Page 41 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Security Analysis and Portfolio Management

Notes 8. Inadequacy of investor service: It is commonly felt that exchanges, particularly the smaller
ones, have been unable to service their investors adequately, and have been able to make
only a limited contribution to the spread of the equity cult in their region. Level of
computerization across stock exchanges has been inadequate, resulting in lower operational
flexibility of stock exchanges and leaving brokers unable to handle sudden surges in
volumes. The absence of computer linkage between stock exchanges and its members has
also hampered effective inter-market operations, monitoring of trading and trading
operations, as well as the free flow of information on an intra- and inter-exchange basis.
The inadequate structure and ineffective trading practices/settlements have also resulted
in lack of NRI confidence in the capital market. Major Indian corporates today need to
diversify their sources of capital and seek the direct recitations of foreign investors. The
areas of concern detailed above would effectively deter such direct foreign currency
investments. The upgradation of existing stock exchanges thus has to be viewed as an
integral component of the increasing globalization of the Indian economy.

1.3.8 Directions to Reform the Functioning of Stock Exchanges

The efforts to reform the functioning of stock exchanges in India have been as old as the stock
exchanges themselves. The Indian regulatory and supervisory framework of securities market
has been adequately strengthened through the legislative and administrative measures in the
recent past. The regulatory framework for securities market is consistent with the best
international benchmarks, such as, standards prescribed by International Organisation of
Securities Commissions (IOSCO).
1. Extensive Capital Market Reforms were undertaken during the 1990s encompassing
legislative regulatory and institutional reforms. Statutory market regulator, which was
created in 1992, was suitably empowered to regulate the collective investment schemes
and plantation schemes through an amendment in 1999. Further, the organization
strengthening of SEBI and suitable empowerment through compliance and enforcement
powers including search and seizure powers were given through an amendment in SEBI
Act in 2002. Although dematerialisation started in 1997 after the legal foundations for
electronic book keeping were provided and depositories created the regulator mandated
gradually that trading in most of the stocks take place only in dematerialised form.
2. Till 2001 India was the only sophisticated market having account period settlement
alongside the derivatives products. From middle of 2001 uniform rolling settlement and
same settlement cycles were prescribed creating a true spot market.
3. After the legal framework for derivatives trading was provided by the amendment of
SCRA in 1999 derivatives trading started in a gradual manner with stock index futures in
June 2000. Later on options and single stock futures were introduced in 2000-2001 and now
India 's derivatives market turnover is more than the cash market and India is one of the
largest single stock futures markets in the world.

4. India's risk management systems have always been very modern and effective. The VaR
based margining system was introduced in mid 2001 and the risk management systems
have withstood huge volatility experienced in May 2003 and May 2004. This included real
time exposure monitoring, disablement of broker terminals, VaR based margining etc.

5. India is one of the few countries to have started the screen based trading of government
securities in January 2003.
6. In June 2003 the interest rate futures contracts on the screen based trading platform were
introduced.

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