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Dear Sir,
Need your guidance for following questions..

1. What are the important laws related to the functioning and operation of capital markets in India? Briefly Discuss.

2. Describe the situation in which large and small firms would be more efficient with respect to size of Industrial units.

3. Assess Industrial Policy of 1956 and explain how Schedule A, B, and C are different from one another.

4. Analyze the first three phases of Foreign Trade Regime, in the process of economic development.

5. What does the Quantity Theory of Money (QTM) imply? Also identify two principal purposes for holding money.

6. Write short  notes on the following:-

a)   Economic Development

b)   Administered Prices

c)   Phased Manufacturing Process

I  will send  the balance  asap.
1.What are the important laws related to the functioning     and operation of capital markets in India? Briefly Discuss.
Indian Securities Market
Before 1992
The Indian securities market before 1992 had the
following characteristics:
• Fragmented regulation; multiplicity of administration.
• Primary markets not in the mainstream of the
financial system.
• Poor disclosure in prospectus. Prospectus and
balance sheet not made available to investors.
• Investors faced problems of delays (refund,
transfer, etc.)
• Stock exchanges regulated through the Securities
Contracts (Regulations) Act. No inspection
of stock exchanges undertaken.
• FIIs also permitted to invest in unlisted securities
and corporate and Government debt.
• The Depositories Act enacted to facilitate the
electronic book entry transfer of securities
through depositories.
• Guidelines for Offshore Venture Capital Funds
announced. SEBI regulations for venture capital
funds become effective.
• Stock Exchanges run as brokers clubs; management
dominated by brokers.
• Merchant bankers and other intermediaries unregulated.
• No concept of capital adequacy.
• Mutual funds—virtually unregulated with potential
for conflicts of interest in structure.
• Poor disclosures by mutual funds; net asset value
(NAV) not published; no valuation norms.
• Private sector mutual funds not permitted.
• Takeovers regulated only through listing agreement
between the stock exchange and the company.
• No prohibition of insider trading, or fraudulent
and unfair trade practices.

Indian Securities Market
Since 1992
The development in Indian securities market since
1992 can be summarized as follows:
• Capital Issues (Control) Act of 1947 repealed
and the office of Controller of Capital Issues abolished;
control over price and premium of shares
removed. Companies now free to raise funds
from securities markets after filing prospectus
with the Securities and Exchange Board of India
• The power to regulate stock exchanges delegated
to SEBI by the Government.
• SEBI introduces regulations for primary and
other secondary market intermediaries, bringing
them within the regulatory framework.
• Reforms by SEBI in the primary market include
improved disclosure standards, introduction of
prudential norms, and simplification of issue procedures.
Companies required to disclose all material
facts and specific risk factors associated
with their projects while making public issues.
• Listing agreements of stock exchanges amended
to require listed companies to furnish annual
statement to the exchanges showing variations
between financial projections and projected utilization
of funds in the offer document and actual
figures. This is to enable shareholders to
make comparisons between performance and
• SEBI introduces a code of advertisement for
public issues to ensure fair and truthful disclosures.
• Disclosure norms further strengthened by introducing
cash flow statements.
• New issue procedures introduced—book building
for institutional investors—aimed at reducing
costs of issue.
• SEBI introduces regulations governing substantial
acquisition of shares and takeovers and lays
down conditions under which disclosures and
mandatory public offers are to be made to the
shareholders. Regulations further revised and
strengthened in 1996.
• SEBI reconstitutes the governing boards of the
stock exchanges and introduces capital adequacy
norms for broker accounts.
• Private mutual funds permitted and several such
funds already set up. All mutual funds allowed
to apply for firm allotment in public issues—also
aimed at reducing issue costs.
• Regulations for mutual funds revised in 1996,
giving more flexibility to fund managers while
increasing transparency, disclosure, and accountability.
• Over-the-Counter Exchange of India formed.
• National Stock Exchange (NSE) establishment
as a stock exchange with nationwide electronic
• Bombay Stock Exchange (BSE) introduces
screen-based trading; 15 stock exchanges now
have screened-based trading. BSE granted permission
to expand its trading network to other
• Capital adequacy requirement for brokers enforced.
• System of mark-to-market margins introduced
in the stock exchanges.
• Stock lending scheme introduced.
• Transparency brought out in short selling.
• National Securities Clearing Corporation, Ltd.
set up by NSE.
• BSE in the process of implementing a trade guarantee
• SEBI strengthens surveillance mechanisms and
directs all stock exchanges to have separate surveillance
• SEBI strengthens enforcement of its regulations.
Begins the process of prosecuting companies for
misstatements and ensures refunds of application
money in several issues on account of misstatements in the prospectus

• Indian companies permitted to access international
capital markets through Euro issues.
• Foreign direct investment allowed in stockbroking,
asset management companies, merchant
banking, and other nonbank finance companies.
• Foreign institutional investors (FIIs) allowed access
to Indian capital markets on registration with
FIIs also permitted to invest in unlisted securities
and corporate and Government debt.
• The Depositories Act enacted to facilitate the
electronic book entry transfer of securities
through depositories.
• Guidelines for Offshore Venture Capital Funds
announced. SEBI regulations for venture capital
funds become effective

Regulatory Framework
Securities and Exchange Board of India
Securities and Exchange Board of India (SEBI)
was set up as an administrative arrangement in 1988.
In 1992, the SEBI Act was enacted, which gave
statutory status to SEBI. It mandates SEBI to perform
a dual function: investor protection through regulation
of the securities market, and fostering the development
of this market. SEBI has been delegated
most of the functions and powers under the Securities
Contract Regulation (SCR) Act, which brought
stock exchanges, their members, as well as contracts
in securities which could be traded under the regulations
of the Ministry of Finance (see Figure A3 for
the present regulatory structure of the Indian securities
market). It has also been delegated certain powers
under the Companies Act. In addition to registering
and regulating intermediaries, service providers,
mutual funds, collective investment schemes,
venture capital funds, and takeovers, SEBI is also
vested with power to issue directives to any person(s)
related to the securities market or to companies in
areas of issue of capital, transfer of securities, and
disclosures. It also has powers to inspect books and
records, suspend registered entities, and cancel registration.
Reserve Bank of India
Reserve Bank of India (RBI) has regulatory involvement
in the capital market, but this has been
limited to debt management through primary dealers,
foreign exchange control, and liquidity support
to market participants. It is RBI and not SEBI that
regulates primary dealers in the Government securities
market. RBI instituted the primary dealership of
Government securities in March 1998. Securities
transactions that involve a foreign exchange transaction
need the permission of RBI.
Department of Company Affairs
In 1947, the Capital Issues (Control) Act was enacted,
which formalized and continued initial controls
on the issue of securities that were introduced
during World War II. This Act was administered by
the office of the Controller of Capital Issues (CCI),
which was a part of the Ministry of Finance. In line
with economic reforms, it was repealed in 1992 to
liberalize capital issuance and pricing. While capital
issuance used to be regulated by the office of the
CCI, both private and public companies were governed
by the Companies Act of 1956, which was
and continues to be administered by the Department
of Company Affairs (DCA) under the Ministry of
Law, Justice and Company Affairs. Besides governing
the incorporation, management, mergers, and
winding up of companies, this Act also specifies certain
aspects concerning capital issuance and securities
trading, particularly the issue of prospectus for
public offers, contents of the prospectus, completion
of allotment, issue, and trading of securities, and
transfer and registration of securities.
Stock Exchanges
SEBI issued directives that require that half the
members of the governing boards of the stock exchanges
be nonbroker public representatives and include
a SEBI nominee. To avoid conflicts of interest,
stock brokers are a minority in the committees of
stock exchanges set up to handle matters of discipline,
default, and investor-broker disputes. The exchanges
are required to appoint a professional, nonmember
executive director who is accountable to
SEBI for the implementation of its directives on the
regulation of stock exchanges. SEBI has introduced
a mechanism to remedy investor grievances against
Similar to companies in capital markets in other countries,
a company offering securities in the Indian
capital market is required to make a public disclosure
of all relevant information through its offer documents.
These documents are as follows:
• prospectus,
• application form and the abridged prospectus (in
case of an issue to the public), or
• letter of offer (in case of a rights issue to existing
shareholders or debenture holders of a company
with or without the right to renounce in favor
of other persons).
After a security is issued to the public and subsequently
listed on a stock exchange, the issuing company
is required under the listing agreement to continue
to disclose in a timely manner to the exchange,
to the holders of the listed securities (the shareholders
or the bondholders), and to the public (through
the exchange or the media), any information necessary
to enable the holders of the listed securities to
appraise its position and to avoid the establishment
of a false market in such listed securities. Such information
• the date of the meeting of the board of directors
for corporate actions;
• the audited financial results on an annual basis
and the unaudited ones on a semiannual basis;
• any proposed change in the general character
or nature of the company’s business;
• any alterations of the company’s capital; and
• any change of the company’s directorate, including
managing directors and auditors.

Changes to Capital Markets Regulations
On October 25, 2010, SEBI announced a number of changes to regulations governing capital markets.

1. Public offerings.

A new regime is being established for IPOs by insurance companies. Rather than issue a new set of guidelines for that industry, SEBI has decided to apply the ICDR Regulations, 2009 along with additional industry-specific disclosures such as specific risk factors, overview of the insurance industry and a glossary of terms. Other changes in public offering norms include enhancement of a maximum application size for retail individual investors to Rs. 2 lakhs across all issues, the introduction of mandatory pro forma financial statements for issuer companies that have undergone a merger or restructuring after the last disclosed financial statements and the removal of a requirement for minimum promoters’ contribution in a further public offering (FPO).

In progressively addressing issues of gun-jumping, SEBI now requires investment banks to submit a compliance certificate “as to whether the contents of the news reports that appear after the filing of the [draft offer document] are supported by disclosures in offer document or not”. An item which is noteworthy is the reference to news reports appearing in media where the issuer has a private treaty with such media group. This will ensure that the securities are sold pursuant to the offer document, which constitutes the single source of information for marketing purpose as also for legal consequences (such as liability of misrepresentation).

2. Preferential Issues

In a measure that tightens restrictions on issue of securities to promoters, SEBI has provided that promoters (or promoter group) are ineligible to receive equity shares, convertible securities or warrants for a period of one year if they have failed to exercise previously issued warrants. This will operate as a disincentive against issue of warrants to promoters and promoter group, and further curb the misuse of warrants. For a previous discussion on regulation of such warrants, see here and here).

3. Rights Issue for IDRs

SEBI has proposed a new framework for rights issues for foreign companies that have outstanding Indian depository receipts (IDRs). Issuers are required to circulate a wrap document that contains information specific to IDR holders. The level disclosures will be similar to that expected in a rights issue by an Indian company. On a related note, the IDR holders of Standard Chartered were faced with certain legal and regulatory issues regarding their ability to participate in the bank’s recent rights offering, and it is hoped that the new regulatory framework will iron out those issues.
2.Describe the situation in which large and small firms     would be more efficient with respect to size of Industrial units.
The increase in efficiency of production as the number of goods being produced increases. Typically, a company that achieves economies of scale lowers the average cost per unit through increased production since fixed costs are shared over an increased number of goods.

There are two types of economies of scale:

-External economies - the cost per unit depends on the size of the industry, not the firm.
-Internal economies - the cost per unit depends on size of the individual firm.

economies of scale gives big companies access to a larger market by allowing them to operate with greater geographical reach. For the more traditional (small to medium) companies, however, size does have its limits. After a point, an increase in size (output) actually causes an increase in production costs. This is called "diseconomies of scale"

Economies of scale are reductions in average costs attributable to production volume increases. They typically are defined in relation to firms, which may seek to achieve economies of scale by becoming large or even dominant producers of a particular type of product or service. A distinction can be made between internal and external economies of scales. Internal economies of scale occur when a firm reduces costs by increasing production. External economies of scale occur when an entire industry benefits from expansion; for example, through the creation of an improved transportation system, a skilled labor force, or by sharing technology.
Economies of scope are reductions in average costs attributable to an increase in the number of goods produced. For example, fast food outlets have a lowe+r average cost producing a multitude of goods than would separate firms producing the same goods. This occurs because the preparation of the multiple products can share storage, preparation, and customer service facilities (joint production).
The basic notion behind economies of scale is well known: As a plant gets larger and volume increases, the average cost per unit of output is expected to drop. This is partially because relative operating and capital costs decline, since a piece of equipment with twice the capacity of another piece does not cost twice as much to purchase or operate. If average unit production cost = variable costs + fixed costs/output, one can see that as output increases the fixed costs/output figure decreases, resulting in decreased overall costs.
Plants also gain efficiencies when they become large enough to fully utilize dedicated resources for tasks such as materials handling. The remaining cost reductions come from the ability to distribute non-manufacturing costs, such as marketing and research and development, over a greater number of products. This reduction in average unit cost continues until the plant gets so big that coordination of material flow and staffing becomes very expensive, requiring new sources of capacity.
This concept can be related to best operating levels by comparing the average unit cost of different sized firms. In many types of production processes, the most efficient types of production facilities are practicable only at high output levels. It is very expensive to build custom-made cars by hand, and would be equally or more expensive to use a large General Motors assembly plant to build just a few Chevrolets per year. However, if the plant is used to build 6 million cars per year, the highly specialized techniques of the assembly line allow a significant reduction in costs per car.
Suppose, for example, that Honda were constrained to produce only 10,000 motorcycles a year instead of a possible 1 million. With this circumstance, the need for an assembly line would become obsolete. Each motorcycle could be produced by hand. Honda could rule out benefits that might be derived from the division and specialization of labor. In producing such a small number, the use of any production techniques that reduce average cost would become obsolete. In these two examples, Honda and General Motors would enjoy economies of scale with reduced average cost simply by increasing the scale of their operations.
More broadly, economies of scale can occur for a number of reasons, including specialization efficiencies, volume negotiating/purchasing benefits, better management of by-products, and other benefits of size that translate into savings or greater profitability for a large-scale producer.
In a small firm, labor and equipment must be used to perform a number of different tasks. It is more difficult for labor to become skilled at any one of them and thereby realize the gains in productivity and reduction in per-unit costs that specialization permits. In the same way, management functions cannot be as specialized in a smaller firm. Supervisors may have to devote time to screening job applicants, a task usually more efficiently handled by a personnel department in a larger firm. Executives may have to divide their attention between finance, accounting, and production functions that could be handled more proficiently by departments specializing in each of these areas in a larger firm.
According to Langlois, some economies of scale result from the specialization and division of labor. Mass production allows the use of specialized equipment and automation to perform repetitive tasks. The larger the output of a product, plant, or firm, the greater will be the opportunities for specialization of labor and capital equipment. Similarly, machinery and equipment cannot be used as efficiently when it has to be switched back and forth between tasks.
Increased specialization in the use of labor is feasible as a plant increases in size. Hiring more workers means that jobs can be divided and subdivided. Instead of performing five or six distinct operations in the productive process, each worker may now have just one task to perform. Workers can be used full-time on those particular operations at which they have special skills. In a small plant a skilled machinist may spend half his time performing unskilled tasks, resulting in higher production costs. Furthermore, the division of work operations made possible by large-scale operations gives workers the opportunity to become very proficient at the specific tasks assigned to them. Finally, greater specialization tends to eliminate the loss of time that accompanies the shifting of workers from one job to another.
Oftentimes, the suppliers of raw materials, machinery, and other inputs will charge a lower price per unit for these items if a firm buys in large quantities. When a firm produces at high output levels, it needs a large volume of inputs and can take advantage of the associated price discounts to reduce its per-unit costs; if the company is large enough it may have strong negotiating power on this point. There may be similar economies of scale for stocks of raw materials, and intermediate and final products, part of which may be held to meet interruptions to the supply of raw materials, a temporary breakdown of firms, and the uncertain flow of orders from customers.
The production of many types of goods gives rise to economically valuable by-products. Large-scale firms are often able to recycle "waste" by-products that smaller size firms simply have to throw away because it is not economical to do anything else with them. For example, a small sawmill may simply throw away sawdust and old wood scraps. Many processing firms find that the volume of these waste products is large enough to warrant their resale. For example, sawdust can be sold as a sweeping compound for cleaning floors and hallways in large buildings. Wood scraps may be packaged, processed, and sold as kindling wood and artificial logs for home barbecues and fireplaces. In this way, the sale of by-products effectively reduces the per-unit costs of producing lumber in large volumes. For the same reasons, large oil firms often produce a host of petroleum by-products, and meatpacking firms produce fertilizers, glue, leather, and other by-products of meat production.
The growth of supporting facilities and services is encouraged by a firm's large scale of operation. As a firm's scale of operations gets larger, it often becomes worthwhile for other firms and local governments to provide it with unique services that result in direct or indirect cost advantages. If a firm builds a large plant in a particular area, an improvement in highways and expanded transportation services may soon follow. Smaller suppliers that find a large part of their sales going to the larger firm may move closer to reduce transportation costs. All of these developments could result in lower per-unit costs for the large firm.
Larger firms have a cost advantage over their competitors. Not only does a larger plant gain from economies of scale, it also will produce more. Companies often use this advantage as a competitive strategy by first building a large plant with substantial economies of scale, and then using its lower costs to price aggressively and increase sales volume. Large economies of scale cause the firm's long-run average total cost curve to fall over a sizeable range as output is increased. In industries where the technology of production leads to economies of scale, the long-run average total cost curve for a single firm may fall over almost the entire range of output covered by the industry demand curve. When long-run average total cost falls in this fashion, it is possible for a firm that gets into this market ahead of others to obtain a competitive advantage. The ever lower per-unit costs it realizes at higher and higher levels of output permit the firm to charge a price lower than the average per-unit costs that prevail at lower levels of output. In this way, the firm is able to satisfy the entire market demand at a price below that which potential new rival firms must charge when getting started. These new firms would thus not be able to charge a price low enough to compete for sales with the established firm. Therefore, the established firm is able to keep rivals out of the market and maintain a monopoly position.
" economies of scope exist if a firm can produce several product lines at a given output level more cheaply than a combination of separate firms each producing a single product at the same output level. Economies of scope differ from economies of scale in that a firm receives a cost advantage by producing a complementary variety of products with a concentration on a core competency. While economies of scope and scale are often positively correlated and interdependent, strictly speaking the benefits from scope have little to do with the size of output.
For instance, in the paper products industry it is common for large firms to produce their own pulp, the primary ingredient in paper, before manufacturing the paper goods themselves. However, smaller firms may have to purchase pulp from others at a higher net cost than the large companies pay. The savings from producing both pulp and paper would be an economy of scope for the large producers, although the large companies probably also have economies of scale that make it feasible to invest in pulping operations in the first place.
In another example, banks have economies of scope when they offer a variety of related financial services, such as retail banking and investment services, through a single service infrastructure (i.e., their branches, ATMs, and Internet site). Clearly, the costs of providing each service separately would be much greater than the costs of using a single infrastructure to provide multiple services.
Research concerning hospitals has suggested that other types of services, such as pediatric care, may have economies of scope. With increasing competition and emphasis on service, economies of scope are necessary for hospitals to provide these services profitability.
When a firm grows beyond the scale of production that minimizes long-run average cost, diseconomies of scale may result. When diseconomies of scale occur the firm sees an increase in marginal cost when output is increased. This can happen if processes become "out of balance," or when one process cannot produce the same output quantity as a related process. Diseconomies of scale also can occur when a firm becomes so large that:
•   Transportation costs increase enough to offset the economies of scale
•   Monitoring worker productivity becomes too imperfect or costly
•   Coordinating the production process becomes too difficult
•   Frequent breakdowns result
•   Maintaining efficient flows of information becomes too expensive
•   Workers feel alienated and become less productive
•   The focus of the firm is reduced, leading to inefficiencies and loss of strategic position

1.   Control – monitoring the productivity and the quality of output from thousands of employees in big corporations is imperfect and costly – this links to the concept of the principal-agent problem – how best can managers assess the performance of their workforce when each of the stakeholders may have a different objective or motivation which can lead to stakeholder conflict?
2.   Co-ordination - it can be difficult to co-ordinate complicated production processes across several plants in different locations and countries. Achieving efficient flows of information in large businesses is expensive as is the cost of managing supply contracts with hundreds of suppliers at different points of an industry’s supply chain.
3.   Co-operation - workers in large firms may feel a sense of alienation and subsequent loss of morale. If they do not consider themselves to be an integral part of the business, their productivity may fall leading to wastage of factor inputs and higher costs. Traditionally this has been seen as a problem experienced by large state sector businesses, examples being the Royal Mail and the Firefighters, the result being a poor and costly industrial relations performance. However, the problem is not concentrated solely in such industries. A good recent example of a bitter dispute was between Gate Gourmet and its workers.


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Leo Lingham


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