments (coupon rate).
o Priority over shareholders in repayment.
o Can be secured or unsecured.
• Types: Convertible (into equity shares later) and non-convertible.
• Analogy: Like lending your friend money for their business, with the agreement
they’ll pay you interest regularly and return your principal after a fixed period.
Aisle 4: Bonds – The Government and Corporate IOUs 󷨕󷨓󷨔
Similar to debentures but often issued by governments and large corporations.
• Definition: Bonds are debt securities that promise to pay a fixed interest over a
specific period.
• Examples: Government bonds, municipal bonds, corporate bonds.
• Special Features:
o Government bonds are considered very safe (low default risk).
o Some offer tax benefits (e.g., tax-free bonds).
• Analogy: Bonds are like lending to a friend you trust completely (in the case of
government bonds), where default risk is minimal.
Aisle 5: Derivatives – Betting on the Future 󹲽󹲾󹲿󹳀󹳁󹳂󹳃󹳈󹳄󹳅󹳆󹳇󹳣󹳤󹳥
These are for investors who like to play the “what will happen next” game.
• Definition: Financial contracts whose value depends on an underlying asset (stocks,
commodities, indices).
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• Types:
o Futures: Agreement to buy/sell at a predetermined price and date.
o Options: Right, but not obligation, to buy/sell at a set price within a time
frame.
• Uses: Hedging, speculation, arbitrage.
• Analogy: It’s like reserving a hotel room months ahead — if rates go up, you win; if
not, you can cancel (in the case of options).
Aisle 6: Mutual Funds – The Investment Buffet 󷑏󷑐󷑍󷑎
Instead of picking individual items, why not get a ready-made platter?
• Definition: Pooled funds from multiple investors managed by professionals, invested
in diversified assets.
• Advantages:
o Diversification reduces risk.
o Professional management.
o Available for various risk appetites — equity funds, debt funds, hybrid funds.
• Analogy: Like buying a thali (platter) in a restaurant — you get a variety, and
someone else cooks it for you.
Aisle 7: Exchange-Traded Funds (ETFs) – The Flexible Platters 󷏝󷏞󷏟󷏠󷏡󷏢󷏣󷏤󷏥󷏦󷏧󷏨󷏬󷏩󷏪󷏫
• Definition: Investment funds traded like shares on an exchange, often tracking an
index.
• Advantages:
o Liquidity of shares with diversification of a mutual fund.
o Lower costs due to passive management.
• Analogy: Like a meal combo you can pick up from a store anytime, without waiting
for table service.
Aisle 8: Warrants – Tickets to Future Ownership 󷗋󷗌󷗍󷗎󷗏
• Definition: Instruments that give you the right to buy a company’s shares at a fixed
price in the future.
• Purpose: Often issued along with bonds or debentures to make them attractive.
• Analogy: Like a voucher for a future purchase at today’s prices.
Aisle 9: Commercial Papers – Short-Term Guests in a Long-Term Hall 󹵅󹵆󹵇󹵈
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Though the capital market focuses on long-term funds, certain money-market-origin
instruments like commercial papers can appear when large companies issue them for
slightly longer durations to bridge finance needs.
Aisle 10: Government Securities (G-Secs) 󷨕󷨓󷨔
• Definition: Long-term government debt instruments with maturities ranging from 5
to 40 years.
• Why they matter: Backbone of the debt market; ultra-safe; used by big institutions
as benchmarks.
Why So Many Instruments? – The Magic of Choice 󼬰󼬮󼬯
Different investors have different needs:
• Some want growth (equity).
• Others want safety with income (bonds).
• Some want flexibility and access (ETFs).
• Others want professional management (mutual funds).
The variety ensures the capital market can cater to risk-takers, cautious savers, and
everyone in between.
The Bigger Picture – Why Instruments Matter for the Economy
The capital market’s instruments aren’t just toys for investors; they:
• Mobilize savings into productive use.
• Provide companies and governments with long-term funding.
• Help in price discovery (through market trading).
• Promote economic growth by financing infrastructure, innovation, and expansion.
Closing the Supermarket Tour 󺪺󺪻󺪼󺪽󺪾
By the time you wheel your cart to the checkout counter, you realize the capital market
offers more than just “buy low, sell high” opportunities. Each instrument is a tool — some
for building wealth, others for safeguarding it, and still others for balancing risk.
Like a well-stocked supermarket, the capital market thrives on variety. And a smart investor,
much like a smart shopper, knows what to pick, in what quantity, and when.
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8. "FII's and FDI's play an important role in the economic development of a
country." Explain.
Ans: These travellers are called FII (Foreign Institutional Investment) and FDI (Foreign Direct
Investment). They are not people in real life, of course — they are forms of foreign
investment — but imagining them as characters makes it easier to understand why
economists treat them as VIP guests in the journey of a nation’s economic development.
The Story of Two Travellers
Once upon a time, a country wanted to grow faster — build better roads, factories, schools,
and digital systems. But like a young tree that needs extra water and nutrients to grow
strong, this country needed extra money, technology, and expertise beyond what it could
produce internally.
That’s when the two travellers stepped in:
• FDI is like a traveller who comes to stay for the long haul. They don’t just bring
money; they build a home here — a factory, an office, or an entire business — and
live alongside locals, creating jobs and transferring skills.
• FII is like a traveller who visits frequently but doesn’t settle down. They bring large
bags of money to invest in the country’s stock markets, bonds, and financial assets.
They boost liquidity and confidence, but they may also leave quickly if the weather
(market conditions) turns stormy.
What Exactly Are They?
Foreign Direct Investment (FDI)
• Meaning: When a foreign company or individual invests directly in a business in
another country, acquiring ownership and management control.
• Examples: Toyota setting up a manufacturing plant in India, IKEA opening retail
stores, Samsung building R&D centres.
Key traits:
• Long-term commitment.
• Involves building infrastructure, creating jobs.
• Often brings technology, managerial skills, and global market access.
Foreign Institutional Investment (FII)
• Meaning: When foreign entities like mutual funds, pension funds, hedge funds, or
insurance companies invest in the financial markets of another country.
• Examples: A U.S. pension fund buying shares of Infosys on the Indian stock
exchange.
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Key traits:
• Primarily portfolio investment — no control over management.
• Highly liquid and mobile — can enter and exit quickly.
• Boosts stock market activity and depth.
How They Contribute to Economic Development – The “Gift Bags” They Carry 󷑢󷑣󷑤󷑥
1. Infusion of Capital
• FDI: Builds new factories, plants, offices → increases productive capacity.
• FII: Injects funds into capital markets → makes it easier for companies to raise
money.
Impact: More money in the system means more projects, more employment, and higher
economic activity.
2. Job Creation
• FDI: Directly creates jobs in new manufacturing units, service centres, supply chains.
• FII: Indirectly supports jobs by strengthening companies’ market value, allowing
them to expand.
Impact: Reduces unemployment, increases household income, boosts consumption.
3. Technology Transfer & Skill Development (FDI’s Specialty)
• Foreign companies bring cutting-edge technology, modern equipment, and
advanced processes.
• Employees get trained in global best practices.
Impact: Improves productivity, product quality, and competitiveness of domestic industries.
4. Market Confidence & Liquidity (FII’s Superpower)
• FIIs increase daily trading volumes in stock markets.
• Their participation signals global trust in the country’s economy.
Impact: Stronger markets attract even more investors, both domestic and foreign.
5. Access to Global Networks
• FDI: Opens new export markets for local goods by integrating them into global
supply chains.
• FII: Connects the domestic financial market to global capital flows.
Impact: Helps the country become part of the global economic community.
Challenges and Cautions – The Flip Side of the Story 󼿍󼿎󼿑󼿒󼿏󼿓󼿐󼿔
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Even helpful guests can cause trouble if not handled wisely.
FDI Concerns:
• Can lead to excessive foreign control over key sectors.
• Risk of profits being repatriated abroad instead of being reinvested locally.
• Possible crowding out of small domestic businesses.
FII Concerns:
• Highly volatile — sudden withdrawal of large sums can destabilise financial markets.
• Overdependence on foreign portfolio flows can make stock markets too sensitive to
global events.
Why Both Are Needed Together
Think of the economy as a garden:
• FDI is like planting trees — they take time to grow but give steady shade and fruit for
years.
• FII is like seasonal rain — it can nourish the plants quickly but also disappear
suddenly.
A healthy garden needs both: the permanence of trees and the freshness of rain. FDI builds
the economic base; FII keeps the financial climate vibrant and liquid.
India’s Experience – A Quick Glimpse
After economic liberalisation in 1991:
• FDI started flowing into sectors like telecom, automobiles, retail, IT services.
• FII entry into Indian capital markets boosted stock market depth, improved
corporate governance, and increased foreign exchange reserves.
In years of strong growth, both inflows have surged. In times of global uncertainty, FII
outflows have caused market volatility — proving the need for balance.
Policy Measures to Attract & Manage Them
Governments often:
• Ease foreign ownership caps in key sectors.
• Simplify business registration and compliance rules.
• Provide tax incentives for long-term investments.
• Strengthen regulatory frameworks to ensure transparency.
These steps aim to keep FDI anchored while making FII flows more stable.
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Final Thought – The Harmony of Two Travellers
In our story, the two travellers — FDI and FII — are most valuable when they cooperate
rather than compete.
• FDI plants the seeds of factories, technology, and employment.
• FII waters the markets, giving them the liquidity to grow and flourish.
When a country hosts both wisely, it can accelerate development, improve living standards,
and stand stronger in the global economic arena.
And just like any good host, the country must ensure:
• The long-term guest (FDI) feels welcome and secure.
• The frequent visitor (FII) finds the markets attractive enough to return often.
Because in the tale of economic growth, their combined journey writes some of the most
powerful chapters.
“This paper has been carefully prepared for educational purposes. If you notice any mistakes or
have suggestions, feel free to share your feedback.”