Business Studies Part I
Business Studies Part II

Solution of question paper

1 mark Question Solutions

Q1 Meca Ltd. a reputed automobile manufacturer needs Rupees ten crores as additional capital to expand its business. Atul Jalan, the CEO of the company wanted to raise funds through equity. On the other hand the Finance Manager, Nimi Sahdev said that the public issue may be expensive on account of various mandatory and non-mandatory expenses. Therefore, it was decided to allot the securities to institutional investors. Name the method through which the company decided to raise additional capital.
Answer: The private placement is a method through which the company decided to raise additional capital.

Q2 ABC Ltd. issued a prospectus for the subscription of its shares for Rs. 500 crores in 2008. The issue was oversubscribed by 20 times. The company issued shares to all the applicants on pro-rata basis. Later SEBI inspected the prospectus and found some misleading statements about the management of the company in it. SEBI imposed a penalty of Rs. 5 crores and banned its three executive directors for dealing in the securities market for three years. Identify the function and its type performed by SEBI in the above case. 
Answer: Protective function has been performed by SEBI in the above case. And the type of Protective function is the Prohibition of fraudulent and unfair trade practices.

Q3 Money market is essentially a market for short-term funds’. In light of this statement state any three features of the money market.

Answer: The three features of the money market are described below:

  • It is a market for short term funds whose maturity period is up to one year.
  • The main participants are institutional investors.
  • Since the cost of securities may be high, investment in the money market requires huge capital outlay.

Q4 Reshu’s father has gifted her the shares of a large cement company with which he had been working. The securities were in physical form. She already has a bank account and does not possess any other forms of securities.
She wished to sell the shares and approached a registered broker for the purpose. Mention one mandatory detail which she will have to provide with the broker. 
Answer: Reshu will have to give her Permanent Account Number (PAN) to the broker as it is mandatory as per law.

Q5 Squib Ltd. is a large creditworthy company operating in the Kashmir Valley. It is an export-oriented unit, dealing in exclusive embroidered shawls. The floods in the Valley have created many problems for the company. Many craftsmen and workers have been dislocated and raw material has been destroyed. The firm is, therefore, unable to get an uninterrupted supply of raw materials and the duration of the production cycle has also increased. To add to the problems of the organization, the suppliers of raw materials who were earlier selling on credit are asking the company for advance payment or cash payment on delivery. The company is facing a liquidity crisis. The CEO of the company feels that taking a bank loan is the only option for the company to meet its short-term shortage of cash.
As a finance manager of the company, name and explain the alternative to bank borrowings that the company can use to resolve the crisis.
Answer: Commercial Papers may be used by Squib Ltd. as it is a popular short term instrument that is issued by large and creditworthy companies. The instrument is an unsecured promissory note and is freely transferable by endorsement. Its maturity period may range from a fortnight to a year. It is sold at discount and redeemed at par.

5 Mark Question Solutions 

Q6 Incorporated in 1990, Raju Dairy Ltd., is one of the leading manufacturers and marketers of dairy-based branded foods in India. In the initial years, its operations were restricted only to the collection and distribution of milk. But, over the years it has gained a reasonable market share by offering a diverse range of dairy-based products including fresh milk, flavored yogurt, ice creams, buttermilk, cheese, ghee, milk powders, etc. In order to raise capital to finance its expansion plans, Raju Dairy Ltd. has decided to approach the capital market through a mix of Offer for sale of Rs. 4 crore shares and a public issue of Rs. 2 crore shares.
In the context of the above case:

  1. Name and explain the segment of the capital market being approached by the company.
  2. Identify the two methods of floatation used by the company to raise the required capital. Give one difference between them.

Answer:

  1. The primary market is the segment of the capital market being approached by the company. It is also known as the new issue market as the securities are issued for the first time by the companies through this market.
  2. The two methods of floatation used by the company to raise the required capital are – Issue through the prospectus and Offer for sale.
    In case of the issue through the prospectus, the company approaches the members of the general public directly by issuing a prospectus whereas, in case of Offer for sale, the company approaches members of the general public indirectly through intermediaries like issuing houses, stockbrokers, etc.

Q 7 The SEBI has imposed a penalty of Rs. 7,269.5 crore on Pearls Agrotech Corporation Limited (PACL) and its four directors — Tarlochan Singh, Sukhdev Singh, Gurmeet Singh and Subrata Bhattacharya who had mobilized funds from the general public through illegal collective investment schemes in the name of purchase and development of agriculture land. While imposing the penalty, the biggest in its history, Securities and Exchange Board of India (SEBI) said the company deserved “maximum penalty” for duping the common man. Its Prevention of Fraudulent and Unfair Trade Practices Regulations provides for “severe to severe penalties” for dealing with such violations. As per SEBI norms, it can impose a penalty of Rs. 25 crores or three times the profit made by indulging in fraudulent and unfair trade practices and in the present case, the regulator has imposed a fine equivalent to three times of the illicit gains.
In the context of the above case:

  1. State the objectives of setting up SEBI.
  2. Identify the type of function performed by SEBI by quoting lines from the paragraph.

Answer:

  1. The objective of setting up SEBI are outlined below:
  • To prevent trading malpractice in the securities markets.
  • To protect the rights and interest of investors, and to guide and educate them.
  • To regulate and develop a code of conduct and fair practices by intermediaries like brokers, merchant bankers, etc. with a view to making them competitive and professional.
  • To regulate stock exchanges and the securities market to promote their orderly functioning.
  1. A protective function is performed by SEBI: “The SEBI has imposed a penalty of Rs. 7,269.5 crore on Pearls Agrotech Corporation Limited.”