Here we detail about the five measures regarding capital market reforms.
The five measures are: (1) Establishment of SEBI, (2) Setting up of Private Mutual Funds, (3) Opening up to Foreign Capital, (4) Access to International Capital Markets, and (5) Banks and Capital Markets.
1. Establishment of SEBI:
An important measure regarding capital market reforms is the setting up of Securities and Exchange Board of India (SEBI) as the regulator of equity market in India.
Regulation of stock markets is important to ensure:
(a) That the equity markets operate in a fair and orderly manner,
(b) That the brokers and other professionals of the stock markets deal justly with their customers,
(c) That the corporate firms who raise funds through the market provide all information about themselves which the investors need to make intelligent investment decisions. Since its inception SEBI has been addressing itself to these tasks.
SEBI has introduced various guidelines and regulations for the functioning of capital markets and assuming and selling of shares in the primary market.
The following important regulatory measures have been introduced by SEBI:
(a) SEBI has introduced a code of advertisement for public issues by companies for making fair and truthful disclosures. The companies are now required to disclose all material facts and specific risk factors associated with their projects while making public issues.
(b) It has required the stock exchanges to amend their listing agreements to ensure that a listed company furnishes annual statements to them showing variations between financial projections and project utilisation of funds made in the offer documents and actual. This will enable shareholders to make comparisons between performance and promises made by of company.
(c) An important reform SEBI has introduced is that it has brought merchant banking also under its regulatory framework. The merchant bankers are required to follow the code of conduct issued by SEBI in respect of pricing and premium fixation of issues of shares a companies.
(d) The practice of making preferential allotment of shares at prices unrelated to the prevailing price has been stopped by SEBI. Besides, to ensure transparency insider trading has also been banned.
(e) As a part of the process of establishing transparent rules for trading in stock exchanges, a notorious BADLA system has been banned and in its place Rolling Settlement System has been introduced.
2. Setting up of Private Mutual Funds:
Another important reform is the permission granted to the private sector firms to start Mutual Funds. Many private sector companies such as Tata, Reliance, Birla have set up their mutual funds through which they raise money from the public. In this way monopoly position of UTI in Mutual Fund business has come to end. Mutual Funds raise money by selling units to the public and the funds so raised are invested in a number of equities and debentures of companies.
A mutual fund may be entirely equity-based or debt-based or a balanced one having a particular combination of investment in equities and debentures of a number of companies. Investment in mutual funds enables the investors to reduce risk. Mutual funds have also been allowed to open offshore funds to invest in equities abroad. UTI has also been brought within the regulatory framework of SEBI.
3. Opening up to Foreign Capital:
A significant reform has been that Indian capital market has been opened up for foreign institutional institutions (FII). That is, FII can now buy shares and debentures of private Indian companies in the Indian stock market and can also invest in government securities. This has been done to attract foreign capital. Foreign Institutional Investors (FII) have been permitted full capital convertibility
4. Access to International Capital Markets:
The Indian corporate sector has been allowed to raise funds in the international capital markets through American Depository Receipts (ADRs), Global Depository Receipts (GDR), Foreign Currency Convertible Bonds (FCCBs) and External Commercial Borrowings (ECBs). Similarly, Overseas Corporate Bodies (OCBs) and Non-resident Indians have been allowed to invest in the equity capital of the Indian companies. FIIs have been allowed to invest in equities of private corporate Indian companies as well as in Government securities.
5. Banks and Capital Markets:
Another important step to strengthen the Indian capital market is that banks have been allowed to lend against various capital market instruments such as corporate shares and debentures to individuals, investment companies, trusts and endowment share and stock brokers, industrial and corporate buyers and SEBI-approved market makers.
Lending by banks against various capital market instruments to individuals, share and stock brokers, market makers is made in accordance with certain norms regarding purpose, capital adequacy, transparent transactions, maximum possible amount or ceiling, or duration of the loan. Bank lending against shares and debentures, according to C. Rangarajan, will “enable partial liquidity to scrip’s, to help reduce volatility in price movement, encourage the presence of market makers so as to reduce market concentration and help in widening and deepening of trading in the secondary market.”