Measures Regarding Capital

Market Reforms: 5 Measures

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.”

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Malhotra Committee Purpose: Insurance Sector Reforms

Recommendation:

Government stake in the insurance companies to brought down to 50%.

Government should take over the holdings of GIC and its subsidiaries so that these
subsidiaries can act Independent Corporation All the insurance companies should
give greater freedom to operate.

Competition :

 Private companies with a minimum paid up capital of rs.1 billion should

allowed to enter the industry.

 No company should deal in both life and general insurance through in a single
entity.

 Foreign companies may be allowed entering the industry in collaboration with

the domestic companies.

 Postal life Insurance should be allowed operating in the rural market.

 Only one state level life insurance company should allowed operating in each
state. The insurance Act should change.

 An insurance regulatory body should be set up.

 Controller of Insurance should be made independent.