Capital Market Reforms

Abolition of Controller of Capital Issues: The Capital Issues (Control) Act, 1947 governed capital issues in India. The capital issues control was administered by the Controller of Capital Issues (CCI).

    • The Narasimham Committee (1991) had recommended the abolition of CCI and wanted SEBI to protect investors and take over the regulatory function of CCI.
    • As a result, the government replaced the Capital Issues (Control) Act and abolished the post of CCI.
    • Companies are allowed to approach the capital market without prior government permission subject to getting their offer documents cleared by SEBI.

Securities and Exchange Board of India (SEBI)

    • SEBI was set up as a non-statutory body in 1988 and was made a statutory body in January 1992.
    • SEBI has introduced various guidelines for capital issues in the primary market. They are explained below
      • Companies are required to disclose all material facts and specific risk factors associated with their projects
      • SEBI has also introduced a code of advertisement for public issues for ensuring fair and truthful disclosures
      • SEBI has allowed the companies to determine the par value of shares issued by them.
      • SEBI has allowed issues of IPOs through “book building” process

FIIs Permitted to Operate in the Indian Market

    • Foreign institutional investors such as mutual funds and pension funds are allowed to invest in equity shares as well as in debt market, including dated government securities and treasury bills

Accessing Global Funds Market:

    • Indian companies are allowed to access global finance market and benefit from the lower cost of funds. They have been permitted to raise resources through issue of American Depository Receipts (ADRs), Global Depository Receipts (GDRs), Foreign Currency Convertible Bonds (FCCBs) and External Commercial Borrowings (ECBs).
    • Also, Indian companies can list their securities on foreign stock exchanges through ADR/GDR issues

Intermediaries under the Purview of SEBI

    • Merchant bankers, and other intermediaries such as mutual funds including UTI, portfolio managers, registrars to an issue, share transfer agents, underwriters, debenture trustees, bankers to an issue, custodian of securities, and venture capital funds – have been brought under the purview of SEBI

Credit Rating Agencies

    • Various credit rating agencies such as Credit Rating Information Services of India Ltd. (CRISIL – 1988), Investment Information and Credit Rating Agency of India Ltd. (ICRA – 1991), Cost Analysis and Research Ltd. (CARE – 1993) and so on were set up to meet the emerging needs of capital market.

Setting up of National Stock Exchange (NSE):

  • NSE was set up in November 1992 and started its operations in 1994; which has now developed into a sophisticated, electronic market, which ranked fourth in the world by equity trading volume

Over the Counter Exchange of India (OTCEI)

  • It was set in 1992. It was promoted by a consortium of leading financial institutions of India including UTI, ICICI, IDBI, IFCI, LIC and others.
  • It is an electronic national stock exchange listing an entirely new set of companies which will not be listed on other stock exchanges

Disclosure and Investor Protection (DIP) Guidelines for New Issues

  • In order to remove inadequacies and systematic deficiencies, to protect the interests of investors and for the orderly growth and development of the securities market, the SEBI has put in place DIP guidelines to govern the new issue activities.
  • Companies issuing capital in the primary market are now required to disclose all material facts and specify risk factors with their projects

Depository System

  • A major reform in the Indian Stock Market has been the introduction of depository system and scrip less trading mechanism since 1996.
  • Before this, the trading system was based on physical transfer of securities.
  • A depository is an organization which holds the securities of shareholders in electronic form, transfers securities between account holders, facilitates transfer of ownership without handling securities and facilitates their safekeeping

The National Securities Clearing Corporation Ltd. (NSCL)

  • The NSCL was set up in 1996. It has started guaranteeing all trades in NSE since July 1996.
  • The NSCL is responsible for post-trade activities of the NSE. Clearing and settlement of trades and risk management are its central functions

Trading in Central Government Securities

  • In order to encourage wider participation of all classes of investors, including retail investors, across the country, trading in government securities has been introduced from January 2003.
  • Trading in government securities can be carried out through a nationwide, anonymous, order-driver, screen-based trading system of stock exchanges in the same way in which trading takes place in equities

Mutual Funds

  • Emergence of diversified mutual funds is one of the most important development of Indian capital market.
  • Their main function is to mobilize the savings of general public and invest them in stock market securities.
  • Mutual funds are an important avenue through which households participate in the securities market.