Eulogising the conscious role played by SEBI in the difficult and turbulent decade after its formation, the chairman SEBI has further stated as under:
"In the interregnum, the Indian Securities market has passed through several trials and tribulations, navigated quite a few storms and braved rough weathers, yet continued to significantly contribute to the growth and development of Indian economy, post
liberalisation, in particular. While journeying through the high volt transmission line of
Securities Market developments, the Nation received a couple of serious shocks of major
market misconducts by various entities. The unfortunate events have eroded the confidence
of the common investors who seem to have receded even though they had joined the
majestic march of economic freedom by full scale participation in Capital Market with a
gusto and trampled the rise of new breed entrepreneur eventually, impacting the economic
growth from the real sectors."
The Positive Achievements of Capital Market in the Decade after onset of SEBI
Today, if the Indian economy has grown into robust and strong economy – strong enough to successfully swim against the currents of global competition, it is due, in no small measure, to the contribution of the Indian capital market. The capital market has
proved to be an effective medium of canalising the savings of the investors from every
nook and corner of the country, for investment needed for capital formation and
economic growth. Over the last century and a quarter, Indian securities market has
phenomenally grown into a size of global dimension. SEBI, since its inception, has under-taken several far reaching initiatives which have not only radically reformed but totally transformed Indian Securities Market. The significant milestones include:
Screen based real time trade; outcries in the exchanges are a thing of the past.
A market of this dimension and complexity requires technological sophistication and commensurate risk management system. It also calls for operational transparency, executional efficiency and regulatory oversight. There is no gainsaying the fact that we have one of the most efficient trading platforms and settlement systems in the world. The trading system has become on line, fully automated and screen-based. Open outcry is now outmoded and our market intermediaries have quickly adapted themselves to this
technological sophistication.
Availability of trading terminals in over 400 towns and cities;
over 10,000 terminals are creating waves by clicks. Manual trading has given place to Terminal-trading. The participants across the country, irrespective of their location, trade with one another simultaneously and anonymously.
Contraction of settlement cycles from T+15, euphemistically described as T+ anything, to T+3 (now T+2)
Trade settlement now takes place on T+2 basis i.e. the trade is settled or securities and cash are exchanged on the 3rd day of settlement. The transition into shortened settlement cycle from T+5 to T+3 and then to T+2, in rapid succession, all in 2 years time, so smoothly with out any hitch, has lifted up many international eyebrows.
100% rolling settlement and abolition of no delivery period.
In the rolling settlement system, the trading period (T) is one day. Obligations are netted and determined on basis of trades done on the trading day (T). The obligations have to be settled on the fifth working day after the trading day in a T+5 rolling settlement scheme. Typically, a trade done on a Monday is settled on the next Monday. Thus, there is a settlement everyday. Thus, in the rolling settlement regime, depository participants have to be ready to handle settlement-related activity everyday. This facility is particularly useful for investors having accounts at locations where DPs do not have direct connectivity to NSDL's central system. DPs may encourage their clients to use this feature to ensure that the securities are delivered in time.
Dematerialisation, a globally acknowledged success story
Our objective of cent-percent trading in dematerialised form has virtually materialised. Our investors are relieved of the problems and pains of bad delivery, delayed delivery, non delivery, bogus or forged documents. And spared from the irritating inconvenience of intimating change of address!
The risk management system
with three pronged margining requirement of daily margin, marked to market margin and volatility margin - real time monitoring of margining position and automatic terminal disablement in the event of failure to make good margin- shortfall - is virtually second to none in the world and the system has stood the test of stress. A Central Counter Party has been created in the form of Central Clearing Corporation which assumes the responsibility of meeting the members’ obligations, while trade / settlement guarantee fund serves as fall back cushion to absorb the impact of any member’s default.
Upgradation of disclosures, accounting standards and corporate governance to global platform of modernity.
Good corporate governance standard is also a vital factor to enhance investors’ confidence. While the Company Law takes care of the corporate governance structure, the listing requirement which incorporates SEBI’s guidelines based on the Narayana Murthy committee’s recommendations would take care of the dynamic aspect of continued compliance. A few provisions perceived to have the potential of unintended consequences are being revisited. As a third plank, at the instance of SEBI, ICRA and CRISIL have evolved a corporate governance rating model. The disclosure standards prescribed for new issues in India are comparable, in terms of contents and stringency, to that obtaining elsewhere in the world. The entry norms and track record criteria have been attuned to ensure the quality of new issues. The continual disclosure requirements for listed companies are also on par with international standards.
Straight through processing on the securities side w.e.f. 2nd December 2002. India may be the first country to accomplish such a feat. STP is a one-point data entry system that allows electronic data processing from the point of first deal to the final settlement. This reduces the time and cost of market transactions.
Derivatives trading have been introduced, in a segregated segment of Exchange, and the basket of products has been enlarged to cover index futures, index options, stock futures and stock options. The Indian traders have been remarkably adept in understanding of the nuances of the products and dealing in them as hedging instruments to cover different types of risks to which they are exposed.
What Could Not be achieved
Whereas, these developments have uplifted the level of the Securities Market of India, which now rubs shoulders with most markets even in the developed world, the investors continue to remain disenchanted, the market is yet to experience their significant participation and as Hon'ble Union Minster for Finance and Company Affairs says, the ethos does not manifest "EQUITY CULT". Only 2% of the retails investors in India enter the primary market as against 51% in US and other European countries implying the lukewarm response in retail segment. The participation by the household sector earlier before the mid-Nineties reached up to 6%, but after the first securities scam it slipped back to 2%.
But why this Phenomenon?
Over the years, the Indian Securities market has transformed itself into vibrant, efficient, transparent one, a reasonably safe and secure place for savers and investors, institutions and individuals. However, human ingenuity knows no bounds.
Manipulations, misconduct, malpractice, fraudulent and unfair trade practices raise their
ugly heads, now and then. These go to undermine the market integrity, erode into
investor’s confidence and jeopardise the interests of the hapless investors. These constitute be the matters of concern to the Regulator and the investors.
With the onset of the liberalised economy of the Nineties consequent on the economic reforms, a robust IPO market depicting boom conditions was steadily growing in volumes. However this growth was severely affected in the subsequent years (1994-95) by the stock market Scam (popularly identified as the Harshad Mehta Scam). It became the Era of Fly-by-night operators. A number of promoters queued up to raise funds through IPOs after controls on pricing of issues were lifted in 1992. Encouraged by the buoyant stock market, a slew of finance companies flocked to the market with issues priced at substantial premiums. Most of the issues were of poor quality and the funds raised were routed into treasury operations. Investing in the shares of a finance company was blindly taken as a lucrative proposition by the unsuspecting investors. Little did people realise the risk involved in it. Most companies vanished later. And the returns from the few that survived did not justify the premium. The quality on offer was poor, and the size of most of the offers small - far below Rs 2 crore. Stringent disclosure requirements were not in place to check fly-by-night operators at that time. The offer document of those days gave the investing public little information of relevance.
The bad experience in the mid-1990s put off investors from the primary market for several years to come. 1998 was the worst year as public issues practically dried up. Only 150 companies tapped the market in 1997-98, against 1,500 companies in 1995. The amount mobilised through public and rights offers too shrunk to about Rs 15,000 crore against Rs 25,000 crore in 1997-98. This period saw a shift towards the debt market and the preferential issue route to make up for the steep fall in the IPO segment. Corporates could switch to easier available options for raising capital requirements.
The IT boom of the late 1990s and the introduction of the book-building system for pricing of public issues came to revive investor interest in the primary market to an extent subsequently. The primary market was laden with issues from the media and technology segment as against earlier years, when the primary issue market was dominated by the finance sector or core industries such as cement, steel and petroleum. There was an awakening of sorts in the public issue market in 2003 after it had hibernated for nearly six years.
Year 2004 appears to be a big year for IPOs. Big-ticket issues, including those of PSUs such as ONGC and GAIL, the long-awaited TCS and those in the power and oil and gas sectors such as Power Trading Corporation, NTPC and Petronet LNG, are in line to raise funds. The total funds to be mobilised are estimated at a whopping Rs 50,000 crore - higher than the amount raised in any of the previous years. Most of these are quality offers - a departure from the past. These issues can have a significant impact on the secondary market too as current holdings could be liquidated to mop up new issues.
Other Developments that need correctional Measures
Retail Investors feels shy of participating in the Securities Market
The participators in the securities market are high net worth individuals, portfolio investors, domestic financial institutions, and foreign financial institutions. Most of these categories are not actually long term investors in the security market, but carry on trading activities, involving regular selling/buying of securities based on the volatility of the market. They use sophisticated software to carry out stock valuations forecast which direction the volatility would move.
Brisk turn over, but restricted to a few premium chips, while a large number of remaining securities are sparely traded or not traded at all
There are other unique features equally significant. The turnover in the cash segment in NSE during January 2004 is stated as Rs.134268 Crores of rupees. But bulk of the turnover centers round a select few premium chips (securities) and there is no widespread distribution of stocks traded. There could be in fact less volatility in the price movement of these securities. The value of lot size can be within reach of the small investor unlike the premium chips, where it can anything near Rs.5 Lacs or more.
There is poor business turnover in Regional stock exchanges & declining trend of turn over in BSE
The third anomaly in the market is major trading takes place in NSE followed by BSE. These two exchanges have turned out to be market for trading high value securities. The system of screen trading and establishment of nation wide trading centres by these two stock exchanges have driven out of business the Regional Stock Exchanges numbering over 20
About 50% of the securities listed in BSE and the Regional stock exchanges have turn illiquid with nil or very poor trading
There is brisk trading in the two stock exchanges, but such trading is restricted to a few premium chips. The stock markets in India are plagued by severe illiquidity with trading being very infrequent and concentrated in only a few stocks. Around 85% of the trading volume on the B.S.E is from the Group 'A' securities which constitute about 88 companies. In fact, 32% of the volume is due to only the 10 most active issues. In contrast, about 25% of the listed companies do not trade even once a year. Latest statistics indicate that between March 31, 1996 and March 31, '03, the number of illiquid scrips rose by 34%. The number of scrips traded has fallen to 2,283 from about 3,443. Only 8.8% of companies listed on the BSE traded for less than 10 days. About 67% of companies listed were traded for more than 100 days during '02-03, while 32.3% of the stocks were traded for less than 100 days. Not more than 2,500 scrips were traded in 1999-2000, while the number of scrips traded during 2000-01 and 2001-02 were about 1,800 and 1,600 respectively. The task of devising a strategy to bring to life the large number of illquid stocks is receiving the urgent attention of the market regulator and stock exchanges.
The market regulator have to confront with these problems in the coming months
This is a bird's eye view of the securities market about which we will be discussing more in detail in the ensuing articles
