Capital market reforms by the SEBI

Securities and Exchange Board of India (SEBI) has a primary responsibility of regulating and supervising the capital market. It has introduced a number of reforms for the control and supervision of capital market and investors protection.

Primary Market Reforms by the SEBI:

The Securities and Exchange Board of India (SEBI) has introduced various guidelines and regulatory measures for capital issues for healthy and efficient functioning of capital market in India. The issuing companies are required to make material disclosure about the risk factors, in their offer documents and also to get their debt instruments rated. Steps have been taken to ensure that continuous disclosures are made by firms so as to enable to investors to make a comparison between promises and performance. The merchant bankers now have greater degree of accountability in the offer document and the issue process. The due diligence certificate by the lead manager regarding disclosure made in the offer document, has been made a part of the offer document itself for better accountability and transparency on the part of the lead managers.

New reforms by SEBI, in the primary market, include improved disclosure standards. introduction of prudential norms and simplifications of issue procedures. Companies are now required to disclose all material facts and specific risk factors associated with their projects while making public issues. SEBI has also introduced a code for advertisement for public issues for ensuring fair and true picture. In order to reduce the cost of issue, the underwriting of issues has been made optional subject to the conditions that if the subscription is less than 90% f the amount offered, the entire amount collected would be refunded to the investors.

The book-building process in the primary market has been introduced with a view to further strengthen the price fixing process. Indian companies have been allowed to raise funds from abroad by issue of ADR/GDR/FCCB, etc.

Secondary Market Reforms by the SEBI:

Since the establishment of Securities and Exchange Board of India (SEBI) in 1992, the decades old trading system in stock exchanges has been under review. The main deficiencies of the system were found in two areas : (i) the clearing and settlement system in stock exchanges whereby physical delivery of shares by the seller and the payment by the buyer was made, and (ii) procedure for transfer of shares in the name of the purchaser by the company. The procedure was involving a lot of paper work, delays in settlement and non-transparency in costs and prices of the transactions. The prevalence of ‘Badla’ system had often been identified as a factor encouraging speculative activities. As a part of the process of establishing transparent rules for trading, the ‘Badla’ system was discontinued in December 1993. The SEBI directed the stock exchanges at Mumbai, Kolkata, Delhi and Ahmadabad to ensure that all transactions in securities are concluded by delivery and payments and not to allow any carry forward of the transactions.

The floor-based open outcry system has been replaced by on-line electronic system. The period settlement system has given way to the rolling settlement system. Physical share certificates system has been outdated by the electronic depository system. The risk management system has been made more comprehensive with different types of margins introduced. FII’s have been allowed to participate in the capital market. Stringent steps have been taken to check insider trading. The interest of minority shareholders has been protected by introducing takeover code. Several types of derivative instalments have been introduced for hedging.

As a result of the reforms/initiatives taken by Government and the Regulators, the market structure has been refined and modernized. The investment choices for the investors have also broadened. The securities market moved from T+3 settlement period to T+2 rolling settlement with effect from April 1, 2003. Further, straight through processing has been made mandatory for all institutional trades executed on the stock exchange. Real time gross settlement has also been introduced by RBI to settle inter-bank transactions online real time mode.

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