Unit – 6; Resource Mobilization
Q.1 What do you understand by the term ‘finance’?
Ans. ‘Finance’ refers to funds or monetary resources needed by individuals, business houses and the government to carry out its various operations successfully.
Q.2 “Finance is the elixir that assists in the formation of new businesses, and allows businesses to take advantage of opportunities to grow and expand”. In the light of the above statement mention the various points depicting the significance of Finance for an organization.
What is the significance of finance for an organization?
Ans. The significance of finance can be stated hereunder:
- a) Promote or establish the business
- b) Acquire fixed assets
- c) Make market investigations
- d) Develop product
- e) Keep men and machines at work
- f) Encourage management to make progress and create value.
- g) Expand, diversify, improve and grow.
- h) Be enough to meet unexpected/unplanned business expenses.
Q.3 “Financing” is the prime function for the survival of any organization because nothing can be done without money. Before doing anything, what points should an entrepreneur take into consideration which are critical for the survival of the organization?
Ans. Before doing anything, an entrepreneur should clearly answer the following three questions:
1) How much money is required?
2) Where will money come from?
3) When does the money need to be available?
Q.4 “It is the organized mechanism meant for effective and smooth transfer of money capital or financial resources from the investors to the entrepreneurs”. Identify the concept being talked about and enlist its significance.
“It satisfies the tastes of savers and the needs of investors through its various financial instruments and institutions”. Identify the concept being talked about and enlist its significance.
Ans. The concept being talked about is Capital Market.
Capital markets are the most important source of raising finance for the entrepreneurs as this market can:
- Mobilize the financial resources on a nation-wide scale.
- b) Secure the required foreign capital and know-how to promote economic growth at a faster rate.
- c) Ensure the most effective allocation of the mobilized financial resources by directing the same either to such projects which are capable of the highest yield or to the underdeveloped priority areas where there is an urgent need to promote balanced and diversified industrialization.
Q.5 “It is the market which facilitates transfer of resources from the savers to the entrepreneurs”. Identify the type of market being talked about.
Ans. Primary Market
Q.6 What are the various Methods of flotation of new issues?
Ans. An entrepreneur can raise the required capital in the primary market by the following methods:
- Public issue / going public
Public issue is the most popular method of raising capital by the entrepreneurs. This involves raising of funds directly from the public through the issue of prospectus.
- Rights issue
Rights issue is a method of raising additional finance from existing shareholders by offering securities to them on pro-rata basis i.e. giving them a preferential right to a certain number of shares in proportion to the shares they are holding.
- Private placement
Private placement means the direct sale by a company of its securities to a limited number of sophisticated investors. Entrepreneurs, herein, raise funds by selling the issues mainly to the institutional investors like: Unit Trust of India, Life Insurance Corporation of India, General Insurance Corporation of India, Army Group Insurance, State Level Financial Corporations, etc.
- Offer to employees
Stock options or offering shares to the employees has gained much popularity in many countries of the world. This method enables employees to become shareholders and share the profits of the company leading to higher efficiency, Low labour turnover, Better industrial locations, Low floatation cost and Wider/higher generation of funds.
Q.7 Name the type of market which enhances the marketability of securities?
Ans. Secondary Market or Stock Exchange
Q.8 Why is Secondary capital market known as old securities market?
Ans. Secondary capital market is also known as old securities market or stock exchange as it deals with buying and selling of old securities i.e. the market securities issued earlier are sold by existing investors in this market.
Q.9 What are the features of stock exchange?
1) Association of persons: A stock exchange is an association of persons or body of individuals which may be registered or unregistered.
2) Recognition from central government: Stock exchange is an organized market. It requires recognition from the Central Government.
3) Market for securities: Stock exchange is a market, where securities of corporate bodies, government and semi-government bodies are bought and sold.
4) Deals in second hand securities: It deals with shares, debenture, bonds and such securities already issued by the companies. In short it deals with existing or second hand securities and hence it is called secondary market.
5) Regulates trade in securities: Stock exchange does not buy or sell any securities on its own account. It merely provides the necessary infrastructure and facilities to its members and brokers who trade in securities. It regulates the trade activities so as to ensure free and fair trade.
6) Allow dealings only in listed securities: Stock exchanges maintain an official list of securities that could be purchased and sold on its floor. Securities which do not figure in the official list of stock exchange are called unlisted securities. Such unlisted securities cannot be traded in the stock exchange.
7) Transactions effected only through members: All the transactions in securities at the stock exchange are effected only through its authorized brokers and members. Outsiders or direct investors are not allowed to enter in the trading circles of the stock exchange. Investors have to buy or sell the securities at the stock exchange through the authorized brokers only.
8) Working as per rules: Buying and selling transactions in securities at the stock exchange are governed by the rules and regulations of stock exchange as well as SEBI Guidelines. No deviation from the rules and guidelines is allowed in any case.
9) Specific location: Stock exchange is a particular market place where authorized brokers come together daily on the floor of market called trading circles and conduct trading activities. The price of different securities traded are shown on electronic boards. After the working hours market is closed, All the working of stock exchange is conducted and controlled through computers and electronic system.
10) Financial barometers: Stock exchanges are the financial barometers and development indicators of national economy of the country. Industrial growth and stability is reflected in the index of stock exchange.
Q.10 “Stock exchange performs a number of functions in respect of marketability of different types of securities for investors and borrowing companies.” Explain those functions.
Ans. The various important functions of Stock exchange are:
a) Continuous and ready market for securities
Stock exchange provides a central market for purchase and sale of securities. It provides ready and continuous outlet for buying and selling of securities. Buyers and sellers strongly believe that they would be able to buy and sell securities as and when they want.
b) Facilitates evaluation of securities
Stock exchange is useful for the evaluation of industrial securities. It publishes price quotation of the shares of the companies that have been listed with them after thorough analysis of demand and supply position. This enables investors to know the true worth of their holdings at any time.
c) Checks on brokers
Stock exchanges control the activities of brokers and protect the investors from being deceived. Now, if any broker is found indulging in malpractices as overcharging or giving wrong information, his/her licence may be cancelled.
d) Provides safety and security in dealings
Activities of the stock exchange are controlled by the provisions of the Securities Control (Regulation) Act and all this creates confidence in the minds of investors. As transactions are conducted as per well defined rules and regulations, fraudulent practices stands checked effectively ensuring safety, security and justice in dealings.
e) Regulates company management
Listed companies have to comply with rules and regulations of concerned stock exchange and work under the vigilance of stock exchange authorities.
f) Intensifying capital formation
Stock exchange accelerates the process of capital formation through creating the habit of saving, investing and risk taking among the investing class by converting their savings into profitable, safe investments.
g) Facilitates raising of new capital
Because of stock exchange, for either development, organisation or expansion, the need for more capital by the existing companies is easily met out.
h) Facilitates public borrowing
Stock exchange serves as a platform for marketing government securities. It enables government to raise public debt easily and quickly.
i) Facilitates healthy speculation
Healthy speculation, keeps the exchange active. Normal speculation is not dangerous but provides more business to the exchange. However, excessive speculation is undesirable as it is dangerous to investors & the growth of corporate sector.
j) Serves as economic barometer
Stock exchange indicates the state of health of companies and the national economy. It acts as a barometer of the economic situation/conditions and is thus referred as pulse of economy or economic mirror.
k) Facilitates bank lending
Banks easily know the prices of quoted securities. They offer loans to customers against corporate securities. This gives convenience to the owners of securities.
Q.11 “Stock Exchange is an investment intermediary which facilities economic and industrial development of a country”. Comment.
Ans. Stock exchange facilitates economic and industrial development of a country in the following manner:
- From the viewpoint of investors
(a) Dissemination of useful information: Stock exchange publishes useful information regarding price lists, quotations, etc., of securities through newspapers and journals. The interested persons buy and sell their securities on the basis of information provided by the stock exchanges.
(b) Ready market: Persons desirous of converting their shares into cash may easily do so through a member of stock exchange.
(c) Investors’ interests protected: Stock exchanges formulate rules and regulations so that members may not exploit the investors.
(d) Genuine guidance about the securities listed: The investors can safely depend upon the information provided by the stock exchanges.
(e) Barriers of distance removed: Stock exchange removes the barriers of distance with regard to securities listed there. Without stock exchange the securities of a Delhi company may have a limited market in Delhi only.
(f) Knowledge of profit or loss on investments: The investors can estimate the profit or loss on the total amount of investments in securities, by comparing the original amount invested and the price of securities on a particular day.
- From the viewpoint of entrepreneurs /companies
(a) Recognition: The market values of companies’ shares are published in important dailies. This enhances the reputation of good companies/entrepreneurs.
(b) Wide market: The securities of some companies are listed in some stock exchanges. The market for the securities of such companies is considerably widened. Thus, larger amounts of capital may be raised from different types of investors.
(c) Higher share values: People have a tendency to buy shares that have some premium value. Demand of such shares increases. This leads to further increase in the price of such shares.
- From the viewpoint of society
(a) Rapid capital formation: People get tempted to invest in securities when they study the trend of necessary prices of shares of good companies. This habit leads to investment of savings in corporate and government securities. The income from these securities may further be invested in buying more securities. This flow of funds leads to rapid capital formation.
(b) Economic development: Through easy funds mobilizing, the boosted production fetches more capital, enhancing economic development.
(c) National projects: As stock exchange promotes, the capital formation rate the projects which brings National Prosperity can be easily undertaken.