Ch_19

CAPITAL MARKET EFFICIENCY AND CAPITAL MARKETS IN INDIACHAPTER19LEARNING OBJECTIVESExplain the concept of the capital market efficiency Discuss the features of perfect capital marketHighlightthedevelopmentsinthestockmarkets (secondarymarket)andthenewissuemarket(primary market) in India Understand role of merchant bankers and mutual funds2CAPITAL MARKETSapital markets facilitate the buying and selling of securities! such as shares and bonds or debentures" #hey perform two valuable functions$%"&i'uidity(" )ricing securities34Weekly Share Price Index, 10 Feb. 1990 to 28 Feb. 20095Weekly market returns, 10 Feb. 1990 to 28 Feb. 2009Capia! Ma"#$ E%&i$'&(apital *arket Efficiency may be defined as the ability of securities to reflect and incorporate all relevant information in their prices" #hree forms of capital market efficiency may be distinguished + %" ,eak form of efficiency (" -emi.strong form of efficiency/" -trong form of efficiency)*$a# F+", +- E%&i$'&(#he security prices reflect all past information about the price movements"S$,i.S"+'/ F+", +- E%&i$'&(#he security prices reflect all public ally available information about the price movements"S"+'/ F+", +- E%&i$'&(#hesecuritypricesreflectallpublishedand unpublishedpublicandprivateinformationabout the price movements"A"i01$2 +- a P$"-$& Capia! Ma"#$%" 0o entry 1arriers"(" &arge 0umber of 1uyers and -ellers"/" Divisibility of financial assets"2" 3bsence of transaction costs"4" 0o tax differences"5" 6ree #rading"13T4"$$ 2i/'i5&a' i,p$"-$&i+'2 +- Capia! ,a"#$2#ax asymmetriesInformation asymmetries#ransaction costs11CAPITAL MARKETS IN INDIA)rimary market-econdary market12PRIMARY CAPITAL MARKET IN INDIA)rimarycapitalmarketisaconduitforthesaleof new securities"&isted(existingornew)companiesmaymakethe public issues of shares" #heinitialpublicofferings(I)7s)arethepublic issuesofsecuritiesbynewcompaniesforthefirst time"13Fi'a'&ia! I'2"1,$'2E'uityanddebtarethetwobasicinstrumentsof raising capital from the primary markets"7rdinary shares)reference sharesDebenturesonvertible debentures,arrantsumulative convertible preference shares ()-)Derivative securities1orrowings from financial institutions14R$2+1"&$ M+0i!i6ai+' -"+, IPO2 a'7 Ri/42 I221$215P"i8a$ P!a&$,$'Insteadofapublicissueofsecurities!acompany mayofferthemprivately!onlytoafewinvestors8 that is! less than 49 in number" #his is referred to as private placement of securities"1)R$a2+'2 -+" 4$ 7$8$!+p,$' +- P"i8a$ P!a&$,$')rivateplacementofsecuritiesissub:ecttomuch less compliance than the public issues)rivateplacementiscosteffectiveascomparedto public issues)rivateplacementistimeeffectiveasdealscanbe easily and directly negotiated with a few investors)rivateplacementhelpstotailoringtheissues according to the needs of the companies19E1"+ I221$2ompaniesinIndiahavestartedraisingfundsvia euro issues in the foreign capital markets" Euroissuesincludeforeigncurrencyconvertible bonds(61s)!globaldepositoryreceipts (;D&4a'/$@BSEA a'7 4$ Nai+'a! S+ E>&4a'/$ @NSEABS$&1"ii$2 a'7 E>&4a'/$ B+a"7 +- I'7ia@SEBIA-E1Iisre'uiredtoregulateandpromotethesecurities market by$2)S$&+'7a"( Ma"#$< S$!$&$7 I'7i&a+"229G+8$"',$' S$&1"ii$2 Ma"#$#hegovernmentdebtmarketconstitutesabout three.fourths of the debt market in India"ommercialbanksandfinancialinstitutionsin Indiaownalargeproportionofthegovernment debtsecuritiesduetostatutoryli'uidityandother investment re'uirements"2:D$"i8ai8$2 Ma"#$Derivatives are securities derived from other securities (called underlyingsecurities)likee'uity!debt!oranyothertypeof security" #heyalsoincludecontractsthatderivetheirvaluesfrom prices or index of prices" InIndia!the7#derivativesarenotallowed8thelegal derivatives must trade on recognised stock exchanges only"29T"a7i'/ a'7 S$!$,$'Demateriali>ation of shares#radingethesavingsofthe public!andinvesttheminsecuritiesandother assets! enabling the investors to earn good returns"32B"+a7 &a$/+"i$2 +- M11a! F1'72losed.ended mutual funds7pen.ended fund33Va"i+12 #i'72 +- -1'72 p+22i0!$