Capital Markets

CAPITAL MARKETS

Neelam Tandon

Introduction              

Efficient capital markets are a critical component for any developed economy The key to developing effective capital markets as an engine of growth is to design facilitating regulatory structures Indian capital markets today are amongst the best regulated markets providing efficient trading and settlement infrastructure, high levels of disclosure and fostering an environment for innovation The regulatory framework has kept pace with the significant growth in the securities markets and can be benchmarked with markets in developed nations Increasing integration with global markets will be the key agenda going forward as Indian corporates expand their presence across the globe and companies in the region look at listing in India While events during the past decade have resulted in strengthening of the regulatory framework, the environment is proactive and continues to develop with a strong industry interface and open minded approach

PRIMARY MARKETS         

Abolition of Controller of Capital Issues in 1992 Constitution of Securities and Exchange Board of India (SEBI) as the apex regulator for capital markets Free pricing of equity Introduction of book building for raising capital Relaxation in equity dilution norms allowing large unlisted firms esp. in the technology sector to list in Indian markets Progressive changes in the entry norms enabling all companies to access markets but subject to high disclosure norms and QIB participation

Secondary Markets               

Electronic trading - Setting up of National Stock Exchange (NSE) in 1992 Demutualization of stock exchanges - Corporatization - Separation of clearing and trading functions - Broad basing of the governing bodies Dematerialization of securities - Safe and speedy settlement systems Introduction of Rolling Settlement System - Progressed from T + 5 days to T + 2 days; India is the only major market to have achieved this milestone in such a short span of time - Despite high volatility resulting from global events, natural disasters etc. markets have continued to operate without any disruption Derivative trading - Introduction of futures and options on both indices and individual stocks

Why Self Regulation?               

SROs can enforce ethical standards beyond the requirements of government regulations SROs may have considerable depth and expertise regarding market operations and practices Can respond more quickly and flexibly to changes in market conditions International Experience: National Association of Securities Dealers (NASD) - leading private-sector provider of financial regulatory services - Oversees the activities of more than 5,100 brokerage firms, approximately 138,820 branch offices and more than 659,080 registered securities representatives - Licenses individuals and admits firms to the industry - writes rules to govern their behavior examines them for regulatory compliance and disciplines those who fail to comply - oversee and regulate trading in securities - operate the largest securities dispute resolution forum in the world 13

SROs In India                 

Association of Mutual Funds in India (AMFI) - Apex body of asset management companies - Aims to define, maintain high professional and ethical standards in mutual fund industry Association of Merchant Bankers of India (AMBI) - Aims to recommend and regulate healthy business practices among merchant bankers Fixed Income Money Market and Derivatives Association of India (FIMMDA) - Interacts with regulators and undertakes development activities in the fixed income money markets and derivatives arena Central Listing Authority - Conceptualized to act as the agency for processing applications for listing and give recommendations Steps that need to be taken - Regulatory regime to make appropriate use of existing Self-Regulatory Organizations (SROs) - SROs to exercise direct oversight and responsibility for their area of competence - SROs subject to regulation and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities

Way Ahead.. Restricted Offerings and IDRs             

Changes in SEBI Take Over Code - Harmonization of DIP Guidelines, Takeover Regulations and Delisting guidelines so that takeovers become more smooth - Hostile takeovers should not be discouraged in case of underperforming companies - Norms relating to inter-se transfer among Indian and foreign promoter should be eased by relaxing the pricing norms Clarity with regards to “Promoter/Public Shareholding” - SEBI take over code defines “Public Shareholding” as shares held by persons other than Promoters - Recent amendment to clause 40A of the listing agreement defines “Public Shareholding” as excluding the promoters shareholding and shares underlying ADRs/GDRs - Clear guidance required as regards to entry/exit of a person as Promoter

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Securitization - Pass Through Certificates (PTCs) should be allowed for listing to create liquidity for securitized instruments - Disclosure requirements to be eased for listing of privately placed PTCs and role of SEBI has to be limited to public issue of PTCs Shares with differential voting rights - Concept of shares with differential voting rights including non-voting shares can be introduced in the Indian Securities Market which can be synchronised with relevant provisions of the Companies Act and Listing Guidelines - Mature companies can deliver value to shareholders through issue of tracking stock and passing on benefits of a growing business unit - Non-voting shares can act as a defense mechanism against a hostile takeover

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Clarity with Regards “Private Equity Investors” - Private Equity investors need to be treated as ‘Financial Investors’ and not as ‘Strategic Investors’ requiring compliance as per the SEBI take over code - This treatment would give impetus to small and upcoming enterprises Hedge Funds - Indian Regulators should recognize hedge funds as class of investors and they should be registered as sub-accounts or FIIs - Registration of hedge funds would enable the regulators to look at the structure and the people behind them - Debt funds and distressed debt funds