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CHAPTER – III
INDIAN CAPITAL MARKETS – AN OVERVIEW
INTRODUCTION
Chapter three gives brief account of capital market developments in India
under various heads like Indian capital market before 1990’s , Indian capital market
after 1990’s, primary market developments, secondary market developments, SEBI
registered market intermediaries, mutual funds, derivatives, foreign institutional
investments, screen based trading system, depositories, clearing, processing and
settlement system, risk management system, margin trading facility, Regulatory
frame work for investor protection, security Regulations in force, security guidelines
in force, grievances redressal mechanism, investor education, recent initiatives and
Indian capital market future road map.
Capital market is the backbone of any country’s economy. It is an engine for
economic growth, providing an efficient means of resource mobilisation and
allocation. The literature is full of theoretical and empirical evidence that have
established robust, statistically significant two-way relationship between the
developments in the securities market and economic growth. Levine and Zervos
(1998) argue that well developed stock markets may be able to offer financial
services of different kind that may provide a different kind of impetus to the
economic development1. In India, Agarwall’s (1999), study clearly supports the
Levine and Zervos’s argument and proves that the two main parameters of capital
market development namely, size and liquidity, are found statistically significant to
explain the economic activity.2
The Indian capital market is one of the oldest capital markets in the world. It
dates back to the 18th
century when the securities of the East India Company were
traded in Mumbai and Kolkata. However, the orderly growth of the capital market
began with the setting up of The Stock Exchange of Bombay in July 1875 and
Ahmedabad Stock Exchange in 1984. Eventually 19 other Stock Exchanges sprang
up in various parts of the country.3 In this chapter an attempt has been made by the
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researcher to review the Capital Market Developments that has taken place in India
in two phases such as:
i. Indian Capital Market – Before 1990’s
ii. Indian Capital Market – After 1990’s
3.2. INDIAN CAPITAL MARKET – Before 1990’s
India’s Capital Market was dormant till the mid – 1980‘s.4 The long term
financing needs of the corporate sector were met by the Development Financial
Institutions (DFI’s) namely IDBI, IFCI, ICICI as well as by other investment
institutions like LIC, UTI, GIC etc. Working capital needs were met by the
Commercial Banks through an elaborate network of bank branches spread all over
the country. Capital Market activities were limited mainly due to the easy
availability of loans from banks and financial institutions and administered structure
of interest rates. However, three important legislations namely Capital Issues
(control) Act 1947: Securities Contracts (Regulation) Act, 1956; and Companies
Act, 1956 were enacted to provide suitable legal framework for the development of
capital market in India. The pricing of the primary issues was decided by the Office
of the Controller of Capital Issues. A few stock exchanges, dominated by Bombay
Stock Exchange (BSE) provided the trading platforms for the secondary market
transactions under an open outcry system.
As of 1992, the Bombay Stock Exchange (BSE) was a monopoly.5 It was an
association of brokers, and imposed entry barriers; leading to elevated costs of
intermediation. Membership was limited to individuals; limited liability firms could
not become brokerage firms. Trading took place by ‘open outcry’ on the trading
floor, which was inaccessible to users. It was routine for brokers to charge the
investor a price that was different from what is actually transacted at.
Retail investors and particularly users of the market outside Bombay,
accessed market liquidity through a chain of intermediaries called “sub–brokers”.
Each sub–broker in the chain introduced a mark-up in the price, in the absence of
unbundling of professional fees from the trade price. It was common for investors in
small towns to face four intermediaries before their order reached the BSE floor, and
to face mark-ups in excess of 10% as compared with the actual trade price. The
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market used ‘futures–style settlement’ with fortnightly settlement. A peculiar market
practice called ‘badla’ allowed brokers to carry positions across settlement periods.
In other words, even open positions at the end of the fortnight did not always have to
be settled. The efficiencies of the exchange clearing house only applied for the
largest 100 stocks. For other stocks, clearing and settlement were done bilaterally,
which introduced further inefficiencies and costs.
The final leg of the trade was physical settlement, where the share
certificates were printed on paper. This was intrinsically vulnerable to theft,
counterfeiting, inaccurate signature verification, administrative inefficiencies, and a
variety of other malpractice. Involuntary and deliberate delays in settlement could
take place both at the BSE and at the firm. Many firms used the power of delaying
settlement as a tool to support manipulation of their own stock. The problems were
somewhat simpler for investors in Bombay, who could physically visit the BSE
broker, the BSE clearinghouse, or the company’s Registrar, and accelerates transfer.
For investors outside Bombay, who lacked this recourse and were crippled by the
exorbitantly expensive telephone system, delays of six months between purchasing a
stock and the transfer of legal title were common. If stock splits, rights issues, or
dividend pay-outs took place during this period, it was common for the purchaser
not to obtain the benefits.
Floor–based trading, the inefficiencies in clearing and settlement entry
barriers into brokerage, and the low standards of technology and organisational
complexity that accompanied the ban upon corporate membership of the BSE led to
an environment where order execution was unreliable and costly. 6
These factors led
to an extremely poor functioning of the capital markets till 1992.
3.3. INDIAN CAPITAL MARKET – After 1990’s
The Indian capital markets have witnessed a major transformation and
structural change during the past one and half decades, since the early 1990’s.7 The
Financial Sector Reforms in general and the Capital Market Reforms in particular
were initiated in India in a big way since 1991 – 1992. These reforms have been
aimed at improving market efficiency, enhancing transparency, checking unfair
trade practices and bringing the Indian capital market up to the International
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Standards. The Capital Issues (control) Act, 1947 was repealed in May 1992 and the
office of the Controller of Capital Issues was abolished in the same year. The
National Stock Exchange (NSE) was incorporated in 1992 and was given
recognition as a Stock Exchange in April 1993, which has been playing a lead role
as a change agent in transforming the Indian Capital Market to its present form.8 The
Securities and Exchange Board of India (SEBI) was set up in 1988 and acquired the
statutory status in 1992. Since 1992, SEBI has emerged as an autonomous and
independent statutory body with definite mandate such as: (a) to protect the interests
of investors in securities, (b) to promote the development of securities market and
(c) to regulate the securities market. In order to achieve these objectives, SEBI has
been exercising power under: (a) Securities and Exchange Board of India Act, 1992,
(b) Securities Contracts (Regulation) Act, 1956, (c) Depositories Act, 1996 and
delegated powers under the (d) Companies Act, 1956. Indian Capital Market has
made commendable progress since the inception of SEBI and has been transformed
into one of the dynamic capital markets of the world.9 The statistics on International
equity Markets as on December 31, 2009 given in Table-1 clearly highlights this.
Table – 3.1
International Equity markets (End December 2010) 10
Exchange
Market
Capitalisation
(US $ Million)
No. of
Listed
Companies
Value of Share
trading
(US $ Million)
No. of
trading
days
Americans
American SE
Lima SE
Mexican Exchange
Nasdaq
NYSE
Santiago SE
Sao Paulo SE
132367
71663
352045
3239492
11837793
230732
591966
486
241
406
2852
2327
236
392
561603
4532
84255
28951349
17784586
38103
724199
253
249
252
252
252
250
249
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77
Europe-Africa
Middle East
Athens Exchange
Copenhagen SE
Deutsche Borse
Euronext
Irish SE
JSE South Africa
Ljubljana SE
London SE
Luxembourg SE
Oslo Bors
Swiss Exchange
Warsaw SE
Wiener Borse
112632
-
1292355
2101746
61291
482700
12141
2796444
105048
227233
1064687
150962
114076
288
-
783
1002
64
411
76
2792
267
238
339
486
115
66702
-
2186433
4411249
35077
395235
1216
3391103
281
245008
759369
57012
47952
248
-
254
256
253
251
251
253
253
251
251
252
248
Asia – Pacific
Australian SE
BSE the SE
Mumbai
Bursa Malaysia
Colombo SE
Hong Kong
Exchanges
Jakarta SE
Korea Exchange
National SE of India
New Zealand
Exchange
Osaka SE
Philippine SE
Shanghai SE
Shenzhen SE
Singapore Exchange
Taiwan SE Corp.
Thailand SE
Tokyo SE
1261909
1306520
286157
9547
2305143
89567
834597
1224806
35507
138330
86349
2704779
868374
481247
657610
176956
3306082
1966
4955
959
231
1319
889
1788
1453
165
432
248
870
830
773
755
535
2335
931555
263352
86033
1238
1501638
31169
1559040
786684
14901
139868
20802
2061643
2774065
245425
905131
126097
3990909
254
243
250
240
249
243
253
243
252
243
242
244
244
253
251
243
243
Source: World Federation of Exchanges.
The milestones achieved during the past one and half decades are discussed
below:
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3.3.1 Primary Market Developments
The 1990’s witnessed the emergence of the Capital Market as a major source
of finance for trade and industry in India. A growing number of companies have
been accessing the Capital Market rather than depending on loans from financial
institutions.11
Tremendous developments have taken place in the primary market
where the corporates issue fresh securities through public issues as well as private
placements. Huge amount of resources have been mobilised by the corporates from
the primary market which is shown in Table-2 below: -
Table – 3.2
Resources Mobilised from the Primary Market12
(Rs. in Crores)
Year Total Amount Instrument Wise
Equities CCPS Bonds Others
1998-99 14276 7845 75 5400 957
1999-00 4570 1881 10 1550 1128
2000-01 5587 857 78 4450 202
2001-02 7817 4566 0 3200 51
2002-03 6108 3226 142 2704 36
2003-04 7543 1272 0 5601 670
2004-05 4070 1457 0 2600 13
2005-06 23272 18958 0 4324 0
2006-07 28256 24388 0 3867 0
2007-08 27382 27372 0 0 10
2008-09 33506 32901 0 356 249
2009-10 87029 79739 5687 1603 0
2010-11 14720 14272 0 448 0
Source: SEBI
As on March 31, 2011, Rs. 14,720 crores has been mobilised from the
Primary market, out of which Rs. 14,272 crores has been raised through equities and
Rs. 448 crores through bonds capital market instruments.
Since the early 1990’s, there has been a paradigm shift from merit based
regulated regime to disclosure based regime. Comprehensive guidelines on
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disclosures and investor protection were issued and were amended by SEBI from
time to time. The companies accessing the capital market through public issues have
to comply with adequate disclosure norms on initial as well as continuous basis.
India’s disclosure norms are considered as one of the best in the world and are often
cited as benchmark for the global standards.13
Indian accounting standards are
principle based and aligned to international accounting standards. In terms of
consolidation segmental reporting, deferred tax accounting and related party
transactions, the gap between India and the US is minimal. In addition to sound
accounting standards, the issues relating to corporate governance have been pursued
in right earnest consistent with the best international practices.
In a deregulated regime, the market determines the price of the public
issues, i.e., either by the issuer through fixed price or by the investors through book-
building process. A fair system of proportionate allotment of shares has been put in
place. The share of retail investors in the allotment of book-built issues has been
increased to 35 percent.14
Discretionary allotment to the Qualified Institutional
Buyers (QIBs) has been withdrawn. Companies are allowed to issue ADRs/ GDRs
and also raise funds through external commercial borrowing. The ADR / GDR’s
have two–way functionality. The Foreign Institutional Investors have been allowed
to invest in primary issues within the sectoral limits set by the Government.
3.3.2. Secondary Market Developments
The securities issued in the Primary Market are traded in the Secondary
Market. Exchanges in India offer screen based, electronic trading. The trading
system is connected using the VSAT technology from around 201 cities. There are
8652 trading members registered with SEBI at the end of March 2009. Enormous
amount of developments have taken place in the secondary market during the last
one decade. The selected indicators in Table-3 below clearly indicate this.
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Table – 3.3
Secondary Markets – Selected Indicators15
(Amount in Rs. mn)
Year
Capital Market Segment of Stock Exchanges
No.
of
Brokers
No. of
Listed
Companies
S & P
CNX
Nifty
Sensex Market
Capitalisation
Market
Capitalisation
Ratio (%)
Turnover Turnover
Ratio (%)
1997-1998 8,476 9,100 985.30 3366.61 5,722,570 47.0 2,273,680 39.7
1998-1999 8,867 9,890 968.85 3360.89 4,883,320 34.6 6,461,160 132.3
1999-2000 9,005 9,833 1116.65 3892.75 5,898,750 37.7 9,086,810 154.1
2000-01 9,069 9,877 1078.05 3739.96 5,740,640 34.1 10,233,820 178.3
2001-02 9,192 9,871 1528.45 5001.28 11,926,300 84.7 20,670,310 173.3
2002-03 9,782 9,954 1148.20 3604.38 7,688,630 54.5 28,809,900 374.7
2003-04 9,687 9,644 1129.55 3469.35 7,492,480 36.4 8,958,180 119.6
2004-05 9,519 9,413 978.20 3048.72 6,319,212 28.5 9,689,098 153.3
2005-06 9,368 - 1771.90 5590.60 13,187,953 52.3 16,204,977 122.9
2006-07 9,128 - 2035.65 6492.82 16,984,280 119.1 16,668,963 98.1
2007-08 9,335 - 3402.55 11280.00 30,221,900 85.58 23,901,030 79.09
2008-09 9,443 - 3821.55 13072.10 35,488,081 86.02 29,014,715 81.76
2009-10 9,487 - 4734.50 15644.44 51,497,010 109.3 51,308,160 99.63
2010-11 9,628 - 3020.95 9708.50 30,929,738 58.12 38,520,970 124.54
Source: SEBI & NSE.
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Market capitalization as percentage to GDP in India reached nearly 58
percent in 2008–09 and still further on a fluctuating trend. The rate of growth in
market capitalisation and turnover over the period indicates that more companies
have started using the trading platform of the Stock Exchanges. Although there are
22 stock exchanges, the National Stock Exchange (NSE) and the BSE together
account for more than 99 percent of the total turnover.
Recently, a separate trading platform, namely BSE Indonext, has been set up
jointly by BSE and the Federation of Indian Stock Exchanges to facilitate
transactions of shares exclusively relating to the small and medium enterprises. 16
3.3.3. SEBI Registered Market Intermediaries
Various institutions / intermediaries associated with primary as well as
secondary markets such as merchant bankers, registrars to issues, portfolio
managers, underwriters, bankers to issues, stock exchanges, brokers and sub-
brokers, share transfer agents, depositories, FIIs, custodians, credit rating agencies,
venture capital funds, collective investment schemes including mutual funds have to
register with SEBI and operate within the guidelines issued from time to time. SEBI
also promotes self-regulatory organizations. SEBI registered market intermediaries
from 1996 which are listed below in Table-4.
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Table – 3.4
SEBI Registered Market Intermediaries17
Market
Intermediaries
As on 31st March
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Stock Exchanges
(Cash Market) 22 22 22 23 23 23 23 23 23 22 22 21 19 19
Stock Exchanges
(Derivatives Market) - - - - 2 2 2 2 2 2 2 2 2 3
Brokers
(Cash Segment) 8476 8867 9005 9069 9192 9782 9687 9519 9368 9128 9335 9384 8517 8652
Corporate Brokers
(Cash Segment) 1917 2360 2976 3173 3316 3808 3862 3835 3746 3733 3961 4101 3955 4079
Sub Brokers
(Cash Segment) - 1768 3760 4589 5675 9957 12208 13291 12815 13684 23479 27540 43874 62471
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Brokers (Derivative) - - - - - 519 705 795 829 994 1120 1258 1442 1587
Foreign Institutional
Investors 367 439 496 450 506 527 490 502 540 685 882 997 1319 1635
Custodians - - - - 15 14 12 11 11 11 11 11 15 16
Depositories - 1 1 2 2 2 2 2 2 2 2 2 2 2
Depository
Participants - 28 52 96 191 335 380 438 431 477 526 593 654 714
Merchant Bankers 1012 1163 802 415 186 233 145 124 123 128 130 152 155 134
Bankers to an issue 77 80 72 66 68 69 68 67 55 59 60 47 50 51
Underwriters 40 38 43 17 42 57 54 43 47 59 57 45 35 19
Debenture Trustees 23 27 32 34 38 37 40 35 34 35 32 30 28 30
Credit Rating
Agencies - - - - 4 4 4 4 4 4 4 4 5 5
Venture Capital
Funds - - - - - 35 34 43 45 50 80 90 106 132
Foreign Venture
Capital investors - - - - - 1 2 6 9 14 39 78 97 129
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Registrars to an Issue
& Share Transfer
Agents
334 386 334 251 242 186 161 143 78 83 83 82 76 71
Portfolio Managers 13 16 16 18 23 39 47 54 60 84 132 158 205 232
Mutual Funds 27 37 38 41 38 39 38 38 37 39 38 40 40 44
Collective investment
Schemes - - - - 0 0 0 0 0 0 0 0 0 1
Approved
Intermediaries(Stock
Lending Schemes)
- 1 1 4 6 8 10 4 3 3 3 3 2 3
Source: SEBI
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As on March 31, 2009, there were 19 Stock Exchanges, 8635 Brokers (cash
segment) and 62,471 Sub-brokers, over 9,000 Listed Companies, 2 Depositories,
714 Depository Participants, 134 Merchant Bankers, 19 Underwriters, 5 Credit
Rating Agencies and 1635 Foreign Institutional Investors in India.
3.3.4. Mutual Funds
In order to develop the security cult and also to encourage indirect
participation of households in the Indian Securities Market, Mutual Funds have been
encouraged, both in the public and private sectors. Huge resources have been
mobilised through Mutual Funds. The trend in resource mobilisation by Mutual
Funds is indicated in Table-5 below: -
Table – 3.5
Trends in Resource Mobilisation by Mutual Funds18
(Rs. in Crores)
Year Gross
Mobilisation Redemption Net Inflow
Assets at the
end of the
period
1993-94 62076 - - -
1994-95 13727 - - -
1995-96 6508 - - -
1996-97 4777 - - -
1997-98 11406 - - -
1998-99 22710 23660 -949 68193
1999-00 61241 52271 18970 107946
2000-01 92957 83829 9128 90587
2001-02 164523 157348 7175 100594
2002-03 314706 310510 4196 109299
2003-04 590190 543381 46808 139616
2004-05 839708 837508 2200 149600
2005-06 1098149 1045370 52779 231862
2006-07 1938493 1844508 93985 326292
2007-08 4464377 4310575 53802 505152
2008-09 5426354 5454650 - 28296 417300
Source: SEBI
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Currently, there are 44 Mutual Funds including foreign mutual funds, offering more
than 400 schemes to the investors .The cumulative Assets Under Management
(AUM) of all the Mutual Funds which were Rs. 3,26,292 crores as on March 31,
2007 and has increased to Rs.5,05,152 crores by March 31, 2008. At the end of
March 2009 there is a sudden decrease when compared to end of March 2009. For
an orderly growth of the mutual funds, prudential regulations have been put in place
keeping in view the interest of the investors.
3.3.5. Derivatives
Introduction of securities related derivatives in India is another milestone
which provides an important avenue to the investors, mainly for hedging. The
securities contract (Regulation) Act, 1956 was amended in December 1999 to
expand the definition of securities to include derivatives so that the entire regulatory
framework governing trading of securities could apply to trading in derivatives.
Derivatives trading began in India with the launch of index futures in June 2000
followed by index options, single stock options and single stock futures in 2001. 19
Interest rate futures were introduced in June 2003. The derivative products have a
monthly maturity cycle. From September 13th
, 2004 weekly stock and index option
was launched on the derivative segment of BSE .Two premier stock exchanges,
namely BSE and NSE, provide trading platforms for derivative transactions.
The growth of the derivatives segment at BSE and NSE is indicated below in
Table-6.
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Table – 3.6
Derivatives Segment at BSE and NSE20
Year No. of
Trading Days
No. of
Contracts
Turnover
(Rs.Crore)
BSE
2003-04 207 77743 1673
2004-05 247 99918 1812
2005-06 251 137209 2456
2006-07 254 374637 11743
2007-08 253 531630 16111
2008-09 251 201 9
2009-10 249 1781214 59006
2010-11 243 515588 12268
NSE
Jun-00 toMar01 211 90580 2365
2003-04 247 3159344 76764
2004-05 251 13245847 339731
2005-06 254 51303705 1913436
2006-07 253 71972073 2378195
2007-08 251 152378495 4643981
2008-09 249 211600263 7162459
2009-10 251 415552569 12731341
2010-11 243 644094527 10781254
Source: BSE & NSE
Bulk of the derivative trading is done in the NSE. The combined turnover in
derivatives on BSE and NSE surpassed the combined turnover in the cash segments
since early 2009. During 2009-10, the turnover in the derivative segments of NSE
was 223 percent of its cash segment turnover. Similar to international trend, single
stock futures emerged as the most popular derivative product, followed by index
futures, stock options and index options. NSE ranks first in terms of number of
contracts traded in the single stock futures, second in Asia in terms of number of
contracts traded in equity derivatives instrument. 21
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3.3.6. Foreign Institutional Investments
The Foreign Institutional Investors (FIIs) were allowed to invest in India in
1992 under the portfolio investment scheme. They are also allowed to participate in
the public issues of debt and equities within the sectoral limits set for equities and
the overall limit fixed for the debt instruments by the Government. India has been a
centre of attraction for the FIIS. The growth in foreign investment inflows is
indicated in below in Table-7.
Table – 3.7
Foreign Investment Inflows22
Year A. Direct Investment B. Portfolio
Investment
Total (A +B)
(Rs.
Crore)
(Us $
Million)
(Rs.
Crore)
(US $
Million)
(Rs.
Crore)
(US $
Million)
1992-93 174 97 11 6 185 103
1993-94 316 129 10 4 326 133
1994-95 965 315 748 244 1713 559
1995-96 1838 586 11188 3567 13026 4153
1996-97 4126 1314 12007 3824 16133 5138
1997-98 7172 2144 9192 2748 16364 4892
1998-99 10015 2821 11758 3312 21773 6133
1999-00 13220 3557 6794 1828 20014 5385
2000-01 10358 2462 -257 -61 10101 2401
2001-02 9338 2155 13112 3026 22450 5181
2002-03 18406 4029 12609 2760 31015 6789
2003-04 29235 6130 9639 2021 38874 8151
2004-05 24367 5035 4738 979 29105 6014
2005-06 19860 4322 52279 11377 72139 15699
2006-07 27188 6051 41854 9315 69042 15366
2007-08 39674 8961 55307 12492 94981 21453
2008-09 103367 22826 31713 7003 135080 29829
2009-10 138276 34362 109741 27271 248017 61633
2010-11 161481 35168 -63618 -13855 97863 21313
Source: RBl Bulletin
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Foreign investment inflows both by direct investment and portfolio
investment amounted to Rs. 97863 crores and US $ 21313 million as on March 31,
2009.
FIIs have been bullish on the Indian securities. Their net investment every
year was positive ever since they were allowed to invest in India except in 1998- 99
& 2008-09 as shown in Table-8 below:
Table – 3.8
Trends in FII Investment23
Year Gross
Purchases
Gross
Sales
(Rs.
Crore)
Net
Investment
(Rs. Crore)
Net
Investment
(US $ mn)
Cumulative
Net
Investment
(US $ mn)
1989-90 18 4 13 4 4
1990-91 5593 467 5127 1634 1638
1991-92 7631 2835 4796 1528 3167
1992-93 9694 2752 6942 2036 5202
1993-94 15554 6980 8575 2432 7635
1994-95 18695 12737 5958 1650 9285
1995-96 16116 17699 -1584 -386 8899
2001-02 56857 46735 10122 2474 11372
2002-03 74051 64118 9933 2160 13531
2003-04 50071 41308 8763 1839 15371
2004-05 47061 44372 2689 566 15936
2005-06 144855 99091 45764 10005 25942
2006-07 216951 171071 45880 10352 36293
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82
2007-08 346976 305509 41467 9363 45657
2008-09 520506 489665 30841 6821 52477
2009-10 948018 881839 66179 16442 68919
2010-11 614576 660386 -45811 -9837 59081
Source: RBI Bulletin.
The cumulative net investment by FIIs, which stood at US $ 52,477 million
at the end of March 2010, further increased to US $ 68,919 million by the end of
March 2011. At the end of March 2009 there is a sudden decrease when compared to
end of March 2008. Net investment by FIIs to the tune of roughly US $ 10 billion
each for the last two consecutive years vindicated the growth story of the
subcontinent. As on March 31, 2010, the number of FIIs registered with SEBI stood
at 1319 which further increased to 1635 by the end of March 2011. 24
About 41
percent of total FIIs originate from the USA, followed by the UK (18 percent).
During the last two and half years, the FIIs have identified India as a
preferred destination. Strong macro economic fundamentals, favorable tax treatment,
attractive valuation of shares and encouraging corporate results have been cited as
underlying causes of large portfolio investment by the FIIs in India.
3.3.7. Screen Based Trading System
The screen based trading system is a landmark achievement of the Indian capital
market.25
The NSE introduced the screen-based trading since its inception
followed by other stock exchanges. The screen-based trading enables the
participants for online, electronic, anonymous and order-driven transaction with
the help of over 10,000 terminals spread over 400 cities in India and abroad. This
is perhaps the biggest trading network in any country of the world. The order
matching is done strictly on price/ time priority. The screen-based trading is
transparent and provides equal access to all investors irrespective of their
geographical locations. Screen-based trading has significantly improved depth
and liquidity of the market.
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3.3.8. Depositories
Depositories Act, 1996 was another landmark development in the history of
India’s capital market.26
Thereafter two depositories namely, Central Depository
Services Limited (CDSL) and National Securities Depository Limited (NSDL) were
set up. NSDL and CDSL have been successful in the dematerialisation of securities
to the extent of 99 percent of the total market capitalisation. Currently the transfer of
ownership is mostly done through book-entry form. This has tremendously
improved the speed, accuracy and security of the settlement system. About 99.9
percent of trades in BSE and 100 percent of trades in NSE as shown in Table-9
below are currently settled through delivery, which is possible only due to
dematerialisation of scrip by the two depositories.
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Table – 3.9
Settlement Statistics for Cash Segment of BSE and NSE27
Year N
o. of
Tra
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1 2 3 4 5 6 7 8 9 10
BSE
1992- 93 126 35031 - - 45696 - - -
1993-94 123 75834 - - 84536 15861 18.76 - -
1994-95 196 107248 44696 41.68 67749 26641 39.32 - -
1995-96 171 77185 26763 34.67 50064 11527 23.02 - -
1996-97 155 80926 21188 26.18 124190 10993 8.85 - -
1997-98 196 85877 24360 28.37 207113 22512 10.87 - -
1998-99 354 129272 50570 39.12 310750 85617 27.55 - -
1999-00 740 208635 94312 45.20 686428 174740 25.46 - -
2000-01 1428 258511 86684 33.53 1000032 1666941 16.69 - -
2001-02 1277 182196 57668 31.65 307292 59980 19.52 - -
2002-03 1413 221401 69893 31.57 314073 48741 15.52 - -
2003-04 2005 385806 133240 34.54 503053 107153 21.30 132941 99.78
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2004-05 2374 477171 187519 39.30 518716 140056 27.00 187347 99.91
2005-06 2643 664467 300653 45.25 816074 271227 33.24 300497 99.95
2006-07 3462 560780 229685 40.96 956185 297660 31.13 229573 99.95
2007-08 5303 986009 361628 36.68 1578855 476196 30.16 361542 99.98
2008-09 5408 739601 196630 26.59 1100074 230332 20.94 196096 99.73
NSE
Nov 94 –
Mar- 95 3 1330 688 51.74 1728 898 51.98 - -
1995-96 64 39010 7264 18.62 65742 11775 17.91 - -
1996-97 262 134317 16453 12.25 292314 32640 11.17 - -
1997-98 383 135217 22051 16.31 370010 59775 16.15 - -
1998-99 550 165310 27991 16.93 413573 66204 16.01 6179 22.08
1999.00 958 238605 48713 20.42 803050 82607 10.29 26063 53.50
2000-01 1614 304196 50203 16.50 1263898 106277 8.41 47257 94.13
2001-02 1720 274695 59299 21.59 508121 71766 14.12 59169 99.78
2002-03 2403 365403 82305 22.52 621569 87895 14.14 82305 100.00
2003-04 3751 704539 174538 24.77 1090963 220341 20.20 174538 100.00
2004-05 4494 787996 201405 25.56 1140969 276120 24.20 201405 100.00
2005.06 6000 818438 226346 27.66 1516839 407976 26.90 226346 100.00
2006-07 7857 850515 238571 28.05 1940094 543533 28.02 238571 100.00
2007-08 11645 1481229 366974 24.77 3519919 970618 27.58 366974 100.00
2008-09 13639 1418928 303299 21.38 2749450 610498 22.20 303299 100.00
Source: BSE & NSE
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3.3.9. Clearing, Processing and Settlement System
The setting of the Clearing Houses / Clearing Corporations (CCs) has been a
critical institutional arrangement to improve the market microstructure of the Indian stock
market. NSE has a dedicated subsidiary namely, National Securities Clearing Corporation
Limited (NSCCL) which performs the role of a central counterparty. The CCs provide
full innovation with multilateral netting. Trade and Settlement Guarantee Funds have
been set up to guarantee settlement in case of default by brokers. There is also a system
of security lending and borrowing to obviate settlement risk .As CCs provide guaranteed
settlement, there is no counterparty risk in India. Moreover, India is one of the few
countries of the world to implement full- fledged Straight Through Processing (STP). The
STP has been made mandatory for all institutional trades.28
Another notable achievement has been the short ending of the settlement cycle
and adoption of the rolling settlement. The settlement cycle was as high as 14 days for
specified scrips and 30days for others. The settlement risk was very high as many things
can happen between the transaction and the settlement. Initially, the settlement cycle was
reduced to a week. There after the settlement vehicle was further reduced to T+3 from
April 2002 and to T+2 from April 2003. Efforts are being made to reduce the settlement
cycle further to T+1 basis. India’s settlement cycle is one of the best in the world.29
3.3.10. Risk Management System
SEBI has put in place a comprehensive risk management system. The major
features of the dynamic risk management system include, interalia, capital adequacy
norms, trading and exposure limits, margin requirement based or mark to market and Var
based margins, market-wide circuit filters, on-line position monitoring and automatic
disablement of broker’s terminals.30
Indian capital market remained insulated against the
South-East Asian meltdown in the late 90s. The May 17, 2004, crash of the stock market
in India was short-lived due to comprehensive risk management system. The T+2 trading
cycle, settlement guarantee funds, guaranteed settlement by CCs together with risk
management system have significantly reduced the risk perception of the Indian stock
market.
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3.3.11. Margin Trading Facility
SEBI has allowed the member brokers to provide margin trading facility to their
clients in the cash segment since April 1, 2004. Securities with mean impact cost of less
than or equal to one and traded at least 80 per cent of the days during the previous 18
months would be eligible for margin trading. Only corporate brokers with net-worth of at
least Rs. 3 crore would be eligible to offer this facility after obtaining prior permission
from the exchanges.31
3.3.12. Regulatory Framework for Investor Protection
Investors are the major stakeholders in the securities market. It is mandatory for
SEBI to protect the interests of the investors. As a matter of fact, protection of investors’
interest is pursued by the securities market regulators throughout the world. Although the
objective is more or less the same for most of the regulators, the means to achieve it
varies from one jurisdiction to another. In India, one of the major achievements has been
to shift from merit-based regime to disclosure-based regime. SEBI issued Disclosure and
Investor Protection (DIP) Guidelines in 2000 and amended the same from time to time
keeping in view the investors’ interest. The disclosure norms in India are considered as
one of the best in the world.32
Listed companies have to comply with the disclosure
norms on an initial as well as on a continuous basis. The major objectives of the
disclosure norms have been to ensure transparency and provide adequate protection to the
investors.
Pricing of the public issues has been deregulated since the early 1990s. In a
deregulated regime, disclosures play a crucial role for the investors to take informed
decisions about their investment. Nevertheless, many companies, which flooded the
primary market in the early 1990s, have vanished. Hence, the disclosure norms have been
tightened from time to time.
Disclosure ought to be done on the stock exchange in addition to filing of regular
returns to stock exchange where it is listed, as well as to the Registrar of Companies. Any
price sensitive information about the company disclosed elsewhere attracts penal action.
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Moreover, unfair trade practices, including insider trading, is prohibited in India in order
to provide a level playing field to all investors. If any person indulges in fraudulent and
unfair practices, he shall be liable to a maximum penalty of Rs. 25 crore or three times
the amount of profits made out of such practices, whichever is higher. 33
There is a system of proportional allotment of public issues in India. In case of
fixed price public issues, 50 per cent shares are being allotted to the retail investors. In
case of book-built issues, the share of allotment for the retail investors has been raised
from 25 per cent to 35 per cent. Keeping in view the possible misuse, the discretionary
allotment to the Qualified Institutional Buyers (QIBs) has been withdrawn. In a move
towards providing a level playing field, QIBs have been asked to deposit 10 per cent of
the bid amount.34
SEBI has given in-principle approval for the introduction of IPO grading at the
option of the issuer.35
IPO grading would be done by credit rating agencies registered
with SEBI. The grading is intended to be an independent and unbiased opinion of the
concerned agency. It would be a one time exercise and would focus on assisting the
investor, particularly the retail investors, for taking informed investment decision, SEBI
will not certify the assessment made by the rating agency. An issuer, who has opted for
IPO grading, has to disclose all gradings in the offer document. Cost of IPO grading can
be met by stock exchanges or out of the corpus maintained for Investor Education and
Protection Funds.
It has been recognised the world over that investors’ protection can be
strengthened by adhering to high corporate governance standards. Corporate governance
standards prescribed in India are based on international best practices.36
Following
recommendations of the expert committees, SEBI prescribed several governance
standards to be achieved by the companies by December 31, 2005, under the revised
Clause 49 of the Listing Agreement with the stock exchanges. Violation of this would
now attract penalty under the Listing Agreement. Corporate governance needs to be seen
not as compliance, but as a way of life. In this context, the quality of compliance assumes
significance. High corporate governance standards are not only desirable within the
economy, but also helpful for companies accessing the international capital market. SEBI
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gives utmost importance to the corporate governance including mandatory induction of
independent directors.
The governance standards of the stock exchanges are also being improved
through the process called Corporatisation and Demutualisation (C & D) of stock
exchanges.37
The stock exchanges world over have been generally formed as mutual
organisations. The ownership, trading rights and management are often vested with the
same set of persons. This leads to conflicting interest between ownership and
management. In order to segregate the management function from the ownership and
trading rights, there is a need for demutualisation of stock exchanges. Moreover, stock
exchanges should function as body corporate similar to any other ‘for-profit’ corporate
entity. In India, NSE has been a corporate entity while NSE and OTCEI have been
demutualised from their inception. Corporatisation and Demutualisation of stock
exchanges is a priority item in the SEBI agenda. The oldest stock exchange of the
country, namely, the Bombay Stock Exchange became a limited company on August 19,
2005. The Corporatisation and Demutualisation process has been notified for most of the
remaining Regional Stock Exchanges (RSEs). The future of the RSEs post-
demutualisation is being worked out so that the viable among them can actively
participate in the mainstream market, besides catering to the regional requirements. A
professionally managed stock exchange with at least 50 per cent non-broking share-
holders is expected to play an important role for investor protection.
Security Regulations in Force38
The various security regulations in force are:-
1. SEBI (Stock Broker and Sub Broker) Regulations, 1992.
2. SEBI (Prohibition of Insider Trading) Regulation, 1992.
3. SEBI (Merchant Bankers) Regulations, 1992.
4. SEBI (Portfolio Managers) Regulations, 1993.
5. SEBI (Registrars to an Issue and Share Transfer Agents) Regulations, 1993.
6. SEBI (Underwriters) Regulations, 1993.
7. SEBI (Debenture Trustees) Regulations, 1993.
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8. SEBI (Bankers to an Issue) Regulations, 1994.
9. SEBI (Foreign Institutional Investors) Regulations, 1995.
10. SEBI (Custodian of Securities) Regulations, 1996.
11. SEBI (Depositories and Participants) Regulations, 1996.
12. SEBI (Venture Capital Funds) Regulations, 1996.
13. SEBI (Mutual Funds) Regulations, 1996.
14. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.
15. SEBI (Buy- Back of Securities) Regulations, 1998.
16. SEBI (Credit Rating Agencies) Regulations, 1999.
17. SEBI (Collective Investment Schemes) Regulations, 1999.
18. SEBI (Foreign Venture Capital Investors) Regulations, 2000.
19. SEBI (Procedure for Board Meeting) Regulations, 2001.
20. SEBI (Issues of Sweat Equity) Regulations, 2002.
21. SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty)
Regulations, 2002.
22. SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities
Markets) Regulations, 2003.
23. SEBI (Central Listing Authority) Regulations, 2003.
24. SEBI (Ombudsman) Regulations, 2003.
25. SEBI (Central Database of Market Participants) Regulations, 2003.
26. SEBI (Criteria for Fit and Proper Person) Regulations, 2004.
27. SEBI (Self – Regulatory Organisations) Regulations, 2004.
28. SEBI (Regulatory Fee on stock exchanges) Regulations, 2006.
29. SEBI (Certification of Associated persons in the securities market) Regulations,
2007.
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30. SEBI (Issue and listing of debt securities) Regulations, 2008.
31. SEBI (Intermediaries) Regulations, 2008.
32. SEBI (Delisting of Equity Shares) Regulations, 2009.
33. SEBI (Issue of Capital and Disclosure Requirements), 2010.
Security Guidelines in Force
The various security guidelines in force are:
1. SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme)
Guidelines, 1999.
2. Guidelines for Opening of Trading Terminals Abroad (Issued in 1999).
3. SEBI (Disclosure & Investor Protection) Guidelines, 2000.
4. SEBI (Delisting of Securities) Guidelines, 2003.
5. SEBI (STP Centralized Hub and STP Service Providers) Guidelines, 2004.
6. Comprehensive Guidelines for Investor Protection Fund / Customer protection
Fund at Stock Exchanges (Issued in 2004).
Security Schemes in Force
The various security schemes in force are:
1. Securities Lending Scheme, 1997
2. SEBI (Informal Guidance) Scheme, 2003)
3.3.13. Grievances Redressal Mechanism
There is a comprehensive investor grievances redressal mechanism at its head
office as well as at the regional offices of SEBI. The Office of Investor Assistance and
Education (OIAE) is the single window interface through which SEBI interacts with
investors. SEBI takes up investor complaints with companies and registered
intermediaries on a regular basis. In order to file complaints, there is a standardised
format which is available at all SEBI offices and on the SEBI website for the
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convenience of investors. SEBI has a simple and efficient internet based response system
for investor complaints. A system generated acknowledgement letter is issued to the
investors as soon as a complaint is received electronically. Investors have the option of
filing the complaints online or submitting the same on plain paper. Investors who visit the
SEBI offices or access the investor helpline are guided regarding the appropriate
authority to lodge their complaints which are outside the jurisdiction of SEBI. An account
of receipt and redressal of investor grievances by SEBI is highlighted in Table-10 below:-
Table – 3.10
Receipt and Redressal of Investor Grievances39
Year Grievances Received Grievances Redressed Cumulative
Redressal
Rate (%) During the
period
Cumulative During the
period
Cumulative
1991-92 18794 18794 4061 4061 21.6
1992-93 110317 129111 22946 27007 20.9
1993-94 584662 713773 339517 366524 51.4
1994-95 516080 1229853 351842 718366 58.4
1995-96 376478 1606331 315652 1034018 64.4
1996-97 217394 1823725 431865 1465883 80.4
1997-98 511507 2335232 676555 2142438 91.7
1998-99 99132 2434364 127227 2269665 93.2
1999-00 98605 2532969 146553 2416218 95.4
2000-01 96913 2629882 85583 2501801 95.1
2001-02 81600 2711482 70328 2572129 94.9
2002.03 37434 2748916 38972 2611101 95.0
2003-04 36744 2785660 21531 2632632 94.5
2004-05 54435 2840095 53361 2685993 94.6
2005-06 40485 2880580 37067 2723060 94.5
2006-07 26473 2907053 17899 2740959 94.3
2007-08 54933 2961980 31676 2772577 93.6
2008-09 57580 3019560 75989 2848566 94.3
Source: SEBI
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During the period 1991-92 to 2008-09, the SEBI received 30, 19,560 grievances
from the investors of which a total of 28, 48,566 grievances were redressed by the
respective entities, indicating a redressal rate of 94.3 per cent.
In case the companies fail to redress complaints in spite of repeated reminders by
SEBI, regulatory actions are initiated under section 11B (debarring companies form
accessing the capital markets) and 15C (imposing of monetary penalty) of the SEBI Act,
1992. Up to March 31, 2009, 33 companies have been referred for adjudication
proceedings under Section 15C of the SEBI Act, 1992. Prohibitory orders have also been
passed under Section 11B of the SEBI Act, 1992 against errant companies which did not
redress the investor grievances. Such orders have been passed against 12 companies and
62 directors till March 31, 2009.40
Moreover, SEBI also issues the status of investor
grievances every fortnight for public information and uploads the same on SEBI Website.
3.3.14. Investor Education41
Investor education plays a crucial role for the securities market awareness,
particularly for the retail investors. A major initiative in this regard during the recent past
has been launching of a comprehensive Securities Market Awareness Campaign (SMAC)
on January 17, 2003. The campaign includes workshops, audio-visual clippings, and
distribution of educative materials in English, Hindi and also in regional languages. There
is a dedicated investor website which archives the booklets / pamphlets / FAQs etc. SEBI,
in co-ordination with other agencies, conducted about 2188 workshops throughout the
country till date under the SMAC. (Tamilnadu-134)
SEBI recognises investor associations and extends financial support for
conducting investor education programmes. SEBI has recognised 24 investor associations
up to November 2010.
There has been a long-standing request from the financial journalists of the print
and electronic media to have an interface with SEBI on issues relating to the capital
market. As financial journalists play a critical role for investors’ education, SEBI decided
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to conduct a one-day workshop on capital market for the financial journalists at different
centres. The objective of the programme is to provide adequate inputs to the financial
journalists for balanced reporting of financial events and shoulder the responsibility of
accurate dissemination of information on the developments that are taking place on a
day-to-day basis in the securities market. This programme was organised at New Delhi
and Chennai during 2005-06. At both the places, the programme was inaugurated by Shri
M. Damodaran, Chairman, SEBI. A few outside experts, including professors and
practitioners were invited for an interface with the participants in addition to
presentations given by the senior officers of SEBI. As the response was encouraging,
SEBI is contemplating to conduct the same programme in other centres during 2006-07.
3.4. RECENT INITIATIVES42
SEBI introduced the Application Supported by Blocked Amount (ASBA) as a new
mode of payment in public issue. In this kind of mechanism the application money
remains blocked in the bank account of the applicant till the allotment is finalized.
Direct Market Access facility was introduced for institutional investors in April
2008 by SEBI.
In an endeavour to strengthen the risk management framework, margining for
institutional trades was made mandatory by SEBI.
Reduction in time for Right Issues was reduced from 16 weeks to 6 weeks.
A change in Securities Lending and Borrowing (SLB) Scheme was introduced in
April 2008.
Currency Futures were launched on USD-INR pair in India in August 2008 by
NSE, and October 2008 by BSE and MCX.
Removal of Quantitative restrictions imposed on the Overseas Derivatives
Instruments (ODIs) for FII.
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Exit Option to Regional Stock Exchanges (RSEs).
Listing of close-ended schemes launched on or after December 12, 2008 along with
daily computation of NAV was made compulsory.
SEBI permitted NSE to launch Interest Rate Futures on August 31, 2009.
3.5. INDIAN CAPITAL MARKET – FUTURE ROAD MAP43
SEBI may go in for fresh investor survey at the earliest to understand the
investment behaviour of the households during the more recent period.
Hon’ble Union Finance Minister has proposed to set up an investor protection
fund under the aegis of SEBI which would be funded by fines and penalties
recovered by SEBI.
SEBI would continue to nurture the Mutual Fund Industry and thereby attract
more and more household participation in the capital market.
Gold Exchange Traded Fund (GETF) has been introduced in India and in
addition, SEBI is also working for the introduction of the Real Estate Mutual
Fund, which is likely to mitigate the housing requirement of many households.
SEBI has been authorized to set up a National Institute of Securities Markets
(NISM) for teaching and training intermediaries in the securities market and
promoting research.
3.6. SUMMARY
Thus the Indian Capital Market is in transition. There has been a revolutionary
change over a period of time. In fact, on almost all the operational and systematic risk
management parameters, settlement system, disclosures, accounting standards, the Indian
Capital Market is at par with the global standards. The goal of SEBI is to make the
Indian Capital Market truly world class, competitive, transparent and efficient. A
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perception is steadily growing about the Indian Capital Market, as a dynamic market,
among the international community. Let us dream to make our Indian Capital Market a
benchmark for the rest of the world.
REFERENCES
1. Levine, Ross and S. Zervos, “Stock Market Development and Economic Growth”,
The World Bank Economic Review, Vol.1012, PP.323-339, 2006.
2. Agarwal R.N, “Financial Liberalization in India: Banking system and stock
Markets”, Delhi: D.K. Publishers, 2007.
3. Bajpai G.N., “Developments of capital Markets in India”, cited at London
School of Economics on 2nd
October 2009, www.sebi.gov.in
4. Fama E, “Efficient Capital Markets: II”, Journal of Finance, Vol. XLVI(5),
PP.1575-1617
5. Shah. A and Thomas., S, “Developing the Indian Capital Markets” in J.A.
Hanson and S.Kasthuria, eds, “A Financial sector for the Twenty first century,
India,”: Oxford University Press, Chapter 71, PP.225 -265
6. Ibid., P.270
7. Shirin Rathore, Muneesh Kumar, Amitabh Gupta, “Indian Capital Market – An
Empirical Study”, New Delhi: Anmol publications Pvt. Ltd., Cover page.
8. NSE-Fact book: 2009, www.nseindia.com,p.1.
9. Damodharan.M, “Capital Market in India: A country Profile”, SEBI bulletin,
Vol.3, No.11, Nov2009,P 5.
10. SEBI, Handbook of Statistics on the Indian Securities Market: 2009,
www.sebi.gov.in, PP. 247-250.
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97
11. Indian Securities Market – A Review: 2005, National Stock Exchange
publication, Vol.VIII, P.5.
12. SEBI, Handbook of Statistics on the Indian Securities Market: 2009,
www.sebi.gov.in PP.22-23.
13. Sachdeva, “Emerging Securities Market – Challenges and Prospects”, Chartered
Financial Analyst, Feb 2005, PP.53-56.
14. Ibid., pp.70-75
15. Indian Securities Market – A Review: 2011, National Stock Exchange
publication, PP.15.
16. Damodharan.M, “Capital Market in India: A country Profile”, SEBI bulletin,
PP.6.
17. SEBI, Handbook of Statistics on the Indian Securities Market:2009,
www.sebi.gov.in PP.3
18. Ibid., PP.52
19. NSE-Fact book: 2011, www.nseindia.com,p.1, PP.85
20. SEBI, Handbook of Statistics on the Indian Securities Market: 2009,
www.sebi.gov.in, PP.43.44.
21. Indian Securities Market – A Review: 2011, National Stock Exchange
publication, PP.85.
22. Ibid., PP.50.
23. Ibid., PP.51.
24. Ibid., PP.3.
Page 34
98
25. Damodharan.M, “Capital Market in India: A country Profile”, SEBI bulletin,
Vol.3, No.11, Nov2010 PP.7.
26. Ibid., pp.10-12.
27. SEBI, Handbook of Statistics on the Indian Securities Market:2009,
www.sebi.gov.in, PP.40-43.
28. Damodharan.M, “Capital Market in India: A country Profile”, SEBI bulletin,
Vol.3, No.11, Nov2005
29. Ibid.,
30. Ibid., PP.8.
31. Indian Securities Market – A Review: 2005, National Stock Exchange
publication, Vol.VIII, PP:112-113.
32. Chopra V.K, “Investor Protection: An Indian Perspective”, SEBI bulletin, Nov
2006,
33. Chopra V.K. “Capital Market Reforms in India: Recent Initiatives”, SEBI bulletin
Nov 2011,
34. Ibid.,pp.5
35. Chopra V.K, “Investor Protection: An Indian Perspective”, SEBI bulletin, Nov
2010,
36. Ibid.,pp.6.
37. Chopra V.K. “Capital Market Reforms in India: Recent Initiatives”, SEBI bulletin
Nov 2006
38. Security Regulations, Guidelines, Schemes in Force, SEBI bulletin, Vol.3, No.11,
Nov 2010, PP.13
Page 35
99
39. SEBI, Handbook of Statistics on the Indian Securities Market:2011,
www.sebi.gov.in PP.70.
40. Chopra V.K, “Investor Protection: An Indian Perspective”, SEBI bulletin, Nov
2009,
41. Ibid., pp. 20
42. Chopra V.K. “Capital Market Reforms in India: Recent Initiatives”, SEBI bulletin
Nov 2008
43. Chopra V.K, “Investor Protection: An Indian Perspective”, SEBI bulletin, Nov
2011.
