CUET UG Business Studies: Finance - Financial Markets, Money Market vs Capital Market, SEBI

Must?Know (15–20 detailed bullets)

• Financial markets are broadly classified into money market and capital market as per NCERT Class 12 Business Studies, Chapter 9.
• Money market deals in short-term funds (up to 1 year), e.g., Treasury Bills issued by RBI with maturities of 91, 182, and 364 days.
• Capital market deals in long-term securities (more than 1 year), e.g., equity shares of Reliance Industries listed on BSE.
• Money market instruments are close substitutes for money and are highly liquid.
• Capital market instruments include equity shares, preference shares, debentures, and bonds.
• The capital market is further divided into primary market (new issues) and secondary market (resale of existing securities).
• SEBI was established in 1988 as a regulatory body; given statutory powers in 1992 through the SEBI Act, 1992.
• SEBI’s headquarters is located in Mumbai.
• One of SEBI’s functions is to protect the interests of investors in securities, e.g., by mandating timely disclosure of shareholding patterns.
• SEBI performs three functions: regulatory, protective, and developmental, e.g., launching investor awareness programs.
• Call money market is part of the money market where funds are lent/borrowed for 1 day, primarily between banks to maintain CRR.
• Commercial papers (CPs) are unsecured promissory notes issued by highly rated companies like Tata Capital, with maturity between 7 days and 1 year.
• Certificate of Deposit (CD) can be issued by banks (maturity 7 days to 1 year) and by FIs (1 to 3 years), as per RBI guidelines.
• Treasury Bills (T-Bills) are issued at a discount to face value, e.g., ?98,000 for a ?1 lakh bill, with zero coupon.
• The primary market uses the 'Initial Public Offer' (IPO) route for raising funds from the public for the first time.
• The secondary market enables liquidity through stock exchanges like NSE and BSE.
• SEBI regulates both the primary and secondary capital markets in India.
• Under Section 11 of the SEBI Act, 1992, SEBI has the power to regulate stock exchanges and intermediaries.
• Repo rate transactions in the money market involve short-term borrowing by banks against government securities.
• Developmental financial institutions like IDBI and IFCI operate in the capital market to support industrial growth.

Difficulty Level

Intermediate — Requires understanding of distinctions between market types, regulatory roles, and instrument features; includes specific examples and legal provisions.

Common CUET Traps (3 bullets)

• Trap: Confusing money market with capital market based on size of transactions rather than maturity period.
  Avoid: Differentiate strictly by maturity: money market = up to 1 year; capital market = more than 1 year.

• Trap: Believing SEBI was established by the Companies Act or SEBI Act in 1992.
  Avoid: SEBI was set up in 1988; it became statutory in 1992 via the SEBI Act, 1992.

• Trap: Assuming commercial papers can be issued by any company.
  Avoid: Only companies with minimum credit rating (e.g., P-2 by CRISIL) and net worth criteria can issue CPs as per RBI.

Practice MCQs (5 questions)

1. Which of the following instruments is traded in the money market?
   A. Equity shares
   B. Debentures
   C. Treasury Bills
   D. Preference shares
   Answer: C
   Explanation: Treasury Bills are short-term government securities with maturity up to 364 days, traded in the money market.
   Why others fail: Equity and preference shares are long-term instruments traded in the capital market.

2. SEBI was given statutory powers through an Act in which year?
   A. 1988
   B. 1990
   C. 1992
   D. 1994
   Answer: C
   Explanation: The SEBI Act, 1992 granted statutory powers to SEBI, transforming it from a non-statutory body.
   Why others fail: 1988 is when SEBI was established, not when it became statutory.

3. Which of the following is a function of the capital market?
   A. Facilitating short-term borrowing by banks
   B. Providing liquidity through call money
   C. Mobilizing long-term funds for businesses
   D. Issuing Treasury Bills
   Answer: C
   Explanation: The capital market mobilizes long-term funds through instruments like equity and bonds.
   Why others fail: Options A, B, and D relate to the money market, not capital market.

4. Who among the following can issue Commercial Paper (CP)?
   A. Any private individual
   B. A partnership firm
   C. A corporate with minimum credit rating
   D. A small-scale industry without credit rating
   Answer: C
   Explanation: As per RBI guidelines, only corporates with a minimum credit rating (P-2) can issue CP.
   Why others fail: Individuals, partnerships, and unrated firms are not eligible to issue CP.

5. Which of the following statements correctly describes the call money market?
   A. It involves lending for more than 15 days
   B. It is used by the government to raise long-term funds
   C. It helps banks meet short-term liquidity needs on an overnight basis
   D. It deals in equity shares of listed companies
   Answer: C
   Explanation: Call money market allows banks to borrow/lend funds overnight to maintain CRR requirements.
   Why others fail: Maturities beyond 1 day fall under notice money; government does not raise funds here.

Last?Minute Revision (15–20 one?liners)

• Money market: maturity-1 year; Capital market: >1 year — define by time, not instrument type.
• SEBI established in 1988, statutory powers from 1992 — remember two different years.
• T-Bills: 91, 182, 364 days — only these maturities in India.
• CP issued by corporates with min. credit rating (P-2) — not all companies can issue.
• CDs by banks: 7 days to 1 year; by FIs: 1 to 3 years — different maturity rules.
• Call money: 1 day; Notice money: 2–14 days — both under money market.
• Primary market: new securities; Secondary market: resale — IPO vs stock exchange.
• SEBI Act passed in 1992 — Section 11 gives regulatory power.
• SEBI functions: Protective, Regulatory, Developmental — use PRD mnemonic.
• IPO: Initial Public Offer — first sale of shares to public in primary market.
• FPO: Further Public Offer — subsequent issue after IPO.
• NSE launched in 1992; first electronic exchange — not oldest (BSE is).
• Repo rate: short-term borrowing by banks from RBI against securities.
• Reverse repo: RBI borrows from banks — opposite of repo.
• IDBI, IFCI — capital market institutions for industrial finance.
• SEBI headquartered in Mumbai — not Delhi or Kolkata.
• Commercial Paper maturity: min 7 days, max 1 year — verify from NCERT.
• Treasury Bills are zero-coupon — issued at discount, redeemed at par.