14 Major Defects of Indian Capital Market (Explained)

Despite the rapid growth of the capital market in the 1980s, a number of abuses existed such as insider trading, price rigging, inadequate, vague, and misleading prospectuses of companies, delays in share allocation and issuing refund orders, and manipulation of prices in stock exchanges.

major defects of indian capital market
major defects of the Indian capital market

The capital market was less liquid and lacked transparency thereby providing little protection to investors.

Top Challenges of Indian Capital Market

Despite these reforms, there are many defects or problems in the working of the Indian capital market which re-discussed as under:

1. Inadequate Stock Exchanges

With the phenomenal increase in the number of companies being listed every month and in the number of shareholders, the existing stock exchanges numbering 22 with Mumbai having three, are inadequate.

This has resulted in the mushrooming of undertheorized and unregistered private stock exchanges all over the south.

These share trading houses and associations indulge in speculative transactions.

2. Defective Operations of Stock Exchanges

The stock exchanges in India continue to be defective in their operations.

They do not have proper infrastructure. They lack adequate space for the stockbrokers to operate efficiently.

They do not possess adequate telecommunication and computerization facilities. Old trading practices are still followed. All these defects deter trading or listed shares in the majority of stock exchanges in India.

This has led to a great rush at the Bombay Stock Exchange with its consequent delays in transaction deliveries and payments.

Related: Key Factors Affecting Capital Structure (Complete List).

3. Odd Lot Shares Problem

Despite SEBIs instruction regarding the non-issuing of odd-lot shares by the companies bonus share and rights issue share are being allotted in odd lots.

Nothing has also been done for small investors who already hold odd lot shares issued prior to the instruction of the SEBI. The holders of lots have to pay brokerage up to 15% while buying and selling odd lot shares.

The effort of the BSE, UTI, and GIC to buy and sell odd lots at fair brokerage is limited only to selective and good scrips.

4. Inadequate Protection to Investors

The protections given to clients in case of default by brokers and sub-broker are inadequate.

The protection is given to individual shareholders under the consumers’ protection fund set up at each stock exchange s limited to 40000 in case of a defaulting broker.

This limit is very low because it may be the cost of one lot of a high-priced share.

5. Lacks Transparency

Trading transactions in stock exchanges still lack transparency.

Buyers and sellers of scrips are at the mercy of brokers and sub-brokers who often quote the lowest traded rate of a script to the sellers and the highest top buyers.

Thus, they pocket the maximum fraudulent gain on both the transaction maintain proper accounts, and manipulate them.

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6. Stockbroking System Defective

The system of stockbroking continues to be defective.

The brokers have their sub-brokers and sub-broker, in turn, have their own sub-brokers who manipulate prices and cheat the sellers and buyers of shares and debentures in the secondary market.

7. Vague Prospectus

Despite SEBIs guidelines, the prospectuses issued by individual companies do not contain all the information and are vague.

Free pricing norms laid down by the SEBI are not strictly followed. Premium fixing is also not fair.

As a result, many companies dupe investors outright and close down without any trace.

8. Existence of Grey Market

The unofficial unregulated market before the listing of shares called the grey market, attract and misleads gullible in their analysis.

They often mislead investors at the instance of companies.

Consequently, small investors suffer the most.

9. Stockinvest not Popular

The stock investment instrument has been virtually cornered by big investors.

The non-availability of stockiest of small denominations, procedural difficulties, and high bank charges have kept the small investors away from his instrument.

10. Inefficient Banking and Postal Services

Banking and postal service are inefficient which adds to the woes of the small investors.

Refunds, dividend warrants, and interest payments are sent by companies to the small clients by ordinary posts which often do not reach them.

Some dishonest postal and bank employees often collaborate and pocket such cheques throughs fraudulent means and dupe the small investors.

Different Services Rendered by Merchant Bankers.

11. Inadequate market Instruments

The capital market instruments in India have been confined primarily to shares and debentures which are inadequate for the proper functioning of a capital market.

issues and challenges of capital market
issues and challenges of capital market

The newly introduced warrants, zero-coupon bonds, etc are not yet popular with investors.

12. Insider Trading

The Indian capital market has been plagued with fluctuations due to insider trading.

Persons working inside a company often buy or sell shares on the basis of the expected profitability or losses of the company.

This brings about price fluctuations in the scrips of the company thereby adversely affecting the interests of the small investors.

Some big industrial houses also resort to transactions in the shares of group companies thereby accentuating this problem of insider trading to the detriment of ordinary shareholders.

13. Delay in Delivery

There is an unusual delay in the delivery of scrips and settlement or payment of transactions.

The delivery of scrips usually takes 3 to 4 months and payments range between 2 to 3 months. Bad deliveries mainly due to the verification of signatures of sellers further lengthen the period and complicate the problem.

There are also delays in payments s which usually range between 1 to 2 months.

Often delays in payments and deliveries lead to the suspension of stock exchange operations.

Essential Steps of Depository System Process.

14. Poor Liquidity

The Indian capital market does not possess sufficient liquidity.

A recent study shows that only 20% of the scraps are traded everyday arid that too of group A. Another 20A% are traded 2 to 3 times a week and 10 % once in a fortnight.

Thus 50% of scraps listed on the Bombay stock exchange, the biggest in the country, have very poor liquidity. At other stock exchanges two, theirs of the scrips listed are not traded at all.

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