I. Choose the Correct Answer
Q1. Which of the following is not provided by the capital market? Answer: Short term Funds — The capital market provides long-term funds, not short-term funds.
Q2. NSEI was established in the year: Answer: 1992
Q3. In the primary market, securities are issued for the: Answer: First Time
Q4. Participants in the capital market include: Answer: All of the above — Individuals, corporate bodies, and financial institutions all participate.
II. Choose the Correct Answer (Additional MCQs)
Q1. The market for long-term funds is: Answer: Capital Market
Q2. Which institution pools small investor savings into diversified investments? Answer: Mutual Fund
Q3. Price in the capital market is determined by: Answer: Demand and Supply
Q4. NSEI was established in: Answer: 1992
Q5. One of the functions of the capital market is: Answer: Capital formation
Q6. The market for new issues is called: Answer: New issues market (Primary Market)
Q7. The capital market is also known as: Answer: Securities Market
Q8. Find the odd one out: Mutual Fund, Venture Fund, Reserve Funds, Factoring Answer: Reserve Funds — It is not a capital market institution; the others are.
Q9. Which is correctly matched? Answer: Venture Fund — Hi-technology projects (Venture capital finances new and innovative high-technology projects.)
Q10. Securities in the secondary market can be sold: Answer: Multiple times
III. Match the Following
Q1.
| Column I | Column II | ||
|---|---|---|---|
| i | NSDL | 3 | Dematerialisation |
| ii | SHCIL | 1 | Stock Holding Corporation |
| iii | NCDS | 4 | National clearing system |
| iv | NSEI | 2 | Transparent System |
IV. Assertion and Reason
Q1. Assertion (A): FDI has been liberalised. Reason (R): It brings foreign capital. Answer: Both A and R are true — Liberalisation of FDI brings foreign capital into the country, which strengthens the capital market.
Q2. Assertion (A): IFCI, IDBI, and SIDBI have started venture funds. Reason (R): They provide equity financing for new projects. Answer: Both A and R are true — These institutions have established venture funds to provide equity financing for new and innovative projects.
V. Very Short Answers
Q1. What is a capital market? Answer: A capital market is a market where buyers and sellers trade in long-term securities such as shares, debentures, and bonds.
Q2. What is OTCEI? Answer: OTCEI (Over The Counter Exchange of India) was established by financial institutions to provide a platform for electronic counter-based trading of securities.
Q3. What is a mutual fund? Answer: A mutual fund is an institution that channels the savings of small investors into a diversified portfolio of investments, providing professional management and reduced risk.
Q4. Who are the participants in the capital market? Answer: The participants in the capital market include individuals, corporate bodies, government, and financial institutions.
Q5. How is the price determined in the capital market? Answer: Price in the capital market is determined by demand and supply forces.
VI. Short Answers
Q1. Distinguish between primary market and secondary market. Answer: The primary market deals with new issues — securities are issued for the first time and sold directly to investors. The secondary market deals with previously issued securities that are traded on stock exchanges among investors.
Q2. What are the two important functions of the capital market? Answer: (i) Ready and continuous market: The capital market provides a ready and continuous platform for buying and selling securities. (ii) Reliable guide to performance: It serves as a reliable indicator of the performance of companies and the overall economy.
Q3. What is NCDS? Answer: NCDS (National Clearing and Depository System) is a scripless trading system with three segments: National Trade Comparison, National Clearing System, and National Depository System. It enables electronic settlement of trades.
Q4. Explain the evolution of the capital market in India. Answer: The evolution of the Indian capital market has two phases: (i) 1947-73 (Infrastructure phase): Establishment of IFCI (1948), ICICI (1955), IDBI (1964), UTI (1964), and State Financial Corporations (SFCs). (ii) 1980-92 (Growth phase): Introduction of debentures, establishment of new stock exchanges, and creation of SEBI.
Q5. What is factoring? Answer: Factoring is a financial service where a financial institution (factor) provides accommodation to a business based on its account receivables. The factor purchases the receivables at a discount and manages the collection.
Q6. What is venture capital? Answer: Venture capital is equity financing provided to new, innovative, and high-technology projects. Venture capitalists take higher risks in exchange for potential high returns, and typically invest in start-ups and emerging companies.
VII. Long Answers
Q1. Explain the characteristics of the capital market.
The characteristics of the capital market are:
1. Price: Securities are priced based on demand and supply forces in the market. 2. Market for Financial Assets: The capital market deals with financial assets such as shares, debentures, and bonds rather than physical goods. 3. Securities Market: It is essentially a securities market where long-term instruments are traded. 4. Participants: A wide range of participants including individuals, corporate bodies, government, and financial institutions operate in the market. 5. Location: The capital market operates through both physical stock exchanges and electronic trading platforms.
Q2. Explain the functions of the capital market.
The functions of the capital market can be remembered with the mnemonic FIRES:
1. Savings and Capital Formation: Mobilises savings from households and channels them into productive investment, leading to capital formation. 2. Permanent Capital: Provides permanent capital to companies through equity shares that need not be repaid. 3. Industrial Growth: Supplies long-term funds required for establishing and expanding industries. 4. Ready and Continuous Market: Offers a platform for continuous buying and selling of securities. 5. Reliable Guide to Performance: Share prices reflect company performance, serving as a guide for investors. 6. Proper Channelization: Ensures funds flow from savers to the most productive uses. 7. Variety of Services: Provides services like factoring, venture capital, and mutual funds. 8. Development of Backward Areas: Channels funds into backward regions for balanced development. 9. Foreign Capital: Attracts foreign direct investment and portfolio investment. 10. Easy Liquidity: Provides liquidity to investors through the secondary market where securities can be easily converted to cash.
Q3. Explain the new financial institutions in the capital market.
1. SHCIL (Stock Holding Corporation of India Limited): Provides custodial and depository services, and handles clearing and settlement of trades. 2. OTCEI (Over The Counter Exchange of India): Established by financial institutions for electronic counter-based trading, enabling smaller companies to list and trade. 3. NSDL (National Securities Depository Limited): Provides dematerialisation of securities, converting physical share certificates into electronic form. 4. Venture Capital Institutions: Provide equity financing for new, innovative, and high-technology projects (e.g., IFCI, IDBI, SIDBI venture funds). 5. NSEI (National Stock Exchange of India): Established in 1992, it provides a transparent, screen-based trading system and operates in both the primary and secondary market segments.