COMMERCE

Module 1 – Production and Inventory Management.

Q-1. What is production management? State its objectives.

Production is the first and primary function of management because unless
goods are produced, they cannot be marketed. Production management
includes planning, organizing, staffing, directing, and controlling the activities of
the production function. It involves taking all the decisions which are required
to be taken for producing goods or services according to specifications at the
right time and costs.
The objective of the Production Management:
So the objective of production management is to produce goods and services of
the right quality and quantity at the right time and right manufacturing cost.
1. Right quality: Product quality is a relative term. The objective of production
management is to produce goods of the quality which is required by the
customers. The right quality is not necessarily the best.
2. Right Quantity: The quantity of production should be decided after
forecasting the demand for the product. The decision on the size of production
should be the right decision to avoid both excess or deficit production.
3. Right Time: The goods should be produced and supplied when they are
required by the customers.
4. Right manufacturing cost: The cost of manufacturing is decided before
actually producing the product. This cost can be considered as a standard or pre-
established cost. An attempt should be made to produce the product at this
standard cost.

Q-2. What is the scope of Production Management?

The scope of production management involves taking various decisions related
to the production activities. These decisions are of two types.
A] Strategic decisions
These decisions are taken for deciding the product and production system
and time taken for Production. The strategic level decisions are
1) New Product Identification and Design: Constant changes take place
in consumer likes & dislikes tastes, expectations. The organization may
require introducing a new product or innovating or modernizing the
existing one to meet the changing needs and demands of the consumers
so identifying and designing the new product is the strategic decision of
production management.
2) Process Design / Layout and Planning: It involves taking decisions as
regards the use of the appropriate technology for conversion of raw
materials into products and planning of the process of production which
can include deciding process design, determining the work stations, and
the flow of work.
3) Deciding Location for the production process: Deciding the location for
the manufacturing unit is a very crucial one. It is taken after considering
factors like the supply of raw materials, nearness to market, availability of
transportation facilities, and labor, climatic conditions, and so on.
4) Design of Material Handling: System Material handling systems should
be such as to minimize the cost and time and labour involved in material
handling. The material handling system is decided after considering
various factors such as the distance between the work stations, intensity
of flow or traffic and shape and nature of materials to be handled.
5) Capacity Planning: Deciding the size of production should be done after
considering various factors such as demand forecasting, availability of
resources, Government regulations, economies of large scale, and so on.

B. Operating decisions :
These decisions are short-term and are acquired to be taken for a smooth
production process. The operational level decisions are
1) Production Planning: It relates to taking production-related
decisions on day to day basis such as allocation of work among the
workers, repairs, and maintenance of machinery, fixing quotas and
targets for the workers, and so on.
2) Production Control: The use of production control techniques aims
at finding out whether the activities are carried out as per the plan. It
involves comparing actual output with the standard output and if the
actual output is less than the standard output, then measures are
taken to increase the output.
3) The other activities: The other activities include inventory control,
repairs, and maintenance and replacement of machinery, cost
reduction and cost control, time and motion study providing proper
working conditions, and so on.

Q-3. What is the importance of Production Planning and Control?

Production Planning and control is the managerial function which
includes deciding various issues related to the production process
such as the use of the human resource, raw materials, machines
working conditions, training to workers, supervision, fixing of targets,
etc. It is the technique to plan every step in a long series of the
production process.
Importance of Production Planning and Control can be given with the
help of the following points –
1)Better service to customers
It helps in providing better services to customers in terms of a better
quality of goods at reasonable prices and timely delivery of goods. It
helps in improving customer relations.
2) It helps in a smoother, timely, and efficient production process
and helps in maintaining necessary stock levels.
3) It facilitates effective use of resources such as labour,
machinery & equipment, raw materials and thereby reducing the
cost of production and requirement of working capital.
4) Improvement in the morale of the workers
Efficient production planning & control helps the workers to do
their jobs efficiently. It improves job satisfaction and thereby the
morale of the workers.
5) Image of the organization
A proper system of production planning and control helps in
smooth production operations in an organization. It helps in the
timely delivery of standard quality goods and improving customer
satisfaction. Improved customer satisfaction results in increased
sales, increased profits, and ultimately good public image of the
organization.
6) Coordinates departmental activities
Proper production planning and control help in coordinating the
activities of the production dept with other departments such as
finance, marketing, human resource departments.
7) Helps to face competition
With improved performance of production dept, the organization
can improve marketing performance and thereby can face market
competition effectively.
8) Provides better work environment
Production planning and control help in providing better work
conditions to the workers to improve their efficiency such as
proper lighting, ventilation, canteen facility, safety measures and
so on.

Q-4. What are the steps in Production Planning and Control?

1. ROUTING
a) Meaning
Routing is the first step in production planning and control. It
involves the selection of the path of work and the sequence of
operations for the completion of the production process in an
orderly manner.
b) Objective
The basic objective of routing is to move the work through a
variety of combinations of machines capable of performing the
operations required. It determines the best and the cheapest
sequence of operations.
c) Procedure
1. Determining what to make and what to purchase.
2. Determining the material required.
3. Determining the manufacturing operations and their
sequences.
4. Determining scrap factor.
5. Preparation of production control forms.
6. Determining lot sizes.
7. Preparation of route sheets.
2. SCHEDULING:
a) Meaning
Schedule means a plan for carrying out a task. It includes a list of
intended events and times. Scheduling refers to deciding the
starting and the finishing date and time of each operation in the
manufacturing process. It involves the preparation of time table of
production activities. Scheduling aims at achieving the required
output with a minimum of delay and disturbance in the
production process.
b) Objective
The main objective of scheduling is to ensure the completion of
each operation or activity on time. Scheduling ensures continuity
in the production process.
c) Procedure
1. Preparation of timetable.
2. Listing out all production activities.
3. Finalizing a list of all production activities.
4. Determining starting time of every activity.
5. Determining the finishing time of every activity.
6. Availability of plant capacity, number of operators, and
materials required.

3. DISPATCHING
a) Meaning
Dispatching is concerned with the execution of the production
plan. It is based on the route sheets and schedule sheets.
Production orders are issued to the factory or department and
instructions are issued to execute the planned production.
Dispatching is the action element of production planning and
control.
b) Objective
The purpose of dispatching orders and instructions is to see that
the machine operators understand what is expected of them and
that they do not right things at the right time and complete the
production on time.
c) Procedure
1. Arranging machines and tools in a proper manner.
2. Procuring raw materials as per the requirement.
3. Assigning work to the machine operators and others
4. Issuing orders and instructions to the workers.
5. Maintaining a proper record of the start time and finish time of
each operation.
6. Dispatching procedure may be centralized or decentralized.
7. Expediting work as per original plan.
8. Control of the progress of all operations.

4. FOLLOW-UP
a) Meaning
Follow-up refers to the monitoring of actual performance. It helps
in taking the necessary corrective measures to obtain the right
quality and quantity of production.
b) Objective
The basic objective of follow-up is monitoring actual work in the
production process and to introduce remedial measures.
c) Procedure
1. Measuring actual production.
2. Comparing actual production with planned targets.
3. Finding out causes of deviations, if any.
4. Listing out various corrective measures to correct deviations.
5. Studying or analyzing the corrective measures.
6. Selecting the best corrective measures.
7. Implementation of corrective measures. 8. Review of corrective
measures

Q-5 What is Production System? Explain its Types?

Production is a process by which goods and services are produced
for consumption. A typical production system comprises three
main components i.e. inputs, conversion process, and output. A
combination of various production operations employed to
produce goods and services is known as a production system. A
production system is a group of subsystems. Each sub-system
performs a distinct function. According to Buffa and Sarin,a
production system may be defined as "the means by which we
 transform resource inputs to create useful goods and services as
outputs"
Types of Production Systems
The production systems can be broadly divided into two groups:
1. INTERMITTENT SYSTEMS
In this system, goods are manufactured to supply the
customers as per their orders. In this case, there is an
intermittent flow of materials.
a) Job production
In jobbing production, one or few units of a product are
produced to the consumer's requirement within the given
date. The price is fixed before the contract. Here, the
manufacturer accepts and executes customer's orders e.g.
printing of visiting cards, calendars, diaries, key chains, etc.
b) Batch production
Batch production is the production of several identical units
according to specific orders or based on demand forecasts. The
items are produced in batches or lots. There exists more
standardization and generally, there are repeat orders.
Products are demanded in fairly large quantities e.g.
manufacturing of medicines, chemicals, lubricants, etc.
c) Project production
In project production, a single assignment of complex nature is
undertaken for completion within the given period and within
the estimated expenditure. For example, construction of the
building, roads, dams, shipbuilding, etc

2. CONTINUOUS SYSTEM
Continuous production is a method used to manufacture,
produce, or process materials without interruption. Here,
goods are produced constantly as per demand forecast. Goods
are produced on a large scale for stocking and selling. They are
not produced on consumer's order. The inputs and outputs are
standardized along with the production process and sequence.
a) Mass production
In mass production, items are produced on a large scale and are stocked
in warehouses till they are demanded in the market. The items are
manufactured with the help of a single operation or a series of
operations. Examples of mass production systems include the
manufacture of toothpaste, soaps, dairy products, textile units, etc.
b) Process production System
In-process production system, a single product type is produced and
stocked in warehouses till it is demanded in the market. The flexibility of
such a plant is almost zero as only one product can be produced.
Examples of process production systems include steel, cement, paper,
sugar, electronic items, toys, etc.
c) Assembly production
Assembly production system developed in the automobile industry in
the USA. A manufacturing unit prefers to use an assembly line as it helps
to improve the efficiency of production. Production cost comes down
due to the use of flow production methods. Assembly line production
system is convenient when a limited variety of similar products is to be
manufactured on a mass scale or in large batches continuously. The
assembly production system is employed in the manufacturing of
automobiles, radios, T.V., and other electronic products.

Q-6. What is Productivity? What are the factors influencing

Productivity?
Productivity is the ratio of output to inputs. It refers to the volume of
output produced from a given volume of inputs or resources. It is the
amount of output per unit of input. Productivity reflects the amount of
product created by one unit of a factor of production over a specific
period. Productivity expresses the relationship between the outputs
from a system and the inputs which go in its creation. Productivity can
be found out by the following formula
Productivity = Output/Input
 According to Peter Drucker, "productivity means that the balance
between all factors of production that will give the greatest output for
the smallest effort"

Factors Influencing Productivity

The factors influencing productivity are explained below:
a) Technological factors
The technological factor is the most important. It includes proper
location, layout, and size of the plant and machinery, the correct design
of machines and equipment, research and development, automation,
and computerization, etc. If the organization uses the latest technology
then its productivity will be high
b) Production factors
The production of all departments should be properly planned,
coordinated, and controlled. The right quantity and quality of raw materials
should be used for production. The production process should be simplified
and standardized. All this will increase productivity.
c) Organisational factors
A simple type of organization should be used. The Authority and
responsibility of each individual and department should be clearly defined.
The line and staff relationships should also be clearly defined. So, conflicts
between line and staff should be avoided. There should be a division of
labour and specialization as far as possible. All this will increase
productivity.
d) Human factors
The right men should be selected for the right posts. They should be given
proper training and development. They should be provided with very good
working conditions and working environment. They should be properly
motivated by financial, non-financial, and positive incentives; Incentive
wage policies should be introduced. Job security should be given. Workers
should be given importance. There should be proper transfer, promotion
demotions, and other personnel policies. All this will increase the
productivity of the organization.
e) Financial factors
Finance is the lifeblood of modern business. There should be proper control
over both fixed and working capital. There should be proper financial
planning. Capital expenditure should be properly controlled. Both over and
under capitalization should be avoided. The management should see that
they get proper returns on the capital which is invested in the business. If
the finance is managed properly the productivity of the organization will
increase.
f) Managerial Factors
The management should be scientific, professional, enlightened,
futureoriented sincere, and competent. They should possess organizational
capacity, imagination, judgment, and willingness to take a risk. They should
make optimum use of the available resources to get maximum output at
the lowest cost. They should use the recent techniques of management and
production. They should develop better relations with the employees and
the trade unions. They should encourage the employees to give
suggestions. They should provide a very good working environment and
they should motivate the employees to increase their productivity. Efficient
management is the most significant factor in increasing productivity and
decreasing cost
g) Governmental factors
The management should have a piece of proper knowledge about the
government rules and regulations. They should also maintain good relations
with the government monetary facilities, tax concessions for research and
development activities, subsidies, facilities for technology transfer,etc
should be provided by the government. Government has to provide
encouragement and facilities to make the productivity movement popular
in the country.
h) Sociological factors
Productivity also depends on sociological factors such as the attitude and
behavior of investors, customers, suppliers, etc. The attitude of workers and
society towards new inventions, social values of the society, community
differences, caste, race, and religion, etc.
i) Natural factors
Productivity also depends on natural factors such as geographic locations,
climatic conditions availability of different kinds of natural resources, etc.

Q-7. What are the measures for improving Productivity?

Improving productivity is essential for earning more profits and being
competitive in the business. Productivity in manufacturing is the result of
efficient employees, proper tools, equipment and machinery, and processes
so the management has to look into these areas for improving productivity.
For this, the following measures can be suggested:
1. Study and analysis of the existing system
The management has to identify study and analyze the weak areas as for as
the employees, technology, and processes are concerned.
2. Improvement in the production process
The production process can be improved by making proper utilization of
resources such as workers, technology, materials, floor space and time
available, and so on.
3. Providing training to workers
Training has to be provided to workers from time to time to enhance their
skills knowledge and attitudes with proper training, the workers can do
their jobs efficiently and can get job satisfaction.
4. The setting of realistic targets
To improve worker efficiency it’s important to set realistic, clearly defined
objectives. It improves the sense of responsibility and loyalty and job
satisfaction of the workers.
5. Use of modern technology
In mechanical production, it is important to update technology, to improve
productivity and competitiveness in an ever-changing business
environment.
6. Repairs and maintenance
Tools, equipment, and machinery are required to be repaired and
maintained periodically to maintain a smooth flow of the production
process and to ensure industrial safety.
7. Optimum utilization of resources
The managers have to ensure the proper use of resources such as
manpower, money, material, and machinery. Wastage or misuse of any
kind should be avoided.
8. To encourage team spirit
The manpower should develop proper coordination and communication
among the workers so that they work as a team towards the achievement
of common goals and targets.

Q-8. What is Inventory Control? Explain its Objectives.

"Inventory control is the process whereby the investment in materials and
parts carried in stocks is regulated within the pre-determined limits set
asper the inventory policy established by the management"
OBJECTIVES:
The main objectives of inventory control are as follows,
a) Protection of Stores: Inventory control is directed towards protecting
stores against theft, unauthorized use, and wastage. This can be done by
making it difficult for employees to gain unauthorized possession of
materials.
b) Better service to customers: If the company maintains a proper
inventory of raw materials, then it can deliver its products in time. So, it can
deliver the finished goods to the customers in time. Similarly, if the
company has a proper inventory of finished goods then it can satisfy the
additional demand of the customer.
c) Continuity of production operations: Proper inventory control helps to
maintain continuity of production operations. This is because it maintains a
smooth flow of raw materials. So, there are no shortages of raw materials.
d) Better returns on investment: Shareholder's wealth can be maximized
and a better return on their investment is possible if the inventory is at an
optimum level. Inventory control ensures the proper use of limited funds.
e) Buffer to reduce uncertainty: There can be an irregular supply of raw
materials due to transportation problems or even due to natural causes. In
such a scenario there arises a need to have a buffer stock to protect against
such vagaries. Buffer stock maybe even sometimes necessary to meet the
unexpected surge in demand.
f) Ensures continuity of supply: Inventory control explains when to order
and how much to order. It ensures continuity of supply of uniform quality of
goods at the lowest cost. It is possible to calculate fluctuations in the supply
of new materials and take preventive steps to build the inventories.
g) Useful during peak season: Some companies adopt a strategy of
producing during the slack season when the cost of production is less. This
excess stock can be effectively sold at a higher price during peak season,
The reduced cost during the slack season more than offsets the cost of
maintaining inventory.
h) Avoid duplication in ordering: Inventory control avoids duplication in the
ordering of stock. This is done by having a separate purchase department.
This department will do all the purchasing for the organization. No other
department is allowed to do purchasing.
i) Focus on Inventory: In a production unit, inventory control focuses on
materials control because the main concentration is on the physical
product. In the service sector, the focus is on service which is consumed
promptly. The main concentration is more on the supply of service and less
on materials. For example banks, transport companies, educational
institutions, etc.
j) Avoid wastage: Inventory control helps to maintain a check on the loss of
materials due to carelessness or pilferage. If there is no proper inventory
control, then there are more chances of carelessness and pilferage by the
employees, especially in the store-keeping departments
Q-9. What are the Techniques of Inventory Control?
There are several techniques of inventory control. Some of the commonly
used techniques are as follows.
a) ABC Analysis:
ABC (Always Better Control) analysis is a basic technique of inventory
control. This technique can be used for all aspects of materials
management such as verification of bills, purchasing, receiving,
inspection, store-keeping, issue of stores, inventory control, etc. ABC
analysis classifies all the items in the inventory into three groups i.e. A
group, B group, and C group A group of items has a high value although
their number may be low. B group of items are in between with average
value and number. C group of items has very low value but their number
may more. ABC analysis provides a basis for selective inventory to a
small number of items which account for most of its inventory costs. So,
it can concentrate on controlling these items, on the other hand, low
cost, and high volume items need not be closely controlled.
b) Economic Order Quantity (EOQ): In Economic order Quantity, the
fixed order quantity of materials is ordered when the stock on hand
reaches the re-order point. The re-order point is the inventory level at
which the stock should be re-ordered for the smooth flow of production.
c) Just-in-Time (JIT): The Just-in-Time technique was started by a
Japanese company. Here the company does not have a warehouse and it
does not maintain any inventories at any stage of production. The exact
quantities of materials are purchased at the right time at each stage of
production. A truck delivers raw materials at one gate at the same time
truck will take finished goods from another gate to the market. This
system can't be used by all companies for all materials. However, in
India, Maruti Udyog Ltd, and Food specialist Ltd have successfully used
the JIT technique.
d) CARDEX system: In the Cardex system, cards are vertically arranged in
a tray and kept in cabinets. Posting in this card may be done manually.
However, nowadays computers are taking over the place of manual
posting. The cards are known as 'stock control cards' are of different
types, sizes, and colors. The cards indicate the position of stock which
includes stock of items ordered, stock items received from suppliers,
stock of items issued, the balance of stock, etc.
 e) The maximum-minimum system: It refers to the maximum, minimum
quantity of inventory. Maximum inventory is that quantity which the
company must keep in stock, when the stock reaches its minimum
quantity, an order is placed to bring the stock up to the maximum level.
f) Two-Bin system: Here the materials are kept in two bins. The first bin
is locked and kept as reserve stock. The second bin is kept open,
materials are used from the second bin for the production process.
When the material from this bin is over, an order is placed for
purchasing more materials. Then the first bin is opened and the
materials are used from this bin.
g) MAPICS (Manufacturing Accounting and Production Information
Control System): MAPICS is a computerized common data-based system
for manufacturing information and control. In simple words, entire data
relating to manufacturing i.e. the inventory required, the production
schedule, type of stock, the cost involved,etcare stored in the computer.
Control over stock becomes easy as any information relating to stock
level is readily available. In this system, there are various modules for
control. Modules can be relating to product data management, material
requirements planning, inventory management, and so on.
h) Inventory turnover ratio (ITR): This technique of inventory control
uses accounting ratios such as Inventory Turnover Ratio. This technique
establishes the relationship between average inventory and cost of
inventory consumed or sold during a fixed period. The following formula
is used to calculate the inventory turnover ratio

When consumption is made between current years inventory ratio with

those of past years, it will reveal information such as obsolete, fastmoving
items, and slow-moving items.
Q-10. What is the importance of Scientific Inventory Control System?
The purpose of the Scientific Inventory Control system is to avoid the
dangers of overstocking and under stocking of materials, work-inprocesses,
and finished products.
Importance of Scientific Inventory Control System:
1. It ensures smooth flow of production processes by making the right
quality of materials at right time.
2. It reduces ordering cost
There are certain overhead costs involved in ordering supplies. It is possible
to avoid frequent ordering of requirements if the organization has a
scientific inventory control system.
3. It minimizes locking up of working capital in inventories
With a proper inventory control system, it is possible to minimize the
locking up of working capital in excess inventories and to improve the
liquidity position of the firm.
4. It helps in the supply of goods as per the market demand
If there is sufficient stock of goods in hand, it is possible to supply goods as
per the demand. It helps to satisfy customers and improve the market
image.
5. It helps in getting quantity discounts
For bulk orders, the organization gets the benefits of trade discounts from
the suppliers. These discounts can reduce the cost of goods and increase
profits.
6. It helps in taking the advantage of price fluctuations
The firm can make purchases in bulk lots, when the prices of raw materials
are low, thereby reducing the cost of raw materials. The firm can also take
the benefit by marketing goods when the prices are higher. Thus, by taking
the advantage of price fluctuations, the firm can maximize profits.
7. It helps in deciding timely replenishment of stocks
A proper inventory control system helps in keeping up-to-date records of
the inventories. It helps the firm to avoid thefts, wastages, and leakages of
inventories. These records also help in deciding about the timely ordering of
stocks.
 COMMERCE
Module 2 – Quality Management

Q-1. Define Quality. What are the dimensions of Quality?

Quality is the degree to which a product, process, or service satisfies a
specified set of attributes or requirements. It is a relative term because
specifications or requirements differ from person to person or organization to
organization.
Dimensions of Quality
The following are the dimensions of quality that can be used to
determine/decide the quality characteristics.
1. Performance: Performance of a product/service refers to a product's
primary operating characteristics. It decides whether it can perform well to
fulfil the need or requirements of the consumer.
2. Features: Features are additional or supplementary characteristics that
enhance the utility or performance of the product/service. These features
supplement the basic functioning of the product/service.
3. Reliability: Reliability indicates the specified working life of the product, and
it’s a kind of assurance that the product can be used for the specified period
without fail.
4. Conformance: The dimension of conformance refers to the degree to which
a product design and operating characteristics meet established standards. It is
a kind of quality assurance given by the organization to the customers.
5. Durability: Durability refers to the length of a product’s life. With proper
handling, repairs, and maintenance, the product’s life can be increased to a
certain limit.
6. Serviceability: Serviceability refers to how efficiently the organization can
provide repairs and maintenance service to the customers if the product fails
to operate.
7. Aesthetics: Aesthetics is the relative / subjective term and it refers to how
the product looks, feels, sounds, tastes, and smells. It is a matter of personal
performance a judgment.
8. Perceived Quality: Very often consumers do not get or have complete
information about a product’s or service’s attributes. They may select the
particular brand based on other factors such as the organization’s and brand’s
image, advertising message, feedback from the customers, and so on.

Q-2. What is cost of quality? State the types of quality cost.

Cost of quality refers to the cost involved in activities and resources for
preventing detecting and remediating manufacturing of poor quality of
goods/services.
Quality costs are categorized / Types into four main types and they are –
1. Prevention Costs: It is always better to take measures to prevent defects in
manufacturing products. The costs which are incurred to avoid or minimize the
defects in manufacturing costs are known as prevention costs. Such costs can
include costs incurred for improvement of manufacturing processes, training
to workers, repairs, and maintenance of machinery, etc.
2. Appraisal Costs: Appraisal or Inspection costs are those costs that are
incurred to identify defective products before they are sold to customers.
These costs include supervision or inspection costs for maintaining a team of
inspectors. It helps to ensure the production of products with required quality
standards.
3. Internal failure costs: Internal failure costs are those costs that are incurred
to remove defects from the products before selling them to customers. They
include the cost of rework, rejected products, scrap, etc.
4. External failure costs: External failure costs are incurred if the defective
goods are sold to customers. They include the costs like warranties
replacements, sales returns, etc. It also covers the damages such as spoiling of
market reputation & goodwill unsatisfied customers reduced sales and profits.
Q-3. Define Quality Circle. What are the features of Quality circle?
A quality circle is a small group of volunteered employees from the same work
area, doing similar work, who meet regularly to identify, analyse and solve
problems in their work field.
A quality circle is a small group of employees who voluntarily join hands to
solve day-to-day work-related problems such as wastage of materials, quality
of raw materials, tools, semi-finished and finished goods, work environment,
scheduling, maintenance of machinery, safety measures, and so on. They solve
the problems with the guidance and advice of their supervisor.
The following are the characteristics/features of the quality circle:
1. It is a group of workers/employees doing a similar kind of job.
2. It is a group of few members maybe three to ten to achieve better
communication and coordination.
3. Members join the circle voluntarily. They feel the need to identify and solve
work-related problems.
4. Generally, meetings of the circle take place for at least an hour every week
at a time suitable to all members.
5. The quality circle is formed basically to find out solutions to the workrelated
issues/problems. So the supervisor, who is in charge of the work, generally acts
as a leader of the group.
6. The members of the group are concerned only about the issues related to
their work area only.
7. After studying and analysing the problem related to the work, the members
collectively find out the solutions for the problems and they are forward to the
management for their approval.
After the management’s approval, the circle members can implement the
measures for overcoming the problems.
Q-4. Write the meaning and importance of Total Quality Management(TQM).
Total Quality Management is a comprehensive concept and not related only to
the quality of goods and services. It is a wide term that is concerned with an
overall improvement of the system, techniques, and staff of the organization.
Total quality management is a preventive approach and not a corrective one. It
aims at producing the best possible product and service through regular
innovation. It believes in doing the right things the first time. TQM is a strategic
approach to produce the best possible product and service through constant
innovation and timely action. It is always focused on the requirements of the
customers both internal and external.
The following is the importance of Total Quality Management
TQM helps reduce total quality costs. In other words, it aims to produce
superior quality products and services so that no additional costs are borne
later. Many companies like Apple, Microsoft, etc. implemented TQM techniques
to reduce manufacturing costs, saving billions of dollars.
b) Enhanced Productivity: Some organizations offer superior quality resources,
high-end infrastructure and excellent technology—all of which are instrumental
in motivating employees. With improved standards of work and better working
conditions, employees are encouraged to maximize their output.
c) Lesser Redundancy: Every organization aims at improving productivity and
profitability. TQM uses a systematic approach to reduce any duplication of tasks,
therefore saving time and fully utilizing available resources.
d) Improved Innovation Process: As we’ve already established, TQM includes a
research phase. Organizations collect data about any current challenges or
problems to devise effective solutions. Some organizations rely on unique
strategies to get to the root of a problem. For example, businesses often use the
A/B testing method to compare two versions of the same strategy and
implement the one that produces better results.
e) Continual Improvement: As we’ve already established, TQM includes a
research phase. Organizations collect data about any current challenges or
problems to devise effective solutions. Some organizations rely on unique
strategies to get to the root of a problem. For example, businesses often use the
A/B testing method to compare two versions of the same strategy and
implement the one that produces better results.
f) Effective Communication: TQM techniques push individuals to collaborate
and support each other for the greater benefit of an organization. Increased
teamwork and crossfunctional collaboration prompt everyone to strive for
continuous improvement. For example, clear communication enables a
production chain that functions seamlessly because everyone is on the same
page.
g) Holistic Approach: To Management: Many organizations struggle with low
employee engagement. TQM helps workplaces bring behavioral changes by
facilitating self-development, teamwork and improved employee engagement.
Individuals show more interest in their roles because the organization prioritizes
their well-being and job satisfaction.
h) Increased Goodwill: Organizations can establish quality standards for
goods/services using TQM. Internal stakeholders (employees and investors) get
lucrative incentives and profitable return on investment. External stakeholders
(customers and clients) get superior quality products and services. The result:
positive brand image and goodwill in the long-run
i) Satisfied Customers: High-quality products that meet customers’ needs
results in higher customer satisfaction. High customer satisfaction, in turn, can
lead to increased market share, revenue growth via upsell and word-of-mouth
marketing initiated by customers.
j) Well-defined cultural values: Organizations that practice TQM develop and
nurture core values around quality management and continuous improvement.
The TQM mindset pervades across all aspects of an organization, from hiring to
internal processes to product development.
Q-5. What is Six Sigma? Explain the steps in Six Sigma.
In 1986, Bill Smith, a Motorola engineer, developed the six sigma program. Six
Sigma is a set of tools, techniques, and strategies designed for process
improvement. Six Sigma attempts to improve the quality of process output by
identifying and removing the cause of defects or errors. It minimizes variability
in manufacturing and business processes. Under six Sigma Motorola defined six
standard deviations of variation which could be squeezed within the limits
defined by their customer's specification.
The steps in Six Sigma are as follows:
1. DEFINE PHASE:
There are five high-level steps in the application of Six Sigma to improve
the quality of output. The first step is to Define. During the define phase,
the important major takes are undertaken i.e. formation of project team,
document customers core business processes, develop a project charter
and develop the Suppliers, Input, Process, Output, Customers (SIPOC)
process map. This step helps to know who the customer or end-user is,
their resistance issues, and requirements. You should also have a clear
understanding of goals and the scope of the project including budget,
time constraints, and deadlines.

2. MEASURE PHASE:
The second step or phase of Six Sigma is a measured phase. During the
measure phase, the overall performance of the core business process is
measured. There are three important part of the measure phase
i) Data collection plan and data collection: A data collection plan is
prepared to collect the required data. This plan includes what type
of data needs to be collected, what are the sources of data etc. The
reason to collect data is to identify areas where current processes
need to be improved.
ii) Data evaluation: At this stage, collected data is evaluated and Sigma
is calculated. This gives the approximate number of defects.
iii) Failure mode and Effects Analysis (FMEA): The final segment of the
measure phase is called FMEA. This refers to preventing defects
before they occur. The FMEA process usually includes rating
possible defects or failures.
3. ANALYSE PHASE:
Six Sigma aims to define the causes of defects, measure those defects,
and analyse them so that they can be reduced. Five specific types of
analysis help to promote the goals of the project. These are source
analysis, process analysis, data analysis, resource analysis, and
communication analysis. The proper procedure is the one that works best
for your team, provided that the result is successful. Analysis helps to
reduce the defects.
4. IMPROVE PHASE:
If the project team does a thorough job in the root causation phase of
Analysis, the Improve phase of DMAIC can be quick, easy, and satisfying
work. The objective of Improve phase is to identify improvement
breakthroughs, identity high gain alternatives, the select preferred
approach, design the future state, determine the new sigma level,
perform Cost/benefit analysis, design dashboard/scorecards, and create
a preliminary implementation plan.
5. CONTROL PHASE:
The last stage or phase of DMAIC is control, which ensures that the
processes continue to work well, produce desired output results, and
maintain quality levels. There are four specific aspects of control i.e.
quality control, standardization, control methods and alternative, and
responding to defects. The project team determines how to technically
control the newly improved process and creates a response plan to
ensure the new process maintains the improved sigma performance.
Q-6. What is IS9000? Explain the procedure to obtain IS9000.
ISO is the International Organisation for standardization, located in
Switzerland. It has been established to develop common international
standards worldwide. The term ISO 9000 refers to a set of quality
management standards. Currently, ISO 9000 is supported by national
standards bodies from nearly 150 countries including India. ISO 9000
is essentially a mark of quality assurance. The purpose of ISO is to
facilitate international trade by providing a single set of standards that
people worldwide would recognize and respect. It is to be noted that
there is no compulsion to obtain ISO certification and use ISO 9000
standards, except in some cases where governments or regulatory
authorities impose them for public security reasons, or where they are
required in contractual terms. However, the demand for these
standards has been increasing in the global markets, and avoiding
them will soon become impossible. It is also be noted that the ISO
registration does not automatically extend to other plants of a
company, even if the same product or the same service is been
offered.
The following is the procedure to obtain ISO 9000 certification
a) Preliminary Investigation: The Company wishing to obtain ISO 9000
certification should first conduct self-evaluation to determine its
quality control infrastructure. This work can be entrusted to a team of
specialists working with the firm the company can appoint an ISO
steering team to evaluate the existing quality procedures prevailing
within the firm.
b) Submission of application: Exporters can apply on the prescribed
proforma in triplicate to the nearest regional office of BIS along with
the prescribed non- refundable application fee. The Company has to
give information about the name, location, and structure of the
company, size of the business, range of products, type of
manufacturing process, name of products, etc.
c) Audit of the quality manual: The existing quality manual is audited
to determine how it compares with the twenty elements of the ISO
9000 standard. A report is prepared on the findings. Deficiencies, if any
are corrected and the manual is resubmitted for approval by the
auditing body the quality manual would provide guidelines to the
employees of the firm to maintain quality standards.
d) Selection of Registrar: A registrar is an independent body with
knowledge, skills, and experience to evaluate a company's quality
system. Registrars are approved and certified by accreditors. The
company should make an application to the accredited agency along
with necessary documents which include quality manual undertaking
to pay the required fee etc.
e) Pre-assessment meeting: The company representative would hold
a pre-assessment meeting with the registrar of the agency. Pre-
inspection meetings may look for sufficient documents as per the
standards, implementation of the documented procedure, and
whether implementation is effective.
f) Preliminary visit: The accredited agency, normally, arranges for a
preliminary visit to the firm and notifies the company of any significant
omission or deviations from the prescribed requirements, so that any
suitable modification or changes can be made before the assessment
visit.
g) Actual Assessment visit: The actual assessment visit is a practical
evaluation to check that the company's systems are functioning
effectively. The assessment team from the BIS will visit the firm to
assess the firm's compliance with the procedures as mentioned in the
quality manual. The assessment will go through the opening meeting,
conducting assessment, closing meeting, and presenting the report.
h) Issue of certificate: The assessment team should ensure whether
the company has complied with the ISO 9000 standard. Verbal
feedback is given to the company at the time of assessment. The
assessment team, if satisfied will submit a favorable report to the
registration board. When the registration board approves the
registration, the registrar issues a certificate that enables the company
to use ISO 9000 mark
Q-7. What is Kaizen? Explain the steps in Kaizen process.
The concept of Kaizen was made popular by Masaaki Imai in his book
Kaizen: - The Key to Japan's competitive success. Kaizen in Japanese
means 'change (kai) for good (zen)'. Kaizen technique places emphasis
on continuous improvement in varied aspects of the organization such
as quality, corporate culture, safety, technology, process, productivity,
and leadership. Kaizen applies not only to manufacturing units but also
service organizations as well as non-profit organizations.
The following are the steps in the Kaizen process:
a) Define the problem: Kaizen is of utility only when, at the initial
stage, the problem is correctly defined. When defining the problem,
we often notice a performance gap. It means there is a difference
between the ideal situation and the current level of performance. In
the process of defining the problem, we may notice a deviation in
performance.
b) Document the current situation: The management must analyze
the current situation in terms of organization structure, Superior-
Subordinate relationships, employee selection procedures, training
policies and practices, the production facilities, corporate culture,
technology, production process, and so on. A proper analysis of the
current situation may enable the management to have a re-look at the
causes of the problem. To solve the problem, it is important to
correctly assess the current situation.
c) To find the root cause: Kaizen is built on the premise that it is vital
to locate the root cause to rightly solve the problem. Root cause
analysis is the central theme of Kaizen. Once the cause of the problem
is identified, under Kaizen, it is not accepted instantly but several
efforts are made to confirm that the cause thus established is the real
one. Root cause analysis uses problem-solving techniques.
d) Define measurement Targets: There is a need to define
measurement targets at which the outcomes or results can be
compared. For example, the measurement target for complaints of the
customer can be stated as Reduction in customer. Customers from the
current level of 60 per month to 15 in the first month of the
implementation and finally to near zero at the end of three-month
period.
e) Brainstorm Solutions to the problem: The management needs to
generate ideas to develop an effective solution to the problem. As far
as possible, multiple solutions need to be generated. This can be done
through various techniques i.e. obtaining suggestions from the
employees, analysis of solutions for a similar problem and adopted by
other organizations, organizing brainstorming sessions involving
representatives of the management and the employees, etc. The
knowledgeable people call to find the solution.
f) Develop Kaizen plan: There is a need to prepare a Kaizen plan to
bring continuous improvement in the organization at all levels and in
all departments. Kaizen plan includes the areas or activities,
responsible persons, period, process, and the number of funds that
can be utilized for improvements during the plan period, etc.
g) Implement plan: Once the solution is selected, and the plan is
prepared to implement the solution, the management needs to
implement the solution. Implementation of the solution would involve
i.e. arrangement of resources, directing the employees, and
motivating the employees.
h) Measurement of outcomes: The management must measure the
outcomes of the solution. The actual outcome needs to be recorded
and compared against the set targets. The comparison is required to
find out whether the organization is on the right track to achieve
Kaizen success.
Q-8. What is Service Quality Management? Explain the importance
of SQM.
Service quality is understood in terms of the satisfaction that the
customer derives and whether it is in keeping with the service desired.
Service quality management is undertaken to improve the quality of
services continue to enhance customer satisfaction and loyalty. It is to
be noted that service firms must consider the trade-off between
incremental costs involved in service quality improvement and
incremental revenues. It makes no business sense to improve the
quality dimensions when the customers are not willing to pay extra for
the added quality dimensions.
Definition: Service quality management refers to the monitoring and
maintenance of end-to-end Services for specific customers or classes
of customers.
The importance of Service quality management is as follows:
a) Customer Satisfaction: Service quality management leads to
improvement in the quality of services. Therefore, Service quality
management leads to customer satisfaction. Customer satisfaction
takes place when service performance meets customer expectations.
At times, service quality management may lead to customers' delight.
Customer delight takes place when service performance is much more
than customer expectation. Service providers prosper on the
continued support of customers.
b) Earning goodwill: Service quality management offering high-quality
service earns goodwill in the market. They retain a competitive
advantage in the marketplace. Goodwill is not earned overnight but
over a long period. These SQM's offer consistently high-quality service
which ensures consumer loyalty.
c) Efficiency: Efficiency is the ratio of returns to costs. A service
organization would be more efficient when it gets higher returns at
lower costs than before. Service quality management helps to reduce
internal costs, and at the same time, the organization is likely to get a
higher return due to the efforts of trained and motivated employees.
d) Premium price: Customers looking for reliable and satisfactory
service are prepared to pay a higher price provided the quality of
service is as per their expectations. In services like medical, travel and
tourism, entertainment, etc. customers want better service and show
readiness to pay the premium price.
e) Corporate Image: Service quality management helps to improve the
image of the organization. Due to good quality services, the
organization may get higher performance, on account of higher
performance, the image of the organization improves in the mind of
various stakeholders i.e. customers, employees, shareholders, and
others.
f) Commitment of top management: Service quality must be based on
active support, involvement, and commitment of top management to
accomplish specific goals. Top management must not restrict its
prosperity in terms of profits but must also give equal importance to
service performance to keep the customers loyal to the business.
g) Economies of Scale: Service quality management may also generate
economies of scale. The service organization may adopt the latest
technology for its operations. The use of technology reduces the need
for more manpower as it expands. Therefore, the service firm may get
economies of large-scale operation.
h) Self-Service: Service quality management helps to make service
transactions prompt, convenient, and accurate with the help of
advanced technology. Because of the use of advanced technology
customers have preferred self-service. For example, ATMs of banks,
automatic vending machines at railway stations, online purchase of
tickets, and hotel booking. They make service transactions prompt,
convenient, and accurate.
i) Expansion of business: Service quality management facilitates the
expansion of business. Due to higher performance, and corporate
image, a service organization can enter into new markets. This means
a service organization can expand from local level to regional level to
national level and national level to international level.
Q-9. What is SERVQUAL Model?
The Service Quality Model or SERVQUAL Model was developed and
implemented by American Marketing Experts like Valarie Zeithaml, A.
Parasuraman, and Leonard Berry in 1988. Its purpose is to measure the
service quality experienced by customers.
Marketing of services is more challenging than the marketing of
goods. As services are intangible they cannot be seen or touched. They
can only be felt or experienced by the customers. So to measure the
performance/ quality of services is subjective and not easily
quantifiable.
This model is a qualitative analysis. It finds out the shortcomings or
weaknesses in the performance of services provided by the supplier.
In that sense, it is also called ‘GAP Analysis’. It compares the expected
service quality and the service quality that has been experienced.
Thus the model helps to compare the expectations of the customers
and the satisfaction the customers have experienced after getting the
service performance. If there is a difference in quality that is shown in
the difference (the gap) between what was expected and what was
experience the organization can take certain corrective measures to
improve the service performance.
While studying and analyzing the performance of service quality, it
was found out that the following ten dimensions of service quality are
considered important service quality and they are reliability,
responsiveness, competence, access, courtesy, communication
credibility, security, knowing the customer, and tangibles such as the
appearance of the staff and office.
So this model is certainly useful to organizations dealing in goods
and services to survive in a competitive environment. They are to be
conscious about the service quality provided by them to gain
consumer satisfaction.
Q-10. What are the measures to improve service quality?
Products are tangible and so they have standard specifications and so
measuring the quality of products is rather easier whereas services are
intangible so measuring the quality of services is rather a challenging
task. However, it is important to measure the service quality provided
by the organizations to make decisions on measures to improve
service quality and thereby consumer satisfaction.
The following are the measures to improve service quality –
1. The first step is to measure service quality as it is hard to improve
that which is not measured.
2. The second step is to identify gaps between the customer’s
expectations of service quality and the service provider’s desired level
of performance.
3. To understand the customer expectations, efforts should be made
to observe and interact with customers by conducting customer visits
& surveys.
4. After knowing the customer expectations, the organization should
create service quality standards.
5. Employees should be trained in performing the services.
6. The management to observe how services are being performed by
the staff.
7. The organization should recruit skilled and knowledgeable staff and
make efforts to retain and motivate them.
8. There have to be effective & prompt feedback from customers to
know their satisfaction levels.
 COMMERCE
Module 3 – Indian Securities Market
Q-1. What is the structure of Indian Financial Market?
The Indian financial market is structured in a multi-tiered manner, comprising
various segments and institutions. Here's a broad overview of its structure:
1. Primary Market: This is where new securities are issued for the first
time. The primary market includes Initial Public Offerings (IPOs), Rights
Issues, and Preferential Allotments. The Securities and Exchange Board
of India (SEBI) regulates this market.
2. Secondary Market: This is where previously issued securities are traded
among investors. The secondary market includes stock exchanges like
the Bombay Stock Exchange (BSE) and the National Stock Exchange
(NSE). SEBI also regulates this market.
3. Money Market: This is where short-term funds are borrowed and lent,
with maturities typically ranging from overnight to one year.
Instruments traded in the money market include Treasury Bills,
Commercial Papers, Certificates of Deposit, and Repurchase Agreements
(Repos).
4. Capital Market: This encompasses the issuance and trading of long-term
securities, such as stocks and bonds. It includes both the primary and
secondary markets for such securities.
5. Derivatives Market: This market deals with financial contracts whose
value is derived from an underlying asset or group of assets. Derivatives
can be used for hedging, speculation, or arbitrage. The two main
exchanges for derivatives trading in India are the National Stock
Exchange (NSE) and the Multi Commodity Exchange (MCX).
6. Commodity Market: India also has a commodity market where various
commodities are traded. This market facilitates trading in agricultural
commodities, metals, energy, and other goods. The Multi Commodity
Exchange (MCX) and the National Commodity & Derivatives Exchange
Limited (NCDEX) are the major commodity exchanges in India.
7. Forex Market: The Foreign Exchange market deals with the trading of
currencies. India has a forex market where different currencies are
bought and sold. The Reserve Bank of India (RBI) plays a crucial role in
regulating and overseeing this market.
 8. Insurance Market: The insurance sector in India deals with the transfer
of risk from individuals or entities to insurance companies in exchange
for a premium. The Insurance Regulatory and Development Authority of
India (IRDAI) regulates this sector.
9. Banking Sector: The banking sector in India includes commercial banks,
cooperative banks, and development banks. It provides various financial
services such as deposit-taking, lending, and investment. The Reserve
Bank of India (RBI) is the central regulatory authority overseeing the
banking sector.
Overall, the Indian financial market is diverse and dynamic, with various
segments catering to the diverse needs of investors and participants.
Additionally, regulatory bodies like SEBI, RBI, and IRDAI play a crucial role in
ensuring the smooth functioning and integrity of these markets.

Q-2. What is a primary market? State the features of primary markets?

Primary Market is the market for new securities issues and is facilitated by
underwriting groups. The companies sell their securities to the public directly
to the investors through the underwriters (normally investment banks for
stock and bond issuance). When the firm is issuing shares for the very first
time, it is called Initial Public Offering (IPO). New shares issued by firms whose
shares are already trading in the market are called seasoned or secondary
issues. The issuing company receives cash from the sale and uses it to expand
or fund the operations. After the initial sale, the securities trading will be
conducted on the secondary market.
The primary market is the part of the capital market that deals with issuing of
new securities. Companies, governments, or public sector institutions can
obtain funds through the sale of a new stock or bond issues through the
primary market. This is typically done through an investment bank or finance
syndicate of securities dealers. The process of selling new issues to investors is
called underwriting. In the case of a new stock issue, this sale is an Initial Public
Offering (IPO). Dealers earn a commission that is built into the price of the
security offering, though it can be found in the prospectus. Primary markets
create long-term instruments through which corporate entities borrow from
the capital market. Once issued the securities typically trade on a secondary
market such as a stock exchange, bond market, or derivatives exchange.
Features:
Features of primary markets are:
1. This is the market for new long-term equity capital. The primary market is
the market where the securities are sold for the first time. Therefore, it is also
called the new issue market (NIM).
2. In a primary issue, the securities are issued by the company directly to
investors.
3. The company receives the money and issues new security certificates to the
investors.
4. Primary issues are used by companies to set up a new business or for
expanding or modernizing the existing business.
5. The primary market performs the crucial function of facilitating capital
formation in the economy.
6. The new issue market does not include certain other sources of new long-
term external finance, such as loans from financial institutions. Borrowers in
the new issue market may be raising capital for converting private capital into
public capital; this is known as going public.

Q-3. What is an IPO? State the steps involved in the process of IPO.
The IPO (Initial Public Offering) process is the process through which a private
company issues new and or existing securities to the public for the first time.
Private companies decide to convert themselves into Public Limited Companies
to raise a huge amount of capital in exchange for securities. So to offer its
shares to the public, it has to go through the process of IPO. The IPO process is
quite complicated. The entire process of IPO is regulated by the Securities and
Exchange Board of India. The following are the steps involved in the IPO
process.
1. Appointment of an investment bank: A company appoints a team of
underwriters or investment banks to start the process of IPO. They are the
specialized agencies to market the securities to the public. They study the
financial position of the company and make decisions on the amount that will
be raised and the securities that will be issued. They are the managers of the
issue of securities and do not share the risks involved in the marketing of
securities.
2. Register with SEBI: The company has to submit a registration statement to
SEBI, which includes a detailed report of its financial position and business
plans. It has to fulfill all the requirements and satisfy all rules and regulations.
3. Preparation of the Prospectus: The companies with the help of the
underwriters have to prepare the prospectus giving all the details of the
company & its plans and the expected share price range. The prospectus is
meant for prospective investors who would be interested in buying the stock.
4. The Roadshow: Once the prospectus is ready, underwriters and company
officials plan countrywide roadshows for promoting the company’s IPO among
selected few private buyers and also to get the idea about the response of the
prospective investors.
5. SEBI’s Approval: Once SEBI is satisfied with the registration statement, it
gives a green signal to the IPO and date to be fixed for the same. Sometimes, it
asks for certain changes in the prospectus before giving its approval.
6. Selection of a stock exchange: The Company needs to select a stock
exchange where it intends to sell its shares and get listed.
7. Deciding on Price Band and number of share to be issued: After the SEBI
approval, the company, with assistance from the underwriters decides on the
price band of the shares and also decides the number of shares to be sold. The
shares can be issued with the help of two methods - 1) Fixed Price IPO - In a
Fixed Price issue, the company decides the price of the share issue and the
number of shares being sold. 2) Book Building IPO - A Book building issue helps
the company discover the price of the issue. The company decides a price band
and it gives the investor an option to choose the price at which he/she wishes
to bid for the company shares.
8. Available to Public for Purchase: On the dates mentioned in the prospectus,
the shares are made available to Public Investors fill-up the IPO form and if it is
a book building IPO, specify the price at which they wish to make the purchase
and submit the application.
9. Determination of Issue Price and Share Allotment: Once the stipulated
period for applying for IPO is over, the company, with the help of underwriting
banks, determines the price at which shares are to be allotted to the
prospective investors. The price would be directly determined by the demand
and the bid price quoted by investors. Once the price is finalized, shares are
allotted to investors based on the bid amounts and the shares available. In
case of over-subscribed issues, shares are not allotted to all applicants.
10. Listing of shares: The last step is the listing of shares on the stock
exchanges.

Q-4. What are Depositories? What is the role of depositories?

Earlier shares were issued in the form of physical certificates that the investor
had to keep safe and then forward to the buyer once sold. This process was
highly time-consuming and gave rise to issues like fake securities and bad
deliveries. Because of all these problems and the improvement in technology a
new system of depositories and the electronic mode of holding and
transferring shares have come up.
The electronic mode of holding and transferring shares is called the
dematerialization of securities. It is a process by which the physical certificates
of an investor are taken up by the depositary and are destroyed and an
equivalent number of securities are credited in the depository account of the
investor. The depository acts as a bank. It accepts the deposits of securities
such as shares, debentures, bonds, and government securities, in electronic
form. Thus depositary holds the securities of investors and provides services to
them.
In India, two companies are acting as depositories and they are - 1) National
Securities Depository Ltd. (NSDL) and Central Depository Service Ltd. (CDSL).
The depositories provide their services to investors through their agents called
depository participants (DP). A DP can be a bank, financial institution, a
custodian, or a broker. Just as one opens a bank account to avail of the services
of a bank / an investor opens a depository account with a depository
participant to avail of depository facilities.
The following are the functions/Role of Depository –
1. Dematerialization: One of the primary functions of the depositary is to
eliminate or minimize the movement of physical securities in the market. This
is achieved through the dematerialization of securities.
2. Account Transfer: The depository keeps records of all transfers resulting
from the settlement of trades and other transactions between various
beneficial owners by recording entries in the accounts of such beneficial
owners
3. Transfer and Registration: A transfer is the legal change of ownership of a
security in the records of the issuer. For affecting a transfer, certain legal steps
have to be taken like an endorsement, execution of a transfer instrument, and
payment of stamp duty.
4. Corporate Actions: A depository may handle corporate actions in two ways.
In the first case, it merely provides information to the issuer about the persons
entitled to receive corporate benefits. In the other case, the depositary itself
takes the responsibility for the distribution of corporate benefits.
5. Pledge and Hypothecation: Depositaries allow the securities placed with
them to be used as collateral to secure loans and other credits.
6. Linkages with clearing system: The depository has linkages with the clearing
system attached to a stock exchange that performs the functions of
ascertaining the pay in (Sell) or pay-out (buy) of brokers who have traded on
the stock exchange.

Q-5. What is Dematerialisation? Explain its process.

A concept of reducing the number of materials required to serve economic
functions. Signifies conversion of a share certificate from its present physical
form to electronic form for the same number of holding. It attempts to avoid
the time-consuming and complex process of getting shares transferred in the
name of the buyers. Dematerialization of shares is optional and an investor can
still hold shares in physical form. However, he/she has to DEMAT the shares if
he/she wishes to sell the same through the Stock Exchanges. Similarly, if an
investor purchases shares, he/she will get delivery of the shares in DEMAT
form only. It offers scope for paperless trading through state-of-the-art
technology, whereby share transactions and transfers are processed
electronically without involving any share certificate or transfer deed after the
share certificates have been converted from physical form to electronic form.
Process of Dematerialisation:
Any person should open a DEMAT account with any Depository Participant
(DP). The DP acts like an agent between the investor and depository. The
process is as follow:
1. He/she has to fill up an online DEMAT account opening form and needs to
surrender the certificate(s) to the DP. The DP then sends the form and the
original share certificates and the documents for proof of his identity and
address and self-attested passport size photograph to the concerned Registrar
& Transfer (R&T) agent. To avoid any misuse of the share certificates, the
investor must ensure that they are defaced by marking “Surrendered for
Dematerialization” on the face of the certificates.
2. The person will have to sign a pact with his DP in which all the rules and
regulations will be written to be followed by the investor and DP both. The DP
gives a copy of the agreement to the investor.
3. After signing the agreement and the verification of the documents, in about
15 days the person will get his online account number. It is also known as BO
ID that is Beneficiary Owner’s Identification Number. All your future
transactions will be done with this ID.
4. The R&T agent holds the details about the shares. He checks with the
signature of the applicant and processes it and intimate about this to the
company & NSDL.
5. On receiving intimation from the R&T agent, NSDL or CDSL credit the
securities in the depository account of the client with the DP and inform the
client accordingly. It should not take more than 30 days from the date of
submission of a DEMAT request to get the holdings dematerialized. Finally, the
investor gets the DEMAT shares through his/her DP.
A person having a DEMAT account, can step into the world of the stock
exchange and start investing the money in mutual funds, shares, debentures,
insurance, retirement funds, etc. Unlike the bank account, the person has not
kept a minimum balance, the DEMAT account does not require the minimum
number of securities.
Q-6. Describe SEBI. What are the functions of SEBI?
The Securities and Exchange Board of India (frequently abbreviated SEBI) is the
regulator for the securities market in India. It was established in the year 1988
and given statutory powers on 12 April 1992 through the SEBI Act, 1992. The
SEBI is a vital component in improving the quality of the financial markets in
India, both by attracting foreign investors and protecting Indian investors.
The SEBI is managed by its members, which consists of the following:
 The chairman is nominated by the Union Government of India.
 Two members, i.e. Officers from Union Finance Ministry.
 One member from The Reserve Bank of India.
 The remaining 5 members are nominated by the Union Government of India
out of them at least 3 shall be a whole-time member.
FUNCTIONS OF SEBI:
The SEBI performs functions to meet its objectives. To meet three objectives
SEBI has three important functions. These are:
1. Protective Functions: These functions are performed by SEBI to protect the
interest of the investor and provide safety of the investment. As protective
functions SEBI performs the following functions:
a. It Checks Price Rigging: Price rigging refers to manipulating the prices of
securities with the main objective of inflating or depressing the market price of
securities. SEBI prohibits such practice because this can defraud and cheat the
investors.
b. It Prohibits Insider trading: Insider is any person connected with the
company such as directors, promoters, etc. These insiders have sensitive
information which affects the prices of the securities. This information is not
available to people at large but the insiders get this privileged information by
working inside the company and if they use this information to make a profit,
then it is known as insider trading, e.g., the directors of a company may know
that company will issue Bonus shares to its shareholders at the end of the year
and they purchase shares from market to make profit with bonus issue. This is
known as insider trading. SEBI keeps a strict check when insiders are buying
securities of the company and takes strict action on insider trading.
 c. It prohibits fraudulent and Unfair Trade Practices: SEBI does not allow
the companies to make misleading statements that are likely to induce the sale
or purchase of securities by any other person. SEBI undertakes steps to
educate investors so that they can evaluate the securities of various companies
and select the most profitable securities.
d. SEBI promotes fair practices and code of conduct in the security market
by taking the following steps: SEBI has issued guidelines to protect the
interest of debenture-holders wherein companies cannot change terms in a
midterm. SEBI is empowered to investigate cases of insider trading and has
provisions for stiff fines and imprisonment. SEBI has stopped the practice of
making preferential allotment of shares unrelated to market prices.
2. Developmental Functions: These functions are performed by the SEBI to
promote and develop activities in the stock exchange and increase the
business in the stock exchange. Under developmental categories following
functions are performed by SEBI:
a. SEBI promotes the training of intermediaries of the securities market.
b. SEBI tries to promote activities of stock exchange by adopting a flexible
and adaptable approach in the following way:
c. SEBI has permitted internet trading through registered stock brokers.
d. SEBI has made underwriting optional to reduce the cost of the issue.
e. Even an initial public offer of the primary market is permitted through the
stock exchange.
3. Regulatory Functions: These functions are performed by SEBI to regulate
the business in the stock exchange. To regulate the activities of the stock
exchange following functions are performed
a. SEBI has framed rules and regulations and a code of conduct to regulate
the intermediaries such as merchant bankers, brokers, underwriters, etc.
b. These intermediaries have been brought under the regulatory purview
and private placement has been made more restrictive.
c. SEBI registers and regulates the working of stockbrokers, sub-brokers,
share transfer agents, trustees, merchant bankers, and all those who are
associated with the stock exchange in any manner.
 d. SEBI registers and regulates the working of mutual funds etc.
e. SEBI regulates the takeover of the companies.
f. SEBI conducts inquiries and audits of stock exchanges.

Q-7. What is Stock Exchange? Describe the functions of Stock Exchange.

Stock Exchange is also called Stock Market or Share Market. It is one important
constituent of the capital market. The stock exchange is an organized market
for buying and selling corporate and other securities. It is a convenient place
where trading in securities is conducted systematically i.e. as per certain rules
and regulations. The securities include shares and debentures issued by public
companies which are duly listed at the stock exchange and bonds and
debentures issued by the government, public corporations, and municipal and
port trust bodies. London stock exchange (LSE) is the oldest stock exchange in
the world. Similar large Stock exchanges exist and operate in the majority of
countries of the world.
Functions of Stock Exchange:
1. Providing a ready market: The Organization of Stock Exchange provides a
ready market to speculators and investors in industrial enterprises. It thus,
enables the public to buy and sell securities already in issue.
2. Providing a quoting market price: It makes possible the determination of
supply and demand on price. The very sensitive pricing mechanism and the
constant quoting of market price allow the investors to always be aware of
values. This enables the production of various indexes which indicate trends
etc.
3. Providing facilities for working: It provides opportunities to Jobbers and
other members to perform their activities with all their resources in the stock
exchange
4. Safeguarding activities for investors: The Stock Exchange renders
safeguarding activities for investors which enable them to make a fair
judgment of securities. Therefore, directors have to disclose all material facts
to their respective shareholders. Thus innocent investors may be safeguard
from the clever brokers.
5. Operating a compensation fund: It also operates a compensation fund
which is always available to investors suffering loss due to the speculating
dealings in the stock exchange
6. Creating the discipline: The Members are controlled under a rigid set of
rules designed to protect the general public and its members. Thus this
tendency creates discipline among its members in their social life also.
7. Checking functions: New securities are checked before being approved and
admitted to the listing. Thus stock exchange exercises rigid control over the
activities of its members.
8. Adjustment of equilibrium: The investors in the stock exchange promote
the adjustment of equilibrium of demand and supply of a particular stock and
thus prevent the tendency of fluctuation in the prices of shares.

Q-8. Write about the spectaculars of Stock Exchange.

The speculators are traders of securities on stock exchanges. They are engaged
in buying and selling securities to earn profits. They are not investors. They buy
securities with the hope to sell them in the future at a profit. They do not hold
the securities for a longer period. They are more concerned with price
movements on stock exchanges. In reality, there is no much difference
between a speculator and an investor. Each investor is to a certain extent - a
speculator as he also buys the securities with the hope of selling them at a
higher price in the future. Similarly, every speculator to a certain extent is an
investor because he may also hold the securities for some period with the
hope of selling them at a higher price. Thus, the difference between the two is
a matter of degree only.
Types of Speculators
Four types of speculators trade on stock exchanges are as follows.
1. Bull: A bull is an optimistic speculator. He expects a rise in the price of the
securities in which he deals. Therefore, he buys the securities with the hope of
selling them in the future at a higher price and gain profits. If it happens he can
sell the securities. Thus he is not required to take delivery of the securities.
2. Bear: A bear is a pessimistic speculator who expects a sharp fall in the prices
of certain securities. He, therefore, enters into selling contracts in certain
securities on a future date. If the price of the security falls as per his
expectations he will get the price difference.
3. Stag: He is a cautious investor as compared to the bulls or bears. He only
applies for IPOs of the companies to sell them at a premium or profit as soon
as he gets the shares allotted.
4. Lame Duck: When a bear cannot fulfil his commitment immediately, he is
called a lame duck.

Q-9. What are Credit Rating Agencies? Write about the advantages of CRAs.
Credit rating is an analysis of the credit risks associated with a financial
instrument or a financial entity. It is a rating given to a particular entity based
on the credentials and the extent to which the financial statements of the
entity are sound, in terms of borrowing and lending that has been done in the
past. Usually, is in the form of a detailed report based on the financial history
of borrowing or lending and creditworthiness of the entity or the person
obtained from the statements of its assets and liabilities to determine their
ability to meet the debt obligations. It helps in the assessment of the solvency
of the particular entity.
“Credit Rating is an opinion expressed by an independent rating agency about
the credit quality of the issuer of a debt instrument”.
ADVANTAGES OF CREDIT RATING AGENCIES:
1) Collection of financial information: Credit rating agencies collect valuable
information relating to the credit quality of an issuer of debt security. The
collected information is analyzed and summarized in a simple and readily
understood manner. The rating agency is likely to provide unbiased
information.
2) Supply of information: The information about the credit quality of an issuer
is provided to the public. This helps them in making an investment decision.
The information is also supplied to others like SEBI, bankers, government, etc.
3) Provides the basis for assessing risk and return: The ratings are evaluated
and revised from time to time, and as such it helps the existing investors to
decide whether or not to hold on to the security or to dispose of it off. The
information provided to the potential investors enables them to decide
whether or not to invest in debt securities.
4) Corporate Discipline: Credit rating imposes healthy discipline on corporate
borrowers. Firms would naturally prefer a better credit rating as a higher credit
rating tends to enhance the corporate image and visibility of the firms.
Therefore, they maintain financial discipline i.e. regular payment of interest
and repayment of debt on time.
5) Guidance to institutional investors: Credit rating agencies facilitate the
formulation of public policy guidelines on institutional investment. This helps
them to plan their investment portfolios easily and earn better returns.
6) Provide Greater Credence: Credit rating agencies provide greater credence
to financial and other representations. When a credit rating agency rates
particular security, its credibility is at stake, and as such, it would make all
possible efforts to collect proper financial information about the credit quality
of the issuer and that of the debt instrument.

Q-10. Write a note on Credit Rating and Information Services of India

Ltd.(CRISIL).
CRISIL is India's global analytical company providing ratings, research, and risk
and policy advisory services. CRISIL’s businesses can be divided into three
broad categories - Ratings, Research and Advisory. CRISIL Ratings has assessed
over 61,000 entities in India. Its rating capabilities span the entire range of
debt instruments and it has worked across the corporate strata, from large
corporations in the country to SMEs. CRISIL was established in 1987. The
world’s largest rating agency Standard & Poor's now holds a majority stake in
CRISIL. It has been promoted by Industrial Credit and Investment Corporation
of India Ltd. (ICICI) and Unit Trust of India Ltd. (UTI) as a public limited
company with its headquarters in Mumbai. Under Research, CRISIL Global
Research and Analytics serves global investment banks and financial
institutions with high-end research, risk, analytics, and equity and credit
research services. Its credit research supports 80 percent of the global
structured finance market and over 60 percent of the global credit markets.
The company's equity research covers over 90 percent of the global trading
volumes and 88 percent of the global market capitalization. In India, CRISIL
Research is an independent and integrated research house. It provides the
following information:
Functions of CRISIL
1. It provides growth forecasts, profitability analysis, emerging trends,
expected investments, industry structure, and regulatory frameworks. CRISIL's
rating experience covers more than 24654 entities, including 14,500 small and
medium enterprises.
2. CRISIL offers domestic and international customers with independent
information, opinions, and solutions related to credit ratings and risk
assessment; energy infrastructure and corporate advisory; research on India's
economy, industries, and companies; global equity research; fund services; and
risk management.
3. CRISIL Infrastructure Advisory is a division of CRISIL Risk and Infrastructure
Solutions (CRIS) Limited, a wholly-owned subsidiary of CRISIL Limited. It helps
shape policy and establish viable frameworks to improve the risk profile of
infrastructure projects. It works with government agencies in enhancing their
capacity, capabilities, and internal financial viability, and supports the
implementation of infrastructure improvement initiatives.
4. CRISIL Risk Solutions (CRS), the other division of CRIS, provides a range of
risk management tools, analytics, and solutions to financial institutions, banks,
and corporate, in India, and across the world. The rating is an opinion on the
future ability and legal obligation of the issuer of securities to make timely
payments of principal and interest on specific fixed income security such as
debentures.
The role of CRISIL can be divided into two groups:
1. Specific Roles: CRISIL’s businesses can be divided into four broad
categories:
Ratings
Research
Advisory
Risks Management

2. General Roles: The general roles of CRISIL are as follows:

a) It supplies credit rating information to the public.
b) It provides the basis for assessing risk and return for an investment.
c) It imposes good discipline on corporate borrowers.
d) It facilitates the formulation of public policy.
e) It protects investor interests.

Q-11. Write a note on Credit Analysis and Research Ltd. (CARE)

Credit Analysis & Research Ltd (CARE) commenced its operations in the year
1993 has established itself as the leading credit rating agency of India. The
company provides various credit ratings that help corporates to raise capital
for their various requirements and assist the investors to form informed
investments decision based on the credit risk and their own risk return
expectations. Credit Analysis & Research Ltd (CARE Ratings) is full service rating
company that offers a wide range of rating and grading services across sectors.
The company is recognized by Securities and Exchange Board of India (Sebi)
Government of India (GoI) and Reserve Bank of India (RBI) etc. The company
was promoted by major Banks/ FIs (financial institutions) in India. The
company carries out rating of the debt instruments namely structured
obligations Commercial paper Debentures Fixed deposits and Bonds covering
the full spectrum of Universe comprising Industrial Companies Service
companies Infrastructure companies Banks Financial Institutions (FIs) Non-
Bank Finance companies (NBFCs) Public Sector Undertakings (PSUs) State
Government Undertakings Municipal Corporations Structured Finance
Transactions Securitization Transactions SMEs SSI and Micro Finance
Institutions. In addition to debt ratings the company has experience in
providing specialized grading/rating services such as Corporate Governance
ratings IPO grading Mutual Fund Credit quality Ratings Insurance Claims Paying
Ability Ratings Issuer Ratings Grading of Construction entities Grading of
Maritime training institutes and LPG/ SKO Ratings.
Q-12. Write a note on Information and Credit Rating Agency of India Ltd.
(ICRA)
ICRA Limited (formerly Investment Information and Credit Rating Agency of
India Limited) was set up in 1991 by leading financial/investment institutions,
commercial banks and financial services companies as an independent and
professional investment Information and Credit Rating Agency. Today, ICRA
and its subsidiaries together form the ICRA Group of Companies (Group ICRA).
ICRA is a Public Limited Company, with its shares listed on the Bombay Stock
Exchange and the National Stock Exchange.
Alliance with Moody’s Investors Service
The ultimate parent company of international Credit Rating Agency Moody’s
Investors Service is the indirect largest shareholder of ICRA. The participation
of Moody’s is supported by a Technical Services Agreement, which entails
Moody’s providing certain technical services to ICRA. Specifically, the
agreement is aimed at benefiting ICRA’s in-house research capabilities by
providing ICRA with access to Moody’s global research base. Under the
agreement Moody’s provides enrichment programs to ICRA employees,
including access to the financial markets and related courses that are offered
as part of the eLearning software licensed by Moody’s from Intuition, and
provision of financial writing training seminars to designated ICRA employees.
Services of ICRA
 Provide information and guidance to institutional and individual
investors/creditors;
 Enhance the ability of borrowers/issuers to access the money market and the
capital market for tapping a larger volume of resources from a wider range of
the investing public;
 Assist the regulators in promoting transparency in the financial markets;
 Provide intermediaries with a tool to improve efficiency in the funds raising
process
 COMMERCE
Module 4 – Recent Trends in Finance

Q-1. What are Mutual Funds?

A mutual fund is a mechanism for pooling the resources by issuing units to the
investors and investing funds in securities in accordance with objectives as
disclosed in the offer document. Investments in securities are spread across a
wide cross-section of industries and sectors and thus the risk is reduced.
Diversification reduces the risk because all stocks may not move in the same
direction in the same proportion at the same time. Mutual fund issues units to
the investors in accordance with the quantum of money invested by them.
Investors of mutual funds are known as unitholders.
The profits or losses are shared by the investors in proportion to their
investments. The mutual funds normally come out with several schemes with
different investment objectives which are launched from time to time. A
mutual fund is required to be registered with the Securities and Exchange
Board of India (SEBI) which regulates securities markets before it can collect
funds from the public.
Mutual funds represent one of the organizational forms of the delegated
portfolio management, in which fund shareholders delegate the task of
allocating their money to the fund manager. Since the manager’s objective are
not necessarily identical to those of the fund’s shareholders, a potential agency
problem arises: the agent may not pursue investment policies optimal for the
principals (fund shareholders)
Mutual funds are typically organized as corporations and have a board of
directors or trustees, which is elected by the shareholders. In contrast to most
business corporations, mutual funds are very limited internal resources and
rely on the provision of specific services by affiliated organizations and
independent contractors. In particular, the board of directors hires a separate
entity- the investment advisor/ management company- to provide all
management and advisory services to a fund for a fee, which is usually based
on a percentage of the fund’s average net assets.
In practice, however, the usual procedure is for the management
organization to create mutual funds. To mitigate a potential conflict of interest,
the ICA requires that an investment advisor must serve under a written
contract approved initially by a vote of the shareholders and thereafter
approved annually by the board of directors.

Q-2. What are the advantages and limitations of mutual funds?

 Advantages of mutual funds:
An investor must be aware of the advantages and limitations of mutual
funds to choose the best fund for investment. The advantages of Mutual
Funds are as follows:
1. Diversification of risks: Mutual fund managers invest the funds in
different sectors and thus the risks of investing in securities get reduced
or diversified.
2. Professional Management: Investing in securities is not an easy task
many factors are required to be studied and analyzed before making an
investment decision. The advantage of mutual funds is that they are
managed by professional experts who can make the right investment
decisions.
3. Simplicity: Mutual fund dealers make available the required
information about the funds easily such as level of risk, return on
investment, and the price so the investor can choose the right type of
mutual fund very easily.
4. Liquidity: Liquidity refers to the ability to convert your assets to cash
with relative ease. An investor can get money by exiting the mutual fund
very easily and quickly.
5. Cost: Mutual funds are one of the best investment options
considering the costs involved. A Portfolio Management Service may
charge 2% to 3% of the total investment per year as its management
fees. They may deduct a share from your profit. Mutual funds are
relatively cheaper and deduct only 1% to 2% of the expense ratio. Debt
mutual funds usually deduct even lesser.
6. Tax efficiency: Mutual funds are relatively more tax-efficient than
other types of investment. Long-term capital gain tax on equity mutual
funds is zero. For debt funds, long-term capital gains apply when you
hold them for 3 years.
 Limitations of Mutual Funds:
1. Costs: Some mutual funds have a high cost associated with them.
Mutual funds charge for managing the funds. Even when an investor
exits from the mutual fund within a specified duration, there may be an
extra cost as exit load. Thus investors should be aware that different
funds have different expense ratios.
2. Dilution: Diversification has an averaging effect on your investments
while diversification protects the investor from suffering any major
losses, it also prevents from making any major gains. Thus, major gains
get diluted.
3. Costs to Manage Mutual Funds: The salary of the market analysts and
fund managers comes from the investors. Total fund management
charge is one of the first parameters to consider when choosing a
mutual fund. Higher management fees do not guarantee better fund
performance.
4. Fluctuating returns: Mutual funds do not offer fixed guaranteed
returns in that you should always be prepared for any eventuality
including depreciation in the value of your mutual fund. In other words,
mutual funds entail a wide range of price fluctuations. Professional
management of a fund by a team of experts does not insulate you from
the bad performance of your fund.
5. No Control: All types of mutual funds are managed by fund managers.
In many cases, the fund manager may be supported by a team of
analysts. Consequently, as an investor, you do not have any control over
your investment. All major decisions concerning your fund are taken by
your fund manager. However, you can examine some important
parameters such as disclosure norms, corpus, and overall investment
strategy followed by an Asset Management Company (AMC).
6. Diversification: Diversification is often cited as one of the main
advantages of a mutual fund. However, there is always the risk of over-
diversification, which may increase the operating cost of a fund,
demands greater due diligence, and dilutes the relative advantages of
diversification.
Q-3. What are the factors responsible for the growth of Mutual funds?
The various factors responsible for the growth mutual fund industry in
India can be given as follows:
1. Population: In India, the percentage of the young and working
population is increasing at a higher rate. It results in higher per capita
income, higher savings, and investments in equity markets. Also, there is
growing awareness of the benefits of investments in mutual funds, both
in urban and rural areas.
2. Movement in Global Markets: In India, the performance of equity
markets is far better than in other countries of the world. This has
resulted in higher investments in mutual funds.
3. The growing significance of the service industry: The service sector is
growing faster than the manufacturing sector. As a result, professional
services are available at reasonable costs in India.
4. Inflation affects the Returns: Inflation represents the general price
level of the country and it is increasing over a period of time. It affects
the returns on fixed income options such as bank deposits, PPF, National
Service Certificates, and so on. As a result, such traditional options of
investing money are becoming unpopular.
5. Other factors: The other factors contributing to the growth of mutual
funds in India are - change in the attitudes of people, availability of
several mutual funds even operated by public financial institutions, the
impact of globalization, and so on.

Q-4. Describe Systematic Investment Plan.

The terms SIP and mutual fund schemes are not synonymous. A SIP is
only a scheme that helps the investor to invest regularly in mutual fund
schemes. Thus, SIP or systematic Investment Plan is a scheme in which
an investor invests a fixed amount of money regularly in a mutual fund,
generally an equity mutual fund scheme. An investor can start investing
in a mutual fund scheme with a minimum of Rs. 500. He can invest a
fixed amount of money monthly, bi-monthly, or forthrightly, according
to his convenience. In a step-up SIP scheme, an investor can increase the
SIP amount periodically. In Alert SIP, the mutual fund management
sends an alert to the investor to increase his investment when the
markets are down. In perpetual SIP; the investor can continue to invest
periodically, without any end date. He can exit the scheme as his
requirements.
The following are the benefits of investing in mutual funds by using a SIP
scheme.
1. It is very convenient and time-saving as money gets automatically
debited from an investor’s account.
2. It helps to average purchase cost and maximize returns when an
investor invests regularly over a period of time irrespective of the
market conditions, he gets more units when the market is down and
fewer units when the market is up. This averages out the purchase cost
of mutual fund units.
3. It helps to build the habit of saving and invest regularly among the
people.
4. When an investor continues to invest over a long period, his returns
get compounded. After the expiry of a long period, he can accumulate a
large sum of money which ultimately helps him to achieve his long-term
financial goal.

Q-5. What are Commodity Markets? Explain the categories of

Commodity Markets.
A commodity market is a market that trades in the primary economic
sector rather than manufactured products, such as cocoa, fruit and
sugar. Hard commodities are mined, such as gold and oil. Futures
contracts are the oldest way of investing in commodities. Commodity
markets can include physical trading and derivatives trading using spot
prices, forwards, futures, and options on futures. Farmers have used a
simple form of derivative trading in the commodity market for centuries
for price risk management.
Categories of Commodity Markets
Commodities that are traded are typically sorted into four categories
broad categories: metal, energy, livestock and meat, and agricultural.
Metals: Metals commodities include gold, silver, platinum, and copper.
During periods of market volatility or bear markets, some investors may
decide to invest in precious metals, particularly gold—because of its
status as a reliable, dependable metal with real, conveyable value.
Investors may also decide to invest in precious metals as a hedge against
periods of high inflation or currency devaluation.
Energy commodities: Energy commodities include crude oil, heating oil,
natural gas, and gasoline. Global economic developments and reduced
oil outputs from established oil wells around the world have historically
led to rising oil prices, as demand for energy-related products has gone
up at the same time that oil supplies have dwindled.
Energy: Investors who are interested in entering the commodities
market in the energy sector should also be aware of how economic
downturns, any shifts in production enforced by the Organization of the
Petroleum Exporting Countries (OPEC), and new technological advances
in alternative energy sources (wind power, solar energy, biofuel, etc.)
that aim to replace crude oil as a primary source of energy, can all have a
huge impact on the market prices for commodities in the energy sector.
Livestock and meat: Livestock and meat commodities include lean hogs,
pork bellies, live cattle, and feeder cattle.
Agriculture: Agricultural commodities include corn, soybeans, wheat,
rice, cocoa, coffee, cotton, and sugar. In the agricultural sector, grains
can be very volatile during the summer months or during any period of
weather-related transitions. For investors interested in the agricultural
sector, population growth—combined with limited agricultural supply—
can provide opportunities for profiting from rising agricultural
commodity prices.

Q-6. What are Derivative markets. Who are the participants in this
market?
The Derivatives Market is meant as the market where the exchange of
derivatives takes place. Derivatives markets are markets that are based
upon another market, which is known as the underlying market.
Derivatives markets can be based upon almost any underlying market,
including individual stock markets (e.g. the stock of company XYZ), stock
indices (e.g. the Nasdaq 100 stock index), and currency markets (i.e. the
forex markets). Derivatives markets take many different forms, some of
which are traded in the usual manner (i.e. the same as their underlying
market), but some of which are traded quite differently (i.e. not the
same as their underlying market).
The following are the participants in the derivatives market.
1. Hedgers: They are cautious traders in stock markets. They enter
derivative markets to secure their investment portfolio against the
market risk and price movements. They can achieve this by taking an
opposite position in the derivatives market. In this manner, they transfer
the risk of loss to those others who are ready to take it. To have this
benefit, they are required to pay a premium to the risk-taker.
2. Speculators: They are risk-takers of the derivative market. They are
ready to take risks to earn profits. If their anticipation of price
movements proves to be correct, they can earn huge profits.
3. Margin Traders: A margin refers to the minimum amount that is
required to be deposited with the broker to participate in the derivative
market. It is used to compensate for the losses if any, while trading in
the derivatives market.
4. Arbitrageurs: They deal in low-risk, low-priced securities to make
profits. They buy low-priced securities in one market and sell them at a
higher price in another market. This can take place only when the same
security is quoted at different prices in different markets.

Q-7. Explain the types of Derivatives.

In broad terms, there are two groups of derivative contracts, which are
distinguished by the way they are traded in the market:
1. Over-the-counter: (OTC) derivatives are contracts that are traded
(and privately negotiated) directly between two parties, without going
through an exchange or other intermediary. Products such as swaps,
forward rate agreements, exotic options – and other exotic derivatives –
are almost always traded in this way. The OTC derivative market is the
largest market for derivatives, and is largely unregulated with respect to
the disclosure of information between the parties, since the OTC market
is made up of banks and other highly sophisticated parties, such as
hedge funds. Reporting of OTC amounts is difficult because trades can
occur in private, without the activity being visible on any exchange.
2. Exchange-traded derivatives: (ETD) are those derivatives instruments
that are traded via specialized derivatives exchanges or other exchanges.
A derivatives exchange is a market where individuals trade standardized
contracts that have been defined by the exchange. A derivatives
exchange acts as an intermediary to all related transactions and takes
initial margin from both sides of the trade to act as a guarantee. The
world's largest derivatives exchanges are the Korea Exchange (which lists
KOSPI Index Futures & Options), Eurex, and CME Group. For better
conceptual understanding derivatives and the most common types of
derivatives are classified as forwarding contracts, futures contracts,
options contracts, and swap contracts. These are the most common use
types of derivatives:
A. Forward Contracts: A forward contract is an agreement between two
parties – a buyer and a seller to purchase or sell something at a later
date at a price agreed upon today. Forward contracts, sometimes called
forward commitments, are very common in everyone's life. Any type of
contractual agreement that calls for the future purchase of a good or
service at a price agreed upon today and without the right of
cancellation is a forward contract.
B. Future Contracts: Market in standardized contracts for future delivery
of various goods. A futures contract is an agreement between two
parties – a buyer and a seller – to buy or sell something at a future date.
The contact trades on a futures exchange and is subject to a daily
settlement procedure. Future contracts evolved out of forwarding
contracts and possess many of the same characteristics. Unlike forward
contracts, futures contracts trade on organized exchanges, called future
markets. Future contacts also differ from forwarding contacts in that
they are subject to a daily settlement procedure. In the daily settlement,
investors who incur losses pay them every day to investors who make
profits. It arose in the mid-1800s in Chicago and institutionalized an
ancient form of contracting called forward contracts. In 1842, the
Chicago Board of Trade was founded. In 1871, Fire destroyed all records.
C. Options Contracts: Options are contractual obligations that Derive
their value from some underlying asset. Options are of two types – calls
and puts. Calls give the buyer the right but not the obligation to buy a
given quantity of the underlying asset, at a given price on or before a
given future date. Puts give the buyer the right, but not the obligation to
sell a given quantity of the underlying asset at a given price on or before
a given date. In options on futures contracts, the contractual obligations
call for delivery of one futures contract.
D. Binary contracts: Binary contracts are contracts that provide the
owner with an all-ornothing profit profile.
E. Warrant: Apart from the commonly used short-dated options which
have a maximum maturity period of 1 year, there exist certain long-
dated options as well, known as the warrant. These are generally traded
over-thecounter.
F. Swaps: Swaps are private agreements between two parties to
exchange cash flows in the future according to a prearranged formula.
They can be regarded as portfolios of forwarding contracts. The 1st
major swap occurred in August of 1981. The World Bank issued $290
million in Eurobonds and swapped the interest and principal on these
bonds with IBM for Swiss francs and German marks. The two commonly
used swaps are interest rate swaps and currency swaps.
1. Interest rate swaps: These involve swapping only the interest
related cash flows between the parties in the same currency.
2. Currency swaps: These entail swapping both principal and
interest between the parties, with the cash flows in one direction being
in a different currency than those in the opposite direction.

Q-8. Explain the concept of Start Up Finance. What are the sources of
start-up finances?
Start-up capital is what entrepreneurs use to pay for any or all of the
required expenses involved in creating a new business. This includes
paying for the initial hires, obtaining office space, permits, licenses,
inventory, research and market testing, product manufacturing,
marketing, or any other expense. In many cases, more than one round of
start-up capital investment is needed to get a new business off the
ground. The majority of start-up capital is provided to young companies
by professional investors such as venture capitalists and/or angel
investors. Some start-ups may also receive start-up capital from banks
and other financial institutions. Considering the sources of start-up
capital, it's no surprise that companies may receive large amounts of
money from their investors. Since investing in young companies comes
with a great degree of risk, these investors often require a solid business
plan in exchange for their money. They usually get an equity stake in the
company for their investment.
Sources of start-up financing:
It is always better to use different sources for financing the new business
besides a bank loan. The following are typical sources of financing start-
ups.
1. Personal Investment: While starting a new business an entrepreneur
should have his savings and/or assets as collateral security for investing
in the business.
2. Love money: This is the money that an entrepreneur borrows from a
spouse, parents, family, or friends. He should be cautious while
borrowing love money as they may like to have an equity stake in the
business.
3. Venture Capital: Every entrepreneur cannot depend upon venture
capital. Because generally venture capitalists are very selective in their
approach and they prefer to invest in technology-driven businesses and
companies with high growth potential in sectors such as information
technology, communications, and biotechnology Venture capitalists also
require to be given some ownership or equity stake in the business.
4. Angels: Angels are generally wealthy individuals or retired company
executives who invest directly in small firms owned by others. They also
contribute to the business by way of their expertise, experience, and/or
managerial knowledge.
5. Business incubators: Business incubators provide various services for
new businesses such as sharing their premises and even laboratories as
well as their administrative logistical and technical resources. Generally,
the incubation phase lasts up to two years. Once the product is ready, an
entrepreneur leaves the incubator’s premises and starts its industrial
production phase. Such services are available in sectors such as
biotechnology, information technology, multimedia, or industrial
technology.
6. Government Grants and Subsidies: Government agencies finance
venture capital in the form of grants and subsidies. An entrepreneur
needs to go through a long and complicated procedure to avail of grants
and subsidies. He has to submit a detailed project report giving details
like project description, the significance of the project, cost structure,
resources available, projected return on investment, and so on.
7. Bank Loans: A bank loan is the major source of financing venture
capital for small and medium-sized businesses. An entrepreneur needs
to select the bank that meets his specific needs. He has to fulfil various
requirements for getting bank loans such as a detailed project report
and the guarantee.
Q-9. What is Micro Finance? Explain the importance of Micro Finance.
Microfinance is a general term to describe financial services to
lowincome individuals or to those who do not have access to typical
banking services. Microfinance is also the idea that individuals are
capable of lifting themselves out of poverty if given access to some of
the financial services. The two main mechanisms for the delivery of
financial services to such clients are:
 Relationship-based banking for individuals’ entrepreneurs and small
business; and
 Group-based models, where several individual entrepreneurs come
together to apply for loans and other services as a group.
"Microfinance is the supply of loans, savings, and other basic financial
services to the poor." As these financial services usually involve small
amounts of money - small loans, small savings, etc. - the term
"microfinance" helps to differentiate these services from those which
formal banks provide.

Importance of Microfinance:
Microfinance institutions are those which provide credit and other
financial services and products of very small amounts to the poor in
rural, semi-urban, and urban areas for enabling them to raise their
income and improve their standard of living.
1. Credit to Rural Poor: Usually, the rural sector depends on non-
institutional agencies for their financial requirements. Microfinancing
has been successful in taking institutionalized credit to the doorstep of
the poor and has made them economically and socially sound.
2. Poverty Alleviation: Due to microfinance poor people get
employment. It also helps them to improve their entrepreneurial skills
and encourages them to exploit business opportunities. Employment
increases income level which in turn reduces poverty.
3. Women Empowerment: Normally more than 50% of SHGs are formed
by women. Now they have greater access to financial and economic
resources. It is a step towards greater security for women. Thus
microfinance empowers poor women economically and socially.
4. Economic Growth: Finance plays a key role in stimulating sustainable
economic growth. Due to microfinance, the production of goods and
services increases which increase GDP and contribute to the economic
growth of the country.
5. Mobilisation of Savings: Microfinance develops saving habits among
people. Now poor people with meagre income can also save and are
bankable. The financial resources generated through savings and
microcredit obtained from banks are utilized to provide loans and
advances to its members. Thus microfinance helps in the mobilization of
savings.
6. Development of Skills: Microfinancing has been a boon to potential
rural entrepreneurs. SHGs encourage its members to set up business
units jointly or individually. They receive training from supporting
institutions and learn leadership qualities. Thus microfinance is indirectly
responsible for the development of skills.
7. Mutual Help and Co-operation: Microfinance promotes mutual help
and cooperation among members. The collective efforts of the group
promote economic interest and help in achieving socio-economic
transition
8. Social Welfare: With employment generation the level of income of
people increases. They may go for better education, health, family
welfare, etc. Thus microfinance leads to social welfare or betterment of
society.

Q-10. What is the role of Self Help Groups?

Self Help Groups generally operate in rural India. They are also found in
other countries, especially in South Asia and Southeast Asia. It generally
consists of 10-20 self-employed rural women. Members of the group are
encouraged to serve a small amount regularly and contribute to the
common fund. After few months, when a sizable amount is accumulated
the group starts lending back to the members as to others in the village
for some purpose. In India, many SHGs are linked to banks for the
delivery of microcredit. Microcredit refers to small loans that help poor
rural women to meet their immediate credit needs. Central and State
Government along with the National Bank for Agriculture and Rural
Development are encouraging Self Help Groups to achieve women
empowerment.
Role of Self Help Groups:
The role of SHGS in India can be given with the help of the following
points –
 Initiate and maintain savings within the group: All members must
regularly save at least a small amount. These savings allow them
to get future credits for their group.
 Lending loans to the members: The savings made by the SHG
must be used to provide loans to members of the group.
Everything related to the loan must be decided within the group.
 Solving common problems: SHGs mostly consist of individuals
who face similar problems. The grouping should essentially help
the individual overcome these problems through discussions and
interactions within the group and overcoming the problems and
finding a common and united solution to the problems.
 Bank Loans: SHGs work on getting a collective guarantee system
so that they can avail of loans from official sources. Thus they are
of great help to achieve sustainable economic development in
India.
 Poverty Alleviation: The formation of SHGs has helped the
members save a part of their income. It has increased its assets,
income, and generated employment opportunities. There has
been a significant shift in the use of loans for personal use to them
being used for income generation. The cumulative savings of the
members had made them financially stable. This has helped them
come out of the vicious circle of poverty and unemployment.
 Financial Inclusion: According to the NSSO survey (59th round),
more than half of the farmer households in rural India do not have
access to formal credit. Overall around 70% of all the households
don't have any access to institutional credit. Microfinance helps
the SHGs access formal institutions like the banks both for saving
and securing loans. The members of the SHGs are thus able to
minimize their dependence on money lenders. Thus, SHGs can
help achieve the goal of financial inclusion in rural India.
 Human Resource Development: The financial stability of the
members encourages them to spend more on the education of
their children. The member households have reported better
school attendance and a decrease in school dropout rates. The
 financial stability has led to lower child mortality, improved
maternal health, good nutrition, housing, and health – especially
among women and children.
 Women Empowerment: The contribution of women to household
income has increased. It gave them better control over the
decisions that affect their lives. It has led to an increased
involvement of women in decision making. It has increased their
awareness about various welfare schemes and organizations and
access to such organizations. The Expenditure on girl education in
member households has also increased