Page 285 - DECO502_INDIAN_ECONOMIC_POLICY_ENGLISH

Unit 21: Capital Market in India and Working of SEBI

Firstly, the settlement of transactions in the forward market involves a long period of time, and Notes
therefore, there is an incentive to the speculator to keep his commitments open as long as possible.
This often leads to over-speculation and over-trading in stock exchange in India.
Secondly, the dealers in the cash market have only two alternatives before them, viz., (a) to square up
their transactions by offering their purchase by sale and their sale by purchase before the expiry of
the time limit, or (b) to deliver the securities and accept full payment (for sale) or to take delivery of
the securities and make full payment (for purchase).
The dealers in the forward market have, besides the above two alternatives, a third alternative, that
is, the postponement of delivery and payment to the next settlement day by mutual consent of the
two parties to the contract. This system of carry over, i.e., postponement of delivery and payment
usually involves the payment of a consideration by one party to the other. If the buyers (bulls) want
postponement—for they have undertaken to buy but do not wish to buy—for they pay a consideration
to the sellers, known as contango or the budla. If the sellers (the bears) desire the postponement (they
have undertaken to sell but do not wish to sell) they pay a consideration to the buyers for agreeing to
accommodate them until the next settlement known as backwardation or undha budla in Indian
stock exchanges.
21.5 SEBI and Capital Market Reforms

The functioning of the stock exchanges in India has shown many weaknesses, with long delays, lack
of transparency in procedures and vulnerability to price rigging and insider trading. To counter
these shortcomings and deficiencies and to regulate the capital market, the Government of India set
up the Securities Exchange Board of India in 1988. Initially, SEBI was set up as a non-statutory body
but in January 1992 it was made a statutory body. SEBI was authorised to regulate all merchant
banks on issue activity, lay guidelines and supervise and regulate the working of mutual funds and
oversee the working of stock exchanges in India. SEBI, in consultation with the Government, has
taken a number of steps to introduce improved practices and greater transparency in the capital
markets in the interest of the investing public and the healthy development of the capital markets:
The Capital Issues (Control) Act, 1947 governed capital issues in India so as ensure sound capital
structure for corporate enterprises, to promote rational and healthy expansion of the joint stock
companies in India and to protect the interests of the investing public from the fraudulent practices
of fast operators. The capital issues control was administered by the Controller of Capital Issues
(CCI) according to the principles and policies laid down by the Central Government. The Narasimham
Committee on the Reform of the Financial System in India (1991) recommended the abolition of CCI
and wanted SEBI to protect the investors and take over the regulatory function of CCI. The Government
of India accepted this recommendation, repealed the Capital Issues (Control) Act, 1947 and abolished
the post of CCI. Companies were allowed to approach the capital markets without prior government
permission subject to getting their offer documents cleared by SEBI. In other words, SEBI was given
the power to control and regulate the new issue market as well as the old issues market (commonly
known the stock exchange).

Primary Market Reforms in India
SEBI has introduced various guidelines and regulatory measures for capital issues. Companies issuing
capital in the primary market are now required to disclose all material facts and specific risk factors
with their projects; they should also give information regarding the basis of calculation of premium
leaving the companies free to fix the premium. SEBI has also introduced a code of advertisement for
public issues for ensuring fair and truthful disclosures.
In order to encourage Initial Public Offers (IPO) SEBI has permitted companies to determine the par
value of shares issued by them (i.e. SEBI has now dispensed with fixed par values of ` 10 and ` 100).
SEBI has allowed issues of IPOs to go for “book building” - i.e. reserve and allot shares to individual
investors. But the issuer will have to disclose the price, the issue size and the number of securities to
be offered to the public.

LOVELY PROFESSIONAL UNIVERSITY 279