Today we live in industrial world. In todays world, industries are the prime-movers of the society and the country. For a country to progress, it is necessary that its industries progress.
To progress, industries are in constant need of capital. So the prime-mover of the industries,automatically, is the Capital Market. In our country, the Capital Market is still at a nascent stage taking into consideration the number of investors actually invest in it and the number of potential investors. Majority of the investors shy away from the Capital Markets thinking that they are risky or they dont know the rules of the game or they simply dont understand what the buying and selling of shares is all about.
If you are one of those who always wanted to take part in capital markets but were afraid to do so due to one reason or the other, this series of articles is meant for you. I will try to make you understand the whole basic concept so that you can gain confidence in moving ahead. Take it from me, that investing in capital markets is as risky or safe as walking on a road. If you the road and how to walk on it, its all easy.Otherwise, its all mess.
Here we go with the following example without getting into finer legal aspects.
Assume that you and your friend have ,say Rs.50000/- each and want to invest it somewhere. You find a plot of land for Rs.1.00 Lakh and you people buy it and get the sale-deed registered in your joint-names. After one year, you are in need of money and you want that the plot of land be sold. But your friend doesnt agree. You are then stuck up because the land is in the joint-name. Also, your friend does not have resources to pay for your portion. What do you do then.
Now a person callled Mr.X, who is a reputed and creditworthy person of your town comes to your rescue. He proposes that the you people may deposit the original Sale-deed with him along with power of attorney and he will give you a certificate to this effect . You people may transfer this certificate to any other person as per your wish at any time. Mr.X also assures that he will either get the sale-deed registered in the name of the certificate-holder at any time or pay him the actual market rate of the land at that time. Mr.X puts a condition that every time the certificate is transferred, the new holder shall visit his office and inform him and he will update his records for which Mr.X will charge a nominal fee of Rs.100/- .
With this arragement(though it may not actually work as per the current Laws), the plot of land becomes tradeable in two portions through the Certifictes-One certificate belonging to you and the other belonging to your friend.
Now going back again to the time when you needed money , you find the the cost of the land has gone up to Rs.2.00 Lakhs so your portion is now worth Rs.1.00 Lakh. You sell your certificate to say Mr.Y for Rs.1.00 Lakh and move away. Next year when the cost of the land becomes Rs.3.00 Lakhs ,your friend sells his certificate for Rs.1.50 Lakhs. After ten years, the cost of the plot becomes Rs.10.00 Lakhs so each certificate will be traded at Rs.5.00 Lakhs.
Now one person Mr.Z wants to buy the plot of land for constructing a house. He traces the current certificate holders, pays them Rs.5.00 Lakhs each and submits the certificates to Mr.X. As promised, Mr.X gets the sale-deed registered in the name of Mr.Z and destroys the certificates. The trasanction is now complete.
From the above example we see that :-
1. The land which was not tradeable in portions becomes tradeable with the issue of certificates by Mr.X.
2. The ownership kept changing hands without the land being actually transferred.
3. The Certificate which was worth Rs.50,000/- at the time of issue by Mr.X was worth Rs.5.00 Lakhs at the time of its destruction.
4. The system is a win-win situation for all. You and your friend sold your portions as per your wishes. The buyers of the certificates re-sold them after earning profit and Mr.X earned Rs.100/- every time the certificate changed hands.
5. Last ,but not the least, the system worked because there was Mr.X in between whom everybody trusted.
This is the basic concept of the Capital Market. An asset belonging to a large number of people(share-holders) becomes tradeable in small portions without physically being transferred. Its only the ownership rights change hands and not the actual asset. Further, the Capital Market has three constituents tradeable assets, investors and a regulator.
To be concluded
Join LAWyersClubIndia's network for daily News Updates, Judgment Summaries, Articles, Forum Threads, Online Law Courses, and MUCH MORE!!"
Tags :Corporate Law