Transformation of Capital market in India

The Securities and Exchange Board of India (SEBI) was set up in 1988 and made the regulator of the capital market under the SEBI Act, 1992. In May 1992, the Government abolished the Capital Issues Control Act, and the functions of the capital issues controller were entrusted to SEBI. As a regulator of the Capital Market, SEBI introduced various regulations for primary and secondary market intermediaries, bringing them within the regulatory framework. The most significant regulations are the SEBI (Custodian of Securities) Regulations, 1996, the SEBI (Depository and Participants) Regulations, 1996, the SEBI (Venture Capital Funds) Regulations, 1996, the revised SEBI (Mutual Funds) Regulations, 1996, and the revised SEBI (Substantial Acquisitions of Shares and Takeovers) Regulations, 1997. Besides, Changes were also made to the SEBI (Merchant Bankers) Regulations, 1992, and the SEBI (Underwriters) Regulations, 1993.  

The primary market witnessed a significant movement away from the CCI regime imposing primary issuance at sub-market rates to a free pricing and book-building system along with mandatory disclosures as prescribed by SEBI. The reforms in the primary market include improved disclosure standards, introduction of prudential norms, and simplification of issue procedures. Any company is free to enter the capital market at any time to raise any amount they want and at any price that they can justify to the SEBI and investors. However, Companies are required to disclose all material facts and specific risk factors associated with their projects while making public issues. Disclosure norms were further strengthened by introducing cash flow statements. Further, listing agreements of stock exchanges amended to require listed companies to furnish the annual statement to the stock exchanges showing variations between financial projections and projected utilisation of funds in the offer document and at actuals, to enable shareholders to make comparisons between performance and promises.  A code of advertisement for public issues is introduced to ensure fair and truthful disclosures. The physical transaction with more paperwork is reduced. The ASBA facility is made available to Indian residents who have a valid PAN number along with a Demat account and trading account. Earlier, the full amount was debited towards application money, now after the introduction of ASBA, the amount to be blocked must be to the extent of application money, till finalization of allotment in the issue or till withdrawal/ failure of issue, or till withdrawal/ rejection of the application, as the case may be. Now paperless transactions are increasing at a rapid rate. It saves money, time, and energy for investors. Thus it has made investing safer and hassle-free encouraging more people to join the capital market.

In the secondary market, corporatisation of exchanges, screen-based trading replaced the open outcry system, the introduction of options and futures replaced the erstwhile Badla System, rolling settlement replaced the 14-day settlement cycle, dematting of securities with a depository system created state-of-the-art infrastructure comparable to the best international practice. Improvements were also made in the clearance and settlement systems which still form a weak link in the securities markets. The development of mutual funds which are important investment vehicles in a mature securities market, was given a major impetus, with the revision of the mutual fund regulations which now provide greater operational flexibility to the fund managers and increase their accountability and supervision.

Far-reaching changes were made to the SEBI regulations for substantial acquisition of shares and takeovers. The take-over regulations were revised based on the recommendations of the committee appointed by SEBI under the chairmanship of Justice P N Bhagwati, former Chief Justice of India. The new regulations, while enhancing the level of investor protection and transparency recognise the new freedom in the corporate sector as an outcome of the reforms. This not only integrated stock markets across the country, capital markets became far more efficient as could be observed in terms of various parameters.

SEBI introduced many innovative financial instruments like Secured premium notes (SPNs) a kind of non-convertible debenture (NCD) attached to a warrant, warrants, Zero Coupon Bonds, deep discount bonds, discount bonds, Flexible bonds, loyalty coupons, Commodity Trading, derivatives trading in the equities ( future and options transactions), etc.

The regulations for Foreign Institutional Investors (FIIs) were liberalised to provide greater flexibility and widen the scope of their investment in Indian securities markets. Foreign Direct Investment is allowed in stock broking, asset management companies, merchant banking, and other non-bank finance companies. Foreign Institutional Investors (FIIs) are allowed to access Indian capital markets on registration with SEBI. They can invest in equity shares and debt markets, mutual funds, and pension funds, as well as in dated Government Securities and treasury bills.

SEBI has initiated several reforms to improve the functions of the capital market. Important regulations like Capital adequacy norms for brokers and issues rules for making the client/broker relationship more transparent, in particular, segregating client and broker accounts are introduced.  System of mark-to-market margins introduced on the stock exchanges, “Revised carry forward” system introduced in place of “badla” etc. All mutual funds are allowed to apply for firm allotment in public issues which is aimed at reducing issue costs. Regulations are made to govern the substantial acquisition of shares and takeovers and lay down the conditions under which disclosures and mandatory public offers to the public.  Indian companies are permitted to access international capital markets through Euro issues. NSC Clearing Ltd [formerly National Securities Clearing Corporation Ltd (NSCCL)] and Indian Clearing Corporation Ltd (ICCL) are clearing corporations regulated by SEBI. They settle the trade and eliminate previous counterparty settlement risk.

SEBI frames regulations for mutual funds. Private mutual funds are permitted and several such funds have already been set up. Enforcement and surveillance remained a major priority for SEBI. SEBI continued to use its powers to the full and instituted several enforcement actions against a wide range of securities law violations. The process of prosecuting companies for misstatement issues includes show cause notices to merchant bankers ensuring refunds of application money in several issues on account of misstatements in the prospectus.

Investor’s Protection: Under the purview of the SEBI the Central Government of India set up the Investors Education and Protection Fund (IEPF) in 2001. It works in educating and guiding investors. It tries to protect the interest of small investors from fraud and malpractices in the capital market.