Inefficiency of the Indian capital market

Abstract

Efficient pricing of securities and maintenance of parity between risk and return are absolutely essential for a well-functioning capital market. In this paper, S K Barua and V Raghunathan discuss a clear .case of observed inefficiency in the Indian capital market. They show, taking the case of Reliance, that an investor can earn returns incommensurate with the degree of risk assumed by operating on rights issues of shares and convertible debentures simultaneously in forward and cash markets. Although the government policy of granting a low premium on rights shares and convertible debentures aids inefficiency, the market is also to be blamed since it is unable to adjust quickly the prices of securities so that the returns earned are in line with the risks assumed.