lecture.no: 27 unit: iii capital market

Lecture.No: 27 Unit: III

Capital Market

MEANING

The industrial securities market in India consists of new issue market and stock

exchange. The new issue market deals with the new securities which were not previously

available to the investing public, i.e., the securities that are offered to the investing public for

the first time.

STOCK EXCHANGE

The stock exchange is a market for old securities, i.e., those which have been already

issued and listed on a stock exchange. These securities are purchased and sold continuously

among investors without the involvement of companies. Stock exchange provides not only

free transferability of shares but also makes continuous evaluation of securities traded in the

market.

DISTINCTION BETWEEN NEW ISSUE MARKET AND STOCK EXCHANGE

The distinction between the new issue market and the stock exchange can be made on

three grounds

i.Functional difference

ii.Organizational difference

iii.Nature of contribution to industrial finance

FUNCTIONAL DIFFERENCE

The new issue market deals with new securities which are issued for the first time for

public subscription. The stock exchange provides a ready market for buying and selling of

old securities.

ORGANIZATIONAL DIFFERENCE

The stock exchanges have physical existence and are located in particular

geographical areas. The stock exchange is a place where dealers security meet regularly at

appointed time announced by the market. The new issue market enjoys neither any tangible

form nor administrative organizational set up nor is subject to any centralized control and

administration for the execution of the business.


FUNCTIONS OF NEW ISSUE MARKET

The main function of a new issue market is to facilitate transfer of resource from

savers to the users. The savers are individuals, commercial banks, insurance companies etc.

the new issue market plays an important role of mobilizing the funds from the savers and

transfer them to borrowers for production purposes, an important requisites of economic

growth. It is not only the platform for raising finance to establish new enterprise but also for

expansion/diversification/modernizations of existing units. In this basis the new issue market

can be classified as follows

1. Market where firms go to the public for the first time through initial public offering

(IPO)

2. Market where firms which are already trade raise additional capital through seasonal

equity offering (SEO)

The main function of new issue market can be divided into a triple service functions;

1. Origination

2. Underwriting

3. Distribution

ORIGINATION

Origination refers to the work of investigation, analysis and processing of new

project proposals. Origination starts before an issue is actually floated in the market. There

are two aspects in this function:

1. A careful study of the technical, economic and financial viability to ensure

soundness of the project. This is a preliminary investigation undertaken by the sponsors of

the issue.

2. Advisory services which improve the quality of capital issues and ensure its success.

The function origination is done by merchant bankers who may be commercial banks,

all India financial institutions or private firms. The origination itself does not guarantee the

success of the issue. Underwriting a specialized service is required in this regard.

UNDERWRITING

Underwriting is an agreement whereby the underwriter promises to subscribe to a

specified number of shares or debentures or a specified amount of stock in the event of public

not subscribing to the issue. If the issue is fully subscribed then there is no liability for

underwriter. Thus underwriting is a guarantee for the marketability of shares.

METHODS OF UNDERWRITING

An underwriting agreement may take any of the following three forms:

1. 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 do not subscribe to the specified

amount of issues, the underwriters buy the balance in the issues.

2. Outright purchase

The underwriter, in this method, makes outright purchase of shares and resell them to

the investors.

3. Consortium method

Underwriting is jointly done by a group of underwriters in this method. The

underwriters form syndicate for this purpose. This method is adopted for large issues.

ADVANTAGES OF UNDERWRITING

Underwriting assumes great significance as it offers the following advantages to the

issuing company.

1. The issuing company is relieved from the risk of finding buyers for the issue offered

to the public.

2. The company is assures of getting minimum subscription within the stipulated time.

3. Underwriters undertakes the burden of highly specialized function of distributing

securities.

The underwriters in India may be classified into two categories:

1.Institutional underwriters

2 Non-institutional underwriters

The institutional underwriters are Life Insurance Corporation Of India (LIC), Unit

Trust Of India (UTI), Industrial Development Bank Of India (IDBI), Industrial Credit And

Investment Corporation Of India (ICICI), Commercial Banks and General Insurance

Companies. The non-industrial underwriters are brokers.

DISTRIBUTION

Distribution is the function of sale of securities to ultimate investors. This service is

performed by brokers and agents who maintain regular and direct contact with the ultimate

investors.

METHODS OF FLOATING NEW ISSUES

The various method which are in the flotation of securities in the new issue market

are:

Public issues

Offer for sale

Placement

Rights issues


STOCK MARKET SYSTEM

There are many players in the new issue market. The important of them are the following:

Merchant bankers

Registrars

Collecting & co- ordinating bankers

Underwriters

Printers, advertising agencies and mailing agencies.

1. MERCHANT BANKERS

They are the issue managers, lead managers, co-managers and are responsible to

the company and SEBI. Their functions and working are described in a separate chapter.

2. REGISTRARS TO THE ISSUE

Registrars are an important category of intermediaries who undertakes all the

activities connected with new issue management. They are appointment by the company in

consultation with the merchant bankers to the issue.

ROLE OF REGISTRAR IN PRE-ISSUE

Suggest draft application form to the merchant bankers.

Help identifying the collecting centre.

Assist in opening collection accounts with banks and lay down procedure foe

operation of these accounts.

DURING THE CURRENCY OF ISSUE

Receive the collection figures everyday.

Keep the merchant bankers and the company informed of the progress of total

subscription.

Inform the stock exchange about the closure of issues.

PRE-ALLOTMENT WORK

Get all application forms from the collecting bankers and sort out valid and invalid

application forms.

The valid application are to be categorized and grouped as cash, draft and stock invest

application.

Reclassify the valid application eligible for allotment.

ALLOTMENT WORK

The most important work of registrar is allotment of shares. The system of

proportional allotment was adopted for new issue in 1993. a new quota system was approved

by SERI in april, 1995. the small investors include all applicants upto 1,000 shares.

POST-ALLOTMENT WORK

Get the letters of allotment and refund orders printed ready for dispatch. Hey have to

be mailed on or before 70 days from tho closing date of subscription. For any delay,

get the permission of the registrar of companies and the relevant regional stock

exchange.

Submit all statements to the company for their final approval.

Assist the company in getting the allotted shares listed on the stock exchange.

QUALIFICATIONS FOR THE REGISTRARS TO THE ISSUE

To be appointed as registrars to the issue, registration with SEBI is essential. The

criteria adopted by SEBI for registration are the competency and expertise, quality of

manpower, their track record, adequacy of infrastructure such as computers, storage space

etc. they have to maintain proper books of accounts and registers for the period of three years.

COLLECTING AND CO-ORDINATING BANKERS

Collecting bankers collect the subscription in cash, cheques, stockinvest etc.Co-

ordinating bankers collect information on subscriptions and co-ordinate the collection work.

They monitor the work and keep inform them to the registrars and merchant bankers.

Collesting banker and co-ordinating banker may be the same bank or different banks.

UNDERWRITERS AND BROKERS

The functions and role of underwriters are explained separately.

Brokers along with the net work of sub brokers market the new issues. They send their own

circulars and applications to the clients and do follow up work to market the securities.

Printers, advertising agencies are other organization involved in the new issue market

operations.

RECENT TRENDS IN NEW ISSUE MARKET

The recent trends in new issue market are as follows:

PUBLIC ISSUE

The public sector organizations like financial institutions, public sector undertakings

have started dominating the primary market. They collectively raised rs.7539 crore or 65 per

cent of the year 1996-97, total mobilization.

EQUITY AT PREMIUM

There was a major decline in equity at premium issues which comprised a meager 21

per cent of total capital mobilization in comparison to 43 per cent in 1995-96 and 46 per cent

in 1994-95. the number of issues made at premium fell from 463 in 1994-95 to 302 in 1995-

96 and to 87 in 1996-97.

SAVINGS TO HOUSE HOLDERS

The share of savings in shares and debentures which has been steadily increasing

since 1989-90 has started showing a downward trend for two consecutive years (1994-95 and

1995-96).

CAPITAL MOBILIZED THROUGH DEBT AND EQUITY

The share of equity finance increased to a high of 73.18 per cent in 1994-95.

However, in 1995-96 there is a rise in the importance of debt largely due to the high interest

rates in the economy and negative returns from the secondary market.

DISTRIBUTION OF PUBLIC ISSUE BY ISSUER

The percentage of number of issues made by existing companies has decreased from

80 percent in 1992-93 to 72 per cent in 1996-97. However the amount raised by these

companies has risen from 71 percent to 89 per cent in the corresponding period.

MUTUAL FUNDS

The funds mobilized through various routes from the primary market is marginally

higher in 1997-98. however, the pattern of financing is drastically altered.

ADVANTAGES OF PRIMARY MARKET

Avenue for investment

Mobilization of savings

Channelising savings for production use

Sources of large supply of funds

Rapid industrial growth

Sources for expansion and technological development

DISADVANTAGES OF PRIMARY MARKET

Possibility of deceiving Investors

No fixed norms for project appraisal

Lack of post issue seriousness

Ineffective role of merchant bankers

Delay in allotment process

Poor mobilizing of savings

Hesitancy to investors shares


STOCK MARKET SYSTEM

MEANING

The term Stock Exchange refers to a market place for purchase and sale of industrial

and financial securities. The word “stock” means a fraction of the capital of a come the word

“exchange” means a place for purchasing selling something.

Definition in the Act:

The securities contracts (regulation) Act, 1956 Defines a stock exchange “an

association, organization or body of Individuals whether incorporated or not, established for

the purpose of assisting, regulating and controlling business in buying or dealing in

securities”

CHARACTERISTICS OF THE STOCK EXCHANGE:

1.Voluntary Association:

The stock exchanges are voluntary association and they do not conduct business for

themselves but hey provide facilities to their members to transact the securities.

2.Control of the Governing Body:

The members of the exchange elect a governing body. The body empowered with

wide authorities and rights and they controls their members activities directly

3. Rules and Regulations:

The members should obey the rules and Regulations of the stock exchange, they can

be removing from the membership.


TRADING LISTED SECURITIES:

Enlisting of securities is very essentiality safeguard the interest of the investors from

unscrupulous broker and dealers in the stock exchange

FUNTIONS OF STOCK EXCHANGE

Ready and Continuous Market for securities:

The stock exchange provides a ready and continuous market for existing securities.

stock exchange provides liquidity, marketability, price continuity and transferability to capital

already invested.

Evaluation of Securities:

It integrates the demand and supply of securities and determines the price for

securities every now ascertain the value of his shareholding.

Safety of Capital and Fair Dealing:

The stock exchange are well-defined rules and regulations and bye-laws. The

member of stock exchange should obey the rules. In the absence of a well-organized sock

exchange, this would be impossible.

Agency for Capital Formation:

The stock exchange plays an active role in the capital formation in the capital

formation . It creates the habit of saving, investment and risk bearing among the investing

people.

Proper Canalisation of Capital:

Stock exchange is a flow of saving into the most productive and profitable channels.

Securities of company are sold above the par i.e above the face value.

Regulation of Company Management:

The companies which want to get their securities listed in the stock exchange should

follow certain rules and fulfill certain conditions. They should also safeguard the interests of

the minority shareholders.

Facilities for Speculation:

Healthy speculation is essential to equate demand and supply of securities at different

places. The stock exchange provides opportunities to businessmen to speculate and reap rich

profits from fluctuations in security prices

Barometer of Business Progress:

Stock exchange act as a barometer of the business conditions in the country. Booms

an depression are reflected by the index of prices.


REGULATION OF STOCK MARKET

SERVICES OF THE STOCK EXCHANGE

We shall examine the services under three heads

Services to the Investors

a)The investors are assured of a ready and continuous market for the securities held by

them.

b) Listed securities can be given to the bankers as a security for the loans.

c) The investor can easily ascertain in the value of the securities held by them.

d) The risk in the investment is minimized and liquidity is ensured

e) The investors is also assured safety of his funds and fair dealings

2. Services to the corporation

a.When the securities of a company are listed in the stock exchange, it enhance prestige to the

company

b.It widens the market for the securities, which is beneficial from the view point of the

corporation.

c) Reputed companies can raise further capital very easily.

d) Price fluctuations are minimized.

e) In relation to the earnings, dividend, and property values, the market price of listed

securities is generally high.

3. Services to the community

a. Financing for Development

b. Promotion of New Industries

c. Capital Formation

d. Productive use of funds


BSE

DEFINITION

It may be defined as an institution which covers a wide range of activities such as

management of customers services, portfolio management, credit syndication, acceptance of

credit, counseling, insurance etc.

ORIGIN

Merchant banking originated through the entering of London merchants in

financing foreign trade through acceptance of bill. Later, the merchants assisted the

government of under developed countries in raising long term funds through flotation of

bonds in London money market. Over a period, they extended their activities to domestic

business of syndication of long term and short term finance, underwriting of new issues,

acting as registrars and share transfer agents, debenture trustees, take over etc.

MERCHANT BANKING IN INDIA

In India prior to the enactment of Indian companies act, 1956, managing agents

acted as issue houses for securities, evaluated project reports, planned capital structure and to

some extent provided venture capital for new firms.

The state bank of India was the first Indian bank to set up merchant banking division in 1972.

later ICICI set up its merchant banking division followed by bank of India, bank of baroda,

canara bank Punjab national bank, and UCO bank.

MERCHANT BANKS AND COMMERCIAL BANKS

There are differences in approach, attitude and areas of operations between merchant banks

and commercial banks are summarized below:

Commercial banks basically deal in debt and debt related finance and their activities.

They are asset oriented and their lending decisions

They are merely financiers

SERVICES OF MERCHANT BANKS

The financial institutions in India could not meet the demand for long term funds

required by the ever expanding industry and trade.

the services of merchant banking are described as follows;

CORPORATE COUNSELLING

It covers the entire field of merchant banking activities viz. project counseling,

capital restructuring, project management, loan syndication, working capital, fixed deposit

etc. it is provided to a corporate unit with a view to ensure better performance, maintain

steady growth and create better image among investors.

PROJECT COUNSELING

It includes preparation of project reports, deciding upon the financing pattern to

finance the cost of the project and appraising project reports with the financial institutions or

banks.

LOAN SYNDICATION

It refers to assistance rendered by the merchant banks to get mainly term loans for

projects. Merchant banks help clients approach financial institutions for term loans.

ISSUE MANAGEMENT

The management of issues includes marketing of corporate securities. There are

two types of issue management

Pre-issue management

Post-issue management

PRE-ISSUE MANAGEMENT

It is divided into

Issue through prospectus, offer for sale and private placement

Marketing underwriting

Pricing of issues

Post issue management

Underwriting of public issue

Managers, consultants or advisers to the issue

Portfolio management

Advisory services relating to mergers and takeovers

Off shore finance

Non-resident investment


NATIONAL STOCK EXCHANGE IF INDIA LIMITED:

The National Stock Exchange of India Limited (NSE), is a Mumbai-based stock

exchange. It is the largest stock exchange in India in terms daily turnover and number of

trades, for both equities and derivative trading.[1]. Though a number of other exchanges exist,

NSE and the Bombay Stock Exchange are the two most significant stock exchanges in India

and between them are responsible for the vast majority of share transactions..

The National Stock Exchange of India was promoted by leading financial institutions

at the behest of the Government of India, and was incorporated in November 1992 as a tax-

paying company. In April 1993, it was recognized as a stock exchange under the Securities

Contracts (Regulation) Act, 1956. NSE commenced operations in the Wholesale Debt Market

(WDM) segment in June 1994. The Capital Market (Equities) segment of the NSE

commenced operations in November 1994, while operations in the Derivatives segment

commenced in June 2000.

DEMATERIALISATION OF SHARES:

Trading in the shares of the Company is compulsory in dematerialized form for

all investors. The Company has, therefore, enlisted its shares with both the depositories,

viz, NSDL and CDSL. This means that you have now have the option to hold and trade

in the shares of the Company in electronic form.

While most of you may be familiar with how a Depository functions, given below is a

brief outline, in question and answer format, which we hope will be useful to you.

DEMATERIALISATION

Dematerialisation (“Demat” in short form) signifies conversion of a share certificate from

its physical form to electronic form for the same number of holding which is credited to your

demat account which you open with a Depository Participant (DP).

Dematerialisation is a process by which the physical share certificates of an investor are

taken back by the Company and an equivalent number of securities are credited in electronic

form at the request of the investor. An investor will have to first open an account with a

Depository Participant and then request for the dematerialisation of his share certificates

through the Depository Participant so that the dematerialised holdings can be credited into

that account. This is very similar to opening a Bank Account.

Who is a Depository Participant?

Similar to the brokers who trade on your behalf in and outside the Stock Exchange; a

Depository Participant (DP) is your representative (agent) in the depository system providing

the link between the Company and you through the Depository. Your Depository Participant

will maintain your securities account balances and intimate to you the status of your holding

from time to time. According to SEBI guidelines, Financial Institutions like banks,

custodians, stockbrokers etc. can become participants in the depository. A DP is one with

whom you need to open an account to deal in electronic form. While the Depository can be

compared to a Bank, DP is like a branch of your bank with whom you can have an account.

What are the benefits of having a demat account?

a. Trading in the shares of the Company is now under the compulsory demat

segment. With SEBI making demat mandatory on most of the traded scrips,

electronic transaction will be the only way everyone will trade.

b. No stamp duty for transfer of securities in the electronic form. In case of

transfer of physical shares, stamp duty of 0.5 percent is payable on the market

value of shares being transferred

c. All risks associated with physical certificates such as delays, loss, in transit,

theft, mutilation, bad deliveries, etc. eliminated. Your shares can be kept in the

“Frozen Mode” by your Depository Participant under your specific

instructions.

d. The concept of an “odd lot” in respect of dematerialized shares stands

abolished, i.e. in the demat mode, market lot becomes one share.

e. Dematerialised securities are most preferred by banks and other financiers for

providing credit facility against securities. Generally, demat securities attract

lower margin and lower rates of interest compared to physical securities.

f. Even in the electronic mode of trading, the payment mechanism (usually

through a broker) between the buyer and seller continues to be as before. Also

the usual brokerage charges would have to be incurred. However, after the

settlement, pay in and pay out are on the same day for scripless trading which

means you get your securities as well as cash immediately.

g. Shares bought or sold are transferred in your name on the very next day of pay

out. In case of physical shares, transfer of ownership takes 30 days or

sometimes even more.

h. No courier / postal charges for sending share certificates / transfer deeds.

i. Facility for freezing / locking of investor accounts, which enables you to make

your account non-operational, for instance if you are abroad.

j. Facility to pledge and hypothecate your securities available.

k. As the Depository System becomes popular, brokers will be increasingly

reluctant to deal with physical shares.

l. Investors prefer to buy shares which are already in dematerialised form.

How do you demat your shares?

The process of opening an account with a Depository Participant is similar to the

opening of a bank account. First, you will have to open an account with a Depository

Participant (DP) of your choice by filling up an Account Opening Form and signing a

“Participant-Client Agreement”. You will be then given a unique client ID number, which

must be quoted in all correspondence with the DP.credit is received by you in your demat

account.

ONLINE TRADING SYSTEM

1. There is a lack of uniformity in organization and control

the stock exchanges.

2. There is no restriction on the membership of the stock exchanges.

3. Many times, stock exchange have failed to control unhealthy speculations

4. More than one stock exchange are allowed to function in the same

place or town or city.

5. There are no margin requirements in the stock exchange.

6. There is no proper regulations of listing of securities on the stock

ORGANISATION OF STOCK EXCHANGE

There is certain amount of in the organizational pattern of the stock exchange in our

country. Except Bombay and Ahmedabad Stock Exchanges, all other stock

exchange were organized only in the present century. Bombay and Ahmedabad exchange

were organized voluntary and non-profit making associations.

MEMBERSHIP IN THE STOCK EXCHANGE

Only member can enter into the floor of the stock exchange and transact business in

listed securities. Only individuals can become member of the stock exchange. Therefore, only

persons with fair integrity, experience and financial backing are allowed to become member

of the exchange.


SECURITIES AND EXCHANGE BOARD OF INDIA

Securities and Exchange Board of India (SEBI) is a autonomous body created

by the Government of India in 1988 and given statutory form in 1992 with the SEBI Act

1992. Its head office is in Mumbai, and has regional offices in Chennai, Kolkata and Delhi.

SEBI is the regulator of Securities markets in India.

The new chairman of SEBI,Mr.C.B.Bhave took charge on February 16 2008.

ORGANISATION STRUCTURE:

Mr. Bhave who is the sixth chairman of the market watchdog had been serving as the

chairman of NSDL [National Securities Depository Limited] and had made significant

contribution to it by introducing a paperless system for storing securities. The Board

comprises whole time members and outside members (representing the finance ministry, RBI

and experts). The present whole time members are:

Dr. TC Nair

Below the Board, the staff/officers of the organization are led by Executive Directors (EDs).

The present EDs are Mr. RK Nair, Ms. Usha Narayanan, Mr. Sandeep P Parekh and Mr. P. K.

Nagpal. Also, Mr. MS Ray, a senior IRS officer on deputation, is an Officer on Special Duty

(equivalent to an ED

FUNCTIONS AND RESPONSIBILITIES

SEBI has to be responsive to the needs of three groups, which constitute the market:

the issuers of securities

the investors

The market intermediaries.

SEBI has three functions rolled into one body quasi-legislative, quasi-judicial and quasi-

executive. It drafts regulations in its legislative capacity, it conducts investigation and

enforcement action in its executive function and it passes rulings and orders in its judicial

capacity. Though this makes it very powerful, there is an appeals process to create

accountability. There is a Securities Appellate Tribunal which is a three member tribunal and

is presently headed by a former Chief Justice of a High court - Mr. Justice NK Sodhi. A

second appeal lies directly to the Supreme Court.

SEBI has had a mixed history in terms of its success as a regulator. Though it has pushed

systemic reforms aggressively and successively (e.g. the quick movement towards making

the markets electronic and paperless rolling settlement on T+2 basis), it lacked the legal

expertise needed to sustain prosecutions/enforcement actions.SEBI has been active in seting

up the rules and regulations as required as directed by the RBI or the Ministry of finance.


ITS ROLE AS REGULATOR OF CAPITAL MARKET

1. Ready delivery contracts : It involves actual delivery of securities by the seller and

Payment of their full prices by the buyers.

2. Forward delivery contracts: They are speculative transactions. These transactions do not

Involve actual delivery of securities and payments of the full price. The volume of such

speculative transactions is much more than the genuine Investment transactions.

CAUSES FOR PRICE FLUCUATIONS:

1. Demand and supply position of the corporate securities

2. Speculative pressure

3. Financial position of the company

4. Nature and performance of the management of the company

5. Attitude of the financial institution

6. Bank rate policy and other fiscal measures

7. Change in the policy of the government

8. Political and other disturbance in the country

9. Industrial relations

LISTING OF SECURITIES

MEANING :

The inclusion of the name of a company in the official list of securities Which can be

dealt with in a stock exchange is called listing. It implies the Securities of a company to the

trading privileges on a stock exchange.

OBJECTIVE OF LISTING:

1. Provision of ready marketability.

2. Imparting liquidity to the securities

3. Provision of free negotiability

4. Protection of the interests of the investors and the general public

CLASSIFICATION OF LISTED SECURITIES

Listed securities can be classified in to two kinds

1. Cleared securities

The securities admitted to dealings, which are included in the Cleared

securities

2. Non-cleared securities

All other securities not on the clear securities are deemed into non-cleared

securities.

ADVANTAGES OF LISTING

Advantage to the Company Management

1. It gives higher status to the management and the company and

expansion programmes.

2. Such companies can raise finance very easily.

3. Listed securities are eligible for certain fiscal advantages such as

concessional rate of income tax and set off of losses of the earlier

years etc.

4. Such companies are better placed while approaching the SEBI for

its consent

5. Listed companies are treated favourably by the financial institutions

and commercial banks when they approach them for short and long

term accommodations.

Advantages to the Investors

1. The security prices are regularly published in the financial news

paper and periodicals. Hence, the investors can sell their holdings at

current market price.

2. Such securities generally fetch higher price.

3. Holders of listed securities are eligible for certain concessions in

matters relating to income tax, wealth tax etc.

4. Listed securities enjoy more public confidence. Hence, they have

high collateral value.

5. Listing makes the securities more prestigious and enhances their

marketability. So the holder can convert their holding without

any difficult in times of need.

6. Listed securities ensure safety to the funds of the investors

DISADVANTAGES OF LISTING

1. Listing makes people depend upon share broker, jobbers etc. many

of them are weak speculators and they create violent price fluctuations.

2. Securities, which are unable to have a stable value, shall loose their

prestige and fell down in the esteem.

3. The management is also induced to show keen interest in the price

movements for personal gains. They may taken advantage of their inside

knowledge.

4. The free negotiability of securities enables a few interested persons

to buy a substantial portion of the securities and they capture the

management of the company.

5. The company should furnish certain information in detail. Such a

detailed disclosure may even injure the prospects of the company.


PRICING

1.Pricing for target return(ROI): When a business man invests money in a business he

calculates probable returns on his investments. A certain rate of return on investments is

aimed and price is fixed accordingly. Firms want to secure a certain percentage of returns on

their investments or on sales. Whole --salers and retailers may charge certain percentage

over and above the price, they purchased which is enough to meet operational cost and

desired profit.

2.Market Share: The target share of the market and the expected volume of sales are the

most important considerations in pricing the products. Some companies adopt the main

pricing objectives so as to maintain or improve the market share towards the products. The

firms may reduce the price ,in comparison with the rivals products ,with a view to capture the

market. By lowering the price ,market share can be increased ,besides attracting new

customers.

3.To meet or prevent Competition: While fixing the price ,the price of similar products

,produced by other firms have to be considered One has to look to the prices of rivals

products and the existing competition and chalk out pricing policies so as to face the market

competition .At the time of introducing a new product ,a low price policy is likely to attract

the customers, and can establish a good market share. The low price policy discourages the

competitors.

4.Profit Maximization: It can be enjoyed only in monopolistic situations. The goal should

be to maximize profit on total output, rather than on every item. It will develop an unhealthy

image and exploits the customers. The customers will have a feeling of monopoly and high

price

5.Stabilise Price: It is a long term objective and aim at prevent frequent and violent

fluctuation in price.. It also prevent price war among competitors. When the price often

changes there arises no confidence on the products. Thus firms forego maximum profits

during periods of short supply of products.

6.Customers Ability to Pay: In some service industries prices are charged as per the

customers ability to pay.

7.Resource Mobilization: The products are priced in such a way that sufficient resources are

made available for the firm’s expansion ,developmental investments etc., Marketers are

interested in getting back the amount invested as speedily as possible. The management may

fix a higher price and this trend will invite competitors with low priced similar products.

lecture.no: 27 unit: iii capital market

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