Commerce Gurukul
Capital Market Reforms by
SEBI - Financial Institution Paper 1 of UPSC Commerce Optional
The Indian capital
market has witnessed major reforms in the decade of 1990s and thereafter.
It is on the verge of the growth.
Thus, the Government of
India and SEBI has taken a number of measures in order to improve the
working of the Indian stock exchanges and to make it more progressive
and vibrant.
There most top four steps
taken by SEBI to strengthen the capital market reforms namely
1.Reforms in Primary Market
2.Reforms in Global
Depository Receipts
3.Reforms in Secondary
Market
4. Reforms in Capital Market
Reforms during 1996-97
Step # 1. Primary Market
Reforms:
SEBI has introduced various
guidelines and regulatory measures to improve conditions of capital issues. As
per these measures companies issuing capital in the primary market are now
required to disclose and clarify all material facts and specific risk factors,
if any, related to their projects along with the basic information related to
calculation of premium.
In order to ensure fair and
truthful disclosures, SEBI has also introduced code of advertisement for public
issues. SEBI has made the underwriting of issue optional so as to reduce the
cost of issue. SEBI has also enhanced the minimum application size along with
the proportion of each issue allowed for firm allotment to institutions such as
mutual funds.
SEBI has again introduced
shares and takeovers and also frame conditions under which disclosures and
mandatory public offers are to be made to the shareholders.
SEBI has also brought
merchant banking statutorily under its regulatory framework. Now the merchant
bankers are to be authorised by SEBI and to adopt stipulatory capital adequacy
norms and also abide by the code of conduct. Under the present framework,
merchant bankers are having greater degree of accountability in the
documentation of offer and its issue process.
In order to protect the
interest of investors, the “Banker to the Issue” is now brought under the
control of SEBI. SEBI has also advised stock exchanges to collect a deposit of
one per cent of the issue amount from the companies in order to attain greater
care and diligence for timely action related to public issues of capital.
In case of non-compliance of
the provisions related to listing agreement, non-despatch of refund orders,
share certificates etc. by registered post within the stipulated time frame,
the company is going to forfeit such one per cent deposit.
In order to cross check the
difference between the promises and performances of the companies, the SEBI has
advised stock exchanges to amend the listing agreement and make it obligatory
on the part of listed company to furnish annual statement to the SEs showing
variations if any, between financial projections, projected utilisation of fund
and its actual utilisation.
Setting up of private mutual
funds are now being permitted by the Government and a few have been set up. The
mutual funds are now permitted to underwrite public issues in order to improve
the scope of its investment. SEBI has also relaxed the guidelines for making
investment in the money market instruments. Moreover, SEBI has also issued
fresh guidelines for making advertisement by mutual funds.
In order to ensure that all
disclosures have been clearly made by the company in its offer documents, SEBI
checks this documents carefully as a routine job. Various guidelines and
regulatory measures of capital issues are incorporated by the SEBI to promote
healthy and efficient functioning of the primary market.
Even after the introduction
of all these measures, there are many instances of break of issue procedures in
collusion with the unscrupulous promoters and corrupt officials of the lead
banks and also with the top officials of SEBI as it was found in case of
mega-issue of M.S. Shoes East Ltd. in March, 1995.
Step # 2. Global
Depository Receipts (GDRs):
The Government of India
permitted Indian companies to have access in the international capital markets
through Euro equity shares since 1992. In the initial period, the Government
allowed the utilisation of Euro issue proceeds for approved end uses.
Later on, with the
accumulation of foreign exchange reserves with RBI, the issuing companies were
allowed to retain the Euro-issue proceeds abroad and repatriate them in times
of need.
Till January 1995, Indian
Companies have been able to raise US $ 3.6 billion through launching of GDR
issues and US $ 1.1 billion through launching of Euro Convertible Bonds (ECBs).
Moreover, the Government of
India has also liberalised investment norms for the NRIs sufficiently which has
enabled the NRIs and overseas corporate bodies to buy shares and debentures
without prior permission from the Reserve Bank of India.
Step # 3. Secondary
Market Reforms:
SEBI has introduced
secondary market reforms and as a part of its reforms, it has started the
process of registration of intermediaries like stock brokers and sub-brokers
under the provisions of the Securities and Stock Exchange Board Act, 1992.
Here the registration in
done on the basis of certain eligibility norms viz., capital adequacy,
transparency infrastructure etc. SEBI has also introduced rules so as to make
the way for client/broker relationship more transparent and to segregate client
and broker accounts.
In order to protect and
preserve the integrity of stock markets, the SEBI has introduced certain
regulations under the provisions of SEBI Act, which, in turn, would help
inspire confidence of the investor in the stock exchanges. In-spite of this,
insider trading, rigging of the market and manipulating stock market price
quotations are still continuing.
The traditional trading
system of Indian SEs has been constantly reviewed by SEBI since 1992. SEBI is
instrumental in simplifying procedures, attaining transparency in costs and
prices of stocks, speeding up clearing and settlement and transferring shares
in the name of buyers. SEBI has prohibited completely the “renewal” of
transactions in “B” group securities so as to settle the transactions within 7
days.
SEBI has also issued
guidelines for the composition of Governing Body (GB) of stock exchange so as
to make it more broad-based. Moreover, SEBI had successfully reconstituted the
GBs of stock exchanges in 1994-95.
Government has also
permitted the foreign institutional investors (FIIs) like mutual funds, pension
funds, investment trusts, asset or portfolio management companies etc. to
invest their capital in Indian capital market as and when they are registered
with SEBI. Total number of FIIs, registered with SEBI, which was only 10 in
January 1993 and 136 in January 1994 has substantially increased to 286 in
January 1995.
Besides, the cumulative net
investments of FIIs has considerably increased from $ 200 million in January
1993 to $ 3 billion in January 1995, which reflects the growing impact of
liberalisation policy of the country.
Step # 4. Capital
Market Reforms, 1996-97:
An array of capital market
reforms were introduced during 1996- 97, encompassing primary and secondary
markets, equity and debt, and foreign institutional investment. Primary market
reforms aimed at imparting greater flexibility in the issue process and strengthening
the criteria for accessing the securities market.
Reforms in the secondary
market aimed at improving market transparency, integrity and trading
infrastructure.
Among the reforms which were
undertaken are given below:
1. Passing of the Depositories
Act, 1996 by Parliament, providing a legal framework for recording ownership
details in book-entry form and facilitating dematerialization of securities.
The Depositories Related Laws (Am6ndment), 1997 issued through an Ordinance,
which allowed banks; mutual funds and IDBI to dematerialize their scripts.
2. Formulation of SEBI
(Depositories and Participants) Regulations, 1996, which allowed SEBI to
regulate establishment and functioning of depositories, and to protect investor
interests.
3. Tightening of entry norms
for equity issue by companies, to improve quality.
4. Giving up vetting of
public issue offer documents by SEBI, to encourage self regulation. SEBI,
comments, (if any) to be sent within 21 days of filing.
5. Debt issues not
accompanied by an equity component permitted to be sold entirely by the Book-
Building process.
6. Issuers allowed to list
debt securities on stock exchanges even if equity is not listed.
7. FIIs permitted to invest
up to 10 per cent in the equity of any company, to invest in unlisted
companies, to set up pure (100 per cent) debt funds, and to invest in
government securities.
8. Eligibility criteria for
registration an FII were modified to allow endowment funds, university funds,
foundations and charitable trusts/societies to register.
9. Stock lending scheme was
introduced and this will not attract capital gains.
10. The SEBI (Mutual Funds)
Regulations, 1993 were revised to provide for portfolio disclosure,
standardisation of accounting policies, valuation norms for determining net
asset value and pricing.
11. SEBI regulations on
Venture Capital Funds (VCF) were issued, allowing them to invest in unlisted
companies, to finance turnaround companies, and to provide loans. These provide
flexibility to VCFs so that high risk finance can be provided to the market.
12. Modified takeover code,
based on the recommendations of the Bhagwati Committee, was approved. It
requires a mandatory minimum public offer of 20 per cent purchase, when the
threshold limit of 10 per cent equity holding is crossed. Those in “control” are
permitted to purchase 2 per cent of shares per annum up to 51 per cent.
To discourage frivolous
attempts, acquirers will have to deposit a certain value of cash and assets in
an escrow account. The escrow deposit would be higher for conditional public
offers, unless the acquirer agrees to acquire a minimum of 20 per cent.
13. SEBI approved almost all
the recommendations of the Dave Committee for improving the working of the Over
the Counter Exchange of India (OTCEI).
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