The Indian securities market is in transition. Several important changes were brought for the smooth and effective functioning of stock exchanges from the time to time by the SEBI. The revolutionary changes have been taking place over a period of time. In fact, on almost all the operational and systematic risk management parameters, settlement system, disclosures, accounting standards, the Indian securities market is at par with the global standards. Some of those initiatives taken place in the secondary market are discussed below:
- Overall administration, supervision and control of the stock exchanges: The central government for the first time in April 1988 constituted an administrative body viz. securities and exchange board of India and in January 1992, the central government enacted an Act granting a statutory recognition to the securities and exchange board of India as a regulator of the securities/ markets. The governing board of the council to be consisting of total 10 members, 4 from stock exchanges, 4 from government, corporate finance, commerce, accountancy, management and law and 2 from investment and development finance institutions.
- Membership of the stock exchange: Minimum basic educational qualification is 12th standard or equivalent and graduation after 5 years. Members to have reasonable background in economics, corporate finance, taxation, etc. The stock exchanges have to approve members (trainers) to impart adequate knowledge and training to aspirants for membership. Financial institutions, commercial banks and companies are also eligible for membership of stock exchanges.Membership is to be open to a qualified person at any time. Multiple memberships are allowed to member to encourage provision of better services to the investing public and to further the healthy development of capital market.
- Public issues: The companies eligible to make a public issue can freely price their equity shares or any security convertible into equity at a later date in cases of public/ rights issues by listed companies and public issue by unlisted companies. In addition, eligible infrastructure companies can freely price their equity shares subject to compliance of disclosure norms of SEBI. The public and private sector banks can also freely price their shares subject to approval by RBI. A company may issue shares to applicants in the firm allotment category at higher price than the price at which securities are offered to public. Further an eligible company is free to make public/ rights issue in any denomination determined by it in accordance with sub-section (4) of section 13 of the companies Act, 1956 and SEBI norms.
- Risk management: In the equipment leasing industry, application of the liquidity and hedging tools of modern corporate finance has lagged behind other sectors of the financial services business. The creation of a deep and liquid secondary market for lease assumptions will enable liquidity to be made available and provide more flexibility to both lessees and lessors. For a better appreciation of how this might come about, this article presents an economic and financial analysis of the developing secondary market for lease assumption. A continuing development in corporate finance has been the sophisticated risk management methodologies involving credit enhancement, hedging through derivative securities, and techniques and structures such as securitization for improved liquidity. This paper presents a brief economic and financial analysis of the developing secondary market for lease assumption, focusing on the incentive structure and the underlying rationale for a secondary market. The enhanced optionality and liquidity that this advance in the state of the art permits has the potential to create value for all market participants and, in particular, significant risk management benefits for lessors.
- Systems audit: Trading, settlement and risk management system of stock exchanges are almost completely automated. For this reason, it becomes very important that the systems do not have deficiencies which can impair their efficacy. It also becomes important to ensure that the stock exchanges have suited disaster recovery sites and business continuity plans and that the systems are adequately secure. Active stock exchanges have been asked to carry out system audit through external agencies competent to carry system audit exercise. SEBI does follow-up for rectification of deficiencies pointed out in the systems audit reports. In 2004-2005 too. Such follow-up was done through offsite analysis of compliance reports from stock exchanges and meeting with the senior management of stock exchanges.
- Institutionalization: Capital market are said to be more efficient when they have more participants, instruments, processes and other alternatives. Indian capital market was dominated by individual investors till early part of the 1990’s. Earlier institutional investors such as life insurance Corporation of India, General Insurance Corporation of India and its four subsidiaries, Development financial institutions, banks etc., used to take minor role in the capital market activity. Unit trust of India, the only mutual fund then, used to play active role in the primary market and secondary capital market. 1990s saw entry of many new participants to the capital market. SEBI permitted private sector and joint sector (Indian as well as foreign), mutual funds. Government of India and SEBI allowed foreign institutional investors, non-resident Indians and overseas corporate bodies to trade in securities. Additionally, non-banking finance companies also have been taking interest in dealing in securities. Thus, the variety of participants taking interest in the Indian capital market substantially increased and the current variety is as large as is available in any other developed market.