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Chapter 9 ended with a firm that has decided to raise ₹200 crore of long-term funds. It did not say where the ₹200 crore comes from. This chapter stands on the other side of that transaction — at the household that has ₹50,000 it does not need this year — and shows the machinery that carries money from the one to the other.
Chapter 9 left the firm at the end of the financing decision: how much to raise from equity and how much from debt, and in what proportion — the capital structure. That was a decision taken inside the boardroom.
Chapter 10 asks the question the boardroom cannot answer alone: who hands the money over, and through what? A financing decision is only a wish until a saver somewhere agrees to part with savings. This chapter is the market where those two meet.
This chapter is not in the NCERT textbook. NCERT rationalised Financial Markets out of Business Studies Part 2; the 2026-27 reprint contains only three chapters — Financial Management, Marketing and Consumer Protection.
The CBSE curriculum document for 2026-27 still lists it as Unit 10, with its own learning outcomes, inside the 15 marks it shares with Financial Management. It is examinable. This deck is built from the curriculum document and from current market practice — so where a fact has moved since the old chapter was written, the slide says so and gives the year.
Seven sections. The first defines the market; the last regulates it. Everything in between is a subdivision of the first.
Units 9 and 10 together carry 15 marks. In practice Unit 10 supplies a 1-mark and a 3-mark question almost every year, and a 4- or 6-marker on either a distinguish-between pair (money/capital, primary/secondary) or the functions of a stock exchange or SEBI's functions. Those three are the highest-yield slides in the chapter.
Financial market
A financial market is a market for the creation and exchange of financial assets. It channelises savings from surplus units (households) to deficit units (business firms) who need those funds for investment.
What changes hands is a claim — a share, a debenture, a bill, a deposit receipt. Nobody carts away a machine. That is why a financial market needs no floor space and can be entirely electronic.
Two words, two halves of the chapter. Creation is the primary market — a new share comes into existence. Exchange is the secondary market — an existing share changes owner. Miss the pair and Section 4 and 5 will not make sense.
Vaishali Kamat, a schoolteacher in Belagavi, puts ₹40,000 of her savings into a bank fixed deposit. The bank lends it to Deccan Ceramics for a new kiln. Vaishali has never heard of Deccan Ceramics and never will. The market did the finding, the judging and the pricing for her.
Allocative function
The allocative function of a financial market is the allocation of scarce savings among competing users of funds, so that savings flow to the most productive investment.
Performed well, it raises two things at once — the rate of return to the saver and the rate of growth of the economy.
Two Nashik firms approach the market in the same week. Godavari Agro Foods wants ₹100 crore for a cold-chain unit that will earn 18% a year. Satpura Textiles wants ₹100 crore for a loom line that will earn 6%. There is exactly ₹100 crore of savings available. Investors bid the price of Godavari's issue up and left Satpura's undersubscribed, so the cold-chain unit was built and the loom line was not.
Nobody decided this. No official ranked the two projects. The price did it — and that is the allocative function working. A market that allocates badly injures both sides at once: savers earn less than they could, and genuinely productive firms are starved of capital.
Four functions, and the examiner wants all four named. Mobilisation, price, liquidity, cost.
It gathers scattered small savings and makes them available in the sizes firms actually need. Vaishali's ₹40,000 is useless to a kiln project on its own; forty thousand Vaishalis are not.
The interaction of demand and supply of funds fixes the price of a financial asset — the share price, the rate of interest. The market is where that number is found, not announced.
A saver can sell the asset and get cash whenever he wants. Without that exit, almost nobody would lend to a twenty-year project in the first place.
It saves the buyer and the seller time, effort and money spent on searching for each other and on gathering information. That is the dashed red arc on the last-but-two slide, priced.
Points ≈ marks. A 3-mark question wants three points; 4 marks want four; 5–6 marks want five or six. Each point is a bolded heading plus one or two lines. A heading alone earns about half; an unheaded paragraph earns less than either.
State any three functions of a financial market.
Anwesha Bose did two things on 4 June. She transferred ₹2 lakh to Meghna Polymers Ltd for shares in its new public issue, and she bought 300 shares of Tata Steel from another investor through her broker on the NSE for ₹1.7 lakh. Her friend Rohit says both are financial market transactions but only one of them financed anything.
Is Rohit right? Name the market each transaction belongs to, and say precisely who received Anwesha's money in each case.
Money market
The money market is the market for short-term funds, dealing in monetary assets whose period of maturity is up to one year. It is a market for low-risk, unsecured, highly liquid short-term debt instruments.
The transaction sizes are large, so the players are the RBI, commercial banks, non-banking finance companies, mutual funds and large corporates — not individuals.
There is no physical exchange. Deals are done over the counter — by telephone and by screen, directly between the two parties.
Short maturity and creditworthy borrowers mean safety and high liquidity — and therefore a lower expected return than the capital market. You are paid for risk; there is little here.
Students routinely write that "the money market is the market where currency notes and coins are bought and sold." It has nothing to do with cash. Nothing is bought with money that is not also bought with money elsewhere. "Money" here means short-term debt — a promise to repay within a year. Write "market for short-term funds, maturity up to one year" and you cannot go wrong.
Sarvodaya Cooperative Bank, Kolhapur discovers at 6 p.m. on Friday that heavy withdrawals have left it ₹18 crore short of the cash reserve it is legally required to keep with the RBI. It borrows ₹18 crore from Bank of Maharashtra at 6.4% per annum and repays it on Monday morning. No security is pledged and no document is registered.
Name the market and the instrument involved, and state why a bank would ever borrow for three days.
Learn the issuer and the maturity of each. Nine questions out of ten give you one of those two and ask for the name.
| Instrument | Who issues it | Maturity | The one thing that identifies it |
|---|---|---|---|
| Treasury bill | RBI, on behalf of the Government of India | 91, 182 or 364 days | Issued at a discount, redeemed at par — a Zero Coupon Bond |
| Commercial paper | Large, creditworthy companies | 15 days to 1 year | Unsecured, and backed by no trade transaction |
| Call money | Banks, to one another | 1 day to 15 days | Repayable on demand; used to meet the CRR |
| Certificate of deposit | Commercial banks and development financial institutions | 91 days to 1 year | Issued by a bank to a depositor in tight liquidity |
| Commercial bill | A seller, drawn on a buyer | Usually 90 days | Arises from a genuine trade transaction; can be discounted |
These are the examinable maturities — learn them as they stand. The RBI has since shortened the legal floor for commercial paper and the certificate of deposit to seven days; that is flagged on the slide where the pair is defined. The rupee amounts on the following slides are illustrative.
Treasury bill
A Treasury bill is a short-term promissory note issued by the Reserve Bank of India on behalf of the Government of India. It is issued at a discount and redeemed at par, the difference being the investor's return, and is therefore also called a Zero Coupon Bond. Maturities are 91, 182 or 364 days, and the minimum lot is ₹25,000.
On 12 February the RBI auctions 91-day Treasury bills on behalf of the Government of India. Sundaram Asset Management buys a bill of face value ₹1,00,000. It pays ₹98,300 for it and receives ₹1,00,000 from the government after 91 days. No interest is ever paid to it.
The borrower is the sovereign. A government that can tax and can print does not default in its own currency — which is why the T-bill rate is the floor under every other short-term rate in India. The figures above are illustrative; the 91/182/364-day maturities and "issued at a discount" are what the paper asks for.
Commercial paper
A short-term, unsecured promissory note issued by large and creditworthy companies to raise funds. It is negotiable, freely transferable and issued at a discount, with a maturity of 15 days to one year.
Its classic use is bridge financing — meeting the floatation cost of a long-term issue that has not yet been made.
Certificate of deposit
An unsecured, negotiable, short-term instrument issued by commercial banks and development financial institutions to depositors. It is issued in periods of tight liquidity, when deposit growth is slow but the demand for credit is high.
Maturity 91 days to one year.
In March, Yamuna Commercial Bank finds loan demand from its Ludhiana textile clients running far ahead of the deposits coming in. It issues ₹500 crore of negotiable instruments of 180 days to insurance companies and mutual funds, at a discount to face value. Its treasury head calls it "buying deposits".
"Commercial paper and certificate of deposit are the same thing — both are short-term unsecured notes." Both are, and that is exactly why the distinguishing word is the issuer: commercial paper is issued by a company, a certificate of deposit is issued by a bank. Case 5 says bank — so it is a certificate of deposit.
The maturities above are the textbook figures, and they are what the board expects. The RBI has since shortened both floors: under the RBI (Certificate of Deposit) Directions, 2021 a CD may run from 7 days to one year, and under the RBI (Commercial Paper …) Directions, 2024, in force from 1 April 2024, commercial paper may also run from 7 days to one year. Both now carry a minimum denomination of ₹5 lakh.
In the exam write 15 days–1 year for commercial paper and 91 days–1 year for a CD. The current RBI floors are worth knowing, and worth a sentence in an answer that asks about current practice — but they are not the marked answer.
Call money
Short-term finance repayable on demand, with a maturity of one day to fifteen days. It is used mainly by banks borrowing from one another to meet the Cash Reserve Ratio (CRR), and the interest paid on it is the call rate.
The call rate is highly volatile and moves inversely with the price of other short-term money market instruments.
Commercial bill (trade bill)
A bill of exchange drawn by a seller on a buyer for the value of goods sold on credit. If the seller needs the money before the bill matures, he can have it discounted with a commercial bank. When it is accepted by a bank, it becomes a bill of the highest quality.
Self-liquidating, because a real sale stands behind it.
Ambika Steel Tubes, Raipur sells ₹40 lakh of tubing to a Nagpur builder on 90 days' credit and draws a bill on him, which he accepts. Needing the money at once for wages, Ambika takes the accepted bill to Bank of Baroda, which pays it ₹39.1 lakh today and collects ₹40 lakh from the builder in 90 days.
A commercial bill exists because goods moved. Commercial paper exists because a company wanted cash. If the case mentions goods sold on credit, it is a commercial bill; if it mentions a company simply raising short-term funds, it is commercial paper.
Identify the money market instrument in each, in one line with a reason.
Konark Auto Components Ltd, a listed Pune firm rated A1+, raised ₹120 crore for 90 days last week. There was no sale of goods behind it and no security was pledged; the instrument was sold at a discount to a mutual fund and is freely transferable. A student writes: "Unsecured, discounted, 90 days — this is a commercial bill."
Why is the student wrong? Name the correct instrument and give the two features that force the reading. Then say what would have to change in the case for the student to be right.
Capital market
The capital market is the market for medium and long-term funds. It deals in both debt and equity instruments — shares, debentures and bonds — and it has two segments, the primary market and the secondary market.
It performs the allocative function for long-term funds — routing savings to the projects that will earn most from them.
Shares, debentures and bonds with a maturity beyond one year, and in the case of equity shares, no maturity at all.
Individual investors, mutual funds, insurance companies, foreign portfolio investors, banks — and the transaction can be small, unlike in the money market.
Long maturity plus the possibility of default or of a fall in price means more risk — and so a higher expected return than the money market offers.
When Bajaj Housing Finance raised roughly ₹6,560 crore through its initial public offer in September 2024, that was a capital market transaction: long-term equity, open to retail investors, and no maturity date. Figure illustrative; the classification is the examinable part.
"The money market deals in money — notes, coins and currency." It does not. It deals in short-term debt instruments of up to one year. Nothing in Section 2 was cash.
"The capital market is a building in Mumbai." It is not a place at all. It is the whole set of arrangements — issues, brokers, exchanges, depositories — through which medium and long-term funds are raised and traded. The BSE building on Dalal Street is one institution operating inside the capital market, not the capital market.
"Capital market means shares." It means debt and equity both. A ten-year debenture is as much a capital market instrument as an equity share.
Ask one question of any instrument: does it mature within one year? If yes it is a money market instrument, whatever it is called. If no — or if it never matures — it is a capital market instrument. Every other difference follows from that one.
| Basis | Money market | Capital market |
|---|---|---|
| Participants | Few and largely institutional — the RBI, commercial banks, NBFCs, mutual funds, large companies. A wholesale market. | Many and varied — retail investors, mutual funds, insurance companies, foreign portfolio investors, banks, underwriters. |
| Instruments | Treasury bill, commercial paper, call money, certificate of deposit, commercial bill — all debt. | Equity shares, preference shares, debentures and bonds — debt and equity both. |
| Investment outlay | Large. Instruments are issued in big denominations — a Treasury bill in lots of ₹25,000, commercial paper in crores. | Small. A share can be bought in a single unit, so an investor with a few thousand rupees can participate. |
| Duration | Short term — up to one year, and often overnight. | Medium and long term, and in the case of equity shares, perpetual. |
| Liquidity | Highly liquid. Short maturity plus a formal secondary arrangement means cash is never far away. | Liquid, but less so. Liquidity depends on the security being listed and traded; an unlisted share can be very hard to sell. |
| Safety | Safer. Short maturity and financially sound issuers mean low default risk and little price risk. | Riskier. Long maturity, and the issuer's fortunes can change; equity carries no promise of repayment at all. |
| Expected return | Low — you are paid little because you are risking little. | High — dividend and capital appreciation, in exchange for bearing the risk. |
Vidarbha Agrotech Ltd needs ₹15 crore for four months to buy the soybean crop, and ₹90 crore for eight years to build a solvent extraction plant. Its finance director, Nandini Sathe, tells the board that the two requirements must be met in two completely different markets. "The four-month money will be raised on our credit rating and repaid before the next harvest; the eight-year money will be raised by issuing debentures to the public."
Name the market for each requirement, and state two differences between the two markets that Nandini's sentence itself demonstrates.
Shreyas Nadkarni holds two instruments of exactly 364 days. One is a certificate of deposit issued by his bank. The other is a listed debenture of Konkan Power Ltd which has 364 days left to run, out of an original term of ten years. He argues that because both mature in 364 days, both are money market instruments.
Is he right? Answer with the test that decides it, and say what the residual maturity of a security does and does not tell you.
Primary market
The primary market, also called the new issues market, is the market in which a company issues fresh securities for the first time in order to raise funds. The money raised goes directly to the company, and the transaction is between the company and the investor.
This is the only place in the whole chapter where capital formation occurs. A factory gets built because a primary issue succeeded, never because a share changed hands on the NSE.
Almost nobody would give a company money for twenty years if he could never get out. The promise of an exit in the secondary market is what makes a primary issue subscribable.
An IPO — an initial public offer — is a primary market transaction. So is a further public offer by an already-listed company, and so is a rights issue. All three create securities that did not exist before.
A company in the primary market must choose how to place its securities. Five methods, and the examiner names them exactly like this.
The general public — prospectus, offer for sale, e-IPO. A selected few — private placement. Existing shareholders only — rights issue.
Yes under a prospectus and an e-IPO. No under an offer for sale — intermediaries stand in between and do the selling.
Private placement and rights issue — no prospectus, no underwriting, no advertising. A public issue is the most expensive of the five.
All five are primary market methods. Choosing between them does not move you into the secondary market — even an e-IPO, which uses the stock exchange's electronic system, is a primary issue, because the securities are new and the company gets the money.
Offer through prospectus
The company makes a direct appeal to the general public to subscribe to its securities through a prospectus. The issue must be advertised in newspapers and the prospectus must satisfy SEBI's disclosure requirements.
The commonest method. Also called a public issue. Under SEBI's ICDR Regulations the public announcement and the pre-issue advertisement go into an English national daily, a Hindi national daily and a regional-language daily at the place of the registered office — three, not two. Write "advertised in newspapers"; the count is not examinable.
Offer for sale
Securities are not issued directly to the public but are sold in a block to intermediaries — issue houses or stockbrokers — who then resell them to the investing public at a higher price.
The company is spared the formalities, time and cost of a public issue; the resale profit accrues to the intermediary.
Aravali Ceramics Ltd, Alwar needs ₹80 crore and has no experience of a public issue. Its merchant banker offers two routes. Route one: file a prospectus, advertise in the Rajasthan Patrika and the Economic Times, and take applications for six weeks. Route two: sell the entire ₹80 crore issue in one block to two issue houses at ₹96 a share and let them place it with the public at ₹104.
Name route two, and state the one advantage and the one cost it carries for Aravali Ceramics.
Private placement
The allotment of securities by a company to institutional investors and to some selected individuals, rather than to the general public. It saves the floatation cost, time and formalities of a public issue.
Rights issue
The offer of new shares by an existing company to its existing shareholders in proportion to the shares they already hold. It is a pre-emptive right — the shares must be offered to them before they can be offered to anybody else.
e-IPO
The issue of securities to the public through the on-line system of a stock exchange. The company must appoint brokers registered with the exchange to accept applications and a registrar to the issue with electronic connectivity.
Sahyadri Precision Forgings Ltd, a Pune auto-component maker with 1,860 shareholders, needs ₹24 crore to add a press line. Its promoter, Kedar Bhagwat, holds 51% and does not want that percentage diluted. The board offers one new share at ₹120 for every four shares already held, and the offer letter goes only to the names on the register as on 30 June.
Identify the method of floatation and explain, in four points, why it suits Kedar Bhagwat better than a public issue.
Write a four-line case set in a Surat diamond-polishing firm that could only be answered private placement — not offer for sale, and not rights issue. Then underline the words in your own case that force the reading.
Hiralaxmi Gems Pvt Ltd, Surat, needs ₹35 crore to buy laser-cutting machines. It is not listed and cannot afford the cost of a prospectus issue. It allots the whole ₹35 crore of debentures to three institutional investors — an insurance company and two mutual funds — chosen by its merchant banker, without any offer to the public or to its own existing shareholders.
Narmada Bioplastics Ltd did two things in March. On the 6th it allotted ₹60 crore of shares to four insurance companies after a private negotiation. On the 19th its promoter family sold 40 lakh of the shares it already owned to the public through the stock exchange, and the ₹52 crore raised went into the family's own accounts. The company's finance manager tells the class both were primary market transactions.
Is the finance manager right about both? Classify each transaction, name the floatation method where one applies, and state the single test you used.
In real Indian IPO documents this second kind of sale is called an Offer for Sale (OFS) component, and most large IPOs contain both a fresh issue and an OFS. In the board paper, "offer for sale" means the method of floatation defined two slides ago. Use the deck's definition in the exam.
Secondary market
The secondary market, also called the stock exchange or the after-market, is the market in which existing and already-issued securities are bought and sold between investors. It provides liquidity and marketability to securities and continuously determines their price. The issuing company is not a party to the transaction.
The two markets are interdependent. A security must first be created in the primary market before it can be traded at all; and investors subscribe to new issues only because the secondary market gives them an exit. Kill either one and the other stops working within a year.
India has two stock exchanges of national significance — the Bombay Stock Exchange (BSE), established 1875 and the oldest in Asia, and the National Stock Exchange (NSE), which began trading in 1994. Both are electronic, order-driven and screen-based; the trading floor with shouting brokers has not existed in India since the 1990s.
"The primary market is where a company sells shares and the secondary market is where it sells them again." A company never sells the same share twice. In the secondary market investors sell to investors; the company is not in the room.
"Both markets raise money for the company." Only the primary market does. In the secondary market the company receives nothing — that is the crossed-out arrow in the "life of one share" diagram.
"So the secondary market is useless to the company." It is not. A liquid secondary market is why the primary issue got subscribed, and the price it sets is what the company's next issue will be priced against.
The primary market has no fixed geographical location — it is a set of arrangements, not a place. The secondary market does have a definite place of operation, the stock exchange, even though the exchange is now entirely electronic. Write "fixed place / no fixed place", not "building".
| Basis | Primary market | Secondary market |
|---|---|---|
| Securities | New securities, issued for the first time. Also called the new issues market. | Existing securities that have already been issued once. Also called the after-market. |
| Buying and selling | Between the company and the investor — the investor buys directly from the company. | Between one investor and another. The company is not a party at all. |
| Intermediary | Merchant bankers, underwriters and the registrar to the issue. | Brokers, who are members of the stock exchange, and depository participants. |
| Price determination | The price is decided by the management of the company within SEBI's disclosure rules — a fixed price or a book-built band. | The price is determined by the forces of demand and supply in continuous trading, and changes minute to minute. |
| Capital formation | It directly promotes capital formation — the funds go into the company and then into real assets. | It promotes capital formation only indirectly, by supplying the liquidity that makes primary issues subscribable. |
| Entry and place | No fixed geographical location. Any company that satisfies the requirements may make an issue. | Operates at a defined place, the stock exchange, and only listed securities may be traded. |
Farhan Qureshi, who invests from Andheri, shows you two documents. On 2 April he was allotted 250 shares of Saptagiri Renewables Ltd at a fixed price of ₹212 set by the company's board. On 5 September he bought 250 shares of the same company at ₹289 — a price no board fixed, quoted continuously on the NSE screen, from a seller he has never met.
Classify each purchase, and identify two bases of difference that the case itself demonstrates.
Stock exchange
A stock exchange is an organised institution or market where securities that have already been issued are bought and sold, under prescribed rules and regulations. It deals only in listed securities, and only in the secondary market.
Both phrases earn marks. A stock exchange is not a bazaar — membership, listing, disclosure, margins and settlement are all rule-bound, and SEBI stands over the rules.
Listing is the exchange's admission test: the company must file continuing disclosures and maintain minimum public shareholding. It is the first protection the investor gets, before any of the six functions begin.
"Secondary market" and "stock exchange" are used almost interchangeably, and the definition on the earlier slide says so — but they are not identical. The secondary market is the whole activity of trading existing securities; the stock exchange is the institution in which most of that activity happens. A private transfer of unlisted shares between two people is a secondary market transaction that never touches a stock exchange.
Its basic function. It gives securities a ready and continuous market, so a holder can sell at any moment and turn his holding into cash.
The constant interaction of demand and supply prices each security. That price is a signal — it tells management and investors what the market thinks the company is worth.
Membership is regulated and dealings are well defined and within the legal framework, so the investor is dealing under rules rather than on trust.
Through disinvestment and reinvestment, savings are continually shifted out of less productive uses into more productive ones — capital formation and economic growth.
By educating the public and by regulating new issues and dealings, it encourages wider share ownership and better trading practices.
A reasonable degree of healthy speculation is permitted, and is necessary, because it is what keeps the market liquid and prices continuously adjusting.
Speculation
Speculation is the buying and selling of securities in the hope of profiting from short-term movements in their price, rather than for long-term investment. A reasonable degree of healthy speculation is necessary on a stock exchange, because it supplies liquidity and continuous price adjustment.
Buys for long-term returns — dividend and capital appreciation. Holds through price movements. Takes calculated, moderate risk.
Buys for a short-term price difference, and often does not want the security at all. Takes high risk — and supplies the other side of the investor's trade when nobody else will.
An answer that says only "a stock exchange provides scope for speculation" reads as though the exchange encourages gambling. The examinable wording is "a reasonable degree of healthy speculation" and the reason is liquidity. Excessive speculation is harmful, and is curbed by SEBI through margins, circuit filters and position limits.
Preeti Vaidya holds 800 shares of a Chennai cement company bought two years ago at ₹340. At 11 a.m. she decides she wants the money for a house deposit. Within ninety seconds her broker's screen shows a buyer at ₹506, the trade is done, and the money is in her bank account the next working day. She had never met the buyer, and nobody negotiated the ₹506 with her.
Identify and explain the functions of a stock exchange highlighted in the case. Six marks means six points — name each function, then prove it from the case.
Girish Menon bought shares of a listed Hyderabad pharma company at ₹880 on Monday. By Thursday they were ₹686, after a poor results announcement. He complains that the stock exchange has failed in its function of "safety of transactions", because he lost ₹1.9 lakh on a trade the exchange itself arranged.
Is Girish right? Say precisely what "safety of transactions" does and does not guarantee, and name the function that is doing its job in his case.
Almost every case on the trading procedure hinges on the contract note. It is the only legally enforceable evidence the investor has if a broker later disputes the price, the quantity or the brokerage charged. An answer on the trading procedure that omits it is incomplete however many other steps it lists.
Dematerialisation
Dematerialisation is the process by which physical share certificates are converted into an equivalent number of securities in electronic form and credited to the investor's demat account. It is compulsory for trading on a stock exchange in India.
The account in which securities are held in electronic form. Securities bought are credited to it; securities sold are debited from it. Not the same as a trading account, and not the same as a bank account.
An institution that holds securities in electronic form and transfers them by book entry. India has exactly two — NSDL and CDSL. Think of it as a bank for securities.
The depository's agent — a bank, broker or financial institution registered with SEBI — through which the investor opens and operates his demat account. The investor never deals with the depository directly.
Anwesha's shares are held by CDSL. She has never spoken to CDSL. She speaks to HDFC Securities, which is her DP — exactly as she deals with a bank branch and never with the bank's head office.
"My demat account is where my money is." No. Bank account = money. Demat account = securities. Trading account = the order-placing facility with the broker. A question that says "the shares were credited" is talking about the demat account; "the amount was debited" is the bank account.
Converting electronic holdings back into physical certificates is rematerialisation. It is rarely used and cannot be used to trade on an exchange — but the word is worth a mark if it is asked for.
Rolling settlement
Rolling settlement means that every trading day is a separate settlement day, and a trade is settled a fixed number of days after it is executed. India follows a T+1 cycle — a trade executed on day T is settled on the next working day.
| Cycle | Meaning | In force in India |
|---|---|---|
| T+5, T+3, T+2 | Settlement two to five working days after the trade | Historic. T+2 applied from April 2003 until the phased move to T+1, which began in February 2022 and ended in January 2023. |
| T+1 | Settled on the next working day | Current, from 27 January 2023. India was the second market in the world to complete the move, after China. |
| T+0 | Settled the same day, in a separate optional window | Optional, not compulsory. Piloted on 25 stocks from 28 March 2024; extended to the top 500 stocks by market capitalisation in phases of 100 a month from 31 January 2025, all 500 covered by May 2025. Verified August 2026. |
The old NCERT chapter and most guidebooks still say "T+2 rolling settlement", because they were written before 2023. That is out of date. Write T+1 in the board paper, and if you have room, add that an optional T+0 same-day cycle exists for the top 500 stocks. Mention T+2 only as history, with the years attached.
Every day between the trade and the settlement is a day on which one side could fail to pay or deliver. Shortening the cycle cuts counterparty risk and frees up the margin money brokers must keep locked. That is the whole argument, and it is worth a mark in an "explain why" question.
Ritika Shenoy tells her broker on Tuesday to buy 150 shares of a Pune engineering company at not more than ₹740. The broker's terminal matches the order at ₹736 at 10:12 a.m. By Tuesday evening she has a document showing the time, the quantity, the price, the brokerage and the broker's SEBI registration number; on Wednesday ₹1,10,400 leaves her bank account and 150 shares appear in her account with CDSL.
Name the document, name the settlement cycle being followed, name the two institutions involved in delivering the shares, and state which of Ritika's three accounts each figure touches.
Write a four-line case set in a Coimbatore textile trader's office in which the investor is certain to lose his dispute with the broker — and the reason must be something he failed to obtain in the trading procedure, not bad luck with the price.
Ramanathan Iyer telephoned his broker in Coimbatore and asked him to buy 400 shares "at about ₹300". He asked for nothing in writing, took no order confirmation slip and never collected the contract note. Three weeks later the broker's statement shows the purchase at ₹318 with brokerage of ₹1,900, and Ramanathan cannot show what price he had agreed.
Devang Mehta, a broker at Nariman Point, does three things for the same client that afternoon. He submits an application in an IPO through the exchange's on-line system. He buys 500 listed shares on the NSE. And he arranges for the client's twelve old paper share certificates, issued in 1998, to be surrendered and credited to the client's account with NSDL.
Classify each of the three activities — market, and where relevant the method or process — and explain why the first one is not a secondary market transaction merely because it went through the stock exchange's system.
Everything so far assumed that the market is honest. In the 1980s in India, it very often was not.
Enormous growth in issues, and with it price rigging, unofficial premia on new issues, violation of company law provisions, delays in delivery of share certificates, and insider trading that nobody could act against.
The investor, whose confidence in the market was destroyed; and through him industry, because a public that will not subscribe cannot finance a factory. The allocative function fails when the market cannot be trusted.
SEBI — Securities and Exchange Board of India
SEBI was established by the Government of India on 12 April 1988 as a non-statutory body, and was given statutory status in 1992 by the Securities and Exchange Board of India Act, 1992. Its head office is in Mumbai.
SEBI's Board consists of a Chairman, two members from the Union Finance Ministry, one member from the RBI and five members nominated by the Central Government. The Chairman since March 2025 is Tuhin Kanta Pandey. The board paper asks for SEBI's objectives and functions, not for names — but do not write anything undated.
SEBI's overall objective is to protect the interests of investors and to promote the development of, and to regulate, the securities market. That single sentence contains the three words the whole answer hangs on — protect, develop, regulate.
So that they function in an orderly manner.
Particularly the individual investor, and to guide and educate him.
And to achieve a balance between self-regulation by the industry and statutory regulation.
Brokers, merchant bankers and underwriters, so as to make them competitive and professional.
An objective is what SEBI is for. A function is what it does. A student who answers "objectives of SEBI" with "registration of brokers" has answered the wrong question. Read the verb in the question stem.
Those performed to protect the interests of investors and other participants.
Those performed to promote and develop activities in the securities market.
Those performed to regulate the business in the securities market.
Investor education is developmental, not protective — SEBI is building the market's capacity, not stopping a wrongdoer. Conversely insider trading is protective, not regulatory, even though it involves punishment. Ask: is SEBI stopping harm (protective), building (developmental) or licensing and policing (regulatory)?
(a) It bars Ashwin Gokhale, company secretary of a Vadodara chemicals firm, for buying his employer's shares two days before an unannounced merger. (b) It runs a certification programme for research analysts. (c) It cancels the registration of Trivedi Securities, Kanpur, a sub-broker, after an audit shows client funds were misused. (d) It permits companies to make an initial public offer through the on-line system of a stock exchange.
Classify each item as a protective, developmental or regulatory function, and name the function in SEBI's own words.
SEBI issues one circular, and Devang Mehta, the Nariman Point broker of Case 17, reads all three parts of it. Part 1 requires every broker to display its SEBI registration number on all contract notes. Part 2 makes it compulsory for brokers to segregate client funds from their own. Part 3 launches a free investor grievance portal on which any investor may file a complaint against a listed company or intermediary and track it.
A student says all three are regulatory, "because SEBI is regulating brokers in all of them". Answer him part by part, and state the test that decides which basket an act belongs to.
One. Money market or capital market is decided by one year. Two. Primary or secondary is decided by who receives the money. Three. A SEBI function is classified by purpose — stopping harm, building, or policing. Almost every question in this chapter is one of those three tests wearing a costume.
Explain the allocative function of a financial market, and state what happens to the economy when it is performed badly.
Distinguish between the money market and the capital market on any four bases.
| Basis | Money market | Capital market |
|---|---|---|
| Participants | Few and institutional — RBI, banks, NBFCs, mutual funds, large companies. | Many and varied — retail investors, mutual funds, insurance companies, foreign portfolio investors. |
| Instruments | Treasury bill, commercial paper, call money, certificate of deposit, commercial bill. | Equity shares, preference shares, debentures and bonds. |
| Duration | Short term — up to one year. | Medium and long term; equity shares are perpetual. |
| Safety and return | Safer, and therefore a lower expected return. | Riskier, and therefore a higher expected return. |
Four bases for four marks. A fifth adds nothing and costs you time you needed for the case study.
Explain any six functions of a stock exchange.
Deccan Hydraulics Ltd has 4,000 shareholders and needs two sums. ₹9 crore is required for five months to fund an unusually large order book, and it will be raised as unsecured 150-day paper placed with two mutual funds on the strength of the company's A1+ rating. ₹110 crore is required for nine years for a new plant, and the board resolves to offer one new share at ₹185 for every three shares held, the offer going to the register of members as it stands on 12 August. The promoter, Sulakshana Deshpande, holds 54% and insists that percentage must not fall.
(a) Name the market and the instrument for the ₹9 crore. (b) Name the market and the method of floatation for the ₹110 crore. (c) Explain, quoting the case, why the method in (b) suits Sulakshana. Six marks — six points.
Sutlej Commercial Bank issues ₹400 crore of 180-day negotiable instruments to insurance companies because deposits are growing more slowly than loan demand. On the same day, Sanchita Rao, an investor in Mumbai, instructs her broker to buy 900 listed shares at not more than ₹455. The order is matched at ₹451 at 10:40 a.m., she receives a document that evening showing the time, price and brokerage, and on Wednesday the money leaves her bank account while the shares are credited by book entry to her account with NSDL. A month later SEBI bars a bank executive who bought those same shares two days before the bank's results were announced.
Identify: (a) the bank's instrument and its market; (b) Sanchita's market; (c) the document; (d) the settlement cycle; (e) the institution named and its role; (f) the SEBI function involved in the last sentence, with its basket.
Chapters 9 and 10 financed the firm. Chapter 11 asks how it reaches the person who will buy from it.
What Chapter 11 will need from this one: the idea that a market is a set of arrangements rather than a place, and the habit of asking, of every transaction, who receives the money and what they receive in return. Marketing runs the same question over goods instead of securities — and its four Ps are, in the end, four answers to it.