Question

Explain the problems of the capital market in India.

Explain any four problems of capital market in India.

Answer 1

Capital market is an important constituent of the financial system. It is basically a market for long-term funds (both equity and debt) raised within and outside the country.

The problems faced by the Indian Capital Market are as follows:

1. Financial Scams: Increasing number of financial frauds have resulted in an irreparable loss for the capital market. Besides this, it has also lead to public distrust and loss of confidence among the individual investors.
2. Insider trading and price manipulation: Insider trading refers to buying or selling of a security by person/s who can access ‘non-public’ or ‘unpublished information’ for personal benefit. Price manipulation or price rigging on the other hand means simply raise the prices of shares through buying and selling of shares within certain individuals themselves for personal gains. Such illegal practices have also affected the smooth functioning of the capital market.
3. Inadequate debt instruments: Debt instruments include bonds, debentures, etc. There is not much trading in the debt securities due to the narrow investor base, high cost of issuance, lack of accessibility to small and medium enterprises.
4. Decline in the volume of trade: Regional stock exchanges have witnessed a sharp decline in the volume of trade because investors prefer to trade in securities listed in premier stock exchanges like BSE, NSE, etc.
5. Lack of informational efficiency: A market is said to be informationally efficient if a company’s stock prices incorporate all the available information into the current prices. However, the stock market in India lacks informational efficiency compared to advanced countries.