RETURNS IN PRIMARY MARKETS
MODERNIZATION
The impact of the reforms is most pronounced in the area of modernization of the market. The main drawback of the Indian capital markets was the prevalence of obsolete systems and practices. Modernization involved replacing them with new systems, which are in line with those existing in advanced capital markets.
Technology has played a vital role in the whole process. The changes are aimed at establishing transparent trading system, efficient clearing and settlement system, reducing transaction costs, introducing of risk management products, eliminating paper by setting up of depository, etc.
i. Free Pricing: The abolition of the office of the Controller of Capital Issues
resulted in the emergence of a new era in the primary markets. All controls on the pricing, designing and tenure of the instruments were abolished. A wide variety of instruments were designed to meet the specific requirements of the issuers and the investors. The issuers were also given the freedom to price the instruments. It was left to the market forces to decide the appropriateness of the pricing.
ii. Entry Norms: Hitherto there were no restrictions for a company to tap the capital markets. This resulted in a massive surge of small cap issues. Many of the companies were promoted by persons with dubious credentials. Most of these shares were not even traded in the secondary markets after listing. Several investors lost heavily by investing in these shares. The need for transparent entry barriers was felt. SEBI introduced eligibility norms in the form of dividend track record for existing companies and compulsory appraisal of projects for new companies.
iii. Disclosures: The quality of disclosures in the offer documents was extremely poor. Several vital pieces of adverse information was not disclosed in the offer document. SEBI has introduced stringent disclosure norms. The Malegam Committee was appointed to suggest measures to increase the levels of disclosures by Indian issuers. Most of the recommendations of the Committee have been implemented. The attempt is to make Indian disclosure norms conform to global standards.
iv. Book Building: Book building is the process of price discovery. One of the drawbacks of free pricing was the pricing mechanism. The issue price had to be decided around 60-70 days before the opening of the issue. Further, the issuer has no clear idea about the market perception of the price determined. Introduction of book building helps overcome this limitation and results in market driven pricing of securities.
v. Streamlining the Procedures: All the procedural formalities were streamlined. Many of the operational aspects were hitherto unregulated and different practices were being followed. SEBI has issued guidelines to ensure uniform procedures. Many aspects of the operations have been made more transparent.
vi. Registration of Intermediaries: SEBI started the process of registration of some of the intermediaries associated with the process of issue management. This is done to ensure professionalisation of the intermediaries and to curb the malpractices indulged by some of the intermediaries.
MODERNIZATION
The impact of the reforms is most pronounced in the area of modernization of the market. The main drawback of the Indian capital markets was the prevalence of obsolete systems and practices. Modernization involved replacing them with new systems, which are in line with those existing in advanced capital markets.
Technology has played a vital role in the whole process. The changes are aimed at establishing transparent trading system, efficient clearing and settlement system, reducing transaction costs, introducing of risk management products, eliminating paper by setting up of depository, etc.
i. Free Pricing: The abolition of the office of the Controller of Capital Issues
resulted in the emergence of a new era in the primary markets. All controls on the pricing, designing and tenure of the instruments were abolished. A wide variety of instruments were designed to meet the specific requirements of the issuers and the investors. The issuers were also given the freedom to price the instruments. It was left to the market forces to decide the appropriateness of the pricing.
ii. Entry Norms: Hitherto there were no restrictions for a company to tap the capital markets. This resulted in a massive surge of small cap issues. Many of the companies were promoted by persons with dubious credentials. Most of these shares were not even traded in the secondary markets after listing. Several investors lost heavily by investing in these shares. The need for transparent entry barriers was felt. SEBI introduced eligibility norms in the form of dividend track record for existing companies and compulsory appraisal of projects for new companies.
iii. Disclosures: The quality of disclosures in the offer documents was extremely poor. Several vital pieces of adverse information was not disclosed in the offer document. SEBI has introduced stringent disclosure norms. The Malegam Committee was appointed to suggest measures to increase the levels of disclosures by Indian issuers. Most of the recommendations of the Committee have been implemented. The attempt is to make Indian disclosure norms conform to global standards.
iv. Book Building: Book building is the process of price discovery. One of the drawbacks of free pricing was the pricing mechanism. The issue price had to be decided around 60-70 days before the opening of the issue. Further, the issuer has no clear idea about the market perception of the price determined. Introduction of book building helps overcome this limitation and results in market driven pricing of securities.
v. Streamlining the Procedures: All the procedural formalities were streamlined. Many of the operational aspects were hitherto unregulated and different practices were being followed. SEBI has issued guidelines to ensure uniform procedures. Many aspects of the operations have been made more transparent.
vi. Registration of Intermediaries: SEBI started the process of registration of some of the intermediaries associated with the process of issue management. This is done to ensure professionalisation of the intermediaries and to curb the malpractices indulged by some of the intermediaries.