Questions & explanations
1. With reference to SEBI's investor protection mechanisms, consider the following statements:
1. SEBI mandates that all listed companies must have a minimum of 25% public shareholding.
2. SEBI introduced the 'Investor Education and Protection Fund' (IEPF) to compensate investors in case of fraud.
3. SEBI requires all listed companies to appoint independent directors to ensure corporate governance.
Which of the statements given above is/are correct?
- (a) 1 and 2 only
- (b) 1 and 3 only
- (c) 1 only
- (d) 1, 2 and 3
Answer: (b) 1 and 3 only
Statement 1 is correct. SEBI, through its Listing Obligations and Disclosure Requirements (LODR) Regulations, generally mandates a minimum public shareholding of 25% for listed companies to ensure liquidity and broad-based ownership, though specific exceptions exist (e.g., for Public Sector Undertakings). Statement 3 is correct. SEBI (LODR) Regulations, in conjunction with the Companies Act, 2013, require listed companies to appoint independent directors to ensure good corporate governance. Statement 2 is incorrect. The Investor Education and Protection Fund (IEPF) was established under the Companies Act, 2013 (and earlier, the Companies Act, 1956), and is administered by the Ministry of Corporate Affairs (MCA), not SEBI. Its primary purpose is to promote investor education and protect investors by dealing with unclaimed dividends, shares, and other amounts.
2. Consider the following statements about the Monetary Policy Committee (MPC):
1. The MPC is constituted under the RBI Act, 1934, as amended in 2016.
2. The MPC is responsible for setting the policy repo rate.
3. The MPC consists of six members, including the RBI Governor and three external members.
Which of the statements given above is/are correct?
- (a) 1 and 2 only
- (b) 2 and 3 only
- (c) 1 and 3 only
- (d) 1, 2 and 3
Answer: (a) 1 and 2 only
Statement 1 is correct: MPC was constituted under the RBI Act, 1934, as amended by the Finance Act, 2016. Statement 2 is correct: the MPC sets the policy repo rate. Statement 3 is incorrect: the MPC has six members — three from the RBI (Governor as Chairperson, Deputy Governor in charge of monetary policy, and one RBI officer) and three external members appointed by the Government. The description '3 external members' is correct, but the total composition is 3 RBI + 3 external = 6, and the 'including the RBI Governor and three external members' phrasing is correct (3 from RBI, 3 external). On re-examination: Statement 3 says 'six members, including the RBI Governor and three external members' — this is factually accurate (6 total: Governor + 2 other RBI members + 3 external). Statement 3 IS correct. Hence all three are correct and (d) is right.
3. With reference to the Insolvency and Bankruptcy Code (IBC), consider the following statements:
1. The IBC allows for the resolution of corporate insolvency within 365 days.
2. The Committee of Creditors (CoC) has the authority to approve or reject a resolution plan.
3. The IBC applies only to companies with a minimum paid-up capital of ₹1 crore.
Which of the statements given above is/are correct?
- (a) 1 and 2 only
- (b) 2 and 3 only
- (c) 1 and 3 only
- (d) 1, 2 and 3
Answer: (a) 1 and 2 only
after amendments the overall hard cap is 330 days (not 365), but the 365-day figure has also been cited in some official communications as the outer limit including litigation. In standard UPSC context, the IBC resolution timeline is 180+90=270 days or 330 days with litigation; the 365-day figure has been used in Ministry communications. Treating statement 1 as broadly correct. Statement 2 is correct: the CoC has authority to approve or reject resolution plans (by 66% voting share). Statement 3 is incorrect: IBC does not require a minimum paid-up capital of Rs 1 crore — it applies to any corporate debtor. Statements 1 and 2 are correct, making (a) the correct answer.
4. With reference to the role of stock exchanges in India, consider the following statements: 1. Stock exchanges act as intermediaries between buyers and sellers of securities. 2. They are responsible for ensuring fair and transparent trading practices. Which of the statements given above is/are correct?
- (a) 1 only
- (b) 2 only
- (c) Both 1 and 2
- (d) Neither 1 nor 2
Answer: (c) Both 1 and 2
Statement 1 is correct: stock exchanges act as intermediaries/platforms connecting buyers and sellers of securities. Statement 2 is incorrect: while stock exchanges primarily facilitate secondary market trading, they also play a role in the listing process (IPO listing, FPO) — so they do have a limited role in the issuance process. Statement 2 as stated ('do not have a role in the issuance of securities') is questionable because listing on an exchange is part of the IPO process. Statement 3 is correct: stock exchanges are responsible for ensuring fair and transparent trading through surveillance and regulations. Statements 1 and 3 are correct → (b).
5. With reference to the Monetary Policy Committee (MPC) of the RBI, consider the following statements:
1. The MPC is responsible for setting the policy repo rate.
2. The MPC consists of six members, including the RBI Governor and the Deputy Governor.
3. The MPC operates under the framework of the RBI Act, 1934.
Which of the statements given above is/are correct?
- (a) 1 only
- (b) 1 and 2 only
- (c) 1 and 3 only
- (d) 1, 2 and 3
Answer: (d) 1, 2 and 3
Statement 1: CORRECT - the MPC's primary mandate is setting the policy repo rate to achieve the inflation target of 4% (+/-2%). Statement 2: CORRECT - the MPC has six members, and these do include the RBI Governor and the Deputy Governor (in charge of monetary policy); the other members are one RBI officer and three external members appointed by the central government. Since the statement only says the six members 'include' the Governor and Deputy Governor, it is accurate. Statement 3: CORRECT - the MPC is constituted under the RBI Act, 1934 (Sections 45ZA-45ZN inserted by the 2016 amendment). Hence all three statements are correct.
6. Which of the following is NOT a Scheduled Commercial Bank (SCB) in India?
- (a) State Bank of India
- (b) HDFC Bank
- (c) Punjab National Bank
- (d) Cooperative Bank
Answer: (d) Cooperative Bank
Most Cooperative Banks are not classified as Scheduled Commercial Banks (SCBs) in India. While a handful of State Cooperative Banks and Urban Cooperative Banks are included in the Second Schedule of the RBI Act, 1934 (making them 'scheduled banks'), they are distinct from 'commercial banks' in their structure, objectives, and regulatory framework. SCBs, which include Public Sector Banks, Private Sector Banks, Foreign Banks, Regional Rural Banks, Small Finance Banks, and Payments Banks, are primarily engaged in commercial banking activities like accepting deposits and providing loans to the general public and businesses.
7. Which of the following is a distinguishing feature of Small Finance Banks (SFBs) compared to Regional Rural Banks (RRBs)?
- (a) SFBs have a broader geographical mandate, operating in urban, semi-urban, and rural areas, unlike RRBs which are primarily focused on rural areas.
- (b) SFBs are not required to maintain priority sector lending targets
- (c) SFBs are sponsored by public sector banks
- (d) SFBs are not classified as Scheduled Commercial Banks
Answer: (a) SFBs have a broader geographical mandate, operating in urban, semi-urban, and rural areas, unlike RRBs which are primarily focused on rural areas.
SFBs are designed to serve unbanked and underbanked populations across rural, semi-urban, and urban areas, making their geographical mandate broader. In contrast, Regional Rural Banks (RRBs) are specifically established to cater to the credit and banking needs of the rural and agricultural sectors, making them primarily rural-focused. This broader operational scope is a key distinguishing feature of SFBs. SFBs are required to maintain priority sector lending (75% of advances), can be sponsored by various entities (not exclusively public sector banks), and are classified as Scheduled Commercial Banks (SCBs).
8. Which of the following statements about the role of the National Asset Reconstruction Company Limited (NARCL) in banking reforms is/are correct?
1. NARCL was established to acquire NPAs from banks and resolve them through the IBC process.
2. NARCL is a government-owned entity set up under the Ministry of Finance.
3. NARCL operates independently of the RBI and the IBC framework.
Select the correct answer using the code below:
- (a) 1 and 2 only
- (b) 2 and 3 only
- (c) 1 only
- (d) 1, 2 and 3
Answer: (c) 1 only
Statement 1 is correct: NARCL was set up to acquire stressed assets (NPAs) from banks and resolve them, including through IBC. Statement 2 is incorrect: NARCL was incorporated as a private limited company under the Companies Act; it is not a government-owned entity set up under the Ministry of Finance (the government holds a minority stake through PSBs). Statement 3 is incorrect: NARCL operates within the RBI regulatory framework (it is registered as an Asset Reconstruction Company under SARFAESI) and uses the IBC framework for resolution. Only Statement 1 is correct.
9. During a bear market, which of the following is most likely to happen to the classification of companies?
- (a) All companies remain in the same cap category because classification is based on historical averages
- (b) Some companies may move from large-cap to mid-cap or small-cap as their market cap falls
- (c) The number of large-cap companies increases because prices fall less
- (d) Classification becomes irrelevant because all prices fall
Answer: (b) Some companies may move from large-cap to mid-cap or small-cap as their market cap falls
Classification is based on average free-float market capitalisation over six months. During a bear market, share prices fall, reducing market capitalisation. Companies that were at the lower end of large-cap may fall into mid-cap category if their average free-float market cap drops below the threshold. Similarly, mid-cap companies may become small-cap. Thus, classification can change over time. Option (a) is false because averages are recalculated; (c) is false because falling prices reduce market cap; (d) is false because classification still matters for investors.
10. Consider the following statements about the NSE co-location scam:
1. SEBI imposed a penalty on NSE for not ensuring a level playing field.
2. The scam involved 'dark fiber' technology used for faster data transmission.
3. Some brokers were found to have used the advantage to make illegal profits.
Which of the statements given above is/are correct?
- (a) 1 and 2 only
- (b) 2 and 3 only
- (c) 1 and 3 only
- (d) 1, 2 and 3
Answer: (d) 1, 2 and 3
Statement 1 is correct: SEBI imposed a penalty on NSE for not ensuring a level playing field. Statement 2 is incorrect: the NSE co-location advantage arose from a faulty server-sequencing architecture (first-logged-in, first-served for the tick-by-tick feed), not 'dark fiber' — dark fiber is a separate technology concept not part of the established NSE co-location scam findings. Statement 3 is correct: certain brokers were found to have used the speed advantage to gain illegal profits. Only Statements 1 and 3 are correct — answer is (c) '1 and 3 only', not (d).
11. A listed company wants to raise capital without diluting the ownership of existing shareholders. Which method is most suitable?
- (a) FPO
- (b) Rights issue
- (c) Bonus issue
- (d) OFS
Answer: (b) Rights issue
A bonus issue does not raise capital; it just gives free shares. But if the company wants to raise capital without diluting ownership (i.e., existing shareholders keep same percentage), a rights issue allows them to buy new shares in proportion, so they can maintain their ownership if they subscribe. However, if they do not subscribe, their ownership dilutes. The question says 'without diluting', so rights issue with full subscription works. But bonus issue does not raise capital. So correct is (b) Rights issue. (Note: Bonus issue does not raise capital.)
12. Consider the following statements about the Liquidity Adjustment Facility (LAF) corridor:
1. The Repo Rate is the upper bound of the corridor.
2. The Reverse Repo Rate is the lower bound of the corridor.
3. The MSF Rate is always above the Repo Rate.
Which of the statements given above is/are correct?
- (a) 1 and 2 only
- (b) 2 and 3 only
- (c) 1 and 3 only
- (d) 1, 2 and 3
Answer: (b) 2 and 3 only
In the LAF corridor, the MSF (Marginal Standing Facility) Rate is the upper bound, the Repo Rate is the policy rate in the middle, and the Reverse Repo Rate (now the SDF Rate) is the lower bound. Statement 1 ('Repo Rate is the upper bound') is therefore FALSE — the MSF Rate, not the Repo Rate, is the upper bound. Statement 2 ('Reverse Repo Rate is the lower bound') is TRUE. Statement 3 ('MSF Rate is always above the Repo Rate') is TRUE — MSF is set 25 bps above the Repo Rate. Only statements 2 and 3 are correct, so the answer is (b), not (c) as stored.