Previous Year UPSC Questions

Explanation

Alternative Investment Fund or AIF means any fund established or incorporated in India which is a privately pooled investment vehicle which collects funds from sophisticated investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors. AIF does not include funds covered under the SEBI (Mutual Funds) Regulations, 1996, SEBI (Collective Investment Schemes) Regulations, 1999 or any other regulations of the Board to regulate fund management activities. In what categories can an applicant seek registration as an AIF? Applicants can seek registration as an AIF in one of the following categories, and in sub-categories thereof, as may be applicable:

Category I AIF:

Venture capital funds (Including Angel Funds) SME Funds o Social Venture Funds Infrastructure funds Category II AIF Category III AIF Venture Capital: Venture capital funds invest in startups and emerging companies and are classified as Alternative Investment Funds under Indian regulations. What are Category I AIFs? AIFs which invest in start-up or early stage ventures or social ventures or SMEs or infrastructure or other sectors or areas which the government or regulators consider as socially or economically desirable and shall include venture capital funds, SME Funds, social venture funds, infrastructure funds and such other Alternative Investment Funds as may be specified. What are Category II AIFs? AIFs which do not fall in Category I and III and which do not undertake leverage or borrowing other than to meet day-to-day operational requirements and as permitted in the SEBI (Alternative Investment Funds) Regulations, 2012. Various types of funds such as real estate funds, private equity funds (PE funds), funds for distressed assets, etc. are registered as Category II AIFs. Hedge Funds: Hedge funds fall under the category of Alternative Investment Funds. They pool capital from investors and use complex strategies including leverage, derivatives, and short selling, which differ from traditional investments. What are Category III AIFs? AIFs which employ diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives. Various types of funds such as hedge funds, PIPE Funds, etc. are registered as Category III AIFs. Stocks: Stocks or equity shares represent ownership in companies and are considered traditional investments, not AIFs. Bonds: Bonds are considered traditional investment instruments and are not categorized as Alternative Investment Funds. They are debt securities issued by governments or corporations.

Explanation

The Reserve Bank of India is the central bank of the country. It earns income primarily through monetary operations, management of currency, and foreign exchange transactions

Statement 1 is correct: The RBI conducts open market operations involving the buying and selling of government securities (bonds). It earns income through interest receipts and capital gains on these transactions.

Statement 2 is correct: The RBI manages India’s foreign exchange reserves and intervenes in forex markets to stabilize the rupee. Gains from currency transactions contribute to its income.

Statement 3 is incorrect: RBI does not manage pensions for citizens or the government. Pension Fund Regulatory and Development Authority (PFRDA) governs pension systems like NPS. RBI only manages government accounts and public debt, not pension

Statement 4 is incorrect: The RBI does not lend directly to private companies. It lends to commercial banks and financial institutions as part of monetary policy and financial regulation, but lending to private companies is not a source of income.

Statement 5 is correct: RBI has the sole right to print and issue currency notes in India. It earns income through seigniorage, the profit made from issuing currency notes, which is the difference between the face value and the cost of printing. Seigniorage = Face value of currency - cost of printing it. For example, printing a 100 note may cost 3, giving a profit of 97.

Explanation

Row I is not matched: The Directorate of Enforcement (ED) is a specialized economic intelligence and law enforcement agency under the Department of Revenue, Ministry of Finance (not Ministry of Home Affairs). It enforces laws like the Foreign Exchange Management Act (FEMA) and the Prevention of Money Laundering Act (PMLA). While the Fugitive Economic Offenders Act, 2018 is also enforced by the ED, it does not work under the Internal Security Division-I of the Ministry of Home Affairs. Row II is matched: The DRI is the premier anti-smuggling agency responsible for enforcing the Customs Act, 1962, and functions under the Department of Revenue, Ministry of Finance. Row III is incorrectly matched: The Directorate General of Analytics and Risk Management (DGARM) has been set up, w.e.f. 01-07-2018, to provide intelligence inputs and carry out big data analytics to assist the tax officers for better policy formulation and nabbing evaders. The DGARM functions under the Central Board of Indirect Tax and Customs (CBIC), mainly to use internal and external sources for detailed data mining to generate actionable inputs. The DGARM is an attached office of the CBIC which reports to Chairman, CBIC through Member (Investigation). This Directorate General functions for Customs, Central Excise and Goods and Services Tax. The DGARM works in close coordination with Directorate General of Systems and Data Management, Directorate General of Revenue Intelligence, Directorate General of Goods and Services Tax Intelligence, Directorate General of Audit and Directorate General of Valuation. The DGARM utilizes internal and external data sources for detailed data mining and analysis to generate outputs for focused and targeted action by field formations and investigation wings of CBIC. It in conjunction with DG Systems, organize, evaluate and interpret data for the purposes of effective, efficient and targeted policy formulation and revenue administration.

Explanation

Statement 1 is incorrect: The Reserve Bank of India (RBI) does not mandate the submission of the Business Responsibility and Sustainability Report (BRSR). Instead, the Securities and Exchange Board of India (SEBI) mandates this requirement. Since 2022, SEBI has required the top 1,000 listed companies by market capitalization to submit BRSR as part of their annual reporting to improve transparency on ESG (Environmental, Social, and Governance) matters.

Statement 2 is correct: BRSR disclosures primarily involve non-financial information related to a company’s social responsibility, sustainability initiatives, environmental impact, governance, and stakeholder engagement. It complements financial reports by providing stakeholders with a broader understanding of a company’s impact and sustainable practices.

Explanation

Statement I is incorrect: Under Section 10(1) of the Income Tax Act, only agricultural income is exempt. Allied activities like poultry farming, dairy, or wool rearing do not fall under the definition of agricultural income. Hence, they are taxable under normal income tax provisions even in rural areas.

Statement II is correct: Under Section 2(14) of the Income Tax Act, 1961, rural agricultural land is specifically excluded from the definition of a capital asset. This means that capital gains tax is not applicable on the transfer of rural agricultural land. However, this exclusion applies only to land situated in rural areas and used for agricultural purposes.

Explanation

Statement 1 is correct: India has become 14th member of the Mineral Security Partnership (MSP) in June 2023. The other member countries are the United States, Australia, Canada, Finland, France, Germany, Italy, Japan, Norway, the Republic of Korea, Sweden, the United Kingdom and the European Commission. MSP seeks to bolster critical minerals supply chains to support economic prosperity and climate objectives.

Statement 2 is incorrect: While India has identified a list of 30 critical minerals vital for its economy (including lithium, cobalt, nickel etc.), it is not resource-rich in all of them. On the contrary, India lacks sufficient domestic reserves for many of these minerals and depends heavily on imports. Only a handful of the 30 (such as copper, gallium, graphite, cadmium) have notable domestic availability. For several critical minerals for example, lithium and cobalt India has little to no indigenous supply and largely import dependent. In summary, India cannot be described as "resource-rich" in all of its identified critical minerals; rather, it has significant supply gaps and is actively seeking foreign sources and partnerships to secure many of these materials.

Statement 3 is correct: In 2023, India’s Parliament passed the Mines and Minerals (Development and Regulation) Amendment Act, 2023, which gave the central government powers to exclusively conduct auctions of mineral concessions for specified critical minerals. This amendment empowers the central government to exclusively auction mining lease and composite licence for certain critical minerals viz. molybdenum, rhenium, tungsten, cadmium, indium, gallium, graphite, vanadium, tellurium, selenium, nickel, cobalt, tin, platinum group of elements, minerals of "rare earth" group (not containing Uranium and Thorium). This amendment also mentions, even though auction would be conducted by the Central Government, the mining lease or composite licence for these minerals to the successful bidders will be granted by the State Government only and the auction premium and other statutory payments shall continue to be received by the State Government.

Explanation

Statement I is correct: In corporate finance and investing, bonds (debt investments) are typically viewed as safer and less volatile than stocks (equity investments). Bondholders have more certainty in their returns as they receive fixed interest payments and return of principal at maturity, whereas stockholders’ returns (dividends and share price appreciation) are uncertain and variable and depend on the company’s performance. In the event of financial trouble or bankruptcy, bond investors are among the first to be paid, whereas common stockholders often receive later, this safety net further reduces the risk for bondholders. In sum, stocks are inherently riskier than bonds, so bondholders face lower risk relative to stockholders, which is why they also often expect lower returns than equity investors as compensation for that lower risk.

Statement II is correct: Bondholders lend money to the company by purchasing its bonds, making them debtholders. Stockholders (shareholders) are owners of the company’s equity. In other words, buying a bond means one effectively acts as a lender to the firm, entitled to interest and principal repayment, whereas buying stock means you purchase a share of ownership in the firm, with claim to its residual profits.

Statement III is correct: In a company’s capital structure, bondholders have priority over stockholders when it comes to repayment, especially in distress or liquidation scenarios.

Statement II and Statement III are correct and both of them explain Statement I: Bondholders are lenders to the company while stockholders are owners (Statement II), and bondholders have rights and claims on their investments compared to owners. Consequently, bondholders have more security: the company must meet its debt obligations to bondholders (or face default), and bondholders get priority in any repayment or liquidation (Statement III). These factors greatly reduce the risk to bond investors relative to equity investors. Stockholders, on the other hand, are residual claimants who are paid last and only after all obligations are met, they have no guaranteed returns. Because of this structure, investing in a company’s bonds is generally less risky than investing in its stock.

Explanation

Statement 1 is correct: India has emerged as a dominant player in the global equity options market. In 2023, Indian exchanges accounted for approximately 78% of global equity options trading volume, with 84.3 billion contracts traded, marking a 153% increase from the previous year. By April 2024, the combined volume of equity derivatives on the NSE and BSE constituted nearly 81% of global turnover. This surge reflects a significant boom in India’s equity options trading activity

Statement 2 is correct: India’s stock market has experienced substantial growth in recent years. On January 22, 2024, the combined market capitalization of Indian exchanges reached $4.33 trillion, surpassing Hong Kong’s $4.29 trillion, thereby making India the world’s fourth-largest stock market by market capitalization. This milestone underscores the rapid expansion and investor confidence in India’s equity markets.

Statement 3 is incorrect: India has strong regulatory bodies like the Securities and Exchange Board of India (SEBI) which actively regulate the securities market, including derivatives trading. SEBI issues guidelines, warnings, and investor education campaigns on the risks of options trading. It also takes action against unregistered financial advisors and fraudulent activities to protect retail investors.

Explanation

Statement I is correct: The circular economy model aims to reduce resource extraction, encourage recycling and reuse, and design out waste. All these reduce energy consumption and emissions. Greenhouse gas (GHG) emissions are reduced in several ways:

Lower extraction and processing of virgin materials (which is carbon-intensive). Emphasis on reuse, recycling, and resource efficiency. Waste reduction leads to less landfill methane and less incineration. Impact organisation Circle Economy’s Circularity Gap Report 2021 finds that circular economy strategies can cut global greenhouse gas emissions by 39%.

Statement II is correct: By emphasizing reuse, refurbishment, remanufacturing, and recycling, the circular economy significantly reduces the need for raw materials as inputs in production processes, conserving natural resources.

Statement III is correct: The circular economy focuses on reducing wastage in production by improving process efficiency, redesigning products for durability and easy repair, and adopting sustainable manufacturing practices. Statements II and III explain Statement I: Reducing raw material use (Statement II) and cutting production wastage (Statement III) both contribute to lower energy consumption and fewer emissions, which leads to a reduction in overall greenhouse gas emissions (Statement I).

Explanation

Statement 1 is correct: Capital receipts are receipts that either create a liability for the government (such as borrowings) or lead to a reduction in assets (such as recovery of loans or disinvestment proceeds). They are distinguished from revenue receipts, which are the income earned from the government’s normal operations.

Statement 2 is correct: Borrowings (loans taken by the government) and disinvestment proceeds are classified as capital receipts. Borrowings increase the government’s liabilities, while disinvestment reduces government ownership in public sector undertakings (thus reducing assets).

Statement 3 is incorrect: Interest received on loans given by the government is a non tax revenue receipt, not a capital receipt or liability. Interest payment by the government, on the other hand, is an expenditure. Interest received on loans is income for the government. It’s revenue generated from money it has lent out.