Page 287 - DECO502_INDIAN_ECONOMIC_POLICY_ENGLISH

Unit 21: Capital Market in India and Working of SEBI

Secondary Market Reforms in India Notes
SEBI has started the process of registration of intermediaries, such as the stock brokers and sub-
brokers under the provisions of the Securities and Stock Exchange Board Act, 1992. The registration
is on the basis of certain eligibility norms such as capital adequacy, infrastructure, etc. There has been
much opposition and resistance to this step of SEBI. SEBI has also made rules for making client/
broker relationships more transparent, in particular, segregating client and broker accounts.
SEBI has notified regulations on insider trading under the provisions of SEBI Act. Such regulations
are meant to protect and preserve the integrity of stock markets and, in the long run, help inspire
investor confidence in the stock exchange. Despite these regulations, insider trading is rampant in
our stock exchanges, and, rigging the market and manipulating stock market price quotations are
quite common. M.S. Shoes East Ltd. fiasco was an example of market rigging; SEBI could do nothing
about it.
Since 1992, SEBI has constantly reviewed the traditional trading systems in Indian Stock Exchanges.
It is simplifying procedures and achieving transparency in costs and prices at which customers’
orders are executed, speeding up clearing and settlement, and, finally transfer of shares in the names
of buyers.
To make the governing bodies of stock exchanges broad based, the governing body of stock exchanges
should have 5 elected members, not more than 4 members nominated by the Government or SEBI
and 3 or fewer members nominated as public representatives.
The Government has allowed foreign institutional investors (FIIs) such as pension funds, mutual
funds, investment trusts, asset or portfolio management companies etc. to invest in the Indian capital
market provided they are registered with SEBI. Till January 1995, as many as 286 FIIs have been
registered with SEBI — they were only 10 in January 1993 and 136 in January 1994. The cumulative
net investments of FIIs has increased from $200 million in January 1993 to $3 billion in January 1995,
reflecting the economic liberalisation policy of the country and to some extent, the prevalence of low
rates of interest abroad. The Government of India has now permitted joint venture stock broking
companies to have non-Indian citizens on their Board of Directors.
To prevent excessive speculation and volatility in the stock market, SEBI has introduced rolling
settlements from July 2,2001, under which settlement has to be made every day. This, however, has
not succeeded extreme volatility in the stock market.
Insurance Reforms

The most notable event during 1999-2000 in the field of contractual savings has been the passing of
the Insurance Regulation and Development Authority (IRDA) Act despite stiff opposition from trade
unions and the Left parties. The IRDA Act ends the monopoly of the Government in the insurance
sector because it seeks to promote the private sector (including limited foreign equity) in the insurance
sector. It gives priority in the utilisation of policy holders funds for the development of social and
infrastructure sectors. The Government has given licences to a number of private sector companies to
do insurance business.
Strengthening of SEBI
In January 1995, the Government of India promulgated an ordinance to amend SEBI Act, 1992 so as to
arm SEBI with additional powers for ensuring the orderly development of the capital market and to
enhance its ability to protect the interests of the investors. The important features of this ordinance are:
1. To enable SEBI to respond speedily to market conditions and to reinforce its autonomy, SEBI
has been empowered to file complaints in courts and to notify its regulations without prior
approval of the Government.
2. SEBI is now provided with regulatory powers over companies in the issuance of capital, the
transfer of securities and other related matters.
3. SEBI is now empowered to impose monetary penalties on capital market intermediaries and
other participants for a listed range of violations. The amendment proposes to create adjudicating

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