Q. What is Secondary Market? Explain the major problems or defects of Secondary Market.
Ans. MEANING OF SECONDARY MARKET: The market where the outstanding securities are traded is known as secondary market. This market is popularly known as stock market or stock exchange. In this market, the investors can sell and buy shares or debentures of companies. Stock markets deal in equity shares primarily, but the debt instruments like bonds and debentures are also traded in stock market. The growth of primary market depends on the secondary market. It also promotes capital formation.
Definition: The Securities Contracts (Regulation) Act, 1956 defines a stock exchange as “an established association, organisation or body of individuals, whether incorporated or not, established for the purpose of assisting, regulating and controlling business in buying, selling and dealing in securities.”
MAJOR PROBLEMS OR DEFECTS OF SECONDARY MARKET: The Indian Secondary Market is suffering from certain defects. These are:
1. Weak Management of Stock Exchanges: The management of stock exchanges is weak and deficient in India. The Indian stock exchanges are governed by the member brokers for their own benefit. The Executive Director has also failed to perform his regulatory functions freely as he is also responsible to the governing body.
2. Lack of Integration: There are 23 stock exchanges in India which are scattered throughout the country. But these exchanges lack in integration. Due to lack of integration among the stock exchanges, the prices of securities vary considerably between different markets at the same time.
3. Arbitrary Classification of Specified and Non-specified Shares: The Indian stock exchanges have been following an arbitrary practice of classifying listed shares into specified and unspecified groups. This type of arbitrary categorisation favours artificial encouragement to a few large companies and promotes speculation in it.
4. Ignoring Investors’ Interest: The Indian stock exchanges are ignoring the genuine interests of investors. Complaints made by investors remain uncared and unattended.
5. Domination of Financial Institution: Indian capital market is dominated by financial institutions and big operators. UTI, LIC, GIC, ICICI and 3-4 big operators are the main players in the Indian stock markets. Transactions done by these institutions set the trend in the market. If these institutions buy the stocks, the market gets bullish and on the reverse side, the market becomes bearish because of selling by them. Individual investor has no say in the stock market.
6. Poor Liquidity: The Indian stock exchanges suffer from poor liquidity. A small number of stocks are traded everyday and most of the times, thin volumes can be seen at the stock exchanges.
7. Less Floating Stocks: Scarcity of floating stocks in the Indian stock exchanges is another reason for their weaknesses. The shares and debentures offered for sale are a small portion of total stock. Financial institutions do not offer the scrips they have purchased for sale. It creates shortage of floating stocks.
