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Paper 11

Capital Market Analysis & Corporate Laws

Test Paper III/11/CMC/2008/T-1

GROUP -A

Ans. To Q. 1(A)

A Capital Market can be defined as the market in which financial assets are created or transferred. The capital market

is designed to finance the long-term investments. The transactions taking place in this market will be for periods over

a year. The Capital Market is broadly classified as Primary market and Secondary Market. The Primary market is the

segment in which new issues are made whereas secondary market is the segment in which outstanding securities are

traded. t is for this reason that the Primary Market is also called !ew issues Market or P"#$P" market and the

Secondary market is

called Stock Market.

Stock Market in India

$rom scattered and small beginnings in the %& th Century' ndia(s stock market has risen to great

heights. n %&&)' we had %& stock e*changes in the country. There were around +'))) listed

companies and the invested population stood around %, million.

The history of stock e*changes shows that the development of oint stock enterprise would never have reached its

present stage but for the facilities which the stock e*changes provide for dealing with the securities. Stock e*changes

have a very important function to fulfill in the country(s economy. The stock e*change is really an essential pillar of

the private sector corporate economy. t discharges essential functions in the process of capital formation and in

raising resources for the corporate sector

NEED FOR STOCK MARKET

%. t helps in the capital formation in the economy of the country. t facilitates and maintains active trading.

/. t provides li0uidity to financial assets.

1. t also helps in price discovery process

$unctions of Stock Market 2

a3 To provides a market place for purcase and sale of securities2- t ensures the free transferability of

securities which is the essential basis for the stock enterprise system. The private sector economy cannot function

without the assurance provided by the e*change to the owners of shares and bonds that they can be sold in the market

at any time. At the same time' those who invest their surplus funds in securities for long-term capital appreciation or

for speculative purpose can also buy scripts of their choice in the market.

b3 To provides te linka!e "et#een te savin!s in te ouseold sector and investment in corporate

econom$%& t mobili4es savings' and channeli4e them in the form ofsecurities into those enterprises which are

favored by the investors on the basis of such criteria as future growth prospects' good returns and appreciation of

capital.

c3 Toprovidin! a market 'uotation of te prices of sares and "onds%& a sort of collectiveudgement simultaneously reached by many buyers and sellers in the market-the stock e*change serves the role of

barometer' not only of the state of health of individual companies' but also of the nation(s economy. The changes in

share prices are brought about by a comple* set of factors' all operating in the market simultaneously. Share values as

a whole are subect to secular trends set by the economic programme of the nation' and governed by factors like

general economic situation' financial and monetary policies' ta* changes' political environment' international -

economic and financial development' etc.

Ans. to Q.1(b)

5a3 The rate of return is the percentage of the amount invested in as stock multiplied by its

e*pected rate of return. Thus' of the 6s. ,)'))) invested.

Company A 7 /) percent of total with %, percent rate of return 2

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/) 8 6s. ,)'))) 8 .%, 9 6s. ',)

Company : 7 ;) percent with a % percent rate of return 2

;) 8 6s. ,)'))) 8.% 9 6s. 1'))

The total return is 6s. +1,) 5i.e.' 6s. ,) < 6s.1'))3

5b3 The e*pected percentage rate of return is the total return divided by the amount invested2

r =Total Return

Total amount invested

r =.Rs.6450

Rs.50,000

= 12 .0 !

Ans( to )(*+A,

i3 Pre-ta* ncome 6e0uired on nvestment of 6s. %+'))')))

=et the period of investment be >P( 9 6s. %+'))')))8 1? 9 6s. +1')))

( )16,00,000 X

8X

p-40,000

10012

=64000

%)'++.1) P - 1)'))) 9 +1')))

%)'++.1 P 9 1)')))

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/ mobili4e savings for economic development

/protect interest of investors by ensuring full disclosures.

/ Making a 0uotation available for a company(s share to be traded.

/ Trading on a SB 7 Public =td. Companies with minimum paid up capital of 6s. , Crores

/ Trading on :SB # !SB - Minimum paid up capital of 6s. %) Crores

=isting of securities have to be in accordance with the provisions of the Securities Contracts

56egulation3 Act' %&,+' Securities Contracts 56egulation3 6ules' %&,;' Companies Act' %&,+'

@uidelines issued by SB: and 6ules' :ye-laws and 6egulations of the B*change.

Ans( to )( 0

+a, Demutuali1ation of Stock E2can!es%&

istorically stock e*changes were formed as >mutual( organisations' which were considered beneficial in terms of ta*

benefits and matters of compliance. They are generally >not-for-profit( and ta* e*empted entities. The trading

members who provide broking services' also own' control and manage such e*changes for their common benefit' but

do not distribute the profits among themselves. The ownership rights and trading rights are clubbed together in a

membership card which is not freely transferable and hence this card at times carries a premium. n contrast' in a

demutual( e*change' three separate sets of people own the e*change' manage it and use its services. The owners

usually vest in management constituting a board of directors which is assisted by a professional team. A completely

different set of people use trading platform of the e*change. These are generally >for-profit( and ta* paying entities.

The ownership rights are freely transferable. Trading rights are ac0uired#surrendered in terms of transparent rules.Membership cards do not e*ist. These two models of e*changes are generally referred to as >club( and institution(

respectively. The most important development in the capital market is concerning the demutualisation of the stock

e*changes. Demutualisation of e*changes means segregating the ownership from management. This move was

necessitated by the fact that brokers in the management of the stock e*change were misusing their position for

personal gains. Demutualisation would bring in transparency and prevent conflict of interest in the functioning of the

stock e*changes. The Minister of $inance in his union budget speech of ))-)/ has made important announcement

that the process of demutualisation and corporatisation of stock e*changes is e*pected to be completed during the

course of the current year. !ow' all the stock e*changes in ndia are demutualised entities.

Ans( to )( 0

+d, 3ed!in!

The classic hedging application would be that of a wheat farmer forward# futures selling his harvest at a known price

in order to eliminate price risk. Conversely' a bread factory may want to buy wheat forward#futures inorder to assist

production planning without the risk of price fluctuations. edgers wish to eliminate or reduce the price risk to whichtheyare already e*posed. The hedging function solely focuses on the role of transferring the risk of price changes to other

holders in thefutures markets. hedging techni0ue is e0uivalent of insurance facility against market risk where price is

always volatile.

Ans( to )( 0

+e, )ualified institutional -u$er

Eualified nstitutional :uyers are those institutional investors who are generally perceived to

possess e*pertise and the financial muscle to evaluate and invest in the capital market. As per

the SB: guidelines E:s shall mean the following2

Public $inancial nstitution as defined in section 1A of the Companies Act' %&,+

Scheduled Commercial :anks

Mutual $unds

$oreign nstitutional nvestors registered with SB:

Multilateral and :ilateral Development $inancial nstitutions

Fenture Capital $unds registered with SB:

$oreign Fenture Capital nvestors registered with SB:

State ndustrial Development Corporations

nsurance Companies registered with the nsurance 6egulatory and Development Authority56DA3

Provident $unds with minimum corpus of 6s. , crores

Pension $unds with minimum corpus of 6s. , crores.

These entities are not re0uired to register with SB: as E:s. Any entities falling under the

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categories specified above are considered as E:s for the purpose of participating in primary

issuance process.

4RO56 7-8

Ans( to ) No(9+c,

As per the provision of Companies Act %&,+' the 0uorum for the board meeting shall be %#/rd of its total

strength Gany fraction contained in that one third being rounded off as oneH or two directors' whichever is higher. t

should be noted that >interested director( shall not be counted for deciding the 0uorum for the meetingH. f a meetingof the board of directors could not be held for want of 0uorum' the unless the articles otherwise provide' the meeting

shall automatically stand adourned till the same day ne*t week' at the same time and place or if that day is a public

holiday' till the ne*t succeeding day' which is not a public holiday' at the same time and day.

n the given case of == =td. A resolution to be passed by circulation shall be deemed to have been passed if

it is circulated to all members not being less than the 0uorum along with necessary papers Gmembers of the board or its

committee and those in ndiaH and has been approved by such of the directors as are then in ndia or by a maority of

such of them as are entitled to vote on the resolution.

Ans( to ) No(9+d,

if the statements are false or fraudulent or if some material information is withheld' allottee can apply to the

Court for the rescission of the contract. owever he should apply within reasonable time and before the company goes

into li0uidation. e will also have to surrender the shares and his name will be removed from the register of members.After completing these formalities' he will get his money back along with the interest. owever' it should be noted

that the right of rescission shall be available to the shareholder only in the event of the following.

i. The statement must be a material misrepresentation of fact. n other words' the statement should be false

and misleading about the facts. t should be remembered that there is a difference between an honest opinion and

statement of fact. Thus when it is mentioned that due to the hard work and efficiency of directors' the profits of the

company are e*pected to reach a certain figure' it becomes a statement of opinion. "n the other hand' if a prospectus

states that >certain persons have agreed to become directors of the company(' it can be material misrepresentation if it

prove to be a false statement. A shareholder can avail of the right to rescission of a contract if there is a material

misrepresentation.

ii. The statement must have induced the shareholder to take the shares. Though it is very difficult to prove that

the shareholder has been induced to take the shares on the basis of the misstatement in the prospectus' it will have tobe dependent on the circumstances of each case. The crucial point is that if the statement is such as it would influence

a common man' the Tribunal will infer that it influenced the applicant. f the applicant(s acts show' that he did not rely

on the statement' he is not entitled to rescind.

Ans( to ) No(:+a,

This Act may be called the 6ight to nformation Act ))1 t e*tends to the whole of ndia e*cept the State of

Iammu and Jashmir. t shall come into force within %) days of it being enacted. Khere State legislation e*ists

dealing with the right to access information a person will have the right to seek information under the State law as

well as under this Act. Bvery public authority shall maintain all its records' duly catalogued and inde*ed' in a manner

and form which facilitates the right to information as provided for in this Act. Bvery public authority shall for the

purposes of this Act' designate as many officers as Public nformation "fficers' in all administrative units and offices

under such authority. A person desirous of obtaining information shall make a re0uest in writing or through electronic

means in Bnglish or in the official language of the area in which the application is being submitted. "n receipt of a

re0uest under section +' the Public nformation "fficer shall as e*peditiously as possible and in any case within fifteen

days of the receipt of the re0uest' either provide the information re0uested on payment of such fee as may be

prescribed or reect the re0uest for any of the reasons specified in sections L and &. Kithout preudice to the provisions

of section L' a Public nformation "fficer may reect a re0uest for information where such a re0uest for providing

access would involve an infringement of copyright subsisting in a person other than the State. f a re0uest for access to

information is reected on the ground that it is in relation to information which is e*empted from disclosure' then

notwithstanding anything contained in this Act' access may be given to that part of the record which does not obtain

any information that is e*empted from disclosure under this Act and which can reasonably be severed from any part

that contains e*empted information. Khere a public authority intends to disclose any information or record' or partthereof on a re0uest made under this Act which relates to' or has been supplied by a third party and has been treated as

confidential by that third party' the Public nformation "fficer shall' within five days from the receipt of a re0uest'

give written notice to such third party of the re0uest and of the fact that the public authority intends to disclose the

information or record' or part thereof and invite the third party to make a submission' in writing or orally' regarding

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whether the information should be disclosed' which submission shall be taken into account when determining whether

to disclose the information

The State @overnment may' by notification in the "fficial @a4ette' make rules to carry out the provisions of

the Act. n particular' and without preudice to the generality of the foregoing power' suchrules may provide for all or

any of the following matters' namely2-

5a3 the fee payable under sub-section 5%3 of section ;2

5b3 the authority before whom an appeal may be preferred under sub-section 53 of section %2

5c3 any other matter which is re0uired to be' or may be prescribed2

Provided that initially the rules shall be made by the nion @overnment by notification in the official ga4ette.

Ans( to ) No(:+",

O";ectives of Ri!t to Information Act < *==> %&

%. give effect to the $undamental 6ight to nformation' which will contribute to strengthening democracy'

improving governance' increasing public participation' promoting transparency and accountability and

reducing corruption.

. establish voluntary and mandatory mechanisms or procedures to give effect to right to information in a

manner which enables persons to obtain access to records of public authorities in a swift' effective'

ine*pensive and reasonable manner.

/. promote transparency' accountability and effective governance of all public authorities by' including but not

limited to' empowering and educating all persons to2-

understand their rights in terms of this Act in order to e*ercise their rights in relation topublic authorities

understand the functions and operation of public authorities and effectively participating in decision making

by public authorities that affects their rights.

Ans( to )( No( ?

+a, 6assin! Resolution "$ 6ostal -allot%& A listed public company and Central @overnment may declare to be

conducted only by postal ballot by notification and declare to be conducted only by postal ballot. Khere a

company decides to pass any resolution by postal ballot' it shall send a notice to all the shareholders' along

with a draft resolution e*plaining the reasons therefore and re0uesting them to send their assent or dissent in

writing on a postal ballot within a period of /) days from the date of posting of the ballot. The notice shall be

sent by registered post or by any other method as may be prescribed by the Central @overnment on this

behalf' and shall include with the notice' a postage prepaid envelop for facilitating the communication of theassent or dissent of the shareholders to the resolution within the said period. f a resolution as assented to by a

maority of the shareholders by means of postal ballot' it shall be deemed to have been duly passed at a

general meeting convened in that behalf.

+", Alternate Director%-Alternate Director Section /)/ provides that an alternate director can be appointed by

the :oard of Directors ifit is authori4ed by the articles of association or by a resolution passed in the annual

general meeting. e shall act as alternate director in the place of the original director in his absence for a

period of at least / months' from the State in which the meetings of the:oard are normally held.

Appointment "$ 6roportional Representation

Section +, provides that the articles of association of a public company or a private company' which is a

subsidiary of a public company may provide for appointment of directors by proportional representation. This

provision is made basically for providing representation to all segments of the shareholders. The section

further provides that the articles may provide for appointment of not less than #/ rd of the total number of

directors by proportional representation. The appointment can be made either by a single transferable vote or

by a system of cumulative voting or other wise. The appointment is to be made once in every three years and

interim casual vacancies being filled in according to the other relevant provisions

+c, Forfeiture of Sares %& f a shareholder defaults in the payment of the installments in the issue price of a

share calledby the company' the :oard of Directors may decide to forfeit the shares held by the defaulting

shareholders by following the procedure as laid down in the Articles of Association of the company. n the

absence of the Articles of Association' Table A re0uires that a notice of %1 days is to be given before the

forfeiture is made and if the shareholder fails to pay the dues within this period' the :oard of Directors' may

be passing resolution in the :oard meeting' decide toforfeit the shares. As a result of forfeiture' the shares are

cancelled and the name of the concerned shareholder is struck off the 6egister of Members. $orfeited sharescan be re-issued bythe company if they are not cancelled.