PART ONE: POLICIES AND PROGRAMMES Part One: Policies and ... · Part One: Policies and Programmes...

�

Part One: Policies and Programmes

The Annual Report of the Securities andExchange Board of India (SEBI) presents thepolicies and programmes of SEBI and itsworking and operations during the financialyear 2004-05 in accordance with the formatprescribed in the Securities and ExchangeBoard of India (Annual Report) Rules, 1994notified in the Official Gazette on April 7, 1994.The Report articulates the manner in whichSEBI discharged its functions and exercisedits powers in terms of the Securities andExchange Board of India Act, 1992; theSecurities Contracts (Regulation) Act, 1956;the Depositories Act, 1996; and the delegatedpowers under the Companies Act, 1956. TheReport also reviews the developments in theIndian securities market during the financialyear 2004-05 within the evolving regulatoryframework provided by SEBI. As enshrined in

PART ONE: POLICIES AND PROGRAMMES

the SEBI Act, it has been the continuousendeavour on the part of SEBI to achieve itsstatutory objectives such as (a) protection ofinterests of the investors in securities, (b)development of the securities market, (c)regulation of the securities market, and (d)matters connected therewith and incidentalthereto. SEBI, as a statutory body, has soughtto balance these objectives by constantlyreviewing and assessing its policies andprogrammes, initiating new guidelines andregulations to nurture areas hithertounregulated or inadequately regulated andimplementing them in a manner so as topromote the orderly growth of the capitalmarket with transparency, fairness, efficiency,safety, and integrity. The major policy initiativesand developments in the securities marketduring 2004-05 are furnished in Box 1.1.

Allocation of Shares to Retail Individual Investors

� Allocation of shares to retail individual investors has been increased from 25 per cent to 35 per cent of thetotal issue of securities in case of book-built issues. The retail individual investor has been redefined as onewho applies or bids for securities of or for a value not exceeding Rs.1 lakh, as against the earlier limit ofRs. 50,000.

Issue Advertisement

� The SEBI Disclosure and Investor Protection (DIP) Guidelines, 2000 were amended in order to ensurebetter readability of the issue advertisements appearing on television and to reduce the cost incurred inpublishing pre-issue advertisements. The pre-issue advertisement which was mandatory for all public issues(fixed and book-built) should now contain minimum details.

Introduction of Shelf Prospectus

� The facility of shelf prospectus was introduced for public sector banks, scheduled banks and public financialinstitutions. They can file a draft shelf prospectus in the first instance disclosing the aggregate amount theyintend to raise through various tranches. Any amount of over-subscription can be retained by the issuer ineach tranche subject to the overall limit set for the year.

Green Shoe Option

� With an objective to widen the facility of Green Shoe Option, the SEBI (DIP) Guidelines, 2000 were amendedto make it available in case of all public issues, viz., initial public offerings, follow-on offerings, public issueseither through book building or fixed price route. All pre-IPO shareholders (including promoters) in case ofIPOs and pre-issue shareholders holding more than 5 per cent shares (including promoters) in case offollow-on offerings can lend their shares for the purpose of green shoe option.

Issue Norms

� The SEBI (DIP) Guidelines 2000 on issue norms were amended to provide for a floor face value of Re.1 pershare in order to restrict the pre-IPO splitting of shares. The face value has to be necessarily Rs.10 pershare for issue price below Rs.500 and in cases where the issue price is Rs 500 or more, the issuercompanies can fix the face value below Rs. 10 per share.

Box 1.1: Major Policy Initiatives and Developmentsin the Capital Market during 2004-05

�

Annual Report 2004-05

� The definition of the minimum application lot has been changed from Rs.2,000 to a band of Rs.5,000-Rs.7,000. The applications can be made in multiples of such value.

� The DIP Guidelines for preferential allotment were amended to: a) restrict sale of shares by shareholderswho are allotted shares on preferential basis; b) impose lock-in period on pre-preferential shareholding fromthe relevant date till six months after the date of allotment; c) reduce the period for allotment from 30 to 15days; and d) facilitate corporate debt restructuring.

Corporate Governance

� To improve the standards of corporate governance, SEBI amended Clause 49 of the Listing Agreement. Themajor changes in the new Clause 49 include amendments/additions to provisions relating to definition ofindependent directors, strengthening the responsibilities of audit committees, improving quality of financialdisclosures, including those pertaining to related party transactions and proceeds from public/rights/preferentialissues, requiring Boards to adopt formal code of conduct, requiring CEO/CFO certification of financialstatements and improving disclosures to shareholders. Certain non-mandatory clauses like whistle blowerpolicy and restriction of the term of independent directors have also been included.

� The implementation schedule of the amended Clause 49 which was initially proposed to be effective fromApril 1, 2005 for listed companies has been extended to December 31, 2005.

Debt Listing Agreement

� In order to further develop the corporate debt market, SEBI prescribed a model debenture listing agreementfor all debenture securities issued by an issuer irrespective of the mode of issuance.

Rationalisation of Dematerialisation Charges

� The existing structure of dematerialisation charges has been rationalised to provide benefits to investors.With effect from February 1, 2005, certain charges paid by investors were removed which include chargestowards opening of a Beneficiary Owner (BO) account, credit of securities into BO account and custodycharge for BO account opened on or after February 1, 2005. With effect from April 1, 2005, the custodycharges are not levied on any investor.

IndoNext

� The first phase of BSE IndoNext trading platform was inaugurated by the Honourable Finance Minister onJanuary 7, 2005 to provide for a nation-wide trading platform for the small and medium enterprises (SMEs).

Implementation of STP

� Mandatory processing of all institutional trades executed on the stock exchanges through the Straight ThroughProcessing (STP) was introduced with effect from July 1, 2004. This was in continuation of the efforts madeby SEBI to ensure the inter-operability between the STP Service Providers through the setting up of STPCentralised Hub.

SEBI (STP Centralised Hub and STP Service Providers) Guidelines, 2004

� In order to regulate the STP service, SEBI issued the SEBI (STP Centralised Hub and STP Service Providers)Guidelines, 2004 which also prescribed the model agreement between the STP centralised hub and theSTP service providers. The STP Guidelines prescribe the eligibility criteria and conditions of approval,obligations and responsibilities and code of conduct for the STP centralised hub and the STP service providers.

� In consonance with the internationally accepted ISO 15022 messaging standards, standardised transactionwork flow and messaging format for the STP system in India was specified by SEBI.

Derivatives

� In order to encourage the trading and clearing members of stock exchanges to use infrastructure of specialelectronic fund transfer (SEFT) facility as laid down by RBI to the extent possible, the members are nowgiven a choice to opt for payment of mark-to-market margins, either before the start of trading next day i.e.,on T day, or on the next day i.e., T+1. In case the members opt to pay mark-to-market margin on T day, noscaling up of initial margin would be applicable.

Box 1.1: Major Policy Initiatives and Developmentsin the Capital Market during 2004-05 (Contd.)

�


� Units of money market mutual funds and units of gilt funds were permitted to be accepted towards cashequivalent as part of the liquid assets of a clearing member.

� The eligbility criteria for indices on which futures and options are permitted to be introduced was modified toencourage the introduction of derivatives contracts on sectoral indices.

Foreign Institutional Investors (FIIs)

� The Union Government announced, within an overall External Commercial Borrowing (ECB) ceiling of US $9 billion, a sub-ceiling of US $ 1.75 billion for FII investment in dated Government securities and TreasuryBills, both under 100 per cent debt route and normal 70:30 route. Further, a cumulative sub-ceiling of US $500 million for FII investment in corporate debt was announced over and above the sub-ceiling of US $ 1.75billion. Both the sub-ceilings are separate and not fungible.

� FII position limits in the equity index derivative contracts were revised. Accordingly, FII position limit in allindex options and futures contracts on a particular underlying index shall be Rs.250 crore (separately forfutures and options) or 15 per cent of the total open interest of the market in index futures and indexoptions, whichever is higher per exchange.

� The frequency of reporting of offshore derivative instruments by registered foreign institutional investors hasbeen made monthly.

� The mutual funds and FIIs have been advised to enter the Unique Client Code (UCC) pertaining to theparent entity at the order entry level and enter the UCCs for their individual schemes/sub-accounts on thepost-closing session.

SMILE Task Force

� A Securities Markets Infrastructure Leveraging Expert Task Force (SMILE Task Force) was constituted bySEBI to carry out a thorough ‘health check’ on the securities markets infrastructure encompassing all segmentsof the markets (viz. equities, debt, derivatives, fund products) and covering all market participants such asexchanges, trading platforms, clearing and settlement systems, payment systems, depositories, issue houses(registrars) and other intermediaries, The Task Force has submitted reports on “Infrastructure and ProcessFlow for the Primary Market” and “Infrastructure and Process Flows for Enhancing Distribution Reach in theMutual Fund Industry”. The Reports are under consideration of SEBI for implementation.

MoU Signed with Overseas Regulators

� Securities and Exchange Board of India (SEBI) signed a Memorandum of Understanding (MoU) with UnitedStates Commodity Futures Trading Commission (CFTC) at Washington on April 28, 2004. This is the sixthMoU that SEBI had signed with its international counterparts for strengthening communication channels andestablishing a framework for assistance and mutual co-operation between the two organisations.

In order to fine-tune the regulatory requirements, regulations amended during 2004-05 are as follows :

� SEBI (Venture Capital Funds) (Amendment) Regulations, 2004.

� SEBI (Foreign Venture Capital Investors) (Amendment) Regulations, 2004.

� SEBI (Central Database of Market Participants) (Amendment) Regulations, 2004.

� SEBI (Portfolio Managers) (Amendment) Regulations, 2004.

� SEBI (Depositories and Participants) (Amendment) Regulations, 2004.

� SEBI (Buy-back of Securities) (Amendment) Regulations, 2004.

� SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) (Amendment) Regulations,2004.

� SEBI (Substantial Acquisition of Shares and Takeovers) (Amendment) Regulations, 2004.

� SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) (Second Amendment)Regulations, 2004.


�


� SEBI (Substantial Acquisition of Shares and Takeovers) (Second Amendment) Regulations, 2004.

� SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) (Third Amendment) Regulations,2004.

� Amendments to the existing laws entail a detailed procedure. Pending amendment to existing laws,regulatory pro-activeness was reflected through the following set of notifications:

� Notification under Sub-Regulation (1) of Regulation 6 of Securities and Exchange Board of India (CentralDatabase of Market Participants) Regulations.

� Notification under Sub-Regulation (2) of Regulation 6 of Securities and Exchange Board of India (CentralDatabase of Market Participants) Regulations.

� Notification under Sub-Regulation (1) and (3) of Regulation 6 of Securities and Exchange Board of India(Central Database of Market Participants) Regulations.

� Notification under Sub-Regulation (1) of Regulation 5A of Securities and Exchange Board of India (CentralDatabase of Market Participants) Regulations.

� Notification under Sub-Regulation (1) of Regulation 4 and Sub-Regulation (1) and (2) of Regulation 6 ofSecurities and Exchange Board of India (Central Database of Market Participants) Regulations.

1. GENERAL MACRO-ECONOMICENVIRONMENT

According to the advance estimates ofthe Central Statistical Organisation (CSO), thereal GDP at factor cost grew by 6.9 per centin 2004-05 as compared to 8.5 per cent(revised estimates) during the previousfinancial year (Table 1.1). The decelerationin the real GDP growth was mainly due touneven and deficient monsoon which pulleddown the growth rate of agricultural sectorfrom 9.6 per cent in 2003-04 to 1.1 per centin 2004-05 (Table 1.2). Notwithstandingunfavourable monsoon and high base effect,growth in the agricultural sector turned out tobe better than anticipated signifying itsresilience against erratic monsoon. Theindustrial sector grew by 8.3 per cent in 2004-05 as against 6.5 per cent in 2003-04, partlymitigating the setback to agriculture. Theservice sector, which has been the maindriver of growth in India, continued to sustainhigh growth rate i.e, 8.6 per cent in 2004-05as compared with 8.9 per cent in 2003-04.The average growth rate of real GDP during

the first three years (2002-05) of the TenthPlan period was higher at 6.5 per cent thanthat of 5.5 per cent achieved in the Ninth Planperiod (1997-2002). With acceleration in thegrowth rate, India is one of the fastest growingeconomies of the world.

One of the important features of themacro-economic developments in 2004-05was the resurgence of the industrial sector.Led by ‘manufacturing’ and ‘electricity, gas andwater supply’, recovery in the industrial sectorwas further strengthened and broadenedduring 2004-05. As a result, the contributionof the industrial sector to the overall GDPgrowth went up to 26 per cent in 2004-05 from17 per cent in 2003-04. Major factors behindthe high growth of the manufacturing sectorwere buoyant exports, encouraging domesticinvestment climate, increased confidenceamong the investors, and significantimprovement in domestic demand.

The services sector continued to remainthe main engine of growth in India with itscontribution to GDP growth reaching a high



Table 1.1: National Income (At 1993-94 prices)(Rs. crore)

2003-04 2004-05Item 2002-03 (Quick (Advance

Estimate) Estimate)

1 2 3 4

A. Estimates at Aggregate Level

1. National Product

1.1 Gross National Product (GNP) 13,10,471 14,22,479 15,19,535at factor cost (8.5) (6.8)

1.2 Net National Product (NNP) 11,61,902 12,66,005 13,54,385at factor cost (9.0) (7.0)

2. Domestic Product

2.1 Gross Domestic Product (GDP) 13,18,362 14,30,548 15,29,366at factor cost (8.5) (6.9)

2.2 Net Domestic Product (NDP) 11,69,793 12,74,074 13,64,216at factor cost (8.9) (7.1)

B. Estimates at Per Capita Level

1. Population (million) 1,055 1,073 1,091(1.7) (1.7)

2. Per Capita NNP at factor cost (Rs.) 11,013 11,799 12,414(7.1) (5.2)

Note: Figures in the parentheses are percentage change over the previous year.

Source: Central Statistical Organisation.

Table 1.2: GDP at Factor Cost by Economic Activity (At 1993-94 prices)(Rs. crore)

2003-04 2004-05 Percentage ChangeIndustry 2002-03 (Quick (Advance over Previous Year

Estimate) Estimate) 2003-04 2004-05

1 2 3 4 5 6

1. Agriculture, Forestry & Fishing 2,83,393 3,10,611 3,13,915 9.6 1.1

2. Mining & Quarrying 31,185 33,195 34,955 6.4 5.3

3. Manufacturing 2,27,642 2,43,400 2,65,119 6.9 8.9

4. Electricity, Gas & Water Supply 31,659 32,827 34,903 3.7 6.3

5. Construction 69,911 74,819 79,112 7 5.7

6. Trade, Hotels, Transport 3,26,968 3,65,559 4,06,843 11.8 11.3and Communication

7. Financing, Insurance, Real Estate 1,71,463 1,83,718 1,96,853 7.1 7.1& Business Services

8. Community, Social & Personal Services 1,76,141 1,86,419 1,97,666 5.8 6.0

GDP at Factor Cost 13,18,362 14,30,548 15,29,366 8.5 6.9

Source: Central Statistical Organisation.


of 71 per cent in 2004-05 as compared with59 per cent in 2003-04. Within the servicessector, the growth rate in 2004-05 wasconsolidated in case of ‘trade, hotels,restaurants, transport and communication’(11.3 per cent), maintained in case of‘financing, insurance, real estate and businessservices’ (7.1 per cent), and accelerated incase of ‘community, social and personalservices’ (6.0 per cent) over the previous year.The shares of services and industrial sectorsin GDP improved from 56.7 per cent and 21.6per cent in 2003-04 to 57.6 per cent and 21.9per cent, respectively in 2004-05, while thatof agricultural sector declined from 21.7 percent to 20.5 per cent during the same period(Chart 1.1).

According to the CSO, gross domesticsavings (GDS) as a proportion of GDP atcurrent prices increased significantly to 28.1per cent in 2003-04 from 26.1 per cent in2002-03 (Table 1.3). Notwithstanding lowinterest rates prevailing in the financialmarkets, household savings, particularly infinancial assets, rose considerably in 2003-04 over the previous year. Improvement in

the personal disposable income emanatingfrom high GDP growth, modest inflation rateand uncertainty in the financial markets seemto have contributed to high rate of saving bythe households. Savings by the privatecorporate sector increased modestly reflectingimprovement in the financial results of thejoint stock companies, co-operative banks andsocieties etc. Significant reduction in thepublic sector dis-saving also contributed to arise in aggregate savings, indicating betterperformance in government administration,PSUs and commitment of the government foraugmenting revenue and reducing deficitunder the Fiscal Responsibility and BudgetManagement Act.

The household savings in financialassets as proportion of GDP rose from 10.3per cent in 2002-03 to 11.4 per cent in2003-04. Within the financial savings byhouseholds, ‘deposits’ continue to dominatewith its share in financial assets rising from41.5 per cent in 2002-03 to 42.9 per cent in2003-04 (Chart 1.2). Other major componentsof financial savings were contractual savings,mainly life insurance (14.5 per cent), followed

�


Table 1.3 Gross Domestic Savings and Investment

Per cent of GDP Amount in Rupees crore

Item 2000- 2001- 2002- 2003- 2000 2001 2002- 2003-01 02 03@ 04* -01 -02 03@ 04*

1 2 3 4 5 6 7 8 9

1. Household Sector Saving 21.6 22.6 23.3 24.3 4,52,268 5,13,110 5,74,681 6,71,692

a) Financial Assets 10.4 11.2 10.3 11.4 2,16,774 2,53,964 2,54,439 3,14,261

b) Physical Assets 11.3 11.4 13.0 13.0 2,35,494 2,59,146 3,20,242 3,57,431

2. Private Corporate 4.1 3.6 3.8 4.1 86,142 81,076 94,269 1,14,157Sector Saving

3. Public Sector Saving -2.3 -2.7 -1.1 -0.3 -48,361 -61,912 -26,652 -9,429

4. Gross Domestic 23.5 23.4 26.1 28.1 4,90,049 5,32,274 6,42,298 7,76,420Saving (GDS)

5. Net Capital Inflow(+)/ 0.4 -0.8 -1.3 -1.8 8,130 -18,731 -32,010 -49,552Outflow(-)

6. Gross Domestic Capital 23.8 22.6 24.8 26.3 4,98,179 5,13,543 6,10,288 7,26,868Formation (GDCF)

7. Total Consumption 77.7 76.0 76.2 75.3 16,24,255 17,72,054 18,76,679 20,77,958Expenditure

a) Private Final 65.1 65.5 64.3 64.0 13,60,018 14,88,781 15,85,132 17,65,849ConsumptionExpenditure

b) Government Final 12.6 10.5 11.8 11.3 2,64,237 2,83,273 2,91,547 3,12,109ConsumptionExpenditure

Memo Items

Saving-InvestmentBalance (4-6) -0.4 0.8 1.3 1.8 -8,130 18,731 32,010 49,552

Public Sector Balance# -8.6 -8.9 -6.4 -5.9 -1,79,866 -2,02,007 -1,58,618 -1,63,515

Private Sector Balance# 9.4 10.1 9.9 11.0 1,97,207 2,30,269 2,42,958 3,04,241

a) Private Corporate Sector -0.9 -1.0 -0.5 -0.4 -19,567 -23,695 -11,481 -10,020

b ) Household Sector 10.4 11.2 10.3 11.4 2,16,774 2,53,964 2,54,439 3,14,261

Investment in Shares andDebenture 0.5 0.3 0.2 0.2 10,214 7,777 5,504 5,689

@ : Provisional Estimates. * : Quick Estimates. # :Investment figures are not adjusted for errors and omissions.

Source: Central Statistical Organisation (CSO) and Reserve Bank of India (RBI).

by small savings (13.7 per cent), providentand pension funds (13.0 per cent), andcurrency (10.1 per cent). Investment in sharesand debentures in 2003-04 constituted 1.4 percent of the total household savings in financialassets which was lower than that of 1.6 percent in the previous year. Bulk of suchinvestment was in mutual funds. In terms ofratio to GDP, investment in shares and

debentures in 2003-04 continued to remainunchanged at the previous year’s level of 0.2per cent.

A notable feature of macro-economicdevelopments during 2004-05 was the sharpincrease in non-food credit. Reflecting arobust and broad-based industrial recovery,the non-food credit disbursed by the

�


scheduled commercial banks went up by 26.5

per cent in 2004-05 as compared to 18.4 per

cent in 2003-04. Food credit also increased

during 2004-05 to support higher procurement

operations, unlike the declining trend

witnessed during the previous two years.

Credit flow to industries also surged from the

non-bank sources. The external commercial

borrowings and equity issues were much

higher in 2004-05 than those in the previous

year in consonance with the resurgence in

industrial activities and buoyancy in the stock

markets. Resource mobilisation through

private placements was also impressive

during 2004-05. Mainly triggered by the capital

inflows, the liquidity condition was, by and

large, comfortable throughout the year.

Keeping in view the inflationary pressure on

the economy, the Reserve Bank mopped up

excess liquidity from the market through the

Market Stabilisation Scheme (MSS) and the

Liquidity Adjustment Facility and thereby kept

the supply of broad money (M3) at 13.1 per

cent (net of conversion) which was well within

the projected trajectory of 14.0 per cent.

The price situation, after showing upward

trend during April-August 2004, was under

control by the end of 2004-05.The inflation

rate, measured in terms of changes in the

Wholesale Price Index (WPI), was 5.0 per

cent on a point-to-point basis in 2004-05 as

compared to 4.6 per cent in 2003-04. On an

average basis, the inflation rate at 6.4 per

cent in 2004-05 was much higher than that

of 5.4 per cent in the previous year. The

supply side factors were mainly responsible

for inflationary pressure during the first half

of the year. Increase in the international prices

of crude oil and metals led to the hardening

of domestic prices of coal, petroleum

products, iron and steel and other metals.

Inadequate South-West monsoon also pushed

up the prices of food items and non-food

commodities such as oilseeds and cotton. As

a result, inflation rate accelerated to a peak

of 8.7 per cent by the end of August 2004.

The inflationary pressure has largely receded

since September 2004. Government’s

initiatives to cut the excise and customs duties

in June and August 2004 moderated the pass


through of the increase in international crudeoil prices to domestic inflation. Monetary policymeasures by the Reserve Bank such as thehike in the cash reserve ratio (CRR) andincrease in the reverse repo rate broughtdown the inflation expectations. Prospects ofa bumper rabi crop and gradual easing of thefear of drought softened the prices ofagricultural products like cotton, oilseeds andedible oils.

The escalation of international crude oilprices dominated the external sectordevelopments. According to the DirectorateGeneral of Commercial Intelligence andStatistics (DGCI&S), merchandise exports interms of US dollar witnessed an impressivegrowth of 24.1 per cent in 2004-05 ascompared with 21.1 per cent in the previousyear. The merchandise export growth was thehighest in three decades. Reflecting surge inthe international crude oil prices, total importsin dollar terms increased sharply by 37.0 percent in 2004-05 as compared with 27.3 percent in 2003-04. Merchandise import growthwas the highest since 1980-81. As a result,the gap in the merchandise trade accountwidened to a historic peak of US $ 27.8 billionin 2004-05 compared to that of US $ 14.3billion in the previous year. Net invisiblereceipts, mostly in terms of workers’remittances, software exports and travelearnings bridged the trade gap to a largeextent. Unlike in the previous three years, theexternal current account is likely to end-upwith a modest deficit in 2004-05 signalinghigher domestic investment activities andreversal of net capital exports.

Net capital inflows continued to maintainits momentum in 2004-05, and weredominated by portfolio investment by FIIs. Anincreased appetite for foreign directinvestment was also observed. This reflectedthe on-going reforms in the capital market andthe overall liberalisation programme. DuringApril-December 2004, net capital flows at

US $ 20.7 billion were significantly higherthan US $ 16.6 billion recorded in thecorresponding period of the previous year.Reflecting the innate strength of the externalsector, an accretion of US $ 28.6 billion during2004-05 on top of an unprecedented accretionof US $ 36.9 billion in 2003-04 took India’sforeign exchange reserves to US $ 141.5billion as on March 31, 2005. India’s foreignexchange reserves (excluding gold) were thefifth largest in the world and the fourth largestamong the emerging market economies(EMEs). The present level of foreignexchange reserves is higher than India’sexternal debt and provides import cover forabout 15 months. With sustained capital flowsand a general weakening of the US dollarvis-à-vis other major currencies, Indian rupeeappreciated by 6.6 per cent against the U.Sdollar.

2. REVIEW OF POLICIES ANDPROGRAMMES

SEBI pursued several policy initiativesduring 2004-05 in consultation with theGovernment of India to achieve its statutoryobjectives. These policies and programmesare reviewed in this section under six majorheads of primary securities market, secondarysecurities market, mutual funds, foreigninstitutional investors, corporate restructuring,investor awareness/education/protection inaddition to ‘retrospect and prospects’indicating the unfinished agenda for the future.

I. Primary Securities Market

Primary securities market continued toplay a crucial role in the process of resourcemobilisation. Wide-ranging reforms in theprimary market undertaken by SEBI over theyears improved confidence of the domesticas well as foreign investors. The momentumof resource mobilisation from the primarymarket witnessed in 2003-04 acceleratedfurther in 2004-05. The response of the FIIs,

��


other institutional investors and retail investorsto the public issues has been highlyencouraging. This was evident from over-subscription to such issues. A detaileddescription of the number of issues, amountmobilised, variety of investors and theirresponse to public issues has been analysedin Part Two of this Report. The policyinitiatives relating to primary market arepresented below.

a. Higher Allocation for RetailIndividual Investors

SEBI amended the Disclosure andInvestor Protection (DIP) Guidelines, 2000relating to the allocation of shares in case ofbook-built issues. Earlier the allocation ofshares to the Retail Individual Investors (RIIs),the Non-Institutional Investors (NIIs) and theQualified Institutional Buyers (QIBs) has beenin the ratio of 25:25:50, respectively. Theallocation to RIIs was enhanced to 35 percent of the total issue of securities while itwas reduced to 15 per cent in case of NIIs.Allocation to QIBs remained unchanged at 50per cent. However, in case of book-builtissues that are made pursuant to therequirement of mandatory allocation of 60 percent to QIBs in terms of Rule 19(2)(b) ofSC(R)R, RIIs and NIIs would receive anallocation of 30 per cent and 10 per cent,respectively. Moreover, the definition of RIIshas been modified. According to the newdefinition, a retail individual investor (RII) isone who applies or bids for securities of orfor a value not exceeding Rs. 1 lakh asagainst the existing limit of Rs. 50,000.

b. Issue Advertisement

The extant market practice for all issuesincluding book-built issues was to publish anadvertisement in the newspaper havingcontents of Form 2A under the CompaniesAct, 1956. However, the cost involved inpublishing the entire Form 2A, i.e., abridged

prospectus in the newspaper was very high.As the abridged prospectus is otherwiseavailable to the investors along with theapplication forms, SEBI amended the (DIP)Guidelines, 2000 to ensure better readabilityof the advertisement and stipulated that pre-issue advertisement would be mandatory forall public issues (fixed or book-built) and itwould contain the minimum details, therebyreducing the issue expense.

c. Order of Presentation ofDisclosures in Prospectus

To make the offer documents more user-friendly, SEBI prescribed a standard order ofpresentation of disclosures in the offerdocuments. Over and above the previousrequirements of disclosures while issuing theformat, a few requirements / sections likesummary, table of contents, and industryreview have been added to make theprospectus more effective. The standard orderof presentation did not, however, reduce theflexibility given to the issuer to include otherdisclosures, not mentioned in the guidelines.

d. Data Reporting at Websites ofStock Exchanges on Book-Building

In order to ensure availability of relevantinformation in the public domain, it is nowmandated to (i) improve the contents of andto ensure uniformity in data dissemination onthe websites of the concerned stockexchanges and (ii) to ensure availability ofsuch data for a further period of 3 days afterthe closure of the bids/issue.

e. Disclosure of Price Band/ FloorPrice and Bidding Period in Caseof Listed Companies

The existing guidelines require all issuers(whether listed or unlisted), making a publicissue through book building process, todisclose the price band/ floor price in the RedHerring Prospectus (RHP)/application form.

��


The listed issuers have now been permittedto disclose the price band/floor price at leastone day before bid opening. Moreover, thebidding period, which was 5-10 days(including holidays), has been reduced to 3-7 working days.

f. Introduction of the Facility ofShelf Prospectus

As per Sec. 60A of the Companies Act,1956, the facility of shelf prospectus can beavailed by specific entities like public sectorbanks, scheduled banks and public financialinstitutions. The SEBI (DIP) Guidelines, 2000have been amended to provide for the same.These entities can file a draft shelf prospectuswith SEBI in the first instance disclosing theaggregate amount the issuer intends to raisethrough various tranches.

g. Retention of Over-subscription byDFIs in Tranche Issues

Financial institutions, which come out withpublic issue of unsecured redeemable bonds,regularly file a shelf prospectus with SEBIstating the total amount to be raised during theyear through various tranches. These bondsare usually used by investors as a tax-planningmechanism. Over-subscriptions up to 100 percent in each tranche have been allowed to beretained by the issuers. The DevelopmentFinancial Institutions (DFIs) often receiveheavy over-subscriptions, which exceed themaximum target amount mentioned in theprospectus. In such a scenario, returning theexcess subscription to the applicants adverselyaffects the tax planning drive of the investors.In view of this, SEBI has changed theguidelines so that the issuers can retain anyamount of over-subscription subject to the totalamount specified in the shelf prospectus for thewhole year.

h. Guidelines for Preferential Issues

The guidelines pertaining to preferential

allotment have been amended to restrict saleof shares by shareholders who are allottedshares on preferential basis. This had beendone, inter alia, by imposing lock-in periodon pre-preferential shareholding from therelevant date till six months after the date ofallotment, and by reducing the period forallotment from the existing 30 days to 15days.

i. Restriction on Splitting of Shares

The issuers were found to be splittingshares just before an IPO. Onrecommendation of the Advisory Committeeon Primary Market, the guidelines have beenamended to restrict splitting of shares beforean IPO. The amendments, inter alia, providefor a floor face value of Re.1 per share. Forissue price below Rs.500 per share, the facevalue would be necessarily Rs.10 per share.However, the issuer companies have beenpermitted to fix the face value below Rs. 10per share in those cases where the issueprice is Rs. 500 or more.

j. Terms of the Issue

SEBI has now changed minimumapplication lot from Rs. 2,000 to a band ofRs.5,000- Rs.7,000. The applications can bemade in multiples of such value.

k. Green Shoe Option (GSO) Facility

As GSO is essentially a device to ensurepost-issue price stability, the guidelines havebeen amended to clarify that this facility isavailable in all public issues, viz., initial publicofferings, follow-on offerings, public issueseither through book building or fixed priceroute. Further, the guidelines have also beenamended to permit all pre-IPO share holders(including promoters) in case of IPOs and pre-issue share holders holding more than 5 percent shares, (including promoters) in case offollow-on offerings to lend their shares for thepurpose of GSO.

��


l. Corporate Governance

SEBI constituted a Committee onCorporate Governance headed by Shri N. R.Narayana Murthy, which submitted its reporton February 8, 2003. Taking a cue from thesame, SEBI amended Clause 49 of the ListingAgreement to revise the requirements ofcorporate governance as mandated by thelisting agreement. For entities seeking listingfor the first time, the corporate governancerequirements are to be complied at the timeof seeking in-principle approval for suchlisting. However, for listed entities having apaid-up share capital of Rs. 3 crore andabove or net worth of Rs. 25 crore or moreat any time in the history of the company,corporate governance requirements wereproposed to be complied by April 1, 2005.Taking into account the fact that manycompanies are stil l not in a state ofpreparedness to be fully compliant with therequirements, the date for ensuringcompliance with the corporate governancerequirements of the listing agreement hasbeen extended up to December 31, 2005.

m. Debt Listing Agreement

In order to develop the corporate debtmarket, SEBI prescribed a model debenturelisting agreement for listing of all debenturesecurities issued by an issuer irrespective ofthe mode of issuance. The model agreementhas three parts. Part (I) of this agreementcontains clauses which shall be complied byall issuers irrespective of the mode ofissuance. Part (II) contains clauses whichshall be complied only if the debentures areissued either through public issue or rightsissue and Part (III) contains clauses whichare required to be complied only if thedebentures are issued on private placementbasis. In case of issuers whose equity sharesare listed and which have already entered intoa listing agreement for its equity shares,clauses of equity listing agreement shall have

an overriding effect over the debenture listingagreement, in case of inconsistency, if any.

II. Secondary Securities Market

a. BSE IndoNext Trading Platform

In the Union Budget 2004-05, the CentralGovernment proposed to set up a tradingplatform to enable the small and mediumenterprises (SMEs) to raise capital, both debtand equity, as well as provide liquidity to thesecurities. This trading platform is expectedto provide the much needed avenue forfinancing the SMEs and help redress thepresent imbalance in this regard. SEBI tookthe initiative to encourage the BSE and theRegional Stock Exchanges (RSEs) to set upthis market (Box 1.2). The Government alsoamended Section 13 of the SecuritiesContract (Regulations) Act, 1956 to facilitatetrading by brokers of RSEs on this market.

b. Securities Transaction Tax (STT)

In the Union Budget 2004-05,Government proposed a package of taxmeasures relating to securities transactions.The tax on long term capital gains fromsecurities transactions was abolished whilethe short-term capital gains tax was reducedto a flat rate of 10 per cent. Moreover, it wasproposed to levy a tax on buyers at the rateof 0.15 per cent of the value of securitiestransacted on the stock exchanges in the formof securities transaction tax (STT).

Pursuant to the representations receivedfrom the market participants, the STT wasmodified by the Government in consultationwith SEBI. The revised STT includes interalia, the following:

� The delivery-based transactions wouldattract STT of 0.15 per cent (i.e., 15 basispoints) to be shared equally between thebuyer and the seller;

� For day traders and arbitrageurs, the STTof 0.015 per cent (1.5 basis points) would

��


be imposed on sellers of equities andsettled on net basis;

� For units of equity oriented mutual funds,the STT of 0.15 per cent (15 basis points)would be imposed on sellers;

� The rate of STT on sale of derivatives(Futures and Options) would be 0.01 percent (1 basis points); and

� No STT would be levied on buying andselling of bonds, including governmentbonds, units of MFs other than equityoriented funds.

The STT was notified on September 28,2004. The stock exchanges have beenadvised to levy and collect STT on alltransactions done by their members and remitthe same to the Government of India witheffect from October 1, 2004.

In the Union Budget 2005-06, the STTwas further revised as under (Table 1.4).

The BSE IndoNext has been set up as aseparate trading platform under the present BombayOn Line Trading System (BOLT) of the BSE. It is ajoint initiative of the BSE and the Federation of IndianStock Exchanges (FISE) of which 18 Regional StockExchanges (RSEs) are members. The members ofthe RSEs have been allowed to trade in this market.The BSE IndoNext trading platform has introduced theconcept of single order book for a security as againstmultiple listings permitted in other securities. Once asecurity is eligible for trading in the BSE IndoNextmarket, it will not be available for trading on any otherexchange and orders from brokers of all exchangesin that security will flow only to this market. Theobjectives of the BSE IndoNext trading platform are:a) to provide a nation-wide trading platform for theSMEs already listed with the participating RSEs andBSE; b) to create liquidity in eligible securities listedon the participating RSEs; c) to create an avenue forthe existing and new SME companies from variousregions of the country to raise fresh capital, both equityand debt, which would help achieve balanced regionalgrowth; and d) to use the available infrastructure ofthe participating RSEs for productive purposes.

The BSE IndoNext trading platform is beingimplemented in phases. Honourable Finance Ministerhas inaugurated the BSE IndoNext trading platform

Box 1.2: BSE IndoNext

on January 7, 2005 and operationalised the first phaseof the BSE IndoNext platform. The BSE would transfereligible securities within the range of paid-up capitalbetween Rs.3 crore and Rs.20 crore, currently tradedin the B1 and B2 groups in BSE against which thereis no regulatory action. Similarly, the participatingRSEs will also transfer eligible securities to BSEIndoNext to be traded as permitted securities. At thisstage, the entire responsibility for monitoring andsurveillance is vested with BSE as the brokers whowould be trading on the BSE IndoNext will bemembers of BSE. For this purpose, SEBI has alreadygranted necessary approvals.

The second phase when implemented will allowparticipation of all brokers of RSEs in the BSEIndoNext taking benefit of the recent amendment tothe SC(R)A. For this, the BSE and the RSEs will haveto amend the respective Bye-laws as well as enterinto MoUs. These legal requirements are in progress.Once the Bye-laws are approved by SEBI, the secondphase will be implemented and the responsibility forsurveillance, monitoring and compliance will be jointlyshared between BSE and RSEs. In the third phase,the BSE as well as the RSEs will have to work outan effective marketing and business developmentstrategy.

Table 1.4: Securities Transaction Taxin India

(per cent)

Type of 2004-05 2005-06Transactions (Old (Revised

Rate) Rate) @

1 2 3

A. Equity

1) Delivery-basedTransactions* 0.15 0.20

2) Non-deliverybased Transactions 0.015 0.02

B. Derivative Transactions 0.01 0.0133

@ The revised STT became effective from June1,2005.

* To be equally shared by both buyers and sellers.

��


c. SEBI (Central Database of MarketParticipants) Regulations, 2003

The SEBI (Central Database of MarketParticipants) Regulations, 2003 were notifiedon November 20, 2003. The regulationsprovide for the creation of a centraliseddatabase of market participants and investors(MAPIN database) for the registration of allthe participants i.e., intermediaries, listedcompanies, investors, etc., in the Indiansecurities market by allotting a UniqueIdentification Number (UIN). SEBI hasappointed National Securities DepositoryLimited (NSDL) as the Designated ServiceProvider for creating and maintaining theMAPIN database.

SEBI has been issuing notifications fromtime to time specifying various intermediariesand the related persons to obtain an UINunder the aforesaid regulations. The list ofvarious intermediaries has been notified forthis purpose and the date by which they haveto obtain the UIN has also been notified. Upto March 31, 2005, as many as 2,94,925UINs have been allotted (Table 1.5).

Table 1.5: Allocation of UniqueIdentification Number

Category No. of UINs

1 2

Retail Individual Investors 1,88,652

Employees/Directors/Promoters 44,069

Total Natural Persons 2,32,721

SEBI Registered Intermediaries 8,187

Other Corporate Bodies 54,017

Total Non-Natural Persons 62,204

Total UINs Allotted 2,94,925

Keeping in view the various repre-sentations and feedback received from“specified investors”, viz. “all resident investorsnot being bodies corporate who enter into anysecurities market transaction (including any

transaction in units of mutual funds orcollective investment schemes) of value ofone lakh rupees or more”, on the difficultiesfaced by them in adhering to the time line ofMarch 31, 2005, the “notified date” wasextended from March 31, 2005 to December31, 2005. Further, a Committee has beenconstituted to look into the coverage ofMAPIN and other related matters.

The terms of reference for the saidcommittee are as follows:

i) To re-examine the coverage of theMAPIN, i.e., the category of marketparticipants and investors who would berequired to obtain unique identificationnumber (UIN);

ii) To suggest future implementationschedule based on the coverage; and

iii) To review the cost of obtaining the UINfor the market participants and investors.

d. Investor Protection Measures

(i) Risk Management Framework for theCash Market

A comprehensive risk managementframework in T+2 rolling settlement scenariowas specified for the cash market providingfor the various types of margins,categorisation of stocks for margin purposesand collection of margins on an upfront basis.Value at Risk (VaR) based margining systemwas put in place based on the categorisationof stocks into Groups I, II and III dependingon the stocks’ liquidity and volatility. Itaddresses 99 per cent of the risks in themarket. Additional margins were specified toaddress the balance 1 per cent risks. Further,provisions were specified for shortfall of pay-in of funds/margin, collections of margins bymembers from the client etc. The revisedframework when implemented will be a stepforward in achieving cross-margining betweencash and derivative markets.

�


(ii) Comprehensive Guidelines for InvestorProtection Fund (IPF)/CustomerProtection Funds (CPF) at the StockExchanges

Comprehensive guidelines were issuedfor constitution and management of IPF/CPFand disbursement of the funds out of the IPF/CPF towards settlement of legitimate investorclaims against the defaulter members of thestock exchanges. The exchanges are in theprocess of amending the Trust Deeds for IPF.

(iii) Duration for Transfer of Funds andSecurities

It was mandated that the brokers shouldtransfer funds and securities to the clientswithin one working day after the pay-out day.

e. Matters Relating to Depositories

(i) Review of Dematerialisation Charges

Investors have been representing to SEBIseeking a reduction in the charges paid bythem for dematerialisation of securities. As afirst step, it was decided to rationalise theexisting charge structure. Accordingly, effectiveFebruary 1, 2005, (a) no investor is requiredto pay any charge towards opening of aBeneficiary Owner (BO) account except forstatutory charges as may be applicable; (b)no investor is required to pay any charge forcredit of securities into his/her BO account;and (c) no custody charge is to be levied onany investor opening a BO account on or afterFebruary 1, 2005. With effect from April 1,

2005, the custody charges are not levied onany investor. However, the depositories maylevy and collect the charges towards custodyfrom the issuers, on a per folio (ISIN position)basis as at the end of the financial year.Issuers have to pay at the rate of Rs.5.00(plus applicable service tax) per folio (ISINposition) in the respective depositories, subjectto a minimum amount (Table 1.6). The issuersare required to pay custody charges to thedepository with whom they have establishedconnectivity based on the total number of folios(ISIN positions) as on 31st March of theprevious financial year or the minimumamount, as the case may be, by 30th April ofeach financial year failing which depositoriesmay charge penal interest subject to amaximum of 12 per cent per annum.

(ii) Proof of Identity (PoI) and Proof ofAddress (PoA) for Opening a BOAccount

The list of documents as PoI and/or PoAfor opening a BO account has beenbroadened to include MAPIN card, identitycard issued by Central/State Governments,Statutory/Regulatory authorities, Public SectorUndertakings (PSUs), Scheduled CommercialBanks, Professional Bodies etc.

(iii) Mandatory Admission of Debt Securitieson both Depositories

The issuer companies havebeen advised once again to mandatorily

Table 1.6: Minimum Demat Charges

Nominal Value of Admitted SecuritiesAnnual Custodial Fee payable by

an Issuer to each Depository (Rs.)*

1 2

Up to Rs. 5 crore 4,000

Above Rs. 5 crore and up to Rs. 10 crore 10,000

Above Rs. 10 crore and up to Rs. 20 crore 20,000

Above Rs. 20 crore 30,000

* Plus service tax as applicable.

�


(ii) In order to disseminate informationregarding cancellation of registration ofbrokers and cautioning the investingpublic not to deal with 70 brokers whoseregistration has been cancelled by SEBIduring 2003-04, a public notice waspublished in the newspapers. In theinterest of investors, it has been decidedto publish such information at periodicintervals.

(iii) In order to promote greater disclosureof information in the interest of investorsand from the point of view of measuringthe adequacy of systems and controlsto meet internal as well as externalcompliance requirements, a draft conceptpaper on the professional rating ofmarket intermediaries (viz., stockbrokers, initially to start with) was placedon SEBI website for public comments.

(iv) SEBI has requested credit ratingagencies to develop an appropriaterating model for stock brokers, based onthe parameters set out in the conceptpaper read with public comments.Considering the public response andmarket acceptance to the rating conceptfor stock brokers, the concept may beextended gradually to otherintermediaries as well.

(v) A review of the existing net worthrequirements for stock brokers was takenup and report of the sub-group onSecondary Market Advisory Committee(SMAC) formed for the purpose wasuploaded on SEBI website for publiccomments. The comments received onthe paper are being analysed.

(vi) Guidelines were issued for allowing SEBIregistered market intermediaries to floatoverseas subsidiaries so as to undertakefinancial services activities/ capital

dematerialise their debt securities with boththe depositories.

(iv) Exemption from giving hard copies oftransaction statements to BeneficiaryOwners (BOs) by DepositoryParticipants (DPs)

The DPs have been permitted to providetransaction statements and other documentsto the BOs in the electronic format with digitalsignature, as governed under the InformationTechnology Act, 2000, subject to the DPentering into a legally enforceable agreementwith the BO for this purpose.

(v) Shifting Securities from Trade-for-TradeSegment to Normal Rolling Segment ona Regular Basis

Based on the information provided by thedepositories regarding the establishment ofconnectivity by the listed companies with boththe depositories, the stock exchanges havebeen advised on a regular basis to shift suchcompanies which had not established dualconnectivity from the Trade-for-Trade segmentto normal rolling segment of the stockexchanges, upon their establishing dualconnectivity, provided there are no otherspecific grounds for continuation of the tradingin these scrips in the Trade-for-Tradesegment.

f. Policy Initiatives for MarketIntermediaries

(i) In order to bring about uniformity indocumentary requirements acrossdifferent segments and exchanges andalso to avoid duplication and multiplicityof documents, SEBI in consultation withstock exchanges (BSE and NSE) hasformulated uniform set of broker clientregistration and agreement documents.The same have been made applicablefrom April 1, 2005.

��


market related activities abroad whichhave been approved by the SEBI Board.

g. Policy Initiatives for Derivatives

Currently, a variety of derivative productsare available for trading in India. Index basedderivatives are traded on BSE Sensex on thederivative segment of BSE and on S&P CNXNifty and CNX IT Index on the F&O segmentof NSE. Single Stock Options and Single StockFutures are also available on a number ofindividual stocks at both the derivativesegment of BSE and the F&O segment ofNSE. Interest rate derivatives were introducedon a notional 10-year bond and 91 days T-billat the F&O segment of NSE.

(i) Risk Containment Measures

The initial margins on derivatives arecomputed to cover the probable loss over atime horizon. Therefore, in the event that themark to market margins/ settlements arebeing made after the beginning of trade onnext day (T+1), the initial margins are scaledup by the square root of the days by whichmargins are actually collected. With thefunctioning of Special Electronic FundTransfer facility (SEFT) with many bankbranches, members are now given a choiceto opt for payment of mark to market marginseither before the start of trading next day, i.e.,T+0 or on the next day, i.e. T+1. If themember opts for the payment of the mark tomarket margins on T+1, then correspondinglyhigher initial margins are collected to coverthe potential for losses over the time elapsedin the collection of mark to market margins.

Another risk containment measurerelates to alignment of collaterals in cash andderivatives market. Two liquid assetrequirements were included in the derivativesmarket: (a) units of money market mutualfunds and units of gilt funds were permittedto be accepted towards cash equivalents as

part of the liquid assets of a clearing member;and (b) equity securities classified underGroup I in the underlying cash market werepermitted to be accepted towards the non-cash component (securities) of liquid assetsin the derivative markets. Further, units of allequity mutual funds are also accepted as thesecurities under the liquid assets.

(ii) Eligibility Criteria of Stocks on whichFutures and Options Contracts may bePermitted

Pursuant to the recommendation of theAdvisory Committee on Derivatives andMarket Risk Management, SEBI revised therequirement of the stock’s quarter sigma ordersize from Rs. 5 lakh to Rs. 1 lakh and themarket-wide position limit of the ‘eligible stock’was prescribed at a minimum of Rs. 50 crore.This provision was introduced to preventstocks with a low market capitalisation frombecoming eligible for derivative trading.

(iii) Eligibility Criteria for Selection of Indicesfor Futures and Options Contracts

In order to encourage the introduction ofderivative contracts on sectoral indices, theeligibility criteria for indices on which futuresand options are permitted to be introducedwas also modified. It had earlier been specifiedthat derivative contracts on a new stock indexshall be permitted if the stocks contributing80 per cent weightage (earlier 90 per cent) inthe index are individually eligible for derivativestrading as per the eligibility criteria. However,no single ineligible stock should have aweightage of more than 5 per cent in the index.Additionally, the eligibility criteria for indiceswere also made into a continuous requirementsimilar to that of stocks.

(iv) Market-wide Position Limits for SingleStock Derivatives

In order to avoid frequent triggering of

��


market wide position limits, the market wide

position limits for single stock derivative

contracts was modified to be the lower of 30

times the average number of shares traded

daily during the previous calendar month, in the

relevant underlying security in the cash

segment; or 20 per cent (instead of 10 per cent

earlier) of the number of shares held by non-

promoters in the relevant underlying security.

(v) Enforcement of Market-wide Position

Limits through Administrative Measures

According to the extant guidelines, the

exchanges were required to double the price

scanning range when 80 per cent of the

market-wide limit was reached. Such a

measure was adopted due to technical issues

involved in implementing market wide position

limits. It was felt that the margining system

should be used only to address the solvency

risk of the market and not for any other

purpose, such as enforcing market-wide

position limits. Therefore, the doubling of price

scanning range was done away with and it

was stipulated that market-wide position limits

may be enforced administratively by the

exchanges / Clearing Corporation / House.

(vi) FII Position Limits in Index Derivatives

Index based derivative contracts are

mainly used by large portfolio investors to

manage their portfolio risk. Further,

considering the growth in the index derivative

markets, and considering that a limit linked

to the value of the portfolio of investment in

the underlying cash market in addition to an

absolute figure would serve better, the FII

position limits in index derivatives were

increased as follows: (a) FII position limit in

all index options contracts on a particular

underlying index has been modified to Rs.250

crore or 15 per cent of the total open interest

of the market in index options, whichever is

higher, per exchange; and (b) FII position limit

in all index futures contracts on a particular

underlying index has been modified to Rs.250


of the market in index futures, whichever is

higher, per exchange.

In addition to the above, the FIIs have

been allowed to take positions in equity index

derivatives in designated accounts subject to

the following limits:

(a) Short positions in index derivatives (short

futures, short calls and long puts) in the

designated account not exceeding (in

notional value) the FII’s holding of stocks

in the designated account.

(b) Long positions in index derivatives (long

futures, long calls and short puts) in the

designated account not exceeding (in

notional value) the FII’s holding of cash,

government securities, T-Bills and similar

instruments in the designated account.

(vii) Trading Member Position Limits in Index

Derivatives

It was earlier specified that the trading

member limit in index derivatives on a

particular underlying index would be Rs. 100


on the market in index derivatives, whichever

is higher, per exchange. This limit was

increased as follows:

� The trading member position limit in near

month contracts of all index options

contracts on a particular underlying index

was stipulated to be Rs.250 crore or 15

per cent of the total open interest of the

market in index options, whichever is


� The trading member position limit in near

�


month contracts of all index futures

contracts on a particular underlying index

was stipulated to be Rs.250 crore or 15

per cent of the total open interest of the

market in index futures, whichever is


� Trading members were allowed to take

an exposure of Rs.500 crore or 15 per

cent of total open interest whichever is

higher, in interest rate derivative

products.

(viii) Alignment of Contract Sizes of Existing

Derivative Contracts

SEBI prescribed the methodology for

alignment of contract sizes of existing

derivative contracts to Rs. 2 Lakh. SEBI, vide

letter dated March 17, 2005, delegated the

authority to the exchanges to align the

contract sizes of derivative contracts

whenever necessary, in consultation with each

other.

h. Implementation of STP

The Straight Through Processing (STP)

was launched in India on November 30, 2002.

To start with, STP was insisted upon to be

adopted by the domestic institutions,

investors, fund managers, brokers and

custodians. However, it was observed that

though the market participants had joined the

STP services, the system could not be widely

used due to various issues like lack of inter-

operability between the STP Service

Providers, lack of message handshake

protocols, lack of common authentication of

digital signatures across the STP Service

Providers, lack of end-to-end compliance to

ISO messaging formats from sender to the

recipient and absence of standardisation of

file formats for client’s back office

development etc.

To resolve the issue of inter-operability

between the STP Service Providers and other

issues, SEBI in consultation with the stock

exchanges and the STP Service Providers

decided that a STP Centralised Hub would

be set up. Currently, this STP Centralised Hub

has been set up and made operational by

NSE. NSE obtained the necessary approvals

from the Department of Telecommunications

(DoT) as an Internet Service Provider (ISP).

Subsequently, this STP Centralised Hub

would be further developed jointly with BSE.

Mandatory Use of STP for all Institutional

Trades

SEBI mandated the use of the Straight

Through Processing (STP) system for all

institutional trades with effect from July 1,

2004. SEBI had prescribed a detailed system

flow and the regulatory framework of the STP

system by issuing the SEBI (STP Centralised

Hub and STP Service Providers) Guidelines,

2004. SEBI also outlined the transaction work

flow for the system of Straight Through

Processing (STP) and prescribed the

messaging formats based on internationally

accepted ISO 15022 messaging standards.

There are currently four STP service providers

and STP centralised hub has been set up by

NSE. There has been a steady increase in

number of messages passing through STP

network with approximately 2,500 STP users

registered in the system.

SEBI is the first and perhaps the only

regulator in the world to have prescribed and

mandated a market-wide STP system,

prescribe a regulatory framework along with

the system flow, transaction work flow and

detailed messaging standards for the STP

system.

��


i. Corporatisation andDemutualisation (C and D)of Stock Exchanges

Corporatisation and Demutualisationenables the exchanges to transform from amutual entity to a for-profit demutualised

company with the separation of ownership,

trading rights and management (Box 1.3).

To enable the exchanges to corporatise and

demutualise, the Government amended the

SC(R)A encouraging SEBI to approve the

schemes.

recommendations of the Group, all the stockexchanges were advised to submit their proposals for

C and D to SEBI for approval.

In the meantime, the Securities Laws(Amendment) Ordinance, 2004 was promulgated on

October 12, 2004, which amended the Securities

Contracts (Regulation) Act, 1956 to facilitate thecorporatisation and demutualisation of Stock

Exchanges. The Ordinance was subsequentlyreplaced by the Securities Laws (Amendment) Act,

on January 7, 2005. The Act makes it mandatory that

all stock exchanges, if not already corporatised anddemutualised, shall be corporatised and demutualised

on and from the appointed date so notified in theofficial gazette by SEBI. It obligates the non-corporate

and mutual exchanges to submit, within such time as

may be specified by SEBI, a scheme forcorporatisation and demutualisation to SEBI for

approval.

Following the promulgation of the Ordinance, a

meeting of all stock exchanges and the Depositorieswas convened by SEBI on November 9, 2004 to

evolve the road map for corporatisation and

demutualisation and a tentative time schedule of itsimplementation. Exchanges were advised to adhere

to the time schedule. A press release indicatingtentative time schedule of C&D was issued on January

7, 2005. Thereafter, SEBI had several rounds of

discussions with all the stock exchanges to clarify andsort out their specific issues and to guide them to

prepare their schemes in compliance with the SCRA.The discussions were quite protracted as there were

several legal issues involved. The exchanges were

advised to submit their final schemes to SEBI forapproval latest by January 31, 2005. With the

submission of the scheme by BSE on March 9, 2005,the schemes from all the exchanges were received.

The Corporatisation and Demutualisation of the BSE

was notified on May 20, 2005.

The stock exchanges world over have beengenerally formed as ‘mutual’ organisations. The tradingmembers not only provide broking services, but alsoown, control and manage such exchanges for theirmutual benefit. They don’t generally distribute profitamong themselves and therefore, termed as ‘not-for-profit’ organisations. Stock exchanges owned bymembers may work towards the interest of membersalone which may be detrimental to the rights of otherstakeholders. There could also be conflict of interestbetween ownership and management. In order toeliminate conflict of interest, there is a need tosegregate the management functions from ownershipand trading rights through demutualisation. Moreover,stock exchanges should ideally work as bodycorporate similar to any other ‘for-profit’ corporateentity.

In India, there are 23 stock exchanges of whichone was derecognised in August 2004. Three of themnamely, The Stock Exchange, Mumbai (BSE),Ahmedabad Stock Exchange (ASE) and MadhyaPradesh Stock Exchange (MPSE) are ‘Association ofPersons’. The remaining 19 are registered ascompanies, either limited by guarantees or by shares.Except NSE, all stock exchanges are ‘not-for-profit’organisations. Moreover, all exchanges are ‘mutual’organisations except NSE and OTCEI whereownership, management and trading rights are in thehands of three different sets of people from theinception.

Pursuant to the announcement made by theHonourable Finance Minister in the Parliament onMarch 13, 2001 that the stock exchanges would becorporatised and demutualised, SEBI constituted aGroup on Corporatisation and Demutualisation ofStock Exchanges under the Chairmanship of JusticeM. H. Kania, former Chief Justice of India, for advisingSEBI on corporatisation and demutualisation ofexchanges and to recommend the steps that need tobe taken to implement the same. Based on the

Box 1.3: Corporatisation and Demutualisation (C and D) of Stock Exchanges in India

��


As provided in the SC(R)A, SEBI videnotification dated March 23, 2005, hasspecified that the National Stock Exchangeof India Limited, which is already corporatisedand demutualised would not be required tosubmit a scheme to SEBI for approval,subject to the following conditions:

� The National Stock Exchange of IndiaLimited shall not change its currentcorporate and demutualised structure,without prior approval of SEBI; and

� The National Stock Exchange of IndiaLimited shall comply with furtherconditions as may be imposed by SEBIin this regard from time to time.

The process of C and D involves transferof assets from the exchanges which areAssociations of Persons / Companies limitedby Guarantee / Not-for-profit Companies tothe emerging corporate demutual exchangeand such transfer attracts stamp duty. Tofacilitate the process of corporatisation anddemutualisation and to make it tax-neutral, theHonourable Finance Minister, in the currentyear’s Budget, has proposed a one-timeexemption from payment of stamp duty onnotional transfer of assets from the exchangeswhich are Association of Persons/Companieslimited by Guarantee / Not-for-profitCompanies to the emerging corporatedemutual exchange.

j. Other Developments

� Detailed guidelines have been issuedspecifying the disclosures to be madeby listed companies which resort tochanging of names frequently.

� The stock exchanges have beenadvised to include the value of themembership card as liquid assets for the

purposes of net worth calculation ofmembers.

� The Mutual Funds and FIIs have beenadvised to enter the Unique Client Codefor the parent entity at the order entrylevel and enter the UCCs for theirindividual schemes/sub-accounts in thepost closing session.

III. Mutual Funds

a. Key Information Memorandum(KIM)

Considering the developments in thesecurities market in India and abroad and alsokeeping in view the interests of the investors,SEBI initiated a dialogue with the industryincluding AMFI for a standardised format ofKey Information Memorandum (KIM). Takinginto account the inputs received, a revisedstandardised format of KIM was introduced.

b. Compliance Test Report (CTR)

In order to facilitate smooth operationalflow and synchronise the frequency ofsubmission of two different documents by themutual funds, guidelines were issued tomutual funds for submitting the ComplianceTest Report (CTR) from the next financial year(2005-06) to SEBI once in every two months(instead of once in three months).

c. Minimum Number of Investors andMaximum Percentage of Corpusheld by the Investors in Scheme/Plan of Mutual Funds

SEBI issued guidelines and clarification,that the mutual fund schemes/plans, whichexisted on December 12, 2003 (the date ofthe issue of circular) and did not have aminimum of 20 investors or where oneinvestor was holding more than 25 per centof the corpus of the schemes/plans, were

��


required to be wound up by January 31, 2005.All the schemes/plans are required to complywith both the aforementioned conditionsstipulated in the guideline. However, theguideline is not applicable to ExchangeTraded Funds.

d. Enhancing the Reach of MutualFunds

In order to carry out a complete ‘healthcheck’ of the securities market infrastructure,SEBI had constituted a High Level Task Forcenamely Securities Markets InfrastructureLeveraging Expert Task Force (SMILE TaskForce) which has submitted, inter alia, itsreport to SEBI on “Infrastructure and ProcessFlow for Enhancing Distribution reach in theMutual Fund Industry”. The report of theSMILE Task Force is under consideration ofSEBI.

IV. Foreign Institutional Investors

a. FII Investment in Debt Securities

Earlier, the limit for FII investments indebt securities was US $ 1 billion. The UnionGovernment announced, within the overallExternal Commercial Borrowing (ECB) ceilingof US $ 9 billion, a sub-ceiling of US $ 1.75bill ion for FIIs investment in datedGovernment securities and Treasury Bills,both under 100 per cent debt route andnormal 70:30 route for 2004-05. Further, acumulative sub-ceiling of US $ 500 millionwas announced for FII investment incorporate debt, over and above the sub-ceiling of US $ 1.75 billion. Both the sub-ceilings are separate and not fungible.

b. FII Registrations

Traditionally, most of the institutionsregistered as FIIs have been from the UnitedStates of America and the United Kingdom.Though the trend continues, the registration

of FIIs from countries like Denmark, Italy,Belgium, Canada, Sweden, Ireland etc., wentup in 2004-05. Category–wise, foreigninstitutional investors such as mutual funds,investment trusts, managers of such funds,banks have been in dominance. In the currentyear, foreign pension funds, widely acceptedas long term investors, showed increasedinterest in Indian securities markets and manyof them got registered as FIIs. Some of theimportant pension funds, registered during thefinancial year as FIIs were CalPERS, UNEmployees’ Pension Fund, General MotorsEmployees’ Pension Fund, US State Govt.Pension Funds, Commonwealth ofMassachusetts Pension Reserves InvestmentTrust, Public School Retirement System ofMissouri, Lonmodtagernes Dyrtidsfond,Stichting Gemeenschappelijk BeheerEn Administratie BeroepspensioenfondsenArtsen etc.

V. Corporate Restructuring

a. Takeovers

Certain amendments to the SEBI(Substantial Acquisition of Shares andTakeovers) Regulations, 1997 were notifiedon August 30, 2004. These amendmentswere made to further safeguard the interestof investors and to eliminate operationaldifficulties faced in implementation of theregulations. These include:

(i) Reduction in the Time Period of OpenOffers

The current time cycle of the open offerhas been reduced from 120 days to 90days.

(ii) Expansion in the Scope of Regulations3(1)(f)

The scope of Regulation 3(1)(f) isexpanded to include the change in control bytakeover of management of the borrowercompany by the secured creditor in terms of

��


the Securitisation and Reconstruction ofFinancial Assets and Enforcement of SecurityInterest Act, 2002.

(iii) Restriction on the Participation ofMerchant Bankers in the Open Offerand its Disclosure Requirement

Merchant bankers are restricted to deal inthe scrip of target company during the periodcommencing from the date of their appointmentin terms of Regulation 13 till 15 days fromthe closure of the offer. Merchant bankersalso have to disclose their shareholding in thetarget company, if any, in the publicannouncement as well as in the letter of offer.

b. SEBI (Buy-Back of Securities)Regulations, 1998

Taking into consideration thedevelopment in the field of buy-back activitiesand continuous development in the marketand in order to further strengthen thedisclosures as made in the existing Letter ofOffers, certain additional disclosurerequirements were specified. Accordingly, astandard format of the letter of offer alongwith the general instructions/guidelines wasprepared and issued on May 7, 2004. Further,in order to reduce the cost of buy-back offersand to keep pace with the development inthe field of buy-back activities, the followingamendments to the SEBI (Buy-Back ofSecurities) Regulations, 1998 were notified onJune 18, 2004. These include:

(i) The time period for issuing advertisementon daily basis under sub-regulation (i) ofregulation 15 of the aforesaid regulationswas changed to fortnightly basis andevery time an additional 5 per cent ofthe buy-back has been completed. Therequirement of advertisement wasdispensed with where there is no buy-back during the period.

(ii) Open market buy-backs are allowed tobe carried out only on stock exchanges

having nationwide trading terminals.

(iii) The extinguishment of shares wasallowed within 15 days of acceptance/credit to demat account and the reportingto stock exchanges and SEBI was to bemade on a monthly basis by 7th of thenext month. Extinguishment of shareswithin 15 days of date of acceptance ofshares was also accepted subject to thecondition that in case of the last lot ofdeliveries received, the shares have tobe extinguished within 7 days from thelast date of completion of buy-back incompliance with sub-section 7 of Section77A of the Companies Act, 1956.

(iv) Specified date was changed to not laterthan 30 days from the date of publicannouncement.

(v) A provision was made in the regulationsthat the buy-back shall not be used forthe purpose of delisting of the shares orother specified securities.

(vi) A provision in the said regulations wasmade whereby the transfer of funds shallnot exceed 90 per cent of the amountin the escrow account to the specialaccount for payment of the considerationunder regulation 11(1) of the saidregulations. Remaining 10 per cent shallbe released only on completion of all theformalities laid down in the saidregulations.

c. Delisting of Securities

Currently, the delisting of securities fromthe stock exchanges is governed by SEBI(Delisting of Securities) Guidelines, 2003.These guidelines came into effect onFebruary 17, 2003. The aforesaid guidelinesrecognised two forms of delisting namely,voluntary delisting by the company andcompulsory delisting by the stock exchange.Under these provisions the securities mayeither be (i) completely delisted from all the

��


stock exchanges, in which case an exitopportunity to the existing shareholdersthrough the book building mechanism isrequired to be given; or (ii) delisted only fromthe smaller stock exchanges while remaininglisted at stock exchanges having nation widetrading terminals (BSE/NSE), in which caseno exit opportunity is required to be provided.The guidelines introduced provisions forcompulsory delisting by the stock exchangesfor non-compliance of its listing agreementsby the corporates and also introducedprovisions of relisting of securities after acooling-off period of 2 years.

As per the information provided by thestock exchanges up to February 5, 2005,securities of 569 companies have beendelisted by the stock exchanges under theprovisions of compulsory delisting. Under theprovisions of voluntary delisting, 758 delistingshave taken place. These delisting includesthose cases where exit opportunity need not

be given (as these securities continue to belisted at stock exchanges having nation widetrading terminals viz., NSE and BSE).Moreover, 11 companies have sought to gettheir securities delisted from the stockexchanges under the provisions of voluntarydelisting after having given exit opportunityto the shareholders through the book buildingmechanism.

VI. Investor Awareness/Assistanceand Investor Education/Protection

a. Redressal of Investor Grievances

SEBI has a comprehensive investorgrievances processing mechanism. The Officeof Investor Assistance and Education (OIAE)is the single window interface of SEBI withthe investors. The OIAE accepts grievancesof all investors who prefer to file theircomplaints with SEBI for matters falling withinits jurisdiction. A standardised complaint

Table 1.7: Redressal of Investor Grievances

Grievances Received Grievances Redressed RedressalRateFinancial Year

DuringCumulative

DuringCumulative

Percentagethe year the year (cumulative)

1 2 3 4 5 6

1991-92 18,794 18,794 4,061 4,061 21.61

1992-93 1,10,317 1,29,111 22,946 27,007 20.92

1993-94 5,84,662 7,13,773 3,39,517 3,66,524 51.35

1994-95 5,16,080 12,29,853 3,51,842 7,18,366 58.41

1995-96 3,76,478 16,06,331 3,15,652 10,34,018 64.37

1996-97 2,17,394 18,23,725 4,31,865 14,65,883 80.38

1997-98 5,11,507 23,35,232 6,76,555 21,42,438 91.74

1998-99 99,132 24,34,364 1,27,227 22,69,665 93.24

1999-00 98,605 25,32,969 1,46,553 24,16,218 95.39

2000-01 96,913 26,29,882 85,583 25,01,801 95.13

2001-02 81,600 27,11,482 70,328 25,72,129 94.86

2002-03 37,434 27,48,916 38,972 26,11,101 94.99

2003-04 36,744 27,85,660 21,531 26,32,632 94.51

2004-05 54,435 28,40,095 53,361 26,85,993 94.57

�


While the national as well as the statelevel launches were aimed at generating wideand adequate publicity for the campaign, thestructural foundation of the campaign is basedon the continued and active participation ofmarket participants, market intermediaries,investors’ associations etc., who have, underthe aegis of SEBI, undertaken to organiseworkshops at various cities/medium and smalltowns in the country to spread SEBI’smessage of “Invest with knowledge”. Thedetails of the campaign are enumerated below:

(i) Workshop

The workshops are aimed at reachingout to the common investors and are beingheld primarily in small and medium towns andcities all over the country. At the workshops,the aim is to educate the investors about thefunctioning of the securities market, the basicfundamentals of investment and riskmanagement and the rights andresponsibilities of an investor. The messageis made simple, with lectures and discussionsconducted in the local/regional language. Forthe workshops, SEBI has enlisted the support,directly as well as indirectly, of investorsassociations, market participants, ICAI, ICSI,reputed banks etc., and the attempt is madeto decentralise the campaign keeping in mindthe geographical spread of the investors inthe country.

To further accelerate the speed andcoverage of the programme and to increasethe number of workshops to be conductedeach month, a meeting of market participants/stock exchanges was held wherein it wasdecided to conduct at least 1500 workshopsacross all the states by March 2005. It wasalso decided to allocate each state to marketparticipant(s), who would be responsible forconducting the agreed number of workshopsin each of those states. Till April 2005, 1949workshops were conducted in around 480cities/towns in the country.

format is available at all SEBI offices and onthe SEBI website for the convenience ofinvestors. Complaints are taken up with theconcerned entities either directly by OIAE orby the Investor Complaint Cell of theconcerned department. SEBI officers alsohold meetings with the company officials toimpress upon them their obligations to redressthe grievances of investors. Action underSection 11B & 15C of SEBI Act is initiatedagainst recalcitrant companies.

During the period 1991-92 to 2004-05,SEBI has received 28,40,095 grievances frominvestors. Of this, a total of 26,85,993grievances were redressed by respectiveentities, which indicates a redressal rate of94.57 per cent. The cumulative status ofinvestor grievances received by SEBI is givenin Table 1.7.

b. Internet-based Response System

As a new endeavour in investorassistance, a simple and effective internet-based response system for investorcomplaints has been set up. Under thissystem, on filing of a complaint electronically,a system generated acknowledgement letteris issued to the investor.

c. Securities Market AwarenessCampaign (SMAC)

SEBI launched a comprehensiveeducation campaign aimed at investors insecurities market, which has been christened- “Securities Market Awareness Campaign”(SMAC). The motto of the campaign is – ‘AnEducated Investor is a Protected Investor.’

Following the national launch, thecampaign has already been extended to 20States and Union Territories. While inBangalore, Kolkata and Chennai, theGovernors of the respective States launchedthe campaigns, in Hyderabad and Rajkot, theChief Ministers of the concerned Statesinaugurated the programme.

�


(ii) Audio-Visual Clip

At the time of the national level launch,SEBI had prepared a 4 ½ minute audio-visualclip depicting some of the concerns of thecommon investor and detailing the theme ofthe Securities Market Awareness Campaign.The thematic audio-visual is played at thevarious workshops being organised across thecountry. This short but extremely effectiveaudio-visual clip helps to set the tone at allthe workshops.

(iii) Distribution of Educative Materials

SEBI has prepared standardised readingmaterials and presentation materials for theworkshops. In addition, reference guides onthe following topics have been prepared fordistribution:

� Rights and responsibilities of investors,

� Substantial Acquisition of Shares andTakeovers,

� Simple “dos and dont’s” relating tovarious aspects of the securities market,

� Mutual funds.

These guides/booklets have beentranslated into Hindi and the workshopmaterial has also been translated into 10major regional languages. It is felt that alongwith Hindi, the 10 regional languages wouldcover a substantial portion of the investorbase in the country.

(iv) Investor Website

In order to make the information relevantto the investors and available at one place, adedicated investor website (http://investor.sebi.gov.in) has been operationalisedand the information content on this websiteis augmented on a periodic basis.

All the booklets/pamphlets prepared bySEBI have been posted on this website andappear in a bilingual form. In response to thefeedback received from investors, frequentlyasked questions (FAQs), pertaining to the

important regulations framed by SEBI hasbeen posted on this website. In addition, aglossary of commonly used terms relating tocapital market also appears on this site.

(v) Advertisements

SEBI has prepared simple “dos anddon’ts” for investors relating to variousaspects of the securities market. While thesesimple messages have been put on theinvestor website and have been printed in theform of leaflets to be distributed across thecountry, it was felt that these messages couldbe spread across the investor base by wayof advertisements in newspapers, especiallyin the regional newspapers. Keeping the costconstraint in mind, it was decided that theseadvertisements could be released inassociation with market participants, with thename and logo of the market participantsappearing in the advertisements along withthe name and logo of SEBI. This providedinducement to the market participants to bearthe cost of these advertisements and theresponse has been overwhelming. Till date,over 700 advertisements relating to variousaspects of securities market appeared in 48different newspapers/ magazines, coveringapproximately 111 cities and 9 regionallanguages, apart from English and Hindi.

(vi) All India Radio

With regard to educating investorsthrough the medium of radio, All India Radiowas requested to allot free slots to SEBI ontheir various programmes. AIR allotted 5 freeslots in the month of January 2004 in itsprogramme “People’s Corner”. Further, 8 freeslots were allotted in the programme -Business Pulse - in the months of May andJune 2004.These programmes are aimed atcreating awareness among the commonpublic regarding the functioning of variouspublic service departments. SEBI officialsparticipated in this live, interactive (with“phoned in” queries from investors)

��


programme covering topics such as mutualfunds, secondary market, risk management,derivatives, issues and listing in the primarymarket, investor education and grievanceredressal mechanism etc. A score cardas regards SMAC is furnished below(Table 1.8).

VII. Retrospect and Prospects

a. Retrospect

The activities in the capital marketcontinued to remain buoyant for the secondyear in succession. The capital market - bothprimary and secondary segments - remainedvibrant during 2004-05 due to heightened

Table 1.8: Securities Market Awareness Campaign

Item Particulars

State Level Seminars States/Union Territories 20Covered

Inaugurated by Governor / Chief Minister

Workshops Number held 1949

Cities/Towns covered Around 480

Media – Print Total appeared 721Advertisements/ Languages 11Announcements Cities covered 111

News papers/ Magazines 48

Media: Electronic (Radio) Timing Every Friday of Jan. 04 – 9.30 to 10.00 p.m.

Programme People’s Corner

Topics • Brief overview, role and mandate, registering andlicensing functions related to differentintermediaries.

• Derivatives, settlement system & riskmanagement etc.

• Foreign Institutional Investors (FII), Custodians,Participatory Notes, Investment Trends, etc.

• Mutual Funds, Portfolio Managers, etc.

• Investor Education & Grievances RedressalMechanism.

Timing Every Monday and Friday from May 24, 2004 to June25, 2004 - 9.15 to 9.35 a.m.

Programme Business Pulse

• Brief overview of Mutual Funds & SEBI’s role inregulating them.

• Secondary Market Risk Management and TradingSystems.

• Investor Education & Grievances RedressalMechanism.

• Primary Market-Issues and Listing.

��


economic activities along with strongmacroeconomic fundamentals, bettercorporate results, revival of reform initiativesby the government from the new perspectives,strong FII investment, and most importantlymarket friendly regulations by SEBI. While themarket sentiment was buoyant in thebeginning of the financial year, the politicaluncertainty prevalent in May 2004 resulted inmarket crash of 11.1 per cent in a single dayi.e., on May 17, 2004. The crash was notonly one of the largest in India but also inthe world. It was also unique in the sensethat it was also the most short-lived of themarket crashes. The crash, however,demonstrated the resilience of the riskmanagement system. The stock marketbounced back and rose steadily thereafterwith BSE Sensex reaching a peak of 6915.09and S&P CNX Nifty 2168.95 on March 8,2005. The market capitalisation of both BSEand NSE also reached a historic highreflecting greater confidence of the investorsin the Indian capital market. The marketcapitalisation as a percentage to GDPreached an all time high of 54.6 per cent byend-March 2005.

Primary market activities acceleratedparticularly during the second half of the year.During 2004-05, Rs. 28,256 crore wasmobilised from the primary market out ofwhich Rs. 24,640 crore was through publicissues and the rest was through rights issues.Private sector dominated resourcemobilisation in the primary market, with 61per cent share in the total resourcemobilisation, while the share of public sectorgot reduced due to slowdown in thedisinvestment process. The dominance ofprivate sector may be attributed mainly to theresurgence of industrial activities, fresh capitalformation and transparent and efficientregulatory system. Banks/ financialinstitutions, power and IT sector mobilisedlarge amounts of resources. Large

mobilisation of resources by these sectors donot spring any surprise, because thecontribution of services sector to GDP growthhas been impressive during the recent years.

Mutual funds industry experiencedgrowth in terms of the assets undermanagement which increased fromRs. 1,39,676 crore in 2003-04 to Rs. 1,49,600crore in 2004-05, a rise of 7.2 per cent overthe previous year. Economic resurgence alongwith more liberalisation of capital market,rise in financial savings of households,privatisation of the pension system andpermission to more private players providegreat potential for the mutual fund industry toflourish in India.

Foreign Institutional Investors (FIIs) withtheir expertise and experience of operatingin global markets look for several factorswhich help them maximise their returns oninvestment. Some of these factors relate tocontinuation of market reforms, prevailing taxsystem, higher returns, low inflation, high andsustained growth of the economy etc.Considering all these factors vis-à-vis thosein the other emerging economies, India isconsidered as a favoured destination forportfolio investment by the FIIs. The numberof FIIs registered in India went up from 540in 2003-04 to 685 in 2004-05.

b. Prospects

India’s financial system is at a criticalstage of transformation. While banking systemis being consolidated, the term-lendinginstitutions, better known as DevelopmentFinancial Institutions (DFIs), are convertedinto banks/NBFCs. In view of this, theresponsibility of financing the long-termprojects, which also includes development ofinfrastructure, corporate projects etc., falls onthe securities market. As this transition mayaffect the growth prospects of the economy,Government felt the urgent need to develop

�


the securities market in general and debtmarket in particular so that the needs ofIndian corporate world are met. For orderlydevelopment of the capital market, HonorableFinance Minister announced a package ofmeasures in 2005-06 Budget, which include,inter alia, the following:

� All stock exchanges have to becorporatised. Those stock exchangeswhich are not yet corporatised, will getone time exemption from stamp duty forthe same;

� Government to provide equity support ofRs. 14,040 crore and loans of Rs.3,554crore to central PSUs.

� FIIs will be permitted to submitappropriate collateral, in cash orotherwise, as prescribed by SEBI fortrading in derivatives;

� Securities Contracts (Regulation) Act,1956 will be amended to change thedefinition of ‘securities’ so as to providea legal framework for trading ofsecuritised debt;

� Appointment of a high level ExpertCommittee on corporate bonds andsecuritisation is proposed;

� Proposal to allow Mutual Funds tointroduce Gold Exchange Traded Funds(GETFs), with Gold as the underlyingasset;

� Proposal to set up a National Instituteof Securities Markets for providingtraining to intermediaries in the securitiesmarket and promote research;

� Proposal to amend the Income Tax Act,1961 to provide that income from F&Ooperations will not be treated asspeculative income. It was also proposedto provide that trading in derivatives in

specified stock exchanges would not betreated as ‘speculative transaction’; and

� To appoint a high powered ExpertCommittee to advise the Government onhow to make Mumbai a regional financialcentre.

The above proposals are at differentstages of implementation. The scheme forcorporatisation and demutualisation of theBSE has been approved by SEBI. Guidelineshave been amended for the submission ofappropriate collateral by FIIs for trading inderivatives. Actions have been initiated toimplement the remaining Budget proposals.

In the backdrop of the Budget proposalsand also to pursue the on-going projects, themajor agenda for SEBI for 2005-06 are asunder:

� Corporatisation and Demutualisation ofstock exchanges;

� Setting up of National Institute ofSecurities Markets (NISM);

� Broadbasing of Mutual Funds throughgreater participation of retail investors;

� Rationalisation of Disclosure and InvestorProtection Guidelines for follow-onofferings and rights issues;

� Simplification and rationalisation ofsecurities market regulations;

� Implementation of Integrated MarketSurveillance System (IMSS);

� Development of Corporate Debt Market;

� Issue of guidelines for Indian DepositoryReceipts (IDR);

� Broadening of the investors’ educationprogramme; and

� Conducting of investors’ survey.

PART ONE: POLICIES AND PROGRAMMES Part One: Policies and ... · Part One: Policies and Programmes...

Documents

Transcript of PART ONE: POLICIES AND PROGRAMMES Part One: Policies and ... · Part One: Policies and Programmes...