Functions of Stock Exchange and Functions of SEBI | 12th HSC S.P. Chapter 12

🚨 SMART STUDY ALERT: HOW TO USE THIS PAGE!

Dear Students, please note that this single page contains 2 to 3 DIFFERENT QUESTIONS from the same chapter to help you study easily in one place. Do not get confused by the length of the page!

For any 4-Mark Question (Question 5), exactly how much should you write in the exam?

Step 1: Write the Meaning / Introduction in just 2 to 3 lines (Carries 1 Mark).
Step 2: You DO NOT need to write all 10 points! Select and write ANY 4 to 5 POINTS with a short 2-line explanation for each (Carries 3 Marks).
Total Length: Your final answer in the board exam should be around 1 to 1.5 pages only!

📝 Note: Use the "Memory Trick" and "Objective Points" at the bottom of this page ONLY for your revision. You do not need to write them in your long answers!

The questions "State any four functions of Stock Exchange" and "Explain the functions of SEBI" are the two most important 4-mark brief questions from the final chapter of the Maharashtra State Board (MSBSHSE) 12th Standard HSC Secretarial Practice (S.P.) Chapter 12: Stock Exchange. In the HSC Board Examination, one of these questions is virtually guaranteed to appear in Question 5 (Answer in Brief - 4 Marks), Question 2 (Explain the Terms - 2 Marks), or Question 6 (Justify Statements - 4 Marks). Below are the complete, textbook-accurate solutions for both topics strictly aligned with the latest Balbharati Textbook.

Board Examiner Marking Scheme (4 Marks):
1. Meaning / Introduction of Stock Exchange or SEBI: 1 Mark
2. Any 4 to 5 Functions with Clear Explanation: 3 Marks
Topper's Tip: For SEBI, always mention the establishment year (1988) and the statutory act year (SEBI Act, 1992) in the introduction to secure full marks immediately!

Part A: Meaning & Functions of Stock Exchange

1. Meaning of Stock Exchange

A Stock Exchange (also called Stock Market or Share Market) is a specific organization or association of persons (whether incorporated or not) established for the purpose of assisting, regulating, and controlling the business of buying, selling, and dealing in existing (listed) securities.

Legal Definition [SCRA, 1956]: According to the Securities Contracts (Regulation) Act, 1956, "Stock Exchange means any body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities."
Husband and Dockeray's Definition: "Stock Exchanges are privately organized markets which are used to facilitate trading in securities."

2. Functions of Stock Exchange (9 Official Textbook Points)

(Write any 4 to 6 points in the exam for 4 Marks):

Mobilisation of Savings: Stock markets are organized and regulated markets which protect the interest of investors. This encourages small and big savers to invest in the securities of various corporate sectors. Thus, it facilitates the mobilisation of idle savings from the public into productive corporate investments.
Capital Formation: Investors in securities are attracted due to good returns on investments and capital appreciation. This attracts more investors to invest through the Stock Exchange. Corporates too can easily raise funds to meet their expansion and diversification needs. Thus, it serves as a tool for capital formation in the country.
Pricing of Securities: The stock market helps to value the securities on the basis of demand and supply factors. The securities of profitable and growth-oriented companies are valued higher as there is more demand for such securities. The valuation of securities is useful for investors, the government, and creditors.
Economic Barometer (Pulse of Economy): A Stock Exchange is a reliable barometer (indicator) to measure the economic condition of a country. Every major change in the country and economy is reflected in the prices of shares. The rise or fall in the share prices indicates the boom or recession cycle of the economy. Hence, it is known as the "Pulse of the Economy" or "Economic Mirror".
Protecting Interest of Investors: Stock Exchange protects the interest of investors. In a Stock Exchange, only listed securities are traded. A Stock Exchange allows listing only after verifying the soundness and genuineness of the company. Also, the listed companies have to operate within the strict rules and regulations laid down by the Stock Exchange.
Liquidity: The main function of a Stock Exchange is to provide a ready and continuous market for the sale and purchase of securities. The presence of the Stock Exchange gives assurance to investors that their investments can be converted into cash quickly whenever they want. Due to this high liquidity, investors can invest in long-term projects without hesitation.
Better Allocation of Capital: The shares of profit-making companies are quoted at higher prices and are actively traded; therefore, such companies can easily raise fresh capital from the market. The prices of securities of loss-making companies fall. Thus, Stock Exchange facilitates the allocation of investor funds to profitable and productive channels.
Contributes to Economic Growth: In a Stock Exchange, securities of various companies are bought and sold continuously. This process of disinvestment and reinvestment helps to channelize funds into the most productive investment proposals. This leads to capital formation and faster economic growth.
Providing Scope for Speculation: To ensure liquidity and maintain the demand or supply of securities, the Stock Exchange permits healthy and controlled speculation of securities within the strict provisions of the law.

Part B: Introduction & Functions of SEBI (Securities and Exchange Board of India)

1. Introduction to SEBI

The Securities and Exchange Board of India (SEBI) is the supreme regulator of the Capital Market and Stock Exchanges in India. SEBI was initially established in 1988 as a non-statutory body to regulate the securities market. Subsequently, it was given statutory powers on 30th January 1992 under the Securities and Exchange Board of India (SEBI) Act, 1992. Its headquarters is located in Mumbai (Bandra-Kurla Complex). The primary objective of SEBI is to protect the interest of investors in securities, promote the development of the securities market, and regulate the securities market.

2. Functions of SEBI (8 Official Textbook Points)

SEBI performs various protective, developmental, and regulatory functions (Write any 4 to 6 points in the exam for 4 Marks):

To Protect the Interest of Investors: SEBI's foremost function is to protect the interest of investors in the securities market. It ensures that investors are not cheated by misleading prospectuses or fraudulent companies, and that their grievances are redressed promptly.
To Promote the Development of Securities Market: SEBI takes continuous measures (such as introducing screen-based electronic trading, rolling settlement, and Demat trading) to modernize and develop the Indian capital market.
To Regulate the Business in Stock Exchanges: SEBI frames rules, regulations, and bye-laws for the smooth and transparent functioning of all recognized Stock Exchanges (like BSE, NSE) and any other securities markets.
To Register and Regulate the Working of Intermediaries: SEBI registers and strictly regulates the working of all market intermediaries such as Stock Brokers, Sub-brokers, Share Transfer Agents, Bankers to an Issue, Trustees of Trust Deeds, Registrars to an Issue, Merchant Bankers, and Underwriters.
To Register and Regulate Depositories and Mutual Funds: SEBI registers and monitors the working of Depositories (NSDL & CDSL), Depository Participants (DPs), Custodians of Securities, Foreign Institutional Investors (FIIs), Credit Rating Agencies, and Mutual Funds / Venture Capital Funds (Collective Investment Schemes).
To Promote and Regulate Self-Regulatory Organizations (SROs): SEBI encourages intermediaries and market associations to form self-regulatory bodies and adhere to professional codes of conduct.
To Prohibit Fraudulent and Unfair Trade Practices: SEBI strictly prohibits and penalizes price rigging, market manipulation, and misleading statements in the securities market to maintain market integrity.
To Prohibit Insider Trading in Securities: SEBI strictly bans and penalizes "Insider Trading" (a malpractice where directors, promoters, or officers having access to unpublished price-sensitive information trade in the company's shares for personal profit).
To Promote Investor Education: SEBI conducts nationwide awareness campaigns and workshops to educate retail investors and provide training to market intermediaries.

Quick Memory Trick to Remember in the Exam

Memory Shortcut for Functions of Stock Exchange ("MC-PE-LB-CS"):
1. Mobilisation of Savings & Capital Formation
2. Pricing of Securities & Economic Barometer (Pulse of Economy)
3. Liquidity (Ready Market) & Better Allocation of Capital
4. Contributes to Economic Growth, Protecting Investors & Scope for Speculation

Memory Shortcut for Functions of SEBI ("3P - 3R"):
• 3P: Protect Investors, Promote Market Development, Prohibit Fraud/Insider Trading.
• 3R: Regulate Stock Exchanges, Register Intermediaries, Register Mutual Funds & Depositories.

Key Concept Summary for Objective Questions (Q.1)

Oldest Stock Exchange in Asia: The Bombay Stock Exchange (BSE), established in 1875 (as The Native Share and Stock Brokers' Association), is the oldest stock exchange in India and Asia.
SEBI Establishment: SEBI was set up in 1988 and became a statutory body in 1992.
Bulls and Bears: A Bull (Tejiwala) is an optimistic speculator who buys securities expecting a price rise, while a Bear (Mandiwala) is a pessimistic speculator who sells securities expecting a price fall.
Insider Trading: Trading by company officials on the basis of undisclosed, price-sensitive information is called Insider Trading, and it is strictly prohibited by SEBI.