Indian capital markets: Safeguarding investor growth

Capital investments by a firm, which are reform-driven could enhance productivity and offer various benefits, leading to an increase in investments

Published: 16, Nov 2018

The author is a Partner at Rajani Associates

Image: Shutterstock
Image: Shutterstock

Capital Markets in India
The capital markets in India have grown by leaps and bounds over the past two decades. The Securities & Exchange Board of India (Sebi) has afforded support and infrastructure to encourage their growth, and for this market there is no sky.

Our capital markets are quite modernised and are on par with the international best practices. There is no doubt that the Indian stock exchanges rank amongst the very best in the world, in terms of technology value and volume of business.

In India, the bourses launched online trading in stocks as early as the year 2000. With every person operating smartphones, the penetration of online trading and research on scrips has grown, and may one day be the preferred method of trading.

With the introduction of various facilities such as electronic voting and KYC (Know Your Client), trading is so much easier. The Sebi's move to dematerialise shares way back in 2006 has eased problems faced by brokers and investors, such as bad deliveries and forgery of share certificates. The settlement cycles have also became shorter. Now, even the price and volume data on the stocks to be instantly available to investors and brokers.

Today, investors are comfortable trading stocks online thanks to the availability of large troves of relevant information. Sebi's focus on the protection of the interests of retail investors has also added to the comfort, and investors today realise they are in safe hands, should the target company play foul.

Market regulator Sebi has also made it easier for foreign investors such as sovereign wealth funds, university funds and pension funds to invest in our country. It has issued regulations on issuance, listing and trading of debt securities to encourage mobilisation of resources through public issuance of debt.

Cross-holding in credit rating agencies
Recently, Sebi notified that cross-holding in credit rating agencies (CRA) will be capped at 10 percent and that no CRA would not have representation on the board of the other CRA. It also proposed raising the minimum net worth requirement to Rs 250,000,000 from the current Rs 50,000,000.

Any change in control which results from acquisition of shares or voting rights in a CRA will be subject to a Sebi approval. A promoter of a CRA may have to maintain a minimum 26 percent shareholding in the CRA for a period of three years and a foreign CRA must be incorporated in a Financial Task Force (FATF) jurisdiction and registered under their local law to be eligible to establish a CRA in India. Credit rating agencies may be permitted to withdraw the ratings, if the CRA has rated the instrument for a stipulated period and in the manner as may be specified.

This move would check the menace of 'rating shopping' and 'pick-and-choose' approach. The decision will raise the bar on the eligibility to set up a CRA and stipulate disclosures for issuers on their financial performance.

Unified Exchanges
From October 2018, Sebi has allowed the exchanges to trade in securities and commodity derivatives under one unified licence. Union Finance Minister Arun Jaitley, during his Union Budget speech early this year, proposed the integration of brokers and market participants in both asset classes.

A broker who deals in securities markets can buy, sell or deal in commodity derivatives without establishing a separate entity. This will reduce regulatory compliance and allow inter-operability of accounts, through which clients and brokers will benefit.

Sebi, however, will not rush in to allow unified commodity and stock exchanges. It will first release a consultation paper before moving in that direction.
Capital investments by a firm, which are reform-driven could enhance productivity and offer various benefits, leading to an increase in investments. The thrust on structural reforms and productivity parameters may help revive public and private investments. The moral cycle may be set in motion with a relentless pursuit for competitive and high productivity enterprises.

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