onomi on epts and erminolo ies 22.41
But that might not happen due to many factors
q theory
like the fluctuations in inflation; level of money
supply; follow-up to the exchange rate regimes As investment theory for firms proposed by the
(fixed, floating, etc.), and other. Nobel prize winning (1981) economist James
For the calculation of the PPP, a comparable Tobin (1918–2002). He theorised that firms
basket of goods and services is selected (a very would continue to invest as long as the value of
difficult task) of the identical qualities and their shares exceeded the replacement cost of their
quantities. The other difficulty in computing PPP assets–the ratio of the market value of a firm to the
arises out of the flaw in the ‘one price theory’ i.e., net replacement cost of the firm’s assets is known
due to transportation cost, local taxes, level of as ‘Tobin Q’. If Q is greater than 1, then it should
production, etc. The prices of goods and services expand the firm by investment as the profit it
cannot be the same in different markets (This is should expect to make from its assets (reflected by
correct in theory only, not possible in practice.) share price) exceeds the cost of the assets.
If Q is less than 1, the firm would be better
purchAse tAx off by selling its assets which are worth more than
shareholders currently expect the firm to earn in
A tax collected by states in India on goods. This profit by retaining them.
is imposed on the purchases done by traders/
manufacturers—basically collected by the seller
rAnDom wAlk
and given to the concerned states). This is deducted
once the traders/manufacturers pay value added When it is impossible to predict the next step.
tax (VAT) to the states—as VAT is paid on the As per the Efficient Market Theory the prices of
differential value of the traded/manufactured financial assets (such as shares) follow a random
goods. This tax is among the 8 taxes to be merged walk–there is no way of knowing the next change
into the upcoming indirect tax, the GST. in the price. The reason this theory provides is
that in an efficient market, all the information
qip that would allow an investor to predict the next
price move is already reflected in the current price.
Qualified Institutional Placement (QIP) is a Such belief has led some economists to conclude
policy associated with the Indian stock market that investors cannot outperform the market
for raising capital by issuing equity shares. The consistently.
companies listed on the BSE and the NSE are
As opposed to this, some economists argue
allowed (since May 2006) to raise capital by
that asset prices are predictable and that markets
issuing equity shares, or any securities other
are not efficient–they follow a non-random walk
than warrants, which are convertible into or
perspective.
exchangeable with equity shares. The attractive
part of the new QIP is that the issuing company
reDlining
does not have to undergo elaborate procedural
requirements to raise this capital. These securities The act of not lending to people in certain poor or
have to be issued to Qualified Institutional Buyers troubled neighbourhoods shown on the map with
on a discretionary basis, with just a 10 per cent a ‘red line’. Even if their credit-worthiness has
reservation for mutual funds. been judged on the basis of other criteria, they are