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📘 Chapter 10 Class 12 BST • Part B CBSE Code 054

Financial Markets

Where does Rs 1 lakh saved by a household in Jaipur find its way to a factory being built in Pune? Through the Financial Market — the invisible highway that connects those who have surplus money with those who need it. This chapter covers the full landscape: what financial markets are and how they work, the five Money Market instruments (with the TC³B mnemonic), the Capital Market split into Primary and Secondary markets, all methods of floating securities, the Stock Exchange and its functions — and the watchdog of them all: SEBI (Protect, Develop, Regulate). Every concept locked in with mnemonics.

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📌 The Big Picture

Financial Market = The Highway Between Savers and Borrowers

India has millions of households that save money — but individually, their savings are too small and too scattered to fund a new airport, a pharma factory or a telecom tower. At the same time, businesses need crores of rupees to grow but cannot knock on a million doors to collect it. Financial Markets solve this problem elegantly.

They act as the organised highway that channels money from those who HAVE surplus (investors, savers, banks) to those who NEED it (businesses, government, individuals) — in an efficient, transparent and regulated manner.

Think of it this way: When you buy a share of Reliance on BSE, you are lending YOUR savings to Reliance so they can build refineries — and Reliance is paying you back through dividends and share price growth. Financial markets make this exchange possible at scale, every single day.

2.1 Financial Market: Concept and Nature

📌 Definition

What is a Financial Market?

A Financial Market is a market where financial assets (securities) are created and exchanged. It is a mechanism that allows buyers and sellers to trade in financial instruments — such as shares, debentures, bonds, treasury bills and commercial paper — thereby mobilising savings and channelling them into investment.

Simple definition: A financial market is any arrangement (physical or digital) where buyers and sellers of financial instruments come together to transact.

Functions of Financial Market

Mnemonic: “MPLR” — “Money Provides Liquidity and Returns”

Mobilisation of Savings and Channelling into Investment

Financial markets collect the small, scattered savings of millions of households across India and channel them into productive business investments. Without financial markets, a small investor in Patna could never become a co-owner of Tata Motors — with them, buying one share on NSE makes that possible. This function is the engine of capital formation in the economy.

Facilitates Price Discovery

The price of a security in a financial market is determined by the continuous interplay of demand and supply. When thousands of buyers and sellers transact simultaneously, the resulting price is the most accurate reflection of the security’s fair value. This real-time price discovery function helps investors make informed decisions and businesses know the true cost of raising capital.

Provides Liquidity to Financial Assets

A financial market converts illiquid investments into liquid ones. If you buy a factory (a real asset), you cannot sell it instantly when you need cash. But if you buy shares (a financial asset), you can sell them on BSE/NSE within seconds. The stock exchange gives investors the confidence to invest knowing they can EXIT when needed — without this liquidity, many investors would not invest at all.

Reduces Cost of Transactions

Without financial markets, each investor looking for an investment opportunity and each company looking for funds would need to search independently — spending enormous time and money. Financial markets aggregate all buyers and sellers on ONE platform, dramatically reducing the search cost, information cost and transaction cost for all participants.

Classification of Financial Markets

Basis	Money Market	Capital Market
Time period	Short-term: up to 1 year	Long-term: more than 1 year
Purpose	Meeting short-term liquidity / working capital needs	Meeting long-term investment / fixed capital needs
Instruments	T-Bills, Commercial Paper, Call Money, CDs, Commercial Bills	Equity shares, Debentures, Bonds, Preference shares
Risk	Low — short duration, high creditworthy issuers	Higher — longer duration, more market uncertainty
Return	Lower	Higher (compensates for higher risk)
Liquidity	Very high (short term = easy to cash out)	Lower (but Stock Exchange provides secondary liquidity)
Participants	RBI, commercial banks, large corporates, government	Companies, retail investors, FIIs, Mutual Funds
Regulator	RBI (Reserve Bank of India)	SEBI (Securities and Exchange Board of India)

2.2 Money Market

📌 Definition

What is the Money Market?

The Money Market is the market for short-term funds with a maturity of one day to one year. It deals in monetary assets with high liquidity and low risk. The main purpose is to meet short-term financial needs of businesses and the government.

Key features: Short maturity • High safety • High liquidity • Wholesale market (large transactions) • Not a physical location (telephone/electronic) • Regulated by RBI

Money Market Instruments Mnemonic: “TC³B” — “Two Clever Cats Called Bill”
Treasury Bills • Commercial Paper • Call Money • Certificate of Deposit • Bills (Commercial Bills)

Treasury Bills (T-Bills)

Issued by: Reserve Bank of India (RBI) on behalf of the Central Government.
Maturity: 91 days, 182 days or 364 days.
Minimum amount: Rs 25,000.
Nature: Zero coupon — issued at a DISCOUNT to face value and redeemed at face value. No periodic interest payment. Example: A Rs 25,000 T-Bill issued at Rs 23,500; on maturity, RBI pays full Rs 25,000 = effective return of Rs 1,500.
Risk: Zero risk — backed by the Government of India. Safest money market instrument.
Who buys: Banks, mutual funds, large corporates, RBI uses them for open market operations.
Exam point: Safest instrument + issued at discount + issued by RBI = T-Bills.

C¹

Commercial Paper (CP)

Issued by: Large, well-established, creditworthy COMPANIES (not banks, not government).
Maturity: 7 days to 1 year (maximum 1 year).
Minimum denomination: Rs 5 lakh.
Nature: Unsecured promissory note issued at a discount. No collateral.
Credit rating: Mandatory credit rating from CRISIL, ICRA etc. before issuance.
Purpose: Companies use it to raise short-term funds CHEAPER than bank loans.
Who buys: Banks, insurance companies, mutual funds, other corporates.
Exam points: Issued by CORPORATES (not government, not banks) • Unsecured • Credit rating mandatory • Minimum Rs 5 lakh.

C²

Call Money (Call/Notice Money)

Issued by / between: Commercial banks lending to and borrowing from each other.
Maturity: Overnight (1 day) to 14 days.
Purpose: Banks use it to maintain their statutory reserves (CRR — Cash Reserve Ratio). If a bank falls short of CRR on a particular day, it borrows call money from another bank that has surplus.
Interest rate: The “Call Rate” — highly volatile, changes daily based on supply and demand.
Can be recalled: At any time — hence the name “call” money.
Who participates: ONLY scheduled commercial banks and primary dealers.
Exam points: Between banks only • Overnight to 14 days • Used for CRR maintenance • Most volatile rate.

C³

Certificate of Deposit (CD)

Issued by: Scheduled Commercial Banks and All India Financial Institutions (AIFIs) like NABARD, NHB, SIDBI.
Issued to: Individuals, companies, corporations, non-resident Indians.
Maturity: 7 days to 1 year for banks; 1 to 3 years for AIFIs.
Minimum amount: Rs 1 lakh (and multiples thereof).
Nature: Unsecured, negotiable instrument in bearer form. Can be transferred before maturity.
Purpose: Banks issue CDs when they need to raise funds above their normal deposits — typically during periods of tight liquidity.
Exam points: Issued by BANKS/AIFIs • Minimum Rs 1 lakh • Negotiable/Transferable • Bearer form.

Commercial Bill (Bill of Exchange / Trade Bill)

Issued by: Sellers of goods (drawer) to buyers (drawee) in commercial transactions where goods are sold on credit.
Maturity: Usually 90 days (can vary based on trade terms).
Purpose: The seller needs cash before the bill’s due date, so they can DISCOUNT the bill with a bank — getting immediate cash minus a discount charge. The bank then collects the full amount from the buyer on the due date.
Self-liquidating: Automatically extinguished when the buyer pays on the due date.
Exam points: Used in TRADE transactions • Can be discounted with bank • Self-liquidating • Arises from buying and selling of goods.

Money Market Instruments — Quick Comparison

Instrument	Issued By	Period	Min. Amount	Secured?
Treasury Bills	RBI / Govt	91/182/364 days	Rs 25,000	Yes (Govt guaranteed)
Commercial Paper	Large corporates	7 days – 1 year	Rs 5 lakh	No (unsecured)
Call Money	Banks (inter-bank)	1 – 14 days	No fixed minimum	No
Certificate of Deposit	Banks / AIFIs	7 days – 1 year (banks)	Rs 1 lakh	No (unsecured)
Commercial Bill	Sellers in trade	Usually 90 days	Based on trade value	Self-liquidating

2.3 Capital Market: Meaning and Definition

📌 Definition

What is the Capital Market?

The Capital Market is the market for long-term funds (maturity beyond one year). It deals in equity shares, debentures, bonds, preference shares and other long-term financial instruments. Capital markets help businesses raise funds for fixed capital — building factories, purchasing machinery, long-term expansion.

Capital Market = Primary Market + Secondary Market

Primary Market vs Secondary Market — The Two Halves of Capital Market

Basis	Primary Market (New Issue Market)	Secondary Market (Stock Exchange)
What is traded	NEW securities being issued for the FIRST time	EXISTING/previously issued securities are traded
Who gets the money	The COMPANY (issuer) receives the proceeds	The SELLER (investor) receives the proceeds — NOT the company
Price	Fixed by company (fixed price) or through book-building	Determined by market forces (real-time demand and supply)
Purpose for company	Raises FRESH CAPITAL for expansion/new projects	Company gets no money; provides EXIT route for investors
Physical location	No specific location — applications through brokers, banks, ASBA	Stock Exchange (BSE, NSE) — now electronic
Transaction frequency	Occasional (only when company needs new capital)	Continuous — every trading day

Primary Market — Methods of Floating Securities

Mnemonic: “OFFERS” — “Only Fresh Funds Enter via Rights and Sales”

Initial Public Offer (IPO)

A company going to the STOCK MARKET FOR THE FIRST TIME invites the public to subscribe to its shares/debentures. The company has never been publicly listed before. This is the first time the general public can buy shares in the company.
Example: Zomato IPO in 2021 was the first time the general public could buy Zomato shares — before that, only private investors (VCs) held shares.
Exam tip: IPO = First time going public. Company unlisted before IPO.

Further Public Offer (FPO) / Follow-on Public Offer

A company ALREADY LISTED on the stock exchange issues ADDITIONAL shares to the public. The company is already public but needs more capital.
Example: A listed infrastructure company issues an FPO to raise funds for a new highway project, even though it already trades on NSE.
Exam tip: FPO = Company is ALREADY listed and issues MORE shares. Not the first time public.

Rights Issue

A listed company offers NEW shares to its EXISTING SHAREHOLDERS in proportion to their current holdings. Existing shareholders have the FIRST RIGHT to buy additional shares before they are offered to the public. Typically at a DISCOUNT to market price.
Example: A company with 1 crore existing shareholders offers 1 new share for every 4 held (1:4 rights). Existing shareholder holding 400 shares gets the right to buy 100 additional shares at a discount.
Exam tip: Rights issue = For EXISTING shareholders first. Proportional. At discount to market price.

Private Placement

Securities are sold to a select group of identified large investors — institutional investors, mutual funds, High Net Worth Individuals (HNIs), venture capital firms — WITHOUT a public offer. No need for a public prospectus. Faster and cheaper than IPO/FPO.
Example: A startup raises Rs 500 crore by selling shares to 10 institutional investors (Sequoia, SoftBank, Tiger Global) without any public announcement or SEBI public offer process.
Exam tip: Private placement = selected buyers • No public offer • Faster • No SEBI public offer requirements.

Offer for Sale

Existing shareholders of a company (promoters, venture capitalists, private equity) sell their EXISTING shares to the public — the company does NOT issue new shares and does NOT receive any money. The selling shareholders receive the proceeds.
Example: When the Indian government divests its stake in a public sector company — like selling LIC shares to the public — the government (existing shareholder) gets the money, not LIC itself.
Exam tip: Offer for Sale = Existing shareholders sell existing shares • Company gets NO money • Only seller benefits.

e-IPO (Electronic IPO)

Online mechanism where IPO applications are submitted electronically. Uses the ASBA (Applications Supported by Blocked Amount) system — money is not withdrawn from investor account but only BLOCKED until share allotment. If shares are not allotted, the block is released. Example: Applying for an IPO through your bank’s net banking portal or through Zerodha/Groww — the application amount is blocked in your savings account, not debited, until allotment.

2.4 Stock Exchange (Secondary Market)

📌 Definition

What is a Stock Exchange?

A Stock Exchange is an institution or organised market where existing securities (shares, debentures, bonds) are bought and sold through its members (brokers). It provides a ready, continuous and safe market for securities.

India’s major stock exchanges:
BSE (Bombay Stock Exchange) — established 1875, Asia’s OLDEST stock exchange. Sensex (30 companies).
NSE (National Stock Exchange) — established 1992. Nifty 50 (50 companies). India’s LARGEST by trading volume.

Functions of Stock Exchange

Mnemonic: “LPSESD” — “Liquidity Provides Safety, Economy and Speculation to Depositors”

Provides Liquidity and Marketability to Securities

This is the PRIMARY function of a stock exchange. An investor who buys shares in a company can SELL them on the exchange at any time during trading hours. Without the exchange, shares would be illiquid — once bought, you would be stuck with them. The exchange converts all listed securities into instantly liquid assets, making people willing to invest in the first place.

Facilitates Price Discovery

The continuous auction of buyers and sellers on the stock exchange produces a REAL-TIME, market-determined price for every listed security. This price reflects ALL available information — company performance, macro outlook, investor sentiment — and provides an objective, fair value that no individual can determine alone.

Ensures Safety of Transaction

Stock exchanges operate under SEBI regulations and their own strict rules. All members (brokers) are registered and accountable. Trading is transparent and recorded. Insider trading and price manipulation are prohibited. Settlement is guaranteed by clearing corporations (NSCCL, ICCL). Investors are protected from counterparty default.

Contributes to Economic Growth

By channelling household savings into company equity and debt, stock exchanges fund business expansion, infrastructure development and job creation. A company that can raise capital efficiently through the stock exchange can grow faster, employ more people and contribute more to GDP. The health of the stock market is closely correlated with the health of the economy.

Spreading of Equity Cult

Stock exchanges democratise corporate ownership by allowing ANY citizen with a demat account to own shares in India’s largest companies. A person with Rs 500 can own a share of HDFC Bank, Infosys or Tata. This widespread share ownership — the “equity cult” — creates a shareholder citizenry with a stake in India’s corporate success.

Provides Scope for Speculation

Within legal and regulatory limits, stock exchanges permit speculation — buying securities with the expectation of short-term price gains. While excessive speculation is harmful, some degree is necessary: speculators provide liquidity (always willing to buy and sell), help prices adjust quickly to new information and absorb risk that risk-averse investors want to avoid. SEBI regulates speculation through circuit breakers and position limits.

SEBI — Securities and Exchange Board of India

📌 Key Facts

SEBI at a Glance

Established: 1988 as an administrative body; became a STATUTORY body (with legal powers) in 1992 under the SEBI Act, 1992.
Headquarters: Mumbai (Bandra Kurla Complex).
Chairman: Appointed by Central Government.
Role: The apex regulator of India’s securities market — equivalent to what RBI is for banking.

Objectives of SEBI

Mnemonic: “PDR” — “Please Develop and Regulate”
Protect the interests of investors in securities
Develop the securities market
Regulate the business of securities market

Functions of SEBI — Three Categories

Mnemonic: “PDR” applies to functions too: Protective, Developmental, Regulatory

① Protective Functions (Shield for Investors)

Checks Price Rigging and Manipulation

Price rigging = artificially inflating or depressing a stock price through coordinated buying/selling. SEBI monitors trading patterns, investigates suspicious price movements and penalises manipulators. Example: SEBI investigating and penalising operators who pump a penny stock before dumping.

Prohibits Insider Trading

Insider trading = buying or selling securities using UNPUBLISHED PRICE SENSITIVE INFORMATION (UPSI) — confidential information not yet available to the public. Example: A company director buying shares just before the company announces record profits — using insider knowledge for personal gain. SEBI prohibits this as it is fundamentally unfair to ordinary investors.

Promotes Fair Practices and Code of Conduct

SEBI requires all market participants (companies, brokers, merchant bankers) to follow a code of fair dealing practices. Companies must make timely, complete disclosures. Brokers must act in the best interest of their clients. No misrepresentation of facts to investors.

Investor Education

SEBI runs investor education programmes, maintains a grievance redressal system (SCORES platform) and publishes investor awareness materials. Educated investors make better decisions and are less vulnerable to fraud.

② Developmental Functions (Growing the Market)

Training of Market Intermediaries

SEBI sets qualification requirements and trains intermediaries (brokers, merchant bankers, portfolio managers, mutual fund distributors). This ensures market professionals are competent, ethical and client-focused.

Promotes Research and Innovation

SEBI promotes research in the securities market, introduces new instruments and mechanisms (e-IPO, SME exchange, InvITs, REITs) and encourages technology adoption to make markets more efficient and accessible.

Promotes Fair Trading and Reducing Malpractice

By removing barriers to entry for genuine participants and cracking down on malpractice, SEBI creates a level playing field that attracts more investors, deepening the market.

③ Regulatory Functions (Rules of the Game)

Registers and Regulates All Market Intermediaries

Every stock broker, sub-broker, merchant banker, portfolio manager, mutual fund, custodian, registrar, transfer agent — ALL must be registered with SEBI and operate under its rules. No unregistered entity can participate in the securities market.

Issues Guidelines for Capital Market Processes

SEBI prescribes detailed guidelines for IPOs, FPOs, rights issues, debenture issues, mutual fund operations, portfolio management and all other capital market activities. Companies must follow SEBI’s ICDR (Issue of Capital and Disclosure Requirements) regulations.

Regulates Takeover of Companies

When an acquirer plans to take over a listed company, SEBI’s Takeover Code (SEBI Takeover Regulations) must be followed — including a mandatory open offer to minority shareholders. This protects small investors during mergers and acquisitions.

Controls and Regulates Stock Exchanges

SEBI approves rules of stock exchanges, reviews trading regulations, orders investigations, conducts inspections and takes disciplinary action against exchanges and their members when rules are violated.

Function Category	Key Actions	Memory Hook
Protective	Check price rigging • Prohibit insider trading • Fair practices • Investor education	SEBI is the SHIELD for investors
Developmental	Train intermediaries • Promote research • Reduce malpractice • New instruments	SEBI is the GARDENER — grows the market
Regulatory	Register intermediaries • Issue guidelines • Regulate takeovers • Control stock exchanges	SEBI is the RULEBOOK — sets the law

⚡ Quick Recall — Chapter 10 Key Points

Financial Market: Channels savings to investment. 4 Functions: MPLR = Mobilisation, Price discovery, Liquidity, Reduces transaction costs. Two main types: Money Market (short-term, up to 1 year, RBI regulated) vs Capital Market (long-term, over 1 year, SEBI regulated). Money Market instruments: TC³B = Treasury Bills (RBI/Govt, 91/182/364 days, Rs 25,000, zero coupon, safest) + Commercial Paper (large corporates, unsecured, Rs 5 lakh, credit rating needed) + Call Money (inter-bank, overnight to 14 days, CRR maintenance) + Certificate of Deposit (banks/AIFIs, Rs 1 lakh, negotiable) + Commercial Bills (trade, discountable, self-liquidating). Capital Market = Primary Market (new issues — company gets money) + Secondary Market (existing securities — seller gets money, company gets nothing). Primary Market methods: IPO (first time public), FPO (already listed, more shares), Rights Issue (existing shareholders, proportional, at discount), Private Placement (selected buyers, no public offer), Offer for Sale (existing shareholders sell, company gets no money), e-IPO (online via ASBA). Stock Exchange: BSE (1875, Asia oldest, Sensex 30) + NSE (1992, Nifty 50, largest by volume). Functions: LPSESD = Liquidity, Price discovery, Safety, Economic growth, Spread equity cult, Speculation scope. SEBI: Established 1988, statutory body 1992. HQ Mumbai. Objectives PDR = Protect investors, Develop market, Regulate market. Functions: Protective (price rigging, insider trading, fair practices, investor education), Developmental (train intermediaries, research), Regulatory (register all intermediaries, guidelines, takeover regulations, control exchanges). Insider Trading = using UPSI (Unpublished Price Sensitive Information) to buy/sell securities = prohibited by SEBI. Price Rigging = artificially manipulating stock prices = prohibited. Key difference: In Primary Market, IPO/FPO money goes to the COMPANY. In Secondary Market (Stock Exchange), sale money goes to the SELLER, NOT the company.

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Ch 9: Financial Management

Ch 11: Marketing Management

30 MCQs — Financial Markets

Money market instruments, capital market, primary vs secondary market, stock exchange functions and SEBI — heavy case focus. Q25–Q30 are CUET-level.

📚 Questions 1 to 30

A financial market primarily serves to:

AHelp the government collect taxes from businesses

BMobilise savings from those with surplus funds and channel them to those who need funds for investment, thereby enabling efficient capital formation in the economy

CProvide employment opportunities in the banking sector

DRegulate the foreign exchange rate of the Indian Rupee

Answer: B — Mobilise savings and channel to investment. This is the fundamental purpose of financial markets. They act as a bridge between those with surplus money (households, businesses with savings) and those who need funds (businesses for expansion, government for infrastructure). Without financial markets, this matching would be inefficient, costly and limited in scale. The four functions of financial markets: Mobilisation of savings, Price discovery, Liquidity provision and Reducing transaction costs.

📋 CASE: The RBI issues a short-term government security for 91 days. It is issued at Rs 97,500 and redeemed at Rs 1,00,000 at maturity. No interest is paid during the 91-day period — the return comes only from the discount at which it was issued. This instrument is:

ATreasury Bill — a short-term government security issued by RBI at a discount to face value, with maturity of 91, 182 or 364 days and no periodic coupon payment

BCommercial Paper — short-term unsecured promissory note by large corporates

CCertificate of Deposit — issued by commercial banks to depositors

DCommercial Bill — used in trade transactions between buyer and seller

Answer: A — Treasury Bill. Three identifying features confirm T-Bill: (1) Issued by RBI on behalf of government — not by a company or bank. (2) Issued at DISCOUNT (Rs 97,500) and redeemed at FACE VALUE (Rs 1,00,000) — zero coupon. (3) 91-day maturity — one of the three standard T-Bill tenures (91/182/364 days). T-Bills are the SAFEST money market instrument — zero default risk since backed by the Government of India. Minimum denomination: Rs 25,000.

📋 CASE: Tata Consultancy Services (TCS) needs Rs 500 crore for 6 months to fund its working capital requirements during a large project execution phase. Instead of taking a bank loan at 9%, TCS issues short-term unsecured promissory notes to institutional investors at 7.5%. TCS must get these rated by CRISIL before issuance. This instrument is:

ATreasury Bill — issued by RBI on behalf of the government

BCertificate of Deposit — issued by commercial banks

CCommercial Paper — unsecured short-term promissory note issued by large, creditworthy companies (corporates like TCS), minimum Rs 5 lakh denomination, mandatory credit rating required

DCall Money — inter-bank borrowing for overnight to 14 days

Answer: C — Commercial Paper (CP). Key identifiers: (1) Issued by CORPORATE (TCS — not government, not bank). (2) UNSECURED — no collateral. (3) Mandatory CREDIT RATING from CRISIL before issuance. (4) Raises funds CHEAPER than bank loan (7.5% vs 9%). Minimum denomination is Rs 5 lakh. CPs can be issued for 7 days to 1 year. Companies use CP to bypass banks and access money market investors directly — getting cheaper funds while investors get slightly higher returns than bank deposits.

📋 CASE: At the end of a Tuesday, HDFC Bank finds it has Rs 200 crore less in its accounts than required by RBI’s Cash Reserve Ratio. It immediately calls Axis Bank, which has Rs 350 crore surplus that day. HDFC borrows Rs 200 crore from Axis overnight, agreeing to repay Rs 200.11 crore by Wednesday morning. This instrument is:

ACommercial Paper — short-term corporate borrowing

BTreasury Bill — government security for liquidity management

CCall Money — overnight borrowing between commercial banks to meet statutory reserve requirements (CRR). The interest paid is the “Call Rate”

DCertificate of Deposit — bank raising deposits from public

Answer: C — Call Money. Three definitive identifiers: (1) Between BANKS only (HDFC to Axis) — not companies, not government. (2) OVERNIGHT (1 day) — the hallmark of call money. (3) Purpose: to meet CRR (Cash Reserve Ratio) requirements set by RBI. The interest rate on this transaction is the “Call Rate” — the most volatile interest rate in the money market, changing daily. Call money can also be for 2-14 days (then called “notice money”). Only scheduled commercial banks and primary dealers can participate.

📋 CASE: ICICI Bank needs to raise additional short-term funds beyond normal deposits. It issues a negotiable instrument in bearer form to large investors — minimum Rs 1 lakh each — for a period of 6 months. These instruments can be transferred to other investors before maturity. The interest rate is fixed at issuance. This instrument is:

ACommercial Paper — issued by large corporates

BTreasury Bill — issued by RBI for the government

CCall Money — inter-bank overnight borrowing

DCertificate of Deposit (CD) — issued by COMMERCIAL BANKS (and AIFIs) to raise funds; minimum Rs 1 lakh; transferable/negotiable; bearer form; 7 days to 1 year for banks

Answer: D — Certificate of Deposit (CD). Key identifiers: (1) Issued by ICICI BANK (commercial bank) — not a corporate, not the government. (2) NEGOTIABLE and transferable before maturity. (3) BEARER form — whoever holds it is the owner. (4) Minimum Rs 1 lakh. (5) 6-month maturity (within 7 days to 1 year bank limit). CDs allow banks to raise funds quickly from the market when they need more than normal deposits provide. Different from Commercial Paper (CPs are by companies; CDs are by banks).

📋 CASE: A cotton textile exporter sells Rs 50 lakh of fabric to a garment maker on 90-day credit. The exporter draws a bill of exchange that the garment maker accepts. The exporter needs cash NOW, so he takes the accepted bill to his bank, which pays him Rs 48.5 lakh today (discounting Rs 1.5 lakh as discount charge). The bank will collect Rs 50 lakh from the garment maker after 90 days. This instrument is:

ACertificate of Deposit — issued by banks

BTreasury Bill — issued by RBI

CCommercial Bill (Bill of Exchange / Trade Bill) — arises from commercial trade transactions; the seller discounts it with the bank to get early cash; self-liquidating when buyer pays on due date

DCommercial Paper — unsecured corporate note

Answer: C — Commercial Bill. Three identifiers: (1) Arises from TRADE (sale of fabric between exporter and garment maker). (2) DISCOUNTED with bank — seller receives less than face value NOW (Rs 48.5 lakh vs Rs 50 lakh face value). (3) SELF-LIQUIDATING — the garment maker pays Rs 50 lakh after 90 days, automatically settling the bill. Commercial bills finance the credit gap in trade — the seller does not have to wait 90 days for payment. The bank earns the Rs 1.5 lakh discount as its interest income.

Which institution REGULATES the Money Market in India?

ASEBI (Securities and Exchange Board of India)

BIRDAI (Insurance Regulatory and Development Authority of India)

CRBI (Reserve Bank of India) — the central bank that regulates banking and monetary policy, including all money market instruments and participants

DMinistry of Finance — which controls all government financial markets

Answer: C — RBI regulates the Money Market. Key regulators: RBI = Money Market (Treasury Bills, Call Money, CDs, CPs, Commercial Bills). SEBI = Capital Market (shares, debentures, bonds, mutual funds, stock exchanges). This is one of the most commonly tested distinctions. RBI controls short-term liquidity (monetary policy), while SEBI protects investors and develops the long-term capital market. Both are statutory bodies with independent powers.

📋 CASE: In 2021, Paytm (One97 Communications) offered its shares to the public for the FIRST TIME through a stock market listing. Investors had never been able to buy Paytm shares on any exchange before this. This is an example of:

AInitial Public Offer (IPO) — a company going public for the FIRST time, offering its shares to the general public for the first time in the primary market

BFurther Public Offer (FPO) — already listed company issuing more shares

CRights Issue — offering shares to existing shareholders

DPrivate Placement — selling shares to select institutional investors

Answer: A — Initial Public Offer (IPO). The defining feature of an IPO: the company is being listed on a stock exchange FOR THE FIRST TIME. Before the Paytm IPO, only venture capitalists (Softbank, Alibaba, Ant Group) held Paytm shares privately. The IPO made Paytm shares available to millions of ordinary investors on BSE and NSE for the first time. The company raises fresh capital (or existing investors exit through offer for sale) — and becomes a “public company” with ongoing disclosure obligations.

📋 CASE: HDFC Bank (already listed on NSE and BSE) needs Rs 10,000 crore for expansion. It issues 10 crore new shares at Rs 1000 each to the general public through stock exchanges. This is an example of:

AInitial Public Offer — HDFC Bank going public for the first time

BFurther Public Offer (FPO) / Follow-on Public Offer — a company ALREADY LISTED issuing ADDITIONAL NEW shares to the public to raise fresh capital

CRights Issue — offering shares only to existing HDFC Bank shareholders

DOffer for Sale — existing shareholders selling their HDFC Bank shares

Answer: B — Further Public Offer (FPO). HDFC Bank is already listed (not first time = not IPO). It is issuing NEW additional shares to the general PUBLIC (not just existing shareholders = not Rights Issue). The company raises fresh capital from this issuance. The key distinction: IPO = First time going public. FPO = Already listed, more shares to public. Rights Issue = Already listed, shares to EXISTING shareholders first. Offer for Sale = No new shares; existing shareholders sell their holdings.

📋 CASE: Infosys decides to raise additional capital but wants to give priority to its existing shareholders first. It announces: “Every shareholder currently holding 4 shares can buy 1 additional new share at Rs 1,400 — a 20% discount to the current market price of Rs 1,750.” This is a:

AIPO — first-time public offering

BFPO — issuing more shares to general public

CRights Issue — offering new shares to EXISTING shareholders in proportion to current holdings (1 new for every 4 held), at a DISCOUNT to market price; existing shareholders have the first right before the public

DPrivate Placement — selling to select institutional investors

Answer: C — Rights Issue. The three defining features: (1) Offered to EXISTING shareholders only (not the general public). (2) PROPORTIONAL — 1 new share for every 4 held (1:4 rights ratio). (3) At a DISCOUNT to market price (Rs 1,400 vs market Rs 1,750). Rights issues protect existing shareholders by giving them first right to maintain their proportional ownership. If they do not exercise the right, they can sell the “rights entitlement” itself to others. This method is faster and cheaper than an FPO.

📋 CASE: A pharmaceutical startup raises Rs 300 crore by selling shares to 8 investors — three mutual funds, two PE firms and three family offices — without any public announcement, prospectus or SEBI public offer compliance. The deal is done in 2 weeks. This is called:

AIPO — first-time public offering

BRights Issue — offer to existing shareholders

CPrivate Placement — securities sold to a small, selected group of large investors (institutional, HNI) without a public offer; faster, cheaper, no public prospectus required

DOffer for Sale — existing shareholders selling shares

Answer: C — Private Placement. Key identifiers: (1) Selected, identified investors (8 specific entities — not the general public). (2) No public announcement or prospectus. (3) No SEBI public offer process — much faster (2 weeks vs 6+ months for IPO). (4) Large-value transactions with sophisticated investors who can evaluate risk independently. Private placement is the most common way startups and growing companies raise capital before they are ready for a public listing. It is faster, cheaper and more private than an IPO.

📋 CASE: The Government of India holds 51% of Coal India Ltd. (listed on BSE/NSE). To reduce its stake to 45% (disinvestment), the government offers 6% of Coal India shares to the public through a stock exchange offer. Coal India does NOT issue any new shares — only the government’s existing shares are being sold. Who receives the Rs 3,000 crore raised?

ACoal India Limited — for corporate expansion projects

BThe Government of India (the SELLER) receives the proceeds — this is an Offer for Sale; no new shares are issued, so Coal India gets NO money; only the existing shareholder (government) benefits

CSEBI — as it regulates the transaction

DBSE and NSE — as the exchanges facilitating the transaction

Answer: B — Government (the seller) receives the money via Offer for Sale. This is the most important distinction in primary market: OFFER FOR SALE = existing shareholders sell existing shares to the public. NO new shares issued = company gets ZERO money. Only the selling shareholder benefits. This is exactly how government disinvestment works — the PSU does not receive the disinvestment proceeds; the government does. Contrast with FPO where the COMPANY issues new shares and receives the proceeds.

When an investor sells 100 Reliance shares on NSE to another investor, which type of market is this transaction taking place in?

APrimary Market — because shares are being transacted

BMoney Market — because the settlement is within T+1 day

CSecondary Market (Stock Exchange) — existing shares already issued years ago are being traded between two investors; Reliance gets no money from this transaction

DPrimary Market — because NSE is a primary market for Reliance

Answer: C — Secondary Market (Stock Exchange). These are EXISTING Reliance shares being traded between one investor (seller) and another (buyer). Reliance Industries did NOT issue new shares — these shares were issued years ago (in the primary market). In the secondary market: (1) Existing securities trade between investors. (2) The company gets NO proceeds. (3) Transactions happen continuously every trading day. (4) Price is determined by real-time market supply and demand. This liquidity function of the secondary market is what makes people willing to invest in the primary market in the first place.

SEBI was established in:

A1992 only — as a statutory regulatory body directly

B1875 — when BSE was established

C1988 as an administrative body; became a STATUTORY (legally empowered) body in 1992 under the SEBI Act, 1992, giving it legal powers to regulate the securities market

D2000 — after the Kargil war to strengthen financial regulation

Answer: C — SEBI 1988 (administrative) + 1992 (statutory). This two-date fact is frequently tested. 1988: SEBI set up as an administrative body (no independent legal powers). 1992: SEBI Act passed, making it a STATUTORY body with its own legal framework, enforcement powers and independence. Post-1992, SEBI can investigate, impose penalties, debar market participants and issue binding regulations. This was needed to regulate India rapidly liberalising capital market after the 1991 LPG reforms. HQ: Mumbai (Bandra Kurla Complex).

📋 CASE: A company director buys 10,000 shares of his own company on Tuesday, knowing (but not yet having announced) that the company will report record quarterly profits on Friday. When the results are announced Friday, the share price surges 22%. This is an example of:

ALegal short-term trading — the director is within his rights to buy company shares

BPrice rigging — the director is manipulating the share price upward

CInsider Trading — using Unpublished Price Sensitive Information (UPSI) — the unannounced record profits — to trade in the company shares before the information is public; prohibited by SEBI under its Protective function

DSpeculation — the director is simply taking a calculated market risk

Answer: C — Insider Trading. UPSI (Unpublished Price Sensitive Information) = record quarterly profits not yet announced. The director KNOWS this information before the market does — and buys shares using this unfair advantage. This is insider trading — one of the most serious securities market offences. It harms ordinary investors who trade WITHOUT this inside information. SEBI’s Insider Trading Regulations prohibit all persons connected with a company from trading in its securities while in possession of UPSI. Penalty: fines up to Rs 25 crore or 3x illegal gains.

📋 CASE: A group of operators buys large quantities of a small-cap company stock over 2 weeks, creating artificial buying pressure that pushes the price from Rs 50 to Rs 200. They then issue fake positive news about the company on social media and Telegram groups. Retail investors rush to buy at Rs 180-200. The operators then sell all their shares at these high prices. The price crashes back to Rs 55. This is called:

AInsider trading — using non-public company information

BSpeculation — the operators are taking a calculated risk

CPrice Rigging / Market Manipulation — artificially inflating a share price through coordinated buying and fake news (pump), then selling at the high price causing the price to crash (dump); prohibited by SEBI under its Protective function

DLegal trading strategy — the operators took a position and exited normally

Answer: C — Price Rigging (Pump and Dump scheme). This is the classic “pump and dump” market manipulation: pump the price artificially through coordinated buying + fake positive news, then dump (sell) at inflated prices, leaving uninformed retail investors holding worthless shares. SEBI detects price rigging through surveillance systems that flag unusual price movements and trading volumes. SEBI can freeze accounts, debar market participants and refer criminal cases. This is distinct from Insider Trading (which uses private company information, not artificial price manipulation).

Which of the following correctly identifies SEBI as performing a DEVELOPMENTAL function?

ASEBI prohibiting an operator from price rigging of a midcap stock

BSEBI ordering an investigation into suspected insider trading

CSEBI introducing ASBA (Applications Supported by Blocked Amount) for IPOs, an innovation that makes the process safer for retail investors and encourages more participation in the capital market

DSEBI debarring a company from accessing capital markets for 5 years for disclosure violations

Answer: C — Developmental function. SEBI Functions PDR: Protective = shielding investors (options A and B are protective). Regulatory = rules, registration, debarment (option D is regulatory). Developmental = GROWING and IMPROVING the market through innovation, new instruments, training, reducing malpractice and making participation easier. ASBA (blocking funds rather than withdrawing) dramatically reduced risk for IPO applicants and increased retail participation. Other developmental functions: introducing e-IPO, creating SME exchange, allowing InvITs and REITs, training intermediaries.

The BSE (Bombay Stock Exchange) Sensex consists of:

A50 of the largest companies listed on BSE

B100 top companies from all Indian stock exchanges

C30 of the largest, most actively traded companies listed on BSE — representing key sectors of the Indian economy. When Sensex rises, it reflects overall positive market sentiment for these 30 blue-chip companies

DAll companies listed on BSE — Sensex is a comprehensive index

Answer: C — Sensex = 30 companies. Key facts: BSE Sensex = 30 companies (S&P BSE Sensex). NSE Nifty = 50 companies (Nifty 50). BSE was established in 1875 — Asia’s OLDEST stock exchange (Mumbai, Dalal Street). NSE was established in 1992 and is now India’s LARGEST by trading volume. The Sensex and Nifty are market indices — they measure the overall health and direction of the stock market by tracking their respective constituent stocks. A rising Sensex = positive market sentiment; falling Sensex = negative sentiment.

Which of the following is the PRIMARY function of a stock exchange that makes all other functions possible?

AProviding liquidity and marketability — the ability to convert financial investments into cash at any time; without this, investors would not buy shares in the first place, making IPOs and capital formation impossible

BProviding scope for speculation — speculators provide most of the market liquidity

CSpreading equity cult — making share ownership democratic

DFacilitating economic growth through capital allocation

Answer: A — Providing liquidity and marketability (primary function). Everything else flows from liquidity. WHY would anyone buy shares in a company (IPO) if they could never sell them? The answer: they would not. The stock exchange’s guarantee of liquidity — you can always find a buyer for your shares — is what makes the PRIMARY market (IPO) possible. And the primary market is what channels savings to businesses for growth. Remove liquidity from the stock exchange and the entire capital formation chain collapses. Liquidity is the foundation of the securities market ecosystem.

📋 CASE: A company is exploring two IPO pricing options: (A) Fixed Price Method: set IPO price at Rs 200 per share; investors apply knowing the fixed price. (B) Book Building Method: company announces a price band of Rs 175-200; institutional investors and public bid within this range; the final price is determined by bids received. Which method allows better price discovery?

AFixed Price — easier for retail investors to understand

BBook Building Method — the final price is determined by actual demand from investors (the market) rather than by the company alone; this is true price discovery and ensures the IPO is priced at what the market is actually willing to pay

CBoth methods offer identical price discovery

DFixed price is always better for company as it controls the price

Answer: B — Book Building enables true price discovery. In Fixed Price: company sets price unilaterally — may be too high (under-subscription) or too low (massive oversubscription but company leaves money on the table). In Book Building: investors bid within the price band — the cut-off price reflects actual market demand. If bids are concentrated at Rs 200, the issue price is Rs 200. If most bids are at Rs 180, price is set lower. The market itself determines the fair price through the bidding process. Book building is now the most common IPO pricing method in India.

📋 CASE: A textile company sold goods to a retailer on credit. The exporter drew a bill of exchange for Rs 10 lakh at 90 days. The retailer accepted the bill. The textile company needed immediate funds and approached its bank to discount the bill. The bank agreed to pay Rs 9.75 lakh now (taking Rs 25,000 as discount). Before the 90 days were up, the bank sold this bill to a mutual fund that specialises in short-term instruments. The characteristic that ALLOWS this bill to be transferred from bank to mutual fund is that it is:

ASelf-liquidating — it automatically settles when the retailer pays

BGuaranteed by RBI since it is a money market instrument

CNegotiable — commercial bills can be transferred (endorsed) from one party to another before maturity, making them marketable instruments that can move through multiple hands in the money market

DZero coupon — issued at discount like a Treasury Bill

Answer: C — Negotiable (can be transferred/endorsed). The negotiability of a commercial bill is what makes it a money market INSTRUMENT (tradable) rather than just a private IOU between two parties. The bank can endorse (transfer) the bill to a mutual fund — the mutual fund then holds the right to collect Rs 10 lakh from the retailer on Day 90. This transferability is also the key feature of Certificates of Deposit (also negotiable and transferable). The self-liquidating nature (A) is also true of commercial bills but is NOT the feature that enables transfer between parties.

Which of the following correctly describes the ASBA (Applications Supported by Blocked Amount) system used in IPO applications?

AASBA is a system where IPO application money is immediately transferred to the company upon application

BASBA allows investors to apply for IPOs using borrowed money from their broker

CASBA blocks the application money in the investor bank account rather than debiting it; if shares are not allotted, the block is released immediately; if allotted, only then is money debited — protecting investors from money being misused during the subscription period

DASBA is only available for institutional investors, not retail investors

Answer: C — ASBA blocks funds, not debits them. ASBA (introduced by SEBI) is a developmental innovation that protects retail IPO investors. Before ASBA: Money was physically withdrawn from investor accounts during the IPO period, earning no interest and carrying the risk of misuse. With ASBA: Money stays in YOUR account (earning bank interest or connected to a savings account) but is BLOCKED — you cannot spend it. If shares are not allotted: block released, money yours again immediately. If allotted: money debited only for allotted shares. This is a classic example of SEBI developmental function improving investor experience.

📋 CASE: After buying 200 shares of Wipro in the IPO (primary market) 3 years ago, Rajan needs money urgently. He sells his 200 Wipro shares to Priya through NSE. The sale price is determined by the current NSE market price (Rs 480), which is different from the IPO price (Rs 230). How much does WIPRO receive from this transaction?

ARs 96,000 (200 x Rs 480 — current market price)

BRs 46,000 (200 x Rs 230 — original IPO price)

CThe difference between market price and IPO price (Rs 50,000)

DZERO — Wipro receives nothing. This is a secondary market transaction between investor Rajan and investor Priya; Rajan (the seller) receives Rs 96,000; Wipro is not involved in this exchange at all

Answer: D — Wipro gets ZERO. This is THE most important distinction between primary and secondary markets. Primary Market: company issues new shares and RECEIVES money. Secondary Market (Stock Exchange): existing shares traded between investors. The COMPANY gets NO PROCEEDS. Wipro received money only ONCE — during the original IPO 3 years ago. Every subsequent trade on NSE/BSE is between investors. The price discovery (Rs 480 vs IPO Rs 230 = 109% gain) happens in the secondary market, but the company neither benefits from nor participates in these trades.

SEBI’s regulatory function of “regulating takeover of companies” protects which category of investors primarily?

ALarge institutional investors who hold majority stakes

BThe acquiring company that is taking over

CMinority / small shareholders — SEBI Takeover Code requires an acquirer who crosses certain ownership thresholds to make an Open Offer to all shareholders, giving small investors the chance to exit at a fair price

DSEBI itself as the regulatory body

Answer: C — Minority/small shareholders protected by Takeover Code. When a company is taken over, large shareholders (promoters, institutions) negotiate directly with the acquirer and get fair prices. Small retail shareholders could be left stranded at post-takeover price uncertainty. SEBI Substantial Acquisition of Shares and Takeovers Regulations: When an acquirer crosses 25% ownership threshold, they must make an Open Offer to buy at least 26% more from ALL shareholders — at the highest price paid to any shareholder in the preceding period. This guarantees small investors can exit at a fair price during any takeover.

[CUET Level] Assertion (A): The primary market directly provides liquidity to investors who hold previously purchased securities.
Reason (R): In the primary market, investors can sell their existing holdings to other investors through the stock exchange at current market prices.

ABoth A and R are true, and R correctly explains A

BBoth A and R are true, but R does not explain A

CA is true, R is false

DBoth A and R are false — providing liquidity to existing securities is the function of the SECONDARY market (Stock Exchange), not the primary market; the primary market deals in NEW securities being issued for the first time

Answer: D — Both A and R are false. A is false: PRIMARY market does NOT provide liquidity for existing securities. It raises FRESH capital through new issues (IPO, FPO, Rights Issue). SECONDARY market (Stock Exchange) provides liquidity for existing securities. R is also false: selling existing holdings to other investors through the stock exchange = SECONDARY market activity, not primary. Primary market: company issues new securities, receives fresh capital. Secondary market: existing investors trade previously issued securities among themselves. The company gets no money in secondary market transactions.

[CUET Level] Assertion (A): Treasury Bills are the safest money market instrument in India.
Reason (R): Treasury Bills are issued by RBI on behalf of the Central Government, backed by sovereign guarantee — making default essentially impossible.

ABoth A and R are true, and R correctly explains why T-Bills are the safest — the government of India cannot default on its own currency obligations

BBoth A and R are true, but R does not explain A

CA is true, R is false

DBoth A and R are false

Answer: A — Both true, R correctly explains A. T-Bills are issued by RBI on behalf of the CENTRAL GOVERNMENT of India — which has sovereign guarantee. The Government of India (like any sovereign in its own currency) can always honor its short-term domestic currency obligations. This makes T-Bills RISK-FREE from a credit perspective — the safest instrument in the money market. Commercial Paper (corporate = can default), Call Money (bank default risk), Certificate of Deposit (bank can fail), Commercial Bills (buyer can default) — all carry MORE risk than T-Bills.

[CUET Level — Incorrect Pair] Which of the following pairs is INCORRECTLY matched?

ATreasury Bills — issued by RBI; zero coupon; safest; 91/182/364 days

BCommercial Paper — issued by large creditworthy corporates; unsecured; credit rating required; minimum Rs 5 lakh

CCertificate of Deposit — issued by large creditworthy corporates to raise short-term funds; unsecured promissory note

DCall Money — inter-bank borrowing; overnight to 14 days; used to maintain CRR; call rate is the interest rate

Answer: C is incorrectly matched. The description in C (issued by large creditworthy corporates, unsecured promissory note) actually describes COMMERCIAL PAPER — NOT Certificate of Deposit. A Certificate of Deposit is issued by SCHEDULED COMMERCIAL BANKS and All India Financial Institutions (AIFIs like NABARD, NHB, SIDBI) — not by corporations. CDs are issued to individuals and corporates who want to make time deposits. Minimum: Rs 1 lakh. Negotiable/transferable. Bearer form. This mix-up between CP (corporate issuers) and CD (bank issuers) is the most commonly tested trap in this chapter.

[CUET Level — Case] 📋 Four young professionals discuss their experiences: (I) Arjun applied for shares of a new e-commerce company going public for the first time — received allocation through ASBA. (II) Bina sold her 3-year-old Infosys shares on NSE to another investor. (III) Cuong’s company issued new shares ONLY to its existing shareholders at a 15% discount. (IV) Dhruv’s company sold its government stake to the public without issuing any new shares. Match each to the correct primary market method:

AI=FPO, II=Primary Market, III=Private Placement, IV=IPO

BI=Rights Issue, II=Secondary Market, III=IPO, IV=Offer for Sale

CI=IPO via e-IPO/ASBA (first time public); II=Secondary Market (existing shares between investors); III=Rights Issue (existing shareholders, proportional, at discount); IV=Offer for Sale (government/existing shareholder sells existing shares, company gets nothing)

DAll four are primary market transactions

Answer: C. I: New e-commerce company going public FIRST TIME + ASBA = IPO via e-IPO. II: EXISTING Infosys shares sold on NSE BETWEEN INVESTORS = Secondary Market (not primary). III: New shares to EXISTING shareholders only at DISCOUNT = Rights Issue (proportional, existing shareholders first). IV: GOVERNMENT selling its EXISTING shares (no new shares, company gets nothing) = Offer for Sale. This case tests all four primary market concepts plus the critical secondary market distinction. II is the trick — it is NOT a primary market transaction at all.

[CUET Level — SEBI Functions] 📋 Match each SEBI action to the correct function category: (I) SEBI fining a company director Rs 10 crore for insider trading. (II) SEBI introducing a framework for Real Estate Investment Trusts (REITs) as a new investment product. (III) SEBI mandating that all stock brokers pass a certification exam before operating. (IV) SEBI issuing guidelines requiring companies to disclose quarterly financial results within 45 days.

AAll four are Regulatory functions of SEBI

BI=Protective, II=Regulatory, III=Developmental, IV=Protective

CI=Protective (prohibiting insider trading, protecting investors); II=Developmental (new investment product that grows the market); III=Developmental (training/certifying intermediaries); IV=Regulatory (issuing mandatory disclosure guidelines that all listed companies must follow)

DI=Regulatory, II=Protective, III=Regulatory, IV=Developmental

Answer: C. I: Fining director for insider trading = PROTECTIVE (shielding investors from unfair practices by insiders). II: Introducing REITs as new investment product = DEVELOPMENTAL (growing the market with new instruments, expanding investment options). III: Mandating broker certification exams = DEVELOPMENTAL (training and qualifying intermediaries for better market quality). IV: Quarterly disclosure guidelines = REGULATORY (issuing mandatory rules that all listed companies must follow). The PDR framework: Protective=shield, Developmental=grow, Regulatory=rule. Matching these to real SEBI actions is a core board exam skill.

[CUET Level — Comprehensive] 📋 Four statements about financial markets. Identify ALL correct ones: (I) In a secondary market transaction, the company that originally issued the shares receives the sale proceeds. (II) Commercial Paper requires a mandatory credit rating while Treasury Bills do not need one since they are government-backed. (III) SEBI was established in 1992 as an administrative body and became statutory in 1988. (IV) Call Money is exclusively an inter-bank instrument used to maintain CRR and other statutory reserves.

AAll four statements are correct

BOnly I and III are correct

COnly II and IV are correct — CP requires mandatory credit rating (II correct); T-Bills need no credit rating since government guaranteed (II correct); Call Money is only between banks for CRR maintenance (IV correct)

DOnly III and IV are correct

Answer: C — Only II and IV are correct. Statement I: FALSE — In secondary market, seller (investor) receives proceeds. COMPANY gets NOTHING. Statement II: CORRECT — CP (corporate) needs credit rating (unsecured, so investors need to know creditworthiness). T-Bills (government) need no credit rating (sovereign guarantee). Statement III: FALSE — SEBI established 1988 as ADMINISTRATIVE body; became STATUTORY in 1992. The question REVERSES the dates — a classic exam trap. Statement IV: CORRECT — Call Money is ONLY between scheduled commercial banks and primary dealers to meet CRR and other reserve requirements. Only II and IV are factually correct.

Chapter 10 — Live Quiz

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