Efficiency Of Capital Market

There is no denying the fact that capital market is the backbone of a national economy. It is because the efficient functioning and smooth operation of capital market tends to bring rational allocation of resources to enhance the productive capacity of the economy. Assets are properly built up through best utilization of collected funds from capital market. The overall impact is the better channelisation of funds to business, trade, industry and other service industries. At present, emphasis is given to the growth of the real sector otherwise the capital market cannot cope the problems of economic growth in the long-run. There is tremendous decline in the market capitalization of the real sector while looking to the stock exchange.
On the whole, the development of capital market in our country is trying to generate efficiency through the basic cannons of creating fair competition among market practitioners, confidence of market participants, and adequate and true liquidity, productive asset transformation effects and transparent regulation and timely release of market information to market participants (Securities Board, Nepal 1998-2002). These are meaningful objectives of capital market development in the country. But, how far these will be implemented to make capital market efficiency is still to be seen in years to come.
But, it conceptual term, efficient capital market implies the full reflection of information on security prices. In a efficient market, changes in information about the prospects for a given security are quickly reflected in security prices. Favorable information about the security will cause an immediate price rise and unfavorable information tends to produce an immediate decline in stock prices. As such, capital market to be efficient requires security prices to reveal all available public information about the economy, financial market, and all about the specific company involved. The general belief is that market prices of various individual securities adjust automatically and very rapidly to any flow of new information.
In reality, however according to random walks theory, the general assumption is that changes in price will not follow any pattern. New information can lead to a change in the intrinsic value of a security but subsequent security price movement doesn't follow same expected impact. It means the past security prices can't be used as a guide to predict future prices since in efficient market security, price gets already adjusted. But how far these theory of random walk applies in the country's growing stock is applicable is doubtful. This is because, still investors make decision on the basis of strong past performance fundamentals and in some cases, depending on the false information released by bellow-the-average professional standard market participants.
Like money market, capital is also an important ingredient of the nation's financial system. The smooth and systematic growth of capital market helps students and all those engaged in the business of finance to understand how market participants such as the government, individuals and institutions raise funds to meet financial requirements to finance the various development projects of greater national importance and priorities. Because of the difficulties involved in the matching of timely cash flows, they have to depend on capital market in raising the funds whenever needed and supplying the funds whenever they have enough funds at their disposal. As for instance, government issue bonds and other long-term securities to support the budget deficits. It is because the expected revenues are not keeping in pace to meet all the costs of development projects.
At other time, government has to undertake turnkey projects that are beyond the reach of private sectors. So, government has to raise long-term funds by selling treasury bonds, development bonds and in such a case, government becomes the borrower in the capital market. At other time when government doesn't need funds for the long-term perspective of the economic development, long-term securities are bought to usually flush with funds to become the lender in the capital market. In such situation, government may also make investment in attractive long-term financial assets to increase revenue.
Likewise, business firms have to enter capital market as they face difficulties to meet long-term capital needs to finance huge investment projects. In such a situation, when the retained earnings or ploughed back profits are not sufficient to exploit new potential investment opportunities, they have to go to capital market to raise funds by issuing shares to the common stock investors that include both individual investors and institutional investors.
Take the case of Nepal, the new promising hotel- Oriental Hotel Limited under the brand name of Radisson Hotel, Kathmandu has been successful to float shares of Rs.12.5 million to the public. And there had been more than 6 times over-subscriptions indicating higher public confidence on the management of this hotel by Radisson Group. This is the second to the earlier over-subscriptions record of Tara Gaun Regency Hotel. Thus funds have been raised to repay the loan and cover part of the business expenses. Despite that in experience the actual timing of cash receives and disbursement will not be so easy to maintain for this hotel. But, these companies couldn't meet expectations of the share holders and market values of the shares of hotels are declining below the par value. Due to boom in capital market, primary issues of companies like Gorkha Development Bank, Sanima Development Bank, Himchuli Development Bank, NEPSE Financial Institutions Market, Financial Institution, Nepal Express Financial Institutions, Infrastructure Development Bank, Kuber Merchant Financial Institutions, Prabhu Financial Institutions, IME Financial Institutions, etc. have provided ample scope for the growth of scripts for trading in the secondary market.
As such, when business firms have cash shortages, they raise funds from capital market by issuing shares through the net works of financial intermediaries engaged at present capital market. They become the fund-raisers from the capital market to meet the permanent financing of the long term potential as well as beneficial projects. But, how far they can ensure return to the investors prove simply optimistic projection in prospectus as the regulating authority like Securities Board has no better professional manpower to evaluate the information stated in prospectus to safe guard investors.
At the same time, Business firms when they have adequate funds surplus because of their ability to earn more than necessary, they become the lenders in the capital market. But in Nepal, business firms have not developed to such an extent to play both the role of fund-raisers and investors or lenders in capital market.