CASE STUDY Capital Market Reforms: A Critical Evaluation Capital market is vital for the development and strength

of economy. A strong and vibrant capital market assists corporate world initiatives, finance and exploration of new processes and instruments facilitates management of financial risk. Retail investor is the backbone of the capital market. But with the expansion of the capital market, scams and anomalies, also multiplies. It ultimately leads to the dilution of the faith of the small investor, mutual funds, pension funds, Foreign Institutional Investor and insurance companies in the capital. Therefore sustainable and pragmatic development of capital market has been essential. Understanding the need of the hour Government of India had initiated certain steps towards rebuild the volume of activities of the investor in the capital market. These are popularly known as capital market reforms. This includes educating capital market participates regarding their rights and duties for proper functioning of capital market. After a decade of these reforms, the questions are whether the faith of the investor had built up again in the market or not? Is the investor satisfied with these reforms? In this regard we are trying to explore the answer of these questions. Capital Market Reforms: A Critical Evaluation -----------------------------------------------------------------------------------------------------------Introduction: Capital market is vital for the development and strength of economy. A strong and vibrant capital market assists corporate world initiatives, finance and exploration of new processes and instruments facilitates management of financial risk. Investor i.e. individual investor, mutual funds, Foreign Institutional Investor and insurance companies place their money in various instruments of capital market. They are the soul of the capital market. An investor is very much needed because he is the major (rather the only) source of providing risk capital. As portfolio manager fill their baskets on the basis of subjective evaluation of scrip and FIIs are busy in pocketing profit by only investing in profitable companies. Hence none of them is interested in injecting much needed risk capital. Thus the task is only left to retail investors. With the globalization of economy, scams and anomalies are also multiplies. After various scams in

related to security market (like 1992 scam of Harshad Mehta, JVG scam etc.) the level of investment volume and number of investors is continuously declining due to the following reasons. 1. Whenever any retail investor faces an institutional failure he does not get help from any quarter and has to accept it as a bad luck. 2. The scams remain under investigation with no concrete steps taken against default companies. 3. Regulators only highlight the value addition of new intermediaries, new instruments and new system of trading but nobody discloses inherent risk. Therefore, in a global environment, capital market regulator assumes more significance and regulator has to be dynamic and responsive to changes. There is often no single regulatory approach to an issue. Several instruments may bring desired results. The most important issue kept in mind is investors interest. Regulation is not a static and it is vary dynamic one. Capital market is a fulcrum consisting of investor, intermediaries, companies, self regulatory organization (SROs), exchange facilitators and regulators. Therefore, regulators fine tune their policies towards encouraging and protecting investors. The prospect of any market is investors confidence. An informed investor always contributes to the orderly development of market. Regulatory organization should empower investor and also enable them to make informed decisions in the capital market. One of the big challenges is to adopt regulatory and supervisory approaches to an environment of continuous change. Information technology has already replaced centuries old floor based openout-cry system (Black board system). It results improved liquidity, elimination of dealers, reduced transaction costs and better price discovery. Corporate governance has engaged the attention of regulators, adoption of internationally accepted accounting standards will improve corporate governance. Several capital reforms are listed and explained in the following section. Objectives of the study: 1. To study the rights of stock market investors prescribed by the SEBI. 2. To study the primary market reforms by the SEBI. 3. To study secondary market reforms by the SEBI. 4. To study SEBI Regulations for stock brokers and issues. 5. To study the instruments available to SEBI to protect safety and integrity of the stock market.

Methodology : The present study is conducted depending on both primary and secondary sources of information. The survey method is selected for collecting primary data a sample of retail investors who are trading in recognized stock exchanges are taken. A well structured questionnaire is supplied to investor and they are personally interviewed to share their experiences. The secondary data was collected from books, magazines, journals, reports of SEBI and RBI etc.

Primary market Reforms: For the fulfillment of the basic task of securities market to help in process of capital formation in the economy, this can only be possible by series of systematic measures which would build their confidence in the systems and processes and protect their interest fully. The rising of capital issues were controlled by the office of the controller of capital issues (CCI) established under the capital issues control Act-1947. The Capital Issues Control Act-194, repealed, office of the controller of capital issues abolished and initial share pricing decontrolled. In 1991-92 Finance Minter announced the repeal of the act and transfer of powers from CCI to SEBI from control to disclosure based regulation. The SEBI, the capital market regulator, established in 1992, the primary function of SEBI is to regulate the capital market and protect the interest of the investors. The other important functions of SEBI are: _ Regulating the business in stock exchanges and any other securities markets. _ Registering and regulating the working of collective investment schemes, including mutual funds. _ Prohibiting fraudulent and unfair trade practices relating to securities markets. Therefore SEBI put some guidelines they are: 1. Disclosure and Investor Protection (DIP) guidelines: as per this regulation all the information pertaining to and available with an issuer is provided so as the investor takes an informed decision whether to invest or not to invest. 2. Eligibility Criteria for issuers (DIP-2000): Companies eligible to make an issue can decide on their standard denomination and price of a security. Some parameters that need to be in offer

documents are minimum holding by promoters, size of public issue, issue expenses, information disclosure and advertisement etc. 3. Transparency: SEBI makes available all the offer documents filed with it on its website and also through process release. Complaints are invited from the public within 21 days of filing. 4. Free Pricing of Securities: issuer is free to determine the level of security price. The process of Book-building helps discover price and assist small investor to take an investment decision. 5. Number of Financial Instruments: issuer would like to have an optimum capital structure that reduces cost of capital. Today Indian capital market consists of almost all financial products available in most of the developed capital market, thus the choice to both issuer and investor has become wider. 6. Issue process: Following process is used in the Indian capital market; _ Public issue an invitation by a company to public to subscribe to the securities offered through prospectus. _ Right Issue- issue of capital under Sec-I (81) of Companies act 1956 to be offered to existing shareholders. _ Offer for Sale- it refers to securities by existing shareholder of a company to the public for subscription. _ Book-building- it refers to a process of ascertaining demand for and price of securities through bids, before the actual issue. Book building process is mandatory when the company doses not have track record for three out of preceding five years. 60% allotment to qualified institutional buyers is mandatory under the book building process. _ Compulsory Demat- All Initial public offerings will be compulsory traded in dematerialized form. But the investors have been allowed to exercise option of either subscribing to securities in its physical or dematerialized form. _ Employee stock option means option given to the whole time employee of a company right to purchase or subscribe securities at a future date. _ Buy-back section 77 (A) companies act and SEBI regulations are allowed companies to buy back of share to enhance the wealth of shareholder. 7 Prohibiting insider trading in securities, with the imposition of monetary penalties, on erroring market intermediaries.

8 Foreign Institutional Investors are allowed to invest in Indian capital markets after registration with the SEBI. 9 Indian companies permitted to access international capital markets through Euro issues. 10 The National stock exchanges, (NSE) with nationwide stock trading and electronic display, clearing and settlement facilities, established several regional stock exchanges change over from floor based grading to screen based trading. 11 Private Mutual Funds permitted. 12 The practice of making preferential allotment of shares at prices unrelated to the prevailing market prices stopped and fresh guidelines are issued by SEBI. 13 Badla System has been abolished. 14 A system of rolling settlements introduced. 15 The SEBI (credit rating Agencies) Regulations, 1999 issued for regulating new credit rating agencies as well as introducing a code of conduct for all credit rating agencies operating in India. SEBI Efforts towards Investors Education : i) It has launched intensive investor education exercises. ii) Help investor in redressal of complaints. iii) Disseminates information through its websites. iv) Published number of booklets on policy developments for educating theinvestors. v) It distributed booklets titled A quick reference guide for investor. vi) Issued a series of advertisements/ public issues in national as well as regional news papers to educate and caution the investor about the risks associated with the collective investment schemes. vii) SEBI registered investor associations organized seminars for educating investors on various aspects relating to market. In the reform process it is clearly defined the various authorities that will be accountable for and will be redressing various kinds of the grievances. Some other steps forinvestors grievances redressed are; Investor Grievances Cell. Investor Protection Fund. Investor Service Fund. Complaints with consumers disputes redressal forums suits in the court of law.

viii) Investor empowerment: timely available of quality and reliable information increases confidence of the investor. Over the past one decade many regulatory requirements have been imposed on issuers to disclose relevant information to public. Thus investors empowerment has become possible. ix) Transparency: market transparency refers to the ability of market participants to observe information about the trading process. Information can include prices volumes, sources of order, identification of counter party to trade etc. x) Mutual Funds: the period between1987-1992 witnessed the broadening of the base of the industry by the entry of mutual funds sponsored by nationalized banks and public financial institutions. SEBI has been empowered to regulate mutual funds. The SEBI (Mutual Fund) notified regulation in the year 1993, which permitted entry of private mutual funds into the industry, the regulations 1996 cast greater responsibilities on trustees. Secondary Market Reforms: Several reforms have been introduced in stock exchange administration, security trading, settlement, delivery V/s Payment, security transfer, trading in derivatives, investor protection fund etc. are explained in the following paragraphs. 1. Stock exchanges: Membership of governing boards of stock exchanges was changed to include 50% outside (nonbroker) representatives. SEBI has constituted a group to review and examine the present structure of stock exchanges and examine the legal and financial issues involved in demutualising stock exchanges. 2. Depth and Breadth in the market: India has a unique distinction of having highest number of companies listed on the stock exchanges. But all companies shares are not traded. Policy makers have to explore new options to increase depths and breadth in the Indian stock exchanges. 3. Dematerialization: Power was granted to SEBI to register and regulate depositories and custodians through an amendment to SEBI Act in 1995. There has been substantial progress in dematerialization. Number of companies available for demat with NSDL has increased from 23 in 1997 to 4172 in 2002. 4. Institutionalization:

Indian capital market was dominated by individual investors till early part of the 1990s. Earlier institutional investor like LIC, GIC, DFIs, banks etc. used to take minor role. SEBI permitted private funds, Non-resident Indians, NBFCs and overseas corporate bodies to trade in securities. Of the above mentioned only three classes of investors are very active, individuals, mutual funds and FIIs. 5. Development of Financial infrastructure: It involves development of informed investor class, legal and regulatory environment, institutional investors, world class security trading and payment and settlement systems. It also includes promoting investor associations, setting up of depositorys surveillance system. As another step towards this SEBI has introduced is of new financial instruments (derivatives). 6. Derivatives: These can play a vital role in promoting market efficiency through better price discovery and risk transfer. SEBI granted approval to NSE and BSE to start trading in index futures contract in April 2000 and May 2000 respectively. SEBI also approved the proposal of NSE and BSE to start trading in index options contracts in June 2001. 7. Corporate Governance: SEBI has introduced the corporate governance code for listed companies and for the companies which enter the market now through listing agreement. ICAI has issued standards for consideration of accounts. SEBI Regulation for Stock Brokers: SEBI act 1992 issued regulation for stock brokers in India. 1. Different Nomenclature for the same function. _ Stock broker apply as per regulation 3 as member. _ Trading member derivatives Regulation 2 (inserted in 2000). 2. Need for Minimum educational qualification. _ Regulation 3 every stock broker of an exchange can apply for grant of SEBI registration. Different criteria but no qualification. _ No qualification prescribed for registration as trading member, clearing member, self clearing member 16A (1) and (2). _ To make the system to stand of its own qualification required. 3. Time limit to process the applications

_ Regulation 3 stock exchanges to forward application within 30 days to SEBI. _ No time limit for SEBI to accept or reject. _ Only time limit is refusal to be communicated within 30days of decision to reject. 4. Daily marking to-Market: Regulation 16 3 and 4 which require the clearing and self clearing members- net worth of at least Rs.50 lacs or 100 lacs. 5. Time limit for SEBI orders in case of default by stock brokers: Regulation 25 default by a stock broker dealt under enquiry and penalty regulations. No time limit for SEBI to pass orders. 6. Clarify the issues leading to conflict of interest: in the event of a conflict interest, the broker shall not consider clients interest inferior to his own. SEBI needs to clarify the sale, purchase, advice by the brokers that results in conflict. 7. What constitutes reasonable ground in case of investment advice? Paragraph 7 of schedule II that deals with investment advice by brokers is vague enough confusion as to what constitute a reasonable ground for believing that the recommendation is suitable for such client upon the basis of the facts. 8. Paragraph 7(A) of schedule 11 deals with investment advice with regard to derivatives market. 9. Time limit for sale of membership cards by brokers part XI, paragraph 1(2) of schedule IV prescribes that the validity of prior approval for sale of membership would be 6 months from the date of issue of such approval by SEBI,. 10. Voluntary surrender of membership of the exchange: No provisions and regulations to deal with voluntary surrender of SEBI registration of stock brokers. No time limit for SEBI to communicate. 11. Review of SEBI regulation: no validity period for SEBI registration (of stock brokers), should review once in 5 years. Conclusions: 1. Security market is in open economy. 2. Physical mode abolished. 3. More awareness campaigns need to be launched in smaller towns. 4. Strict monitoring of broker actions and heavy penalties to defaulting parties. 5. The screen based trading, rolling settlements, banning of badla, introduction of derivatives products have necessitated the introduction of the systems that can take care of these developments.

6. SEBI has played and continues to play a vital role. 7. There are some legal issues that need to addressed by the SEBI will enable it to become a proactive and efficient regulator. 8. More seminars on derivatives, futures, and option and investor awareness should beconducted by SEBI. 9. It is our opinion that transparent regulatory frame work can be evolved only when the regulator continuously interacts with all the market participants. 10. SEBI has to be alert to the developments in al the spheres not only in India but also in the whole world to evolve efficient and transparent regulations. Reference: 1. Bhole. L.M Financial Institutions and Market: Structure, Growth and Innovation, Tata Mc Graw Hill. New-Delhi. 2. Chandra Prasanna Indian Capital market: pathways of development Journal of management Vol.20 PP.No 2-3. 3. BSE 2002 BSE investor awareness Hand book for NSDL Depository operation module. 4. Gupta L.C (1992) stock exchange trading in India: Agenda for Reform, Society for capital market R& D, New-Delhi PP. 123. 5. Gupta Ramesh Retail Investors The Chartered Accountant, February 1999. PP No. 12-18. 6. Special issues on Indian Capital Market Indian journal of Commerce Vol. 57 Oct-Dec-2004. 7. Pandy V.H SEBI: its Role, powers, functions and activities chartered secretary. Vol 22, PP. 8. NSDL An investors guide to depositors.