Security Market in India: UPSC Previous Year Questions (Indian Economy)

Explanation

Statement I is incorrect: Both interest and dividend income received from InvITs are taxable in the hands of investors. Interest income is treated as "income from other sources" under the Income Tax Act, 1961, and is subject to tax as per the applicable income tax slab rates. Dividends are taxable in the hands of investors, and the InvITs are required to deduct Tax Deducted at Source (TDS) before distributing dividends as of the current tax regime (post-2020).

Statement II is correct: InvITs are recognized as borrowers under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002(SARFAESI Act). This recognition allows InvITs to raise funds by issuing debt securities and provides a legal framework for lenders to enforce security interests in case of default. The SARFAESI Act is a critical legislation for the financial sector, enabling banks and financial institutions to recover non-performing assets (NPAs) efficiently.

Explanation

Capital markets are financial markets where long-term debt or equity-backed securities are bought and sold. They facilitate the raising of capital for businesses, governments, and other entities. Capital markets include:

Government Bond Market: Government bonds are long-term debt instruments issued by the government to finance its expenditures. They are part of the capital market because they have maturities typically longer than one year. Stock Market: The stock market is a quintessential part of the capital market, as it deals with the buying and selling of equity shares, which represent ownership in companies. Markets Not Included in Capital Markets:

Call money market is part of the money market, not the capital market. It deals with short-term funds (typically with maturities of 1 day to 14 days) used for interbank lending and borrowing. It is used to meet short-term liquidity requirements. Treasury bills (T-bills) are short-term debt instruments issued by the government with maturities of less than one year (usually 91 days, 182 days, or 364 days) which are part of the money market.

Explanation

In finance, beta is a numerical metric that gauges a stock’s volatility in relation to overall market fluctuations. It represents systematic risk, which stems from broader market movements, rather than company-specific factors. A benchmark index like the S&P 500 is assigned a beta value of 1.0 which serves as a reference point for evaluating individual stocks:

Beta > 1.0: The stock experiences greater volatility than the market. For instance, a beta of 1.3 implies that the stock is 30% more volatile than the market. Beta = 1.0: The stock moves in sync with the market. Beta < 1.0: The stock is less volatile compared to the market. Investors use beta to determine how a stock contributes to the overall risk of a diversified portfolio. A higher beta indicates greater risk but also the potential for higher returns, while a lower beta signifies reduced risk and lower expected returns. This concept plays a key role in the Capital Asset Pricing Model (CAPM) which estimates an asset’s expected return based on its beta and the anticipated market returns.