A number of measures were taken by SEBI to increase liquidity in the stock market. The stock market was opened to foreign institutional investors (FII) for investment. The depository system, stock lending system, buy back of shares, market making system, margin trading of shares, and rolling settlement were introduced to increase liquidity in the stock market. A brief profile of each of these measures is presented below.
Investment by Foreign Institutional Investors in the Indian Stock Market:
An important feature of the 1990s was the participation of FIIs in the stock market. FIIs were allowed to participate in the Indian capital market in September 1992. Earlier, FIIs could invest in Indian securities only through the purchase of GDR, foreign currency convertible bonds (FCCBs), and foreign currency bonds issued by Indian issuers.
FIIs commenced their operations in the Indian stock markets with a token investment of Rs 0.6 crore in January 1993. They have become active investors since August 1993.FIIs such as mutual funds, pension funds, country funds, and so on are operating in the Indian capital market.
To facilitate the operations of the FIIs, SEBI granted permission to foreign brokers to extend assistance to all registered FIIs. The government now allows foreign financial service institutions to set up joint ventures in stock broking asset management, merchant banking and other financial services along with Indian partners. Foreign participation in financial services requires the approval of the Foreign Investment Promotion Board (FIPB). Moreover, SEBI allowed domestic companies to privately place their issues with FIIs, subject to certain formalities. Earlier FIIs could invest up to 5 per cent of the issued and paid up capital of a company to further attract investment by FIIs, the aggregate investment limit of FIIs was raised to 24 per cent of the issued capital and paid up capital in the Union Budget 1997-98. In the union Budget 2001-02, the finance minister raised the limit on aggregate equities further to 49 per cent in companies engaged in activities other than agriculture and plantation, with the approval of the shareholders through a special resolution in the General Body Meeting. Finally, this investment limit in a company was linked in September 2001 to the level of Foreign Direct Investment (FDI) in specific sectors. The ceiling was, thus, raised to 74 per cent and beyond (except for banks and financial institutions) to be par with FDI sectoral caps. The ceiling on the total holding by a single FII or FIIs of the same group has been raised from 5 per cent to 10 per cent in July 1996. While there is no restriction on the volume of FII investment or any lock in period, preferential allotment to FIIs is restricted to a maximum of 15 per cent equity of a company.
FLLs which were initially allowed to invest only in the equity shares were later allowed to invest in the debt market, including dated government securities and treasury bills. SEBI amended the SEBI FLL Regulations, 1995, permitting FIIs to invest in unlisted companies through the 100 per cent debt route and to tender the securities directly in response to an offer made in terms of the SEBI (Substantial acquisition of Shares and Takeovers) Regulations 1997. SEBI simplified the process of approval of sub accounts of registered FLLs. SEBI permitted FLLs, form June 1998, to buy and sell derivative contracts which are traded on stock exchanges.
Consequent to the buy back of shares by Indian companies investment by FIIs in such companies, in case they do not participate in buy back, may exceed the permissible limit. SEBI clarified that investment in such companies by FIIs would be frozen but FIIs would not be required to dilute their holding from the pre buy back level.