SEBI and the Capital Market Reforms in India

The following points highlight the top four steps taken by SEBI to strengthen the capital market reforms. The steps are: 1. Primary Market Reforms 2. Global Depository Receipts (GDRs) 3. Secondary Market Reforms 4. Capital Market Reforms, 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).