Important Aspects of Primary Market & Secondary Marke – Securities Laws and Capital Markets Important Questions

Question 1.
Distinguish between: Primary Market & Secondary Market [Dec 2008 (3 Marks)]
Answer:
Following are the main points of distinction between primary & secondary market:

Points	Primary Market	Secondary Market
Meaning	The primary market is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of new shares or bond issue. The primary market is the market where the securities are sold for the first time.	The secondary market, also known as the aftermarket, is the financial market where previously issued securities and financial instruments such as stock, bonds, options, and futures are bought and sold.
Contract	Primary market deals with new is¬sue hence there is a contract between issuer and investor.	Secondary market deals with previously issued securities and financial instruments there is a contract between two investors.
Issue/ Transfer	In a primary issue, the securities are issued by the company directly to investors.	In a secondary market, the securities are exchanged between two investors.
Intermediary	In the primary market, important intermediaries are Lead Merchant Banker, Merchant Banker, under¬writers, Issue House etc.	In a secondary market, important intermediaries are Depository Participants, Brokers, Sub-Brokers and Registrar & Share Transfer Agents.
Regulation	Issue through primary market comes under Companies Act, 2013 & SEBI (Issue of Capital & Disclosure Requirements) Regulations, 2018.	The secondary market is regulated through the Companies Act, 2013, Securities Contracts (Regulation) Act, 1956&other regulations made by the SEBI.

Question 2.
Distinguish between: Initial Margin & Maintenance Margin [June 2009 (4 Marks)]
Answer:
Initial Margin: Initial margin means the minimum amount, calculated as a percentage of the transaction value, to be placed by the client, with the broker, before the actual purchase. The broker may advance the balance amount to meet full settlement obligations.

In simple words, the initial margin is the percentage of a stock price that you are required to have in your account when purchasing that stock on margin.

Maintenance Margin: Maintenance margin means the minimum amount, calculated as a percentage of the market value of the securities, calculated with respect to the last trading day’s closing price, to be maintained by the client with the broker.

In other words, a maintenance margin is the required amount of securities an investor must hold in his account if he either purchases shares on margin or if he sells shares short. If an investor’s margin balance falls below the set maintenance margin, the investor would then need to contribute additional funds to the account or liquidate stocks in the account to bring the account | back to the initial margin requirement. This request is known as a margin call.

Question 3.
Write a short note on Margin Trading [Dec. 2009 (2 Marks)]
Answer:
Margin trading is buying stocks without having the entire money to do it. The exchanges have an institutionalized method of buying stocks without having the capital through the futures market.

For example, if you were to buy 2,000 shares of say Company A, which trades at ₹ 300, you will need about t 6 lakh. But if you buy a futures contract of that company, which comprises 2,000 shares, you only need to pay a margin of 15%. So, by putting ₹ 90,000, you can get an exposure of ₹ 6 lakh.

The same operation can also be executed through margin trading. Here, the trader will buy 2,000 shares, which are partly funded by the broker, and the rest by the trader.

The percentage of margin funding may range between 50% to 90%, depending on the broker and his relationship with the client. The broker, in turn, funds his line of credit from a bank and keeps the shares in his account with any profit/loss going to the client.

Question 4.
Write a short note on Rolling Settlement [Dec. 2009 (4 Marks)]
Answer:
Under rolling settlement, all trades executed on a trading day are settled X days later. This is called ‘T+X’ rolling settlement, where ‘T’ is the trade date and ‘X’ is the number of business days after the trade date on which settlement takes place. The rolling settlement prevailing in India is T+2, implying that the outstanding positions at the end of the day ‘T’ are compulsorily settled 2 days after the trade date.

The rolling settlement was first introduced in India by OTCEI.
SEBI introduced T+5 rolling settlement in the equity market from July 2001. Subsequently shortened the settlement cycle to T+3 from April 1, 2002. After having gained experience of T+3 rolling settlement, it was felt appropriate to further reduce the settlement cycle to T+2 thereby reducing the risk in the market and protecting the interest of investors. As a result, SEBI, as a step towards the easy flow of funds and securities, introduced T+2 rolling settlement in the Indian equity market from 1st April 2003.

Question 5.
Discuss the various functions of Price Monitoring [Dec. 2009 (5 Marks)]
Answer:
Price monitoring is mainly related to the price movement or abnormal fluctuation in prices or volumes. The functioning of the Price Monitoring is broadly divided into the following activities:

On-Line Surveillance
Off-Line Surveillance
Derivative Market Surveillance
Investigations
Surveillance Actions
Rumour Verification
Pro-active Measures

Question 6.
“Primary market is of great significance to the economy.” Comment. [June 2010 (4 Marks)]
Answer:
The primary market is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of new shares or bond issue, f The primary market is the market where the securities are sold for the first time. Therefore, it is also called the New Issue Market.

Features of Primary Markets:

This is the market for new long term equity capital.
In a primary issue, the securities are issued by the company directly to investors.
The company receives the money and issues new security certificates to the investors.
Primary issues are used by companies for the purpose of setting up a new business or for expanding or modernizing the existing business.
The primary market performs the crucial function of facilitating capital formation in the economy.

The primary market is of great significance to the economy of a country. It is through the primary market that funds flow for productive purposes from investors to entrepreneurs. The latter use the funds for creating new products and rendering services to customers in India & abroad. The Strength of the economy of a country is gauged by the activities of the stock exchanges. The primary market creates and offers the merchandise for the secondary market.

Question 7.
Distinguish between: Book Closure and Record Date [Dec. 2010 (3 Marks)]
Answer:
Book closure is the periodic closure of the “Register of Members & Transfer Books”, to take a record of the shareholders to determine their entitlement to dividends or bonus or right shares or other rights pertaining to shares.

Closing “Register of Members & Transfer Books” every time is not possible. In such a case, the recorded date is fixed and informed to a stock exchange in advance.

The record date is the date on which the records of a company are closed for the purpose of determining the stockholders who are entitled to dividends, bonus or right shares or other rights.

In case of a record date, the company does not close its register of security holders. The record date is the cutoff date for determining the number of registered members who are eligible for corporate benefits.

A company may close the register of members for a maximum of 45 days in a year and for not more than 30 days at any one time. [Section 91 of the Companies Act, 2013]

Book closure becomes necessary for the purpose of paying a dividend, making rights issue or bonus issue. The listed company is required to give notice of book closure in a newspaper at least 7 days before the commencement of the book closure. The members whose names appear in the register of members on the last date of book closure are entitled to receive the benefits of dividend, right shares or bonus shares as the case may be.

The minimum time gap between the two book closures and/or record dates would be at least 30 days.

Question 8.
Explain briefly: Surveillance at BSE [Dec. 2010 (2 Marks)]
Answer:
The main objective of the surveillance function of the Stock Exchange is to –

To promote market integrity
Monitor price and volume movements (volatility)
Detecting potential market abuses
Managing default risk by taking necessary actions timely.

All the instruments traded in the equity segment of the Cash and Derivative market come under the Surveillance umbrella of BSE.

Surveillance activities at the Stock Exchange are divided broadly into two major segments:

Price Monitoring and
Position Monitoring.

Question 9.
What is ‘application supported by blocked amount’ (ASBA)? Briefly explain the ASBA process. [Dec. 2010 (5 Marks)]
Answer:
“Application Supported by Blocked Amount” means an application containing an authorization to Self Certified Syndicate Bank to block the application money in a bank account for subscribing to a public or rights issue.

ASBA Process: In ASBA investor submits an application physically or electronically to the bank with whom the bank account to be blocked is maintained. Such a bank is called “Self Certified Syndicate Bank” (SCSB). The bank then blocks the application money on the basis of the authorization.

The application money remains blocked till the finalisation of the basis of allotment or till the withdrawal/failure of the issue.

Thereafter, the application data uploaded by the bank in the electronic bidding system through a web-enabled interface provided by the Stock Exchanges.

Once the basis of finalized allotment, the Registrar to the Issue sends a request to the bank for unblocking the accounts and to transfer the requisite amount to the issuer’s account.

In case of withdrawal or failure of the issue, the amount shall be unblocked by the bank on receipt of information from the pressure merchant bankers.

Question 10.
Discuss briefly the different surveillance system adopted by the stock exchanges. [June 2011 (4 Marks)]
Answer:
Online Surveillance: One of the most important tools of surveillance is the Online Real-Time Surveillance system which was commissioned in 1999.

The system has a facility to generate the alerts online, in real-time, based on certain preset parameters like –

price and volume variations in scrips,
members taking unduly large positions not commensurate with their financial position or
having large concentrated positions in one or few scrips, etc.

An alert is a measure of abnormal behaviour. An Alert occurs in the surveillance system when a metric behaves significantly differently from its benchmark. The alerts generated by the system are analyzed and corrective action based on preliminary investigations is taken in such cases. The system also provides a facility to access trades and orders of members.

Off-Line Surveillance: The Off-Line Surveillance system comprises various reports based on different parameters and scrutiny thereof.

High /Low difference in prices
% change in prices over a week/fortnight/month
Top N scrips by turnover
Trading in infrequently traded scrips
Scrips hitting new high/low

The surveillance actions or investigations are initiated in the scrips identified from the above-stated reports.

Question 11.
Distinguish between: Book Closure and Record Date [Dec. 2011 (3 Marks)]
Answer:
Book closure is the periodic closure of the “Register of Members & Transfer Books”, to take a record of the shareholders to determine their entitlement to dividends or bonus or right shares or other rights pertaining to shares.

Closing “Register of Members & Transfer Books” every time is not possible. In such a case, the recorded date is fixed and informed to the stock exchange in advance.

The record date is the date on which the records of a company are closed for the purpose of determining the stockholders who are entitled to dividends, bonus or right shares or other rights.

A company may close the register of members for a maximum of 45 days in a year and for not more than 30 days at any one time. [Section 91 of the Companies Act, 2013]

The minimum time gap between the two book closures and/or record dates would be at least 30 days.

Question 12.
Write a short note on ASBA [Dec. 2011 (4 Marks)]
Answer:
“Application Supported by Blocked Amount” means an application containing an authorization to Self Certified Syndicate Bank to block the application money in a bank account for subscribing to a public or rights issue.

If an investor is applying through ASBA, his application money shall be debited; from the bank account only if his application is selected for allotment after the basis of allotment is finalized.

It is a supplementary process of applying in IPO, Right Issues and FPO made through book building route and co-exists with the current process of using cheque as a mode of payment and submitting applications. ASBA is stipulated by SEBI and available from most of the. banks operating in India.

Benefits of ASBA:
The investor need not pay the application money by cheque rather block his bank account to the extent of the application money, thus continue to earn interest on application money.

The investor does not have to bother about refunds, as in ASBA only an amount proportionate to the securities allotted is taken from the bank account when his application is selected for allotment after the basis of allotment is finalised.

The application form is simpler.

The investor deals with the known intermediary ie. his own bank.

No loss of interest, since the application amount is not debited to the savings account on the application.

Since the amount is available in the account, it is considered for the calculation of the Average Quarterly Balance (ABQ).

Customer can revise or withdraw the bid before the end of the issue in the prescribed format with the bank, j Eligibility of Investors: An Investor is eligible to apply through the ASBA process if:

He is a “Resident Retail Individual Investor”.
He is bidding at cut-off, with a single option as to the number of shares bid for.
He is applying through the blocking of funds in a bank account with the bank.
He has agreed not to revise his bid.
He is not bidding under any of the reserved categories.

Question 13.
Stock exchanges are virtually the nerve centre of the capital market. Comment. [Dec. 2012 (4 Marks)]
Answer:
The secondary market comprises stock exchanges that provide a platform for the purchase and sale of securities by investors. The trading platforms of stock exchanges are accessible only through brokers and trading of securities is confined only to stock exchanges.

The stock exchanges are the exclusive centres for trading in securities and the trading platform of exchange is accessible only to brokers. The regulatory framework heavily favours the recognized stock exchanges by almost banning trading activity outside the stock exchanges.

The stock market ensures free marketability, negotiability and price discharge. For these reasons the stock market is referred to as the nerve centre of the capital market, reflecting the economic trend as well as the hopes, aspirations and apprehensions of the investors.

Question 14.
Distinguish between: Initial Margin & Maintenance Margin [June 2013 (4 Marks)]
Answer:
Initial Margin: Initial margin means the minimum amount, calculated as a percentage of the transaction value, to be placed by the client, with the broker, before the actual purchase. The broker may advance the balance amount to meet full settlement obligations.

In simple words, the initial margin is the percentage of a stock price that you are required to have in your account when purchasing that stock on margin.

Question 15.
Explain briefly: Circuit breakers [June 2013 (3 Marks)]
Answer:
What is a circuit: Circuits are of two types – circuit for an index and for a stock. So, if an index or the price of a stock increases or declines beyond a specified threshold it is said to have entered into a circuit. SEBI specifies this threshold as a percentage of the prior day’s closing figures.

Circuit breaker for an Index: Circuit breakers are applied only on equity and equity derivative markets. Whenever the major stock indices like BSE SENSEX and Nifty cross the threshold level, SEBI rules require that the trading at the stock exchange be stopped for a certain period of time beginning from half an hour to even an entire day. The time frame for which trading is stopped depends upon the time and amount of movement in the indices. The idea is to allow the market to cool down and resume trading at normal levels. The thresholds are implemented stage wise.

Question 16.
Distinguish between: Book Closure and Record Date [Dec. 2013 (3 Marks)]
Answer:
Book closure is the periodic closure of the “Register of Members & Transfer Books”, to take a record of the shareholders to determine their entitlement to dividends or bonus or right shares or other rights pertaining to shares.

Closing “Register of Members & Transfer Books” every time is not possible. In such a case recorded date is fixed and informed to the stock exchange in advance.

The record date is the date on which the records of a company are closed for the purpose of determining the stockholders who are entitled to dividends, bonus or right shares or other rights.

A company may close the register of members for a maximum of 45 days in a year and for not more than 30 days at any one time. [Section 91 of the Companies Act, 2013]

Book closure becomes necessary for the purpose of paying a dividend, making • rights issue or bonus issue. The listed company is required to give notice of book closure in a newspaper at least 7 days before the commencement of the book closure. The members whose names appear in the register of members on the last date of book closure are entitled to receive the benefits of dividend, right shares or bonus shares as the case may be.

The minimum time gap between the two book closures and/or record dates would be at least 30 days.

Question 17.
Write a short note on Online Surveillance by stock exchange [June 2014 (3 Marks)]
Answer:
Online Surveillance: One of the most important tools of surveillance is the Online Real-Time Surveillance system which was commissioned in 1999.

The system has a facility to generate the alerts online, in real-time, based on certain preset parameters like –

price and volume variations in scrips,
members taking unduly large positions not commensurate with their financial position or
having large concentrated positions in one or few scrips, etc.

Question 18.
Distinguish between: Listed Securities & Permitted Securities [June 2015 (3 Marks)]
Answer:
Securities traded in the stock exchanges can be classified as under:
1. Listed Cleared Securities: The securities admitted for dealing on the stock exchange after complying with all the listing requirements and placed by the SEBI on the list of cleared securities are known as listed cleared securities.

Securities of companies, which have signed the Listing Agreement with BSE, arc traded as “Listed Securities”. Almost all securities traded in the equity segment fall in this category.

2. Permitted Securities: The security listed on one stock exchange, when permitted to be traded by some other stock exchange where it is not listed is called permitted security. Such permission is given if suitable provisions exist in the regulations of the concerned stock exchanges.

Example: Suppose, Company X is listed on BSE. If another stock exchange like OTCEI allows trading of securities of Company X, then securities of Company X is known as permitted security for other stock exchange i.e. OTCEI.

Similarly, if any security is not listed on BSE but BSE allows the security to trade on BSE, such security is known as permitted security.

Question 19.
Stock market indices are the barometer of stock markets. [Dec. 2015(3 Marks)]
Answer:
A modern stock exchange is like a supermarket where various securities can be bought and sold. It is well regulated and computerized. It is efficient, transparent and market-oriented.

Stock exchange provides easy marketability to securities of a company.

The capital market and in particular the stock exchange is referred to as the barometer of the economy. The government’s policy is so moulded that the creation of wealth through products and services is facilitated and surpluses and profits are channelised into productive uses through capital market operations. Reasonable opportunities and protection are afforded by the Government through special measures in the capital market to get new investments from the public and the Institutions and to ensure their liquidity.

Question 20.
Distinguish between: Listed Securities & Permitted Securities [June 2017 (3 Marks)]
Answer:
The main objective of the surveillance function of the Stock Exchange is to –

To promote market integrity
Monitor price and volume movements (volatility)
Detecting potential market abuses
Managing default risk by taking necessary actions timely.

All the instruments traded in the equity segment of the Cash and Derivative market come under the Surveillance umbrella of BSE.

Surveillance activities at the Stock Exchange are divided broadly into two major segments:

Price Monitoring and
Position Monitoring.

Question 21.
What do you understand by “Application Supported by Blocked Amount” (ASBA)? How does it work in Initial Public Offer (IPO)? Describe. [June 2018 (5 Marks)]
Answer:
“Application Supported by Blocked Amount” means an application containing an authorization to Self Certified Syndicate Bank to block the application money in a bank account for subscribing to a public or rights issue.

The application money remains blocked till the finalisation of the basis of allotment or till the withdrawal/failure of the issue.

Thereafter, the application data uploaded by the bank in the electronic bidding system through a web-enabled interface provided by the Stock Exchanges.

Once the basis of finalized allotment, the Registrar to the Issue sends a request to the bank for unblocking the accounts and to transfer the requisite amount to the issuer’s account.

In case of withdrawal or failure of the issue, the amount shall be unblocked by the bank on receipt of information from the pressure merchant bankers.

Question 22.
Write short notes: Book Closure and Record Date [Dec. 2018 (3 Marks)]
Answer:
Book closure is the periodic closure of the “Register of Members & Transfer Books”, to take a record of the shareholders to determine their entitlement to dividends or bonus or right shares or other rights pertaining to shares.

Closing “Register of Members & Transfer Books” every time is not possible. In such a case, the recorded date is fixed and informed to the stock exchange in advance.

The record date is the date on which the records of a company are closed for the purpose of determining the stockholders who are entitled to dividends, bonus or right shares or other rights.

A company may close the register of members for a maximum of 45 days in a year and for not more than 30 days at any one time. [Section 91 of the Companies Act, 2013]

The minimum time gap between the two book closures and/or record dates would be at least 30 days.

Question 23.
What is meant by the Block deal? How is it being executed in the Stock Exchange? [Dec. 2018 (5 Marks)]
Answer:
SEBI had issued guidelines outlining a facility of allowing Stock Exchanges to provide a separate trading window to facilitate the execution of large trades. The Exchanges have introduced a new block window mechanism for the block trades from January 1, 2018.

1. Session Timings:
(a) Morning Block Deal Window: This window shall operate between 8:45 AM to 9:00 AM.

(b) Afternoon Block Deal Window: This window shall operate between 2:05 PM to 2:20 PM.

In the block deal, the minimum order size for the execution of trades in the Block deal window shall be ₹ 10 Crore.
The orders placed shall be within ±1% of the applicable reference price in the respective windows as stated above.
The stock exchanges disseminate the information on block deals such as the name of the scrip, name of the client, the number of shares bought/ sold, traded price, etc. to the general public on the same day, after the market hours.

Question 24.
Write short notes on Key difference between WPI & CPI [June 2019 (3 Marks)]
Answer:
Following are the main points of distinction between wholesale price index & consumer price index:

Points	Wholesale Price Index	Consumer Price Index
Meaning	Wholesale Price Index (WPI), amounts to the average change in prices of commodities at the wholesale level.	Consumer Price Index (CPI) indicates the average change in the prices of commodities, at the retail level.
Published by	Wholesale Price Index (WPI) is computed by the Office of the Economic Adviser in the Ministry of Commerce & Industry, Government of India.	CPI for Industrial Workers (IW) & CPI for Agricultural Labourers (AL)/Rural Labourers (RL) are compiled and released by the Labour Bureau in the Ministry of Labour and Employment. CPI (Rural/Urban/Combined compiled and released by the Central Statistics Office (CSO) in the Ministry of Statistics and Programme Implementation.
No. of items	There are total of 676 items in WPI.	The number of items in the CPI basket includes 448 in rural and 460 in urban.
Focuses on	WPI focuses on the prices of goods traded between business houses.	CPI focuses on the prices of goods purchased by consumers.
Coverage	WPI covers all goods including intermediate goods transacted in the economy.	CPI covers only consumer goods and consumer services
Measurement of Inflation	WPI measures inflation at the first stage of the transaction.	CPI measures inflation at the final stage of the transaction.

Question 25.
Write short note on Basis of SENSEX [June 2019 (3 Marks)]
Answer:
The Sensex is primarily an index reflecting the Bombay Stock Exchange (BSE). The Sensex comprises 30 prominent stocks derived from all key sectors which are traded actively in the exchange. Thus, Sensex truly reflects the movement of the Indian stock markets.

Calculation Methodology for Sensex: Like the other major financial indexes of the world, Sensex has also shifted to the ‘Free Float market capitalization’ methodology to determine its figures with effect from the year 2003. The level of the index is a direct reflection of the performance of the 30 selected key stocks in the market.

Free-float market capitalization is defined as that proportion of total shares issued by the company that are readily available for trading in the market. It generally excludes promoters’ holding, government holding, strategic holding and other locked-in shares that will not come to the market for trading in the normal course. So, simply put, free-float market capitalization is the proportion j of total shares available for trading to the general public.

Question 26.
Write short note on Bulk Deal [June 2019 (3 Marks)]
Answer:
A bulk deal is a trade, where the total quantity bought or sold is more than 0.5% of the number of equity shares of a listed company.

Bulk deal can be transacted by the normal trading window provided by brokers j throughout the trading hours in a day. Bulk deals are market-driven and take place throughout the trading day.

The stockbroker, who facilitates the trade, is required to reveal to the stock exchange about the bulk deals on a daily basis.

Bulk orders are visible to everyone. If the bulk deal happens through a single trade, it should be notified to the exchange immediately upon the execution of the order. If it happens through multiple trades, it should be notified to the exchange within one hour from the closure of the trading.

Question 27.
Dhruv has purchased 1000 shares ₹ 80 per share of a company. Did he want to pay ₹ 5,000 in cash and balance through bank transfer to a stockbroker? As a Company Secretary advise Dhruv by referring to SEB regulation/ circular. [June 2019 (5 Marks)]
Answer:
SEBI Circular [SEBI/HO/MIRSD/DOP/CIR/P/2018/113] dated July 12, 2018 deals with “discontinuation of acceptance of cash by Stock Brokers”. The circular makes the following clarification regarding the mode of payment by the client to the stockbrokers.
1. The government of India has promoted various means for the transfer/receipt of funds through digital mode for encouraging a cashless economy. Financial institutions/Banks have introduced various modes of electronic payment facility including mobile banking, Unified Payment Interface (UPI) etc.

2. In view of the various modes of payment through electronic means available today, it is directed that Stock Brokers shall not accept cash from their clients either directly or by way of cash deposit to the bank account of a stockbroker.

3. All payments shall be received/made by the stockbrokers from/to the clients strictly by account payee crossed cheques/demand drafts or by way of direct credit into the bank account through electronic fund transfer, or any other mode permitted by the RBI. The stockbrokers shall accept cheques drawn only by the clients and also issue cheques in favour of the clients only, for their transactions. Stock Brokers shall not accept cash from their clients either directly or by way of cash deposit to the bank account of a stockbroker.

Considering the above provisions of the SEBI Circular, Dhruv cannot pay some consideration in cash to a stockbroker. He is advised to pay to his broker by way of account payee crossed cheque/demand draft or by way of direct credit into the bank account through electronic fund transfer, or any other mode permitted by the RBI.

Related Posts

Leave a Comment Cancel Reply