Financial Instruments and Investor Categories

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Questions and Answers

Which of the following is NOT a requirement to become a member of the stock exchange?

Must have experience in a related field

Must be 21 years of age

Must be a citizen of India

Must be a graduate in finance (correct)

Which type of broker acts on behalf of clients and charges a commission?

Tarawaniwalas

Floor brokers

Jobbers

Commission brokers (correct)

What is a key characteristic of a Jobber in the stock exchange?

Acts as an agent for multiple brokers

Transactions are conducted in their own name (correct)

Works exclusively for clients

Cannot register with SEBI

Who are considered floor brokers in the stock exchange?

Sub-brokers who work for principal brokers Signup and view all the answers

Which of the following statements about Tarawaniwalas is correct?

They can change roles based on market requirements. Signup and view all the answers

What is the primary role of Arbitrageurs in the stock exchange?

To earn profits by exploiting price differences Signup and view all the answers

Which type of member in the stock exchange is specifically defined as an agent of clients?

Commission brokers Signup and view all the answers

Which member type is typically specialized in particular types of securities?

Jobbers Signup and view all the answers

What is the primary function of the BOLT system used by BSE?

To enable online trading of securities from brokers' offices Signup and view all the answers

Which segment is NOT offered by the Metropolitan Stock Exchange of India Limited (MSEIL)?

Commodity Trading Signup and view all the answers

What is the minimum market capitalization required for a large cap company on BSE?

₹25 Cr Signup and view all the answers

Which of the following indices is NOT associated with the BSE?

NSE Composite Signup and view all the answers

What type of trading does BSE allow through its mobile-based application, Fastrade?

Online trading through a mobile device Signup and view all the answers

What classification does BSE use to categorize companies for listing based on their market capitalization?

Large cap and Small cap Signup and view all the answers

Which of the following is a recognized regulatory body for MSEIL?

Securities and Exchange Board of India Signup and view all the answers

What is the minimum issue size required for a small cap company listed on BSE?

₹3 Cr Signup and view all the answers

What is the primary purpose of arbitrage activities?

To profit from price differences in different markets Signup and view all the answers

How does domestic arbitrage differ from foreign arbitrage?

Domestic arbitrage occurs within one country, while foreign involves different countries. Signup and view all the answers

What is the primary purpose of a Placement Document prepared by a Merchant Banker?

To conduct a Qualified Institutions Placement (QIP) Signup and view all the answers

What is a Shelf Prospectus best known for?

Enabling multiple issues without filing a new prospectus each time Signup and view all the answers

What is the primary intention behind executing wash sales?

To create confusion about the actual price movement Signup and view all the answers

What distinguishes a blank transfer from a standard share transfer?

Blank transfers allow shares to be transferred multiple times without individual registration. Signup and view all the answers

What is a key disadvantage of issuing shares through a prospectus?

It incurs additional costs such as advertising and legal charges Signup and view all the answers

Which practice is commonly associated with cornering the market?

Holding a substantial portion of a security's supply Signup and view all the answers

In an Offer for Sale (OFS), how are shares typically offered to the public?

Through sponsoring intermediaries after purchase Signup and view all the answers

Which category does an investor who applies for a public issue for more than 2 Lakhs fall into?

Non-Institutional Investor (NII) Signup and view all the answers

What is a major consequence of engaging in wash sales?

Legal penalties imposed by stock exchanges Signup and view all the answers

What underlying factor drives the need for quick action in arbitrage?

The volatility of security prices Signup and view all the answers

What is one advantage of the Offer for Sale (OFS) method?

The company is relieved from publicizing the prospectus Signup and view all the answers

Who typically benefits from a Shelf Prospectus?

Companies that need to make multiple share issues over a year Signup and view all the answers

Which of the following best describes the nature of transactions in wash sales?

They are fictitious transactions lacking true movement of securities. Signup and view all the answers

Which categories of investors participate in public issues?

Retail Individual Investors, Qualified Institutional Buyers, Non-Institutional Investors Signup and view all the answers

What is a key characteristic of Global Depository Receipts (GDRs)?

They represent a specific number of equity shares. Signup and view all the answers

Which of the following intermediaries is not mandatory for issuing Indian Depository Receipts (IDRs)?

Foreign stock exchange Signup and view all the answers

What is the minimum size for an IDR issue in India?

Rs. 50 crores Signup and view all the answers

Which of the following statements about Foreign Currency Convertible Bonds (FCCBs) is correct?

FCCBs can be converted into equity shares or depository receipts after a specified period. Signup and view all the answers

What is a defining feature of Yankee bonds?

They are dollar denominated bonds issued by non-American companies. Signup and view all the answers

Which of the following is a requirement for a foreign company to issue an IDR in India?

The foreign company should have a good track record of distributable profits. Signup and view all the answers

Which of the following best describes the function of a custodian in the context of GDRs?

They physically hold the equity shares underlying GDRs. Signup and view all the answers

What advantage do Yankee bonds offer to issuers?

They allow issuers to benefit from favorable regulatory conditions in the US. Signup and view all the answers

Study Notes

Placement Document

A document prepared by a Merchant Banker for the purpose of a Qualified Institutions Placement (QIP).

Shelf Prospectus

Enables an issuer to make a series of issues within a one-year period without filing a fresh prospectus each time.

Offer for Sale (OFS)

An indirect offer of securities to the public through a sponsoring intermediary.
The sponsoring intermediary buys the entire shares and resells them to the investing public.
Facilitates promoters of an already listed company to sell or dilute their existing shareholdings.

Categories of Investors

Retail Individual Investors (RIIs): Investors (individuals & HUFs) who apply or bid for a value of not more than ₹2 Lakhs in a public issue of securities.
Qualified Institutional Buyers (QIBs): Institutional investors who meet specific criteria.
Non-Institutional Investors (NIIs): Investors who apply or bid for a value exceeding ₹2 Lakhs in a public issue of securities.

Global Depository Receipts (GDRs)

A dollar-denominated instrument tradable on stock exchanges in Europe or the US or both.
Represents a certain number of equity shares issued by the company to an intermediary called "Depository."
Physical possession remains with another intermediary called the "custodian."

Indian Depository Receipts (IDRs)

A foreign company can access the Indian securities market for fund-raising through IDR issuance.
A domestic depository (custodian of securities, registered with SEBI) creates the IDR in Indian Rupees.
The issuing company (foreign company) delivers the underlying equity shares to an Overseas Custodian Bank (OCB).
OCB authorizes the domestic depository to issue IDRs.
The size of an IDR issue should not be less than ₹50 crores.
The issuing company should be listed in its home country and have a good track record of distributable profits and compliance with security market regulations.

Foreign Currency Convertible Bonds (FCCBs)

A special category of bonds used by companies to raise money in foreign currencies.
Linked to equity and convertible into equity shares or depository receipts after a specified period.

Yankee Bonds

Dollar-denominated bonds issued in the US bond market by a non-American company.
Help issuers take advantage of favorable regulatory and lending conditions within the US, along with access to a large bond market.

BSE (Bombay Stock Exchange)

Introduced the world's first centralized exchange based Internet trading system (bsewebx.co.in).
Launched mobile-based trading using the Fastrade mobile application and a wireless access protocol browser-based mobile trade portal.

BSE Operations

Has Equity, Debt and Derivatives segments.
Trades based on BOLT (BSES Online Trading) System.
Brokers enter buy/sell orders from trader-workstations installed in their offices.
Trading occurs from Monday to Friday.
Scrips are classified into Group A, B, S, TS, Z etc based on parameters like trading volume and market capitalization.
Companies are categorized as large cap (minimum issue size of ₹10 Cr. and market capitalization of ₹25 Cr.) and small cap (minimum issue size of ₹3 Cr. and minimum market capitalization of ₹5 Cr.).
Important indices include SENSEX, BSE 100, BSE Dollex, BSE 200, and BSE IPO Index.

Metropolitan Stock Exchange of India Limited (MSEIL)

A government-owned stock exchange recognized by SEBI.
Provides an electronic, transparent, and high-tech platform for trading in Capital Market, Futures & Options, Currency Derivatives, Debt Market, and SME segments.
SX40 serves as the market index.
Shareholders include top public sector banks, private sector banks, and domestic financial institutions.

Listing of Securities

Securities are listed when included in the official list of the stock exchange for trading.
Listing is compulsory if a company goes for public issue.
Only members can trade on the floor of the stock exchange.
To become a member, one must:
- Be a citizen of India
- Be 21 years of age
- Not be bankrupt or insolvent
- Not be a declared defaulter by any other stock exchange
- Have a certificate of registration from SEBI
- Have at least 2 years of experience in the field
- Have the minimum net worth and working capital fixed by the stock exchange.

Categories of Stock Exchange Members

Commission Brokers: Act as agents for non-members or clients, buying and selling securities on their behalf for a fixed percentage commission.
Jobbers: Independent brokers who deal in securities for themselves, buying and selling in their own name.
Floor Brokers (Sub-Brokers): Brokers who work for principal brokers, executing orders for a commission.
Tarawaniwalas: Dealers who trade in their own name, similar to Jobbers but not officially classified in India.
Arbitrageurs: Brokers who exploit price differences in two different exchanges to make a profit.

Arbitrage

A specialized speculative activity to profit from price differences in two markets.
The speculator buys the security from one market where it's cheaper and sells it in another, where it's more expensive.
Domestic arbitrage refers to transactions within the same country, while foreign arbitrage involves different countries.
Helps to level prices between the two markets.

Wash Sales

Fictitious transactions where a speculator sells and repurchases securities at a higher price through the broker.
No actual transaction occurs, but designed to create confusion about the true movement of a security's price.
Creates artificial demand, leading to an artificial rise in price.
Considered an objectionable practice and prohibited by stock exchange rules.

Blank Transfer

A transfer of shares without mentioning the transferee's name in the deed.
Allows for multiple transfers until the final transferee submits the blank transfer form to register the shares in their name.
Saved stamp duty and other transfer fees.
Became irrelevant with the dematerialization of shares, which are transferred electronically.

Cornering

A market condition where one individual or group controls almost the entire supply of a particular security.
Speculators can enter into purchasing contracts with bears (those who expect the price to fall) to manipulate the market.

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Description

This quiz covers key concepts related to financial instruments like Placement Documents, Shelf Prospectus, and Offer for Sale. It also explores the different categories of investors involved in public issues, including Retail Individual Investors and Qualified Institutional Buyers. Test your understanding of these essential finance terms.