Some of the frequently asked exam questions on the types of markets are as follows:

Q.1. Describe the organisation of any stock exchange in India.

Ans. The Calcutta Stock Exchange, established as an association in 1908, was converted to a limited company with an authorised capital of 1200 shares of Rs. 250 each.

Anybody can became a member of the Calcutta Exchange by acquiring one share, paying an admission fee of Rs. 5,000/- and keeping a deposit of Rs. 20,000. In case a member is in default or is unable to meet his obligations, his deposit is utilised to meet the liabilities. Only members can transact business at the floor of the exchange.


A member can acquire only one share. A member can appoint his agent. The agent can enter into contracts on behalf of the principal and is allowed to do business in the exchange and is also required to pay Rs. 500 for admission fee and a deposit of Rs. 5,000. Clerks are also appointed by the members and the clerks are allowed to enter into the exchange.

The management of the exchange is entrusted to a Committee of Manage­ment consisting of members. Of these some are elected from among the members of the exchange and some are nominated by the Government. Every year Presi­dent and Vice-president of the Committee are elected from among the members of the Committee.

The Committee appoints various sub-committees to lock after specific affairs of the exchange. Members of the Committee are liable to retire by rotation. Every year the Committee is formed by admission of new members.

The Committee frames rules, regulations and bye-laws and the members are required to transact business in accordance with these rules and regula­tions. If a member is in default and fails to deliver or take delivery of securities, be is given seven days time by the Committee.


If after the expiry of this time the member is unable to meet his obligations, the seller or the buyer of the securities may sell or buy securities to or from other members and the loss, if any, sustained is made good by the defaulting member.

The names of the defaulting members are notified and they are debarred from enjoying the privileges granted to the members of the exchange so long they remain defaulters. In case of any dispute between the markers, the same is referred to an Arbitration Sub-Committee whose decision becomes final and is binding on the member.

Q.2. What are the evils of future trading?

Ans. The primary object of futu­res trading is to provide the manufacturer with a hedge market. The evils of futures transactions are gambling and price manipulation. Generally, persons with poor resources resort to gambling. Unlike the real speculators, they do not increase the potential demand or supply of commodities.


They indulge in speculative trading with an inadequate capital which often resu­lts in gambling since such trades cannot fulfill their obligations. Due to this, futures trading fails to give protection to the manufacturer.

The other evil of price manipulation is the result of concerted buying on selling of commodities by traders. With a view to deriving higher profit margins, prices are forced to deviate from their normal levels by manipula­tive activities. Manipulation is usually done by two methods, namely, sprea­ding of false news and making of false transactions.

Through the dissemina­tion of false news about market conditions, market activities may be influ­enced by a group of traders. Alternatively, some fictitious sales may be made by the manipulators for the sake of convincing others. Besides wash sales, there are matched orders for false buying.

When the futures market is entirely controlled by manipulators, the market comes under the grip of a “corner”. In cases of partial control, the market is said to be under the influence of a “squeeze”. Whatever might be the extent of control, full or partial, the futures market becomes useless for hedging purposes.


Q.3. State the fundamental reasons behind the establishment of co-operative marketing system.

Ans. The mar­keting patterns of agricultural products in India are different because of a variety of factors and problems.

The following basic reasons have prompted the establishment of co-operative marketing system in the case of agricultural products:

1. Reasonable Prices:


The agriculturists are not compelled to sell their produce at low prices in the market just at the time of harvest. The societies can collect and store the grains and other products against some advance to the agriculturists and thereafter arrange sales when the prices go up in the market during off-seasons. This way, the societies ensure better and reasonable prices.

2. Storage Facility:


Same co-operatives with storage facilities provide services to the farmers for keeping stocks of grains with the pur­pose of regulating sales.

3. Relief from Unregulated Markets:

The unscrupulous grain merch­ants do not pay the full amounts of the products of the farmers. Their influence in the market stands in the way of disposal of agricultural pro­ducts by the poor farmers. The formation of Agricultural Cooperative Socie­ties is a great relief to those farmers.

4. Elimination of Middlemen:


The formation of co-operative marke­ting societies does away with the role of intermediaries who prosper at the cost of the poor cultivators.

5. Loan Facility:

The agricultural credit societies provide faci­lities for loan on the basis of the products of the cultivators.

6. Grading Facility:

The societies arrange for grading of various products by means of which higher prices can be secured for the benefit of the farmers.

7. Collective Bargaining:


Through the formation of co-operative marketing societies, the producers and cultivators can adopt the policy of collective bargaining for better and higher prices.

8. Wider Markets:

The co-operative marketing societies can carry on their operations even beyond their rural markets and enter into the urban markets, whereby the farmers get the benefit of large-scale marketing field as well as of higher prices.

Q.4. Write a short note on the consumers co-operative society bringing out its characteristics.

Ans. The fundamental characteristics of a consumer co-operative society are:


1. Voluntary Membership:

Anybody who is willing to abide by the rules and regulations of the society can become its member.

2. Democratic Organization:

Each member has only one vote irres­pective of his shareholding. Every member stands on equal footing with respect to his voice and participation in the affairs of the society.

3. Absence of Credit Facilities:

All sales are on cash basis and thus, there is no possibility of bad debts.


4. Equi-Distribution of Profits:

The profits earned by the society are distributed among the markers in proportion to their purchases.

5. Economy in Buying:

The society generally buys goods in bulk for meeting the requirements of large number of members. This achieves economy and as a result the society is able to sell the goods at lower rates.

Inspite of the advantages derived by the above characteristics, the consumer co-operatives suffer from certain disadvantages like loose manage­ment, improper and fraudulent behaviour and lack of managerial ability. These drawbacks have shaken the faith of the public in these co-operatives.


Q.5. (a) Discuss the different kinds of agricultural markets found in practice. (b) State and discuss the role of agricultural prices commission and other agencies. (c) Enumerate the steps taken by the government of India in improving the agricultural marketing system in India.


(a) Kinds of Agricultural Markets:

Three kinds of agri­cultural markets are found in practice:

(1) Local markets, and

(2) Terminal markets.


These are discussed below:

(1) Local Markets:

These are mostly located near to the places of agricultural production. These are, therefore, known as village markets and referred to as primary markets.

These markets perform the following two functions in particular:

(i) Collection of agricultural produce from the farmers and cultiva­tors; and

(ii) Gradation, assembly, and packaging of the products into economical lots for subsequent marketing.

A large number of intermediaries like commission agents, brokers, financiers, assemblers and merchants operate in local markets. The State Government, through the formation and establishment of co-operative socie­ties, has introduced some kinds of control over the methods and practices followed in such markets.

(2) Regional or District Markets:

These are mostly located in the populated centers of a district or region. They form the link between the local markets and terminal markets. The wholesalers operate in these markets. These markets’ perform the marketing functions of concentration, dispersion and equalisation in addition to the subsidiary activities like price fixing, grading and packaging.

The activities like speculation, hedg­ing and floor trading are also dealt -with in these regional markets where future and forward transactions are allowed. The retail businessmen buy products in small lots from these markets for distribution and sale to the ultimate consumers through the terminal markets. These markets actually act as the equalisers of the supply and demand of the various products.

(3) Terminal Markets:

These markets are the places where the final stage in the concentration of supplies of commodities is undertaken. The final dispersion of products to various industrial users on ultimate consu­mers takes place from these markets.

The marketing activities like grading, warehousing, financing, etc. are also associated with the terminal markets. In these markets, the retailers play a dominant role to reach cut the custo­mers and consumers.

(b) Role of Agricultural Prices Commission, etc.:

The role of the Agricultural Price Commission set up in 1965 by the Government of India is restricted to the issue of recommendations for a better dissemina­tion of marketing intelligence and news as well as are fixation of prices of agricultural products.

On the basis of its suggestions, the Marketing Department attached to the Central Government is engaged in releasing up-to- date marketing information through a bulletin named Agricultural Situation in India.

Besides this, the All India Radio and Doordarshan arrange for broadcasts and telecasts on markets and prices of agricultural produce including ancillary implements. Nowadays newspapers and journals exclusively for marketing provide information for the knowledge of agriculturists. But their performance is not very satisfactory. The markets covered by them are inadequate and the types of information are also limited.

(c) Government Steps to Improve Marketing System:

The steps taken by the Government of India towards the improvement of the work­ings of the agricultural marketing system in India may be summarised as follows:-

(1) The formation and establishment of different marketing societies.

(2) The establishment of regulated markets through the formation of joint committees consisting of representatives from the cultivators as well as traders for marketing decisions.

(3) The establishment of All India Warehousing Corporation and the State Warehousing Corporations for the provision of godowns, etc.

(4) The setting up of the Price Stabilisation Board to watch over the trend of the prices of agricultural products.

(5) The setting up of the procurement centers at village levels by the Food Corporation of India.

(6) The system of support price with an obligation on the part of the Government to purchase the agricultural produce at a certain fixed minimum price although the price ruling in the market may be low.

Q.6. Distinguish between the organised and unorganised markets.

Ans. The main points of distinction between them are:

(i) the market dealings in the organised market conform to certain agreed regulations but such dealings are individually influenced in an unorganised market;

(ii) the ‘spot’ or ‘cash’ transactions take place in the organised market, whereas the unorganised market assumes ‘futures’ transactions;

(iii) any person can do business in unorganised market whereas the organised market is restricted to the members only; and

(iv) organised markets are classifiable as to commodity/capital/money markets but unorganised market has no specific classification. Jute market is an organised market but daily markets are unorganised markets.

Q.7. What is the difference between a commodity market and a stock market ?

Ans. Commodity market is a type organised market dealing in agricultural and non-agricultural commodities (jute, bullion, etc.) which are stable and durable for a considerable period and the operations of which are guided by the Forward Contracts-(Regulations) Act. The stock mar­ket, on the contrary, is a part of the capital market which deals with buying and selling of securities like shares, debentures, and Government securities. The Securities Contracts (Regulations) Act controls this market.

Q.8. Write short notes on :- (a) hedging (b) arbitrage (c) option dealings (d) contango and backwardation (e) listing of securities (f) stock exchange clearing house (g) blank transfer (h) margin trading (i) wash sales and hammering (j) short selling (k) investment trust (l) IFC (m) IDBI (n) deposit insurance corporation (o) bill market in india (p) crossed cheque (q) NABARD (r) unit trust (s) speculation (t) bulls and bears (u) stag and lame duck (v) ICICI (w) IRCI.

Ans. (a) Hedging

Hedging denotes an action to mitigate fluctuation in prices. It is a kind of transaction by means of which the speculators try to offset loss from one transaction by gain from other transactions. Thus, hedging may be defined as two offsetting transactions in the same commodity, one purchase or sale in the spot market and another sale or purchase in the futures market, for neutralizing the loss or gain arising from either of them over a period due to adverse price fluctuations.

Hedging is quite common in the organised market of indus­trial materials like, jute, cotton, metals, etc. in order to keep the price steady. It relieves the manufacturer from risks and provides with some sort of price insurance with certain limitations.

Its three­fold limitations are:-

(i) It is assumed that the raw material price is the only determinant of the total cost of production. So, hedging absolutely fails to help the manufacturer when the cost of production rises due to an increase in labour cost and after expenses, 

(ii) The prices of different grades of a commodity do not exactly change in the same proportion,

(iii) To have complete protection against price changes, the prices in the spot and futures markets must more identica­lly and the price spread between two markets must remain at the cons­tant level. But in reality, the price spread does not remain constant and as a result, hedging fails to give protection to the extent by which the prices stay out of control.

(b) Arbitrage

Arbitrage means buying the same security, or commodity in one market where the price is low and to sell it immediately in another market where the price is high. By this the price in the former market will rise owing to higher demand and the price in the latter market will fall owning to larger supply. Consequently, there will be stabilisation and uniformity of price in both the markets. 

This is possible provided the commodity is dealt in both the markets and action is taken simultaneously. Arbitrage is very common in foreign exchange markets and is also practiced in stock exchanges when the same securities are enlisted in more than one stock exchange. Some currency may have cheaper rate in one country and dearer in another country, e.g. dollar is dearer here than in West Germany where imports from USA are less. So, it may be profitable to buy dollars in West Germany and sell them in India. This can be done by an exchange bank to earn profit. This type of speculation is healthy and economic.

Arbitrage operations are much more wider in scope in commodity markets than in stock markets. Staple commodities like wheat and cotton are dealt in on international level and they have a world market prices of these commodities in different countries which vary due to transport cost, tariff, and exchange rate. This situation is brought about by the speculators’ arbitrage operations.

(c) Option dealings

This type of speculation known as ‘satta’ is purely of gambling type. Under this method one speculator keeps some money deposited with another and buys ‘option’ or right to buy or to sell or to sell some securities at an agreed price on a future date. On that date the depositor may buy or sell. If he does not keep his promise then the other party forfeits the deposited amount. The depositor will not fulfill his promise if the price moves unfavourable to him.

 There are three types of options:

i. the depositor buys an option to sell.

ii. the depositor buys an option to buy.

iii. the depositor buys the option either to buy or to sell.

On the agreed date the depositor may settle the account on difference payment system if the price moves to his favour.

(d) Contango and Backwardation

Contango and Backwardation In the London Stock Exchange transac­tions are settled within a fortnight. The settlement continues for four days. The first day is known as Contango Day. Each member is required to deliver or take delivery of securities and arrange for receiving or paying for prices within the fortnight. In case a buyer fails to take delivery of securities, the transaction is carried over to the next settlement period and the buyer is required to pay for such carry over a charge known as contango.

Similarly, if a seller is unable to deliver the securities, the transaction is carried over. The seller is required to pay for such carry over a charge known as backwardation. In Indian exchanges Budla Charges are somewhat similar to Contango or Backwardation.

(e) Listing of Securities

A Stock Exchange does not permit all ‘ shares and securities to be dealt in. Only these shares,and securities which are listed by the Exchange are allowed to be bought and sold. For enlistment of shares and securities in the Stock Exchange, a com­pany has to apply.

For listing of securities, the important formalities to be observed by a company are:

(a) the copies of Memorandum of Asso­ciation, Articles of Association, Balance Sheet, Profit and Loss Acco­unt, and the particulars regarding different classes of shares are to be furnished;

(b) any alteration in the capital structure is to be notified; and

(c) the Articles of Association should provide and state clearly a common form of transfer, etc.

By listing of securities, the companies can create a faith among the average investors about the safety and profitability of securities.

(f) Stock Exchange Clearing House

A stock exchange should provide for the establishment of a clearing house for settling transactions between members. In India each stock exchange has its own clearing house. Each member in an exchange deals in securities with other mem­bers. It is very difficult for the member to settle purchase or sale of securities or meet cross obligations immediately on entering into contracts, as it is a time consuming process.

A clearing house deals with the settlement of dealings between members. It arranges for deli­very of securities and payment of prices. Only members can use the clearing house. Each member is required to furnish a statement of dealings with other members. The clearing house collects these state­ments and makes arrangement for adjusting differences.

Each member is required to refer forward delivery transactions to the clearing house. Forward transactions are settled within a fort­night or a month. It can be carried over to the next settlement period but for this budla charges are to be paid.

(g) Blank Transfer

In the case of transfer of shares from the seller to the purchaser a transfer deed is executed by the transferor and sent to the company for recording the name of the transferee as a shareholder. The transfer deed contans details in respect of the shares transferred, namely, the class of shares, the consideration, number of shares, their distinctive numbers, signatures of transferor and transferee etc. When any one of the above details is not given in the transfer deed, it is known as Blank transfer. Generally, when the transferee’s name is not mentioned in the transfer deed, it is called Blank Transfer.

The blank transfer may ease dealings in shares. It may help the purchaser of shares to sell them again without executing any fresh deed, as in the original transfer deed his name as a transferee is not mentioned. In this way the blank transfer may enable the dealers to use the share certificates as quasi-negotiable instruments. Moreover, they can get loans from banks against the security of shares. In this case the banks usually prefer blank transfer to enable them to sell those shares in case the constituents fail to repay the loans. The system stimulates gambling and evasion of tax.

(h) Margin Trading

Margin trading refers to a deposit of a certain percentage of security prices for dealings on credit. If a member pur­chases securities on credit, he is required to deposit a certain per­centage for any change in security prices during the period of credit. In the stock exchanges of India members are required to keep deposit of a certain amount of the security prices with the clearing house. This type of margin deposit checks undue or over speculation. If the prices of securities are increased, the members are required to augment their deposits. In the converse case, the amount already deposited may cover a large amount of credit.

(i) Wash Sales and Hammering

A speculator makes fictitious transactions of selling some security and then buying it up through his appointed broker. Actually there is no buying and selling but an impression is created in the market as if the security is in high demand and so the price of it actually goes up. Then the speculator actually sells out his holdings and makes profit. This is unhealthy and bad.

Hammering—Whenever a member fails to meet his obligation, he is called defaulter and the process of declaring a member defaulter is known as hammering. The stock exchange insists on meeting obliga­tions on the due date by its members to maintain its goodwill or repu­tation. The assets of the defaulting member are entrusted to the Offi­cial Assignee.

(j) Short Selling

Bears sell securities for the purpose of buying them back at lower prices. In course of selling shares bears sell those securities which they do not possess. This is known as short selling. Though short selling leads to cornering of shares, it is necessary for speculative dealings. It helps in maintaining steady prices by enabling the bears to cover short selling by corresponding purchases and checks undue rise in prices.

(k) Investment Trust

Such trusts raise capital from the market by selling securities and invest the fund in other securities. The income from such investments are distributed among the holders of the trust securities after deducting running expenses. The Unit Trust of India is a very good example.

Investment Trust is a financial institution which supplies capital to the industrial enterprises by way of purchasing their shares and debentures. It not only purchases and sells outright industrial securi­ties but also underwrites them. Its incomes are varied, namely, it enjoys profit from dealing in industrial shares and debentures, coll­ects interests and dividends from various companies and earns underwri­ting commission. It diversifies its investments by dealing in various types of securities and hence minimises the risks of investments.

(l) The Industrial Finance Corporation of India

Incorporation The Industrial Finance Corporation of India (IFCI) was established in July 1948 as a statutory corporation by a special Act to provide medium and long-term financial assistance to any public limited company or co-operative society engaged in manufacturing or processing work or producing electricity or other kind of power, min­ing, shipping, hotel-keeping or preservation of goods.

The IFCI is meant for large-scale industrial concerns only. By amending the Act in 1972 private limited companies have also been brought within the scope of the IFCI. This is the first financial corporation in the country. Its financial resources are: Share Capital, Bonds and Borrow­ings from both inland and foreign.

(m) The Industrial Development Bank of India

Incorporation- The Industrial Development Bank of India (IDBI) was established in July 1964 under a special Act as the biggest and highest organisation for long-term financial institution in the coun­try. It was to provide a new direction in the field of long and medium- term financing. The IDBI has the dual objects of promoting very large enterprises by mobilising financial resources and coordinating as well as controlling the functions of other financial institutions.

Such coordination is necessary to rationalise the functions of the financial institutions in the context of growing industrialisation and diversification of the industrial sector, keeping in view the objectives of the Five-Year plans. If necessary, it can take over any other financial institution. The IDBI renders help both to the private and public sectors. It has been designed in the model of the Industrial Development Bank of Canada.

Its financial resources are : Share capital, bonds, debentures, and public deposits, usual and special loans from the Central Govern­ment, borrowings from the RBI, in foreign currencies and from the special fund of the Central Government. The main function of the Bank is to provide long-term and medium- term financial assistance to all types of industrial enterprises enga­ged in manufacturing, mining, transporting, power generating etc. both in the public and the private sectors.

For this purpose, it is empowered

(1) to provide financial accommodation directly to the indus­trial concerns by means of granting loans and advances, participating in the share capital, underwriting shares, bonds or debentures, guaran­teeing loans taken from scheduled banks and rediscounting bills and promissory notes,

(2) to grant financial assistance to other term lending institutions like IFC, SFCs and ICICI by acquiring shares and bonds of those institutions, guaranteeing their underwriting liabi­lities and granting direct loans and advances,

(3) to provide refinance facilities to the above institutions as well as to the scheduled and co-operative banks which generally grant term loans to the industrial concerns, and

(4) to grant refinance accommodation to the above insti­tutions for export credits granted by them.

Out of all the financial institutions, the working of the IDBI has been so far the best. It has really opened’ new avenues of industrial development in the country. Its establishment can be described as a “milestone in the country’s journey to the institutional provision of industrial finance on a long and medium-term basis”.

(n) Deposit Insurance Corporation

After the end of the Second World War the bank failures were rampant in our country. People lost their confidence in Indian banks. This feature prompted the Government to enact Banking Companies (Regulation) Act to empower the Reserve Bank to control the activities of the Commercial banks.

Most of the banks were brought under the overall control of the Reserve Bank. Failures of the two banks in 1960 despite stricter regulation by the Reserve Bank again prompted the Government to think over the introduction of Deposit Insurance Scheme in India. The Shroff Committee on ‘Finance for private sector’ considered the question of deposit insurance and accepted in principle the idea.

Hence, to protect the interests of the general depositors, the Central Government established Deposit Insurance Corporation in 1962. Deposit Insurance Corporation was established with a capital of Rs. 1 crore. From July, 1971, the Deposit Insurance Scheme was extended to co-operative banks particularly in the States of Andhra Pradesh, Maharashtra and Madhya Pradesh.

The management of the corporation is entrusted to a Board. The Governor of the Reserve Bank is appointed as its Chairman. The Central Government also nominates eminent personalities and experts in trade and commerce in the Board.

The establishment of the Deposit Insurance Corporation is, no doubt, a laudable approach towards improving the confidence of Indian depositors and the standards of banking practices.

(o) Bill Market Scheme in India

The commercial banks in India advance money in the form of cash credits, overdrafts, loans etc. and not so for against discounting of bills. This was due to the absence of organised bill market in India. This market was not developed as the commercial banks were reluctant to advance money against bills on account of the absence of rediscounting facilities from the Reserve Bank.

To remove these difficulties the Reserve Bank introduced a Bill Market Scheme in 1952. According to this scheme, the Reserve Bank would rediscount the promissory notes of the banks supported by the commercial bills of their customers. But this was not actually redisco­unting of bills but mere advancing money in times of need.

The scheme was modified in 1970-71. In accordance with the new scheme the Reserve Bank is now extending rediscounting facilities to bills arising out of sale of goods to Governments, government compa­nies and other semi-government institutions.

Advancing money against discounting of bills is advantageous both to the borrowers and to the banks. The borrower can get the nece­ssary finance against the trade bills without lodging with the bank other forms of securities. They, are also not required to repay the loans as and when the bank demands it. The banks are also assured of getting back the loans within the stipulated period. They can also get the necessary funds in times of emergency by rediscounting those bills with the Central Bank.

(p) Crossed Cheque

It is not paid on the counter of a bank. The amount is credited by the bank to the account of the payee. If a person gets a crossed cheque, he will be required to deposit the same with his banker. His banker known as collecting bank will get the amount from the paying banker and credit his account. Then he can get the amount by drawing a cheque on his banker.

A crossed cheque is, therefore, payable only through the bank.

Different Types of Crossed Cheque : To make a cheque crossed one, two parallel lines are to be drawn across the face of the cheque with the words ‘& Co.’ or ‘A/c payee’ or ‘Not negotiable’ etc.

General Crossing – When two parallel lines across the face of the cheque bear the words ‘& Co.’ or ‘A/c payee’, such crossing is known as general crossing. In case of ‘A/c payee’ cheque the fund so collected is credited to the account of the payee.

Special Crossing –  When two parallel lines are drawn and the name of a bank is mentioned therein, the crossing is known as special crossing. The amount is payable only through the bank, the name of which is written between these lines.

Not Negotiable Crossed Cheque -The words ‘not negotiable’ across the face signify that the holder cannot give a better title to the cheque unless the transferor from whom the holder took the cheque had the same. This cheque is, of course, transferable.


In July 1982, the Government has established by a special Act, the National Bank for Agricultural and Rural Development (NABARD) with a capital of Rs. 100 crores subscribed equally by the Central Government and the Reserve Bank of India.

The NABARD has taken over the functions of Agricultural Refinance and Development Corporation and the functions of the Reserve Bank in respect of agricultural credit and rural development.

NABARD is managed by a Board of Directors consisting of:

(a) A Chairman,

(b) Two directors as experts in rural economy,

(c) Three directors out of whom two have experience in cooperative banking and one in commercial banking,

(d) Three directors out of the directors of the RBI.

(e) Three. directors out of the officials of the Central Government,

(f) Two directors from the officials of the State Govern­ments.

(g) A Managing Director,

(h) One or more whole time Directors appointed by the Central Government.

(r) Unit Trust or Fixed Trust

The essential principle of a unit trust lies in purchasing a block of definite securities for permanent holding out of funds provided by financial institutions or collected from the share capital of a new company. The entire block of securities is looked upon as a “trust fund,” and it is placed in the hands of the trustee who is usually a well-known banker or an insurance company. Against this trusted fund, the trustee is authorised to issue a number of certificates which represent the full beneficial interest of the investment trust.

These certificates are sold to the public at a price. These trust certificates are known as sub-units, because they are issued out of full scrip values of investment units comprising the trusted fund. There being no market for sub-units or trust certifica­tes, the unit trust is required to buy back these certificates from sub-unit holders.

The Unit Trust of India (UTI) was established by the Government in 1963 under the Unit Trust of India Act, 1963. It started its opera­tions from July 1964.

The UTI is a special type of financial institu­tions, rather a financial intermediary, with two distinct types of objectives:

(a) to augment savings particularly Small Savings so that people of small income can save and get opportunities to canalise their savings into lucrative and secured investments; and

(b) to augment capital formation through a portfolio of balanced investment in secured as well as growth-oriented stocks and other securities.

It has been formed in the line of the Unit Trust of England but it has some special features:

(a) It is the first unit trust in public sector in the world;

(b) It draws initial capital not from the inves­tors or unit holders but from banks and financial institutions,

(c) It does not make any separation between management of the concern and trusteeship of the investments,

(d) It offers various tax advantages to the investors unlike any other unit trust of the world.

The UTI has two types of capital :

(1) Initial Capital of Rs. 5 crores, and

(2) Unit Capital obtained by selling ‘units’ which are marketable securities.

The sale price and re-purchase price of a ‘unit’ fluctuate in the capital market according to the market situation.

There are two types of ‘Unit Scheme’:

(1) The unit scheme of 1964 by which the units were offered for sale in the market with a face value of Rs. 10/- each; and

(2) The unit scheme of 1971 which introduced ‘a separate unit scheme called Unit-linked Insurance Plan. The UTI also does underwriting function for new companies. It has to be admitted that the UTI has pla­yed a dominant and effective role in the capital formation of the country by utilising the small savings of the people of small and medium income.

It has given opportunities to the small savers to go for safe investments and share in the prosperity of big investments. Units have extreme liquidity as they can be repurchased by the UTI and the units provided first rate collateral security for bank accommo­dation. The UTI has been able so far to maintain a fair return on the units.

(s) Speculation

The term speculation comes from the Latin word ‘speculare’ which means to look from a distance. In other words specu­lation is connected with anticipation of future trend of events. Specu­lation is a very normal affair in business. It means to buy now when the price is low, to sell when the price will become high in future as anticipated and to make profit out of price difference or, to sell in advance now when price is high to buy in future when price will become low as anticipated and to make profit out of price diff­erence

Speculation, in stock exchange operations, consists in buying and selling securities and shares in the hope of a profit from antici­pated changes of value.

Every producer or trader is a speculator. A producer produces goods in anticipation of demand and ahead of it. That producer may be a manufacturer or an agriculturist. A trader holds stock of goods when the price is low and releases it when it is high.

Such genuine speculation, called legitimate speculation, is good and economic beca­use:

(i) it helps adjustment of supply with the demand,

(ii) it prevents unusual fluctuation of prices,and

(iii) thereby it-makes stabilisation of prices.

(t) Bulls and Bears

Bulls are optimist speculators who go on buying securities with the expectation that they would be able to sell the securities at higher prices at a future date. They have no intention to take delivery of securities or commodities. They simply enjoy the price differences by buying at low prices and selling at higher prices before settlement with the original dealer.

Their buying activities produce a great demand for the securities or commodities and move the prices of those securities or commodities upward. Bulls are also known as ‘tejiwalas’. They are called as such because the bull has a tendency to throw up the enemy by horns.

Bears, on the other hand, are pessimist speculators who go on selling securities with the expectation that they would be able to buy them back at lower prices at a future date. They have no intention of delivering them and to sell securities or commodities which they do not possess. Their selling activities produce a greater supply of those securities or commodities and move their prices downward.

They simply make profits by selling at higher prices and buying those secu­rities back at lower prices. Bears are also known as ‘mandiwalas’. They are called as such because the bear has a tendency to trample the enemy on the ground.

Bulls and Bears perform certain important economic functions. By buying and selling in futures they check wide and undue fluctuations in prices of securities or commodities. They keep prices more or less steady. Secondly, they enable the producers to manufacture on a large scale, since they are assured of markets of their products. Lastly, they help the manufacturers to manufacture their products in antici­pation of demand and enable the general investors to deal in securities at steady prices.

They help the corporate enterprises to procure the necessary finance for expansion and development of industries. Neither the bulls are genuine buyers of securities nor the bears genuine sell­ers. A stock exchange’ is dominated either by a group of bulls or by a group of bears. Accordingly, the stock market is called bullish or ‘teji’ and bearish or ‘mandi’.

(u) Stag

Stags are a type of speculators who neither buy nor sell securities but always after premiums. They simply apply to a company for new issue of shares and pay for the application money with the expectation that they would be able to sell those securities at a premium on a future date. They create an artificial demand for those securities in the market and enjoy the premium by selling them before the allotment is made. Sometimes, they are appointed by a new company for the purpose of getting necessary capital by selling shares at a premium. These speculators are called stags because a stag is timid by nature.

Lame Duck– Bears sell large volume of securities and even those securities which they do not possess. This is known as ‘short selling’ of securities. In course of short selling the bear speculators may find themselves in a tight corner and cannot meet their obligations at the due date.

Bears sell securities with the expectation of buying them back at lower prices. In course of time the shares may be cornered and the bears are not in a position to buy them to cover their transac­tions. This position of bears is known as” ‘Lame Duck’. In such a situa­tion, bear speculators struggle like a ‘lame duck’ in a pool.


The Industrial Credit and Investment Corporation of India was incorporated under the Companies Act 1956 in the private sector with the participation of foreign capital and interest free loan from the Central Government. It was established on the advice of the World Bank Mission. The Corporation is managed by a Board of Directors consisting of eleven directors. Of these, one is nominated by the Central Government, two by British, one by American and the remaining by the Indian shareholders.

The main purpose in setting up of this corporation is to grant long-term loans and advances to industrial units in the private sector. The corporation provides financial assistance and assists in other ways for the establishment, expansion and renovation of private indus­trial units. It encourages participation in and provides opportunities for the flow of private investments .in such enterprises. Its another important function is to invite foreign capital and facilitate the participation of foreign private capital in such enterprises.

For this purpose, it guarantees loans procured from private sources, under­writes or acquires new shares, bonds and debentures and renders all help in making available technical and managerial services to the Indian Industries. This corporation grants loans or provides financial assistance in various ways only to the limited companies.

(w) IRCI

The Industrial Reconstruction Corporation of India (IRCI) was incorporated in April 1971 under the Companies Act financed by different financial institutions both in the public and the private sectors and the nationalised banks. It provides financial, managerial and technical assistance to revitalise industrial concerns of any size which has become or going to be ‘sick’, i.e. unprofitable and uneconomical. The assistance is given till a sick unit becomes economi­cally viable. The IRCI started its operations in West Bengal and now having its operations in other states also. Its financial sources are : share capital, loan, and borrowings. It grants soft loans i.e. loans not having much rigidity as regards securities.

Q.9. Distinguish between a cheque and a bill of exchange.

Ans. The following are the points of distinction:

(1) Both are unconditional order, but a bill is an order on a debtor while a cheque is an order on a bank.

(2) A bill requires acceptance but a cheque does not require any acceptance.

(3) A cheque is payable on demand, but a bill is payable either on demand or at a future date.

(4) A bill can be discounted and for this facility sometimes it is drawn, but a cheque cannot be discounted.

A cheque is also a bill of exchange containing an order of a bank to pay on demand a certain sum of money to the drawer himself or to his order or to the bearer.

Q.10. What is a promissory note ?

Ans. A promissory note is an unconditional promise in writing, signed by the maker, to pay a certain sum of money on demand or at a future date to or to the order of another person or to the bearer of the instrument. Two parties are involved in a Promissory Note, namely, the maker and the payee. The makers of the note are jointly or severally liable.

Q.11. Distinguish between a promissory note and a bill of exchange .

Ans. The following are the points of distinction:

(1) A promissory note is a promise to pay, but a bill of exchange is an order to pay.

(2) Three parties are involved in a bill, namely, the drawer, the drawee and the payee, while two parties are involved, in a promis­sory note, the maker and the payee.

(3) A bill of exchange requires acceptance, but a promissory note is itself an acceptance and hence need not be presented for accep­tance.

(4) A bill is drawn by a creditor and payable by the debtors, whereas a promissory note is drawn by a debtor on a creditor.

(5) When a bill is accepted by more than one person, the acceptors are jointly liable on the bill while the makers of a promissory ”note are jointly or severally liable.

(6) The liability of the drawer of a bill is secondary, that is,, the liability arises only when the acceptor does not honour the bill. The liability of the maker of a promissory note is primary.

Q.12. Distinguish between a cheque and a promissory note.

Ans. The points of distinction between a cheque and a promissory note are as follows:-

(1) A promissory note is drawn by a debtor on a creditor, but a cheque, is always drawn on a bank.

(2) A promissory note requires stamp, but a cheque does not require any stamp.

(3) A cheque can be crossed, but a promissory note is not required to be crossed.

(4) A cheque is payable on demand, but a promissory note is payable either on demand or at a future date.

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