BB0022 Capital and Money Market - 4 Credits
(Book ID: B0101)
Assignment (60 Marks)
1. Explain the securities market and discuss the methods of underwriting the securities. Ans. Securities Market: The bulk of the financial needs (long term financial requirements) of a company are met by rising through the securities like equity shares, preference shares, debentures and bonds. The term securities market is a comprehensive one and refers to the buyers and sellers of securities and also the structure comprising all those agencies and institutions which help in the sale and resale of company securities. There are different types of business organizations in India namely partnership firm, cooperative societies, private & public limited companies and joint sector organizations etc. The more frequently organized method is the company registered under the Indian companies Act, 1956. Under this act, there are three types of companies: a) Companies Limited by guarantee.
b) Companies which are private limited companies – limited by shares paid up. c) Companies which are public limited companies – limited by shares paid up. Under this act, the private limited companies can have 50 members and their shares are not transferable freely. These companies reserve the right to refuse any transfer of shares and as such trading in them is restricted. Due to these inhibitive features, private limited companies do not have any access to the securities market. Methods of Underwriting An underwriting agreement may take any of the following forms. i) Standing behind the Issue: Under this method, the underwriter guarantees the sale of a specified number of shares within a specified period. If the public does not take up the whole of the specified amount of the issue, the underwriters standing behind the issue come forward to purchase the balance. ii) Outright Purchase: Underwriters purchase the issue outright and resell the securities to the investors. The purchase price is negotiated between the issuers and the underwriters or may be determined by competitive bidding. iii) T he Consortium Method: Underwriting is jointly done by a group of underwriters who form a syndicate for the purpose. This method is adapted for large issues. This method enables the spread of risk among the members of the syndicate. No single underwriter bears the entire risk.
2. List out the primary stock exchanges operating in India and the causes of price fluctuations of shares.
Ans. There are 23 stock exchanges functioning in India. Stock exchanges are organized as voluntary associations or public limited companies or as guarantee companies. These two are primary stock exchanges operating in India. Bombay Stock Exchange (BSE) The Bombay Stock Exchange (BSE) established in 1875 is the first stock exchange in India. National Stock Exchange of India (NSEI) NSEI was established in 1994 by the financial institutions and banks with IDBI as a nodal agency.
CAUSES OF PRICE FLUCTUATIONS The prices of variable yield securities, say equity shares, in the stock exchange fluctuate frequently and sometimes widely. Many factors combine together to cause such changes, but quite a few are only remotely related to the process of the valuation of shares. In general, the fluctuations in the prices of scrip’s may be ascribed to the following factors: Demand and Supply: The law of demand and supply operates rigidly in the stock exchange. The demand and supply depends on a variety of factors, all of which are related either to the actual yield from them or the general expectation about the yield. If the actual yield is below the general expectations, there may be more sellers than buyers of the shares as such the market value of the shares will fall. On the other hand the market value of the shares may rise when actual yield is better than general expectations. Bank Rate: The bank rate is the rate percent at...