Capital Markets — UPSC Prelims Economy previous year questions

Statement 1 is correct. Tokenization turns a real-world asset, such as property or bonds, into a digital token on a blockchain.
Statement 2 is correct. Tokens can trade round the clock, every day. This widens access and helps financial inclusion.
Statement 3 is correct. Tokens can be split into small parts. This lets individuals in India invest in assets that were earlier out of reach.
So 1, 2 and 3 are all correct.
Remember: splitting an asset into small token units is called fractional ownership.

Source: RBI and SEBI discussion documents on tokenisation; World Economic Forum notes on asset tokenisation

A green bond funds only environmental projects.
A social bond funds only social projects.
A sustainability bond funds a mix of both environmental and social projects. This matches the question.
A sovereign bond is simply a bond issued by a government. It has no link to the use of proceeds.
So the answer is (c).
Remember: the International Capital Market Association (ICMA) sets voluntary principles for green, social and sustainability bonds.

Source: ICMA Green, Social and Sustainability Bond Principles; SEBI circulars on ESG debt securities

Statement 1 is correct. Crowdfunding collects small sums from many investors through a web platform or social networking site, for a specific project.
Statement 2 is correct. SMEs can raise funds this way at lower cost and with lighter procedures than with a public issue.
So both statements are correct.
Remember: SEBI has issued a consultation paper on regulating crowdfunding.

Source: SEBI Consultation Paper on Crowdfunding

Only two of the four items are Alternative Investment Funds (AIFs).
An AIF is a privately pooled investment fund. SEBI regulates it under its 2012 AIF Regulations.
Hedge funds are AIFs. They fall in Category III.
Venture capital funds are AIFs. They fall in Category I.
Bonds are loan instruments, and stocks are shares of a company. Neither is a fund, so neither is an AIF.
Remember: Category I covers venture capital, Category II covers private equity, and Category III covers hedge funds.

Source: SEBI (Alternative Investment Funds) Regulations, 2012

Statement I is incorrect. SEBI, not the RBI, requires the BRSR. It applies to the top 1,000 listed companies by market capitalisation, not to all listed companies.
Statement II is correct. The BRSR reports on environmental, social and governance matters. These disclosures are largely non-financial.
So only Statement II is correct.
Remember: SEBI introduced the BRSR in 2021 to replace the older Business Responsibility Report.

Source: SEBI circulars on Business Responsibility and Sustainability Reporting (BRSR)

All three statements are correct, and Statements II and III both explain Statement I.
Statement II is correct. A bondholder lends money to the company. A stockholder owns a share of the company.
Statement III is correct. If a company is wound up, lenders are repaid before owners.
Statement I is correct. Bondholders get fixed interest and repayment priority. So they face lower risk than stockholders.
Both reasons explain the lower risk, so option (a) is right.
Remember: Bonds are debt. Stocks are equity.

Source: NCERT Class XI Economics (financial securities); SEBI investor education material

Statement I is correct. Indian exchanges account for a very large share of the equity-option contracts traded globally.
Statement II is correct. India's stock market capitalisation overtook that of Hong Kong in early 2024.
Statement III is incorrect. SEBI regulates options trading. It has warned small investors about the risks and acts against unregistered advisers.
So only I and II are correct.
Remember: SEBI is the regulator of the securities market and its intermediaries.

Source: SEBI study on equity derivatives; World Federation of Exchanges data

Insurance companies and pension funds are large institutional investors in bonds. They trade in both corporate bonds and G-Secs.
Retail investors can also buy and sell them. They can use the stock exchange platforms and the RBI Retail Direct portal for G-Secs.
So all three can trade, and options that drop any one are wrong.
Remember: RBI Retail Direct, launched in 2021, lets individuals open a gilt account with the RBI.

Source: RBI Retail Direct Scheme (2021); SEBI rules on corporate bond trading

A financial instrument is a contract that gives one party a financial asset and another a financial liability.
An ETF is a fund unit traded on an exchange, so it is a financial instrument. A currency swap is a contract to exchange currency cash flows. This is also a financial instrument.
A motor vehicle is a physical asset, not a financial contract.
So only 1 and 3 are correct.
Remember: derivatives such as swaps, futures and options are financial instruments.

Source: SEBI and RBI definitions of financial instruments and derivatives

Capital markets deal in long-term securities.
The government bond market is a capital market. It trades long-term debt.
The stock market is a capital market. It trades equity.
The call money market is a money market. It handles overnight and very short-term loans.
The treasury bill market is a money market. T-bills mature in under one year.
So only two are capital markets.
Remember: money market = up to one year; capital market = beyond one year.

Source: RBI, Financial Markets; SEBI, Securities Markets

Beta measures how much a stock's price moves relative to the whole market.
A beta above 1 means the stock is more volatile than the market.
A beta below 1 means it is less volatile.
The first option describes arbitrage.
The second describes portfolio management in general.
The third is not a definition of beta.
Remember: beta is the key input in the Capital Asset Pricing Model.

Source: SEBI investor education material; standard finance texts (CAPM)

Statement 1 is incorrect. Credit rating agencies are regulated by SEBI under the SEBI (Credit Rating Agencies) Regulations, 1999.
Statement 2 is correct. ICRA Limited is a public limited company listed on stock exchanges.
Statement 3 is correct. Brickwork Ratings is an Indian agency registered with SEBI.
Remember: SEBI regulates CRAs; RBI recognises them only for bank capital rules.

Source: SEBI (Credit Rating Agencies) Regulations, 1999

Statement 1 is correct. The conversion option has value. So investors accept a lower coupon than on a plain bond.
Statement 2 is correct. Equity prices tend to rise with inflation. If the bond is converted, the holder gains some protection against rising prices.
Remember: a convertible bond is a debt instrument that can become equity.

Source: SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018; standard finance texts

Statement 1 is correct. Under the RBI Retail Direct scheme, retail investors can buy T-bills and G-Secs in the primary market through a demat account.
Statement 2 is correct. NDS-OM is an electronic order matching platform run by the RBI for G-Secs.
Statement 3 is incorrect. CDSL was promoted by the Bombay Stock Exchange with banks. The RBI is not a promoter.
Remember: NSDL and CDSL are the two depositories in India.

Source: RBI, Retail Direct Scheme (2021); CDSL company profile

Statement 1 is correct. Commercial paper is an unsecured short-term promissory note issued by companies.
Statement 2 is incorrect. Certificates of Deposit are short-term and are issued by banks, not by the RBI.
Statement 3 is correct. Call money is overnight or short-term lending among banks.
Statement 4 is incorrect. Zero-coupon bonds pay no interest and are sold at a discount.
Remember: CP, CD, call money and T-bills are money market instruments.

Source: RBI, Master Directions on Commercial Paper and Certificates of Deposit

A Participatory Note (P-Note) is issued by a registered FPI.
It lets overseas investors take exposure to Indian securities without registering with SEBI.
Certificates of Deposit and Commercial Paper are money market instruments.
A promissory note is a plain written promise to pay.
Remember: SEBI regulates P-Notes through FPI regulations.

Source: SEBI (Foreign Portfolio Investors) Regulations, 2019

Venture capital is risk capital. Investors give it to new firms with high growth potential.
It is long-term money. In return, investors usually take an equity stake in the start-up.
The risk is high, but the possible returns are also high.
It is not short-term working capital. So option (a) is wrong.
It is not meant to rescue loss-making firms or to renovate old units. So options (c) and (d) are wrong.
Remember: Venture capital funds in India are regulated by SEBI under the Alternative Investment Funds Regulations, 2012.

Source: SEBI (Alternative Investment Funds) Regulations, 2012

A bear is an investor who expects prices of a security to fall.
A bear usually sells now, hoping to buy back later at a lower price.
An investor who expects prices to rise is a bull. So option (b) is wrong.
A person with an interest in a company is a stakeholder. So option (c) is wrong.
A lender through loans or bonds is a creditor. So option (d) is wrong.
Remember: A 'bear market' is a period of falling share prices.

Source: Previous year paper; answer key cross-checked against published sources

Shcomp is the Shanghai Composite Index. It belongs to China, not Singapore. So this pair is wrong.
Singapore's main index is the Straits Times Index.
Nikkei 225 is the main index of the Tokyo Stock Exchange, Japan.
FTSE 100 is the main index of the London Stock Exchange, UK.
Nasdaq is a US stock exchange and index.
Remember: Hang Seng is Hong Kong's index; DAX is Germany's.

Source: Shanghai Stock Exchange; Singapore Exchange (SGX)

Statement 1 is incorrect. Sensex is based on 30 stocks. The 50-stock index is NSE's Nifty 50.
Statement 2 is correct. Each stock gets weight in proportion to its free-float market capitalisation. Free float means shares readily available for trading.
Statement 3 is incorrect. The NYSE was founded in 1792. The Amsterdam exchange (1602) is generally regarded as older.
Remember: Sensex has 1978-79 as its base year, with base value 100.

Source: BSE (S&P BSE Sensex methodology)