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Unit 2: Indian capital market - Practice Quiz

FIN213 — Indian Financial System 60 Questions
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1 What does the Indian capital market primarily deal with?

introduction of Indian capital market Easy
A. Foreign currencies only
B. Commodities only
C. Long-term funds
D. Short-term funds

2 What is the primary objective of SEBI?

objectives and functions of SEBI Easy
A. To issue currency notes
B. To regulate the insurance sector
C. To protect the interests of investors in securities
D. To collect direct taxes

3 What does the acronym SEBI stand for?

objectives and functions of SEBI Easy
A. State Exchange Board of India
B. Securities and Enterprise Bureau of India
C. Securities and Exchange Board of India
D. Stock and Equity Board of India

4 What was the major global event that led to a massive crash in the Indian capital market in 2008?

Capital Market fluctuations during crisis- 2008 crisis and Covid-19 Easy
A. The Brexit Vote
B. The Subprime Mortgage Crisis in the US
C. The Asian Financial Crisis
D. The Dot-com Bubble

5 How did the Indian stock market immediately react to the outbreak of the Covid-19 pandemic in early 2020?

Capital Market fluctuations during crisis- 2008 crisis and Covid-19 Easy
A. It remained stable with no changes
B. Trading was permanently halted
C. It experienced a sharp crash
D. It reached all-time highs instantly

6 Why does SEBI regularly issue new guidelines for the capital market?

recent guidelines of SEBI for Investors' protection Easy
A. To manage the monetary policy of India
B. To print more currency
C. To increase the government's tax revenue
D. To prevent frauds and protect investors

7 In which market are new securities issued to the public for the first time?

Primary and secondary financial market and its issuance Easy
A. Primary market
B. Secondary market
C. Money market
D. Commodity market

8 What is the common name for the secondary market?

Primary and secondary financial market and its issuance Easy
A. New Issue Market
B. Wholesale Market
C. Stock Exchange
D. Derivatives only Market

9 What does IPO stand for in the context of the primary market?

Primary and secondary financial market and its issuance Easy
A. Indian Portfolio Organization
B. Initial Public Offering
C. Internal Profit Objective
D. Interest Payout Order

10 What is the defining characteristic of the money market?

Money market: nature of money market in India Easy
A. It deals in long-term debt instruments
B. It only operates internationally
C. It deals exclusively in equity shares
D. It deals in short-term funds usually up to one year

11 Which of the following is a key benefit of the money market for commercial banks?

functions and benefits of money market Easy
A. It gives them control over national taxation
B. It allows them to buy real estate
C. It helps them issue long-term bonds
D. It helps them manage their short-term liquidity needs

12 Which of the following is a common money market instrument?

money market instruments Easy
A. Debentures
B. Equity Shares
C. Treasury Bills (T-Bills)
D. Mutual Funds

13 Who issues Treasury Bills in India?

money market instruments Easy
A. Reserve Bank of India on behalf of the Central Government
B. State Bank of India
C. Private Corporations
D. Securities and Exchange Board of India

14 Which institution acts as the central bank of India?

Reserve Bank of India- organisation and functions Easy
A. Reserve Bank of India
B. NITI Aayog
C. State Bank of India
D. Ministry of Finance

15 Which of the following is a primary function of the Reserve Bank of India (RBI)?

Reserve Bank of India- organisation and functions Easy
A. Regulating the stock market
B. Providing direct loans to farmers
C. Issuing currency notes
D. Regulating mutual funds

16 Which entity is the primary regulator of the banking system in India?

RBI as a Regulator Easy
A. RBI
B. SEBI
C. IRDAI
D. PFRDA

17 Under which major Act does the RBI derive its powers to regulate banks in India?

RBI as a Regulator Easy
A. Securities Contracts (Regulation) Act, 1956
B. Companies Act, 2013
C. Banking Regulation Act, 1949
D. Consumer Protection Act, 2019

18 What major step did the RBI take to provide immediate relief to borrowers struggling during the Covid-19 pandemic?

steps taken by RBI to deal with Covid-19 crisis Easy
A. It announced a loan moratorium
B. It forced banks to cancel all loans completely
C. It stopped issuing currency
D. It doubled the interest rates

19 How did the RBI attempt to boost liquidity and encourage lending in the economy during the Covid-19 crisis?

steps taken by RBI to deal with Covid-19 crisis Easy
A. By increasing the Cash Reserve Ratio (CRR)
B. By reducing the Repo Rate
C. By increasing the Repo Rate
D. By banning the issuance of new loans

20 Which market provides a platform for investors to liquidate their existing investments?

Primary and secondary financial market and its issuance Easy
A. Secondary Market
B. Insurance Market
C. Primary Market
D. Foreign Exchange Market

21 A rapidly growing infrastructure company requires funds to finance a new highway project that will take 5 years to complete. Which segment of the Indian financial system is most appropriate for raising these funds, and why?

introduction of Indian capital market Medium
A. Call money market, because it allows borrowing on an overnight basis to meet immediate daily expenses.
B. Capital market, because it facilitates the raising of long-term funds required for projects with long gestation periods.
C. Money market, because it offers lower interest rates for infrastructure projects.
D. Foreign exchange market, because infrastructure projects exclusively require foreign currency.

22 When SEBI conducts enquiries and audits of stock exchanges to ensure compliance with fair market practices, which category of its functions is it actively performing?

objectives and functions of SEBI Medium
A. Legislative function
B. Regulatory function
C. Protective function
D. Developmental function

23 SEBI exercises quasi-judicial, quasi-legislative, and quasi-executive powers. Which of the following actions represents its quasi-judicial power?

objectives and functions of SEBI Medium
A. Conducting search and seizure operations for suspicious market activities
B. Drafting regulations in its legislative capacity
C. Passing rulings and orders against entities engaged in insider trading
D. Organizing training programs for intermediaries

24 During the 2008 global financial crisis, the Indian capital market experienced a severe crash despite Indian banks having limited direct exposure to subprime mortgages. What was the primary transmission mechanism for this crash?

Capital Market fluctuations during crisis- 2008 crisis and Covid-19 Medium
A. Aggressive selling and withdrawal of funds by Foreign Institutional Investors (FIIs) facing liquidity crunches at home
B. The complete shutdown of the primary market for government securities
C. The immediate bankruptcy of several major Indian public sector banks
D. Massive default by Indian retail investors on domestic housing loans

25 The Covid-19 market crash in early 2020 was characterized by a rapid decline followed by a 'V-shaped' recovery in the Indian capital market. Which factor primarily drove this swift recovery?

Capital Market fluctuations during crisis- 2008 crisis and Covid-19 Medium
A. A complete ban on short-selling enforced by the government
B. The sudden transition of all Indian companies to purely digital business models
C. Massive liquidity injections by global central banks and increased retail investor participation
D. Immediate resumption of pre-pandemic corporate earnings within a month

26 SEBI recently implemented the 'Margin Pledge/Re-pledge' process for stockbrokers. What is the fundamental investor protection objective behind this guideline?

recent guidelines of SEBI for Investors' protection Medium
A. To allow investors to trade directly without needing a stockbroker
B. To prevent brokers from misusing client securities to meet their own proprietary margin requirements
C. To completely eliminate the use of leverage in the secondary market
D. To guarantee that investors receive a fixed 10% return on their pledged shares

27 An investor has a grievance against a listed company for non-receipt of dividends. Under SEBI's recent investor protection framework, which platform should the investor utilize to ensure time-bound resolution?

recent guidelines of SEBI for Investors' protection Medium
A. Nifty NDS-OM
B. BSE STAR MF
C. SEBI SCORES
D. RBI Ombudsman

28 A listed company wishes to raise additional equity capital but wants to avoid diluting the ownership percentage of its current shareholders. Which issuance method is most appropriate?

Primary and secondary financial market and its issuance Medium
A. Private Placement to a Venture Capitalist
B. Offer for Sale (OFS)
C. Initial Public Offering (IPO)
D. Rights Issue

29 In the book-building process of a primary market issuance, what happens when an investor bids at the 'Cut-off price'?

Primary and secondary financial market and its issuance Medium
A. The investor commits to purchasing the shares at the final price discovered by the company, regardless of what it is within the band.
B. The investor is guaranteed an allotment of 100% of the applied shares.
C. The investor's application is automatically rejected if the issue is oversubscribed.
D. The investor commits to purchasing the shares at the lowest price in the price band.

30 How does an active secondary market directly benefit the primary market?

Primary and secondary financial market and its issuance Medium
A. By fixing the interest rates for corporate bonds issued in the primary market
B. By providing continuous liquidity and price discovery, which encourages investors to subscribe to new primary issues
C. By eliminating the underwriting risk for investment banks
D. By generating the initial capital for unlisted companies

31 The Indian money market is characterized by a 'dichotomous' or dual nature. What does this specifically refer to?

Money market: nature of money market in India Medium
A. The existence of both equity and debt instruments within the same market
B. The separation of domestic currency trading from foreign currency trading
C. The coexistence of the organized sector (banks, RBI) and the unorganized sector (indigenous bankers, moneylenders)
D. The division between primary market issuances and secondary market trading

32 A well-developed money market serves as a vital mechanism for the central bank. Which of the following best explains this function?

functions and benefits of money market Medium
A. It provides a highly sensitive mechanism for the central bank to implement and transmit monetary policy through liquidity management.
B. It guarantees long-term financing for government fiscal deficits.
C. It directly sets the retail inflation rate for the country.
D. It eliminates the need for foreign direct investment in the economy.

33 A highly rated corporate entity needs to raise short-term, unsecured funds for 90 days to meet its working capital requirements. Which money market instrument is most suitable?

money market instruments Medium
A. Call Money
B. Commercial Paper
C. Treasury Bills
D. Certificate of Deposit

34 If a commercial bank faces a temporary shortfall in maintaining its Cash Reserve Ratio (CRR) at the end of the day, which instrument will it predominantly use to borrow funds overnight?

money market instruments Medium
A. Call Money
B. Notice Money
C. Term Money
D. Commercial Bill

35 Treasury Bills (T-Bills) in India are issued at a discount and redeemed at par. If a 91-day T-Bill with a face value of ₹100 is issued at ₹98.50, what does the difference of ₹1.50 represent?

money market instruments Medium
A. The penalty for early redemption
B. The implicit interest yield earned by the investor
C. The brokerage fee paid to RBI
D. The capital gains tax deducted at source

36 As the issuer of currency, the Reserve Bank of India follows the 'Minimum Reserve System'. What does this system mandate?

Reserve Bank of India- organisation and functions Medium
A. RBI must keep minimum cash reserves in all public sector banks.
B. RBI must link the currency issuance directly to the GDP growth rate.
C. RBI must hold 100% backing in gold for all currency notes issued.
D. RBI must maintain a minimum reserve of ₹200 crore, comprising gold and foreign exchange, against the currency issuance.

37 When the Indian Rupee is depreciating rapidly against the US Dollar due to capital outflows, how is the RBI most likely to intervene as the custodian of foreign exchange reserves?

Reserve Bank of India- organisation and functions Medium
A. By freezing all foreign exchange transactions in the country
B. By buying US Dollars and injecting Indian Rupees into the market
C. By selling US Dollars from its reserves to absorb excess Indian Rupees from the market
D. By printing more Indian Rupees to dilute the exchange rate

38 Under its regulatory mandate, the RBI occasionally places commercial banks under the Prompt Corrective Action (PCA) framework. Which scenario would trigger this?

RBI as a Regulator Medium
A. A bank increasing its lending to the priority sector
B. A bank breaching critical thresholds of capital adequacy, asset quality (high NPAs), and leverage
C. A bank reporting exceptionally high profits and expanding its branch network
D. A bank introducing a new digital payment application

39 During the Covid-19 pandemic, the RBI introduced TLTROs (Targeted Long-Term Repo Operations). What was the specific 'targeted' objective of this measure?

steps taken by RBI to deal with Covid-19 crisis Medium
A. To provide zero-interest loans to individual retail borrowers
B. To force banks to deploy the borrowed liquidity specifically into investment-grade corporate bonds, commercial papers, and non-convertible debentures
C. To lend exclusively to the Government of India for healthcare expenses
D. To target and penalize banks with high non-performing assets

40 To alleviate the financial stress of borrowers during the Covid-19 lockdowns, the RBI permitted a six-month loan moratorium. What did this moratorium practically imply for a retail borrower?

steps taken by RBI to deal with Covid-19 crisis Medium
A. The borrower's loan principal was reduced by six months' worth of EMIs.
B. The borrower could defer EMI payments for six months without being classified as a defaulter, though interest continued to accrue.
C. The loan was completely restructured into a permanent zero-interest loan.
D. The RBI paid the EMIs on behalf of the borrower for six months.

41 Which structural shift in the Indian capital market post the abolition of the Capital Issues (Control) Act, 1947, most significantly altered the price discovery mechanism for new equity issuances?

introduction of Indian capital market Hard
A. The transition from screen-based trading to open outcry systems on the Bombay Stock Exchange.
B. The statutory requirement for companies to issue shares strictly at face value without any premium.
C. The transition from merit-based pricing governed by a central controller to a free-market book-building process.
D. The mandate that all new initial public offerings must be fully underwritten by foreign institutional investors.

42 SEBI exercises quasi-judicial, quasi-legislative, and quasi-executive powers. In the context of a complex insider trading investigation, which action specifically represents the execution of its quasi-judicial authority?

objectives and functions of SEBI Hard
A. Drafting and notifying new amendments to the Prohibition of Insider Trading (PIT) Regulations.
B. Passing a final adjudication order imposing monetary penalties and debarring the suspected entities after conducting hearings.
C. Conducting search and seizure operations at the premises of suspected corporate executives.
D. Issuing a circular mandating all listed companies to close their trading windows proactively.

43 Distinguishing between SEBI's regulatory and developmental functions, which of the following initiatives represents a pure developmental function aimed at deepening the Indian capital market?

objectives and functions of SEBI Hard
A. Registering and regulating the working of venture capital funds and collective investment schemes.
B. Permitting internet-based trading and introducing extensive financial literacy campaigns for retail investors.
C. Levying fees or other charges for carrying out the purposes of the SEBI Act, 1992.
D. Prohibiting fraudulent and unfair trade practices relating to securities markets.

44 During the 2008 Global Financial Crisis, Indian equity markets saw massive Foreign Institutional Investor (FII) sell-offs. What structural characteristic of the Indian financial system primarily prevented a systemic banking collapse akin to Western markets?

Capital Market fluctuations during crisis- 2008 crisis and Covid-19 Hard
A. A statutory mandate requiring the RBI to purchase all equities sold by foreign investors.
B. The absence of highly leveraged synthetic derivatives like Collateralized Debt Obligations (CDOs) on Indian bank balance sheets.
C. The total prohibition of short selling in the Indian secondary equity market.
D. The complete isolation of the Indian stock market from international portfolio flows.

45 Analyzing the extreme volatility during the March 2020 COVID-19 market crash, Indian stock exchanges frequently halted trading. What is the specific mechanical threshold for the first market-wide circuit breaker in the Indian equity market?

Capital Market fluctuations during crisis- 2008 crisis and Covid-19 Hard
A. A 20% drop in market capitalization of the top 10 blue-chip stocks.
B. A 5% movement in either the BSE Sensex or NSE Nifty 50, halting trading for 15 minutes.
C. A 10% movement in either the BSE Sensex or NSE Nifty 50, which halts trading for 45 minutes if triggered before 1:00 PM.
D. A 15% movement in the VIX (Volatility Index), immediately closing the market for the day.

46 Contrasting the post-crash recoveries of the 2008 Financial Crisis and the COVID-19 pandemic in India, which phenomenon uniquely characterized the capital market recovery following the COVID-19 crash?

Capital Market fluctuations during crisis- 2008 crisis and Covid-19 Hard
A. A 'K-shaped' recovery driven by rapid digitalization, favoring technology and pharmaceutical stocks while contact-intensive sectors lagged.
B. A 'V-shaped' recovery identical across all sectors without any divergence.
C. An 'M-shaped' double-dip recession isolated entirely to the manufacturing sector.
D. A prolonged 'L-shaped' stagnation solely due to the collapse of the real estate sector.

47 SEBI's mandate transitioning the market to a 'T+1' settlement cycle aims to enhance investor protection and reduce systemic risk. From a clearing corporation's perspective, how does this mathematically impact the Value at Risk (VaR) margin requirements?

recent guidelines of SEBI for Investors' protection Hard
A. It increases the VaR margin requirement by demanding 100% upfront capital for overnight trades.
B. It has no mathematical impact on VaR, as margins are calculated solely on historical stock volatility.
C. It shifts the burden of VaR calculations entirely to retail investors, eliminating clearing corporation liability.
D. It reduces the VaR margin requirement by substantially lowering the time horizon of open counterparty exposure.

48 Under SEBI's recent stringent norms addressing the rise of algorithmic trading utilized by retail investors, how are unregulated Application Programming Interfaces (APIs) mitigated to protect investors?

recent guidelines of SEBI for Investors' protection Hard
A. Brokers must subject all API-based trades to their own risk management systems, treating them equivalently to broker-approved algorithms.
B. Retail investors must register themselves as non-banking financial companies to access API trading limits.
C. APIs are completely banned for retail investors, restricting their use strictly to Qualified Institutional Buyers.
D. Exchanges are required to charge a 5% transaction tax on all API orders to discourage algorithmic latency arbitrage.

49 In a heavily oversubscribed Initial Public Offering (IPO) utilizing the book-building process, how are shares mathematically allocated to the Qualified Institutional Buyer (QIB) segment under SEBI (ICDR) Regulations?

Primary and secondary financial market and its issuance Hard
A. QIBs are guaranteed at least one minimum trading lot, with the remainder distributed evenly.
B. Shares are allotted on a completely randomized lottery basis, regardless of bid size.
C. Shares are allotted on a proportionate basis in relation to the magnitude of oversubscription in the QIB category.
D. The largest institutional bidder receives their full allocation first, with remaining shares cascading down to smaller bidders.

50 A listed company launches a Rights Issue fully underwritten by an investment bank. Due to adverse secondary market conditions, the market price of the stock falls below the rights issue subscription price before closure. What is the underwriter's exact regulatory obligation?

Primary and secondary financial market and its issuance Hard
A. The underwriter can invoke a force majeure clause to cancel the issue entirely.
B. The underwriter must fulfill their devolvement liability by subscribing to all unsubscribed rights shares at the pre-agreed issue price.
C. The underwriter must immediately dilute the issue price to match the current secondary market price.
D. The underwriter is obligated to purchase the unsubscribed shares from the secondary market to stabilize the price.

51 The Indian money market exhibits a persistent structural dichotomy between the organized sector (banks, primary dealers) and the unorganized sector (indigenous bankers, moneylenders). Which macroeconomic friction does this dichotomy most prominently create?

Money market: nature of money market in India Hard
A. It eliminates the need for a sovereign yield curve since unorganized rates dictate government borrowing.
B. It triggers automatic capital flight from the organized equity markets to foreign jurisdictions.
C. It forces the RBI to maintain a fixed exchange rate for the Indian Rupee against the US Dollar.
D. It creates an imperfect and lagged transmission of the RBI's monetary policy rates to the broader grassroots credit market.

52 From the perspective of macroeconomic liquidity management, why does the Repo market provide superior and more stable price discovery compared to the Call Money market?

functions and benefits of money market Hard
A. Repo transactions are backed by sovereign securities, virtually eliminating counterparty credit risk and isolating the pure liquidity premium.
B. Repos are uncollateralized, allowing participants to borrow infinitely based on credit ratings.
C. Repos are long-term equity instruments, inherently filtering out short-term market noise.
D. The Call Money market is exclusively restricted to foreign institutional investors, skewing domestic rates.

53 A Commercial Paper (CP) with a face value of ₹5,00,000 is issued for 91 days at an annualized yield of . Using the standard discount yield formula, what is the approximate issue price of the CP? (Assume a 365-day year, )

money market instruments Hard
A. ₹4,85,120
B. ₹4,90,222
C. ₹4,95,350
D. ₹4,60,000

54 If the yield curve for Indian Treasury Bills (91-day, 182-day, and 364-day) becomes steeply inverted, what macroeconomic consensus does this generally signal regarding the RBI's near-term monetary stance?

money market instruments Hard
A. The market anticipates aggressive monetary tightening and repo rate hikes in the near future.
B. The RBI is entirely ceasing the issuance of 364-day Treasury Bills due to fiscal surplus.
C. The market anticipates aggressive policy rate cuts in the near future, typically due to an expected economic slowdown.
D. The market expects inflation to spiral out of control in the long term, requiring permanently high rates.

55 Section 7 of the RBI Act, 1934, grants the Central Government the extraordinary power to issue direct operational mandates to the RBI. Under what strict legal condition can this power be exercised?

Reserve Bank of India- organisation and functions Hard
A. Whenever foreign exchange reserves fall below the equivalent of 3 months of imports.
B. Only in the public interest, and explicitly after mandatory consultation with the Governor of the RBI.
C. Whenever the ruling political party faces a fiscal deficit exceeding 5% of GDP.
D. Solely during a declared National Emergency under Article 352 of the Constitution.

56 Operating as the 'Manager of Foreign Exchange' under FEMA, 1999, how does the RBI structurally intervene to manage extreme, sudden depreciation of the Indian Rupee without permanently shrinking domestic liquidity?

Reserve Bank of India- organisation and functions Hard
A. By enforcing mandatory conversion of all resident domestic bank accounts into USD accounts.
B. By printing excessive domestic currency and purchasing SDRs from the IMF.
C. By banning all imports into the country until the currency stabilizes.
D. By outright selling US Dollars in the spot market and simultaneously entering into a buy/sell swap to replenish reserves later.

57 Under the RBI's Prompt Corrective Action (PCA) framework, if a Scheduled Commercial Bank breaches the most severe threshold (Risk Threshold 3) for Net NPAs and CRAR, which of the following regulatory actions is mandatorily applied?

RBI as a Regulator Hard
A. Suspension of the bank's ability to clear interbank RTGS transactions for 90 days.
B. Immediate privatization of the bank by auctioning its assets to foreign institutional investors.
C. Conversion of all existing retail deposits into equity shares of the bank.
D. Mandatory restrictions on management compensation and directors' fees, alongside halts on dividend distribution and branch expansion.

58 Under the Basel III framework implemented by the RBI, the Capital Conservation Buffer (CCB) is set at of Risk-Weighted Assets. What is the explicit consequence if a bank's capital ratio falls within the CCB range, effectively eroding the buffer?

RBI as a Regulator Hard
A. The bank must automatically double its Cash Reserve Ratio (CRR) maintained with the RBI.
B. The bank faces mandatory limitations on discretionary distributions, such as dividends, share buybacks, and employee bonuses.
C. The bank's banking license is immediately revoked by the RBI.
D. The government must immediately inject taxpayer funds to restore the buffer.

59 To counter the liquidity freeze during the COVID-19 crisis, the RBI introduced Targeted Long-Term Repo Operations (TLTROs). What was the precise structural mandate for commercial banks availing liquidity under the 'TLTRO 2.0' scheme?

steps taken by RBI to deal with Covid-19 crisis Hard
A. At least 50% of the availed funds had to be aggressively channeled to Non-Banking Financial Companies (NBFCs) and Micro Finance Institutions (MFIs).
B. The funds could only be utilized to forgive unsecured retail loans under ₹2 Lakhs.
C. 100% of the funds had to be invested in central government sovereign bonds to finance the fiscal deficit.
D. Banks were required to invest the funds entirely in highly rated AAA corporate bonds of large-cap companies.

60 During the height of the COVID-19 pandemic, the RBI utilized 'Operation Twist' as an unconventional monetary policy tool. What was the exact mechanistic execution and primary objective of this operation regarding the sovereign yield curve?

steps taken by RBI to deal with Covid-19 crisis Hard
A. Complete monetization of the fiscal deficit by buying government bonds directly from the primary market.
B. Converting all outstanding 10-year bonds into perpetual zero-coupon bonds to relieve the government's interest burden.
C. Simultaneous purchase of long-term government securities and sale of short-term securities to flatten the yield curve and lower long-term borrowing costs.
D. Simultaneous purchase of short-term securities and sale of long-term government securities to steepen the yield curve and attract foreign deposits.
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