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Following article on”Security and Exchange Board of India and its impact” is part of our series on general awareness:
Security and Exchange Board of India (SEBI) was established in 1992 as an autonomous body under the SEBI Act 1992 with the objective of protecting the interests of investors in securities and to promote the development of the securities market as well as regulating them. Prior to SEBI, Controller of Capital Issues was the regulatory authority and it derived authority from the Capital Issues (Control) Act, 1947. While the corporates and governments raise resources from the securities market to meet their obligations or to make investments, the households representing investors invest their savings in securities.
The more liberalized a securities market is, the better is its impact on economic growth. Liberalization does not mean scrapping of all codes and statutes, but it means replacement of one set by another set of more liberal code or statute, which allows full freedom to economic agents, so that the liberalized markets operate in an efficient and fair manner and the risks of systemic failure are minimized. A major initiative of liberalization was the repeal of the Capital Issues (Control) Act, 1947 and enactment of SEBI Act in 1992. With this, Government’s control over issue of capital, pricing of the issues, fixing of premium and rates of interest on debentures etc. ceased and the market was allowed to allocate resources.
SEBI has three functions rolled into one body: quasi-legislative, quasi-judicial and quasi-executive. It drafts regulations in its legislative capacity, it conducts investigation and enforcement action in its executive function and it passes rulings and orders in its judicial capacity. Though this makes it very powerful, there is an appeal process to create accountability. There is a Securities Appellate Tribunal which is a three-member tribunal. A second appeal lies directly to the Supreme Court. Since its establishment, SEBI had introduced many reforms in the security market and ensured the fair trading practices in the market through judicious use of its power. The major impact on the security market seen after its establishment are as under-
Disclosure and Investor Protection (DIP) guidelines: In the interest of investors, SEBI issued Disclosure and Investor Protection (DIP) guidelines. The guidelines allow issuers, complying with the eligibility criteria, to issue securities at market determined rates. The market moved from merit based to disclosure based regulation.
Regulation: Its regulatory jurisdiction extends over corporates in the issuance of capital and transfer of securities, in addition to all intermediaries and persons associated with securities market. All market intermediaries are registered and regulated by SEBI. They are also required to appoint a compliance officer who is responsible for monitoring compliance with securities laws and for redressal of investor grievances.
Screen Based Trading: A major developmental initiative was a nation-wide on-line fully-automated screen based trading system (SBTS) where a member can punch into the computer quantities of securities and the prices at which he likes to transact and the transaction is executed as soon as it finds a matching sale or buy order from a counter party. SBTS electronically matches orders on a strict price/time priority and hence cut down on time, cost and risk of error, as well as on fraud resulting in improved operational efficiency. It allowed faster incorporation of price sensitive information into prevailing prices, thus increasing the informational efficiency of markets. It enabled market participants to see the full market on real-time, making the market transparent. It allowed a large number of participants, irrespective of their geographical locations, to trade with one another simultaneously, improving the depth and liquidity of the market – over 10,000 terminals creating waves by clicks from over 400 towns / cities in India. It provided full anonymity by accepting orders, big or small, from members without revealing their identity, thus providing equal access to everybody. It also provided a perfect audit trail, which helps to resolve disputes by logging in the trade execution process in entirety.
Trading Cycle: Earlier, the trading cycle varied from 14 days for specified securities to 30 days for others and settlement took another fortnight. Often this cycle was not adhered to. Many things could happen between entering into a trade and its performance providing incentives for either of the parties to go back on its promise. This had on several occasions led to defaults and risks in settlement. In order to reduce large open period, SEBI reduced the trade cycle to over a period of time to a week initially. Rolling settlement on T+5 basis was introduced from December 2001. T+5 gave way to T+3 from April 2002 and T+2 from April 2003.
Dematerialization: Initially trades were settled by physical movement of paper. This had two aspects. First, the settlement of trade in stock exchanges by delivery of shares by the seller and payment by the purchaser. The process of physically moving the securities from the seller to the ultimate buyer through the seller’s broker and buyer’s broker took time with the risk of delay somewhere along the chain. The second aspect related to transfer of shares in favor of the purchaser by the company. The system of transfer of ownership was grossly inefficient as every transfer involved physical movement of paper securities to the issuer for registration, with the change of ownership being evidenced by an endorsement on the security certificate. In many cases the process of transfer took much longer, and a significant proportion of transactions ended up as bad delivery due to faulty compliance of paper work. Theft, forgery, mutilation of certificates and other irregularities were rampant, and in addition the issuer had the right to refuse the transfer of a security. All this added to costs, and delays in settlement, restricted liquidity and made investor grievance redressal time consuming and at times intractable.
To obviate these problems, the Depositories Act, 1996 was passed to provide for the establishment of depositories in securities with the objective of ensuring free transferability of securities with speed, accuracy and security by (a) making securities of public limited companies freely transferable subject to certain exceptions; (b) dematerializing the securities in the depository mode; and (c) providing for maintenance of ownership records in a book entry form. In order to streamline both the stages of settlement process, the Act envisages transfer of ownership of securities electronically by book entry without making the securities move from person to person. Currently 99% of market capitalization is dematerialized and 99.9% of trades are settled by delivery
Anchor Investor: The concept of anchor investors was introduced by SEBI in June 2009. These are allotted shares a day before the issue opens for subscription and this comes with a lock-in clause of 30 days. The concept of anchor investors was introduced by Securities Exchange Board of India (SEBI) with the intention to improve the price discovery during Initial Public Offers (IPOs). The process was aimed at improving the investment opportunity for retail investors with the company. Since, anchor investors belong to the Qualified Institutional Buyers (QIBs) category they would be in a better position to gauge the fundamentals and the future prospects of the company. The company is required to get at least two anchor investors for an issue size of up to Rs 250 crore, and for issues bigger than that there are at least five.
Increase Retail Participation: To enable larger retail participation, SEBI has adopted a two-fold approach. The market watchdog has made sure that retail investors actually get an allotment in book-built IPOs. Hence, the 10% increase in the allocation for retail investors. But more significant is the change in the definition of what constitutes retail from those applying for up to 1,000 shares to applications for shares worth Rs 50,000 or less. This would ensure that 'retail' is truly retail.
Capital markets regulator SEBI in January 2012 announced that it will further reform the initial public offer (IPO) process and ensure that disclosure norms are made effective as the Indian financial markets undergo radical reforms to become globally competitive. It further stated that the industry should make efforts to channelize more savings into capital markets to fund capital requirements of various sectors. Only 4.6% of national savings are invested in capital markets.
SEBI is working continuously and in close co-ordination with the regulated and the government, to improve market design to bring in further efficiency and transparency to market and make available newer and newer products to meet the varying needs of market participants, while protecting investors in securities. The aim is to make Indian securities market a model for other jurisdictions to follow and make SEBI the most dynamic and respected regulator globally. Some of the recent initiatives taken by SEBI and which are in the pipeline are:
•Setting up a national institute to build a cadre of professionals to man the specialized functions in the securities market to ensure that any person or agent working with a market intermediary has the necessary knowledge and skill to render quality intermediation. For that matter, National Institute of Securities Markets (NISM) was established by SEBI in 2011 for capacity building among the stakeholders in the securities markets through financial literacy, professional education, enhancing governance standards and fostering policy research.
•Corporatize and demutualise exchanges where the ownership, management and trading rights would be with three different sets of people in order to avoid conflict of interest.
•Introduce market wide straight through processing from trade initiation to settlement.
•Migrate to T+1 rolling settlement.
•Continuously review and upgrade accounting standards, disclosures, corporate governance
Practices in the interest of investors.
•Continuously review and amend the various regulations to bring them in tune with dynamics
Of market requirements.
•Introduce new products in the market to meet all kinds of needs of market participants
Securities market allows people to do more with their savings and to do more with their ideas and talents than would otherwise be possible. Therefore SEBI must ensure that every citizen of the country participates in the securities market in some form or other and shares the prosperity. In doing so, it must continue to work to improve the functioning of the securities market to meet the challenges of the changing environment.
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