Market Participants

Question 1 (10 marks)

(a) Classification (4 marks — 1 each)

• Singapore pension fund → FII (Foreign Institutional Investor / FPI) — a foreign-domiciled institution investing in Indian markets. (1)
• Domestic mutual fund → DII (Domestic Institutional Investor) — pooled domestic institutional money. (1)
• Mumbai individual (50 shares via app) → Retail investor — small individual trade, own account. (1)
• Bank's proprietary desk → Prop trader — trading firm's own capital, intraday, closed flat. (1)

(b) Net inflow effect (3 marks)

• FII inflow rises by ₹200 crore (foreign category). (1.5)
• DII inflow rises by ₹120 crore (domestic category). (1.5)
• (Retail is small/individual and prop desk closed flat = ₹0 net, so neither materially moves the FII/DII inflow tables.)

(c) Liquidity effect of prop desk (3 marks)

• High turnover adds depth/liquidity — more counterparties, tighter spreads. (1)
• Even with flat net position, it improves price discovery and order availability. (1)
• Regulators monitor because rapid high-volume trading can create volatility, potential for manipulation/spoofing, and systemic risk if leveraged. (1)

Question 2 (10 marks)

(a) Three listing problems (6 marks — 2 each)

1. Excessive promoter holding (92%) → violates minimum public shareholding (public float must be at least 25% for most listings; promoters can hold max ~75%). Matters because low float → poor liquidity, price manipulation risk. (2)
2. Low net tangible assets (₹2 crore) → falls short of typical profitability/net-worth/net-tangible-asset entry criteria for the main board. Matters as it signals inadequate financial substance. (2)
3. Weak profitability track record (profit in only 1 of 3 years) → fails the consistent-profitability/track-record eligibility norm. Matters because it indicates unstable earnings and higher investor risk. (2)

(b) Friends & family allotment (2 marks)

• Public shareholding norms require a genuine, dispersed public holding, not concentrated related/connected persons. (1)
• Friends & family are effectively linked to promoters → does not create real free float or genuine liquidity; regulators can treat them as part of promoter group. (1)

(c) Regulator & document (2 marks)

• Regulator: SEBI (approval of the offer). (1)
• Document: a prospectus / Draft Red Herring Prospectus (DRHP) filed for the IPO. (1)

Question 3 (10 marks)

(a) Transaction flow (5 marks)

1. A & B place orders via their brokers, who route them to the exchange for matching. (1)
2. Exchange matches the trade and sends details to the clearing corporation (e.g. NSE Clearing). (1)
3. Clearing corporation determines obligations (netting) and acts as central counterparty. (1)
4. On T+1, funds move via clearing banks; securities move through the depository (debit seller's demat, credit buyer's demat). (1)
5. Settlement complete: B receives shares in demat, A receives funds. (1)

(b) Novation (2 marks)

• Novation = the clearing corporation legally inserts itself as buyer to every seller and seller to every buyer. (1)
• Thus A and B no longer face each other; the CCP guarantees settlement, eliminating counterparty default risk. (1)

(c) Inter-depository settlement (3 marks)

• Yes, settlement can still complete. (1)
• India has two interoperable depositories (NSDL & CDSL); the clearing corporation handles the transfer across depositories. (1)
• An inter-depository transfer mechanism moves securities from the NSDL account to the CDSL account so the buyer is credited normally. (1)

Question 4 (10 marks)

(a) Two-sided quoting (4 marks)

• Market maker continuously posts both a bid (buy) and an ask (sell) price with quantities. (2)
• This guarantees the thin stock always has a counterparty → provides liquidity, reduces spread, enables execution, and improves price discovery/reduces volatility. (2)

(b) Spread calculation (3 marks)

• Spread in rupees $= 99.10 - 98.50 = ₹0.60$. (1.5)
• Spread as % of ask $= \dfrac{0.60}{99.10}\times100 = 0.6054\% \approx 0.61\%$. (1.5)

(c) Net position & spread revenue (3 marks)

• Market buy of 200 → market maker sells 200 @ ₹99.10 (ask). (0.5)
• Market sell of 100 → market maker buys 100 @ ₹98.50 (bid). (0.5)
• Net inventory position: sold 200, bought 100 → net short 100 shares. (1)
• Gross spread revenue on the 100 shares matched (round trip): $100 \times (99.10 - 98.50) = 100 \times 0.60 = ₹60$. (1) (The remaining 100 sold @ ₹99.10 leaves a net short position of ₹9,910 exposure.)

Question 5 (10 marks)

(a) Comparison (6 marks — 1.5 each dimension)

(b) SEBI powers & outcome (4 marks)

• Power 1: Investigate & summon records / call for information, inspect books and freeze/attach accounts. (1.5)
• Power 2: Impose monetary penalties, bar/debar the entity from markets, and issue disgorgement orders for ill-gotten gains. (1.5)
• Investor-protection outcome: manipulators removed/penalised → restores fair pricing and protects investors from manipulated (circular-trade) prices, maintaining market integrity. (1)

[
  {"claim":"Bid-ask spread in rupees = 0.60","code":"spread = 99.10 - 98.50\nresult = round(spread,2) == 0.60"},
  {"claim":"Spread as percent of ask approx 0.6054%","code":"pct = (0.60/99.10)*100\nresult = abs(pct - 0.6054) < 0.01"},
  {"claim":"Gross spread revenue on 100 matched shares = 60","code":"rev = 100*(99.10-98.50)\nresult = round(rev,2) == 60.00"},
  {"claim":"Market maker net inventory is short 100 shares","code":"net = 100 - 200\nresult = net == -100"},
  {"claim":"FII plus DII directional inflow totals 320 crore","code":"total = 200 + 120\nresult = total == 320"}
]