CHAPTER 7 INDIAN CAPITAL MARKETS AND THE...

CHAPTER 7

INDIAN CAPITAL MARKETS AND THE REGULATORY AUTHORITIES

7.1 Introduction

The formal operations of the stock exchanges in India commenced in 1875.

Throughout the various phases of development in the capital market, lot of changes

have taken place in trading operations. When this was happening, slowly, the small

investors also were attracted towards the capital market. Still the securities market was

largely unregulated, particularly, prior to independence.

The major thrust of the securities market reforms has been on the improvement of

the operations and efficiency of the markets. For this purpose, some structural changes

have also taken place. In order to make capital markets more vibrant and dynamic,

there always needs an efficient intermediation. Without the presence of effective

regulators, the capital market may find it difficult to develop in a healthy manner. The

several aspects like disclosures, listing, liquidity accounting, trading, and settlement

have to be taken care of for the purpose of maintaining the interest of the investors in

the market. The regulatory body must be present in the market to ensure the investor

protection as well as in promotion and growth of capital market.

While the Reserve Bank of India regulates the banking sector in India, the financial

sector in general and stock exchanges in particular are regulated by the Securities and

Exchange Board of India. Apart from this, there are the authorities like Ministry of

Company Affairs, Ministry of Finance also which govern the market to some extent.

This chapter presents the status of regulatory authorities in Indian capital market. An

attempt has also been made in this chapter to present the recommendations and the

implications of some of the committees which were specifically entrusted the task for

developing capital market from time to time. Naturally, SEBI has a dominant role in

regulating the Indian capital market and hence more emphasis is given to SEBI, its

functions, objectives, formation and its role in promotion and development of capital

markets in India.

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Since the capital markets have gone through various scams, the need was felt to

regulate and control the activities of the capital markets from time to time. Whenever,

some irregularities were found, the steps have been taken to avoid such things in

future. But this was a reactive and not proactive action in the past. Though the

‘damage control’ was done from time to time, fewer efforts were focused on

preventive measures which may be clear from the following discussion.

7.2 Early Attempts of Regulating Capital Markets in India.

The first move towards regulating the Indian capital market was fallout of the panic

which was created in 1865 in BSE. ‘Share mania’ crisis of 1865 left the brokers, small

investors, bankers and creditors in chaos. This was the first time that Indian capital

markets underwent a crash. In response to this, a ‘Bill for the relief of Insolvent

Debtors in the Presidency of Bombay’ was introduced in then Bombay Legislative

Council’.1 This bill was sent to the ‘Select Committee’, but it remained unnoticed for

almost two years. In September 1867, the Bill was withdrawn and thus, the first

attempt to regulate the Indian capital markets failed.

In the second half of the nineteenth century and during the first half of the twentieth

century, the developments in the capital market in India had a low profile. At that

time, India was ruled by the British Empire, which did not give significance to the

aspect of regulation of the capital market. Before independence, i.e. prior to 1947,

Britishers did not institute any legal mechanism or system which could regulate the

capital markets in India.

After independence, Indian government decided to have a socialistic economy. The

government tried to control the entire economy with various laws which were enacted

during 1950’s. Due to this, the need to control the capital markets was also not felt

seriously. As the markets were not open for foreign as well as private players, the need

for regulation did not arise strongly. But due to increasing participation of small

investors, numbers of scams, manipulation by brokers the policy makers were forced

to think about regulatory system in the Indian capital market.

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During the late 19th century, the then government asked BSE to have self regulatory

system involving rules and guidelines about the functioning of the stock exchange. But

the brokers and stock exchanges refused to come out with any such regulatory

system.2

After the First World War, again the capital markets experienced ups and downs and

this resulted into formation of Atlay committee. This Committee recommended the

strong regulatory network in the Indian capital market. The Bombay Securities and

Contract Act was enacted in 1925. Further, in 1947, the same act was replaced by

Capital Issues Control Act.

Around the same time i.e. in 1949, the Reserve Bank of India which was formed in

1935, was nationalized and became a central bank to regulate the banking sector in

India. Though the RBI dose not directly regulate or govern the Indian capital market,

the policy measures introduced by RBI have implications for the Indian capital

markets. The role of the RBI is significant in promotion and development of the

banking sector in India. It announces monetary and credit policies from time to time

keeping in mind the requirements of the economy as the whole. E.g. in order to control

the inflation, the RBI may come out with increase in interest rates or repo/reverse repo

rates. But due to such move the stock markets may experience downtrend due to

increase in financial charges reducing profit margins of the corporates. Though it does

not regulate the stock exchanges, the RBI has an influence over the stock exchanges in

the country.

In 1956, the Indian Companies Act was passed by the parliament. This act is one of

the important functionaries in governing the entire corporate sector. From the

formation of the companies, to the liquidation of the companies, everything is

regulated and governed as per the provisions of the Companies Act, 1956. As the

corporate sector is connected with the stock exchanges, the compliance of Companies

Act provisions is a primary requisite for all the companies desiring to raise the capital

from the markets. Thus, with enacting the Companies Act, India started controlling

and regulating corporate sector which results into healthy environment in the capital

market. 210

When these developments were taking place, the rules and procedure to be followed

for recognition of the stock exchanges were also needed to be formalized. With this

intention, Securities Contracts (Regulation) Rules, 1957 came into existence.3 These

rules contained provisions relating to recognition of stock exchanges, periodical

returns and annual reports of these exchanges, listing requirements etc. These rules

were made statutory standardized formalities which should be applicable to all

recognized stock exchanges. Later on, after SEBI’s formation, some of these

provisions were shifted and SEBI was made more powerful to apply these rules.

In 1969, the Central Government nationalized 14 major commercial banks with an

objective to increase penetration of banking services in various parts of the country.

This move had not much impact immediately on the capital market, but due to

increases awareness and reach of banks, people started thinking about savings and

investment which ultimately supports the capital market.

7.3 Emergence of SEBI as a Regulatory Authority

Though the formal decision to open the economy was introduced in 1991-92, the plan

of opening up of the economy was being prepared in the late 1980’s. Similarly, to

cope up with the problems associated with opening up of the economy, a committee

was formed by the Central Government in 1985 under the Chairmanship of Mr.

M.J.Pherwani. In 1985, the idea of an autonomous, full fledged and strong capital

market regulator was recommended by the Committee. The then Prime Minister, late

Rajiv Gandhi, in 1987, announced this strong regulation and actually, in 1988,

Securities and Exchange Board of India, came into existence. Initially, the SEBI was

not given the autonomy of a full fledged regulator of the Indian capital markets. But

eventually, SEBI Act was passed in the year 1992 by the Parliament and thus the

authority of an autonomous, independent regulator was given to the SEBI. In its two

decades of functioning as a regulatory authority of Indian Capital markets, SEBI has

totally changed the way of functioning of the stock exchanges. As the liberalization

process required a strong regulator due to whims of capital movement, the SEBI

continues to play a dominant role in controlling and developing the capital market in

India.211

After its setting up in April 1988, SEBI was given some interim functions. These

functions were-

-To collect information and advice the Government on matters relating to capital

markets.

-To license and to regulate merchant bankers, mutual funds etc.

-To prepare legal drafts for regulatory and developmental role

-To perform any other function entrusted by the Government regarding regulation of

capital market.

After three years of setting up of SEBI, in 1992, statutory powers were entrusted to

SEBI. In order to curb the malpractices, SEBI was promoted on the same lines in

which Securities Exchange Commission (SEC) was promoted in the USA. Some of

the malpractices which frequently disturbed the primary market were

brokers/consultants’ speculative motive, grey market, delay in listing and allotment in

shares. Apart from this, some malpractices frequently found in the secondary markets

(stock exchanges) were lack of transparency, delay in settlement, insider trading etc.

In order to curb these malpractices, a strong regulator was needed for development of

capital market.

SEBI, which has been entrusted with such regulatory functions, was formed with the

following broad objectives.

-Investor protection to ensure steady flow of savings into the capital market.

-Ensuring the fair practices by the issuers of securities, namely companies so that they

can raise resources at least cost.

-Promotion and efficient services by brokers, merchant bankers and other

intermediaries so that they become competitive and professional.

7.4 Organization of SEBI

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Though initially SEBI carried out the functions of supervisory and advisory body of

the Government, later on legislation giving powers to the SEBI was passed. SEBI Act

gave powers to SEBI in order to protect interests of the investors in securities and to

promote the development of and to regulate the securities market and other matters

connected therewith or incidental there to.

The whole SEBI Act has been divided into 7 chapters.

Chapter I deals with preliminaries and definitions.

Chapter II gives the details of establishment, incorporation, administration and

management of the Board of Directors.

Chapter III provides for the transfer of assets and liabilities of the existing Boards to

the new Board, under the Act.

Chapter IV incorporates an important part of powers and functions of SEBI. These

powers and functions are spread out to all corners of the primary and secondary

markets.

Chapter V deals with registration of stock brokers, sub-brokers, transfer agents etc. on

which action was already taken by the SEBI, since May,’ 92.

Chapter VI gives the provisions regarding accounts, finance, audit, penalties and

adjudication. It also elaborates authority, establishment, jurisdiction and procedure of

appellate tribunal.

Chapter VII gives the power to issue direction to the SEBI. The final power over SEBI

rest with the Central Government as Central Government is an authority for appeal

against SEBI’s order. If it is necessary to supercede the SEBI and to call for returns

and reports, Central Government may use its powers which are given in Chapter VII

As per Section 11 of the SEBI Act, the functions which are entrusted to the SEBI are

classified into Regulatory and Developmental Functions.

Regulatory Functions

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-Registration of brokers, sub-brokers and other players in the market.

-Registration of collective investment schemes and mutual funds

-Regulation of stock exchanges, merchant banks and portfolio managers.

-Prohibition of all fraudulent and unfair trade practices.

-Controlling insider trading and take-over bids and imposing penalties for such

practices.

Developmental Functions

-Investor education

-Training of intermediaries

-Promotion of fair practices and a code of conduct for all Self Regulatory

Organizations (SROs)

-Conducting research and publishing information useful to all market participants.

SEBI: Organizational Structure

After getting a status of an autonomous and strong regulatory authority, SEBI started

functioning to protect the interest of the investors. While performing the functions,

SEBI works through six different departments which are entrusted specific functions.

These departments are-

i. The Primary Market Department- It looks after policy matters and regulatory issues

regarding primary markets, registration, merchant bankers, portfolio management

services, underwriters etc.

ii. The Issue Management Department- It is responsible for granting the prospectuses

and letters of offers for public issue. It coordinates with primary market policy for

monitoring of issue related intermediaries.

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iii. The Secondary Market Department- It looks after regulatory issues for secondary

market. It also regulates the registration and monitors the members of stock

exchanges. Monitoring of insider trading, price movement, EDP and SEBI’s data base

is also maintained by this Department.

The Institutional Investors’ Department- It stresses on policy, registration, regulation

and monitoring of FIIs, domestic mutual funds, international relations etc.

The Legal Department- It looks after all the legal matters arising out of functioning of

the SEBI. While issuing various guidelines or regulating the financial markets, some

legal complications may come out which are looked after by the Legal Department.

The Investigation Department- It carries out inspection and investigation. Such

investigation may be on its own or as ordered by the Central Government.

The Head Office of the SEBI is situated at Mumbai (Bandra Kurla Complex). It also

has three regional offices at New Delhi, Kolkata and Chennai for northern, eastern and

southern region respectively.

SEBI, being a Board , has the composition of nine distinguished members. The

composition is as under.

-The Chairman

(The Chairman of SEBI is appointed by the Central Government. While appointing the

Chairman and the nominated members, the Central Government has to see that these

persons should have ability, integrity and standing who have shown capacity in

dealing with problems of the securities markets. They are required to have good

knowledge or experience in administration also.)

-Two officials from Central Government (These are nominated from Ministry of

Finance, Law and Company Affairs)

-One official is nominated by the Reserve bank of India

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-Five other members are nominated by the Central Government out of which at least

three should be whole time members.

(While nominating these members of the Board, it is emphasized that these members

have good knowledge or experience in the areas of finance, law, accountancy,

economics etc.)

Investor protection is the major responsibility of the SEBI. For this purpose lot of

guidelines have been issued by the SEBI to control and regulate the capital market in

India and thereby, to shoulder the responsibility of protecting the interest of the

investors in the capital market. To perform this job, SEBI has formed two non

statutory advisory committees- Primary Market Advisory Committee and Secondary

Market Advisory Committee. These committees have members from the categories

like market players, recognized investors’ associations and other eminent persons in

the financial markets.

SEBI is also a member of IOSCO (International Organization of Securities

Commissions) which is an international body comprising of financial market

regulators throughout the world. SEBI also is actively engaged in the Development

Committee of IOSCO which provides platform for the regulators from emerging

markets to share the views and exchange of information with each other.

Presently, SEBI has following members in its organizational structure

Mr. U.K. Sinha ……………...Chairman

Mr. Prashant Saran……………Member

Mr. Rajeev Kumar Agarwal…..Member

Mr.Thomas Mathew ………….Member

Mr. V.K. Jairath……………….Member

Mr. Naved Masood……………Member

Mr. Anand Sinha……………....Member

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From its inception, SEBI’s chairmen from time to time have significantly contributed

in the development and emergence of SEBI as a regulatory authority in Indian Capital

Markets. The following chart gives details about former chairmen and their respective

tenure.

Table No.7.1 SEBI’s Chairmen and their Tenure

Name of the Chairman Tenure

Mr. U.K. Sinha 18th February, 2011 till date

Mr. C.B. Bhave 19th February, 2008 to 17th February, 2011

Mr. M. Damodaran 18th February, 2005 to 18th February, 2008

Mr. G.N. Bajpai 20th February, 2002 to 18th February, 2005

Mr. D.R. Mehta 21st February, 1995 to 20th February, 2002

Mr. S.S. Nadkarni 17th January, 1994 to 31st January, 1995

Mr. G.V. Ramakrishna 24th August, 1990 to 17th January, 1994

Dr. S.A. Dave 12th April, 1988 to 23rd August, 1990

7.5 Powers of SEBI

Earlier, there were various other acts to govern the capital market. Capital Issues

(Control) Act, 1947 played an important role in functioning of the Indian Capital

Market since India’s independence. But after SEBI’s inception, the said Act was

repealed by the Capital Issues (Control) Act, 1992. Now most of the powers under this

Act are administered by SEBI. The powers of SEBI were further wide spread when

Parliament passed the SEBI (Amendment) Bill, 2002. The Bill gave the powers to the

SEBI like seizure of books of accounts, imposing penalty of Rs.25 Crores on insider

trading, penalty of Rs. 1 Lakh per day where small investors are cheated, suspension

of governors of stock exchanges. Even the investigating agencies to be appointed were

also entrusted on SEBI’s governing board.

Some of the other powers entrusted to the SEBI are as follows.

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-Power to call periodical returns from recognized stock exchanges

-Power to call any information or explanation from recognized stock exchanges or

their members

-Power to direct enquiries to be made in relation to affairs of stock exchanges or their

members.

-Power to grant approval to bye – laws of recognized stock exchanges.

-Power to make or amend bye – laws of recognized stock exchanges.

-Power to compel listing of securities by public companies.

-Power to control and regulate stock exchanges.

-Power to grant registration to market intermediaries.

-Power to levy fees or other charges for carrying out the purpose of regulation.

-Power to declare applicability of section 17 of the Securities Contract (Regulation)

Act in any state or area to grant licenses to dealers in securities.

-Power to demand books of accounts and other documents.

-Power to summon and enforce attendance of persons and examining them on oath.

-Power to issue orders/ directions in the interest of the investors.

-Power to hear appeals by companies against the decision of stock exchanges for

refusal of listing their securities.

-Power to suspend or cancel registration of any intermediary.

7.6 Evaluation of SEBI’s Role in Indian Capital Market.

While evaluating the SEBI’s role in the Indian capital market, some important aspects

have been considered. Registration of intermediaries, redressal of grievances of

investors, primary market regulation, secondary market regulation , regulation of

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takeovers, emergence of institutional investors, maintaining fairness and integrity of

the markets are some of the aspects on the basis of which SEBI’s role has been

examined as regulator in capital market in India.

7.6.1.Registration of Intermediaries-

SEBI started the registration of intermediaries in the securities markets for the first

time, by making registration mandatory for categories like merchant bankers,

registrars and transfer agents, brokers, bankers to the issue, debenture trustees,

underwriters, portfolio managers, mutual funds, depositories, foreign institutional

investors etc. Following table gives some highlights regarding registration of

intermediaries from SEBI’s inception.

Table No.7.2 Registration of Intermediaries

Intermediaries 1993 1997 2001 2005 2009

Stock Exchanges 21 22 23 22 19

Brokers (Including sub

brokers)

5,290 13,025 24,066 27,503 76,789

Merchant Bankers 74 1,163 233 128 134

Registrars and Transfer

Agents

- 386 186 83 71

Bankers to the Issue - 80 69 59 51

Debenture Trustees - 27 37 35 30

Underwriters - 38 57 59 19

Portfolio Managers 28 16 39 84 232

Mutual Funds - 37 39 39 44

Depositories - 1 2 2 2

Depository Participants - 28 335 477 714

Foreign Institutional - - 1 14 129

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Investors

Source: Annual Report, SEBI (Various Issues)

From Table No.7.2, it can be seen that there is substantial growth in the number of

registered bookers. Especially, the sub brokers registered under SEBI increased in

number sharply during 2005-2009. Due to derecognition of three stock exchanges, the

number of stock exchanges declined to 19 in the year 2009. Portfolio managers,

depository participants and FIIs have shown a remarkable increase after 2005. But

registrars and transfer agents, underwriters, bankers to the issue, merchant bankers

show a declining trend. This implies more reliance on brokers as intermediaries in the

market.

7.6.2. Redressal of Investors Grievances

SEBI has instituted a separate mechanism for redressal of the investors’ grievances.

Due to increasing interest and number of transactions in the capital markets, there was

also increase in number of grievances so also the redressed grievances.

Table No 7.3

Grievances Received and Redressed by SEBI

Year Grievances Received

(cumulative)

Grievances Redressed

(cumulative)

Redressal Rate

(%)

1991-92 18,794 4,061 21.61

1994-95 12,29,853 7,18,366 51.35

1997-98 23,35,232 21,42,438 91.74

2000-01 26,29,882 25,01,801 95.13

2003-04 27,85,660 26,32,632 94.51

2006-07 29,07,053 27,40,959 94.28

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2008-09 30,19,560 28,48,566 94.34

Source: Annual Report, SEBI, 2009

The Table No.7.3 gives an idea about grievances received by SEBI and redressal

thereof from 1991-92 to 2008-09. It is clear that initially, the redressal rate was too

low i.e. 21.61%. This is understandable as SEBI was newly instituted and with less

power given to it, SEBI found it difficult to redress the grievances in time. But

especially after 1997-98, the redressal rate is almost around 95 % which means that

SEBI has been very effective in grievance redressal. Thus, the basic objective of SEBI

i.e. to protect the interest of the investors is near to its fulfillment.

7.6.3 Primary Markets

The major step initiated by SEBI in regard to primary market was improvement in

disclosure norms. The full and fair disclosure by issuers of securities is directed by

SEBI for protection of investors’ interest. The various guidelines have been issued by

SEBI in relation to raising the capital from the primary market. Filing of offer

documents has been made mandatory by SEBI and it has also prohibited companies

from giving future projections.

Table No.7.4

Offer documents received and observations* issued by SEBI

Year Offer documents

received

Observations issued Amount involved

(Rs.Crores)

1999-2000 165 125 12,021

2000-01 197 181 11,156

2001-02 34 28 9,229

2002-03 28 23 4,982

2003-04 98 58 17,872

2004-05 88 59 12,559

2005-06 198 149 5,945221

2006-07 185 140 9,455

Source :- Handbook on Indian Securities Market, 2010, SEBI, pp.76-78

*Observations are the queries raised by the SEBI. If SEBI thinks it necessary to have

additional information from any clause in the offer document, it can issue such

observations. The issue of capital is allowed only after fulfillment and satisfactory

compliance towards these queries raised by the SEBI.

The Table No.7.4 shows that there are number of observations issued by SEBI

consistently, over the last decade to the issuers of securities in primary market.

Amount involved in those observations does not correlate with number of

observations, but observations issued against offer documents received by SEBI for

companies is quiet significant. Therefore, it can be observed from this table that SEBI

has been objectively scrutinizing the offer documents and thus, trying to maintain

fairness in primary market.

7.6.4 Secondary Markets

In order to have cordial development of capital market, investors must have

confidence in the market. In the secondary markets or stock exchanges, the major

reform directed by SEBI is introduction of online and screen based trading system.

SEBI has also introduced capital adequacy norms for the brokers to avoid liquidity

problems. Dematerialization and rolling settlement are some other features which are

advised by SEBI to all stock exchanges. The listing requirements are also directed by

SEBI to be amended by stock exchanges. Quarterly disclosure of financial

performance has also been made mandatory.

Table No.7.5

Secondary Markets after SEBI’s Emergence

1992 2010

Trading Mechanism Open outcry Screen Based Trading System

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Transfer of shares Physical Online trading

Settlement cycle T+7 T+2

No.of depositories - 2

Depository participants - 714

Stock Exchanges (cash) 21 19

Stock Exchanges (derivatives)

- 03

Listed companies (no) 2861 4929

No. of trades (Lakhs) 126 5408

Demat securities (Lakhs) - 7,39,287

Demat turnover (Rs.crore) - 10,99,871

Liquidity 25.1 58.0

Source : www.sebi.org.in/SMBM_2008... extracted on 01.07.2011

Table No.7.5 gives highlights about how the secondary markets have changed the

functioning of stock exchanges. From open outcry, the markets shifted to online and

screen based trading system. There has been faster settlement and clearing. This is also

directed by SEBI and Settlement Guarantee Fund has also been established. Due to the

dematerialization of securities, with the help of depositories, markets have become

more efficient. This can be seen from more number of trades, more turnover and

increased number of demat securities. This has, to some extent, tried to solve the

problem of liquidity.

7.6.5 Regulation on Takeovers/ Acquisitions

SEBI has notified ‘takeover code’ to provide exit route to minority shareholders in the

process of takeover. This code regulates the process of substantial acquisition of

shares in a listed company. Prior to this code, this process was a part of listing

provision. But now, SEBI’s regulatory functions extend the scope towards such

takeovers/acquisitions. The code makes it mandatory for the acquirer to make a public

offer to acquire a further 20 % equity in the target company. The tender offer should

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http://www.sebi.org.in/SMBM_2008

be handled by a SEBI registered merchant banker. For this purpose, SEBI has directed

acquirers to open an escrow account before making public offer. In case of non-

compliance, such proceeds of escrow account shall be forfeited as per the provisions

of Takeover Code.

Table No.7.6

Takeovers and Acquisitions

Year Open Offer* Exemption#

(No.) Amount (Rs.Crores)

(No.) Amount

(Rs.Crores)

1997-98 40 578 93 3502

1998-99 66 1014 201 1888

1999-00 75 461 252 4677

2000-01 77 1372 248 4873

2001-02 81 3610 276 2539

2002-03 88 6389 238 2428

2003-04 65 1595 171 1436

2004-05 61 4632 212 6958

2005-06 102 4078 245 17132

2006-07 87 11352 223 18608

2007-08 114 28706 232 6458

2008-09 99 4711 227 10502

Source : SEBI : Handbook of Statistics on Indian Securities Market, pp.65

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*Open offer stands for the interest shown by the parties for takeover. This further is

given in quantity as well as amount involved in all these proposed takeovers.

#Exemption is the concession granted to the bidders from open offer as per the

takeover code issued by SEBI. The column of ‘No’ gives the number of cases while the

amount involved in those cases is given in the next column.

The Table No. 7.6 reveals that due to the SEBI’s ‘Takeover code’, more and more

acquirers had to make public offer. This offer straightway comes under the purview of

SEBI. With the advent of this ‘Takeover code’, SEBI is in a position to protect

companies from unwarranted acquisitions. Some unscrupulous acquirers were

identified with this particular move. This has helped in providing relief to minority

shareholders against malafide acquisitions or takeovers.

7.7 Committees on the Issues Relating to the Development in The Capital

Markets in India.

Throughout the various phases of development, SEBI has come out with guidelines

and directions on specific issues of capital markets. While these directions were given

and guidelines being formulated, some committees were appointed to give

recommendations and also to take review of the present system prevailing in the

market. Subsequent paragraphs highlight some of the major committees with reference

to their terms of reference, methodology, constitution and important

recommendations.

7.7.1 Report of the Expert Committee

Appointed for Interpretation of Turnover (1992) 4 (Appendix B 1)

Methodology

The committee, in its meetings, carefully considered the questions raised by various

stock exchanges, and also the replies given to SEBI explaining the practices followed

by brokers and stock exchanges. The committee also reviewed SEBI’s guidelines in

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respect of stock brokers and sub brokers. The committee met brokers, jobbers, traders,

financers to make specific recommendations.

Major Recommendations

1. For jobbing transactions identified and included in the turnover as proposed in the

report, the scale of fees to be reduced to 1/200 %.

2. In the case of carry forward, renewal of badla transactions the offsetting entries may

not be counted as a part of turnover.

3. For government securities and PSU bonds and units traded in similar manner, the

turnover may be calculated separately and a registration fee of 1/1000 % be charged

on such turnover rather than present scale of 1/100 %

4. If brokers are carrying out transactions in securities without reporting it to the stock

exchange, those transactions would be taken into account for the purpose of turnover

and the broker would be responsible for registration fee.

5. Stock exchanges to ensure that registration fees are properly calculated and paid to

the SEBI.

6. The trade put through on other stock exchanges, would be included in the turnover

of that exchange.

7. The activities like underwriting and collection of deposits would not be taken into

account for the purpose of calculating the turnover of the brokers.

7.7.2.Report of the Review Committee on

SEBI (Merchant Bankers) Rules and Regulations, 1992 5 (Appendix B 2)

Methodology

Rules existing before 1992 contained provisions which were more oriented towards

issue management but merchant banking business also needed to be covered under the

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regulations. The committee, therefore, examined the rules and regulations and

deliberated upon bringing out the rules and regulations to control the business of

merchant bankers in the capital markets.


1. There should be a single regulation governing the merchant bankers. To avoid

multiplicity of regulations, the existing rules to be rationalized and combined.

2. Similarly, to avoid confusion and to have more simplicity, ‘underwriting’ to be

made permitted activity and to be brought under SEBI’s merchant bankers rules.

3. Merchant bankers be allowed to take up both: fund based and non fund based

activities with the changing market conditions. This may include services like

insurance broking, margin lending etc.

4. Net worth requirement should be regarded as a function of level of activity of the

merchant banker. ‘Net worth’ for this purpose should be reckoned as per definition

given by ICAI which states ‘net worth is paid up capital plus free reserves, provided

however, that any fictitious assets will be reduced from the computation of net worth.’

5. The processing fees to be levied are to be adjusted against registration fees in case

of grant of registration. Processing at the time of renewal of registration to be more

simple i.e. automatic renewal on payment of stipulated fee.

7.7.3 Report of the B.D.Shah Committee on Short Sales (November,1996) 6

(Appendix B 3)

Methodology

The committee met the different market participants such as stock brokers, office

bearers of stock exchanges, representatives from financial institutions etc. The

committee sought explanation from these market players regarding possible modalities

to regulate short sales and stock lending mechanism along with its operational

modalities.

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1. The stock exchanges having online trading system would modify their trading

software within three months and the other stock exchanges which are to begin online

trading, would incorporate necessary features in the software.

2. In the event of a broker having declared a transaction as ‘sale for delivery’ and

subsequently fails to give deliveries, a penalty of 2 % of auction price to be charged on

the broker for the quantity undelivered.

3. The client / broker selling the shares at one stock exchange against his outstanding

purchase position at another stock exchange will be considered as ‘short sale’.

4. SEBI to review any increase/ decrease in the margins as also the threshold limits in

future depending upon the market conditions.

5. Any addition or deletion in the list of the identified scrips for the purpose of

disclosure or for imposition of margin could be reviewed by SEBI depending upon the

market conditions.

6. Operational modalities of the stock lending mechanism needs to be redefined to

take care of eligibility of the participants, tax issues, confidentiality of information,

limit of lending of stocks by financial institutions.

7.7.4 Justice P.N. Bhagwati Committee Report on

Takeovers (January, 1997) 7 (Appendix B 4)

Methodology

The committee held a number of meetings to deliberate extensively on all the existing

provisions of regulations and on the issues which came up before SEBI for

administration in financial sector. The committee had deliberations with market

participants, industrialists who have made acquisitions of companies, intermediaries

involved in corporate takeovers. Apart from these, financial and investment

institutions and financial journalists were also invited for deliberations.

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1. SEBI should appoint a panel comprising experts of SEBI and the recommendations

of the panel may be taken into account by SEBI while considering exemptions to be

covered under the regulations.

2. Indirect acquisition of control of a company should require compliance to the

regulations and this needs to be clarified by way of suitable explanation.

3. Apart from disclosures about individual holdings, disclosures about persons in

control of management of the company and their shareholding interest in the company

should also be called for.

4. Public announcement be released in all editions of an English national daily with

wide circulation, one Hindi national daily and a regional daily having circulation at the

place where the registered office of the target company is situated and at the place of

stock exchanges where shares of such company are frequently traded.

5. The highest and average price paid by the acquirer of shares of target company

during the twelve month period prior to the date of public announcement be disclosed

in public announcement.

6. Disclosure requirements be clearly and elaborately specified by the Board.

7. The acquirer shall make firm arrangements for finance required and disclose full

details of the arrangements both in the public announcement and in the letter of offer.

8. SEBI Act be amended to expand the scope of adjudication and additionally, the

provisions should be made in company law for personal disqualification of directors of

the acquirer who violates the provisions of the regulations.

7.7.5 Report of Justice Dhanuka Committee on Securities Laws (1998) 8

(Appendix B 5)

Methodology

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The committee sent out a questionnaire to a number of agencies, intermediaries,

market participants and experts and received comments from them. A number of

meetings were held to deliberate extensively upon the issues of new securities law. All

the presidents of the stock exchanges in India, professional agencies like ICSI were

also consulted for this purpose. The status of securities law in other countries was also

compared with Indian context. Finally, the committee came out with the report in three

parts. First part highlights recommendations of the committee and proposed new

legislation. The second part contains the report in relation to Companies Bill 97. The

third part relates with Depositories Act and relevant recommendations.


1. There should be a comprehensive legislative framework and the requisite legislative

provisions should support the market regulations.

2. Those pockets which have been excluded from the present legislation have to be

included in the scope of new legislation.

3. Investor protection should be of paramount importance while framing any

amendment/legislation.

4. There has to be a strong market regulator and all the aspects relating to the

regulation be brought under the same.

5. The delegated legislation should be unambiguously expressed for proper

implementation and enforcement.

6. The conflict amongst various legislations be removed and harmonized.

7. The role of SEBI as a regulatory authority be recognized so that it supplements the

development of securities markets.

8. SEBI must be subjected to administrative law jurisprudence in India. It must be

reasonably and fairly given the powers but at the same time, wherever SEBI exceeds

its authority, provisions of the law should provide for correcting SEBI.

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9. All the market participants which are presently beyond the purview of securities

laws, be brought under these laws and be regulated by SEBI.

10. SEBI to consider organizing investors’ education programmes, for the benefit of

general public.

11. The stock exchanges can entrust the function of clearing house to a clearing

corporation separately constituted.

12. The depository should not be liable for the loss caused to the beneficial owner as a

result of fraud or negligence of the participant.

13. The appeal against the order of SEBI shall lie with the Securities Appellate

Tribunal (SAT) and not to the Central Government.

14. Whenever there is a transfer of securities into physical forms (rematerializing), no

stamp duty is to be leviable.

15. The stamp duty levied at the stage of issue of securities should be made uniform.

16. Pending dematerialization, the securities of an investor entrusted, be held in trust

by the participant (DP).

7.7.6 Report of the Committee on

Carry Forward Under Rolling Settlement (1999) 9 (Appendix B 6)

Methodology

The committee had lot of deliberations among themselves. The members exchanged

their views with each other through fax and e-mail continuously. Mr.Himanshu Kazi

and Mr. Ravi Narain also provided valuable inputs and they attended the meetings also

by invitation. The committee also sought the explanation from the stock exchanges.


1. There should be a scrip wise position limit, but for ease of implementation, this

position limit should be achieved through the use of prohibitively high margins.

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2. Stock exchanges should make the necessary software changes to incorporate client

codes in all transactions within a short period of time.

3. The exchanges implementing carry forward should obtain SEBI approval for the

eligibility criteria, process of choosing the scrips for carry forward list and disclosure/

transparency provisions relating to the above.

4. Intra-day margins should be levied on carry forward trades if and only if they are

levied on normal trades.

5. The weekly carry forward system under rolling settlements may be introduced as

carry forward product to make it easier for the market to understand and use the

product.

6. Exchanges must be allowed to introduce futures contracts in individual stocks

directly.

7. Both the products daily and weekly carry forward, be permitted and the exchanges

were free to decide to introduce either of the both or neither. This choice should be left

to the market place.

Notes of Dissent.

Prof. J.R. Varma – The weekly carry forward product will migrate to a full fledged

futures market. Hence, the product will cease to be regulated as carry forward product

and it will be regulated as futures/ derivatives contract.

Dr. R.H. Patil – The weekly carry forward product should be supported by risk

mechanism similar to the futures market.

Mr. Anand Rathi – The weekly carry forward product would amount to introduction of

carry forward system without the checks and balances which modified carry forward

system (MCFS) approved by SEBI has imposed.

7.7.7 Report of the Committee on

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Internet Based Securities Trading and Services (1999) 10 (Appendix B 7)

Methodology

The committee took stock of the developments in the use of internet in securities

business at the international level and within the country. The matters related to

encryption of messages are considered / handled by the committee along with

Department of Telecommunication.


1. SEBI registered stock brokers interested in providing internet based trading services

will be required to apply to the respective stock exchange for a formal permission. The

stock exchange, before giving such permission to brokers, shall ensure the fulfillment

of net worth requirements, operational and system requirements, risk management

system.

2. The security measures to be made mandatory like user id, passwords, firewalls,

socket level security etc.

3. Advance security products used for E- Commerce may be made optional like

SMART cards, second level passwords etc.

4. Policy and regulations of Dept. of Telecommunications, will govern the level of

encryption

5. Brokers should follow the similar logic / priorities used by the exchange to treat

client orders.

6. Brokers should make periodic reporting to the exchange as specified by the

exchange.

7. 128 bit encryption should be allowed to be freely used by the DOT, GOI to ensure

safety, security and integrity as well as for maintaining investor trust in the internet

based trading system. (Encryption is a system where a message is encoded into bits of

binary system. This code is sent to the requisite recipient only so that he can decode

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the same and the message becomes readable. 128 bit encryption adds more safety

while transmitting the messages electronically)

7.7.8 Report of the Kumar Mangalam Birla Committee

On Corporate Governance (2000) 11 (Appendix B 8)

Methodology

There are a number of reports and codes which have already been published

internationally. The committee reviewed all the best internationally accepted practices

in corporate governance. Though the committee reviewed these reports, the primary

objective was to view corporate governance from the point of view of investors and

shareholders. The committee identified the three key constituents viz. shareholders,

board of directors and management with reference to their roles and responsibilities in

corporate governance. The draft report was sent to chambers of commerce, investors’

associations, stock exchanges, ICAI, ICSI, AMFI, merchant bankers’ association,

academicians, foreign investors etc.


1. It is necessary that the ‘code’ is also reviewed from time to time, keeping pace with

changing expectations of the investors, shareholders and other stakeholders and with

increasing sophistication achieved in capital market.

2. A non-executive chairman should be entitled to maintain a chairman’s office at the

company’s expenses to enable him to discharge the duties effectively.

3. A qualified and independent audit committee should be set up by the board of a

company. This should facilitate credibility in financial disclosures of a company.

4. Audit committee to be chaired by an independent director and should have a

company secretary as committee’s secretary.

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5. Audit committee should meet at least thrice a year. The quorum in the meeting

should be either two members or one-third of committee members, whichever is

higher.

6. Audit committee should review the financial statement, adequacy of internal control

system, findings of internal investigations, discussion with external auditor.

7. A director should not be a member in more than 10 committees or act as a chairman

of more than five committees across all companies in which he is a director.

8. Management discussion and analysis report should form part of the annual report to

the shareholders.

9. Disclosures must be made by the management to the board relating to all material

financial transactions, where they have personal interests that may have potential

conflict with the interest of the company at large.

10. The half yearly declaration of financial performance including summary of the

significant events in the last six months, should be sent to each household of

shareholders.

11. The board committee under the chairmanship of non-executive director, to look

into the redressing of shareholder complains.

12. The company should arrange to obtain a certificate from the auditors of the

company regarding compliance of mandatory recommendations and annexe the

certificate with the director’s report, which is sent annually to all the shareholders of

the company. The same certificate should also be sent to the stock exchanges along

with the annual returns filed by the company.

7.7.9 Report of the Committee on Reduction in the Cost

for the Investors relating to Demat Operations, (June, 2002) 12 (Appendix B 9)

Methodology

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The committee had in all four meetings wherein there were extensive discussions

regarding the question that whether there is a possibility of reduction in the cost for the

investor with regard to demat operations. The committee examined various charges

regarding demat operations especially charged by Depository Participants (DPs).

Before submitting the report and concluding the deliberations, the committee had a

survey of investors through the investors associations.


1. The ways and means may be found out to make the companies bear at least a

substantial part of the cost of dematerialization to provide relief to the investors as the

companies are saving lot of costs of printing, postage etc.

2. Simultaneous transfer-cum-demat scheme should be abolished as it is prone to

misuse.

3. Sick companies or BIFR cases should not be included in compulsory demat scrips

as the cost involved in such companies for demat operations may be too large.

4. SEBI may approach Department of Telecommunications for reduction in the

charges that are payable by the DPs who avail the facility of WAN.

5. DPs may be allowed to take money by way of reasonable advance from the clients

or any other suitable safeguards.

6. DPs may have account closing charges at their discretion, but if a DP introduces

such charges for the first time, it should give sufficient time to the clients to exit.

7. SEBI may evolve a mechanism to address the issue of management of risk on demat

shares.

Notes of dissent (Mr. Manubhai Shah)

1. As the committee was working on the cost aspect, it was improper and inconsistent

on the part of depositories to raise their charges during the tenure of committee.

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2. The insurance policy taken by the depositories to cover the liability of the

depository should be made available to ‘Investor Protection Groups’ recognized by

SEBI

7.7.10 Report of the SEBI’s Accounting Standards Committee

(August, 2002) 13 (Appendix B 10)

Methodology

The committee had deliberations with representatives from stock exchanges for

functioning requirements. The members of ICAI were consulted for examining

accounting practices and audit qualifications. Similarly Dept. of Company Affairs was

also consulted for reviewing the regulatory requirements. AMFI, as a financial

intermediary was also consulted by the committee to come out with specific

suggestions.


1. It was not desirable to prescribe quarterly disclosure of loans, advances and

investments as well as prohibiting companies from having more than one subsidiary

investment company.

2. The corporate governance code to be reviewed to consider the provisions of parent-

subsidiary company board composition.

3. The risk report shall be prepared, discussed by the Board of Directors of the

company and published in the annual report.

4. The stock exchanges shall be required to inform SEBI in cases where companies

fail to remove audit qualifications.

5. SEBI to constitute an Advisory Committee to examine the cases reported by the

stock exchanges where the companies have failed to remove audit qualifications.

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6. SEBI may refer the matter to Dept. of Company Affairs to initiate necessary action

under Companies Act and also to ICAI in cases where actions are required against the

auditors of the company.

7.7.11 Report of the Committee on Formation of an ‘SRO’

(Self Regulatory Organization ) for Merchant Bankers.(2002) 14 (Appendix B 11)

Methodology

The committee had three meetings where the terms of reference were elaborated/

discussed. Mr. Y.H. Malegam was also invited in one of the meetings, to have expert

advice in the matter. The self regulatory models of various types like- voluntary,

statutory, member-defined, supervised and self- managed -all were discussed at length

during the committee meetings.


1. A member-defined SRO model in the short term and a supervised SRO model in the

medium and long term be applied as it would be effective and efficient.

2. Membership of the SRO should be a pre-condition for registration and renewal of

registration as merchant banker with SEBI. On the recommendation of the SRO, SEBI

would issue an in-principle approval to the merchant banker.

3. The SRO should have an independent CEO appointed by its Board.

4. The SRO should have a disciplinary committee comprising five members viz.

chairman, any director of the SRO, two independent directors, an independent member

with judiciary experience/ background.

5. SEBI to provide the details of all registered merchant bankers to facilitate the

calculation of fees to be charged from merchant bankers as registration charges. A

reasonable interest income from corpus of SRO would also be available to meet the

cost of SRO.

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6. SEBI to have the powers to dismantle the SRO’s board of directors or derecognize

the body.

7.7.12 Report of the Group on Corporatisation and Demutualisation of Stock

Exchanges (2002) 15 (Appendix B 12)

Methodology

The group had deliberations among the members as well as with other legal experts,

stock exchanges and market participants. The group also considered the experiences of

other countries where stock exchanges were already demutualised like Austria,

Hongkong, U.K., Singapore etc. In India NSE has been looked as a demutualised or

corporatized stock exchange and hence the group felt it helpful that capital,

organizational structure and management of NSE be compared with other stock

exchanges in the world.


1. The stock exchanges which are setup as association of persons and those which are

setup as companies limited by guarantee be converted into companies limited by

shares.

2. A common model for corporatization and demutualization be adopted for all the

stock exchanges.

3. The provisions of Income Tax Act and Securities Contract (Regulation) Act have to

be amended as the stock exchanges would shift from ‘not for profit entity’ to ‘for

profit Company’.

4. The stakeholders viz. shareholders, brokers, and investing public through the

regulatory body should be equally represented on the governing board of a

demutualised exchange.

5. Adequate disclosures about the directors’ background should be provided to the

shareholders at annual general meetings and annual report.

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6. The demutualised stock exchanges should follow the relevant norms of corporate

governance applicable to listed companies.

7. The stock exchange should appoint a CEO who shall be responsible for day to day

activities of the exchange and in addition, voluntarily it can have a CFO.

8. The concept of regional stock exchanges needs to be abolished.

9. The stock exchanges could explore the possibility of merger for alternative use of

infrastructure. For this purpose, the stock exchanges may use the ‘Euronext model.’

7.7.13 Report of the Committee for Implementation of

Straight Through Processing (STP)* in Indian Markets (2003) 16 (Appendix B 13)

*STP involves electronically capturing and processing transactions in one pass, from

the point of first ‘deal’ to final settlement. It results in reduced settlement cycle,

greater transparency, reduced risk, more timely processing and improves attractiveness

of market.

Methodology

The committee confined its discussion to STP only. It has deliberated on the issues

involved in reducing manual intervention in the trade process, reduction of paper and

standardization of messaging protocols. The committee also discussed issues like

RTGS, stamp duty and other ancillary issues. The committee also invited other

persons from various organizations and associations to provide inputs on various

issues. The committee also studied a few international experiences in achieving STP.


1. There has to be online connectivity between the depositories to permit easier

settlement.

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2. Recognition be given to the electronic contract notes as a legal document as an

alternative to paper based contract notes.

3. ISO 15022 standards be adopted for financial messaging.

4. The existing laws/regulation/bye-laws etc. to be amended to provide recognition of

paper less form of data and records.

5. The issues relating to payment system have to be addressed by RBI as SEBI does

not govern or regulate payment system.

6. There is need to have RTGS system so that settlement of funds takes place faster. If

it requires a time period, EFT facility may be increased in terms of its coverage and

value so that the payments may be made faster.

7.7.14 Report of the Committee on Reallocation of Shares in the Matter of IPO

Irregularities. (2007-08) 17 (Appendix B 14)

Methodology

The committee deliberated over several sittings and invited relevant parties and

experts in the field to take valuable inputs. The committee’s deliberations and analysis

was confined to 21 IPOs specified by SEBI. These IPOs were taken out of public

issues during 2003-2005.


1. For the purpose of reallocation or payment to these deprived applicants only the

closing price at which these shares were listed on the first day of listing will be

considered.

2. The reallocation should therefore be quantified in monetary terms and the

reallocation value for each deprived applicant should be initially computed based upon

shares but subsequently converted into the amount of gains associated with such

shares.

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3. A ‘spillover’ method of reallocation of shares is to be applied. Totally unsuccessful

applicants shall be reallocated shares equally from the available pool, till they each

receive the minimum shares allocated to the lowest category in the IPO.

4. An administrator be appointed by SEBI to handle the process.

5. The reallocation or payment, to the valid deprived applicants, may be made as far as

possible as per the bank records in their demat accounts.

7.7.15 The Report of the Committee on

Model Byelaws of Stock Exchanges. 18 (Appendix B 15)

Methodology

The committee extensively reviewed the existing laws governing the stock exchanges.

Initially the draft of the rules was prepared by Dr. S.P. Narang and Mr. V.K. Agarwal.

This draft was the basis of discussions during the committee meetings and

deliberations. Apart from that, rules of BSE were also referred to develop a set of

model rules. Then the draft was hosted on the SEBI’s website for public comments.

After deliberating upon these comments, the recommendations were submitted finally

to the SEBI.


1. The bye-laws to be made or amended should be published in gazette of India as well

as respective state. Apart from this these laws to be displayed on the websites of SEBI

and the respective stock exchanges.

2. The stock exchanges be empowered to impose a penalty of Rs. 5 Lakhs for violation

of the rules.

3. Trading members to be made responsible to issue contract notes directly to their

clients hence, issue of confirmation memos by sub-brokers to their clients, be

suspended.

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4. The system of registration of sub-brokers be modified and to be brought under

jurisdiction of respective stock exchange.

5. The primary responsibility for the discharge of surveillance and investigation

functions to rest with stock exchanges.

6. The custodians may be made responsible and liable as professional clearing

members for which they have to acquire professional clearing membership of the

stock exchanges.

7. Investors’ Protection Fund and Investors’ Services Fund be set up pursuant to

guidelines issued by Govt. of India and SEBI.

7.7.16 Report of the Primary Market Advisory Committee 19 (Appendix B 16)

Methodology

The committee had meetings at regular intervals and accordingly deliberations have

taken place extensively. The committee also received representations from merchant

bankers and other participants in the primary market regarding the various changes

required in SEBI’s guidelines to make them more investor friendly. Some of the

suggestions discussed in the committee meetings were recommended to SEBI.


1.The company may be allowed to disclose the floor price, just prior to the bid

opening date, instead of ‘Red herring prospectus’, by way of public advertisement.

2. SEBI may consider providing flexibility to the issuer company by permitting them

to indicate a 20 % price band. Issuer may be given the flexibility to revise the price

band during the bidding period.

3. The issuer may be allowed to have a closed book building. i. e. the book will not be

made public.

4. SEBI may examine the requirement to delete the provision that a company make an

IPO of less than 25 % of paid up capital with minimum 60 % allocation to Q. I. B.*

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*Q.I.B. stands for Qualified Institutional Bidder which include banks, financial

institutions and other bidders who apply for the IPO. These bidders are registered

with SEBI and they also fulfill the eligibility criterion for qualifying as a bidder in

public issue. Therefore they are known as ‘Qualified’ Institutional Bidders (Q.I.B.s)

5. Black out period for research should be restated from 40 days before issue opening

till 40 days after issue closing.

6. The draft and final offer document may be made available on the lead manager’s

and company’s website till listing.

7. ‘Retail investor’ may be redefined in terms of the amount applied for, instead of the

number of shares applied for.

8. SEBI should consider not having a mandatory requirement of 90 % subscription and

allowing the companies to disclose in the prospectus, the amount of minimum

subscription they require and sources for meeting the shortfall.

7.7.17 Report of the Secondary Market Advisory Committee 20 (Appendix B 17)

Methodology

The committee held in all nine meetings during June-July, 2002. The committee, in

those meetings deliberated upon the issues like liquidity, auction, investor protection

fund, scrutiny of trading activity etc. The issues of short sales, margin trading and

securities lending and borrowing were also considered and discussed in the committee

meetings. Finally, the committee came out with some recommendations for

development in secondary market.


1. The short sale be defined as failure to deliver securities at the time of settlement and

this should be monitored at the time of delivery and settlement.

2. The short sales should be regulated by putting in place a sound and efficient

securities lending and borrowing mechanism.

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3. The model of margin trading may be considered for introduction immediately as it

does not require legal amendments/ clarifications.

4. There should not be exchange traded model of margin trading.

5. The model of securities lending for handling settlement shortages by clearing

house / clearing corporation may be considered for introduction.

6. The return of the borrowed securities by the clearing corporation/ clearing house

should be independent of the normal settlement.

7. The existing scheme may be allowed to continue for a period of six months and the

feedback thereon may be obtained from the participants before revising the scheme.

7.7.18 Report of the Malegam Committee on

Disclosure Requirements in Offer Documents 21 (Appendix B 18)

Methodology

The committee studied the existing rules/regulation in regard to disclosure

requirements. The committee had 25 meetings for deliberations about the disclosure

requirements in offer documents. The committee’s approach was based on the

principle of investors’ protection. The committee reviewed the existing rules and

regulations extensively and suggested the further requirements. The representatives of

stock exchanges, FICCI, investors’ association, chartered accountants were also

invited for deliberations. The representations of Department of Company Affairs,

ASSOCHAM were also invited for committee’s deliberations.


1. Risk factors should be determined on the basis of their materiality. Materiality

should be decided by taking the consideration of events which may be collectively

material events, qualitatively material events and potential material events in future.

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2. Risk factors should appear in the offer document in the following manner: risk

envisaged by the management and how these risks are proposed to be addressed.

3. There should be a provision for some minimum financial commitment from

qualified Institutional Brokers and the withdrawal from QIBs should not be allowed

after the closure of the issue.

4. A company shall not be allowed to come out with a public issue unless at least 75 %

of the means of finance are to be raised from public issue.

5. Only one standard financial unit should be used in the offer document.

6. The issuer company to include in the offer documents, the financial statements

prepared on the basis of more than one accounting standard, to disclose all material

facts/events.

7. The draft offer document shall be submitted to SEBI needs to be approved and

signed by the Board of Directors of company.

8. Differentiation should be made in the funds being raised for a financial purpose like

fixed assets and working capital. The requirement should particularly be stated very

clearly and specifically.

9. The initial decision as to whether the issue should be permitted may be taken by

SEBI.

10. If more than one merchant banker is associated with the public issue, the

responsibility of each merchant banker is to be clearly disclosed and demarcated.

7.7.19 Report of the

Takeover Regulations Advisory Committee (July, 2010) 22 (Appendix B 19)

Methodology

The committee felt that views from the public on as many issues as possible should be

considered while undertaking a review of such an important corporate activity area. A

246

press release was issued seeking suggestions and inputs in a structured manner from

the public. The committee has also taken into consideration the prevailing practices

and key regulatory requirements relating to takeovers.


1. The acquirer promoter / shareholders shall be asked to disclose their acquisition on

periodic as well as transaction specific basis.

2. Unless the acquirer declares an intention in public statement, the acquirer shall be

debarred from alienating any material assets of the target company for two years.

3. The independent directors on the board of directors of the target company should

make a reasoned recommendation on the open offer.

4. If a competing offer is made, there shall be no appointments of directors during the

offer period.

5. An open offer to be withdrawn where any stipulated condition is not met for reasons

outside the reasonable control of the acquirer.

6. Where a change in control over the target company occurs, shareholders of the

target company ought to rightfully get an adequate exit opportunity.

7. The initial acquisition threshold for a mandatory open offer be raised to 25 % of the

voting capital of the target company.

8. Every open offer of substantial acquisition ought to be for every share held by all

shareholders of the target company, as on expected date of the close of the tendering

period.

7.7.20 Report of the Committee on Review of Ownership and Governance of

Market Infrastructure Institutions’ (November,2010) 23 (Appendix B 20)

Methodology

247

The committee decided to adopt consultative strategy to have benefit of views of all

the stakeholders, viz. market infrastructure institutions, shareholders, industry

associations, investors and general public. The discussions were also held with

representatives of NSE, BSE, NSDL, CDSL, LIC, MCX and others. The committee

also examined global experience concerning ownership and governance norms of

MIIs.


1. The concept of dispersed ownership to be favoured for the well being of the stock

exchanges.

2. Domestic institutions registered in India having a net worth of Rs.1,000 Crores or

more be permitted to be anchor institutional investors for stock exchanges for 10

years.

3. Clearing corporations and depositories not to be allowed to invest in other class of

MIIs.

4. At least 51 % of the paid up equity capital of the clearing corporation should be

held by one or more recognized stock exchanges.

5. No trading / clearing member shall be allowed on the board of a stock exchange.

6. All transactions in securities of the board members of the MIIs and their family

have to be disclosed to the board of the MIIs.

7. Appointment of compliance officer shall be mandatory for stock exchanges and

clearing corporations. The compliance officer shall immediately and independently

report to SEBI, any instance of non- compliance.

8. Working of the MII should be reviewed again by SEBI, after five years once the

suggestion made by the committee is implemented.

7.7.21 Report of The Abid Hussain Committee on

Development of Capital Markets (1985) 24

248


1. Creation of two-tier stock exchanges along with fiscal measures to streamline the

stock market.

2. Merchant bankers to be made more responsible and accountable.

3. Merchant bankers should enter into a tie up with the brokers, to quote floor price.

4. The complicated and cumbersome procedures of transferring the shares to be

simplified.

5. A highly reputed national level institution to be set up to undertake multiple

memberships in stock exchanges throughout the country.

6. New instruments such as non-voting shares with higher dividends be opened so as

to reduce the fear of capturing the management by purchasing the shares.

7. In order to finance the buying and selling of shares, provision of institutional

financing be made through commercial banks.

7.7.22 Report of The Patel Committee on the

Functioning of Stock Exchanges (1985) 25


1. Only authorized clerks of the members be permitted to enter the trading ring.

2. The monitoring department or surveillance department of the stock exchange should

watch the price movements and take necessary action, if required to control excessive

speculation.

3. In case of any disputes on trading floor between members and their authorized

assistants, the floor committee shall officially intervene and give judgment in the

dispute.

249

4. The operations department of the stock exchange shall supervise the operations,

make announcement at the time of trading, suspension of trading, collection of

quotation etc.

5. There has to be Customers’ Protection Fund and insurance cover to the member of

stock exchanges.

7.7.23 Report of the M. J. Pherwani Committee (1991) 26


1. There should be some criteria for setting up new stock exchange, which will

develop the National Market System in the country.

2. To strengthen the move towards professionalization of the capital market as also to

provide nation-wide securities trading facilities to investors.

3. To set up a model stock exchange viz. National Stock Exchange.

4. NSE to have license of Additional Trading Floor (ATF) instead of multiplying the

number of stock exchanges in the country.

5. Infrastructure in terms of space, telecommunication, computerization, online

processing, and library for the ‘National Market’ be set up by NSE.

6. By the end of trading day, the exchange system will give out rates and list of

completed transactions for each trading member.

7. Only large and medium sized companies and PSUs to be listed on this exchange.

8. There shall be completely automated system in terms of both trading and settlement

procedures.

9. Compulsory market makers/jobbers to provide liquidity and ready market.

10. The problems of lack of liquidity, inefficient and outdated trading system, outdated

settlement system to be removed by establishment of NSE which would ensure equal

250

access to investors all over the country and provides a fair, efficient and transparent

securities market to investors using electronic trading system.

7.7.24 Report of the Committee on Financial System (1991) 27


1. Improvement in the flexibility and operational efficiency of the markets.

2. Strengthening power to SEBI to make it a strong regulatory authority in Indian

capital markets

3. Vetting the powers of Capital Control Issues Act to SEBI to enable SEBI to perform

supervisory and regulatory functions.

4. Deregulate and liberalize the operations in the capital markets.

7.7.25 Report of the Dave Committee (1996) 28


1. The companies ineligible for listing on the other stock exchanges should be

provided listing on OTCEI.

2. The companies with a paid up capital of less than Rs.10 Crores, should be listed on

OTCEI to provide liquidity.

3. The upper limit of Rs. 25 Crores for listing on OTCEI, should be removed and

made at par with other stock exchanges.

4. Trading in the equity of all unlisted companies shall be channelized through

OTCEI, as mutual funds, FIs and FFIs trade in them.

5. Companies delisted on other stock exchanges and those with an offer on ‘TAP’

system, should be allowed to be listed only on OTCEI.

251

6. There should be a shift from to T+3 to T+7 for the purpose of settlement. This is

particularly relevant in respect of permitted securities traded on other exchanges on

T+7 basis.

7. The promoters should play a more active role in increasing the number of

companies listed and traded.

8. The market making requirements on the sponsors should be liberalized. Issue with a

paid up capital of Rs. 10 Crores should attract compulsory market making. The higher

the paid up capital, the lower is the need for holding inventory by the market makers.

9. The efforts should be made to increase volumes on the OTCEI so as to make it a

viable alternative to other exchange.

7.8 Conclusion

The regulatory authorities in Indian capital markets have been instrumental in the

development of Indian capital markets. Initially, the capital markets in India were

grossly non regulated. As the people attracted towards the capital market were less in

number, the need to regulate these markets was not also felt seriously. During the

initial phase of development of capital markets in India, the then British Government

did not give adequate attention to regulate the capital market. But immediately after

independence, Capital Issues (Control) Act was passed as first attempt of regulation of

Indian capital markets. Though this Act was just a step further to earlier Bombay

Securities and Contract Act of 1925, some significant provisions were enacted in the

law to govern the capital market. In 1949, the RBI was nationalized and made the

Central Bank to regulate the banking sector in India. As there was no other separate

body for regulating financial sector, RBI was also expected to play an important role

in financial sector. The policy measures taken by the RBI to control and regulate

banking sector and economy, as a whole, have direct and indirect implications on the

functioning of stock exchanges in India. Further, in 1956, the Companies Act was

passed and further in 1969, major commercial banks were nationalized. The enactment

of the Companies Act was a major landmark as the Act contains the provisions

252

relating to formation and liquidation of companies which raise the capital through the

capital markets.

The major step in regulation of Indian capital market was establishment of SEBI in the

year 1988 which started the functioning from 1992 as a statutory authority in

regulating the Indian capital market. Since last two decades, SEBI has been significant

as a regulatory authority. Though initially, SEBI was reactive, gradually, it became a

strong regulator in financial sector in India. Now, SEBI has been looked as a strong

promotional and developmental authority in Indian capital markets. SEBI has come

out with a number of guidelines on various aspects related to the capital market.

Especially, SEBI has concentrated on investors’ protection and accordingly it has

worked to regulate the market. Apart from issue of guidelines, lot of committees were

appointed by the SEBI from time to time to give recommendations on various critical

issues. The reports of most of these committees have been accepted and accordingly

amendments are made in the existing procedures and laws in the capital market from

time to time.

Recently, some more acts were also enacted like Depositories Act and some earlier

acts like Capital Issues (Control) Act were abolished. This step was taken in line with

the new developments taken place especially after the globalization. But during all

these developments, SEBI has emerged as a strong regulatory authority in

development of capital markets in India.

A careful review of the recommendations of various committees referred to above

clearly highlights the sincerity and integrity of the SEBI in making Indian capital

market more inclusive, transparent, safe, quick and reflective of important influences

emerging from forces governing evolution of Indian economy and aspirations of

investing population at the same time absorbing good and refuting bad from within

and building up for a global financial hub.

253

1 “Indian Legislative Assembly Debates (1947)”, Parliament of India, New Delhi, 2004

2 Somaiyya Kirit (2005) “Scientific Management of Small Investors Protection in the new millennium with reference to India : Challenges and Opportunities (1991-2011)” ,Ph.D Thesis, University of Mumbai, p.110

3 Avadhani V.A.(2002) “Investment Management”, Himalaya Publishing House Mumbai, (6th Revised Edition), 2002, pp.189

4 “Report of the Expert Committee Appointed for Interpretation of Turnover” 1992

5 “Report of the Review Committee on SEBI (Merchant Bankers) Rules and Regulations”,1992

6 “Report of the B.D.Shah Committee on Short Sales" November,1996

7 “Justice P.N. Bhagwati Committee Report on Takeovers” January, 1997

8 “Report of Justice Dhanuka Committee on Securities Laws” 1998

9 “Report of the Committee on Carry Forward Under Rolling Settlement” 1999

10 “Report of the Committee on Internet Based Securities Trading and Services” 1999

11 “Report of the Kumar Mangalam Birla Committee On Corporate Governance” 2000

12 “Report of the Committee on Reduction in the Cost for the Investors relating to Demat Operations”, June, 2002

13 “Report of the SEBI’s Accounting Standards Committee” August, 2002

14 “Report of the Committee on Formation of an ‘SRO’ (Self Regulatory Organization ) for Merchant Bankers”.2002

15 “Report of the Group on Corporatization and Demutualization of Stock Exchanges” 2002

16 “Report of the Committee for Implementation of Straight Through Processing (STP) in Indian Markets” 2003

17 “Report of the Committee on Reallocation of Shares in the Matter of IPO Irregularities”. 2007-08

18 “The Report of the Committee on Model Byelaws of Stock Exchanges”

19 “Report of the Primary Market Advisory Committee”

20 “Report of the Secondary Market Advisory Committee”

21 “Report of the Malegam Committee on Disclosure Requirements in Offer Documents”

22 “Report of the Takeover Regulations Advisory Committee” July, 2010

23 “Report of the Committee on Review of Ownership and Governance of Market Infrastructure Institutions” November,2010

24“ Report of The Abid Hussain Committee on Development of Capital Markets” 1985

25“ Report of The Patel Committee on the Functioning of Stock Exchanges” 1985

26 “Report of the M. J. Pherwani Committee” 1991

27“ Report of the Committee on Financial System” 1991

28 “Report of the Dave Committee” 1996

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