Alivio del absoluto de la comprensión del tiempo humano

• The open outcry trading system, prevalent till 1995, was replaced by the on-line screen-based elec-tronic trading. In all, 23 stock exchanges have approximately 8,000 trading terminals spread all over the country.

• Three new stock exchanges at the national level were set up in the 1990s. These were: the Over the Counter Exchange of India (1992), the National Stock Exchange of India (1994), and the Inter-connected Stock Exchange of India (1999).

• Trading and settlement cycles were uniformly trimmed from 14 days to 7 days in all stock exchanges in August 1996. Rolling settlement (T + 5) was introduced in January 1998 for the dematerialised segment of all companies. With effect from December 31, 2001, all scrips have come under rolling settlement. The settlement cycle for all securities was shortened from T + 5 to T + 3, with effect from April 1, 2002.

• With a view to maintaining integrity and ensuring safety of the market, various risk containment measures have been initiated or strengthened, such as the mark to market margin system, intra-day trading limit, exposure limit, and setting up of trade/settlement guarantee fund. Stock exchanges are allowed, subject to conditions, to use the settlement guarantee funds (SGFs) for meting short-falls caused by non-fulfillment/partial fulfillment of the obligations by members, before declaring them defaulters. The NSE set up a separate clearing corporation—The National Securities Clearing Corporation—to act as a counter-party to all trades executed in the capital market segment of the exchange.

• To enhance the level of investor protection, the process of dematerialisation of securities through the depository system and their transfer through electronic book entry is pursued vigorously. To enable this, the National Securities Depository Limited was set up in November 1996 and the Central Depository Service Limited in February 1999. All actively traded securities are held, traded, and settled in demat form.

• Badla –the carry forward trading mechanism was reinstated in January 1996, with safeguards in line with the recommendations of the Patel Committee (1995) and the Varma Committee (1996). The cash segment was strengthened with measures such as mandatory delivery under negotiated deals, securities lending, and continuous net settlement. All deferral products including badla have been discontinued from July 2001 following the scam of March 2001.

• Issuing companies are required to make continuing disclosures under the listing agreement. All listed companies are required to furnish to stock exchanges and also publish unaudited financial results on a quarterly basis. Disclosure of material information, which may have a bearing on the performance/operations of a company, is also required to be made available to the public.

• One of the most significant reforms in the secondary market is the measure to improve corporate governance. Corporate governance is a set of systems and processes designed to protect the interests of stakeholders. It is about commitment to values, ethical business conduct, and a high degree of transparency. It is about creating and enhancing shareholder wealth while protecting the interests of all other stakeholders. The SEBI had appointed a committee under the chairmanship of Kumar Mangalam Birla on corporate governance in India. The committee framed the codes for corporate governance and suggested the implementation of the code through stock exchanges.

• Stock exchanges have also undergone some major structural reforms. The boards of various stock exchanges have been made broad-based so that they represent different interests and not just the interests of their members. Stock exchanges, brokers, and sub-brokers have been brought under the regulatory purview of the SEBI.

• Companies are allowed to buy back their own shares for capital restructuring, subject to the condi-tion that the buy back does not exceed 25 per cent of the paid-up capital and free reserves of the concerned company. This buy back has been allowed to improve liquidity and enhance wealth of the shareholder.

• The insider trading regulations have been formulated prohibiting insider trading and making it a criminal offence, punishable in accordance with the provisions under the SEBI Act, 1992.

• Regulations are also in place for take over and substantial acquisition of shares to make the take over process more transparent and mindful of the interests of small shareholders. In September 2002, the SEBI amended the Takeover Code by accepting the Bhagwati Committee recommendations on takeovers. As per the new code, if an acquirer gains control of over 15 per cent in a company which already owns 15 per cent in another company, the acquirer has to declare open offers for sharehold-ers of both the companies. Also, any change in management control will result in an open offer, even though the equity stake is below 15 per cent. Shareholders can withdraw shares already tendered in an open offer and sell them in the open market or to another acquirer at a higher price. Acquirers now have to disclose their holdings in companies at various levels of acquisitions such as 5 per cent, 10 per cent, and 14 per cent. Once the holding touches the 15 per cent mark, the acquirer then has to make disclosures at every 2 per cent acquisition, thereby ensuring full transparency in acquisition.

• An index-based market wide ‘circuit breaker’ system has also been introduced to check a sudden rise in security price, in speculation and over-trading. This system becomes active at three stages of the index movements either way, at 10 per cent,15 per cent and 20 per cent. As an additional measure of safety, individual scrips-wise bands of 20 per cent either way can be imposed for all securities except those available for stock options.

• In February 1999, trading terminals were allowed to be set up abroad for facilitating market partici-pation by non-residents. Internet trading was permitted in February 2000.

• For ensuring greater market transparency, SEBI, in 1999, banned negotiated and cross deals (where both the seller and buyer operate through the same broker). Moreover, all private off-market deals in both shares as well as listed corporate debts were banned. So these deals are routed only through trading screens.

• Since June 2000, trading of futures has begun. Both the NSE and the BSE have created proper facili-ties for derivatives trading, including conducting of regular training programmes for the same. The Securities Contracts (Regulation) Act, 1956 has been amended for introduction of options trading.

Trading of index-based and stock-based options started in June and July 2001 respectively while trading of stock-based futures began in November 2001.

• 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 markets in developed countries.

• To check price manipulation, mandatory client code and minimum floating stock for continuous listing were stipulated in November 2001.

• The government amended the Securities Contracts (Regulation) Rules, 1957 to standardise listing requirements at stock exchanges.

• A 99 per cent value at risk (VaR) based margin system for all scrips in rolling settlement was intro-duced from July 2, 2001.

• 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 utilised for the promotion of aware-ness amongst investors and protection of their interests.

• 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 that date.

• It is mandatory for all brokers to disclose all details of block deals. Block deals include trading which accounts for more than 0.5 per cent of the equity shares of that listed company.

• With a view to providing greater liquidity in the secondary securities market, the SEBI allowed cor-porate brokers with a net worth of atleast Rs. 3 crore to extend margin trading facility to their clients in the cash segment of stock exchanges.

• A clearing corporation/clearing house, after registration with the SEBI, under the SEBI scheme for Securities Lending and Borrowing, as an approved intermediary may borrow securities for meeting shortfalls in settlement on behalf of the member.

• The SEBI has made it mandatory for every intermediary, to make an application for allotment of unique identification numbers for itself and for its related persons, under the SEBI (Central Data Base of Market Participants) Regulations, 2003. This move aims to promote up-to-date information about all market participants. This will be made mandatory for investors and companies at a later date.

• Stock exchanges were advised to amend Clause 41 of the Listing Agreement to make it mandatory for listed companies to publish the number of investor complaints received, disposed of, unresolved along with quarterly results.

• Clearing and settlement cycle time was further contracted to T + 2 with effect from April 1, 2003.

• With a view to strengthening the position, specifying accountability and protecting the interest of investors, the SEBI defined the roles of the chief executive officer and fund manager of mutual funds. It prescribed a uniform cut-off time for calculating and applying NAVs, both for subscrip-tions and redempsubscrip-tions. It also prescribed the minimum number of investors in a scheme. Further, it specified that no single investor should hold more than 25 per cent of the corpus of any scheme/

plan.

• SEBI allowed mutual funds to invest in derivative securities. They were also permitted to invest upto 10 per cent of the net assets as on January 31 of each year in foreign securities with the limit of minimum US $5 million and maximum of US $50 million.

• Interest rate futures contracts were introduced in June 2003 and futures and options contracts on sectoral indices were introduced in August 2003.

• FIIs and NRIs were permitted to invest in all exchange-traded derivative contracts.

• Stock brokers were allowed to trade in commodity derivatives.

• FIIs were allowed to participate in delisting offers, sponsored ADR/GDR programmes and disin-vestment by the government in listed companies.

• In order to facilitate execution of large trades without impacting the market, the stock exchanges were permitted to provide a separate trading window for block deals subject to certain conditions.

The BSE and the NSE activated this window with effect from November 14, 2005.

• In order to prevent off-market trades prior to the commencement of trading, the International Securities Identification Numbers (ISINs) of IPOs will be activated by the depositories only on the date of commencement of trading on the stock exchanges.

• The Depositories/DPs cannot levy any charges when a BO transfers all securities lying in his/her account to another branch of the same depository participant (DP) or to another DP of the same depository or another depository, provided the BO accounts at the transferee DP and at transferor DP are one and the same

• In order to protect the interest of minority shareholder, the Securities Contracts (Regulation) Act was amended in 2004 to recognise delisting. The draft delisting rules notified by the department of economic affairs on October 30, 2006 state that stock exchanges will have to compulsorily delist a company if

 it has suffered losses during the preceding three consecutive years and its net worth has turned negative.

 trading in its securities has remained suspended for more than six months, or if the securities have been ‘infrequently traded’ during the preceding three years.

 it violates SCR Act or Sebi Act or the Depositories Act or rules and regulations thereunder, that warrant a penalty of Rs. 1 crore or less than three years punishment.

 it vanishes or furnishes false addresses or there is an unauthorised change of registered office.

 the public shareholding in the company shrinks to below the minimum level prescribed in the listing agreement.

These apart, a company can opt for delisting if it has been listed in a recognised exchange for a minimum period of three years or the delisting has been approved by three-fourth of the shareholders in a general body meeting or the promoters commit to buy the outstanding securities of the minority and non-promoter holders.

SEBI amended the listing agreement in December 2007 to improve the transparency with regard to utilisation of issue proceeds. Any company making a public offer or rights issue of more than Rs. 500 crores has to appoint a monitoring agency to monitor the utilisation of issue proceeds.

From April 21, 2008, all institutional trades in the cash market are margined on a T + 1 basis with margin being collected from the custodian upon confi rmation of the trade. Subsequently, with effect from June 16, 2008, the collection of margins moved to an upfront basis.

In April 2008, SEBI allowed all classes of investors to short sell subject to a broad framework. SEBI also set up a full-fl edged securities lending and borrowing (SLB) scheme for all participants in the market

under the overall framework of ‘Securities Lending Scheme, 1997’. Naked short selling is not allowed and FIIs are prohibited from day trading.

Comprehensive risk management for the cash market and margining of institutional trades in the cash market have been specifi ed by SEBI. In September 2008, SEBI introduced trading in rights enti-tlements.

Brokers can offer to their clients an electronic facility known as Direct Market Access Facility (DMA), which enables their clients to place orders directly into an exchange-traded system.

Elements of Market Design in Indian Securities Market, 1992 and 2003

Features Regulator No specifi c regulator, but

central government oversight.

A specialised regulator for securities market (SEBI) vested with powers to protect investors’ interest and to develop and regulate securities market. The SROs strengthened.

Intermediaries Some of the intermediaries (stock brokers, authorised clerks and remisiers) regulated by the SROs.

A variety of specialised intermediaries emerged. They are registered and regulated by the SEBI (Also by the SROs). They as well as their employees are required to follow a code of conduct and are subject to a number of compliances.

Access to Market Granted by central government.

Eligible issuers access the market after complying with the issue requirements.

Pricing of Securities Determined by central government.

Determined by market, either by the issuer through fi xed price or by the investors through book building.

Access to International Market

No access. Corporates allowed to issue ADRs/GDRs and raise ECBs. ADRs/

GDRs have two-way fungibility. FIIs allowed to trade in indian market. MFs also allowed to invest overseas.

Corporate Compliance Very little emphasis. Emphasis on disclosures, accounting standards and corporate governance.

Mutual Funds Restricted to public sector. Open to private sector and emergence of a variety of funds and schemes.

Trading Mechanism Open outcry, available at the trading rings of the

exchanges, opaque, auction/negotiated deals.

Screen-based trading system, orders are matched on price–time priority, transparent, trading platform accessible from all over country.

Aggregation Order Flow Fragmented market through geographical distance.

Order fl ow unobserved.

Order fl ow observed. The exchanges have Open Electronic Consolidated Limit Order Book (OECLOB).

Anonymity in Trading Absent. Complete.

Settlement System Bilateral. Clearing house of the exchange or the clearing corporation is the central counter-party.

Basis of Settlement Bilateral netting. Multilateral netting.

Transfer of Securities Cumbersome. Transfer by endorsement on security and registration by issuer.

Securities are freely transferable. Transfers are recorded electronically in book entry form by depositories.

Risk Management No focus on risk management. Comprehensive risk management system encompassing capital adequacy, limits on exposure and turnover, VaR based margining client-level gross margining, and on-line position monitoring.

Derivatives Trading Absent. Exchange-traded futures and options available on two indices and select securities.

Source: Chartered Secretary, April 2004, p. 485.

KEY TERMS

Capital Market, Primary Securities, Primary Market, Secondary Securities, Secondary Market.

SUMMARY

1. The capital market is a market for long-term funds— both equity and debt—and funds raised within and outside the country.

2. The primary market refers to the long-term fl ow of funds from the surplus sector to the government and corporate sector (through pri-mary issues) and to banks and non-bank fi nancial intermediaries (through secondary issues). Primary issues of the corporate sector lead to capital formation (creation of net fi xed assets and incremen-tal change in inventories).

3. The secondary market is a market for outstanding securities. Unlike primary issues in the primary market which result in capital forma-tion, the secondary market facilitates only liquidity and marketabil-ity of outstanding debt and equmarketabil-ity instruments.

4. The history of the capital market in India dates back to the eight-eenth century when East India Company securities were traded in the country. It has been a long journey for the Indian capital market.

Now the capital market is organised, fairly integrated, mature, more global and modernised. The Indian equity market is one of the best in the world in terms of technology.

REVIEW QUESTIONS

1. What is a capital market? How does it aid economic growth? What are the functions of the capital market?

2. Compare and contrast the Harshad Mehta and Ketan Parekh scams.

3. List down the major reforms in the primary and secondary capital market.

4. State the differences between FDI and FII?

5. What is primary market? State the nature of fund raising in primary market?

6. How do primary and secondary markets contribute to economic growth?

REFERENCES

1. Bhatt, R. S. (1992), ‘Securities Scandal—Need for Balance,’ The Economic Times, July 10, 1992.

2. Economic Times, various issues.

3. Institute of Chartered Financial Analysts of India, Chartered Finan-cial Analyst, May 2002.

4. Kumar, Arun (1992), ‘Securities Scandal, Wages of New Policy,’ The Economic Times, July 9, 1992.

5. Misra, B. M. (1997), ‘Fifty Years of the Indian Capital Market’ RBI Occasional Papers, June and September 1997.

6. Patel, D. R., Capital Market, an unpublished paper.

7. Rajadhyaksha Niranjan and Srinivas (2001), ‘The Unmaking of Mr Ketan Parekh,’ Business World, April 16, 2001, pp. 18–26.

8. Rambhia, Ashok (1997), ‘Fifty Years of Indian Capital Market,’

Capital Market, August 1997.

9. Ravi, A. B. and Joseph Lancelot (2001), ‘The 2001 Scam: Greed, Fear, Panic ...,’ Business India, April 16–19, pp. 50–60.

10. Reserve Bank of India, Annual Report.

11. Reserve Bank of India, Report on Currency and Finance.

12. Sau, Ranjit (1992), ‘Securities Scandal—Bonfi re of Rationalities,’

The Economic Times, July 11, 1992.

13. Bhatt, U. R. (2003), ‘Wealth Effect and the Bull Market,’ The Eco-nomic Times, November 10, 2003, p. 8.

14. Bhatt, U. R. (2005), ‘The New Foreign Hand Theory,’ The Econom-ics Times, January 10, 2005, p. 8.

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