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Question
Explain the recent Capital Market reforms in India.
Solution
A capital market refers to the market that deals in the trading of medium and long-term securities. That is, it deals in those securities that have a maturity period of greater than or equal to one year. Capital market comprises of instruments such as equity and preference shares, debentures, bonds, mutual funds, public deposits, etc. A capital market can be divided in two parts namely, Primary Market and Secondary Market. Primary market deals with issue of new securities. Issue of new securities in the primary market directs funds towards those entrepreneurs who either want to start a new enterprise or wish to expand the existing one. Secondary market, on the other hand, deals in the sale and purchase of the existing securities. That is, it deals in the trading of those securities that were initially issued in the primary market.
The history of capital market in the form of stock exchange dates back to the eighteenth century. The Government of India introduced the Companies Act in 1850 with the aim of generating investor interest in corporate securities. The first stock exchange was set up in India in the year 1875 as 'The Native Share and Stock Brokers Association' in Bombay. Later it was renamed as 'Bombay Stock Exchange' (BSE). In the subsequent years stock exchanges were developed in Ahemdabad, Calcutta and Madras.
In 1990s, the Indian secondary market only consisted of regional stock exchanges wherein, first being the BSE. However, after the reforms of 1991, the Indian Stock Market acquired a three-tier system. This consisted of Regional Stock Exchanges, National Stock Exchange and Over the Counter Exchange of India (OTCEI).
Regional Stock Exchange
The first Regional Stock Exchange was developed in Ahemdabad as Ahmedabad Stock Exchange (ASE) in 1894. Similarly, in 1908, Calcutta Stock Exchange (CSE) was established. Subsequently in the later years other regional stock exchanges were established in Calcutta, Madras, Ahemdabad, Delhi, Hyderabad and Indore. Recently, regional stock exchanges were developed in Coimbatore as Coimbatore Stock Exchange and in Meerut as Meerut Stock Exchange. Currently, there are 22 regional stock exchanges in India.
National Stock Exchange
The NSE is the latest technology driven stock exchange which was recognised in 1993. It started its operations in 1994 with trading in money market securities. Later, it also expanded its trading operations in capital market segment. NSE was set up in order to establish a nationwide platform for trading in all types of securities. It ensured development of fair and efficient securities market. Within the span of its existence, NSE has transformed the Indian capital market and has been able to take the stock market to the investor's door step. It has provided a wide screen-based automated trading system across the nation ensuring equal access to all the investors.
Over the Counter Exchange of India (OTCEI)
OTCEI is a company which was set up in 1990 under the Companies Act,1956 but later was recognised as a stock exchange under the Securities Contracts Regulation Act, 1956. It commenced its operations in trading in 1992 and is modelled along the lines of NASDAQ, the OTC exchange in USA. It aims at providing the small companies an easy access to the capital market. OTCEI provides a screen based nationwide trading system, that acts as a place where buyers meet the sellers and negotiate for an acceptable terms of trade. Herein, dealers can trade both in new issue of securities as well as secondary market. It is a single window exchange which provides a convenient, transparent and efficient avenue for capital market investment.
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RELATED QUESTIONS
Differentiate between 'Primary Market' and 'Secondary Market' on any five basis.
Answer each of these questions in about fifteen words:
What is the need of secondary market?
Answer each of these questions in about one hundred and fifty words:
State the nature of money market. Who are the major participants in the money market?
Complete the correlation:
Money market : Short-term funds :: ______ : Long-term funds
Assertion and Reasoning:
- Assertion (A): Regional stock exchanges have witnessed a sharp decline in the volume of trade.
- Reasoning (R): Investors prefer to trade in securities listed in premier stock exchanges like BSE, NSE, etc.
Justify the following statement.
Capital market is useful for corporate sector.
Bank Rate means.
Primary and secondary markets
To be listed on OTCEI, the minimum capital requirement for a company is
Read the following text and answer the following question on the basis of the same:
ISQM SOLAR Limited is searching for options to raise Rs. 20,000 crores from the primary market for diversification and modernisation of existing projects. It hired the services of a renowned financial consultancy firm, DHAN LAXMI Pvr LTD. to suggest options for the same. DHAN LAXMI PVI LTD. suggested a list of options to the Board of Directors of the company. It was decided that for the immediate requirement of Rs. 1,500 crores, the company will give a privilege to existing shareholders to subscribe to a new issue of shares according to the terms and conditions of the company. Rs. 4,500 crores would be raised by allotment of securities to a consortium of financial institutions, instead of inviting subscription from the public by making a direct appeal to investors to raise capital. It was further decided to raise capital to the tune of Rs. 6,000 crores through an issuing house. All these options were accepted by the Board of Directors. The Board further decided to raise Rs. 8,000 crores through the online system of the stock exchange by entering into an agreement with the exchange.
"Rs. 4,500 crores would be raised by allotment of securities to a consortium of financial institutions, instead of inviting subscription from the public by making a direct appeal to investors to raise capital."
Identify the method of floatation of new issues in the primary market being discussed above, which the company has decided to use:
Read the following text and answer the following question on the basis of the same:
ISQM SOLAR Limited is searching for options to raise Rs. 20,000 crores from the primary market for diversification and modernisation of existing projects. It hired the services of a renowned financial consultancy firm, DHAN LAXMI Pvr LTD. to suggest options for the same. DHAN LAXMI PVI LTD. suggested a list of options to the Board of Directors of the company. It was decided that for the immediate requirement of Rs. 1,500 crores, the company will give a privilege to existing shareholders to subscribe to a new issue of shares according to the terms and conditions of the company. Rs. 4,500 crores would be raised by allotment of securities to a consortium of financial institutions, instead of inviting subscription from the public by making a direct appeal to investors to raise capital. It was further decided to raise capital to the tune of Rs. 6,000 crores through an issuing house. All these options were accepted by the Board of Directors. The Board further decided to raise Rs. 8,000 crores through the online system of the stock exchange by entering into an agreement with the exchange.
Identify the reason which has made the firm raise funds from the institutional investors :
Who plays a very vital role as a financial intermediary?
In its vital role as a financial intermediary, capital markets satisfies the tastes of the savers and the need of the investors. Evaluate the given statement.
Complete the correlation:
Money market : Short term funds :: ______ : Long term funds.
Complete the correlation:
Money market : Short term funds :: ______ : Long term funds
Complete the correlation.
Money market : Short term funds :: ______: Long term funds
Complete the correlation.
Money market : Short term funds :: ______ : Long term funds
Complete the correlation:
Money market : Short term funds :: ______ : Long term funds
