Description
GROWTH OF SE
SECURITIES LAWS AND CAPITAL MARKETS –
CHANGING SCENARIO
DIVYA SAXENA* LEENA JAIN** ANKUR JAIN***
INTRODUCTION
Transfer of resources from those with idle resources to others who have a
productive need for them is perhaps most efciently achieved through the securities
markets. Stated formally, securities markets provide channels for allocation of
savings to investments and thereby decouple of these two activities. As a result, the
savers and investors are not constrained by their individual abilities, but by the
economy’s abilities to invest and save respectively, which inevitably enhances
savings and investment in the economy.
During the late !"#s, the developing countries started liberali$ing their %nancial
sectors. &ncreased emphasis was put on the development of e'uity markets. &ndia
also followed this path. Stock markets grew rapidly in &ndia during the late !"#s and
early !!#s.
(ver the decade of the !!#s, many important policy initiatives have focused on
fostering li'uidity and efciency of the Securities markets. )apital markets have
taken a prominent place in the developing countries %nancial system during the last
decade.
To promote and develop the )apital markets various securities laws had been
enacted during the decade.
The four main legislations governing the securities market are*
+ the SEBI Act, 1992, which establishes S,-& to protect investors and develop and
regulate securities market.
+ the Companies Act, 1956, which sets out the code of conduct for the corporate
sector in relation to issue, allotment and transfer of securities, and disclosures
to be made in public issues.
+ the Secuities Contacts !Re"u#ation$ Act, 1956, which provides for regulation of
transactions in securities through control over stock e/changes. and
+ the Depositoies Act, 1996, which provides for electronic maintenance and transfer
of ownership of demat securities.
Since its inception in !!0, S,-& had been promoting and developing the capital
market. The country had witnessed a ma1or shift from mandate2based regulations
before the !!#s to disclosure based regulations in recent times. &ts regulatory
1urisdiction e/tends over corporates in the issuance of capital and transfer of
securities, in addition to all intermediaries and persons associated with securities
market. &t can conduct en'uiries, audits and inspection of all concerned.
Capita# %a&ets' (esent Scene
The ,'uity markets all over the world are becoming increasingly integrated over
time. The securities markets in &ndia witnessed several policy initiatives during the
year 0##02#3, which further re%ned the market micro2structure, moderni$ed
operations and broadened investment choices for investors. The irregularities in the
securities transactions in the last 'uarter of the previous %nancial year hastened the
introduction and implementation of several reforms. 4hile a 5oint 6arliamentary
7 A)S
77 A)S
777 8anagement Trainee
)ommittee was constituted to go into the irregularities and manipulations in
transactions relating to securities, decisions were taken to complete the process of
demutuali$ation and corporatisation of stock e/changes to implement the decision to
separate ownership, management and operation of stock e/changes and to e9ect
legislative changes for investor protection and to enhance the e9ectiveness of S,-&
as the capital market regulator.
The markets have been weakening since the year 0### when the S:6 );< ;ifty
inde/ was at =## level which has come down now to ### on 0st 8arch 0##3. &n
&ndia, e'uity investments and sales are driven by highly irrational emotions of greed
or fear. The &ndian securities markets dance to the tune of innumerable events across
the globe. 4hether it be September , 0##0 terrorist attacks on the 4orld Trade
)entre in the >.S. or the SA?S scare and the fallout of @AT implementation on
corporate results dragged down the ma1or indices. The Tables & shown below illustrate
the e9ect on indices, of various events that took place during the past years*
Ta)#e I
1* +a"est Da, To Da, -#uctuations In S.( CN/ NI0T1 as O- %ach 2**2
10 Largest Advances in NIFTY
Rank Up in Date Closing Occassion
Percent Index
. A."3 B2Apr2!! #CC.C= ,/pectation that @a1payee Dovernment
survive.
0. A.== 325an2## =!0.0# Successful rollover to E0F.
3. A.3# A25un2!" !AB.=# ?-& announces fresh forward cover
bene%ts
for G&&s.
C. A.0 0!2(ct2!A #A.## ?ebound after the fall on (ctober 0",
0###.
=. A.A A2Apr2## ==A.= Dovernment withdraws ta/
claim on G&&s.
B. B." C28ar2# !C.0 8arkets recover after previous 3 days
fall as a result of Tehelka ,/pose.
A. =.BC 0B2Apr2## C3B.# ?ela/ation of price bands from "H to
0H.
". =.B 02Geb2!B !".3 Ieavy purchases by G&&s.
!. =.=3 A2(ct2!! CB!.A= -56 lead ;DA Dovernment returns to
power.
#. =.=# 0"2Geb2!A #=3.== )hidambaramJs JdreamJ budget.
10 Largest Declines in NIFTY
Rank Down in Date Closing Occassion
Percent Index
. 2".CB 328ar2!A !B".3# )ongress withdraws support to J>GJ
Dovernment.
0. 2A."A 0"2(ct2!A #30.B# Asian meltdown.
3. 2A.C0 A2Apr2!! !BB.!= @a1payee government fails.
C. 2A.#! =2(ct2!" "C#.A= >T& announces a cut in >S BC
e/posure.
=. 2B.!= C2Apr2## C0".# Ta/ on G&&s.
B. 2B. 328ar2# 0C.A# ,9ect of global stock meltdown and
S,-& action against -S, broker
directors.
A. 2=.B! 0C25ul2## 3A.A= 6olitical uncertainity, persistent G&&
selling, fall in ;ASDAK and the ?-&s
decision to hike key interest rates.
". 2=.B# =25un2!" !B."# &mposition of fresh set of margins.
!. 2=.3= C2Sep2# !!.A# Ieavy selling by G&&s post 4T)
attacks.
#. 2=.0# 028ay2## 333.C= Ieavy selling by banks of pledged
shares.
?olling settlement on TL0 basis commenced for all listed securities from April ,
0##3 and ?olling Settlement on TL basis is due to commence from April , 0##C. All
deferral products such as carry forward were banned from 5uly 0, 0##0. The following
Table && describes the settlement cycle in capital market segment*
Ta)#e II
SETT+E%ENT C1C+E IN CA(ITA+ %AR3ET SE4%ENT
Activity T+3 Rolling Settleent T + ! Rolling
Settleent
"#ro April $% !&&!' "#ro April $% !&&3'
Trading T T
)ustodial )on%rmation T L T L
Determination of (bligation T L T L
SecuritiesMGunds 6ay2in T L 3 T L 0
SecuritiesMGunds 6ay2out T L 3 T L 0
@aluation Debit T L 3 T L
Auction T L C T L 3
-ad Delivery ?eporting T L = T L C
Auction 6ay2inM6ay2out T L B T L =
)lose (ut T L B T L =
?ecti%ed -ad Delivery 6ay2inM6ay2out T L A
T L B
?e2bad Delivery ?eporting T L ! T L "
)lose (ut of ?e2bad Delivery T L # T L !
T L means one working day after the trade day. (ther TLterms have similar
meanings.
Trading in interest rate futures has become operational w.e.f. 5une 0C, 0##3 and
the -anks have been allowed to become members of the stock e/changes and trade
directly in interest rate futures. The ;ational )ommodity and Derivative ,/change,
the %rst multi commodity e/change in the country, will start futures trading in Dold
and Silver along with other agri2commodities from (ctober 0##3. The Gorwards
8arkets commission has given permission for having four new commodity Gutures
,/changes in the country. ?ecent estimates have shown that the commodity trading
volumes would be ten times above the stock markets volumes in &ndia in the ne/t
%ve years.
The last couple of months have %nally provided some respite to e'uity market
investors. After a shaky start at the beginning of the year, the markets have risen
smartly in the last two months erasing earlier losses and pushing the indices into
positive territory. ,specially encouraging is the broad based nature of the rally. (n
one hand, both foreign and domestic institutions as well as retail investors have
shown renewed interest in the market. (n the other hand, the rally has seen
participation from both large as well as small and mid si$e companies. &n the last
couple of months investor interest in the market has also re1uvenated. -oth G&&s and
domestic mutual funds have signi%cantly stepped up investments. G&&s have led the
way and made net purchases of N0"3 m in the 5anuary to 5une period versus NC!B
m in the corresponding period last year. ?etail interest has perked up as well as
evidenced by the overwhelming response to the 8aruti initial public o9ering, which
was oversubscribed ten times reOecting the prevalent feel P good factor.
Doing forward, after a disappointing performance during the last year, investors
will be keen to discern any signs of improvement in business conditions. A
reasonable performance from corporate &ndia will add to investor enthusiasm in an
environment of ample li'uidity and improved sentiment.
+e"a# 0ame5o& o- In6ian Capita# %a&ets
@arious Acts, ?ules, ?egulations, (rdinances, guidelines, clari%cations, press
releases and bye2laws of self regulatory organi$ations constitute the legal framework
of &ndian capital markets. The &ndian securities laws, rules and regulations enacted
for its capital markets include the following*
+ The )ompanies Act, !=B
+ The Securities )ontracts Q?egulationR Act, !=B
+ The Securities )ontracts Q?egulationsR ?ules, !=A
+ The Securities and ,/change -oard of &ndia Act, !!0
+ The S,-& Q&nsider TradingR ?egulations !!0
+ The S,-& Q8erchant -ankersR ?egulations !!0
+ The S,-& QStock -rokers : Sub -rokersR ?ules !!0
+ The S,-& QStock -rokers : Sub -rokersR ?egulations !!0
+ The S,-& QDebenture TrusteesR ?ules !!3
+ The S,-& QDebenture TrusteesR ?egulations !!3
+ The S,-& Q6ortfolio 8anagersR ?ules !!3
+ The S,-& Q6ortfolio 8anagersR ?egulations !!3
+ The S,-& Q?egistrars to issue : Share Transfer agentsR ?ules !!3
+ The S,-& Q?egistrars to issue : Share Transfer agentsR ?egulations !!3
+ The S,-& Q>nderwritersR ?ules !!3
+ The S,-& Q>nderwritersR ?egulations !!3
+ The S,-& QAppeal to )entral DovernmentR ?ules !!3
+ The S,-& Q-ankers to an issueR ?ules !!C
+ The S,-& Q-ankers to an issueR ?egulations !!C
+ The S,-& Appelate Tribunal Q6rocedureR ?ules !!C
+ The S,-& QGoreign &nstitutional &nvestorsR ?egulations !!=
+ The S,-& Q6rohibition of fraudulent : unfair trade practices relating to
securities marketR ?egulations !!=
+ Depositories Act !!B
+ The S,-& QDepositories : 6articipantsR ?egulations !!B
+ The S,-& Q8utual fundsR ?egulations !!B
+ The S,-& Q@enture )apital fundsR ?egulations !!B
+ The S,-& Q)ustodianR ?egulations !!C
+ The S,-& QSubstantial ac'uisition of shares : takeoverR ?egulations !!A
+ The Securitisation : ?econstruction of Ginancial Assets and ,nforcement of
Security &nterest Act, 0##0
O)7ecti8e9Use o- the Stu6,
The purpose of this paper is to document changes in trends, functioning of )apital
markets in a globalised scenario particularly with reference to working of S,-& as
market regulator. &t also reOects the impact of changes in securities laws on the
capital markets.
Diven this backdrop, it is important to assess the impact of stock markets on a
countrySs economic development. (ne of the most obvious and direct e9ect of the
stock market is on the corporate sector of a country. The paper gives a section2wise
study of the various determinants of the )apital 8arkets and the e9ects of changes
in securities laws governing them.
SECTION 1 : CA(ITA+ %AR3ETS ; TO(ICA+ DEnion -ank of
&ndia, Allahabad -ank to name a few. The corporate sector is %nding it more
attractive to mobilise funds from the private placement market, which provides them
Oe/ibility in terms of time and cost involved in raising funds and is less rigorously
regulated than public issues market. The private placement dominated the primary
corporate market, accounting for over !#H of total resources mobilised domestically
by non2government entities. )orporate entities mobilised ?s. BC,!=# crores during
0##2#0 through the private placement, essentially through debt Securities, with
public sector units Q6S>sR meeting their resource re'uirements almost e/clusively
through this route. The public sector entities accounted for =BH of total resource
mobilisation by way of private placements, while private corporate sector accounted
for "#H of total resource mobilisation by way of public issues. Iowever, to prevent
public issues from being passed on as private placement, the )ompanies
QAmendmentR Act, 0## considered o9er of securities to more than =# persons as
made to public. Thus, the private placement is dominated by the public sector
entities and public issues by private corporate entities.
As may be seen from Table &&& below, &ndian market is getting integrated with the
global market though in a limited way through euro issues. Since !!0, when they
were permitted access, &ndian companies have raised about ?s. 3A,### crore through
AD?sMDD?s. -y the end of 8arch 0##0, C!# G&&s were registered with S,-&. They had
net cumulative investments over of >S N =.0 billion by the end of 8arch 0##0. Their
operations inOuence the market as they do delivery2based business and their
knowledge of market is considered superior.
Ta)#e III
Resouce %o)i#isation 0om (ima, %a&et
"Rs( Crore'
Iss)es $**&+ $**$+ $**!+ $**3+ $**,+ $**-+ $**.+ $**/+ $**0+ $***+
!&&&+ !&&$+
*$ *! *3 *, *- *. */ *0 ** && &$
&!
)orporate SecuritiesC,0! B,3BB 03,=3A CC,C!" C",#"C 3B,B"! 3A,CA C0,0= B#,!0 A0,C=# A",3!B
AC,C#3
Domestic &ssues C,0! B,3BB 03,0"B 3A,#CC C,!AC 3B,!3 33,"A0 3A,A3" =!,#CC B",!B3
AC,!! A0,#B
;on2Dovt. 6ublic
)ompanies C,30 B,!3 !,"#3 !,33# 0B,CA B,#A= #,C# 3,3" =,#3 =,=3
C,"!# =,B!0
6S> -onds =,BB3 =,A# ,#B0 =,="B 3,#A# 0,0!0 3,3!C 0,!"0 P
P P
Dovt. )ompanies P P C3# "! """ ,### B=# C3 P P
3=#
-anks : G&s P P 3=B 3,"C3 C0= 3,CB= C,3=0 ,CAB C,3=0 0,==
,CA0 ,#A#
6rivate 6lacementC,0CC C,CB3 ,B3= A,CBB ,AC 3,3B =,#BB 3#,#!! C!,BA! B,0=! BA,"3B
BC,!=#
,uro &ssues P P A#0 A,"!" B,AC3 ,0!A =,=!C C,##! ,C" 3,C"A C,!A
0,3C0
Dovernment Securities,=="0,0"C A,B!# =C,=33 C3,03 CB,A"3 C0,B"" BA,3"B #B,#BA 3,33B
0".C"3 =0,=#"
)entral Dovt. ",!"! ",!! 3,""= =#,3"" 3",#" C#,=#! 3B,=0 =!,B3A !3,!=3 !!,B3#
=,"3 33,"#
State Dovt. 0,=B! 3,3BC 3,"#= C,C= =,03 B,0AC B,=3B A,AC! 0,C 3,A#B
3,3## ",A#A
Total 0=,AAA 0",B=# C,00A !!,#3 !,3= "3,CA0 A!,"3= #!,= BB,0=! "=,A"B
0#B,"A! 00B,!
So)rce * ?-&
Issue of Debt Securities
The D&6 Duidelines were further amended on th 5anuary 0##0 to introduce the
facility of issue of debt securities without issue of e'uity, for companies desirous of
coming out with a public issue. The amended guidelines provide that an unlisted
company may make a public issue of non convertible debt securities Q
DSRMdebt
securities convertible into e'uity QDS),R after allotment and make an application for
listing of the same in the Stock ,/changeMs without making a prior public issue of
e'uity and listing thereof, on ful%llment of the following re'uirements*
QaR TheDS shall carry a credit rating not below investment grade at least from one
registered )redit ?ating Agency Q)?AR. 4here the issue si$e of theDS is ?s. ## crore or
more, such rating shall be obtained from at least two )?As.
QbR The promoters contribution of at least 0#H of the pro1ect cost, i.e. ob1ects
proposed to be inter alia %nanced through the issue, shall be brought in the
form of e'uity. 4here the promoters contribution e/ceeds ?s. ## crore, the
promoters shall bring in ?s. ## crore before the opening of the public issue
and the remaining shall be brought in on pro rata basis, before calls on the
DS are made. The promoters contribution of 0#H of e'uity shall be locked
in for a period of 3 years from the date of allotment in the public issue of
DS.
QcR The issuer company shall comply with the re'uirements of continuing
disclosures as speci%ed under the listing agreement to be entered into with
concerned stock e/changes as is applicable for listing of e'uity shares. A
municipal corporation which has no share capital may, sub1ect to the aforesaid
provisions, make a public issue of theDS and list the same on stock
e/changeMs.
Dovernment and corporate sector accessed market through debt issues. They
collectively raised a total of ?s. 0#C,#B! crore from primary market during 0##2
#0. About AC.AH of this was raised by Dovernment, while the balance by the
corporate sector through public issues and private placement as may be seen from
Table 02".
ADR9 4DRS9 0CCBs
Goreign &nvestment through AD?sMDD?s, Goreign )urrency )onvertible -onds
QG))-sR is treated as Goreign Direct &nvestment. &ndian companies are allowed to
raise e'uity capital in the international market through the issue of DD?MAD?sMG))-s.
These are not sub1ect to any ceilings on investment. An applicant company seeking
Dovernment’s approval in this regard should have a consistent track record for good
performance Q%nancial or otherwiseR for a minimum period of 3 years. This condition
can be rela/ed for infrastructure pro1ects such as power generation,
telecommunication, petroleum e/ploration and re%ning, ports, airports and roads.
There is no restriction on the number of DD?sMAD?sMG))-s to be Ooated by a
company or a group of companies in a %nancial year. There is no such restriction
because a company engaged in the manufacture of items covered under Automatic
?oute is likely to e/ceed the percentage limits under Automatic ?oute, whose direct
foreign investment after a proposed DD?sMAD?sMG))-s is likely to e/ceed =# per
centM= percentM AC
percent as the case may be. There are no end2use restrictions on DD?sMAD?s issue
proceeds, e/cept for an e/press ban on investment in real estate and stock markets.
The G))- issue proceeds need to conform to e/ternal commercial borrowing end use
re'uirements. &n addition, 0= per cent of the G))- proceeds can be used for general
corporate restructuring.
ADR, 4DR noms -uthe e#a=e6
+ &ndian bidders allowed to raise funds through AD?s, DD?s and e/ternal
commercial borrowings Q,)-sR for ac'uiring shares of 6S,s in the %rst stage
and buying shares from the market during the open o9er in the second stage.
+ )onversion and reconversion Qa.k.a. two2way conversion or fungibilityR of
shares of &ndian companies into depository receipts listed in foreign bourses,
while e/tending ta/ incentives to non2resident investors, allowed. The re2
coversion of AD?sMDD?s would, however, be governed by the Goreign
,/change 8anagement Act noti%ed by the ?eserve -ank of &ndia in 8arch
0##.
+ 6ermission to retain AD?MDD? proceeds abroad for future foreign e/change
re'uirements, removal of the e/isting limit of N0#,### for remittance under
the employees stock option scheme Q,S(6R and permitting remittance up to N
million from proceeds of sales of assets here.
+ )ompanies have been allowed to invest ## per cent of the proceeds of
AD?MDD? issues Qas against the earlier ceiling of =#HR for ac'uisitions of
foreign companies and direct investments in 1oint ventures and wholly2owned
subsidiaries overseas.
+ Any &ndian company which has issued AD?sMDD?s may ac'uire shares of
foreign companies engaged in the same area of core activity upto N##
million or an amount e'uivalent to ten times of their e/ports in a year,
whichever is higher. ,arlier, this facility was available only to &ndian
companies in certain sectors.
+ G&&s can invest in a company under the portfolio investment route upto 0C per
cent of the paid2up capital of the company. &t can be increased to C#H with
approval of general body of the shareholders by a special resolution. This limit
has now been increased to C!H from the present C#H.
+ Two way fungibility in AD?MDD? issues of &ndian companies has been
introduced sub1ect to sectoral caps, wherever applicable. Stock brokers in
&ndia can now purchase shares and deposit these with the &ndian custodian for
issue of AD?sMDD?s by the overseas depository to the e/tent of the
AD?sMDD?s that have been converted into underlying shares.
Euo Issues ), In6ian Companies
,arlier, &ndian )ompanies re'uired approval of the Dovernment of &ndia before
issue of Goreign )urrency )onvertible -onds QG))-sR. The ?-&, has vide G,8A
;oti%cation ;o * == dated 8arch Ath 0##0, liberalised these rules. Accordingly*
+ &ndian )ompanies seeking to raise G))-s are permitted to raise them under
the Automatic ?oute upto >S =# 8illion Dollars per %nancial year without any
approval.
+ The G))-s raised shall be sub1ect to the sectoral limits prescribed by the
Dovernment of &ndia.
+ 8aturity period for the G))-s shall be at least = years and the Uall in costV at
least ## basis points less than that prescribed for ,/ternal )ommercial
-orrowings.
SECONDAR1 %AR3ET
Union Bu6"et 2**2'*>
To help revive investor interest in primary issues, the >nion -udget of 0##32#C
made the following provisions P
+ Grom April , 0##3 dividends will be ta/2free in the hands of shareholders.
)orrespondingly, there will be a 0.=H dividend distribution ta/ on Domestic
companies.
+ All Tisted e'uities that are ac'uired on or after 8arch 0##3, and sold after
the lapse of a year or more, e/empt from the incidence of )apital Dains ta/.
Dei8ati8es
Derivative is a product whose value is derived from the value of one or more
basic variables, called bases Qunderlying asset, inde/ or reference rateR, in a
contractual manner. The underlying asset can be e'uity, fore/, commodity or any
other asset.
-y their very nature, the %nancial markets can be sub1ect to a very high degree of
volatility. As instruments of risk management, derivative products generally do not
inOuence the Ouctuations in the underlying asset prices. Iowever, by locking2in asset
prices, derivative products minimise the impact of Ouctuations in asset prices on the
pro%tability and cash Oow situation of risk2averse investors.
Derivatives of securities are traded in this segment. The derivative products
available for trading in this segment are &nde/ Gutures and &nde/ (ptions based on
S:6 );< ;ifty, Stock (ptions and Stock Gutures based C speci%ed securities. The
contracts are available with month, 0 months and 3 months e/piry. A new contract
is introduced on ne/t trading day following the e/piry of the near month contract. As
at the end of 8arch 0##3, a total of ,!3" securities comprising of 3 inde/ futures, B#
inde/ options, 03 stock futures and ,A=0 stock options were available for trading.
Dei8ati8es %a&et in In6ia
Derivatives trading commenced in &ndia in 5une 0### after S,-& granted the %nal
approval to this e9ect in 8ay 0###. S,-& permitted the derivative segments of two
stock e/changes, vi$ ;S, and -S, and their clearing houseMcorporation to commence
trading and settlement in approved derivative contracts. To begin with, S,-&
approved trading in inde/ futures contracts based on S:6 );< ;ifty &nde/ and -S,2
3# QSense/R &nde/. This was followed by approval for trading in options based on
these two indices and options on individual securities. The trading in inde/ options
commenced in 5une 0## and trading in options on individual securities commenced
in 5uly 0##. Gutures contracts on individual stock were launched in ;ovember 0##.
Derivative contracts are traded and settled in accordance with the rules, byelaws,
and regulations of the respective e/changes and their clearing houseMcorporation
duly approved by S,-& and noti%ed in the ofcial ga$ette.
Inteest Rate Dei8ati8es
&nterest rate derivatives market has been widely used in the international markets
by banks, institutions and common investors.
&nterest ?ate Derivatives have been introduced in &ndian market by ;S, with
trading on Gutures on notional ! day T2bills and # year $ero coupon as well as BH
notional coupon bearing bond on 5une 0C, 0##3.
The G
segment reported a total trading volume QnotionalR of ?s. C,3!,"BC crore
during 0##02#3 as against ?s. ,#,!0B crore during the preceding year. The trading
volume witnessed a sharp rise with the introduction of stock futures in ;ovember
0##.
0oei"n Institutiona# In8estos !0IIs$
-anks, %nancial institutions QG&sR and insurance companies have turned out to be
ma1or sellers of blue chip stocks during the %rst 'uarter ended 5une 3#, 0##3.
They have oWoaded shares in companies including &T), Drasim &ndustries, State
-ank of &ndia and Tata 8otors Qformerly TelcoR, taking advantage of the rally in the
e'uity markets. Tife &nsurance )orporation QT&)R leads the pack among sellers, having
sold shares in &T), (riental -ank of )ommerce, Drasim &ndustries, Du1arat Ambu1a,
8ahindra and 8ahindra, -S,S and many other corporates. During this period, the
sense/ arose AH while the rise in the ;ifty was =H. 4hile domestic G&s have been
selling, most of the attention in the markets has been focused on G&&s who have been
ma1or buyers in e'uities over the past few months. A key factor fuelling the e'uity
markets has been G&& inOows, which have grown unabated. During the year ended
8arch 0##3 net G&& investment in the market stood at 0=0B.!# while investment for
the period from April 0##3 to August 0##3 stood at BB!B.3#.
%utua# 0un6s
The market is getting institutionali$ed as people prefer mutual funds as their
investment vehicle, thanks to evolution of a regulatory framework for mutual funds,
ta/ concessions o9ered by government and preference of investors for passive
investing. The net investment of mutual funds for 0##02#3 has been showing a
negative trend of ?s. 0,#B" )rores while the net investments for the period from
April 0##3 to August 0##3 was ?s. 20=.33 )rores .
&n Gebruary 0##3, following the repeal of the >nit Trust of &ndia Act !B3 >T& was
bifurcated into two separate entities. (ne is the Speci%ed >ndertaking of the >nit
Trust of &ndia with assets under management of ?s.0!, "3= crores as at the end of
5anuary 0##3, representing broadly, the assets of >S BC scheme, assured return and
certain other schemes. The Speci%ed >ndertaking of >nit Trust of &ndia, functioning
under an administrator and under the rules framed by Dovernment of &ndia and does
not come under the purview of the 8utual Gund ?egulations.
The second is the >T& 8utual Gund Ttd, sponsored by S-&, 6;-, -(- and T&). &t is
registered with S,-& and functions under the 8utual Gund ?egulations. 4ith the
bifurcation of the erstwhile >T& which had in 8arch 0### more than ?s.AB,### crores
of assets under management and with the setting up of a >T& 8utual Gund,
conforming to the S,-& 8utual Gund ?egulations, and with recent mergers taking
place among di9erent private sector funds, the mutual fund industry has entered its
current phase of consolidation and growth. As at the end of 5une 3#, 0##3, there were 3
funds, which manage assets of ?s.#CAB0 crores under 3AB schemes. The following graph depicts
the changes in Assets under management since the year !B= till 5une 0##3*
Note :
,rstwhile >T& was bifurcated into >T& 8utual Gund and the Speci%ed >ndertaking
of the >nit Trust of &ndia e9ective from Gebruary 0##3. The Assets under
management of the Speci%ed >ndertaking of the >nit Trust of &ndia has therefore
been e/cluded from the total assets of the industry as a whole from Gebruary 0##3
onwards.
?ecently the S,-& has clari%ed vide )ircular ;o. #3M="M#3 dated #th 5une, 0##3
that mutual funds may consider using interest rate derivatives.
Raisin" -un6s thou"h (i8ate (#acement
&n sharp contrast to a shrinking public issues market for corporate securities, the
last few years have witnessed huge resource mobili$ation through private placement.
)orporate sector mobilised ?s. =!,0A crore Q?s. CB,00# crore with maturity of
more than one year and ?s. 0,!#A crore with maturity of less than one yearR
during 0##2#0 through private placement of debt securities. According to 6rime
Database estimates, a total of 0#= issuers raised ?s. CB,00# crore through =="
privately placed issues in 0##2#0, a decline of ."=H over the funds raised through
this route in the preceding year. About ?s. 0,B3C billion have been raised through
private placement of debt during last seven years since April !!=.
6ublic Sector units and G&s are most active in mobilising funds through private
placement. They accounted for A=."H of the total private placement market in debt
instruments during 0##2#0 as against "0.=H in 0###2#. All &ndia %nancial
institutions and -anks led the market with a C#.3H share. 6rivate Sector accounted
for 0C.0H of private placement of debt during 0##2#0. The top # issuers accounted
for 3H of total private placement during 0##2#0.
Re"u#ato, 4ap9O8e#ap
The responsibility for supervision and development of the securities market is
shared by Department of ,conomic A9airs QD,AR, Department of )ompany A9airs
QD)AR, ?eserve -ank of &ndia Q?-&R and S,-&. &n view of involvement of a number of
agencies, there is scope for confusion among the regulators and the regulated,
regulatory gaps and overlaps, and duplicate and inconsistent regulations. Gor
e/ample, no regulator was e/plicitly assigned the responsibility of regulating
collective investment scheme till it caused concern when it was assigned to S,-&.
&nvestor interest would probably be better served if there is only one regulator for the
securities market, with clearly de%ned regulatory 1urisdiction and accountability.
SECTION 2 ; SECURITIES +A?S ; A %Onits or any other instrument issued by any collective investment scheme to
the investors in such schemes.
QivR Security receipt.
QvR Dovernment securities.
QviR Such other instruments as may be declared by the )entral Dovernment to be
securities. and
QviiR ?ights or interests in securities.
De)entue Re6emption Rese8e
The Section A) of the )ompanies Act, !=B contemplates the creation of
security and li'uidity to ensure timely repayment by companies on redemption of
debentures and thereby a9ord protection to the debenture holders. &t re'uires every
company to create a Debenture ?edemption ?eserve QD??R to which ade'uate
amounts shall be credited out of its pro%ts every year until such debentures are
redeemed, and shall utilise the same e/clusively for redemption of a particular set or
series of debentures only.
A new development came in the matter when the Department of )ompany A9airs
issued following clari%cations in this regard*
QaR ;o D?? is re'uired for debentures issued by All &ndia Ginancial &nstitutions
QA&G&sR regulated by ?-& and banking companies for both public as well as
privately placed debentures.
QbR Gor other G&s and for ;-G)s registered with ?-&, the ade'uacy of D?? will be
=#H of the value of debentures issued through public issue and no D?? would
be re'uired in the case of privately placed debentures.
QcR Gor manufacturing and infrastructure companies, the ade'uacy of D?? would
be =#H of the value of debentures issued through public issue and 0=H for
privately placed debentures.
QdR Section A) of the )ompanies Act would apply to debentures issued and
pending to be redeemed and as such D?? is re'uired to be created for
debentures issued prior to December 3, 0###.
QeR Section A) would also apply to non2convertible portion of debentures issued
whether they are fully or partly convertible.
EDI0AR
&n association with ;ational &nformatics )entre Q;&)R, S,-& has set up an E#ectonic
Data In-omation 0i#in" an6 Retie8a# Q,D&GA?R System to facilitate an electronic %ling of
certain information by listed companies. This is an automated system for %ling,
retrieval and dissemination of time sensitive corporate information which are now
being %led physically by the listed companies with the stock e/changes. The primary
ob1ective is to centrali$e the information and accelerate its dissemination and
thereby enhance transparency and efciency for the bene%t of various classes of
market participants like, investors, regulatory organisation, research institutions,
companies and stock e/changes. This is analogous to the ,lectronic Data Dathering,
Analysis and ?etrieval Q,DDA?R system of the >S Securities ,/change )ommission.
The system is being introduced in phases. &n the %rst phase, the information that
would be %led online are* QiR %nancial statements comprising of balance sheets, pro%t
and loss account and full version of annual report, half yearly %nancial statements
including cash Oow statements and 'uarterly %nancial statements, QiiR corporate
governance reports, QiiiR shareholding pattern statement, QivR statement of action
taken against the company by regulatory agencies and QvR such other statement,
information or report as may be speci%ed by S,-& from time to time in this regard.
These %lings would be in addition to the %lings made by the companies with the stock
e/changes in compliance with the provisions of the listing agreement. Dradually the
physical %ling would be discontinued and both the number of companies as well as
disclosure statements would be e/panded to cover all the actively traded companies
for all the disclosure statements.
Copoate 4o8enance
The concept of )orporate Dovernance was mooted in the year !!B2!A in the
&ndian corporate sector and has since been discussed at various forums like )&&, &)S&,
G&))& etc. and following the recommendations of Fumar 8angalam -irla )ommittee
formed by S,-& the same was included in the Standard Tisting Agreement and was
sought to be implemented within a de%nite time frame of three years commencing
from the %nancial year 0###2#. At present the code is applicable on all the listed
companies.
The D)A in the 8inistry of Ginance and )ompany A9airs appointed a high level
committee, to e/amine various corporate governance issues and to recommend
change in the diverse areas such as*
QaR the statutory auditor2 )ompany relationship.
QbR the need, if any for rotation of Statutory audit %rms or partners.
QcR the procedure for appointment of auditors and determination of audit fees.
QdR restrictions, if any on non2audit fees.
QeR independence and auditing functions.
QfR measures re'uired to ensure that the management and companies actually
present, Strue and fair’ statement of the %nancial a9airs of companies.
QgR need to consider measures such as certi%cation of accounts and %nancial
statements by management and directors.
QhR the necessity of having a transparent system of random scrutiny of audited
accounts.
QiR ade'uacy of regulating the professions of chartered accountants, company
secretaries and other similar over sight functionaries.
Q1R advantages, if any, of setting up an independent regulator similar to the 6ublic
)ompany Accounting (versight -oard in the S(< Act, and if so, its
constitution. and
QkR the role of independent directors and how their indepence and e9ectiveness
can be ensured.
Centa# +istin" Authoit,
,arlier it was mandatory to list a security on a regional e/change and at the same
time it could be listed on any number of e/changes. The issuer had option to list its
securities on any one or more of the e/changes. The issue fails if the regional
e/change refuses listing. The issue also fails if any of the e/changes, to which
application for listing has been made, refuses to list the security. This arrangement
generates unhealthy competition. There is a competition among the issuers to list
securities on as many e/changes as possible to attract investors from all over the
country and waste resources to comply with the listing re'uirements of a number of
e/changes simultaneously. Similarly there is a competition among the e/changes to
attract as many issuers as possible at times leading to dilution of listing standards
particularly when listing constitutes a ma1or source of income for many of them. 4hy
should a company comply with listing agreement with di9erent e/changes or why
should a number of e/changes monitor compliance by a company X Tisting casts
onerous responsibilities on the e/change in the sense that it acts as a trustee for
investors and ensures compliance of certain standards by a listed company. 8ost of
the e/changes, given their %nancial health and organi$ational structure, are not in a
position to supervise such large number of listed companies.
&n view of the foregoing, it is desirable that there is only one agency which
considers all re'uests for listing and grants listing if it %nds a security suitable for
investors across the country. A security granted listing by the agency would be
available for trading on all e/changes who will not waste resources in terms of
duplication of e9orts on listing and monitoring compliance.
Feeping in view the above, S,-& has noti%ed S,-& Q)entral Tisting AuthorityR
?egulations, 0##3 on 3th Gebruary, 0##3.
The salient features of the above scheme are as follows *2
+ ,stablishment of a self regulatory specialised organisation for screening of
Tisting proposals of )ompanies, 8utual Gunds and )&S.
+ )TA to review Tisting conditions and Tisting Agreement and make
recommendations to S,-&.
+ )ompliance with Tisting conditions and Tisting Agreement are made more
stringent.
+ &n addition to )o’s, )&S, 8G’s have also been sub1ected to )TA.
Demutua#isation
8ost of the e/changes are Association of 6ersons which was considered bene%cial
in terms of ta/ bene%ts and matters of compliance. They are now having a re2look at
the way they conduct business and are gearing up to demutualise themselves by
converting themselves into a public limited companies. They will also be accessing
securities market to %nance their ever e/panding trading network and would be
interested to list their securities. This would create an anomalous situation where a
stock e/change would admit its own securities for trading. A satisfactory solution
would be to vest the listing powers with a body separate from the stock e/changes.
The stock e/changes, e/cept ;S, and (T),&, are organised as mutual which was
considered bene%cial in terms of ta/ bene%ts and matters of compliance. The trading
members, who provide brokering services also own, control and manage the stock
e/change. &n the changed environment, these mutual e/changes do not seem to o9er
an e9ective model for self2regulatory organisations. The regulatory and public
interest role of the e/change at times conOicts with private interests of the elected
broker directors. This limitation has been realised by the stock e/changes themselves
as well as the regulators. &n view of the less than satisfactory 'uality of
administration of broker2managed e/changes, the Ginance 8inister in 8arch 0##
proposed demutualisation of the e/changes by which ownership, management and
trading membership would be segregated from each other. The process of
demutualisation is e/pected to be completed during 0##32#C.
Two stock e/changes vi$. (T),& and ;S, are already demutualised. These are
managed by boards of directors, which do not include trading members. These are
purest forms of demutualised e/changes, where ownership, management and trading
are in the hands of three di9erent sets of people. This model of demutualisation has
completely eliminated any conOict of interest and helped the e/changes to pursue
market efciency and investors interest aggressively. The ;S, model of
demutualisation compares well with the international models of demutualised stock
e/changes.
De#istin" o- Secuities
The incidence of delisting has been increasing in the recent past. This has
assumed importance in view of a number of 8s ac'uiring the entire e'uity of their
&ndian subsidiaries through open o9ers and then delisting from the e/changes.
During the year S,-& has prescribed fresh guidelines on delisting of securities. The
main features of the present guidelines are enumerated below*
+ Duidelines have been noti%ed e9ective from A.#0.0##3 based upon the
recommendations of a )ommittee constituted under the )hairmanship of 8r.
6ratip Far, ,/ecutive Director, S,-&.
+ Delisting of Securities in a fair and transparent and investor friendly manner
either voluntarily by the )o. and compulsory by the S,.
+ -ook building process for determination of e/it price.
+ Dispensation with the compulsory ?S, listing.
+ Shareholder’s right to compensation in the event of compulsory delisting.
+ Tisting at ;S, and -S, made more attractive.
+ -uy back route not permitted for delisting.
+oo&in" 0o5a6
The past decade in many ways has been remarkable for securities market in
&ndia. &t has grown e/ponentially as measured in terms of amount raised from the
market, number of stock e/changes and other intermediaries, the number of listed
stocks, market capitalisation, trading volumes and turnover on stock e/changes and
investor population. Along with this growth, the pro%les of the investors, issuers and
intermediaries have changed signi%cantly. The market has witnessed fundamentalM
institutional changes resulting in drastic reduction in transaction costs and signi%cant
improvements in efciency, transparency and safety.
?eforms in the securities market, particularly the establishment and
empowerment of S,-&, market determined allocation of resources, screen based
nation2wide trading, dematerialisation and electronic transfer of securities, rolling
settlement and ban on deferral products, sophisticated risk management and
derivatives trading, have greatly improved the regulatory framework and efciency of
trading and settlement. &ndian market is now comparable to many developed
markets in terms of a number of 'ualitative parameters. 8ore strategic plans are in
the ofng as S,-& aspires to make the &ndian Securities market a truly world class
market. Iowever the year 0##02#3 has not been such a remarkable year for the
stock markets with stocks plummeting to new lows : a spate of collapses taking
place during the year which has shaken investors’ con%dence in the markets and cast
doubts on the accountability and transparency claims made by corporates, S,-& and
various functionaries of the market.
&t is with this backdrop that the role of S,-& needs a transformation which entails
a greater and proactive role in the market, immediate need to initiate stringent
actions on defaulters, implementation of code of corporate governance in an
e9ective manner. Some transformation is necessary to make the role of S,-& at par
with international regulators like, S,) of >.S.
BIB+IO4RA(@1
. &ndian Securities 8arket ?eview + ;S, publication.
0. ;S, Gact -ook 0##3 + ;S, publication.
3. IDG) 8utual Gund newsletter for 'uarter ended 1une 0##3.
C. The ,conomic Times + newspaper.
=. The Iindustan Times + newspaper.
B. Securities : ,/change -oard of &ndia +www.sebi.com.
A. ?eserve -ank of &ndia + www.rbi.com.
". Association of 8utual Gunds of &ndia + www.am%india.com.
!. ;ational Stock ,/change + www.nseindia.com.
#. www.indiainfoline.com.
. www.indiabudget.nic.in.
0. www.indiabulls.com.
3. &ndian ,/press + ;ewspaper.
C. www.sudhirlaw.com.
doc_441488756.doc
GROWTH OF SE
SECURITIES LAWS AND CAPITAL MARKETS –
CHANGING SCENARIO
DIVYA SAXENA* LEENA JAIN** ANKUR JAIN***
INTRODUCTION
Transfer of resources from those with idle resources to others who have a
productive need for them is perhaps most efciently achieved through the securities
markets. Stated formally, securities markets provide channels for allocation of
savings to investments and thereby decouple of these two activities. As a result, the
savers and investors are not constrained by their individual abilities, but by the
economy’s abilities to invest and save respectively, which inevitably enhances
savings and investment in the economy.
During the late !"#s, the developing countries started liberali$ing their %nancial
sectors. &ncreased emphasis was put on the development of e'uity markets. &ndia
also followed this path. Stock markets grew rapidly in &ndia during the late !"#s and
early !!#s.
(ver the decade of the !!#s, many important policy initiatives have focused on
fostering li'uidity and efciency of the Securities markets. )apital markets have
taken a prominent place in the developing countries %nancial system during the last
decade.
To promote and develop the )apital markets various securities laws had been
enacted during the decade.
The four main legislations governing the securities market are*
+ the SEBI Act, 1992, which establishes S,-& to protect investors and develop and
regulate securities market.
+ the Companies Act, 1956, which sets out the code of conduct for the corporate
sector in relation to issue, allotment and transfer of securities, and disclosures
to be made in public issues.
+ the Secuities Contacts !Re"u#ation$ Act, 1956, which provides for regulation of
transactions in securities through control over stock e/changes. and
+ the Depositoies Act, 1996, which provides for electronic maintenance and transfer
of ownership of demat securities.
Since its inception in !!0, S,-& had been promoting and developing the capital
market. The country had witnessed a ma1or shift from mandate2based regulations
before the !!#s to disclosure based regulations in recent times. &ts regulatory
1urisdiction e/tends over corporates in the issuance of capital and transfer of
securities, in addition to all intermediaries and persons associated with securities
market. &t can conduct en'uiries, audits and inspection of all concerned.
Capita# %a&ets' (esent Scene
The ,'uity markets all over the world are becoming increasingly integrated over
time. The securities markets in &ndia witnessed several policy initiatives during the
year 0##02#3, which further re%ned the market micro2structure, moderni$ed
operations and broadened investment choices for investors. The irregularities in the
securities transactions in the last 'uarter of the previous %nancial year hastened the
introduction and implementation of several reforms. 4hile a 5oint 6arliamentary
7 A)S
77 A)S
777 8anagement Trainee
)ommittee was constituted to go into the irregularities and manipulations in
transactions relating to securities, decisions were taken to complete the process of
demutuali$ation and corporatisation of stock e/changes to implement the decision to
separate ownership, management and operation of stock e/changes and to e9ect
legislative changes for investor protection and to enhance the e9ectiveness of S,-&
as the capital market regulator.
The markets have been weakening since the year 0### when the S:6 );< ;ifty
inde/ was at =## level which has come down now to ### on 0st 8arch 0##3. &n
&ndia, e'uity investments and sales are driven by highly irrational emotions of greed
or fear. The &ndian securities markets dance to the tune of innumerable events across
the globe. 4hether it be September , 0##0 terrorist attacks on the 4orld Trade
)entre in the >.S. or the SA?S scare and the fallout of @AT implementation on
corporate results dragged down the ma1or indices. The Tables & shown below illustrate
the e9ect on indices, of various events that took place during the past years*
Ta)#e I
1* +a"est Da, To Da, -#uctuations In S.( CN/ NI0T1 as O- %ach 2**2
10 Largest Advances in NIFTY
Rank Up in Date Closing Occassion
Percent Index
. A."3 B2Apr2!! #CC.C= ,/pectation that @a1payee Dovernment
survive.
0. A.== 325an2## =!0.0# Successful rollover to E0F.
3. A.3# A25un2!" !AB.=# ?-& announces fresh forward cover
bene%ts
for G&&s.
C. A.0 0!2(ct2!A #A.## ?ebound after the fall on (ctober 0",
0###.
=. A.A A2Apr2## ==A.= Dovernment withdraws ta/
claim on G&&s.
B. B." C28ar2# !C.0 8arkets recover after previous 3 days
fall as a result of Tehelka ,/pose.
A. =.BC 0B2Apr2## C3B.# ?ela/ation of price bands from "H to
0H.
". =.B 02Geb2!B !".3 Ieavy purchases by G&&s.
!. =.=3 A2(ct2!! CB!.A= -56 lead ;DA Dovernment returns to
power.
#. =.=# 0"2Geb2!A #=3.== )hidambaramJs JdreamJ budget.
10 Largest Declines in NIFTY
Rank Down in Date Closing Occassion
Percent Index
. 2".CB 328ar2!A !B".3# )ongress withdraws support to J>GJ
Dovernment.
0. 2A."A 0"2(ct2!A #30.B# Asian meltdown.
3. 2A.C0 A2Apr2!! !BB.!= @a1payee government fails.
C. 2A.#! =2(ct2!" "C#.A= >T& announces a cut in >S BC
e/posure.
=. 2B.!= C2Apr2## C0".# Ta/ on G&&s.
B. 2B. 328ar2# 0C.A# ,9ect of global stock meltdown and
S,-& action against -S, broker
directors.
A. 2=.B! 0C25ul2## 3A.A= 6olitical uncertainity, persistent G&&
selling, fall in ;ASDAK and the ?-&s
decision to hike key interest rates.
". 2=.B# =25un2!" !B."# &mposition of fresh set of margins.
!. 2=.3= C2Sep2# !!.A# Ieavy selling by G&&s post 4T)
attacks.
#. 2=.0# 028ay2## 333.C= Ieavy selling by banks of pledged
shares.
?olling settlement on TL0 basis commenced for all listed securities from April ,
0##3 and ?olling Settlement on TL basis is due to commence from April , 0##C. All
deferral products such as carry forward were banned from 5uly 0, 0##0. The following
Table && describes the settlement cycle in capital market segment*
Ta)#e II
SETT+E%ENT C1C+E IN CA(ITA+ %AR3ET SE4%ENT
Activity T+3 Rolling Settleent T + ! Rolling
Settleent
"#ro April $% !&&!' "#ro April $% !&&3'
Trading T T
)ustodial )on%rmation T L T L
Determination of (bligation T L T L
SecuritiesMGunds 6ay2in T L 3 T L 0
SecuritiesMGunds 6ay2out T L 3 T L 0
@aluation Debit T L 3 T L
Auction T L C T L 3
-ad Delivery ?eporting T L = T L C
Auction 6ay2inM6ay2out T L B T L =
)lose (ut T L B T L =
?ecti%ed -ad Delivery 6ay2inM6ay2out T L A
T L B
?e2bad Delivery ?eporting T L ! T L "
)lose (ut of ?e2bad Delivery T L # T L !
T L means one working day after the trade day. (ther TLterms have similar
meanings.
Trading in interest rate futures has become operational w.e.f. 5une 0C, 0##3 and
the -anks have been allowed to become members of the stock e/changes and trade
directly in interest rate futures. The ;ational )ommodity and Derivative ,/change,
the %rst multi commodity e/change in the country, will start futures trading in Dold
and Silver along with other agri2commodities from (ctober 0##3. The Gorwards
8arkets commission has given permission for having four new commodity Gutures
,/changes in the country. ?ecent estimates have shown that the commodity trading
volumes would be ten times above the stock markets volumes in &ndia in the ne/t
%ve years.
The last couple of months have %nally provided some respite to e'uity market
investors. After a shaky start at the beginning of the year, the markets have risen
smartly in the last two months erasing earlier losses and pushing the indices into
positive territory. ,specially encouraging is the broad based nature of the rally. (n
one hand, both foreign and domestic institutions as well as retail investors have
shown renewed interest in the market. (n the other hand, the rally has seen
participation from both large as well as small and mid si$e companies. &n the last
couple of months investor interest in the market has also re1uvenated. -oth G&&s and
domestic mutual funds have signi%cantly stepped up investments. G&&s have led the
way and made net purchases of N0"3 m in the 5anuary to 5une period versus NC!B
m in the corresponding period last year. ?etail interest has perked up as well as
evidenced by the overwhelming response to the 8aruti initial public o9ering, which
was oversubscribed ten times reOecting the prevalent feel P good factor.
Doing forward, after a disappointing performance during the last year, investors
will be keen to discern any signs of improvement in business conditions. A
reasonable performance from corporate &ndia will add to investor enthusiasm in an
environment of ample li'uidity and improved sentiment.
+e"a# 0ame5o& o- In6ian Capita# %a&ets
@arious Acts, ?ules, ?egulations, (rdinances, guidelines, clari%cations, press
releases and bye2laws of self regulatory organi$ations constitute the legal framework
of &ndian capital markets. The &ndian securities laws, rules and regulations enacted
for its capital markets include the following*
+ The )ompanies Act, !=B
+ The Securities )ontracts Q?egulationR Act, !=B
+ The Securities )ontracts Q?egulationsR ?ules, !=A
+ The Securities and ,/change -oard of &ndia Act, !!0
+ The S,-& Q&nsider TradingR ?egulations !!0
+ The S,-& Q8erchant -ankersR ?egulations !!0
+ The S,-& QStock -rokers : Sub -rokersR ?ules !!0
+ The S,-& QStock -rokers : Sub -rokersR ?egulations !!0
+ The S,-& QDebenture TrusteesR ?ules !!3
+ The S,-& QDebenture TrusteesR ?egulations !!3
+ The S,-& Q6ortfolio 8anagersR ?ules !!3
+ The S,-& Q6ortfolio 8anagersR ?egulations !!3
+ The S,-& Q?egistrars to issue : Share Transfer agentsR ?ules !!3
+ The S,-& Q?egistrars to issue : Share Transfer agentsR ?egulations !!3
+ The S,-& Q>nderwritersR ?ules !!3
+ The S,-& Q>nderwritersR ?egulations !!3
+ The S,-& QAppeal to )entral DovernmentR ?ules !!3
+ The S,-& Q-ankers to an issueR ?ules !!C
+ The S,-& Q-ankers to an issueR ?egulations !!C
+ The S,-& Appelate Tribunal Q6rocedureR ?ules !!C
+ The S,-& QGoreign &nstitutional &nvestorsR ?egulations !!=
+ The S,-& Q6rohibition of fraudulent : unfair trade practices relating to
securities marketR ?egulations !!=
+ Depositories Act !!B
+ The S,-& QDepositories : 6articipantsR ?egulations !!B
+ The S,-& Q8utual fundsR ?egulations !!B
+ The S,-& Q@enture )apital fundsR ?egulations !!B
+ The S,-& Q)ustodianR ?egulations !!C
+ The S,-& QSubstantial ac'uisition of shares : takeoverR ?egulations !!A
+ The Securitisation : ?econstruction of Ginancial Assets and ,nforcement of
Security &nterest Act, 0##0
O)7ecti8e9Use o- the Stu6,
The purpose of this paper is to document changes in trends, functioning of )apital
markets in a globalised scenario particularly with reference to working of S,-& as
market regulator. &t also reOects the impact of changes in securities laws on the
capital markets.
Diven this backdrop, it is important to assess the impact of stock markets on a
countrySs economic development. (ne of the most obvious and direct e9ect of the
stock market is on the corporate sector of a country. The paper gives a section2wise
study of the various determinants of the )apital 8arkets and the e9ects of changes
in securities laws governing them.
SECTION 1 : CA(ITA+ %AR3ETS ; TO(ICA+ DEnion -ank of
&ndia, Allahabad -ank to name a few. The corporate sector is %nding it more
attractive to mobilise funds from the private placement market, which provides them
Oe/ibility in terms of time and cost involved in raising funds and is less rigorously
regulated than public issues market. The private placement dominated the primary
corporate market, accounting for over !#H of total resources mobilised domestically
by non2government entities. )orporate entities mobilised ?s. BC,!=# crores during
0##2#0 through the private placement, essentially through debt Securities, with
public sector units Q6S>sR meeting their resource re'uirements almost e/clusively
through this route. The public sector entities accounted for =BH of total resource
mobilisation by way of private placements, while private corporate sector accounted
for "#H of total resource mobilisation by way of public issues. Iowever, to prevent
public issues from being passed on as private placement, the )ompanies
QAmendmentR Act, 0## considered o9er of securities to more than =# persons as
made to public. Thus, the private placement is dominated by the public sector
entities and public issues by private corporate entities.
As may be seen from Table &&& below, &ndian market is getting integrated with the
global market though in a limited way through euro issues. Since !!0, when they
were permitted access, &ndian companies have raised about ?s. 3A,### crore through
AD?sMDD?s. -y the end of 8arch 0##0, C!# G&&s were registered with S,-&. They had
net cumulative investments over of >S N =.0 billion by the end of 8arch 0##0. Their
operations inOuence the market as they do delivery2based business and their
knowledge of market is considered superior.
Ta)#e III
Resouce %o)i#isation 0om (ima, %a&et
"Rs( Crore'
Iss)es $**&+ $**$+ $**!+ $**3+ $**,+ $**-+ $**.+ $**/+ $**0+ $***+
!&&&+ !&&$+
*$ *! *3 *, *- *. */ *0 ** && &$
&!
)orporate SecuritiesC,0! B,3BB 03,=3A CC,C!" C",#"C 3B,B"! 3A,CA C0,0= B#,!0 A0,C=# A",3!B
AC,C#3
Domestic &ssues C,0! B,3BB 03,0"B 3A,#CC C,!AC 3B,!3 33,"A0 3A,A3" =!,#CC B",!B3
AC,!! A0,#B
;on2Dovt. 6ublic
)ompanies C,30 B,!3 !,"#3 !,33# 0B,CA B,#A= #,C# 3,3" =,#3 =,=3
C,"!# =,B!0
6S> -onds =,BB3 =,A# ,#B0 =,="B 3,#A# 0,0!0 3,3!C 0,!"0 P
P P
Dovt. )ompanies P P C3# "! """ ,### B=# C3 P P
3=#
-anks : G&s P P 3=B 3,"C3 C0= 3,CB= C,3=0 ,CAB C,3=0 0,==
,CA0 ,#A#
6rivate 6lacementC,0CC C,CB3 ,B3= A,CBB ,AC 3,3B =,#BB 3#,#!! C!,BA! B,0=! BA,"3B
BC,!=#
,uro &ssues P P A#0 A,"!" B,AC3 ,0!A =,=!C C,##! ,C" 3,C"A C,!A
0,3C0
Dovernment Securities,=="0,0"C A,B!# =C,=33 C3,03 CB,A"3 C0,B"" BA,3"B #B,#BA 3,33B
0".C"3 =0,=#"
)entral Dovt. ",!"! ",!! 3,""= =#,3"" 3",#" C#,=#! 3B,=0 =!,B3A !3,!=3 !!,B3#
=,"3 33,"#
State Dovt. 0,=B! 3,3BC 3,"#= C,C= =,03 B,0AC B,=3B A,AC! 0,C 3,A#B
3,3## ",A#A
Total 0=,AAA 0",B=# C,00A !!,#3 !,3= "3,CA0 A!,"3= #!,= BB,0=! "=,A"B
0#B,"A! 00B,!
So)rce * ?-&
Issue of Debt Securities
The D&6 Duidelines were further amended on th 5anuary 0##0 to introduce the
facility of issue of debt securities without issue of e'uity, for companies desirous of
coming out with a public issue. The amended guidelines provide that an unlisted
company may make a public issue of non convertible debt securities Q
DSRMdebtsecurities convertible into e'uity QDS),R after allotment and make an application for
listing of the same in the Stock ,/changeMs without making a prior public issue of
e'uity and listing thereof, on ful%llment of the following re'uirements*
QaR The
DS shall carry a credit rating not below investment grade at least from oneregistered )redit ?ating Agency Q)?AR. 4here the issue si$e of the
DS is ?s. ## crore ormore, such rating shall be obtained from at least two )?As.
QbR The promoters contribution of at least 0#H of the pro1ect cost, i.e. ob1ects
proposed to be inter alia %nanced through the issue, shall be brought in the
form of e'uity. 4here the promoters contribution e/ceeds ?s. ## crore, the
promoters shall bring in ?s. ## crore before the opening of the public issue
and the remaining shall be brought in on pro rata basis, before calls on the
DS are made. The promoters contribution of 0#H of e'uity shall be lockedin for a period of 3 years from the date of allotment in the public issue of
DS.QcR The issuer company shall comply with the re'uirements of continuing
disclosures as speci%ed under the listing agreement to be entered into with
concerned stock e/changes as is applicable for listing of e'uity shares. A
municipal corporation which has no share capital may, sub1ect to the aforesaid
provisions, make a public issue of the
DS and list the same on stocke/changeMs.
Dovernment and corporate sector accessed market through debt issues. They
collectively raised a total of ?s. 0#C,#B! crore from primary market during 0##2
#0. About AC.AH of this was raised by Dovernment, while the balance by the
corporate sector through public issues and private placement as may be seen from
Table 02".
ADR9 4DRS9 0CCBs
Goreign &nvestment through AD?sMDD?s, Goreign )urrency )onvertible -onds
QG))-sR is treated as Goreign Direct &nvestment. &ndian companies are allowed to
raise e'uity capital in the international market through the issue of DD?MAD?sMG))-s.
These are not sub1ect to any ceilings on investment. An applicant company seeking
Dovernment’s approval in this regard should have a consistent track record for good
performance Q%nancial or otherwiseR for a minimum period of 3 years. This condition
can be rela/ed for infrastructure pro1ects such as power generation,
telecommunication, petroleum e/ploration and re%ning, ports, airports and roads.
There is no restriction on the number of DD?sMAD?sMG))-s to be Ooated by a
company or a group of companies in a %nancial year. There is no such restriction
because a company engaged in the manufacture of items covered under Automatic
?oute is likely to e/ceed the percentage limits under Automatic ?oute, whose direct
foreign investment after a proposed DD?sMAD?sMG))-s is likely to e/ceed =# per
centM= percentM AC
percent as the case may be. There are no end2use restrictions on DD?sMAD?s issue
proceeds, e/cept for an e/press ban on investment in real estate and stock markets.
The G))- issue proceeds need to conform to e/ternal commercial borrowing end use
re'uirements. &n addition, 0= per cent of the G))- proceeds can be used for general
corporate restructuring.
ADR, 4DR noms -uthe e#a=e6
+ &ndian bidders allowed to raise funds through AD?s, DD?s and e/ternal
commercial borrowings Q,)-sR for ac'uiring shares of 6S,s in the %rst stage
and buying shares from the market during the open o9er in the second stage.
+ )onversion and reconversion Qa.k.a. two2way conversion or fungibilityR of
shares of &ndian companies into depository receipts listed in foreign bourses,
while e/tending ta/ incentives to non2resident investors, allowed. The re2
coversion of AD?sMDD?s would, however, be governed by the Goreign
,/change 8anagement Act noti%ed by the ?eserve -ank of &ndia in 8arch
0##.
+ 6ermission to retain AD?MDD? proceeds abroad for future foreign e/change
re'uirements, removal of the e/isting limit of N0#,### for remittance under
the employees stock option scheme Q,S(6R and permitting remittance up to N
million from proceeds of sales of assets here.
+ )ompanies have been allowed to invest ## per cent of the proceeds of
AD?MDD? issues Qas against the earlier ceiling of =#HR for ac'uisitions of
foreign companies and direct investments in 1oint ventures and wholly2owned
subsidiaries overseas.
+ Any &ndian company which has issued AD?sMDD?s may ac'uire shares of
foreign companies engaged in the same area of core activity upto N##
million or an amount e'uivalent to ten times of their e/ports in a year,
whichever is higher. ,arlier, this facility was available only to &ndian
companies in certain sectors.
+ G&&s can invest in a company under the portfolio investment route upto 0C per
cent of the paid2up capital of the company. &t can be increased to C#H with
approval of general body of the shareholders by a special resolution. This limit
has now been increased to C!H from the present C#H.
+ Two way fungibility in AD?MDD? issues of &ndian companies has been
introduced sub1ect to sectoral caps, wherever applicable. Stock brokers in
&ndia can now purchase shares and deposit these with the &ndian custodian for
issue of AD?sMDD?s by the overseas depository to the e/tent of the
AD?sMDD?s that have been converted into underlying shares.
Euo Issues ), In6ian Companies
,arlier, &ndian )ompanies re'uired approval of the Dovernment of &ndia before
issue of Goreign )urrency )onvertible -onds QG))-sR. The ?-&, has vide G,8A
;oti%cation ;o * == dated 8arch Ath 0##0, liberalised these rules. Accordingly*
+ &ndian )ompanies seeking to raise G))-s are permitted to raise them under
the Automatic ?oute upto >S =# 8illion Dollars per %nancial year without any
approval.
+ The G))-s raised shall be sub1ect to the sectoral limits prescribed by the
Dovernment of &ndia.
+ 8aturity period for the G))-s shall be at least = years and the Uall in costV at
least ## basis points less than that prescribed for ,/ternal )ommercial
-orrowings.
SECONDAR1 %AR3ET
Union Bu6"et 2**2'*>
To help revive investor interest in primary issues, the >nion -udget of 0##32#C
made the following provisions P
+ Grom April , 0##3 dividends will be ta/2free in the hands of shareholders.
)orrespondingly, there will be a 0.=H dividend distribution ta/ on Domestic
companies.
+ All Tisted e'uities that are ac'uired on or after 8arch 0##3, and sold after
the lapse of a year or more, e/empt from the incidence of )apital Dains ta/.
Dei8ati8es
Derivative is a product whose value is derived from the value of one or more
basic variables, called bases Qunderlying asset, inde/ or reference rateR, in a
contractual manner. The underlying asset can be e'uity, fore/, commodity or any
other asset.
-y their very nature, the %nancial markets can be sub1ect to a very high degree of
volatility. As instruments of risk management, derivative products generally do not
inOuence the Ouctuations in the underlying asset prices. Iowever, by locking2in asset
prices, derivative products minimise the impact of Ouctuations in asset prices on the
pro%tability and cash Oow situation of risk2averse investors.
Derivatives of securities are traded in this segment. The derivative products
available for trading in this segment are &nde/ Gutures and &nde/ (ptions based on
S:6 );< ;ifty, Stock (ptions and Stock Gutures based C speci%ed securities. The
contracts are available with month, 0 months and 3 months e/piry. A new contract
is introduced on ne/t trading day following the e/piry of the near month contract. As
at the end of 8arch 0##3, a total of ,!3" securities comprising of 3 inde/ futures, B#
inde/ options, 03 stock futures and ,A=0 stock options were available for trading.
Dei8ati8es %a&et in In6ia
Derivatives trading commenced in &ndia in 5une 0### after S,-& granted the %nal
approval to this e9ect in 8ay 0###. S,-& permitted the derivative segments of two
stock e/changes, vi$ ;S, and -S, and their clearing houseMcorporation to commence
trading and settlement in approved derivative contracts. To begin with, S,-&
approved trading in inde/ futures contracts based on S:6 );< ;ifty &nde/ and -S,2
3# QSense/R &nde/. This was followed by approval for trading in options based on
these two indices and options on individual securities. The trading in inde/ options
commenced in 5une 0## and trading in options on individual securities commenced
in 5uly 0##. Gutures contracts on individual stock were launched in ;ovember 0##.
Derivative contracts are traded and settled in accordance with the rules, byelaws,
and regulations of the respective e/changes and their clearing houseMcorporation
duly approved by S,-& and noti%ed in the ofcial ga$ette.
Inteest Rate Dei8ati8es
&nterest rate derivatives market has been widely used in the international markets
by banks, institutions and common investors.
&nterest ?ate Derivatives have been introduced in &ndian market by ;S, with
trading on Gutures on notional ! day T2bills and # year $ero coupon as well as BH
notional coupon bearing bond on 5une 0C, 0##3.
The G
segment reported a total trading volume QnotionalR of ?s. C,3!,"BC croreduring 0##02#3 as against ?s. ,#,!0B crore during the preceding year. The trading
volume witnessed a sharp rise with the introduction of stock futures in ;ovember
0##.
0oei"n Institutiona# In8estos !0IIs$
-anks, %nancial institutions QG&sR and insurance companies have turned out to be
ma1or sellers of blue chip stocks during the %rst 'uarter ended 5une 3#, 0##3.
They have oWoaded shares in companies including &T), Drasim &ndustries, State
-ank of &ndia and Tata 8otors Qformerly TelcoR, taking advantage of the rally in the
e'uity markets. Tife &nsurance )orporation QT&)R leads the pack among sellers, having
sold shares in &T), (riental -ank of )ommerce, Drasim &ndustries, Du1arat Ambu1a,
8ahindra and 8ahindra, -S,S and many other corporates. During this period, the
sense/ arose AH while the rise in the ;ifty was =H. 4hile domestic G&s have been
selling, most of the attention in the markets has been focused on G&&s who have been
ma1or buyers in e'uities over the past few months. A key factor fuelling the e'uity
markets has been G&& inOows, which have grown unabated. During the year ended
8arch 0##3 net G&& investment in the market stood at 0=0B.!# while investment for
the period from April 0##3 to August 0##3 stood at BB!B.3#.
%utua# 0un6s
The market is getting institutionali$ed as people prefer mutual funds as their
investment vehicle, thanks to evolution of a regulatory framework for mutual funds,
ta/ concessions o9ered by government and preference of investors for passive
investing. The net investment of mutual funds for 0##02#3 has been showing a
negative trend of ?s. 0,#B" )rores while the net investments for the period from
April 0##3 to August 0##3 was ?s. 20=.33 )rores .
&n Gebruary 0##3, following the repeal of the >nit Trust of &ndia Act !B3 >T& was
bifurcated into two separate entities. (ne is the Speci%ed >ndertaking of the >nit
Trust of &ndia with assets under management of ?s.0!, "3= crores as at the end of
5anuary 0##3, representing broadly, the assets of >S BC scheme, assured return and
certain other schemes. The Speci%ed >ndertaking of >nit Trust of &ndia, functioning
under an administrator and under the rules framed by Dovernment of &ndia and does
not come under the purview of the 8utual Gund ?egulations.
The second is the >T& 8utual Gund Ttd, sponsored by S-&, 6;-, -(- and T&). &t is
registered with S,-& and functions under the 8utual Gund ?egulations. 4ith the
bifurcation of the erstwhile >T& which had in 8arch 0### more than ?s.AB,### crores
of assets under management and with the setting up of a >T& 8utual Gund,
conforming to the S,-& 8utual Gund ?egulations, and with recent mergers taking
place among di9erent private sector funds, the mutual fund industry has entered its
current phase of consolidation and growth. As at the end of 5une 3#, 0##3, there were 3
funds, which manage assets of ?s.#CAB0 crores under 3AB schemes. The following graph depicts
the changes in Assets under management since the year !B= till 5une 0##3*
Note :
,rstwhile >T& was bifurcated into >T& 8utual Gund and the Speci%ed >ndertaking
of the >nit Trust of &ndia e9ective from Gebruary 0##3. The Assets under
management of the Speci%ed >ndertaking of the >nit Trust of &ndia has therefore
been e/cluded from the total assets of the industry as a whole from Gebruary 0##3
onwards.
?ecently the S,-& has clari%ed vide )ircular ;o. #3M="M#3 dated #th 5une, 0##3
that mutual funds may consider using interest rate derivatives.
Raisin" -un6s thou"h (i8ate (#acement
&n sharp contrast to a shrinking public issues market for corporate securities, the
last few years have witnessed huge resource mobili$ation through private placement.
)orporate sector mobilised ?s. =!,0A crore Q?s. CB,00# crore with maturity of
more than one year and ?s. 0,!#A crore with maturity of less than one yearR
during 0##2#0 through private placement of debt securities. According to 6rime
Database estimates, a total of 0#= issuers raised ?s. CB,00# crore through =="
privately placed issues in 0##2#0, a decline of ."=H over the funds raised through
this route in the preceding year. About ?s. 0,B3C billion have been raised through
private placement of debt during last seven years since April !!=.
6ublic Sector units and G&s are most active in mobilising funds through private
placement. They accounted for A=."H of the total private placement market in debt
instruments during 0##2#0 as against "0.=H in 0###2#. All &ndia %nancial
institutions and -anks led the market with a C#.3H share. 6rivate Sector accounted
for 0C.0H of private placement of debt during 0##2#0. The top # issuers accounted
for 3H of total private placement during 0##2#0.
Re"u#ato, 4ap9O8e#ap
The responsibility for supervision and development of the securities market is
shared by Department of ,conomic A9airs QD,AR, Department of )ompany A9airs
QD)AR, ?eserve -ank of &ndia Q?-&R and S,-&. &n view of involvement of a number of
agencies, there is scope for confusion among the regulators and the regulated,
regulatory gaps and overlaps, and duplicate and inconsistent regulations. Gor
e/ample, no regulator was e/plicitly assigned the responsibility of regulating
collective investment scheme till it caused concern when it was assigned to S,-&.
&nvestor interest would probably be better served if there is only one regulator for the
securities market, with clearly de%ned regulatory 1urisdiction and accountability.
SECTION 2 ; SECURITIES +A?S ; A %Onits or any other instrument issued by any collective investment scheme to
the investors in such schemes.
QivR Security receipt.
QvR Dovernment securities.
QviR Such other instruments as may be declared by the )entral Dovernment to be
securities. and
QviiR ?ights or interests in securities.
De)entue Re6emption Rese8e
The Section A) of the )ompanies Act, !=B contemplates the creation of
security and li'uidity to ensure timely repayment by companies on redemption of
debentures and thereby a9ord protection to the debenture holders. &t re'uires every
company to create a Debenture ?edemption ?eserve QD??R to which ade'uate
amounts shall be credited out of its pro%ts every year until such debentures are
redeemed, and shall utilise the same e/clusively for redemption of a particular set or
series of debentures only.
A new development came in the matter when the Department of )ompany A9airs
issued following clari%cations in this regard*
QaR ;o D?? is re'uired for debentures issued by All &ndia Ginancial &nstitutions
QA&G&sR regulated by ?-& and banking companies for both public as well as
privately placed debentures.
QbR Gor other G&s and for ;-G)s registered with ?-&, the ade'uacy of D?? will be
=#H of the value of debentures issued through public issue and no D?? would
be re'uired in the case of privately placed debentures.
QcR Gor manufacturing and infrastructure companies, the ade'uacy of D?? would
be =#H of the value of debentures issued through public issue and 0=H for
privately placed debentures.
QdR Section A) of the )ompanies Act would apply to debentures issued and
pending to be redeemed and as such D?? is re'uired to be created for
debentures issued prior to December 3, 0###.
QeR Section A) would also apply to non2convertible portion of debentures issued
whether they are fully or partly convertible.
EDI0AR
&n association with ;ational &nformatics )entre Q;&)R, S,-& has set up an E#ectonic
Data In-omation 0i#in" an6 Retie8a# Q,D&GA?R System to facilitate an electronic %ling of
certain information by listed companies. This is an automated system for %ling,
retrieval and dissemination of time sensitive corporate information which are now
being %led physically by the listed companies with the stock e/changes. The primary
ob1ective is to centrali$e the information and accelerate its dissemination and
thereby enhance transparency and efciency for the bene%t of various classes of
market participants like, investors, regulatory organisation, research institutions,
companies and stock e/changes. This is analogous to the ,lectronic Data Dathering,
Analysis and ?etrieval Q,DDA?R system of the >S Securities ,/change )ommission.
The system is being introduced in phases. &n the %rst phase, the information that
would be %led online are* QiR %nancial statements comprising of balance sheets, pro%t
and loss account and full version of annual report, half yearly %nancial statements
including cash Oow statements and 'uarterly %nancial statements, QiiR corporate
governance reports, QiiiR shareholding pattern statement, QivR statement of action
taken against the company by regulatory agencies and QvR such other statement,
information or report as may be speci%ed by S,-& from time to time in this regard.
These %lings would be in addition to the %lings made by the companies with the stock
e/changes in compliance with the provisions of the listing agreement. Dradually the
physical %ling would be discontinued and both the number of companies as well as
disclosure statements would be e/panded to cover all the actively traded companies
for all the disclosure statements.
Copoate 4o8enance
The concept of )orporate Dovernance was mooted in the year !!B2!A in the
&ndian corporate sector and has since been discussed at various forums like )&&, &)S&,
G&))& etc. and following the recommendations of Fumar 8angalam -irla )ommittee
formed by S,-& the same was included in the Standard Tisting Agreement and was
sought to be implemented within a de%nite time frame of three years commencing
from the %nancial year 0###2#. At present the code is applicable on all the listed
companies.
The D)A in the 8inistry of Ginance and )ompany A9airs appointed a high level
committee, to e/amine various corporate governance issues and to recommend
change in the diverse areas such as*
QaR the statutory auditor2 )ompany relationship.
QbR the need, if any for rotation of Statutory audit %rms or partners.
QcR the procedure for appointment of auditors and determination of audit fees.
QdR restrictions, if any on non2audit fees.
QeR independence and auditing functions.
QfR measures re'uired to ensure that the management and companies actually
present, Strue and fair’ statement of the %nancial a9airs of companies.
QgR need to consider measures such as certi%cation of accounts and %nancial
statements by management and directors.
QhR the necessity of having a transparent system of random scrutiny of audited
accounts.
QiR ade'uacy of regulating the professions of chartered accountants, company
secretaries and other similar over sight functionaries.
Q1R advantages, if any, of setting up an independent regulator similar to the 6ublic
)ompany Accounting (versight -oard in the S(< Act, and if so, its
constitution. and
QkR the role of independent directors and how their indepence and e9ectiveness
can be ensured.
Centa# +istin" Authoit,
,arlier it was mandatory to list a security on a regional e/change and at the same
time it could be listed on any number of e/changes. The issuer had option to list its
securities on any one or more of the e/changes. The issue fails if the regional
e/change refuses listing. The issue also fails if any of the e/changes, to which
application for listing has been made, refuses to list the security. This arrangement
generates unhealthy competition. There is a competition among the issuers to list
securities on as many e/changes as possible to attract investors from all over the
country and waste resources to comply with the listing re'uirements of a number of
e/changes simultaneously. Similarly there is a competition among the e/changes to
attract as many issuers as possible at times leading to dilution of listing standards
particularly when listing constitutes a ma1or source of income for many of them. 4hy
should a company comply with listing agreement with di9erent e/changes or why
should a number of e/changes monitor compliance by a company X Tisting casts
onerous responsibilities on the e/change in the sense that it acts as a trustee for
investors and ensures compliance of certain standards by a listed company. 8ost of
the e/changes, given their %nancial health and organi$ational structure, are not in a
position to supervise such large number of listed companies.
&n view of the foregoing, it is desirable that there is only one agency which
considers all re'uests for listing and grants listing if it %nds a security suitable for
investors across the country. A security granted listing by the agency would be
available for trading on all e/changes who will not waste resources in terms of
duplication of e9orts on listing and monitoring compliance.
Feeping in view the above, S,-& has noti%ed S,-& Q)entral Tisting AuthorityR
?egulations, 0##3 on 3th Gebruary, 0##3.
The salient features of the above scheme are as follows *2
+ ,stablishment of a self regulatory specialised organisation for screening of
Tisting proposals of )ompanies, 8utual Gunds and )&S.
+ )TA to review Tisting conditions and Tisting Agreement and make
recommendations to S,-&.
+ )ompliance with Tisting conditions and Tisting Agreement are made more
stringent.
+ &n addition to )o’s, )&S, 8G’s have also been sub1ected to )TA.
Demutua#isation
8ost of the e/changes are Association of 6ersons which was considered bene%cial
in terms of ta/ bene%ts and matters of compliance. They are now having a re2look at
the way they conduct business and are gearing up to demutualise themselves by
converting themselves into a public limited companies. They will also be accessing
securities market to %nance their ever e/panding trading network and would be
interested to list their securities. This would create an anomalous situation where a
stock e/change would admit its own securities for trading. A satisfactory solution
would be to vest the listing powers with a body separate from the stock e/changes.
The stock e/changes, e/cept ;S, and (T),&, are organised as mutual which was
considered bene%cial in terms of ta/ bene%ts and matters of compliance. The trading
members, who provide brokering services also own, control and manage the stock
e/change. &n the changed environment, these mutual e/changes do not seem to o9er
an e9ective model for self2regulatory organisations. The regulatory and public
interest role of the e/change at times conOicts with private interests of the elected
broker directors. This limitation has been realised by the stock e/changes themselves
as well as the regulators. &n view of the less than satisfactory 'uality of
administration of broker2managed e/changes, the Ginance 8inister in 8arch 0##
proposed demutualisation of the e/changes by which ownership, management and
trading membership would be segregated from each other. The process of
demutualisation is e/pected to be completed during 0##32#C.
Two stock e/changes vi$. (T),& and ;S, are already demutualised. These are
managed by boards of directors, which do not include trading members. These are
purest forms of demutualised e/changes, where ownership, management and trading
are in the hands of three di9erent sets of people. This model of demutualisation has
completely eliminated any conOict of interest and helped the e/changes to pursue
market efciency and investors interest aggressively. The ;S, model of
demutualisation compares well with the international models of demutualised stock
e/changes.
De#istin" o- Secuities
The incidence of delisting has been increasing in the recent past. This has
assumed importance in view of a number of 8
s ac'uiring the entire e'uity of their&ndian subsidiaries through open o9ers and then delisting from the e/changes.
During the year S,-& has prescribed fresh guidelines on delisting of securities. The
main features of the present guidelines are enumerated below*
+ Duidelines have been noti%ed e9ective from A.#0.0##3 based upon the
recommendations of a )ommittee constituted under the )hairmanship of 8r.
6ratip Far, ,/ecutive Director, S,-&.
+ Delisting of Securities in a fair and transparent and investor friendly manner
either voluntarily by the )o. and compulsory by the S,.
+ -ook building process for determination of e/it price.
+ Dispensation with the compulsory ?S, listing.
+ Shareholder’s right to compensation in the event of compulsory delisting.
+ Tisting at ;S, and -S, made more attractive.
+ -uy back route not permitted for delisting.
+oo&in" 0o5a6
The past decade in many ways has been remarkable for securities market in
&ndia. &t has grown e/ponentially as measured in terms of amount raised from the
market, number of stock e/changes and other intermediaries, the number of listed
stocks, market capitalisation, trading volumes and turnover on stock e/changes and
investor population. Along with this growth, the pro%les of the investors, issuers and
intermediaries have changed signi%cantly. The market has witnessed fundamentalM
institutional changes resulting in drastic reduction in transaction costs and signi%cant
improvements in efciency, transparency and safety.
?eforms in the securities market, particularly the establishment and
empowerment of S,-&, market determined allocation of resources, screen based
nation2wide trading, dematerialisation and electronic transfer of securities, rolling
settlement and ban on deferral products, sophisticated risk management and
derivatives trading, have greatly improved the regulatory framework and efciency of
trading and settlement. &ndian market is now comparable to many developed
markets in terms of a number of 'ualitative parameters. 8ore strategic plans are in
the ofng as S,-& aspires to make the &ndian Securities market a truly world class
market. Iowever the year 0##02#3 has not been such a remarkable year for the
stock markets with stocks plummeting to new lows : a spate of collapses taking
place during the year which has shaken investors’ con%dence in the markets and cast
doubts on the accountability and transparency claims made by corporates, S,-& and
various functionaries of the market.
&t is with this backdrop that the role of S,-& needs a transformation which entails
a greater and proactive role in the market, immediate need to initiate stringent
actions on defaulters, implementation of code of corporate governance in an
e9ective manner. Some transformation is necessary to make the role of S,-& at par
with international regulators like, S,) of >.S.
BIB+IO4RA(@1
. &ndian Securities 8arket ?eview + ;S, publication.
0. ;S, Gact -ook 0##3 + ;S, publication.
3. IDG) 8utual Gund newsletter for 'uarter ended 1une 0##3.
C. The ,conomic Times + newspaper.
=. The Iindustan Times + newspaper.
B. Securities : ,/change -oard of &ndia +www.sebi.com.
A. ?eserve -ank of &ndia + www.rbi.com.
". Association of 8utual Gunds of &ndia + www.am%india.com.
!. ;ational Stock ,/change + www.nseindia.com.
#. www.indiainfoline.com.
. www.indiabudget.nic.in.
0. www.indiabulls.com.
3. &ndian ,/press + ;ewspaper.
C. www.sudhirlaw.com.
doc_441488756.doc