Capital Market Reform in India


Ajit Kumar AJIT KUMARWISDOM IAS, New Delhi.

The capital market was suffering from many problems such as lack of transparency in procedures, price rigging and insider trading. In order to remove these problems, the Government of India set up the SEBI in 1988. In January, 1992, SEBI was made a statutory body and was authorized to regulate all merchant banks on issue activity, lay guidelines and supervise and regulate the working of mutual funds and oversee the working of stock exchanges in India. SEBI has taken a number of steps to improve the functioning of the capital market in India. The Narasimham Committee recommended the abolition of CCI and proposed SEBI to protect the investors and take over the regulatory function of CCI. The Government of India repealed the CCI Act, 1947 and gave SEBI the power to control and regulate the stock exchanges in India.
 
The following measures were undertaken by the Government to reform the capital market in India:
 
1) Measures to Strengthen the Government Securities Market
 
The following measures have been taken to strengthen the government securities market :
 
a) The auction system for the sale of Government of India medium and long term securities was introduced from June 1992. New instruments such as conversion of auction treasury bills into term securities, zero coupon and capital indexed bonds, tap stocks and partly paid stocks were introduced.
 
b) 364 day treasury bills auction was introduced in April 1992 and 91 day treasury bills auction from January 1993, 14 day treasury bills was introduced in June 1997. 182 day treasury bills were introduced once again in May 1999. The auction of 14 day and 182 day treasury bills was discontinued from 14th May 2001.
 
c) The Securities Trading Corporation of India was established in 1994 to develop institutional structure for an active secondary market in government securities.
 
d) A system of primary dealers was established in March 1995 and the guidelines for Satellite Dealers were issued in December 1996.
 
e) From 01st April, 1997 a new scheme of ways and means advances was commenced and the practice of automatic monetization of central government budget deficit through ad
hoc treasury bills was abandoned.
 
f) The RBI initiated steps for the introduction of a Delivery versus Payment system for transactions in government securities in Mumbai. This system ensures settlement by synchronizing the transfer of securities with cash payment. This has reduced settlement risk in securities transactions and has also prevented diversion of funds.
 
g) The RBI started providing liquidity support to mutual funds dedicated to investments in government securities.
 
h) Foreign institutional investors with 100 per cent debt funds were permitted to invest in government securities and treasury bills. Other foreign institutional investors were also allowed to invest in debt market including government securities subject to the ceiling of 30 per cent.
 
i) The interest income on government securities was exempted from the provision of tax deduction at source.
 
j) Retail trading in government securities at select stock exchanges commenced in January 2003.
 
2) Establishment of the Securities & Exchange Board of India
 
The SEBI was set up in 1988. It was given statutory recognition in 1992. The SEBI has been created to develop an environment which would facilitate mobilization of adequate resources through the securities market and its efficient allocation.
 
3) Establishment of the National Stock Exchange of India
 
The NSE was set up in November 1992 and it started its operations in 1994. Four important innovations were made in the way in which trading takes place at the NSE. These
innovations are :
 
a) Replacement of the physical floor by computerized order matching with strict price time priority.
 
b) Use of satellite communications by setting up 2000 satellite terminals all over the country. On a given day, about 3500 traders log into the trading computer over this network.
c) NSE is a limited liability company and brokers are franchisees. Hence NSE staff is free from pressures from brokers and is able to perform its regulatory and enforcement functions more effectively.
 
d) Traditional practices of unreliable fortnightly settlement cycle  with the escape clause of badla were replaced by a strict weekly settlement cycle without badla. These innovations brought the advantages of transparency, anonymity, efficiency and competition in the brokerage industry and also gave equal access to the trading floor from all locations in India.
 
4. Establishment of the National Securities Clearing Corporation
 
The National Securities Clearing Corporation was set up in 1996 to tackle the problem of counter party risks. The NSCC started guaranteeing all trades on NSE. Thus every trade that takes place is from the risk of counter party defaulting.
 
5. Introduction of Dematerialization
 
Share certificates were printed on paper resulting in operational cost and risk. Theft and counterfeiting of share certificates gave rise to criminal activities. In order to solve this problem, the National Securities Depository Services (India) Limited was set up in November 1996. The depository maintains a computer record of ownership of securities and dispenses with physical share certificates. This form of trading is known as “Demat”.
 
6. Derivatives Trading
 
Derivatives are contracts whose value is derived from the underlying asset. The underlying asset can be equity/foreign exchange/any other financial asset. Derivatives help in transferring the price risks either partially or fully by locking-in asset prices. By doing so, derivatives minimize the impact of asset price fluctuations on profitability and cash fallow status of investors who are averse to risk. Derivative trading in equities began in India in June 2000. There are four equity derivative products in India. They are stock options, stock futures, index options and index futures. Derivatives trading take place only in the National Stock Exchange and the Bombay Stock Exchange.
 
7. Trading in Central Government Securities
 
Trading in government securities was introduced in January, 2003. It can be carried out through a nationwide, anonymous, orderdriver, screen-based trading system of stock exchanges. Retail investors are allowed to buy and sell government securities in stock exchanges. Individuals, firms, companies, corporate bodies, institutions, trusts and other entities approved by the RBI are allowed to participate in the retail market.
 
8. Rolling Settlement.
 
Rolling settlement improves the  efficiency and integrity of the securities market. Under
rolling settlement, all trades executed on a trading day (T) are settled after certain days (N). This is called T + N rolling settlement. Since 01st April, 2002 trades are settled under T + 3 rolling settlement. The NSE has introduced T + 2 rolling settlement from 01st April, 2003. Under it, each order has a unique settlement date specified at the time of order entry. It
is mandatory for trades to be settled on the predetermined settlement date.
 
9. Mandatory PAN Requirement
 
In order to maintain a good audit trail of the transactions in the securities market and to
strengthen the ‘know your client’ concept, Permanent Account Number (PAN) has been made compulsory w.e.f. 01st January, 2007.
 
10. Stock Exchanges permitted to set Trading Hours
 
In 2009-10, the stock exchanges were permitted to set their trading hours in the cash and derivative segments subject to
the condition that the trading hours are between 9 a.m. and 5 p.m. and the stock exchange has a risk management system and infrastructure commensurate with the trading hours.
 
11. Investor Protection Measures
 
The SEBI has introduced an autonomous complaints handling system to deal with investor complaints. It has given recognition to many investor associations. It issues advertisement to guide and enlighten investors on various issues related to the securities market. In October, 2001, the Central Government established the Investor Education and Protection Fund for protecting the rights of the investors.
 


Friday, 18th Mar 2016, 12:07:36 PM

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