Capital Market Reforms In India


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Capital Market Reforms In India

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Capital Market Reforms In India

  1. 1. CAPITAL MARKET AND REFORMS Capital Market since 1990s has undergone complete transformation – • Growth, • Innovations and • Regulations.  Landmark decisions in 1992 – o Repeal of Capital Issues (Control) Acct of 1947 o Statutory recognition of SEBI SEBI has been empowered to regulate all Capital Market Segments. Watchdog for Investors. - Significantly changed the face of Indian Capital Market. • Large number of guidelines have been issued to o Develop, monitor and regulate the market operations o Investor protection given top priority Emergence of Financial Services Sector helped the entrepreneurs in capital formation, asset creation and creation of wealth. Financial Intermediaries are landmark for economic growth and development - Promoting growth by allocation of society’s savings to productive investments Financial Market allocates capital through a supply and demand mechanism, establishing a cost of capital at the equilibrium of supply and demand for Securities. Financial Market operates on confidence which can be maintained by transparency and comprise of Money Market and Securities Markets. Capital Market deals in Financial Assets excluding coin and currency. Banking, pension funds, provident funds, mutual funds, insurance, share, debentures of government and private companies and other securities. Stock Exchanges provide a good liquidity to the capital. Stock Market and Money Market the two basic components of Capital market. Capital - Securities Market has 2 independent and inseparable segments – 1. Primary Market - New Issues Market 2. Secondary Market – provides the ‘market-floor’ for trading of the Securities already issued, ensuring liquidity and marketability. Secondary Market, known as Stock Market with constituents such as brokers, general investors, financial institutions, mutual funds, investment institutions and foreign agencies, etc., involves in buying and selling of securities. When the Secondary Market is active and buoyant, it enables the Corporates to enter the Primary Market. Similarly, the activities of a Primary Market determine the depth of the Secondary market.
  2. 2. Some of important reforms initiated in Indian Capital Market in the last one decade are: i. Public Sector bonds brought under SEBI purview ii. Capital adequacy norms prescribed for stockbrokers and other market intermediaries. iii. Private and Foreign Mutual Funds for the benefit of small investors to provide investment avenues managed by experts and portfolio managers. iv. National Stock Exchange, Over the Counter Exchange of India and Interconnected Stock Exchange of India made operational. v. Insider trading declared illegal and regulation made for fraudulent and unfair trade practices. vi. Regulations made to regulate substantial acquisition of shares/control of listed companies. vii. Authorized Lending Borrowing Mechanism (ALBM) introduced in modified form after ban on badla system. viii. Setting up investor protection trusts and bad delivery cells at all Stock Exchanges. ix. Reforms in Primary Market and Mutual Funds to bring more transparency and accountability. x. Introduction of depository concept (Electronic Mode). xi. Stricter vigilance and market surveillance mechanism. xii. Introduction of buy-back of shares and its regulation. xiii. Introduction of book building concept for IPOs. xiv. Trading on Internet permitted. xv. Steps for practicing good corporate governance practice. xvi. Trading in Options, Futures and Derivatives. xvii. Rolling settlements at Stock Exchanges. xviii. Empowerment of shareholders through legislative changes in Companies Act, 1956. xix. Better transparency and disclosure through Listing Agreement. ALBM – Automated Lending and Borrowing Mechanism is a scheme introduced by the National Stock Exchange (NSE) that acts as a facilitator for securities lending. It also facilitates financing in addition to securities lending. ALBM is basically a modified carry forward system. Lending of securities and funds is a way by which individuals can take advantage and participate in the bull period. It allows one to participate in the market without worrying about downside risks and incidental problems. It involves lending securities to those who had sold without being in possession of the instruments (Short-Sellers). It helps generate income for those with idle securities. It also includes lending of funds on those buying shares without funds. MARKET MAKING is a process whereby tow way quotes are offered for the purpose facilitating trading in respect of certain scrip. The primary advantage of market making is that it provides much needed liquidity to the securities. Also increases the supply of scrips in the market and also triggers demand for the scrips in the market. Market making helps in reducing the bane of concentration and thus eliminating the influence of the unbiased sensitive index. EDIFR - Electronic Data Filing and Retrieval System This is an automated system for filing, retrieval and dissemination of time sensitive corporate information, which till now were being filed physically by the listed companies with the stock exchanges in India. By centralizing the information through on-line-filing, EDIFARs primary objective is to centralize the information and accelerate its dissemination and by doing so enhance the transparency and efficiency for the benefit of all the stakeholders in the securities market.
  3. 3. GREEN SHOW OPTION Green Shoe Option means an option of allocating shares in excess of the shares included in the public issue and operating a post-listing price stabilizing mechanism in accordance with SEBI Guidelines. A Company making a public offer of equity shares and desirous of availing this option, should in the resolution of the general meeting authorizing the public issue, seek authorization also for the possibility of allotment of further shares to the ‘Stabilizing Agent (SA) at the end of the stabilization period. The company should appoint one of the merchant bankers or book runners, amongst the issue management team, as SA, who will be responsible for the price stabilization process, if required. The SA shall enter into an agreement with the issuer company, prior to filing of offer document with SEBI, clearly stating all the terms and conditions relating to this option including fees charged / expenses to be incurred by SA for this purpose. The details of the agreements mentioned above should be disclosed in the draft prospectus, the Draft Red Herring prospectus, Red Herring Prospectus and final prospectus. PRICE STABILIZATION FUND The fund created to cause stabilization of the share price of an entity especially after the public issue of securities, is known as Price Stabilization Fund. The aim of the fund is to protect the share price from falling below the issue price. For the purpose of operating a price stabilization mechanism post listing, the issue company appoints a SA. The prime responsibility of SA shall be to stabilize posting listing price of the shares. To this end SA shall determine the timing of buying the shares, the quantity to be bought, the price at which the shares to be bought, etc. Stabilization mechanism shall be available for the period disclosed by the company in the prospectus, which shall not exceed 30 days from the date when trading permission was given by the exchanges. BOOK BUILDING Book Building is a method of floating a public offer that allows the issuer to price its offer of securities based on the market demand. Normally when an issue is made in public offer, its pricing is a determined by the Issuer and Lead Manager, one-sided process. The success or failure of offer depends on whether the market is willing to subscribe at the price fixed. In a book-building offer, the issuer determines only the offer size or the number of securities he would like to offer for subscription. He then invites bids from prospective investors for the offer. Then the offer is priced based on the inherent demand and the price discovered through the process of the bidding. Only the indicative price range is known. Demand for the securities offered can be known everyday as the book is built. Payment effected only after the allocation of securities. DEFICIENCIES OF INDIAN PRIMARY MARKETS - Unreasonable pricing as well as price rigging - Vague and incorrect disclosures in offer documents - Misleading projections - Inability of SEBI to punish violations - Too many public issues at the same time - Incidents of grey market - Unresearched market information - Gullible investors - Lack of transparency and fair play in the market
  4. 4. Many concerted efforts have been taken to remove the deficiencies and major policy initiatives are: - Convertibility of Indian Rupee - Establishment of more Mutual Funds - Expansion of private sector banking - Buy-back of securities - De-listing of securities, where inescapable internet trading - Issue of securities in electronic form (depository) - Introduction of Sweat Equity Shares and ESOP - Book building and Market Making concepts introduction - Many new institutions created to service the capital markets - Due diligence responsibility fixed on merchant bankers BROKER is a member of a recognized stock exchange, who is permitted to do trades on the floor of the exchange. He is enrolled as a member with the concerned exchange and is registered with SEBI. SUB BROKER is a person who is registered with SEBI as such and is affiliated to a member of a recognized stock exchange. What is the pay-in day and pay- out day? Pay in day is the day when the brokers shall make payment or delivery of securities to the exchange. Pay out day is the day when the exchange makes payment or delivery of securities to the broker. Since settlement cycle has been reduced from T+3 rolling settlement to T+2 w.e.f.. April 01, 2003, the exchanges have to ensure that the pay out of funds and securities to the clients is done by the broker within 24 hours of the payout. The Exchanges will have to issue press release immediately after pay out. How long it takes to receive my money for a sale transaction and my shares for a buy transaction? Brokers were required to make payment or give delivery within two working days of the pay - out day. However, as settlement cycle has been reduced from T+3 rolling settlement to T+2 w.e.f. April 01, 2003, the pay out of funds and securities to the clients by the broker will be within 24 hours of the payout. What is Arbitration? Arbitration is an alternative dispute resolution mechanism provided by a stock exchange for resolving disputes between the trading members and their clients in respect of trades done on the exchange. What is the process for preferring arbitration? The byelaws of the exchange provide procedure for Arbitration .You can procure a form for filing arbitration from the concerned stock exchange. The arbitral tribunal has to make the arbitral award within 3 months from the date of entering upon the reference. The time taken to make an award cannot be extended beyond three times up to maximum period of three months. Who appoints the arbitrators? Every exchange maintains a panel of arbitrators. Investors may choose the arbitrator of their choice from the panel. The broker also has an option to choose an arbitrator. The name(s) would be forwarded to the member for acceptance. In case of disagreement, the exchange shall decide upon the name of arbitrators.
  5. 5. What is meant by corporatisation of stock exchanges? Corporatisation is the process of converting the organizational structure of the stock exchange from a non-corporate structure to a corporate structure. Traditionally, some of the stock exchanges in India were established as “Association of persons”, e.g. BSE, ASE and MPSE. Corporatisation of such exchanges is the process of converting them into incorporated Companies. What is demutualisation of stock exchanges? Demutualisation refers to the transition process of an exchange from a “mutuallyowned” association to a company “owned by shareholders”. In other words, transforming the legal structure of an exchange from a mutual form to a business corporation form is referred to as demutualisation. The above, in effect means that after demutualisation, the ownership, the management and the trading rights at the exchange are segregated from one another. How is a demutualised exchange different from a mutual exchange? In a mutual exchange, the three functions of ownership, management and trading are intervened into a single Group. Here, the broker members of the exchange are both the owners and the traders on the exchange and they further manage the exchange as well. A demutualised exchange, on the other hand, has all these three functions clearly segregated, i.e. the ownership, management and trading are in separate hands. What is meant by delisting of securities? The term “delisting” of securities means permanent removal of securities of a listed company from a stock exchange. As a consequence of delisting, the securities of that company would no longer be traded at that stock exchange. What is the difference between Voluntary delisting and Compulsory delisting? Compulsory delisting refers to permanent removal of securities of a listed company from a stock exchange as a penalizing measure at the behest of the Stock exchange for 44 SUPPLEMENT FOR SECURITIES LAWS & REGULATION OF FINANCIAL MARKETS not making submissions/comply with various requirements set out in the Listing agreement within the time frames prescribed. In voluntary delisting, a listed company decides on its own to permanently remove its securities from a stock exchange. What is the exit opportunity available for investors in case a company gets delisted? SEBI (Delisting of Securities) Guidelines, 2003 provide an exit mechanism, whereby the exit price for voluntary delisting of securities is determined by the promoter of the concerned company which desires to get delisted, in accordance to book building process. The offer price has a floor price ,which is average of 26 weeks average of traded price quoted on the stock exchange where the shares of the company are most frequently traded preceding 26 weeks from the date public announcement is made. There is no ceiling on the maximum price. In case of infrequently traded securities, the offer price is as per Regulation20 (5) of SEBI (Substantial Acquisition and Takeover) Regulations. For this purpose, infrequently traded securities is determined in the manner as provided in Regulation20 (5) of SEBI (Substantial Acquisition and Takeover) Regulations. What are Derivatives? The term “Derivative” indicates that it has no independent value, i.e. its value is entirely “derived” from the value of the underlying asset. The underlying asset can be securities, commodities, bullion, currency, live stock or anything else. In other words, Derivative means a forward, future, option or any other hybrid contract of pre determined fixed duration, linked for the purpose of contract fulfillment to the value of a specified real or financial asset or to an index of securities. With Securities Laws (Second Amendment) Act,1999, Derivatives has been included in the
  6. 6. definition of Securities. The term Derivative has been defined in Securities Contracts (Regulations) Act, as:- A Derivative includes (a) a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security; (b) a contract which derives its value from the prices, or index of prices, of underlying securities; What measures have been specified by SEBI to protect the rights of investor in the Derivative Market? The measures specified by SEBI include: 1. Investor’s money has to be kept separate at all levels and is permitted to be used only against the liability of the Investor and is not available to the trading member or clearing member or even any other investor. 2. The Trading Member is required to provide every investor with a risk disclosure document which will disclose the risks associated with the derivatives trading so that investors can take a conscious decision to trade in derivatives. 3. Investor would get the contract note duly time stamped for receipt of the order and execution of the order. The order will be executed with the identity of the client and without client ID order will not be accepted by the system. The investor could also demand the trade confirmation slip with his ID in support of the contract note. This will protect him from the risk of price favour, if any, extended by the Member. 4. In the derivative markets all money paid by the Investor towards margins on all open positions is kept in trust with the Clearing House/ Clearing corporation and in the event of default of the Trading or Clearing Member the amounts paid by the client towards margins are segregated and not utilised towards the default of the member. However, in the event of a default of a member, losses suffered by the Investor, if any, on settled / closed out position are compensated from the Investor Protection Fund, as per the rules, bye-laws and regulations of the derivative segment of the exchanges. What is EDIFAR ? “Electronic Data Information Filing and Retrieval System” (EDIFAR) is a website launched by SEBI in association with National Informatics Center (NIC) in July 2002 to facilitate filing of certain material information/ documents/statements by the listed companies on line in the EDIFAR web site - EDIFAR would enable electronic filing of information in a standard format by the companies and expedite dissemination of information to various classes of market participants like investors, regulatory organization, research institutions, etc. BUY-BACK OF SECURITIES The concept of buy-back of securities was proposed in the Companies Bill, 1997. Prior to the enactment of the Companies (Amendment) Act, 1999, no company limited by shares and no company limited by guarantee and having a share capital could buy its own securities unless the consequent reduction of capital was effected and sanctioned pursuant to the provisions of Sections 100 to 104 or of Section 402 of the Act. REQUIREMENTS Authority in the Articles Board Resolution and Quantum Shareholders’ Resolution and Quantum Maximum quantum of Buy-back Further Offer of Buy-back
  7. 7. Available sources for Buy-back I. ITS FREE RESERVES II. THE SECURITIES PREMIUM ACCOUNT III. THE PROCEEDS OF ISSUE OF ANY SHARES OR OTHER SPECIFIED SECURITIES Cannot be made out of the proceeds of an earlier issue of same kind of securities. Borrowing from Banks/Financial Institutions CONDITIONS TO BE FULFILLED AND OBLIGATIONS Only fully paid-up securities qualify for buy-back Pricing for Buy-Back SECURITIES NOT AVAILABLE FOR BUY BACK Securities in lock-in period Non-transferable securities Disputed securities kept in abeyance MODES OF BUY-BACK