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. It is for this reason that the Primary Market is also called New issues Market or IPO/FPO market and the Secondary market is
called Stock Market.
Stock Market in India
From scattered and small beginnings in the 19th Century, India’s stock market has risen to great
heights. In 1990, we had 19 stock exchanges in the country. There were around 6,000 listed
companies and the invested population stood around 15 million.
The history of stock exchanges shows that the development of joint stock enterprise would never have reached its present stage but for the facilities which the stock exchanges provide for dealing with the securities. Stock exchanges have a very important function to fulfill in the country’s economy. The stock exchange is really an essential pillar of the private sector corporate economy. It discharges essential functions in the process of capital formation and in raising resources for the corporate sector
NEED FOR STOCK MARKET
1. It helps in the capital formation in the economy of the country
2. It facilitates and maintains active trading.
3. It provides liquidity to financial assets.
4. It also helps in price discovery process
Functions of Stock Market :
a) To provides a market place for purchase and sale of securities:- It 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 exchange 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.
b) To provides the linkage between the savings in the household sector and investment in corporate economy:- It mobilizes savings, and channelize 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.
c) To providing a market quotation of the prices of shares and bonds:- a sort of collective
judgement simultaneously reached by many buyers and sellers in the market-the stock exchange 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 complex set of factors, all operating in the market simultaneously. Share values as a whole are subject to secular trends set by the economic programme of the nation, and governed by factors like general economic situation, financial and monetary policies, tax changes, political environment, international - economic and financial development, etc.
Ans. to Q.1(b)
(a) The rate of return is the percentage of the amount invested in as stock multiplied by its
expected rate of return. Thus, of the Rs. 50,000 invested.
Company A – 30 percent of total with 15 percent rate of return :
30 X Rs. 50,000 X .15 = Rs. 2,250
Company B – 70 percent with a 12 percent rate of return :
70 X Rs. 50,000 X.12 = Rs. 4,200
The total return is Rs. 6450 (i.e., Rs. 2250 + Rs.4,200)
(b) The expected percentage rate of return is the total return divided by the amount invested:
r = Total Return
Total amount invested
r = . Rs.6450
Rs.50,000
= 12 .90 %
Ans. to Q.2(A)
i) Pre-tax Income Required on Investment of Rs. 16,00,000
Let the period of investment be ‘P’ = Rs. 16,00,000X 4% = Rs. 64,000
( )
16,00,000 X 8 X p -40,000
100 12 =64000
10,662.40 P - 40,000 = 64,000
10,662.4 P = 40,000 +64,000
P = 9.754
To earn 4% pre tax return of Rs.16,00,000 should be invested in the shorter marketable
securities for a period 9.754 months
(ii) break-even its investment expenditure
( )
16,00,000 X 8 X p -40,000 = 0
100 12
10,662.40 P - 40,000 = 0
10,662.4 P = 40,000
P = 40,000/ 10,662.40 = 3.75
∴The minimum period to break-even its investment expenditure is 3.75 months.
Ans. to Q.2(B)
Listing of Securities
Listing means admission of the securities to dealings on a recognised stock exchange. The
securities may be of any public limited company, Central or State Government, quasi governmental
and other financial institutions/corporations, municipalities, etc.
The objectives of listing are mainly to :
• provide liquidity to securities;
• mobilize savings for economic development;
• protect interest of investors by ensuring full disclosures.
• Making a quotation available for a company’s share to be traded.
• Trading on a SE – Public Ltd. Companies with minimum paid up capital of Rs. 5 Crores
• Trading on BSE / NSE - Minimum paid up capital of Rs. 10 Crores
Listing of securities have to be in accordance with the provisions of the Securities Contracts
(Regulation) Act, 1956, Securities Contracts (Regulation) Rules, 1957, Companies Act, 1956,
Guidelines issued by SEBI and Rules, Bye-laws and Regulations of the Exchange.
Ans. to Q. 3
(a) Demutualization of Stock Exchanges:-
Historically stock exchanges were formed as ‘mutual’ organisations, which were considered beneficial in terms of tax benefits and matters of compliance. They are generally ‘not-for-profit’ and tax exempted entities. The trading members who provide broking services, also own, control and manage such exchanges 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. In contrast, in a ‘demutual’ exchange, three separate sets of people own the exchange, 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 exchange. These are generally ‘for-profit’ and tax paying entities. The ownership rights are freely transferable. Trading rights are acquired/surrendered in terms of transparent rules. Membership cards do not exist. These two models of exchanges are generally referred to as ‘club’ and ‘institution’ respectively. The most important development in the capital market is concerning the demutualisation of the stock exchanges. Demutualisation of exchanges means segregating the ownership from management. This move was necessitated by the fact that brokers in the management of the stock exchange were misusing their position for personal gains. Demutualisation would bring in transparency and prevent conflict of interest in the functioning of the stock exchanges. The Minister of Finance in his union budget speech of 2002-03 has made important announcement that the process of demutualisation and corporatisation of stock exchanges is expected to be completed during the course of the current year. Now, all the stock exchanges in India are demutualised entities.
Ans. to Q. 3
(d) Hedging
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. Hedgers wish to eliminate or reduce the price risk to which they are already exposed. The hedging function solely focuses on the role of transferring the risk of price changes to other holders in the futures markets. hedging technique is equivalent of insurance facility against market risk where price is always volatile.
Ans. to Q. 3
(e) Qualified institutional Buyer
Qualified Institutional Buyers are those institutional investors who are generally perceived to
possess expertise and the financial muscle to evaluate and invest in the capital market. As per
the SEBI guidelines QIBs shall mean the following:
• Public Financial Institution as defined in section 4A of the Companies Act, 1956
• Scheduled Commercial Banks
• Mutual Funds
• Foreign Institutional Investors registered with SEBI
• Multilateral and Bilateral Development Financial Institutions
• Venture Capital Funds registered with SEBI
• Foreign Venture Capital Investors registered with SEBI
• State Industrial Development Corporations
• Insurance Companies registered with the Insurance Regulatory and Development Authority
(IRDA)
• Provident Funds with minimum corpus of Rs. 25 crores
• Pension Funds with minimum corpus of Rs. 25 crores.
These entities are not required to register with SEBI as QIBs. Any entities falling under the
categories specified above are considered as QIBs for the purpose of participating in primary
issuance process.
GROUP ‘B’
Ans. to Q No.6(c)
As per the provision of Companies Act 1956, the quorum for the board meeting shall be 1/3rd of its total strength [any fraction contained in that one third being rounded off as one] or two directors, whichever is higher. It should be noted that ‘interested director’ shall not be counted for deciding the quorum for the meeting]. If a meeting of the board of directors could not be held for want of quorum, the unless the articles otherwise provide, the meeting shall automatically stand adjourned till the same day next week, at the same time and place or if that day is a public holiday, till the next succeeding day, which is not a public holiday, at the same time and day.
In the given case of HLL Ltd. 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 quorum along with necessary papers [members of the board or its committee and those in India] and has been approved by such of the directors as are then in India or by a majority of such of them as are entitled to vote on the resolution.
Ans. to Q No.6(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. However he should apply within reasonable time and before the company goes into liquidation. He 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. However, 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. In other words, the statement should be false and misleading about the facts. It 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 expected to reach a certain figure, it becomes a statement of opinion. On 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 to be 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. If the applicant’s acts show, that he did not rely on the statement, he is not entitled to rescind.
Ans. to Q No.8(a)
This Act may be called the Right to Information Act 2004 It extends to the whole of India except the State of Jammu and Kashmir. It shall come into force within 120 days of it being enacted. Where State legislation exists 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. Every public authority shall maintain all its records, duly catalogued and indexed, in a manner and form which facilitates the right to information as provided for in this Act. Every public authority shall for the purposes of this Act, designate as many officers as Public Information Officers, in all administrative units and offices under such authority. A person desirous of obtaining information shall make a request in writing or through electronic means in English or in the official language of the area in which the application is being submitted. On receipt of a request under section 6, the Public Information Officer shall as expeditiously as possible and in any case within fifteen days of the receipt of the request, either provide the information requested on payment of such fee as may be prescribed or reject the request for any of the reasons specified in sections 8 and 9. Without prejudice to the provisions of section 8, a Public Information Officer may reject a request for information where such a request for providing access would involve an infringement of copyright subsisting in a person other than the State. If a request for access to information is rejected on the ground that it is in relation to information which is exempted 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 exempted from disclosure under this Act and which can reasonably be severed from any part that contains exempted information. Where a public authority intends to disclose any information or record, or part thereof on a request 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 Information Officer shall, within five days from the receipt of a request, give written notice to such third party of the request 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 whether the information should be disclosed, which submission shall be taken into account when determining whether to disclose the information
The State Government may, by notification in the Official Gazette, make rules to carry out the provisions of the Act. In particular, and without prejudice to the generality of the foregoing power, suchrules may provide for all or any of the following matters, namely:-
(a) the fee payable under sub-section (1) of section 7:
(b) the authority before whom an appeal may be preferred under sub-section (2) of section 12:
(c) any other matter which is required to be, or may be prescribed:
Provided that initially the rules shall be made by the Union Government by notification in the official gazette.
Ans. to Q No.8(b)
Objectives of Right to Information Act – 2004 :-
1. give effect to the Fundamental Right to Information, which will contribute to strengthening democracy, improving governance, increasing public participation, promoting transparency and accountability and reducing corruption.
2. 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, inexpensive and reasonable manner.
3. promote transparency, accountability and effective governance of all public authorities by, including but not limited to, empowering and educating all persons to:-
understand their rights in terms of this Act in order to exercise their rights in relation to
public authorities;
understand the functions and operation of public authorities; and effectively participating in decision making by public authorities that affects their rights.
Ans. to Q. No. 9
(a) Passing Resolution by Postal Ballot:- A listed public company and Central Government may declare to be conducted only by postal ballot by notification and declare to be conducted only by postal ballot. Where a company decides to pass any resolution by postal ballot, it shall send a notice to all the shareholders, along with a draft resolution explaining the reasons therefore and requesting them to send their assent or dissent in writing on a postal ballot within a period of 30 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 Government on this behalf, and shall include with the notice, a postage prepaid envelop for facilitating the communication of the assent or dissent of the shareholders to the resolution within the said period. If a resolution as assented to by a majority 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.
(b) Alternate Director:- Alternate Director Section 303 provides that an alternate director can be appointed by the Board of Directors if it is authorized by the articles of association or by a resolution passed in the annual general meeting. He shall act as alternate director in the place of the original director in his absence for a period of at least 3 months, from the State in which the meetings of the Board are normally held.
Appointment by Proportional Representation
Section 265 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 2/3rd 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 Shares :- If a shareholder defaults in the payment of the installments in the issue price of a share called by the company, the Board 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. In the absence of the Articles of Association, Table A requires that a notice of 14 days is to be given before the forfeiture is made and if the shareholder fails to pay the dues within this period, the Board of Directors, may be passing resolution in the Board meeting, decide to forfeit the shares. As a result of forfeiture, the shares are cancelled and the name of the concerned shareholder is struck off the Register of Members. Forfeited shares can be re-issued by the company if they are not cancelled.
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