Q:-What kind of reform process is under way for Indian capital market? Elaborate. ?Capital Market:- A capital market is a place that handles the buying and selling of the securities. This is the ideal place where both the governments and companies can raise their funds. ?Capital Market Reforms:- The capital markets of all the countries have undergone a number of reforms in the history. Capital market reform enables the capital markets to embrace new ideas and techniques affecting the capital market.
Capital market liberalization is one such capital market reform that is adopted by various countries to strengthen their economy. Economic theories are made and implemented to reform the functionalities of the capital market. The prime objective behind all the policies and reforms was obviously to strengthen the capital market of a particular country as much as possible. It has been always a big question to the economists whether to allow or not to allow the foreign investments in the country. Packaged with both advantages and disadvantages, the liberalization of the capital markets has always been controversial.
In the 1980s and 1990s when the US Treasury and International Monetary Fund (IMF) tried to push world-wide capital-market liberalization, there had been enormous opposition. Economists were not in the support of free and unfettered markets. Now, when the capitalist countries, developing capitalist countries, underdeveloped countries and a large number of socialist countries have nodded their support to the capital market reform and capital market globalization, the global capital market has evolved in a new identity.
The concept of capital market is not restricted to the share and bond trading in the developed capitalist countries only but is equally influenced by the capital markets of developing and underdeveloped countries as well. Now the economic or financial change in one country can affect the capital market of other country in real time. Almost all the countries are now exposed to the inter-country trades and inter-country investments. The use of internet and electronic media has added some more feasibility to the practice. Exchange of information is fast and accurate with internet.
Another advantage of this system is that it brings the entire world in a single place. The capital market is one of the industries that enjoy the maximum facility of the internet service. ?The Indian Securities Market Before 1992 The Indian securities market before 1992 had the following characteristics: • Fragmented regulation; multiplicity of administration. • Primary markets not in the mainstream of the financial system. • Poor disclosure in prospectus. Prospectus and balance sheet not made available to investors. • Investors faced problems of delays (refund, transfer, etc. • Stock exchanges regulated through the Securities Contracts (Regulations) Act. No inspection of stock exchanges undertaken. • Stock Exchanges run as brokers clubs; management dominated by brokers.
• Merchant bankers and other intermediaries unregulated. • No concept of capital adequacy. • Mutual funds—virtually unregulated with potential for conflicts of interest in structure. • Poor disclosures by mutual funds; net asset value (NAV) not published; no valuation norms. • Private sector mutual funds not permitted. • Takeovers regulated only through listing agreement between the stock exchange and the company. No prohibition of insider trading, or fraudulent and unfair trade practices. ?Reforms in Indian Securities Market (Capital Market Reforms) The Indian regulatory and supervisory framework of securities market has been adequately strengthened through the legislative and administrative measures in the recent past. The regulatory framework for securities market is consistent with the best international benchmarks, such as, standards prescribed by International Organization of Securities Commissions (IOSCO). 1Extensive Capital Market Reforms were undertaken during the 1990s encompassing legislative regulatory and institutional reforms.
Statutory market regulator, which was created in 1992, was suitably empowered to regulate the collective investment schemes and plantation schemes through an amendment in 1999. Further, the organization strengthening of SEBI and suitable empowerment through compliance and enforcement powers including search and seizure powers were given through an amendment in SEBI Act in 2002. Although dematerialization started in 1997 after the legal foundations for electronic book keeping were provided and depositories created the regulator mandated gradually that trading in most of the stocks take place only in dematerialized form. Capital Issues (Control) Act of 1947 repealed and the office of Controller of Capital Issues abolished; control over price and premium of shares removed.
Companies now free to raise funds from securities markets after filing prospectus with the Securities and Exchange Board of India(SEBI). 3Till 2001 India was the only sophisticated market having account period settlement alongside the derivatives products. From middle of 2001 uniform rolling settlement and same settlement cycles were prescribed creating a true spot market. After the legal framework for derivatives trading was provided by the amendment of SCRA in 1999 derivatives trading started in a gradual manner with stock index futures in June 2000. Later on options and single stock futures were introduced in 2000-2001 and now India’s derivatives market turnover is more than the cash market and India is one of the largest single stock futures markets in the world. 5India’s risk management systems have always been very modern and effective. The VaR based margining system was introduced in mid 2001 and the risk management systems have withstood huge volatility experienced in May 2003 and May 2004.
This included real time exposure monitoring, disablement of broker terminals, VaR based margining etc. 6India is one of the few countries to have started the screen based trading of government securities in January 2003. 7In June 2003 the interest rate futures contracts on the screen based trading platform were introduced. 8India is one of the few countries to have started the Straight Through Processing (STP), which will completely automate the process of order flow and clearing and settlement on the stock exchanges. RBI has introduced the Real Time Gross Settlement system (RTGS) in 2004 on experimental basis. RTGS will allow real delivery v/s. payment which is the international norm recognized by BIS and IOSCO. 10To improve the governance mechanism of stock exchanges by mandating demutualization and corporatization of stock exchanges and to protect the interest of investors in securities market the Securities Laws (Amendment) Ordinance was promulgated on 12th October 2004. The Ordinance has since been replaced by a Bill.