Description
A key division within the capital markets is between the primary markets and secondary markets. In primary markets, new stock or bond issues are sold to investors, often via a mechanism known as underwriting. The main entities seeking to raise long-term funds on the primary capital markets are governments (which may be municipal, local or national) and business enterprises (companies). Governments tend to issue only bonds, whereas companies often issue either equity or bonds.
RESEARCH
includes research articles that focus on the analysis and resolution of managerial and academic issues based on analytical and empirical or case research
SEBI’s Regulation of the Indian Securities Market: A Critical Review of the Major Developments
G Sabarinathan
Executive Summary
Since the empowerment of the Securities and Exchange Board of India (SEBI) through an Act of Parliament in 1992, SEBI has come up with a number of initiatives aimed at regulating and developing the Indian securities market and improving its safety and efficiency. These initiatives have made an impact on nearly every aspect of the market. Some of those initiatives have transformed the market fundamentally. Particularly noteworthy is the growth in the following: • Market capitalization • Number of listed firms • Trading volumes and turnover both in the spot and futures markets. There is a growing network of financial intermediaries that operate in a highly competitive environment while being governed by a tight set of norms. India has one of the most sophisticated new equity issuance markets. Disclosure requirements and the accounting policies followed by listed companies for producing financial information are comparable to the best regimes in the world. The Indian securities market is among the safest and the most efficient trading destinations internationally. The Indian corporate governance code is compared to the Sarbanes Oxley Act of the USA. India has one of the fastest growing and well-developed asset management businesses in the world, with state-owned as well as private sector players. That said, the Indian market is often hostage to some scam or the other from time to time. Effective enforcement of compliance is cited as one of the reasons for these unsavoury episodes. The role that SEBI’s initiatives have played in bringing about this transformation of the market has not been researched comprehensively so far. Literature that has analysed the efficiency and the design of the Indian securities market has examined the role of certain specific regulatory provisions on the functioning of the securities market. So also the various annual reports of SEBI discuss the regulatory and other institutional developments that took place during the year under review. However, no attempt seems to have been made to take stock of all the various initiatives of SEBI so far and assess its impact on the activity in the securities market. This paper identifies some of the major interventions of SEBI relating to each of these aspects of the market and critically examines the economic consequences of the same. Such a stock-taking will enable a well-rounded and objective review of SEBI’s performance. It is also likely to suggest interesting areas for further research.
KEY WORDS Securities and Exchange Board of India (SEBI) Indian Securities Market Primary Market Secondary Market
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n 1992, the Indian Parliament passed The Securities and Exchange Board of India Act, 1992, to establish the Securities and Exchange Board of India (SEBI) in its new incarnation as an empowered regulator of the Indian securities market. SEBI was established to strengthen the oversight of the securities market in India in the wake of a securities scam that surfaced in 1992. Since the establishment of SEBI, the Indian securities market has grown in terms of volume of transactions as evident from the data in Table 1. The number of new types of market participants and the increase in the number of players in each category is evident from Table 2. Many of the institutional improvements in the Indian securities markets have been documented in Shah (1999). Other papers by Shah and Thomas (2000) have focused mainly on the design of the securities market, risk management practices, and market microstructure. Sabarinathan (2010) provides a critical assessment of the adequacy and structure of the statutory levers that SEBI operates. The assessment indicates that SEBI is a suitably empowered and autonomous organization that has the necessary legal authority to be an effective regulator. Table 1: Measures of Market Activity Volumes
(All measures in billions of rupees, unless stated otherwise) MC 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 5,723 4,883 5,898 5,741 11,926 7,689 7,492 6,319 13,188 16,984 30,222 35,488 51,497 30,930 MC/GDP (%) 47.0 34.6 37.7 34.1 84.7 54.5 36.4 28.5 52.3 54.4 85.6 86.0 109.3 58.1 Turnover 2,274 6,461 9,087 10,234 20,670 28,810 8,958 9,689 16,209 16,669 23,901 29,015 51,308 38,521 Turnover Ratio (%) 40 132 154 178 173 375 120 153 123 98 79 82 100 125
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This paper takes stock of SEBI’s achievements. It reviews briefly the more important of the various regulations that SEBI has promulgated and some of the quantitative measures relating to the developments in the market. It is similar to the work in Gokarn (1996) which relates to the period 1992-96. Gokarn (1996) focuses on the regulatory steps taken by SEBI during that period. This paper attempts to understand the developments in the Indian securities trade and link them to SEBI’s regulatory initiatives by drawing upon the data, literature, and SEBI’s annual reports that have emerged since Gokarn (1996). Establishing a cause-effect relationship between the two phenomena may not be easy with regard to some aspects of SEBI’s working, given the numerous forces that interact in the working of the securities market. However, the unmistakable contemporaneity of the working of the market and the regulatory steps taken by SEBI suggests the existence of a possible causal link between the two phenomena. The achievements have been reviewed along the following major areas1: (i) Primary market and issuance of securities (ii) Disclosure requirements (iii) Corporate governance (iv) Market for corporate control (v) Trading mechanisms (vi) Settlement systems (vii) Dematerialization (viii) Institutionalization of trading and ownership of securities (ix) Market integrity and insider trading (x) Ownership and governance of stock exchanges; and (xi) Compliance enforcement. The classification follows the framework developed in Sabarinathan (2010), where it was proposed that regulation was intended to promote efficiency by mitigating problems of information flow, agency costs, transaction costs, and the risk that the transaction might not be completed due to default by the counterparty to the transaction. Accordingly, Sabarinathan op cit identifies the aspects of a securities market’s functioning that the regulation must focus on. The classification above flows from that analysis.
PRIMARY MARKET AND ISSUANCE OF SECURITIES
SEBI has regulated the primary market through (i) the regulation of issuers’ eligibility to offer securities to the public (referred to as access restrictions) (ii) regulation
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Source: Indian Securities Market Review, NSE (2009). MC stands for market capitalization. MC/GDP is the ratio of MC to GDP. Turnover ratio is the ratio of the turnover to the market capitalization.
This study reviews the more important aspects of SEBI’s regulatory activities. Some aspects such as the regulation of venture capital funds and credit rating agencies are not included in this review. SEBI’S REGULATION OF THE INDIAN SECURITIES MARKET ...
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Table 2: Development of the Network of Intermediaries in Indian Securities Market
SE Cash 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 21 22 22 22 22 22 22 23 23 23 23 23 22 22 21 19 19 SE Deriv 2 2 2 2 2 2 2 2 2 2 Brokers 5,290 6,413 6,711 8,476 8,867 9,005 9,069 9,192 9,782 9,687 9,519 9,368 9,128 9,335 8,472 8,517 8,652 Corp Brokers 0 143 616 1,917 2,360 2,976 3,173 3,316 3,808 3,862 3,835 3,746 3,733 3,961 4,110 4,190 4,308 Sub Brokers 0 202 876 1,798 3,760 4,589 5,675 9,957 12,208 13,291 12,815 13,684 23,479 27,541 44,074 62,471 MBs 74 422 790 1,012 1,163 802 415 186 233 145 124 123 128 130 152 155 137 RTI/ STA 0 100 264 334 386 334 251 242 186 161 143 78 83 83 82 76 71 DTs 0 0 20 23 27 32 34 38 37 40 35 34 35 32 30 28 30 CRAs 0 0 0 0 0 0 0 4 4 4 4 4 4 4 4 4 4 Depository 0 0 0 0 1 1 2 2 2 2 2 2 2 2 2 2 2 DPs 0 0 0 0 28 52 96 191 335 380 438 431 477 526 593 654 PMs 28 40 61 13 16 16 18 23 39 47 54 60 84 132 158 205 232 VCFs 0 0 0 0 0 0 0 0 35 34 43 45 50 80 90 106 133 FVCIs 0 0 0 0 0 0 0 0 1 2 6 9 14 39 78 97 129
Source: Various Annual Reports of SEBI; Author’s compilation. SE Cash: Corp Brokers: RTI/STA: CRAs: PMs: FVCIs: Stock exchange with a cash segment Corporate brokers Registrar to the Issue / Share transfer agent Credit rating agencies Portfolio managers Foreign venture capital investors SE Deriv: MBs: DTs: DPs: VCFs: Stock exchange with a derivative segment Merchant bankers Debenture trustees Depository participants Venture capital funds
of information production at the time of issue; and (iii) regulation of processes and procedures relating to issuance of securities. These aspects have been primarily governed through the SEBI (Issuer of Capital and Disclosure Requirements) Regulations, 2009 (ICDR) and a set of regulations that govern the various intermediaries working on the issuance process such as the merchant banker, registrar to the issue and so on.2 All three aspects have evolved considerably over the years. Access-related regulations have, for example, evolved from a regime of unrestricted access3 to equity markets to the current regime which uses a combination of size and profitability record as proxies for quality of the issuer to restrict market access. Over the years, SEBI has brought about numerous changes to the issue process. These have
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ranged from items of minutiae such as the number of centres for receiving applications for public offerings to measures that substantively affect investor welfare such as the basis of allotment. SEBI relies on certification by the merchant banker for ensuring compliance with the regulations. The provisions cast the responsibility on the issue manager for validating the accuracy of the prospectus as well as for ensuring that other intermediaries involved in an issue such as the banker and registrar have the required license and that the underwriter has the financial capacity to provide the service. Incorrect certification would mean that the merchant banker runs the risk of facing stricture or monetary penalty or even being suspended or losing its license. Over time this certification mechanism has been continuously strengthened. (SEBI, 1995; 1996) Three important institutional developments transformed the primary markets fundamentally. First, the guidelines for book-building enabled issuers to price securities based on investor interest and market conditions prevailing at the time of the offer to the public, subject to a floor price that is announced in the prospectus and a 20
The ICDR was first promulgated as SEBI Disclosure and Investor Protection Guidelines in 1992. It was substantially rewritten in 1999, consolidating more than twenty six amendments that had been made to it over the years. The current version of ICDR 2009 has been amended three times, making the ICDR and its predecessors one of the most dynamic pieces of SEBI’s regulations. There were restrictions on access in the form of listing criteria that stock exchanges stipulated, but these restrictions were not imposed at the instance of SEBI.
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per cent band above the floor. Prior to the announcement of the regulations for book-building, in the regime that is commonly referred to as the fixed price regime, the prospectus was required to mention the offer price. (A modified version of the fixed price alternative is still available.) In the earlier fixed price regime, the offer price was thus fixed well in advance of the issue, exposing the issuer to the risk of failure of the issue in case there was an adverse change in market conditions. Second, dematerialization and electronic book-building made it possible to reduce the issue time from the opening of the issue to listing and trading from a mean of 122 days and a maximum of 991 days! (Madhusoodanan and Thiripalraju, 1997). Dematerialization allowed quick and
efficient allotment of securities and provided liquidity to the investor immediately on the completion of the issue. This in turn helped bring down the investor’s cost of applying to a public issue in terms of the cost of funds that was blocked in applying to the public issue. Thirdly, all these improvements appear to have led to a larger participation by institutional investors in public offerings. The growing popularity of book-building is evident from the data in Tables 3A and 3B. Even though the guidelines were announced as far back as 1996, the number of book-built issues started picking up from 2000-01, the year in which SEBI threw open book-building to issues of all sizes and made some important amendments to the guidelines. It is very tempt-
Table 3A: Book Built and Fixed Price Issues in Initial Public Offerings
Book Built Nos 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 0 5 13 1 2 9 15 54 66 83 17 Sum 0 1,711 1,035 834 255 2641 14,507 10,260 23,203 42,262 1,816 Fixed Price Nos 18 46 99 5 4 10 8 21 9 2 4 Sum 379 939 1427 248 784 550 155 504 209 68 183 Book Built Nos 0% 10% ‘12% 17% 33% 47% 65% 72% 88% 98% 81% Sum 0% 65% 42% 77% 25% 83% 99% 95% 99% 100% 91% Fixed Price Nos 100% 90% 88% 83% 67% 53% 35% 28% 12% 2% 19% Sum 100% 35% 58% 23% 75% 17% 1% 5% 1% 0% 9%
Table 3 B: Book Built and Fixed Price Issues in Follow on Public Offerings
Book Built Nos 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 Sum Fixed Price Nos 1 2 1 * * 4 2 7 2 2 Sum 20 1,986 5 * * 4,95 2,24 1,86 41 39 Book Built Nos (%) Sum (%) 0 0 0 * * 60 67 72 78 71 0 0 0 * * 97 96 99 97 100 Fixed Price Nos (%) Sum (%) 100 100 100 * * 40 33 28 22 29 100 100 100 * * 3 4 1 3 0
* * 6 4 18 7 5
* * 14,135 5,911 12,643 12,47 10,856
Source: Prime Annual Report on Primary Market, various issues, Author’s Analysis. *: No follow on public offerings during these years Tables show (i) the number of book built and fixed price issues (ii) the sum of capital mobilized through each of these issues and (iii) the proportion of number of issues and the amount of capital raised through each category as a percentage of total issuance in each of Initial Public Offering (IPO) and Follow-on Public Offering (FPO) category. IPOs would correspond to Unseasoned Public Offerings while FPO would correspond to Seasoned Public Offerings in the North American trade parlance.
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SEBI’S REGULATION OF THE INDIAN SECURITIES MARKET ...
ing to infer as such that the growth in volume of issuances was the result of the various institutional changes and the resultant interest among institutional investors in IPOs. However, a more careful analysis would be necessary to understand the drivers of growth in public offering volumes. For example, it is highly likely that developments relating to the secondary market that reduced the settlement cycle and trade guarantee funds that reduced risks in settlement of trades may also have persuaded foreign institutional investors to participate in public offerings. (Also see discussion on secondary markets in this paper.) Table 2 brings out another interesting aspect of the evolution of the primary markets: The number of merchant bankers, registrars to issues, and share transfer agents increased to begin with and then declined over time. This movement coincides with the increase in the number of public issues during the early and mid-nineties and the subsequent decline in the number during the later part of that decade and thereafter. A definitive comment on these movements would require a thorough investigation of the factors that influenced the prospects for these intermediaries. A cursory examination suggests that SEBI’s regulatory interventions governing the activity of the various intermediaries may have played an important part in these developments. For example, in the case of merchant bankers, two regulatory developments may have significantly affected the structure of the merchant banking industry. One, merchant bankers were initially divided into four categories based on their level of capital. Each category of merchant bankers was restricted to a certain range of business offerings (SEBI, 1994). These regulations may have affected the number of players offering various types of services.4 Second, the restriction on their taking up non-merchant banking and fundbased activities that was imposed in 1997 (SEBI, 1998), may have played a part in the restructuring of the merchant banking industry and the exit of a large number of players.5
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DISCLOSURE
Disclosure and flow of information fall into three categories, namely, disclosure at the time of a public offering, on-going or periodic disclosure after listing of securities and transaction-related disclosures. SEBI enhanced the disclosures required of a company at the time of a public offering by building on the requirements in the Companies Act, 19566 . The increase in disclosures was necessitated by “the quantitative growth of the market and the freedom to price issues had also raised questions about the quality of issues entering the market.” (SEBI, 1996). SEBI’s disclosure standards are not limited to accounting information presented in the prospectus. It extends to other issue-related communications such as advertisements. As a result, the disclosure requirements relating to an issue and currently in vogue are a far cry from the relatively rudimentary requirements specified in the Companies Act. The continuing disclosure regime under the Companies Act that was in force prior to the establishment of SEBI suffered from three principal shortcomings (i) low frequency, at once a year (ii) insufficient and poorly administered deterrents against non compliance; and (iii) a common set of disclosure obligations for companies with limited as well as widely distributed ownership. In order to improve the frequency of disclosure, SEBI constituted a committee in 1996 to examine the question of continuing disclosure7 . SEBI directed stock exchanges to implement most of the recommendations of the committee.8 Continuing disclosure requirements were further enhanced in 1999-2000. With the introduction of the corporate governance requirements in 200001, disclosure of materially significant related-party transactions with promoters, directors, management, subsidiaries, relatives and so on were added. In order to
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Based on recommendations of two committees, in 1995-96 and 200001, under the Chairmanship of Mr. Y H Malegam. The Committee was chaired by Mr. C B Bhave. Prior to the constitution of the “Bhave Committee,” SEBI had mandated some piecemeal changes such as disclosing comparison of actual profitability with projected profitability and so on. The requirements of the committee included quarterly disclosure of financial results, publishing details of deployment of proceeds of public and rights issues half yearly, that the quarterly and half yearly disclosures have to be on the same basis as the accounting principles of the previous year (failing which the previous year’s figures have to be restated for comparability) and all other material events having a bearing on the operations or performance of the company as well as pricesensitive information.
This categorization and restriction of activities was withdrawn in 1997. One possible explanation is that the investment banking industry which was in its early days at that time attracted a large number of poorly capitalized players. These players depended on income from investments in securities for their survival and growth. The funds for these investment activities came from public deposits that were ostensibly raised for asset financing type activities. In a sense these firms’ investments in securities were highly leveraged. When the securities markets collapsed, these merchant banking firms defaulted on their deposits, triggering off a crisis in the retail debt markets as well. The restriction on the deposit taking and asset financing activities of merchant banks was partly in response to these crises.
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institutionalize the evolution of the continuing disclosure process, SEBI entered into a collaborative initiative with the Institute of Chartered Accountants of India (ICAI) and formed the National Committee on Accounting Standards (NACAS). Over the years, the disclosure requirements have started mandating a more detailed presentation of the performance of the company. SEBI has also focused on the flow of information on the trading side. SEBI started by insisting that the brokers’ notes to their clients indicated the price and the brokerage separately for the orders that they executed for their clients (SEBI, 1992-93). SEBI then followed it up by asking brokers to account for their own proprietary funds deployed in the trade and client funds separately (SEBI, 1993-94). Rudimentary as it might sound, these were big steps forward in improving transparency levels in trade execution. The introduction of open electronic limit order books in all the exchanges was perhaps the second and the most important step in increasing the transparency of trades. Following SEBI’s directive, exchanges have improved the flow of trade-related information by taking advantage of technology and minimizing instances of gaps in flow of information as in the case of off market transactions, such as block trades, which are now required to be routed through the electronic trading systems of the stock exchange. Exchanges have also been required to invest in market surveillance systems which could help detect insider trading or market manipulation transactions. Overall, the analysis in Sabarinathan (2010) indicates that the regulations now require a copious flow of information which should result in a substantial improvement in the discovery of prices, both at the time of an issuance as well as once the securities are listed for trading.
role of the Board of Directors of a company collectively and that of directors individually have been dealt with under the Companies Act, long before corporate governance emerged as the hot topic that it is currently.9 SEBI’s initiatives starting with the deliberations of two committees in succession10, culminated in the introduction of Clause 49 in the listing agreement. The main items covered under Clause 49 are: (i) ensuring independence of the Board and disclosure of their compensation (ii) ensuring correctness, sufficiency, and credibility of disclosures (iii) requirement of financial literacy among members of the audit committee and expertise in accounting/financial management among them (iv) whistle-blower policy (v) requirement of a formal risk management policy (vi) certification of financial and cash flow statements by the CEO/CFO to the Board; and (vii) quarterly reporting to the stock exchanges on compliance with the requirements of every provision of Clause 49. Compliance with Clause 49 was mandated for all the listed companies by December 31, 2005 while companies making an IPO are required to comply with Clause 49 at the time of the issue. The provisions of Clause 49 are often compared with those of Sarbanes Oxley Act 2002 and are said to draw upon that legislation in the objectives as well as approach to regulating corporate governance.11 It is perhaps too early to assess the impact of Clause 49 on the governance standards of companies in India although some studies such as Black and Khanna (2007) have tried to estimate the impact of compliance with Clause 49 on the market valuation of companies. Some observers have expressed doubts about whether mere enactment of regulation will suffice to ensure true independence of the Board and raise the standards of governance.12 At least one survey (KPMG, 2008) found that corporate governance in India still has a long way to go in protecting minority shareholders, empowerment of independent directors, and risk management practices, three of the key areas that Clause 49 addresses. Only 19 per cent of the respondents to the survey felt that there
CORPORATE GOVERNANCE
SEBI has led the effort in improving standards of corporate governance in India in companies that are already listed and are about to be listed. Some elements of the
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The Companies Act has provisions governing the constitution of the board of directors of a company (Section 255 to Section 266), disqualification of directors (Section 274), restrictions on maximum number of directorships (Section 275 to Section 278), remuneration of directors (Section 309 to Section 311), vacation of office by directors (Section 283 and Section 284), procedure to be followed in the case of business in which directors are interested (section 299 to Section 302), powers of the board (section 291 to section 293). Further, Section 211 requires that the accounts presented to shareholders will be
authenticated by the directors of the company and Section 224 states that the accounts will have to be audited.
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The two committees were headed by Mr Kumar Mangalam Birla and Mr. N R Narayanamurthy respectively. See for example Singh, Useem and Singh (2007) For one such view see, for example, Sen (2004)
11 12
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has been a “marked improvement” in corporate governance standards in India while 71% of the respondents felt that in comparison with developed countries, penalties meant to discipline poor and unethical governance was low.
The data shows an overall increase in the number of corporate acquisition initiatives during the period. The Takeover Code is an initiative attributable to SEBI.
TRADING MECHANISM
SEBI played an important role in moving many Indian stock exchanges to adopt an electronic trading system.13 The automation of trading and post trading systems on the major stock exchanges (i) reduced manipulation of prices and concealment of audit trails of such manipulation (ii) ensured that investors received time-based priority and correct prices for their trades; and (iii) fundamentally altered the economics of the business of stock exchanges as the operations of NSE and The Stock Exchange, Mumbai were allowed to be extended electronically to other cities from 1996-97. Prior to NSE and BSE going national, the operations of stock exchanges were limited to geographical regions by their charter and approval. As a result the share of trade on regional stock exchanges dropped steadily from 57 per cent in 1994-95 (SEBI, 1995) to 4 per cent in 2002-03 (SEBI, 2003). The fact that SEBI had to exert pressure on some of the exchanges to switch to electronic trading in spite of the signals from the market (from the success of NSE) that electronic trading was likely to be the way forward for stock exchanges in India, suggests that this was an area where market forces may not have provided the required incentives for the incumbent players to choose what was in the best interests of the trade as a whole. (For a more detailed discussion on how the government has used crises to push reform through in the financial markets, see Shah, 2000b).
MARKET FOR CORPORATE CONTROL
Takeovers and acquisitions are regulated by the SEBI (Substantial Acquisition of Shares and Takeover) Regulations 1997, also known as the Takeover Code. The Takeover Code is itself a substantially modified version of the 1994 Code and was modified again substantially in 2002. The Takeover Code has been subject to numerous criticisms. Some of the criticisms are: Poor drafting leading to considerable ambiguity in interpretation, excessive discretion in SEBI’s hands in the administration of the Code, that the Code is favourable to incumbent managements and not favourable to hostile acquisitions which are held to be essential for a healthy market for corporate control, exemptions from applicability of the Code available to various types of acquisitions such as preferential offers, inter se transfers, rights issues and so on, and that the open offer of 20 per cent does not allow all shareholders who wish to exit to be able to sell their shares to the acquirer. Not surprisingly, the Code is being subject to a complete revision. Data on the level of activity under the Code is in Table 4. Table 4: Acquisitions and Takeover under the SEBI Takeover Code
1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Offers (Nos) 8 14 30 26 43 41 63 83 77 81 88 65 60 104 104 116 86 Exemptions (Nos) 10 6 11 29 32 5 4 11 21 16 17 18 17 13 15 31 15 Total (Nos) 18 20 41 55 75 46 67 94 98 97 105 83 77 117 119 147 101
SETTLEMENT SYSTEMS
SEBI directed all SEs in 1992-93 to adopt a weekly settlement progressively for all categories of shares by 199495. With the introduction of dematerialization of securities, SEBI moved the stock exchanges gradually to a T+2 rolling settlement from April 2003. These developments were also accompanied by the discontinuation of the “badla,” a form of futures-based trading which was used as a disguised risk management product. Alongwith the settlement, SEBI also directed the stock exchanges to set up trade and settlement guaran13
Source: Various Annual Reports of SEBI (compilation by author) VIKALPA • VOLUME 35 • NO 4 • OCTOBER - DECEMBER 2010
SEBI pursued automation initiatives with Mumbai, Pune, and Delhi in 1995-96 (SEBI (1996)) and with Jaipur, Magadh, and Inter-Connected Stock Exchanges India Ltd. in 1998-99.
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tee funds to assure investors that they would not face the risk of loss on account of a default by the counterparty. By 1999-2000, sixteen out of the twenty-three exchanges that had any turnover had all set up trade guarantee funds (SEBI, 2000). The reduction of settlement cycles and the introduction of rolling settlement substantially eliminated the risks arising from the long settlement cycles combined with ‘badla,’ namely, defaults, payment crises, and temporary closure of the stock exchanges. The combined result of these initiatives is the reduction in transaction costs that is presented in Tables 5 A and B. (Shah, 1999 and Shah, Thomas and Gorham, 2009). Table 5 A: Indicators of Trading Efficiency on Indian Securities Markets
1994 (%) Trading Fees to Intermediaries 3.00 Market Impact Cost Clearing Counterparty Risk Settlement Paperwork Bad paper risk Stamp Duty
Source: Shah (1999). 1. Standard represents Best in International Standards in terms of lowest cost. 2. Demat represents electronic settlement through depository. 3. Bad Paper Risk is the chance that the trade may not go through due to defects in physical securities that allows the issuer of the security to legally refuse transfer. These risks disappear in depository based settlement and hence the cost in that case is zero.
Table 5B: Estimate of Impact Cost in Indian Securities Market
Year 1996 2001 2002 2003 2004 2005 2006 2007
Source: Shah (2009). Note: These estimates are for a transaction of Rs 5 million on the Nifty, the broad market index of National Stock Exchange.
Impact Cost (%) 0.25 0.20 0.12 0.10 0.09 0.08 0.08 0.08
1999 Physical Demat (%) (%) 0.50 0.25 0.00 75.00 50.00 25.00 0.25 0.25 0.00 0.10 0.00 0.00
Standard (%) 0.25 0.20 0.00 0.05 0.00 0.00
0.75 Present 0.75 0.50 0.25 >5.25
These initiatives did not meet the needs of the rapidly burgeoning trade. A committee appointed by SEBI confirmed the need for an early introduction of dematerialization14 (SEBI, 1998). Starting January 1998, dematerialization was made compulsory in a phased manner for all issuers and all IPOs by September 2001. Dematerialization brought about several benefits: (i) Greater liquidity due to the withdrawal of the requirement of minimum trading lot sizes and reduced “no-delivery” period (ii) No loss or risk on account of mutilation or loss of scrips (iii) Shorter periods of book closure for corporate actions such as dividends payments, rights or bonus issues; and (iv) Eliminated delays in transfer that were intended to withhold transfers so as to create an artificial shortage of scrips in the market. Table 6 provides data that trace the progress in dematerialization since 2001-02. The table shows how dematerialization benefitted from the momentum that was provided by the regulatory push from SEBI. The value of trades settled through the depositories, the number of companies which dematerialized their shares, and the number of DPs have all shown an increase over the years. More importantly, starting 2003-04, in each of the years to-date, more than 99.7 per cent of the number of shares delivered on the BSE and 99.5 per cent of the shares in terms of value delivered on the BSE and 100 per cent of the shares in terms of volume as well as value delivered on the NSE were settled through one of the two depositories. Not surprisingly, the bad delivery during this period progressively declined to negligible levels up to 2008-09 on the BSE while
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DEMATERIALIZATION
With the entry of FIIs starting 1992 and the setting up of mutual funds in the private sector in 1994, the institutionalization of stock trading and, concomitantly, trading volumes had increased considerably over the years. (Table 1 shows the growth in the turnover on stock exchanges over the years.) Various alternatives emerged to tackle the enormous volumes of post-trade processing work such as consolidation of smaller trading lots into a single piece of paper known as a “jumbo certificate” and specialized custodial services. (SEBI, 1994).
The Committee was headed by Mr R Chandrasekharan. SEBI’S REGULATION OF THE INDIAN SECURITIES MARKET ...
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Table 6: Progress in Dematerialization
NSDL Cos Live 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 4,172 4,761 5,212 5,536 6,022 6,483 7,354 7,801 DPs Value Settled (Rs bn) 1,088 1,269 2,784 3,970 6,477 8,305 14,207 10,889 Cos Live 4,284 4,628 4,810 5,068 5,479 5,589 5,943 6,213 CSDL DPs Value Settled (Rs bn) 314 331 837 894 1,371 1,971 3,832 2,240
Table 7: Mobilization of Funds by FIIs and Indian Mutual Funds
(All amounts in billions rupees) Mutual Funds Gross 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 227 612 930 1,645 3,147 5,902 8,397 10,981 19,385 44,644 54,264 Redemption 237 423 838 1,573 3,105 5,434 8,375 10,454 18,445 43,106 54,547 Net -950 190 91 72 42 468 22 528 940 1,538 -283 AUM 689 1079 906 1,006 1,093 1,396 1,496 2,319 3,263 5,052 FIIs Net -16 101 99 88 27 458 459 415 308 662 Cumulative 298 399 499 586 613 1,071 1,530 1,944 2,253 2,915 2,456
226 241 242 340 364 707 803 946
350 397 108 243 438 529 740 815
Source: Various Annual Reports of SEBI and Author’s Compilation. NSDL is National Securities Depository Ltd, CDSL is Central Depository Services Ltd. DP is Depository Participants Companies Live represents the companies whose securities are settled through the depository Value settled represents the value of trade settled through that depository
4,173 -458
Source: Various Annual Reports of SEBI and Author’s Compilation. Note: FIIs stands for Foreign Institutional Investors AUM is Assets under Management Net stands for net funds raised, ie., Gross funds raised less redemptions
no bad deliveries were reported on the NSE. Bad deliveries as a fraction of value delivered was 0.44 per cent on NSE prior to the introduction of dematerialization (SEBI Handbook, 2009). In theory, given the benefits of dematerialization to the investor, it would be reasonable to expect that the drive for dematerialization would have come from stock exchanges. The role for the regulator should have been limited to putting the regulatory framework in place. In practice, given the scope for market manipulation that paper-based trading offered, it is doubtful that dematerialization would have been possible without the “element of compulsion” that SEBI acknowledged in its annual report (SEBI, 1999).
INSTITUTIONALIZATION OF TRADING AND OWNERSHIP OF SECURITIES
A key feature of many of the better developed securities markets is the extent of institutional ownership of shares as well as the increasing share of institutions in securities trade. Table 7 provides an indication of the increase in institutional flow of capital into the securities market in India from two important institutional sources, namely, mutual funds and foreign institutional investors (FIIs). SEBI announced a regulatory framework, SEBI (Foreign
VIKALPA • VOLUME 35 • NO 4 • OCTOBER - DECEMBER 2010
Institutional Investors) Regulations 1995, governing regulation of portfolio investments by FIIs. These regulations made it possible for investors of foreign origin to make portfolio investments in Indian companies. Over time, these regulations have evolved to allow FIIs to play a larger part in the Indian securities market. The changes have been in terms of enabling a wider variety of investment product offerings for foreign investors such as participatory notes and investment in debt, increase in the percentage of investment companies that FIIs are allowed to hold as well as the ease of administration of the pools of capital that FIIs manage. While the interest of FIIs in Indian securities may have been the result of the attractive performance of Indian companies, SEBI’s evolving regulations have made it possible for these institutions to bring in increasing sums of capital. Allen, Chakrabarti and De (2007) estimate that the correlation between monthly net FII inflows and monthly Sensex returns is 0.49 from 1994 to 2005, suggesting a strong and increasing link between FII inflows and market returns, but of unsure causal direction. Apart from its value as a source of capital, FII investments are also said to be important for the impact they seem to have on the governance and, therefore, the market valuation of firms. Goswami (2000) argues that international investors have exerted pressure on Indian corporates to raise their
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standards of governance. The point of distinction brought out by Patibandla (2005) is that state-owned or state-controlled investors did not bring about comparable improvements in governance. Similarly, the announcement of SEBI (Mutual Funds) Regulations, 1996 enabled private sector players to enter the asset management industry. Private sector mutual funds established prior to these guidelines were beset with problems of poor management. Their initial success in garnering investment funds at the expense of their public sector counterparts was short-lived as the funds mobilized declined sharply in 1997-98, based on data on net annual mobilization of resources by mutual funds.15 Resource mobilization by private sector mutual funds has been on a growth path since 1998-99. SEBI’s regulation of mutual funds has sought to improve the quality of performance-related disclosures so as to present a fair picture, reduce fees that investors are charged to reasonable levels, minimize, if not eliminate altogether, opportunistic behaviour by fund managers as well as sponsors of funds, and above all, ensure that mutual fund schemes are launched by players who have the financial capacity to meet requirements of capital adequacy and that the structure of the fund management business has some minimum safeguards to protect investors’ interests and preserve their capital against misuse by sponsors or the managers of the funds. At the same time, the guidelines have been flexible to allow innovation and the launch of a number of new products that address investor needs, although not at the pace that some observers may have liked. It is highly likely that the regulations played a part in the orderly growth of the asset management industry in India.
law abiding economy.” Further, there appears to be some empirical evidence that insider trading can increase volatility. SEBI’s first enactment to curb insider trading, namely, SEBI (Prohibition of Insider Trading) Regulations, 1992 did not make much progress due to poor enforcement. These regulations, again, have been amended substantially over time. SEBI’s current approach centres around prevention of insider trading by requiring listed companies, intermediaries, and advisors to set up internal systems for preventing insider trading and reporting on compliance or otherwise to SEBI. There has been some concern that this approach imposes too much of a burden on the organizations and that this can be especially onerous in the case of smaller organizations. The general view, however, appears to be that given the difficulty in proving and prosecuting an offence of insider trading, the approach of prevention is better. An equally serious concern has been around manipulative practices in the Indian securities markets. Manipulative practices are usually resorted to by traders and brokers in the market. Often they involve the owner managers or promoters of companies who may stand to gain from these practices. These have typically been meant to create a false market in the securities or to push the price of the securities down to unwarrantedly low levels through circular trading and other means. Such practices have not been limited to the so-called “penny stocks” alone but have often been practised in the shares of larger and well-established companies as well. Thus manipulative practices can harm the interests of small and large investors alike as well as that of the companies whose shares are subject to such practices. SEBI has addressed these through the SEBI (Fraudulent and Unfair Trade Practices) Regulation, 2003. SEBI has backed up these regulatory measures with a substantial investment in surveillance of the markets. Progressively, much of the responsibility for surveillance has been handed over to the stock exchanges. SEBI has taken an active part in overseeing the level and nature of surveillance systems installed in the various exchanges (See various annual reports of SEBI for a discussion on this aspect). Protocols have been established for investigating unusual movements in the prices of securities as well as for the stock exchanges to report these incidents to SEBI. These are in addition to the mechanism that suspends trading for varying periods of time in order to curb excessive volatility, also known
SEBI’S REGULATION OF THE INDIAN SECURITIES MARKET ...
MARKET INTEGRITY AND INSIDER TRADING
There has been an increasing recognition that in order to maintain the confidence of investors in the public securities market, it is essential that some economic agents who possess an informational advantage over the others do not exploit the same to derive pecuniary gains for themselves. This view has been captured in a quote attributed to Mr. Arthur Levitt, a former Chairman of the Securities and Exchange Commission of the USA that insider trading “has utterly no place in any fair-minded
15
Based on data on net annual mobilization of resources by Indian mutual funds available at http://rbidocs.rbi.org.in/rdocs/Publications/DOCs/ 78T_HB150909.xls, accessed on June 7, 2010.
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as “circuit breakers.” SEBI’s effort at improving the integrity of securities markets also includes its attempts at improving the governance of stock exchanges, which are discussed below. In particular, the separation of ownership and trading rights should enable the stock exchanges to effectively curtail the level of manipulative practices in the market. SEBI’s record in investigating these cases and taking action against these practices is provided in Table 8. The table suggests that SEBI has shown substantial progress in taking action against or disposing of such cases. However, the data should be interpreted with some caution. The quality of supervision depends on the proportion of instances that are identified and taken up for investigation. That is a fairly difficult matter to comment upon. The general view remains that the Indian securities market is still subject to several manipulative practices and instances of insider trading. Table 8: Record of Action against Insider Trading and Market Manipulation
Year 1996-97 2000-01 2004-05 2006-07 2007-08 2008-09 Insider Trading Taken Up Completed 4 6 7 18 7 14 0 4 10 10 28 14 Market Manipulation Taken Up Completed 67 47 110 95 12 52 0 27 148 77 115 86
ments has been summed up neatly in SEBI’s annual report: “It is expected that with this restructuring, stock exchanges would move away from their ’closed club character’ and re-orient themselves to function as public institutions.” SEBI’s most significant initiative to improve the governance of stock exchanges in India was the move to separate ownership and trading rights, referred to as corporatization and de-mutualization (C&D). BSE, the most prominent Indian stock exchange apart from NSE, was a classic example of a stock exchange that was owned and managed by members who had trading rights on the exchange. This was the case with many other regional exchanges as well. These exchanges often witnessed payment crises and were also considered lax in proceeding against erring members. By contrast, NSE which was owned by financial institutions and managed by a team of professionals independent of owners and members with trading rights had a better record of governance. These attributes were among the factors that enabled the NSE to emerge as a challenger to the BSE (See Shah and Thomas, 2000 for a discussion on the emergence of the NSE). Notwithstanding these developments, the stock exchanges did not come forth with a proposal to demutualize. The resistance to change from the rentiers who benefitted from the mutual ownership structure may have been one of the important reasons for the lack of interest in demutualization. The principal requirements of C&D was that all stock exchanges would be corporatized and not less than 51 per cent of the ownership of the stock exchanges was to be held by public other than shareholders having trading rights.16 As of 2008-09, sixteen of nineteen stock exchanges had completed the C&D requirements while three exchanges lost their recognition due to their inability to comply with the requirements (SEBI, 2009).
Source: SEBI Handbook of Statistics 2009.
GOVERNANCE OF STOCK EXCHANGES
From its early days, SEBI’s approach towards governance of stock exchanges seems to have been influenced by the findings from the inspection completed in 199293. The principal findings of this inspection were that the exchanges were not functioning as effective self-regulatory organizations (SROs), not regulating their members through the enforcement of bye-laws, rules and regulations, and paid minimal attention to redressal of investor grievances with long pending arbitration cases. (SEBI, 1993). In 1993-94, SEBI called for numerous amendments to the rules and Articles of Association of stock exchanges. These amendments mainly had to do with including public representatives on the governing bodies of stock exchanges and in the various statutory committees and a forced break before members could be reelected to the Board. The purpose of these amendVIKALPA • VOLUME 35 • NO 4 • OCTOBER - DECEMBER 2010
COMPLIANCE ENFORCEMENT
Forming a robust view on compliance enforcement is tough because that would require that all instances of market abuse and infraction are detected and dealt with. However, it may be tentatively inferred from the data on redressal of investor grievances in Table 9 that the
16
The change in ownership is governed by Securities Contracts (Regulation) (Manner of Increasing and Maintaining Public Shareholding in Recognised Stock Exchanges) Regulations, 2006 (MIMPS Regulations for short), enacted in November 2006.
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number of unaddressed grievances is a declining fraction of the number of grievances filed. SEBI has been less effective in prosecutions and penalizing erring market participants or non-compliance. Some observers attribute it to its lack of authority to prosecute while others attribute the lack of effectiveness to its inability to make a convincing case with the Securities Appellate Tribunal and the courts. The absence of specialized courts that have the capacity to deal with matters involving the financial markets is cited as a third reason for SEBI’s lack of success in securing prosecution against various offences. Table 9: Compliance Enforcement Record of SEBI
Complaints Received Redressed Redressal Rate (%) 21 80 95 95 94 94 94 Investigations Taken Up 2 122 68 130 120 25 76 Complete 2 55 46 179 102 169 116
ment of the regulations governing mutual funds, the industry was beset with the opportunistic behaviour of many early players, threatening the very existence of the private sector segment of the asset management business. In terms of the functioning of the market, SEBI has mandated an enormous increase in the flow of information at the time of listing, after listing and relating to the trade. The long history of the functioning of the capital market and securities industry in India suggest that voluntary disclosure may not have become a pervasive trend and that without a regulatory push, there would have been underproduction of information. SEBI has secured for itself a say in the process of writing accounting rules through NACAS. This position allows SEBI to ensure that the accounting policies of a listed firm are robust enough to provide reliable information to investors. SEBI’s comprehensive approach to the issue of flow of information should go a long way in aiding the scientific discovery of asset price. The cost of transaction and the risk of settlement have been minimized, making Indian stock exchanges one of the safest and the lowest cost securities markets in the world. The Indian mechanism for securities issuance is among the more sophisticated in the world with the introduction of the guidelines for book-building of issues. The complex web of contracts that governs the issuance process provides a mechanism by which the responsibility for defaults and non-compliance may be affixed on either or both of the important actors in the issuance process, namely, the issuer and the issue manager. Many of the agency problems that affected the securities trade have been addressed through the corporatization and demutualization of securities exchanges. In terms of enforcement, the data suggest that SEBI has achieved considerable progress in terms of detecting and disposing of instances of non-compliance or infractions. This has also been borne out by the relatively orderly functioning of the trading and settlement systems with hardly any instances of payment crises shutting down the exchanges as in the past until the mid-nineties. However, both the primary and secondary markets have been affected from time to time by various other troubles that sometimes assumed the proportion of a scam as in the case of the IPOs of Yes Bank, IDFC and several others. There have also been concerns that SEBI awards penalties too late and too little in comparison to the financial
SEBI’S REGULATION OF THE INDIAN SECURITIES MARKET ...
1992-93
129,111
27,007 1,465,883 2,501,801.00 2,685,993.00 2,740,959.00 2,772,577.00 2,503,560.00
1996-97 1,823,725.00 2000-01 2,629,882.00 2004-05 2,840,095.00 2006-07 2,907,053.00 2007-08 2,961,986.00 2008-09 2,674,560.00
CONCLUSION
Our review of SEBI’s performance in the eighteen years since its establishment in its current incarnation as an adequately empowered and independent regulator indicates that there has been an all-round improvement in the institutional framework in which the securities trade in India is conducted. Progressively, over time, nearly every actor who is directly connected with the securities trade has been brought under the regulatory ambit of SEBI. A combination of registration, licensing, eligibility conditions, and incentives allows SEBI to rein in non-compliant behaviour that could potentially affect the functioning of the securities market adversely. Similarly, many of the important processes have been regulated such as takeover activities, insider trading, manipulative practices, issuance of employee share options and so on. It is thus reasonable to claim that the regulatory framework is fairly comprehensive in its coverage of the securities trade. Some of these regulatory steps may have played an important part in the orderly growth in activity of certain key categories of players such as FIIs and mutual funds. Prior to the announce-
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scale of the infraction. SEBI is also said to have had a poor record in carrying its award through the appellate and the judicial systems. Without a more careful analysis, it is hard to say whether that is the result of poor legal preparation on the part of SEBI or the leniency of the appellate systems towards the trade. Similarly, SEBI’s record in enforcing the canons of corporate governance has not been impressive. The reason for the same may partly be the regulatory arbitrage that has been noted earlier due to the joint responsibility for oversight of companies between the MCA and SEBI. For reasons that are understandable, the two agencies approach regulatory oversight somewhat differently and are endowed with different organizational and legal capacities in the enforcement of their regulatory remit. The Indian corporate sector took advantage of this arbitrage when it successfully pushed back the initial, more demanding set of recommendations of the Committee headed Mr Narayana Murthy. The need for SEBI to address its monitoring and enforcement capabilities has been noted elsewhere, as in Shah (1999). SEBI also has been the target of criticism for the way it has dealt with certain categories of investors such as hedge funds, who used the participatory note to invest in India. Finally, while the data provide a quantitative measure of the work accomplished by SEBI, they do not measure its impact on the efficiency of the market. As Gokarn (1996) points out that exercise is complicated by the quick pace at which many of these developments have taken place as well as the number of other factors that affect the efficiency of the securities markets. Yet another aspect that is not addressed in this paper is the cost of regulation to issuers. The regulatory activity of SEBI imposes a cost on issuers. However, in the absence of an analysis that measures the impact of the regulation on the effi-
ciency of the market, it is not possible to assess whether the cost incurred is justified by the benefits. Such an analysis is impeded by the paucity of relevant data. In other jurisdictions that SEBI draws upon for its work such as the UK or USA, cost-benefit justification is an essential aspect of the evaluation of the utility of regulation. A related and more basic concern relates to SEBI’s approach to coming up with new regulations. Several of the provisions add to the cost of administration and compliance with the regulations. The requirement of having IPOs graded, minimum dilution, mandatory illiquidity on a part of the owner managers’ holding are instances of provisions that add to the cost of administering and complying with the regulations. There appears to be no empirical justification for these requirements. On the contrary, there is some evidence in Khurshed, et al (2008) to suggest that the grading of IPOs does not affect the underpricing of bookbuilt IPOs. On balance, however, the data suggest that SEBI has achieved considerable progress in terms of its oversight of the securities market both in quantitative and qualitative terms. In conclusion, the observation of High Level Committee on Financial Sector Reforms while recommending that the SEBI’s role as a regulator be expanded is worth quoting here: “SEBI is ideally suited for filling these roles for several reasons. First, the equity market (both spot and derivatives) is India’s most sophisticated and most liquid market; hence, SEBI’s knowledge is rooted in the strongest market. Second, the legal foundations of SEBI are relatively recent, and they are less subject to legacy issues. Finally, the vigorous pace at which the SEBI Act and SC(R)A have been amended in the last decade—in response to the requirements of the equity market— has helped position SEBI to take on new challenges.”
REFERENCES
Black, Bernard S, and Khanna, Vikramaditya S (2007). “Can Corporate Governance Reforms Increase Firm Market Values? Event Study Evidence from India,” Journal of Empirical Legal Studies, 4(4), 749-796. Franklin, Allen; Chakrabarti, Rajesh and De, Sankar (2007). “India’s Financial System,” Unpublished working paper, Electronic copy available at http://ssrn.com/abstract=1261244 Gokarn, Subir (1996). “Indian Capital Market Reforms, 199296: An Assessment,” Economic and Political Weekly, April 13. Goswami, Omkar (2000). “The Tide Rises Gradually – CorpoVIKALPA • VOLUME 35 • NO 4 • OCTOBER - DECEMBER 2010
rate Governance in India,” downloaded from http:/// www.oecd.org/dataoecd/6/47/1931364.pdf on July 4, 2005. KPMG Audit Committee Institute (2008). “The State of Corporate Governance in India -- A Poll,” KPMG India. Khurshed, Arif; Paleari, Stefano; Pandey, Alok and Vismara, Silvio (2008). “IPO Garding in India: Does It Add Value to the Book Building Process,” Unpublished Working Paper accessed from www.unibg.it/dati/bacheca/530/ 36104.pdf Madhusoodanan, T P and Thiripalraju, M (1997). “Underpricing in Initial Public Offerings: The Indian Evidence,”
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Vikalpa, 22(4), 17-30. NSE (2009). Indian Securities Market: A Review, Mumbai: National Stock Exchange of India. Patibandla, Murali (2005). “Equity Pattern, Corporate Governance and Performance: A Study of India’s Corporate Sector,” Journal of Economic Behaviour and Organisation, Vol 30, 1-16 . Planning Commission (2008). A Hundred Small Steps-Report of the Committee on Financial Sector Reforms, New Delhi: Sage Publications India. SEBI: Various reports of the annual report from 1992-93 to 200809. Sabarinathan, G (2007). “A Critique of SEBI’s Regulation of Public Offerings of Equity Shares and Convertible Securities in India,” Unpublished Thesis submitted to the National Law School of India University. Sabarinathan, G (2010). “Securities and Exchange Board of India and the Regulation of Indian Securities Market” Working Paper No 2010-06-309, Unpublished working paper, Indian Institute of Management, Bangalore. Sen, Dilip Kumar (2004). Clause 49 of Listing Agreement on Corporate Governance, The Chartered Accountant, De-
cember, pp 806-811. Shah, Ajay (1999). “Institutional Change on India’s Capital Markets,” Economic and Political Weekly, 34(3-4), 183-194. Shah, Ajay and Thomas, Susan (2000a). “David and Goliath: Displacing A Primary Market, Global Financial Market, Spring, 14-23. Shah, Ajay and Susan Thomas (2000b), “Policy Issues in India’s Capital Markets in 2000, in New Economic Policies for a New India, Ed. Surjit S Bhalla, ICSSR, pp 185-210. Shah, Ajay; Thomas, Susan and Gorham, Michael (2009). India’s Financial Markets – An Insider’s Guide to How the Markets Work, Noida, UP: Elsevier. Singh, Jitendra; Useem, Mike and Singh, Harbir (2007). “Corporate Governance in India: Has Clause 49 Made a Difference?” Published in IndiaKnowledge@Wharton: January 25. Subramanian, Samanth (2010). “What is this Sebi-Irda-Ulip Issue all about,” available at http://www.livemint.com/ 2010/04/14162251/What-is-this-SEBIIRDAULIP-is.html World Bank (2004). Report on Observance of Standards and Governance, Corporate Governance Country Assessment, India.
G Sabarinathan is an Associate Professor in the Finance and Control Area at the Indian Institute of Management Bangalore (IIMB). He holds a Post Graduate Diploma in Management from IIMB and a Ph.D from the National Law School of India University, Bangalore. His current research interests are in the areas of financing small and innovative firms, venture
capital and regulation of securities markets. Prior to joining IIMB, he served in leadership positions in leading private equity funds in India. He continues to engage with Indian industry by serving on the investment committee of a private equity fund and by advising businesses on valuation issues. e-mail: [email protected]
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SEBI’S REGULATION OF THE INDIAN SECURITIES MARKET ...
doc_700455284.pdf
A key division within the capital markets is between the primary markets and secondary markets. In primary markets, new stock or bond issues are sold to investors, often via a mechanism known as underwriting. The main entities seeking to raise long-term funds on the primary capital markets are governments (which may be municipal, local or national) and business enterprises (companies). Governments tend to issue only bonds, whereas companies often issue either equity or bonds.
RESEARCH
includes research articles that focus on the analysis and resolution of managerial and academic issues based on analytical and empirical or case research
SEBI’s Regulation of the Indian Securities Market: A Critical Review of the Major Developments
G Sabarinathan
Executive Summary
Since the empowerment of the Securities and Exchange Board of India (SEBI) through an Act of Parliament in 1992, SEBI has come up with a number of initiatives aimed at regulating and developing the Indian securities market and improving its safety and efficiency. These initiatives have made an impact on nearly every aspect of the market. Some of those initiatives have transformed the market fundamentally. Particularly noteworthy is the growth in the following: • Market capitalization • Number of listed firms • Trading volumes and turnover both in the spot and futures markets. There is a growing network of financial intermediaries that operate in a highly competitive environment while being governed by a tight set of norms. India has one of the most sophisticated new equity issuance markets. Disclosure requirements and the accounting policies followed by listed companies for producing financial information are comparable to the best regimes in the world. The Indian securities market is among the safest and the most efficient trading destinations internationally. The Indian corporate governance code is compared to the Sarbanes Oxley Act of the USA. India has one of the fastest growing and well-developed asset management businesses in the world, with state-owned as well as private sector players. That said, the Indian market is often hostage to some scam or the other from time to time. Effective enforcement of compliance is cited as one of the reasons for these unsavoury episodes. The role that SEBI’s initiatives have played in bringing about this transformation of the market has not been researched comprehensively so far. Literature that has analysed the efficiency and the design of the Indian securities market has examined the role of certain specific regulatory provisions on the functioning of the securities market. So also the various annual reports of SEBI discuss the regulatory and other institutional developments that took place during the year under review. However, no attempt seems to have been made to take stock of all the various initiatives of SEBI so far and assess its impact on the activity in the securities market. This paper identifies some of the major interventions of SEBI relating to each of these aspects of the market and critically examines the economic consequences of the same. Such a stock-taking will enable a well-rounded and objective review of SEBI’s performance. It is also likely to suggest interesting areas for further research.
KEY WORDS Securities and Exchange Board of India (SEBI) Indian Securities Market Primary Market Secondary Market
VIKALPA • VOLUME 35 • NO 4 • OCTOBER - DECEMBER 2010
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n 1992, the Indian Parliament passed The Securities and Exchange Board of India Act, 1992, to establish the Securities and Exchange Board of India (SEBI) in its new incarnation as an empowered regulator of the Indian securities market. SEBI was established to strengthen the oversight of the securities market in India in the wake of a securities scam that surfaced in 1992. Since the establishment of SEBI, the Indian securities market has grown in terms of volume of transactions as evident from the data in Table 1. The number of new types of market participants and the increase in the number of players in each category is evident from Table 2. Many of the institutional improvements in the Indian securities markets have been documented in Shah (1999). Other papers by Shah and Thomas (2000) have focused mainly on the design of the securities market, risk management practices, and market microstructure. Sabarinathan (2010) provides a critical assessment of the adequacy and structure of the statutory levers that SEBI operates. The assessment indicates that SEBI is a suitably empowered and autonomous organization that has the necessary legal authority to be an effective regulator. Table 1: Measures of Market Activity Volumes
(All measures in billions of rupees, unless stated otherwise) MC 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 5,723 4,883 5,898 5,741 11,926 7,689 7,492 6,319 13,188 16,984 30,222 35,488 51,497 30,930 MC/GDP (%) 47.0 34.6 37.7 34.1 84.7 54.5 36.4 28.5 52.3 54.4 85.6 86.0 109.3 58.1 Turnover 2,274 6,461 9,087 10,234 20,670 28,810 8,958 9,689 16,209 16,669 23,901 29,015 51,308 38,521 Turnover Ratio (%) 40 132 154 178 173 375 120 153 123 98 79 82 100 125
I
This paper takes stock of SEBI’s achievements. It reviews briefly the more important of the various regulations that SEBI has promulgated and some of the quantitative measures relating to the developments in the market. It is similar to the work in Gokarn (1996) which relates to the period 1992-96. Gokarn (1996) focuses on the regulatory steps taken by SEBI during that period. This paper attempts to understand the developments in the Indian securities trade and link them to SEBI’s regulatory initiatives by drawing upon the data, literature, and SEBI’s annual reports that have emerged since Gokarn (1996). Establishing a cause-effect relationship between the two phenomena may not be easy with regard to some aspects of SEBI’s working, given the numerous forces that interact in the working of the securities market. However, the unmistakable contemporaneity of the working of the market and the regulatory steps taken by SEBI suggests the existence of a possible causal link between the two phenomena. The achievements have been reviewed along the following major areas1: (i) Primary market and issuance of securities (ii) Disclosure requirements (iii) Corporate governance (iv) Market for corporate control (v) Trading mechanisms (vi) Settlement systems (vii) Dematerialization (viii) Institutionalization of trading and ownership of securities (ix) Market integrity and insider trading (x) Ownership and governance of stock exchanges; and (xi) Compliance enforcement. The classification follows the framework developed in Sabarinathan (2010), where it was proposed that regulation was intended to promote efficiency by mitigating problems of information flow, agency costs, transaction costs, and the risk that the transaction might not be completed due to default by the counterparty to the transaction. Accordingly, Sabarinathan op cit identifies the aspects of a securities market’s functioning that the regulation must focus on. The classification above flows from that analysis.
PRIMARY MARKET AND ISSUANCE OF SECURITIES
SEBI has regulated the primary market through (i) the regulation of issuers’ eligibility to offer securities to the public (referred to as access restrictions) (ii) regulation
1
Source: Indian Securities Market Review, NSE (2009). MC stands for market capitalization. MC/GDP is the ratio of MC to GDP. Turnover ratio is the ratio of the turnover to the market capitalization.
This study reviews the more important aspects of SEBI’s regulatory activities. Some aspects such as the regulation of venture capital funds and credit rating agencies are not included in this review. SEBI’S REGULATION OF THE INDIAN SECURITIES MARKET ...
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Table 2: Development of the Network of Intermediaries in Indian Securities Market
SE Cash 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 21 22 22 22 22 22 22 23 23 23 23 23 22 22 21 19 19 SE Deriv 2 2 2 2 2 2 2 2 2 2 Brokers 5,290 6,413 6,711 8,476 8,867 9,005 9,069 9,192 9,782 9,687 9,519 9,368 9,128 9,335 8,472 8,517 8,652 Corp Brokers 0 143 616 1,917 2,360 2,976 3,173 3,316 3,808 3,862 3,835 3,746 3,733 3,961 4,110 4,190 4,308 Sub Brokers 0 202 876 1,798 3,760 4,589 5,675 9,957 12,208 13,291 12,815 13,684 23,479 27,541 44,074 62,471 MBs 74 422 790 1,012 1,163 802 415 186 233 145 124 123 128 130 152 155 137 RTI/ STA 0 100 264 334 386 334 251 242 186 161 143 78 83 83 82 76 71 DTs 0 0 20 23 27 32 34 38 37 40 35 34 35 32 30 28 30 CRAs 0 0 0 0 0 0 0 4 4 4 4 4 4 4 4 4 4 Depository 0 0 0 0 1 1 2 2 2 2 2 2 2 2 2 2 2 DPs 0 0 0 0 28 52 96 191 335 380 438 431 477 526 593 654 PMs 28 40 61 13 16 16 18 23 39 47 54 60 84 132 158 205 232 VCFs 0 0 0 0 0 0 0 0 35 34 43 45 50 80 90 106 133 FVCIs 0 0 0 0 0 0 0 0 1 2 6 9 14 39 78 97 129
Source: Various Annual Reports of SEBI; Author’s compilation. SE Cash: Corp Brokers: RTI/STA: CRAs: PMs: FVCIs: Stock exchange with a cash segment Corporate brokers Registrar to the Issue / Share transfer agent Credit rating agencies Portfolio managers Foreign venture capital investors SE Deriv: MBs: DTs: DPs: VCFs: Stock exchange with a derivative segment Merchant bankers Debenture trustees Depository participants Venture capital funds
of information production at the time of issue; and (iii) regulation of processes and procedures relating to issuance of securities. These aspects have been primarily governed through the SEBI (Issuer of Capital and Disclosure Requirements) Regulations, 2009 (ICDR) and a set of regulations that govern the various intermediaries working on the issuance process such as the merchant banker, registrar to the issue and so on.2 All three aspects have evolved considerably over the years. Access-related regulations have, for example, evolved from a regime of unrestricted access3 to equity markets to the current regime which uses a combination of size and profitability record as proxies for quality of the issuer to restrict market access. Over the years, SEBI has brought about numerous changes to the issue process. These have
2
ranged from items of minutiae such as the number of centres for receiving applications for public offerings to measures that substantively affect investor welfare such as the basis of allotment. SEBI relies on certification by the merchant banker for ensuring compliance with the regulations. The provisions cast the responsibility on the issue manager for validating the accuracy of the prospectus as well as for ensuring that other intermediaries involved in an issue such as the banker and registrar have the required license and that the underwriter has the financial capacity to provide the service. Incorrect certification would mean that the merchant banker runs the risk of facing stricture or monetary penalty or even being suspended or losing its license. Over time this certification mechanism has been continuously strengthened. (SEBI, 1995; 1996) Three important institutional developments transformed the primary markets fundamentally. First, the guidelines for book-building enabled issuers to price securities based on investor interest and market conditions prevailing at the time of the offer to the public, subject to a floor price that is announced in the prospectus and a 20
The ICDR was first promulgated as SEBI Disclosure and Investor Protection Guidelines in 1992. It was substantially rewritten in 1999, consolidating more than twenty six amendments that had been made to it over the years. The current version of ICDR 2009 has been amended three times, making the ICDR and its predecessors one of the most dynamic pieces of SEBI’s regulations. There were restrictions on access in the form of listing criteria that stock exchanges stipulated, but these restrictions were not imposed at the instance of SEBI.
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per cent band above the floor. Prior to the announcement of the regulations for book-building, in the regime that is commonly referred to as the fixed price regime, the prospectus was required to mention the offer price. (A modified version of the fixed price alternative is still available.) In the earlier fixed price regime, the offer price was thus fixed well in advance of the issue, exposing the issuer to the risk of failure of the issue in case there was an adverse change in market conditions. Second, dematerialization and electronic book-building made it possible to reduce the issue time from the opening of the issue to listing and trading from a mean of 122 days and a maximum of 991 days! (Madhusoodanan and Thiripalraju, 1997). Dematerialization allowed quick and
efficient allotment of securities and provided liquidity to the investor immediately on the completion of the issue. This in turn helped bring down the investor’s cost of applying to a public issue in terms of the cost of funds that was blocked in applying to the public issue. Thirdly, all these improvements appear to have led to a larger participation by institutional investors in public offerings. The growing popularity of book-building is evident from the data in Tables 3A and 3B. Even though the guidelines were announced as far back as 1996, the number of book-built issues started picking up from 2000-01, the year in which SEBI threw open book-building to issues of all sizes and made some important amendments to the guidelines. It is very tempt-
Table 3A: Book Built and Fixed Price Issues in Initial Public Offerings
Book Built Nos 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 0 5 13 1 2 9 15 54 66 83 17 Sum 0 1,711 1,035 834 255 2641 14,507 10,260 23,203 42,262 1,816 Fixed Price Nos 18 46 99 5 4 10 8 21 9 2 4 Sum 379 939 1427 248 784 550 155 504 209 68 183 Book Built Nos 0% 10% ‘12% 17% 33% 47% 65% 72% 88% 98% 81% Sum 0% 65% 42% 77% 25% 83% 99% 95% 99% 100% 91% Fixed Price Nos 100% 90% 88% 83% 67% 53% 35% 28% 12% 2% 19% Sum 100% 35% 58% 23% 75% 17% 1% 5% 1% 0% 9%
Table 3 B: Book Built and Fixed Price Issues in Follow on Public Offerings
Book Built Nos 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 Sum Fixed Price Nos 1 2 1 * * 4 2 7 2 2 Sum 20 1,986 5 * * 4,95 2,24 1,86 41 39 Book Built Nos (%) Sum (%) 0 0 0 * * 60 67 72 78 71 0 0 0 * * 97 96 99 97 100 Fixed Price Nos (%) Sum (%) 100 100 100 * * 40 33 28 22 29 100 100 100 * * 3 4 1 3 0
* * 6 4 18 7 5
* * 14,135 5,911 12,643 12,47 10,856
Source: Prime Annual Report on Primary Market, various issues, Author’s Analysis. *: No follow on public offerings during these years Tables show (i) the number of book built and fixed price issues (ii) the sum of capital mobilized through each of these issues and (iii) the proportion of number of issues and the amount of capital raised through each category as a percentage of total issuance in each of Initial Public Offering (IPO) and Follow-on Public Offering (FPO) category. IPOs would correspond to Unseasoned Public Offerings while FPO would correspond to Seasoned Public Offerings in the North American trade parlance.
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SEBI’S REGULATION OF THE INDIAN SECURITIES MARKET ...
ing to infer as such that the growth in volume of issuances was the result of the various institutional changes and the resultant interest among institutional investors in IPOs. However, a more careful analysis would be necessary to understand the drivers of growth in public offering volumes. For example, it is highly likely that developments relating to the secondary market that reduced the settlement cycle and trade guarantee funds that reduced risks in settlement of trades may also have persuaded foreign institutional investors to participate in public offerings. (Also see discussion on secondary markets in this paper.) Table 2 brings out another interesting aspect of the evolution of the primary markets: The number of merchant bankers, registrars to issues, and share transfer agents increased to begin with and then declined over time. This movement coincides with the increase in the number of public issues during the early and mid-nineties and the subsequent decline in the number during the later part of that decade and thereafter. A definitive comment on these movements would require a thorough investigation of the factors that influenced the prospects for these intermediaries. A cursory examination suggests that SEBI’s regulatory interventions governing the activity of the various intermediaries may have played an important part in these developments. For example, in the case of merchant bankers, two regulatory developments may have significantly affected the structure of the merchant banking industry. One, merchant bankers were initially divided into four categories based on their level of capital. Each category of merchant bankers was restricted to a certain range of business offerings (SEBI, 1994). These regulations may have affected the number of players offering various types of services.4 Second, the restriction on their taking up non-merchant banking and fundbased activities that was imposed in 1997 (SEBI, 1998), may have played a part in the restructuring of the merchant banking industry and the exit of a large number of players.5
4 5
DISCLOSURE
Disclosure and flow of information fall into three categories, namely, disclosure at the time of a public offering, on-going or periodic disclosure after listing of securities and transaction-related disclosures. SEBI enhanced the disclosures required of a company at the time of a public offering by building on the requirements in the Companies Act, 19566 . The increase in disclosures was necessitated by “the quantitative growth of the market and the freedom to price issues had also raised questions about the quality of issues entering the market.” (SEBI, 1996). SEBI’s disclosure standards are not limited to accounting information presented in the prospectus. It extends to other issue-related communications such as advertisements. As a result, the disclosure requirements relating to an issue and currently in vogue are a far cry from the relatively rudimentary requirements specified in the Companies Act. The continuing disclosure regime under the Companies Act that was in force prior to the establishment of SEBI suffered from three principal shortcomings (i) low frequency, at once a year (ii) insufficient and poorly administered deterrents against non compliance; and (iii) a common set of disclosure obligations for companies with limited as well as widely distributed ownership. In order to improve the frequency of disclosure, SEBI constituted a committee in 1996 to examine the question of continuing disclosure7 . SEBI directed stock exchanges to implement most of the recommendations of the committee.8 Continuing disclosure requirements were further enhanced in 1999-2000. With the introduction of the corporate governance requirements in 200001, disclosure of materially significant related-party transactions with promoters, directors, management, subsidiaries, relatives and so on were added. In order to
6
Based on recommendations of two committees, in 1995-96 and 200001, under the Chairmanship of Mr. Y H Malegam. The Committee was chaired by Mr. C B Bhave. Prior to the constitution of the “Bhave Committee,” SEBI had mandated some piecemeal changes such as disclosing comparison of actual profitability with projected profitability and so on. The requirements of the committee included quarterly disclosure of financial results, publishing details of deployment of proceeds of public and rights issues half yearly, that the quarterly and half yearly disclosures have to be on the same basis as the accounting principles of the previous year (failing which the previous year’s figures have to be restated for comparability) and all other material events having a bearing on the operations or performance of the company as well as pricesensitive information.
This categorization and restriction of activities was withdrawn in 1997. One possible explanation is that the investment banking industry which was in its early days at that time attracted a large number of poorly capitalized players. These players depended on income from investments in securities for their survival and growth. The funds for these investment activities came from public deposits that were ostensibly raised for asset financing type activities. In a sense these firms’ investments in securities were highly leveraged. When the securities markets collapsed, these merchant banking firms defaulted on their deposits, triggering off a crisis in the retail debt markets as well. The restriction on the deposit taking and asset financing activities of merchant banks was partly in response to these crises.
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institutionalize the evolution of the continuing disclosure process, SEBI entered into a collaborative initiative with the Institute of Chartered Accountants of India (ICAI) and formed the National Committee on Accounting Standards (NACAS). Over the years, the disclosure requirements have started mandating a more detailed presentation of the performance of the company. SEBI has also focused on the flow of information on the trading side. SEBI started by insisting that the brokers’ notes to their clients indicated the price and the brokerage separately for the orders that they executed for their clients (SEBI, 1992-93). SEBI then followed it up by asking brokers to account for their own proprietary funds deployed in the trade and client funds separately (SEBI, 1993-94). Rudimentary as it might sound, these were big steps forward in improving transparency levels in trade execution. The introduction of open electronic limit order books in all the exchanges was perhaps the second and the most important step in increasing the transparency of trades. Following SEBI’s directive, exchanges have improved the flow of trade-related information by taking advantage of technology and minimizing instances of gaps in flow of information as in the case of off market transactions, such as block trades, which are now required to be routed through the electronic trading systems of the stock exchange. Exchanges have also been required to invest in market surveillance systems which could help detect insider trading or market manipulation transactions. Overall, the analysis in Sabarinathan (2010) indicates that the regulations now require a copious flow of information which should result in a substantial improvement in the discovery of prices, both at the time of an issuance as well as once the securities are listed for trading.
role of the Board of Directors of a company collectively and that of directors individually have been dealt with under the Companies Act, long before corporate governance emerged as the hot topic that it is currently.9 SEBI’s initiatives starting with the deliberations of two committees in succession10, culminated in the introduction of Clause 49 in the listing agreement. The main items covered under Clause 49 are: (i) ensuring independence of the Board and disclosure of their compensation (ii) ensuring correctness, sufficiency, and credibility of disclosures (iii) requirement of financial literacy among members of the audit committee and expertise in accounting/financial management among them (iv) whistle-blower policy (v) requirement of a formal risk management policy (vi) certification of financial and cash flow statements by the CEO/CFO to the Board; and (vii) quarterly reporting to the stock exchanges on compliance with the requirements of every provision of Clause 49. Compliance with Clause 49 was mandated for all the listed companies by December 31, 2005 while companies making an IPO are required to comply with Clause 49 at the time of the issue. The provisions of Clause 49 are often compared with those of Sarbanes Oxley Act 2002 and are said to draw upon that legislation in the objectives as well as approach to regulating corporate governance.11 It is perhaps too early to assess the impact of Clause 49 on the governance standards of companies in India although some studies such as Black and Khanna (2007) have tried to estimate the impact of compliance with Clause 49 on the market valuation of companies. Some observers have expressed doubts about whether mere enactment of regulation will suffice to ensure true independence of the Board and raise the standards of governance.12 At least one survey (KPMG, 2008) found that corporate governance in India still has a long way to go in protecting minority shareholders, empowerment of independent directors, and risk management practices, three of the key areas that Clause 49 addresses. Only 19 per cent of the respondents to the survey felt that there
CORPORATE GOVERNANCE
SEBI has led the effort in improving standards of corporate governance in India in companies that are already listed and are about to be listed. Some elements of the
9
The Companies Act has provisions governing the constitution of the board of directors of a company (Section 255 to Section 266), disqualification of directors (Section 274), restrictions on maximum number of directorships (Section 275 to Section 278), remuneration of directors (Section 309 to Section 311), vacation of office by directors (Section 283 and Section 284), procedure to be followed in the case of business in which directors are interested (section 299 to Section 302), powers of the board (section 291 to section 293). Further, Section 211 requires that the accounts presented to shareholders will be
authenticated by the directors of the company and Section 224 states that the accounts will have to be audited.
10
The two committees were headed by Mr Kumar Mangalam Birla and Mr. N R Narayanamurthy respectively. See for example Singh, Useem and Singh (2007) For one such view see, for example, Sen (2004)
11 12
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SEBI’S REGULATION OF THE INDIAN SECURITIES MARKET ...
has been a “marked improvement” in corporate governance standards in India while 71% of the respondents felt that in comparison with developed countries, penalties meant to discipline poor and unethical governance was low.
The data shows an overall increase in the number of corporate acquisition initiatives during the period. The Takeover Code is an initiative attributable to SEBI.
TRADING MECHANISM
SEBI played an important role in moving many Indian stock exchanges to adopt an electronic trading system.13 The automation of trading and post trading systems on the major stock exchanges (i) reduced manipulation of prices and concealment of audit trails of such manipulation (ii) ensured that investors received time-based priority and correct prices for their trades; and (iii) fundamentally altered the economics of the business of stock exchanges as the operations of NSE and The Stock Exchange, Mumbai were allowed to be extended electronically to other cities from 1996-97. Prior to NSE and BSE going national, the operations of stock exchanges were limited to geographical regions by their charter and approval. As a result the share of trade on regional stock exchanges dropped steadily from 57 per cent in 1994-95 (SEBI, 1995) to 4 per cent in 2002-03 (SEBI, 2003). The fact that SEBI had to exert pressure on some of the exchanges to switch to electronic trading in spite of the signals from the market (from the success of NSE) that electronic trading was likely to be the way forward for stock exchanges in India, suggests that this was an area where market forces may not have provided the required incentives for the incumbent players to choose what was in the best interests of the trade as a whole. (For a more detailed discussion on how the government has used crises to push reform through in the financial markets, see Shah, 2000b).
MARKET FOR CORPORATE CONTROL
Takeovers and acquisitions are regulated by the SEBI (Substantial Acquisition of Shares and Takeover) Regulations 1997, also known as the Takeover Code. The Takeover Code is itself a substantially modified version of the 1994 Code and was modified again substantially in 2002. The Takeover Code has been subject to numerous criticisms. Some of the criticisms are: Poor drafting leading to considerable ambiguity in interpretation, excessive discretion in SEBI’s hands in the administration of the Code, that the Code is favourable to incumbent managements and not favourable to hostile acquisitions which are held to be essential for a healthy market for corporate control, exemptions from applicability of the Code available to various types of acquisitions such as preferential offers, inter se transfers, rights issues and so on, and that the open offer of 20 per cent does not allow all shareholders who wish to exit to be able to sell their shares to the acquirer. Not surprisingly, the Code is being subject to a complete revision. Data on the level of activity under the Code is in Table 4. Table 4: Acquisitions and Takeover under the SEBI Takeover Code
1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Offers (Nos) 8 14 30 26 43 41 63 83 77 81 88 65 60 104 104 116 86 Exemptions (Nos) 10 6 11 29 32 5 4 11 21 16 17 18 17 13 15 31 15 Total (Nos) 18 20 41 55 75 46 67 94 98 97 105 83 77 117 119 147 101
SETTLEMENT SYSTEMS
SEBI directed all SEs in 1992-93 to adopt a weekly settlement progressively for all categories of shares by 199495. With the introduction of dematerialization of securities, SEBI moved the stock exchanges gradually to a T+2 rolling settlement from April 2003. These developments were also accompanied by the discontinuation of the “badla,” a form of futures-based trading which was used as a disguised risk management product. Alongwith the settlement, SEBI also directed the stock exchanges to set up trade and settlement guaran13
Source: Various Annual Reports of SEBI (compilation by author) VIKALPA • VOLUME 35 • NO 4 • OCTOBER - DECEMBER 2010
SEBI pursued automation initiatives with Mumbai, Pune, and Delhi in 1995-96 (SEBI (1996)) and with Jaipur, Magadh, and Inter-Connected Stock Exchanges India Ltd. in 1998-99.
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tee funds to assure investors that they would not face the risk of loss on account of a default by the counterparty. By 1999-2000, sixteen out of the twenty-three exchanges that had any turnover had all set up trade guarantee funds (SEBI, 2000). The reduction of settlement cycles and the introduction of rolling settlement substantially eliminated the risks arising from the long settlement cycles combined with ‘badla,’ namely, defaults, payment crises, and temporary closure of the stock exchanges. The combined result of these initiatives is the reduction in transaction costs that is presented in Tables 5 A and B. (Shah, 1999 and Shah, Thomas and Gorham, 2009). Table 5 A: Indicators of Trading Efficiency on Indian Securities Markets
1994 (%) Trading Fees to Intermediaries 3.00 Market Impact Cost Clearing Counterparty Risk Settlement Paperwork Bad paper risk Stamp Duty
Source: Shah (1999). 1. Standard represents Best in International Standards in terms of lowest cost. 2. Demat represents electronic settlement through depository. 3. Bad Paper Risk is the chance that the trade may not go through due to defects in physical securities that allows the issuer of the security to legally refuse transfer. These risks disappear in depository based settlement and hence the cost in that case is zero.
Table 5B: Estimate of Impact Cost in Indian Securities Market
Year 1996 2001 2002 2003 2004 2005 2006 2007
Source: Shah (2009). Note: These estimates are for a transaction of Rs 5 million on the Nifty, the broad market index of National Stock Exchange.
Impact Cost (%) 0.25 0.20 0.12 0.10 0.09 0.08 0.08 0.08
1999 Physical Demat (%) (%) 0.50 0.25 0.00 75.00 50.00 25.00 0.25 0.25 0.00 0.10 0.00 0.00
Standard (%) 0.25 0.20 0.00 0.05 0.00 0.00
0.75 Present 0.75 0.50 0.25 >5.25
These initiatives did not meet the needs of the rapidly burgeoning trade. A committee appointed by SEBI confirmed the need for an early introduction of dematerialization14 (SEBI, 1998). Starting January 1998, dematerialization was made compulsory in a phased manner for all issuers and all IPOs by September 2001. Dematerialization brought about several benefits: (i) Greater liquidity due to the withdrawal of the requirement of minimum trading lot sizes and reduced “no-delivery” period (ii) No loss or risk on account of mutilation or loss of scrips (iii) Shorter periods of book closure for corporate actions such as dividends payments, rights or bonus issues; and (iv) Eliminated delays in transfer that were intended to withhold transfers so as to create an artificial shortage of scrips in the market. Table 6 provides data that trace the progress in dematerialization since 2001-02. The table shows how dematerialization benefitted from the momentum that was provided by the regulatory push from SEBI. The value of trades settled through the depositories, the number of companies which dematerialized their shares, and the number of DPs have all shown an increase over the years. More importantly, starting 2003-04, in each of the years to-date, more than 99.7 per cent of the number of shares delivered on the BSE and 99.5 per cent of the shares in terms of value delivered on the BSE and 100 per cent of the shares in terms of volume as well as value delivered on the NSE were settled through one of the two depositories. Not surprisingly, the bad delivery during this period progressively declined to negligible levels up to 2008-09 on the BSE while
14
DEMATERIALIZATION
With the entry of FIIs starting 1992 and the setting up of mutual funds in the private sector in 1994, the institutionalization of stock trading and, concomitantly, trading volumes had increased considerably over the years. (Table 1 shows the growth in the turnover on stock exchanges over the years.) Various alternatives emerged to tackle the enormous volumes of post-trade processing work such as consolidation of smaller trading lots into a single piece of paper known as a “jumbo certificate” and specialized custodial services. (SEBI, 1994).
The Committee was headed by Mr R Chandrasekharan. SEBI’S REGULATION OF THE INDIAN SECURITIES MARKET ...
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Table 6: Progress in Dematerialization
NSDL Cos Live 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 4,172 4,761 5,212 5,536 6,022 6,483 7,354 7,801 DPs Value Settled (Rs bn) 1,088 1,269 2,784 3,970 6,477 8,305 14,207 10,889 Cos Live 4,284 4,628 4,810 5,068 5,479 5,589 5,943 6,213 CSDL DPs Value Settled (Rs bn) 314 331 837 894 1,371 1,971 3,832 2,240
Table 7: Mobilization of Funds by FIIs and Indian Mutual Funds
(All amounts in billions rupees) Mutual Funds Gross 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 227 612 930 1,645 3,147 5,902 8,397 10,981 19,385 44,644 54,264 Redemption 237 423 838 1,573 3,105 5,434 8,375 10,454 18,445 43,106 54,547 Net -950 190 91 72 42 468 22 528 940 1,538 -283 AUM 689 1079 906 1,006 1,093 1,396 1,496 2,319 3,263 5,052 FIIs Net -16 101 99 88 27 458 459 415 308 662 Cumulative 298 399 499 586 613 1,071 1,530 1,944 2,253 2,915 2,456
226 241 242 340 364 707 803 946
350 397 108 243 438 529 740 815
Source: Various Annual Reports of SEBI and Author’s Compilation. NSDL is National Securities Depository Ltd, CDSL is Central Depository Services Ltd. DP is Depository Participants Companies Live represents the companies whose securities are settled through the depository Value settled represents the value of trade settled through that depository
4,173 -458
Source: Various Annual Reports of SEBI and Author’s Compilation. Note: FIIs stands for Foreign Institutional Investors AUM is Assets under Management Net stands for net funds raised, ie., Gross funds raised less redemptions
no bad deliveries were reported on the NSE. Bad deliveries as a fraction of value delivered was 0.44 per cent on NSE prior to the introduction of dematerialization (SEBI Handbook, 2009). In theory, given the benefits of dematerialization to the investor, it would be reasonable to expect that the drive for dematerialization would have come from stock exchanges. The role for the regulator should have been limited to putting the regulatory framework in place. In practice, given the scope for market manipulation that paper-based trading offered, it is doubtful that dematerialization would have been possible without the “element of compulsion” that SEBI acknowledged in its annual report (SEBI, 1999).
INSTITUTIONALIZATION OF TRADING AND OWNERSHIP OF SECURITIES
A key feature of many of the better developed securities markets is the extent of institutional ownership of shares as well as the increasing share of institutions in securities trade. Table 7 provides an indication of the increase in institutional flow of capital into the securities market in India from two important institutional sources, namely, mutual funds and foreign institutional investors (FIIs). SEBI announced a regulatory framework, SEBI (Foreign
VIKALPA • VOLUME 35 • NO 4 • OCTOBER - DECEMBER 2010
Institutional Investors) Regulations 1995, governing regulation of portfolio investments by FIIs. These regulations made it possible for investors of foreign origin to make portfolio investments in Indian companies. Over time, these regulations have evolved to allow FIIs to play a larger part in the Indian securities market. The changes have been in terms of enabling a wider variety of investment product offerings for foreign investors such as participatory notes and investment in debt, increase in the percentage of investment companies that FIIs are allowed to hold as well as the ease of administration of the pools of capital that FIIs manage. While the interest of FIIs in Indian securities may have been the result of the attractive performance of Indian companies, SEBI’s evolving regulations have made it possible for these institutions to bring in increasing sums of capital. Allen, Chakrabarti and De (2007) estimate that the correlation between monthly net FII inflows and monthly Sensex returns is 0.49 from 1994 to 2005, suggesting a strong and increasing link between FII inflows and market returns, but of unsure causal direction. Apart from its value as a source of capital, FII investments are also said to be important for the impact they seem to have on the governance and, therefore, the market valuation of firms. Goswami (2000) argues that international investors have exerted pressure on Indian corporates to raise their
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standards of governance. The point of distinction brought out by Patibandla (2005) is that state-owned or state-controlled investors did not bring about comparable improvements in governance. Similarly, the announcement of SEBI (Mutual Funds) Regulations, 1996 enabled private sector players to enter the asset management industry. Private sector mutual funds established prior to these guidelines were beset with problems of poor management. Their initial success in garnering investment funds at the expense of their public sector counterparts was short-lived as the funds mobilized declined sharply in 1997-98, based on data on net annual mobilization of resources by mutual funds.15 Resource mobilization by private sector mutual funds has been on a growth path since 1998-99. SEBI’s regulation of mutual funds has sought to improve the quality of performance-related disclosures so as to present a fair picture, reduce fees that investors are charged to reasonable levels, minimize, if not eliminate altogether, opportunistic behaviour by fund managers as well as sponsors of funds, and above all, ensure that mutual fund schemes are launched by players who have the financial capacity to meet requirements of capital adequacy and that the structure of the fund management business has some minimum safeguards to protect investors’ interests and preserve their capital against misuse by sponsors or the managers of the funds. At the same time, the guidelines have been flexible to allow innovation and the launch of a number of new products that address investor needs, although not at the pace that some observers may have liked. It is highly likely that the regulations played a part in the orderly growth of the asset management industry in India.
law abiding economy.” Further, there appears to be some empirical evidence that insider trading can increase volatility. SEBI’s first enactment to curb insider trading, namely, SEBI (Prohibition of Insider Trading) Regulations, 1992 did not make much progress due to poor enforcement. These regulations, again, have been amended substantially over time. SEBI’s current approach centres around prevention of insider trading by requiring listed companies, intermediaries, and advisors to set up internal systems for preventing insider trading and reporting on compliance or otherwise to SEBI. There has been some concern that this approach imposes too much of a burden on the organizations and that this can be especially onerous in the case of smaller organizations. The general view, however, appears to be that given the difficulty in proving and prosecuting an offence of insider trading, the approach of prevention is better. An equally serious concern has been around manipulative practices in the Indian securities markets. Manipulative practices are usually resorted to by traders and brokers in the market. Often they involve the owner managers or promoters of companies who may stand to gain from these practices. These have typically been meant to create a false market in the securities or to push the price of the securities down to unwarrantedly low levels through circular trading and other means. Such practices have not been limited to the so-called “penny stocks” alone but have often been practised in the shares of larger and well-established companies as well. Thus manipulative practices can harm the interests of small and large investors alike as well as that of the companies whose shares are subject to such practices. SEBI has addressed these through the SEBI (Fraudulent and Unfair Trade Practices) Regulation, 2003. SEBI has backed up these regulatory measures with a substantial investment in surveillance of the markets. Progressively, much of the responsibility for surveillance has been handed over to the stock exchanges. SEBI has taken an active part in overseeing the level and nature of surveillance systems installed in the various exchanges (See various annual reports of SEBI for a discussion on this aspect). Protocols have been established for investigating unusual movements in the prices of securities as well as for the stock exchanges to report these incidents to SEBI. These are in addition to the mechanism that suspends trading for varying periods of time in order to curb excessive volatility, also known
SEBI’S REGULATION OF THE INDIAN SECURITIES MARKET ...
MARKET INTEGRITY AND INSIDER TRADING
There has been an increasing recognition that in order to maintain the confidence of investors in the public securities market, it is essential that some economic agents who possess an informational advantage over the others do not exploit the same to derive pecuniary gains for themselves. This view has been captured in a quote attributed to Mr. Arthur Levitt, a former Chairman of the Securities and Exchange Commission of the USA that insider trading “has utterly no place in any fair-minded
15
Based on data on net annual mobilization of resources by Indian mutual funds available at http://rbidocs.rbi.org.in/rdocs/Publications/DOCs/ 78T_HB150909.xls, accessed on June 7, 2010.
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as “circuit breakers.” SEBI’s effort at improving the integrity of securities markets also includes its attempts at improving the governance of stock exchanges, which are discussed below. In particular, the separation of ownership and trading rights should enable the stock exchanges to effectively curtail the level of manipulative practices in the market. SEBI’s record in investigating these cases and taking action against these practices is provided in Table 8. The table suggests that SEBI has shown substantial progress in taking action against or disposing of such cases. However, the data should be interpreted with some caution. The quality of supervision depends on the proportion of instances that are identified and taken up for investigation. That is a fairly difficult matter to comment upon. The general view remains that the Indian securities market is still subject to several manipulative practices and instances of insider trading. Table 8: Record of Action against Insider Trading and Market Manipulation
Year 1996-97 2000-01 2004-05 2006-07 2007-08 2008-09 Insider Trading Taken Up Completed 4 6 7 18 7 14 0 4 10 10 28 14 Market Manipulation Taken Up Completed 67 47 110 95 12 52 0 27 148 77 115 86
ments has been summed up neatly in SEBI’s annual report: “It is expected that with this restructuring, stock exchanges would move away from their ’closed club character’ and re-orient themselves to function as public institutions.” SEBI’s most significant initiative to improve the governance of stock exchanges in India was the move to separate ownership and trading rights, referred to as corporatization and de-mutualization (C&D). BSE, the most prominent Indian stock exchange apart from NSE, was a classic example of a stock exchange that was owned and managed by members who had trading rights on the exchange. This was the case with many other regional exchanges as well. These exchanges often witnessed payment crises and were also considered lax in proceeding against erring members. By contrast, NSE which was owned by financial institutions and managed by a team of professionals independent of owners and members with trading rights had a better record of governance. These attributes were among the factors that enabled the NSE to emerge as a challenger to the BSE (See Shah and Thomas, 2000 for a discussion on the emergence of the NSE). Notwithstanding these developments, the stock exchanges did not come forth with a proposal to demutualize. The resistance to change from the rentiers who benefitted from the mutual ownership structure may have been one of the important reasons for the lack of interest in demutualization. The principal requirements of C&D was that all stock exchanges would be corporatized and not less than 51 per cent of the ownership of the stock exchanges was to be held by public other than shareholders having trading rights.16 As of 2008-09, sixteen of nineteen stock exchanges had completed the C&D requirements while three exchanges lost their recognition due to their inability to comply with the requirements (SEBI, 2009).
Source: SEBI Handbook of Statistics 2009.
GOVERNANCE OF STOCK EXCHANGES
From its early days, SEBI’s approach towards governance of stock exchanges seems to have been influenced by the findings from the inspection completed in 199293. The principal findings of this inspection were that the exchanges were not functioning as effective self-regulatory organizations (SROs), not regulating their members through the enforcement of bye-laws, rules and regulations, and paid minimal attention to redressal of investor grievances with long pending arbitration cases. (SEBI, 1993). In 1993-94, SEBI called for numerous amendments to the rules and Articles of Association of stock exchanges. These amendments mainly had to do with including public representatives on the governing bodies of stock exchanges and in the various statutory committees and a forced break before members could be reelected to the Board. The purpose of these amendVIKALPA • VOLUME 35 • NO 4 • OCTOBER - DECEMBER 2010
COMPLIANCE ENFORCEMENT
Forming a robust view on compliance enforcement is tough because that would require that all instances of market abuse and infraction are detected and dealt with. However, it may be tentatively inferred from the data on redressal of investor grievances in Table 9 that the
16
The change in ownership is governed by Securities Contracts (Regulation) (Manner of Increasing and Maintaining Public Shareholding in Recognised Stock Exchanges) Regulations, 2006 (MIMPS Regulations for short), enacted in November 2006.
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number of unaddressed grievances is a declining fraction of the number of grievances filed. SEBI has been less effective in prosecutions and penalizing erring market participants or non-compliance. Some observers attribute it to its lack of authority to prosecute while others attribute the lack of effectiveness to its inability to make a convincing case with the Securities Appellate Tribunal and the courts. The absence of specialized courts that have the capacity to deal with matters involving the financial markets is cited as a third reason for SEBI’s lack of success in securing prosecution against various offences. Table 9: Compliance Enforcement Record of SEBI
Complaints Received Redressed Redressal Rate (%) 21 80 95 95 94 94 94 Investigations Taken Up 2 122 68 130 120 25 76 Complete 2 55 46 179 102 169 116
ment of the regulations governing mutual funds, the industry was beset with the opportunistic behaviour of many early players, threatening the very existence of the private sector segment of the asset management business. In terms of the functioning of the market, SEBI has mandated an enormous increase in the flow of information at the time of listing, after listing and relating to the trade. The long history of the functioning of the capital market and securities industry in India suggest that voluntary disclosure may not have become a pervasive trend and that without a regulatory push, there would have been underproduction of information. SEBI has secured for itself a say in the process of writing accounting rules through NACAS. This position allows SEBI to ensure that the accounting policies of a listed firm are robust enough to provide reliable information to investors. SEBI’s comprehensive approach to the issue of flow of information should go a long way in aiding the scientific discovery of asset price. The cost of transaction and the risk of settlement have been minimized, making Indian stock exchanges one of the safest and the lowest cost securities markets in the world. The Indian mechanism for securities issuance is among the more sophisticated in the world with the introduction of the guidelines for book-building of issues. The complex web of contracts that governs the issuance process provides a mechanism by which the responsibility for defaults and non-compliance may be affixed on either or both of the important actors in the issuance process, namely, the issuer and the issue manager. Many of the agency problems that affected the securities trade have been addressed through the corporatization and demutualization of securities exchanges. In terms of enforcement, the data suggest that SEBI has achieved considerable progress in terms of detecting and disposing of instances of non-compliance or infractions. This has also been borne out by the relatively orderly functioning of the trading and settlement systems with hardly any instances of payment crises shutting down the exchanges as in the past until the mid-nineties. However, both the primary and secondary markets have been affected from time to time by various other troubles that sometimes assumed the proportion of a scam as in the case of the IPOs of Yes Bank, IDFC and several others. There have also been concerns that SEBI awards penalties too late and too little in comparison to the financial
SEBI’S REGULATION OF THE INDIAN SECURITIES MARKET ...
1992-93
129,111
27,007 1,465,883 2,501,801.00 2,685,993.00 2,740,959.00 2,772,577.00 2,503,560.00
1996-97 1,823,725.00 2000-01 2,629,882.00 2004-05 2,840,095.00 2006-07 2,907,053.00 2007-08 2,961,986.00 2008-09 2,674,560.00
CONCLUSION
Our review of SEBI’s performance in the eighteen years since its establishment in its current incarnation as an adequately empowered and independent regulator indicates that there has been an all-round improvement in the institutional framework in which the securities trade in India is conducted. Progressively, over time, nearly every actor who is directly connected with the securities trade has been brought under the regulatory ambit of SEBI. A combination of registration, licensing, eligibility conditions, and incentives allows SEBI to rein in non-compliant behaviour that could potentially affect the functioning of the securities market adversely. Similarly, many of the important processes have been regulated such as takeover activities, insider trading, manipulative practices, issuance of employee share options and so on. It is thus reasonable to claim that the regulatory framework is fairly comprehensive in its coverage of the securities trade. Some of these regulatory steps may have played an important part in the orderly growth in activity of certain key categories of players such as FIIs and mutual funds. Prior to the announce-
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scale of the infraction. SEBI is also said to have had a poor record in carrying its award through the appellate and the judicial systems. Without a more careful analysis, it is hard to say whether that is the result of poor legal preparation on the part of SEBI or the leniency of the appellate systems towards the trade. Similarly, SEBI’s record in enforcing the canons of corporate governance has not been impressive. The reason for the same may partly be the regulatory arbitrage that has been noted earlier due to the joint responsibility for oversight of companies between the MCA and SEBI. For reasons that are understandable, the two agencies approach regulatory oversight somewhat differently and are endowed with different organizational and legal capacities in the enforcement of their regulatory remit. The Indian corporate sector took advantage of this arbitrage when it successfully pushed back the initial, more demanding set of recommendations of the Committee headed Mr Narayana Murthy. The need for SEBI to address its monitoring and enforcement capabilities has been noted elsewhere, as in Shah (1999). SEBI also has been the target of criticism for the way it has dealt with certain categories of investors such as hedge funds, who used the participatory note to invest in India. Finally, while the data provide a quantitative measure of the work accomplished by SEBI, they do not measure its impact on the efficiency of the market. As Gokarn (1996) points out that exercise is complicated by the quick pace at which many of these developments have taken place as well as the number of other factors that affect the efficiency of the securities markets. Yet another aspect that is not addressed in this paper is the cost of regulation to issuers. The regulatory activity of SEBI imposes a cost on issuers. However, in the absence of an analysis that measures the impact of the regulation on the effi-
ciency of the market, it is not possible to assess whether the cost incurred is justified by the benefits. Such an analysis is impeded by the paucity of relevant data. In other jurisdictions that SEBI draws upon for its work such as the UK or USA, cost-benefit justification is an essential aspect of the evaluation of the utility of regulation. A related and more basic concern relates to SEBI’s approach to coming up with new regulations. Several of the provisions add to the cost of administration and compliance with the regulations. The requirement of having IPOs graded, minimum dilution, mandatory illiquidity on a part of the owner managers’ holding are instances of provisions that add to the cost of administering and complying with the regulations. There appears to be no empirical justification for these requirements. On the contrary, there is some evidence in Khurshed, et al (2008) to suggest that the grading of IPOs does not affect the underpricing of bookbuilt IPOs. On balance, however, the data suggest that SEBI has achieved considerable progress in terms of its oversight of the securities market both in quantitative and qualitative terms. In conclusion, the observation of High Level Committee on Financial Sector Reforms while recommending that the SEBI’s role as a regulator be expanded is worth quoting here: “SEBI is ideally suited for filling these roles for several reasons. First, the equity market (both spot and derivatives) is India’s most sophisticated and most liquid market; hence, SEBI’s knowledge is rooted in the strongest market. Second, the legal foundations of SEBI are relatively recent, and they are less subject to legacy issues. Finally, the vigorous pace at which the SEBI Act and SC(R)A have been amended in the last decade—in response to the requirements of the equity market— has helped position SEBI to take on new challenges.”
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Black, Bernard S, and Khanna, Vikramaditya S (2007). “Can Corporate Governance Reforms Increase Firm Market Values? Event Study Evidence from India,” Journal of Empirical Legal Studies, 4(4), 749-796. Franklin, Allen; Chakrabarti, Rajesh and De, Sankar (2007). “India’s Financial System,” Unpublished working paper, Electronic copy available at http://ssrn.com/abstract=1261244 Gokarn, Subir (1996). “Indian Capital Market Reforms, 199296: An Assessment,” Economic and Political Weekly, April 13. Goswami, Omkar (2000). “The Tide Rises Gradually – CorpoVIKALPA • VOLUME 35 • NO 4 • OCTOBER - DECEMBER 2010
rate Governance in India,” downloaded from http:/// www.oecd.org/dataoecd/6/47/1931364.pdf on July 4, 2005. KPMG Audit Committee Institute (2008). “The State of Corporate Governance in India -- A Poll,” KPMG India. Khurshed, Arif; Paleari, Stefano; Pandey, Alok and Vismara, Silvio (2008). “IPO Garding in India: Does It Add Value to the Book Building Process,” Unpublished Working Paper accessed from www.unibg.it/dati/bacheca/530/ 36104.pdf Madhusoodanan, T P and Thiripalraju, M (1997). “Underpricing in Initial Public Offerings: The Indian Evidence,”
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Vikalpa, 22(4), 17-30. NSE (2009). Indian Securities Market: A Review, Mumbai: National Stock Exchange of India. Patibandla, Murali (2005). “Equity Pattern, Corporate Governance and Performance: A Study of India’s Corporate Sector,” Journal of Economic Behaviour and Organisation, Vol 30, 1-16 . Planning Commission (2008). A Hundred Small Steps-Report of the Committee on Financial Sector Reforms, New Delhi: Sage Publications India. SEBI: Various reports of the annual report from 1992-93 to 200809. Sabarinathan, G (2007). “A Critique of SEBI’s Regulation of Public Offerings of Equity Shares and Convertible Securities in India,” Unpublished Thesis submitted to the National Law School of India University. Sabarinathan, G (2010). “Securities and Exchange Board of India and the Regulation of Indian Securities Market” Working Paper No 2010-06-309, Unpublished working paper, Indian Institute of Management, Bangalore. Sen, Dilip Kumar (2004). Clause 49 of Listing Agreement on Corporate Governance, The Chartered Accountant, De-
cember, pp 806-811. Shah, Ajay (1999). “Institutional Change on India’s Capital Markets,” Economic and Political Weekly, 34(3-4), 183-194. Shah, Ajay and Thomas, Susan (2000a). “David and Goliath: Displacing A Primary Market, Global Financial Market, Spring, 14-23. Shah, Ajay and Susan Thomas (2000b), “Policy Issues in India’s Capital Markets in 2000, in New Economic Policies for a New India, Ed. Surjit S Bhalla, ICSSR, pp 185-210. Shah, Ajay; Thomas, Susan and Gorham, Michael (2009). India’s Financial Markets – An Insider’s Guide to How the Markets Work, Noida, UP: Elsevier. Singh, Jitendra; Useem, Mike and Singh, Harbir (2007). “Corporate Governance in India: Has Clause 49 Made a Difference?” Published in IndiaKnowledge@Wharton: January 25. Subramanian, Samanth (2010). “What is this Sebi-Irda-Ulip Issue all about,” available at http://www.livemint.com/ 2010/04/14162251/What-is-this-SEBIIRDAULIP-is.html World Bank (2004). Report on Observance of Standards and Governance, Corporate Governance Country Assessment, India.
G Sabarinathan is an Associate Professor in the Finance and Control Area at the Indian Institute of Management Bangalore (IIMB). He holds a Post Graduate Diploma in Management from IIMB and a Ph.D from the National Law School of India University, Bangalore. His current research interests are in the areas of financing small and innovative firms, venture
capital and regulation of securities markets. Prior to joining IIMB, he served in leadership positions in leading private equity funds in India. He continues to engage with Indian industry by serving on the investment committee of a private equity fund and by advising businesses on valuation issues. e-mail: [email protected]
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SEBI’S REGULATION OF THE INDIAN SECURITIES MARKET ...
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