Capital Market, SEBI and Stock Exchanges in India

The correct answer is A, 1992. SEBI first appeared in April 1988 as an administrative arrangement with no legal powers, and it became a statutory regulator when the Securities and Exchange Board of India Act was passed in 1992; the words quoted in the question are taken from the preamble of that Act, which speaks of protecting investors, promoting the development of the securities market and regulating it. Because the statutory body dates from the Act, 1992 is the year every examination expects. Option B, 1999, is the year the Central Depository Services Limited was set up, the second depository in India. Option C, 1987, and option D, 1985, come before even the administrative body existed. Keep the sequence in mind: the Securities Contracts (Regulation) Act of 1956, SEBI as an administrative body in 1988, the SEBI Act in 1992 and the Depositories Act in 1996.

The correct answer is B, the Bombay Stock Exchange. It was founded in 1875 as the Native Share and Stock Brokers’ Association, grew out of brokers meeting under a banyan tree in Bombay, and is the oldest stock exchange in Asia; it now stands on Dalal Street and its benchmark index is the Sensex. Option A, the National Stock Exchange, was incorporated only in 1992 and began trading in 1994, though it was the first in India to offer fully screen-based electronic trading. Option C, the Calcutta Stock Exchange, was established in 1908 and is the second oldest in the country, which makes it the most tempting distractor. Option D, the Madras Stock Exchange, came later still and is one of the regional exchanges that lost business once electronic trading made a nationwide market possible.

The correct answer is B, 30. The Sensex, or Sensitive Index, of the Bombay Stock Exchange is built from thirty large, well established and actively traded companies drawn from the main sectors of the economy, and it is weighted by free-float market capitalisation. Option A, 20, matches no Indian benchmark index. Option C, 50, is the number of companies in the Nifty 50 of the National Stock Exchange, and swapping the two is the standard error in this question. Option D, 100, is the size of broader indices such as the Nifty 100 and the older BSE 100. Two more facts are asked with this one: the base year of the Sensex is 1978-79 with a base value of 100, while the Nifty 50 has 1995 as its base year with a base value of 1000.

The correct answer is B, 1978-79. The Sensex was compiled backwards to 1978-79 and that year was given a base value of 100, so the index number states how many times the market value of its thirty constituents has grown since then. Option A, 1950-51, is the base year long used for national income series, not for a share index, and it is a favourite distractor because students remember it from the national income chapter. Option C, 1993-94, and option D, 2011-12, are base years used at different times for the Index of Industrial Production and the wholesale and consumer price series, which is exactly why they appear here. Remember the pair: Sensex 1978-79 with base 100, Nifty 50 with 3 November 1995 as its base date and base value 1000.

The correct answer is B, the Reserve Bank of India. The money market deals in short-term funds of up to one year, through treasury bills, commercial paper, certificates of deposit and call money, and the Reserve Bank regulates it as part of its control over credit and liquidity. Option A, SEBI, regulates the capital market, where long-term funds are raised through shares, debentures and bonds, and the question sets the two against each other on purpose. Option C, the Ministry of Corporate Affairs, administers company law, including the issue of shares by a company, but it is not a market regulator. Option D, the Insurance Regulatory and Development Authority of India, regulates insurers. Where a product straddles both markets, such as a corporate bond, the two regulators work under an agreed division of responsibility.

The correct answer is B, the Securities Appellate Tribunal. A person aggrieved by an order of SEBI may appeal to the Tribunal, which is provided for by the SEBI Act itself, and from the Tribunal a further appeal lies to the Supreme Court on a question of law. This ladder is what makes SEBI a quasi-judicial body: it passes orders that are appealable rather than final. Option A is wrong because a writ petition to a High Court is an extraordinary remedy, not the appeal the Act provides. Option C, the National Company Law Tribunal, hears matters under company law and insolvency, including mergers and oppression cases, not securities market appeals. Option D is wrong because the Reserve Bank is a separate regulator with no appellate authority over SEBI; the two supervise different segments of the financial market.

The correct answer is C, an initial public offering. An IPO is the first sale of shares by a company to the general public, after which the shares are listed and traded on a stock exchange; it belongs to the primary market, because the money raised goes to the company itself. Option A, a rights issue, is an offer of new shares made only to existing shareholders, usually in proportion to their holding and at a stated price. Option B, a follow-on public offer, is a further issue to the public by a company that is already listed, so it cannot be the first one. Option D, a private placement, is an issue to a small number of selected investors, often financial institutions, without a public offer; when the investors are qualified institutional buyers it is called a qualified institutional placement.

The correct answer is B, Mumbai. SEBI has its head office in Mumbai, at the Bandra Kurla Complex, which places the regulator in the same city as the Bombay Stock Exchange, the National Stock Exchange and the Reserve Bank of India, making Mumbai the financial capital of the country. Options A, C and D are wrong as the head office, but each is a regional office of SEBI: New Delhi for the northern region, Kolkata for the eastern region and Chennai for the southern region, with Ahmedabad serving the west. Questions sometimes ask which of the four is not a regional office, so learn all four together. Note also that the Board has a Chairman, two members from Union ministries dealing with finance and company law, one member from the Reserve Bank and five members appointed by the Union Government.

The correct answer is A, the Securities Contracts (Regulation) Act, 1956. It defines what a security is, provides for the recognition of stock exchanges by the Government, and lays down the framework within which contracts in securities may be made; it is the oldest of the statutes governing this market and still the basic one. Option B, the Banking Regulation Act of 1949, governs banking companies and the powers of the Reserve Bank over them. Option C, the Depositories Act of 1996, allows securities to be held and transferred in electronic form and provides for depositories such as NSDL and CDSL, but not for the recognition of exchanges. Option D, the Foreign Exchange Management Act of 1999, governs dealings in foreign exchange and replaced the earlier and far stricter FERA of 1973.

The correct answer is B, NSDL. The National Securities Depository Limited was set up in 1996, the year the Depositories Act was passed, and was the first depository in India; it holds securities in electronic form so that shares need not change hands as paper certificates, a process called dematerialisation. Option A, the Central Depository Services Limited, was established in 1999 and is the second depository, so it is the closest distractor. Option C, the National Securities Clearing Corporation Limited, is a clearing corporation: it settles trades and guarantees their completion rather than holding securities. Option D, the Clearing Corporation of India Limited, clears and settles transactions in government securities, money market instruments and foreign exchange. An investor reaches a depository through a depository participant, usually a bank or a broker.