The 1991-92 securities scam prompted the governments to increase the pace of reforms in the capital market. Several reform measures have been undertaken since then in both the primary and secondary segments of the equity market.
Primary Capital Market
1) The Securities and Exchange Board of India was set up in early 1988 as a non-statutory body under an administrative arrangement. It was given statutory powers in January 1992 through the enactment of the SEBI Act, 1992 for regulating the securities market. The two objectives mandated in the SEBI Act are investor protection and orderly development of the capital market.
2) The Capital Issues (Control) Act, 1947 was repealed in May 1992, allowing issuers of securities to raise capital from the market without requiring the consent of nay authority either for floating an issue or pricing it. Restrictions on right and bonus issues were also removed. The interest rate on debentures was freed. However, the new issue of capital has now been brought under SEBI’s purview and issuers are required to meet the SEBI guidelines for disclosure and investor protection, which are being strengthened from time to time to protect investor interest.
3) The requirement to issue shares at a par value of Rs 10 and Rs 100 was withdrawn. This gave companies the freedom to determine a fixed value per share. This facility is available to companies which have dematerialized their shares. Moreover, the shares cannot be issued in the decimal of a rupee. The companies which have already issued shares at Rs 10 or Rs 100 per value also eligible for splitting and consolidating the share values.
4) To reduce the cost of issue, underwriting by issuer was made optional, subject to the condition that if an issue was not underwritten and in case it failed to secure 90 per cent of the amount offered to the public, the entire amount so collected would be refunded.
5) One of the significant steps towards integrating the Indian capital market with the international capital markets was the permission given to foreign institutional investors such as mutual funds, pension funds, and country funds, to operate in the Indian market. Foreign institutional investors were initially allowed to invest only in equity shares; later, they were allowed to invest in the debt market, including dated government securities and treasury bills. The ceiling for investment by foreign institutional investors was increased from 40 per cent to 49 per cent in 2000-01. This increase can be made with the approval of shareholders through a special resolution in the general body meeting.
6) Indian companies have also been allowed to raise capital from the international capital markets through issues of Global Depository Receipts, American Depository Receipts, Foreign Currency Convertible Bonds (FCCBs) and External Commercial Borrowings (ECBs). Companies were permitted to invest all ADR / GDR proceeds abroad. Two way fungibility was announced for ADRs/ GDRs in 2000-01 for persons residing outside India. Converted local shares could be reconverted into ADRs / GDRs while being subject to sectoral caps wherever applicable.
7) Merchant bankers are prohibited from carrying on fund based activities other than those related exclusively to the capital market. Multiple categories of merchant bankers have been abolished and there is only one entity, the merchant banker.
8) Besides merchant bankers, various other intermediaries such as mutual funds, portfolio managers, registrars to an issue, share transfer agents, underwriters, debentures trustees, bankers to an issue, custodian of securities, venture capital funds and issues have also been brought under the purview of SEBI.
9) It is mandatory for listed companies to announce quarterly results. This enables investors to keep a close track of the scrips in their portfolios. The declaration of quarterly results is in line with the practice prevailing in the stock market in developed countries.
10) To check price manipulation mandatory client code and minimum floating stock for continuous listing were stipulated in November 2001.
11) The government amended the Securities Contracts (Regulation) Rules, 1957 to standardize listing requirements at stock exchanges.
12) A 99 per cent value at risk (VAR) based margin system for all scrips in rolling settlement was introduced from July 2, 2001.
13) The central government has notified the establishment of the Investor Education and Protection Fund (IEPF) with effect from October 1, 2001. The IEPF will be utilized for the promotion of awareness amongst investors and protection of their interest.
14) The restriction on short sales announced in March 7, 2001 was withdrawn with effect from July 2, 2001, as all deferral products stand banned after the date.