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ROLE OF CAPITAL MARKET IN ECONOMIC DEVELOPMENT Depends upon growth prospects based on economic policies & foreign policies

Growth prospects would depend upon proper management and administration of an economy / country Strong & positive government with good policies and their implementations, would lead to real GDP growth, FDI , FII, Exports supporting BOP, profitabilities of listed companies ( short and long term ), credit policies, monetary policies,etc. The general / normal economic thinking has been :

To achieve faster economic growth, the capital market can channelise the source of finance in the primary segment ( new issues ). (i) (ii) Capital market makes two important contributions to growth : It signals to other providers of capital ( such as banks ) the prospects and therefore, the risk of lending to companies It provides opportunities for investors to seek out and invest in companies of the future. STOCK INDICES An Index is a no. that represents the changes in a set of values between a base time period and another time period Similarly, a stock index represents change in the value of a set of stocks which constitute the index, over a base year Sensex & Nifty are the 2 major stock indices of India represents BSE and NSE respectively

2 Main objectives of stock indices are : (a) To reflect market direction (b) To indicate day to day fluctuations in the prices of scrips The utility of a stock market index lies in a positive relationship with returns to different securities The BSE sensex consists of 30 selected stocks and Nifty consists of 50 selected stocks. Most of these Cos are Blue Chip Cos having a very good track record. As they are actively traded, the index shares have a very high liquidity

A stock market index is created by selecting a group of stocks that represent the whole market or a specified sector or segment of the market. An index is calculated with reference to a base period and a base index value

SENSEX MOVEMENT MARCH APRIL : 2006 (i) Sensex had crossed 12000 Mark

(ii) Considered as Peak Point (iii) Taken as a signal of performance of Corporate Sector in India The daily sensex value is available in the market and it fluctuates depending upon the demand & supply factors If sensex is in the range of 18000 20000, then it is generally considered as positive sign in the stock market Sensex point below 6,000 indicates recessionary trend in the market BSE sensex has witnessed more than 100% return during 2004 2008, over a period of 3 years

DURING 2007 : Sensex had crossed 20000 Mark (Due to progress / prospects) DURING 2008 : Sensex started declining touching 8000 Mark ( Meltdown ) DURING 2009 : A recent improving trend around 14000 Mark ( Speculations

DERIVATIVES MARKET A derivative security can be defined as a security whose value depends on the value of other underlying variables Derivative securities are available on stocks, stock indices, bullion, index, currency, Bonds, Interest Rates, Commodities in the World Derivative means Forward, Futures, or Option Contract of Pre-determined fixed duration, linked for the purpose of contract fullfilment to the value of specified real or financial asset or to index securities Derivatives are meant essentially to facilitate temporary hedging of price risk of inventory holding or a financial / commercial transaction over a certain period

Acts as a form of Insurance RISKS in trading derivatives may change depending on what happens to the underlying asset Derivatives are broadly classified into : (i) Futures (ii) Options Trading needs to take place through authorised exchanges

The derivatives market performs a no of economic functions : 1. Helps in managing risks 2. Helps in the discovery of future prices 3. Increases the volume traded in markets because of participation risk averse people in greater numbers 4. Increases savings and investments in the long run The participants in derivatives market are of 3 types : (i) Hedgers (ii) Speculators (iii) Arbitrageurs Hedgers use futures or options markets to reduce or eliminate the risk associated with the price of an asset Speculators use futures and options contracts to get extra leverage in betting on future movements in the price of an asset. They can increase both potential gains and potential losses by usage of derivatives in a speculative venture Arbitrageurs are in business to take advantage of a discrepancy between prices in 2 different markets. If for example, they see the futures prices of an asset getting out of line with the cash price, they will take offsetting positions in the 2 markets to lock in a profit.

PRIVATISATION : MODES, RESONS AND PROBLEMS According to World Bank, privatisation is the transfer of ownership of state-Owned Enterprises ( SOEs ) to the private sector by sale ( full or partial ) of going conerns or by sale of assets following their liquidation. Over past few years, the Indian Government has been working towards privatisation of some state-owned enterprises in order to help diversify the economy.

However, the efforts of privatisation has continued to attract criticism, particularly from the Left Parties, who seem to believe that India should not privatise. The questions to ask , therefore, are what privatisation is and what are the benefits and costs of privatisation MODES OF PRIVATISATION

A firm can be privatised through the following modes : (i) Sale of enterprise (ii) Lease of entity ( with short term purpose ) (iii) Joint Ventures (iv) Public share offers ( example, Initial Public Offer )

The modes and methods of privatisation adopted by governments vary and include the following : (i) Strategic sale by auction method. (ii) Offer of shares through a public offering, both domestic and global, which may or may not involve a change in ownership/ management ( IPO and ADR / GDR ) STRATEGIC SALE

In a strategic sale, there is the transfer of management control of the company to the strategic partner. The strategic sale method of disinvestment enables governments to receive a higher value for the shares transferred by it, as the strategic partner pays a premium for acquiring management control of the target company. This method of disinvestment has been successfully used in Great Britain during the privatisation drive under the Thatcher Led Regime. China has also used this method for selling shares of State-Owned Enterprises ( SOEs ). REASONS FOR PRIVATISATION

To Reduce the Burden on Government To Strengthen Competition and Efficiency To Improve Public Finances

To Fund Infrastructure Growth Accountability to Shareholders To reduce Unnecessary Interference More Disciplined Labour Force PROBLEMS OF PRIVATISATION

Ownership to a Privileged Few Labourers would be at the Mercy of the Owner Price and Ignorance Factors Lack Of Social Responsibility Loss of Experienced Managerial Expertise

Difficulties in the Process of Privatisation POLITICAL SYSTEM ( Majority - Opposition - Coalition ) UNION POWER ( Labour Unions ) SOCIAL INSTITUTIONS ( against job losses ) CORRUPTION MISUSE OF POWER BY NEW OWNERS PRIVATE MONOPOLY CREATION