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Capital Market Reforms: Some Issues
By
Dr. Shivkumar Deene
LecturerKarnataka State Open University
Manasagangotri, Mysore
And
Dr. Madari D.M.
LecturerDept. of Commerce
Bijapur Womens University
Bijapur
And
Dr. Gangashetty.
Lecturer
Dept. of Commerce
Bijapur Womens University
Bijapur
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Abstract
Capital Market Reforms: A Critical Evaluation
Capital market is vital for the development and strength of
economy. A strong and
vibrant capital market assists corporate world initiatives,
finance and exploration of new
processes and instruments facilitates management of financial
risk. Retail investor is the
backbone of the capital market. But with the expansion of the
capital market, scams and
anomalies, also multiplies. It ultimately leads to the dilution
of the faith of the small
investor, mutual funds, pension funds, Foreign Institutional
Investor and insurance
companies in the capital. Therefore sustainable and pragmatic
development of capital
market has been essential. Understanding the need of the hour
Government of India had
initiated certain steps towards rebuild the volume of activities
of the investor in the
capital market. These are popularly known as capital market
reforms. This includes
educating capital market participates regarding their rights and
duties for proper
functioning of capital market. After a decade of these reforms,
the questions are whether
the faith of the investor had built up again in the market or
not? Is the investor satisfied
with these reforms? In this regard we are trying to explore the
answer of these questions.
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Capital Market Reforms: A Critical Evaluation
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Introduction:
Capital market is vital for the development and strength of
economy. A strong and
vibrant capital market assists corporate world initiatives,
finance and exploration of new
processes and instruments facilitates management of financial
risk. Investor i.e.
individual investor, mutual funds, Foreign Institutional
Investor and insurance companies
place their money in various instruments of capital market. They
are the soul of thecapital market. An investor is very much needed
because he is the major (rather the only)
source of providing risk capital. As portfolio manager fill
their baskets on the basis of
subjective evaluation of scrip and FIIs are busy in pocketing
profit by only investing in
profitable companies. Hence none of them is interested in
injecting much needed risk
capital. Thus the task is only left to retail investors. With
the globalization of economy,
scams and anomalies are also multiplies. After various scams in
related to security market
(like 1992 scam of Harshad Mehta, JVG scam etc.) the level of
investment volume and
number of investors is continuously declining due to the
following reasons.
1. Whenever any retail investor faces an institutional failure
he does not get help fromany quarter and has to accept it as a bad
luck.
2. The scams remain under investigation with no concrete steps
taken against defaultcompanies.
3. Regulators only highlight the value addition of new
intermediaries, new instrumentsand new system of trading but nobody
discloses inherent risk.
Therefore, in a global environment, capital market regulator
assumes more
significance and regulator has to be dynamic and responsive to
changes. There is often no
single regulatory approach to an issue. Several instruments may
bring desired results. The
most important issue kept in mind is investors interest.
Regulation is not a static and it is
vary dynamic one. Capital market is a fulcrum consisting of
investor, intermediaries,
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companies, self regulatory organization (SROs), exchange
facilitators and regulators.
Therefore, regulators fine tune their policies towards
encouraging and protecting
investors.
The prospect of any market is investors confidence. An informed
investor always
contributes to the orderly development of market. Regulatory
organization should
empower investor and also enable them to make informed decisions
in the capital market.
One of the big challenges is to adopt regulatory and supervisory
approaches to an
environment of continuous change. Information technology has
already replaced
centuries old floor based open-out-cry system (Black board
system). It results improved
liquidity, elimination of dealers, reduced transaction costs and
better price discovery.
Corporate governance has engaged the attention of regulators,
adoption of internationally
accepted accounting standards will improve corporate governance.
Several capital
reforms are listed and explained in the following section.
Objectives of the study:
1. To study the rights of stock market investors prescribed by
the SEBI.2. To study the primary market reforms by the SEBI.3. To
study secondary market reforms by the SEBI.4. To study SEBI
Regulations for stock brokers and issues.5. To study the
instruments available to SEBI to protect safety and integrity of
the
stock market.
Methodology :
The present study is conducted depending on both primary and
secondary sources
of information. The survey method is selected for collecting
primary data a sample of
retail investors who are trading in recognized stock exchanges
are taken. A well
structured questionnaire is supplied to investor and they are
personally interviewed to
share their experiences. The secondary data was collected from
books, magazines,
journals, reports of SEBI and RBI etc.
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Primary market Reforms:
For the fulfillment of the basic task of securities market to
help in process of
capital formation in the economy, this can only be possible by
series of systematic
measures which would build their confidence in the systems and
processes and protect
their interest fully. The rising of capital issues were
controlled by the office of the
controller of capital issues (CCI) established under the capital
issues control Act-1947.
The Capital Issues Control Act-194, repealed, office of the
controller of capital issues
abolished and initial share pricing decontrolled. In 1991-92
Finance Minter announced
the repeal of the act and transfer of powers from CCI to SEBI
from control to disclosure
based regulation.
The SEBI, the capital market regulator, established in 1992, the
primary function
of SEBI is to regulate the capital market and protect the
interest of the investors. The
other important functions of SEBI are:
Regulating the business in stock exchanges and any other
securities markets. Registering and regulating the working of
collective investment schemes, including
mutual funds.
Prohibiting fraudulent and unfair trade practices relating to
securities markets.Therefore SEBI put some guidelines they are:
1. Disclosure and Investor Protection (DIP) guidelines: as per
this regulation allthe information pertaining to and available with
an issuer is provided so as the
investor takes an informed decision whether to invest or not to
invest.
2. Eligibility Criteria for issuers (DIP-2000): Companies
eligible to make anissue can decide on their standard denomination
and price of a security. Some
parameters that need to be in offer documents are minimum
holding by
promoters, size of public issue, issue expenses, information
disclosure and
advertisement etc.
3. Transparency: SEBI makes available all the offer documents
filed with it onits website and also through process release.
Companies are invited from the
public within 21 days of filing.
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4. Free Pricing of Securities: issuer is free to determine the
level of securityprice. The process of Book-building helps discover
price and assist small
investor to take an investment decision.
5. Number of Financial Instruments: issuer would like to have an
optimumcapital structure that reduces cost of capital. Today Indian
capital market
consists of almost all financial products available in most of
the developed
capital market, thus the choice to both issuer and investor has
become wider.
6. Issue process: Following process is used in the Indian
capital market; Public issue an invitation by a company to public
to subscribe to the securities
offered through prospects.
Right Issue- issue of capital under Sec-I (81) of Companies act
1956 to beoffered to existing shareholders.
Offer for Sale- it refers to securities by existing shareholder
of a company to thepublic for subscription.
Book-building- it refers to a process of ascertaining demand for
and price ofsecurities through bids, before the actual issue. Book
building process is
mandatory when the company doses not have track record for three
out of
preceding five years. 60% allotment to qualified institutional
buyers is
mandatory under the book building process.
Compulsory Demat- All Initial public offerings will be
compulsory traded indematerialized form. But the investors have
been allowed to exercise option of
either subscribing to securities in its physical or
dematerialized form.
Employee stock option means option given to the whole time
employee of acompany right to purchase or subscribe securities at a
future date.
Buy-back section 77 (A) companies act and SEBI regulation are
allowedcompanies to buy back of share to enhance the wealth of
shareholder.
7 Prohibiting insider trading in securities, with the imposition
of monetarypenalties, on erroring market intermediaries.
8 Foreign Institutional Investors are allowed to invest in
Indian capital marketsafter registration with the SEBI.
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9 Indian companies permitted to access international capital
markets throughEuro issues.
10 The National stock exchanges, (NSE) with nationwide stock
trading andelectronic display, clearing and settlement facilities,
established several regional
stock exchanges change over from floor based grading to screen
based trading.
11 Private Mutual Funds permitted.12 The practice of making
preferential allotment of shares at prices unrelated to the
prevailing market prices stopped and fresh guidelines are issued
by SEBI.
13 Badla System has been abolished.14 A system of rolling
settlements introduced.15 The SEBI (credit rating Agencies)
Regulations, 1999 issued for regulating new
credit rating agencies as well as introducing a code of conduct
for all credit
rating agencies operating in India.
SEBI Efforts towards Investors Education :
i) It has launched intensive investor education exercises.ii)
Help investor in redressal of complaints.iii) Disseminates
information through its websites.iv) Published number of booklets
on policy developments for educating the
investors.
v) It distributed booklets titled A quick reference guide for
investor.vi) Issued a series of advertisements/ public issues in
national as well as
regional news papers to educate and caution the investor about
the risks
associated with the collective investment schemes.
vii) SEBI registered investor associations organized seminars
for educatinginvestors on various aspects relating to market. In
the reform process it is
clearly defined the various authorities that will be accountable
for and will
be redressing various kinds of the grievances. Some other steps
for
investors grievances redressed are;
Investor Grievances Cell. Investor Protection Fund.
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Investor Service Fund. Complaints with consumers disputes
redressal forums suits in the court of
law.
viii) Investor empowerment: timely available of quality and
reliable informationincreases confidence of the investor. Over the
past one decade many
regulatory requirements have been imposed on issuers to disclose
relevant
information to public. Thus investors empowerment has become
possible.
ix) Transparency: market transparency refer to the ability of
market participantsto observe information about the trading
process. Information can include
prices volumes, sources of order, identification of counter
party to trade etc.
x) Mutual Funds: the period between1987-1992 witnessed the
broadening ofthe base of the industry by the entry of mutual funds
sponsored by
nationalized banks and public financial institutions. SEBI has
been
empowered to regulate mutual funds. The SEBI (Mutual Fund)
notified
regulation in the year 1993, which permitted entry of private
mutual funds
into the industry, the regulations 1996 cast greater
responsibilities on
trustees.
Secondary Market Reforms:Several reforms have been introduced in
stock exchange administration, security
trading, settlement, delivery V/s Payment, security transfer,
trading in derivatives,
investor protection fund etc. are explained in the following
paragraphs.
1. Stock exchanges:Membership of governing boards of stock
exchanges was changed to include 50%
outside (non-broker) representatives. SEBI has constituted a
group to review and
examine the present structure of stock exchanges and examine the
legal and
financial issues involved in demutualising stock exchanges.
2. Depth and Breadth in the market:India has a unique
distinction of having highest number of companies listed on
the stock exchanges. But all companies shares are not traded.
Policy makers have
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to explore new options to increase depths and breadth in the
Indian stock
exchanges.
3. Dematerialization:Power was granted to SEBI to register and
regulate depositories and custodians
through an amendment to SEBI Act in 1995. There has been
substantial progress
in dematerialization. Number of companies available for demat
with NSDL has
increased from 23 in 1997 to 4172 in 2002.
4. Institutionalization:Indian capital market was dominated by
individual investors till early part of the
1990s. Earlier institutional investor like LIC, GIC, DFIs, banks
etc. used to take
minor role. SEBI permitted private funds, Non-resident Indians,
NBFCs and
ioverseas corporate bodies to trade in securities. Of the above
mentioned only
three classes of investors are very active, individuals, mutual
funds and FIIs.
5. Development of Financial infrastructure:It involves
development of informed investor class, legal and regulatory
environment, institutional investors, world class security
trading and payment and
settlement systems. It also includes promoting investor
associations, SROs,
setting up of depositorys surveillance system. As another step
towards this SEBI
has introduced new financial instruments (derivatives).
6. Derivatives:
These can play a vital role in promoting market efficiency
through better price
discovery and risk transfer. SEBI granted approval to NSE and
BSE to start
trading in index futures contract in April 2000 and May 2000
respectively. SEBI
also approved the proposal of NSE and BSE to start trading in
index options
contracts in June 2001.
7. Corporate Governance:
SEBI has introduced the corporate governance code for listed
companies and for
the companies which enter the market now through listing
agreement. ICAI has
issued standards for consideration of accounts.
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SEBI Regulation for Stock Brokers:
SEBI act 1992 issued regulation for stock brokers in India.
1. Different Nomenclature for the same function. Stock broker
apply as per regulation 3 as member. Trading member derivatives
Regulation 2 (inserted in 2000).
2. Need for Minimum educational qualification. Regulation 3
every stock broker of an exchange can apply for grant of
SEBI registration. Different criteria but no qualification.
No qualification prescribed for registration as trading member,
clearingmember, self clearing member 16A (1) and (2).
To make the system to stand of its own qualification required.3.
Time limit to process the applications
Regulation 3 stock exchanges to forward application within 30
days toSEBI.
No time limit for SEBI to accept or reject. Only time limit is
refusal to be communicated within 30days of decision
to reject.
4. Daily marking to-Market: Regulation 16 3 and 4 which require
the clearingand self clearing members- net worth of at least Rs.50
lacs or 100 lacs.
5. Time limit for SEBI orders in case of default by stock
brokers: Regulation 25default by a stock broker dealt under enquiry
and penalty regulations. No time
limit for SEBI to pass orders.
6. Clarify the issues leading to conflict of interest: in the
event of a conflictinterest, the broker shall not consider clients
interest inferior to his own. SEBI
needs to clarify the sale, purchase, advice by the brokers that
results in conflict.
7. What constitutes reasonable ground in case of investment
advice?Paragraph 7 of schedule II that deals with investment advice
by brokers is vague
enough confusion as to what constitute a reasonable ground for
believing that
the recommendation is suitable for such client upon the basis of
the facts.
8. Paragraph 7(A) of schedule 11 deals with investment advice
with regard toderivatives market.
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9. Time limit for sale of membership cards by brokers part XI,
paragraph 1(2) ofschedule IV prescribes that the validity of prior
approval for sale of membership
would be 6 months from the date of issue of such approval by
SEBI,.
10.Voluntary surrender of membership of the exchange: No
provisions andregulations to deal with voluntary surrender of SEBI
registration of stock
brokers. No time limit for SEBI to communicate.
11.Review of SEBI regulation: no validity period for SEBI
registration (of stockbrokers), should review once in 5 years.
Conclusions:
1. Security market is in open economy.2. Physical mode
abolished.3. More awareness campaigns need to be launched in
smaller towns.4. Strict monitoring of broker actions and heavy
penalties to defaulting parties.5. The screen based trading,
rolling settlements, banning of badla, introduction of
derivatives products have necessitated the introduction of the
systems that can
take care of these developments.
6. SEBI has played and continues to play a vital role.7. There
are some legal issues that need to addressed by the SEBI will
enable it to
become a pro-active and efficient regulator.
8. More seminars on derivatives, futures, option and investor
awareness should beconducted by SEBI.
9. It is our opinion that transparent regulatory frame work can
be evolved onlywhen the regulator continuously interacts with all
the market participants.
10.SEBI has to be alert to the developments in al the spheres
not only in India butalso in the whole world to evolve efficient
and transparent regulations.
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Reference:
1. Bhole. L.M Financial Institutions and Market: Structure,
Growth andInnovation, Tata Mc Graw Hill. New-Delhi.
2. Chandra Prasanna Indian Capital market: pathways of
development Journal ofmanagement Vol.20 PP.No 2-3.
3. BSE 2002 BSE investor awareness Hand book for NSDL Depository
operationmodule.
4. Gupta L.C (1992) stock exchange trading in India: Agenda for
Reform, Societyfor capital market R& D, New-Delhi PP. 123.
5. Gupta Ramesh Retail Investors The Chartered Accountant,
February 1999. PPNo. 12-18.
6. Special issues on Indian Capital Market Indian journal of
Commerce Vol. 57Oct-Dec-2004.
7. Pandy V.H SEBI: its Role, powers, functions and activities
charteredsecretary. Vol 22, PP. 9.
8. NSDL An investors guide ton depositors.
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