CHAPTER 7

INDIAN CAPITAL MARKETS AND THE REGULATORY AUTHORITIES

7.1 Introduction

The formal operations of the stock exchanges in India commenced in 1875.

Throughout the various phases of development in the capital market, lot of changes
have taken place in trading operations. When this was happening, slowly, the small
investors also were attracted towards the capital market. Still the securities market was
largely unregulated, particularly, prior to independence.

The major thrust of the securities market reforms has been on the improvement of
the operations and efficiency of the markets. For this purpose, some structural changes
have also taken place. In order to make capital markets more vibrant and dynamic,
there always needs an efficient intermediation. Without the presence of effective
regulators, the capital market may find it difficult to develop in a healthy manner. The
several aspects like disclosures, listing, liquidity accounting, trading, and settlement
have to be taken care of for the purpose of maintaining the interest of the investors in
the market. The regulatory body must be present in the market to ensure the investor
protection as well as in promotion and growth of capital market.

While the Reserve Bank of India regulates the banking sector in India, the financial
sector in general and stock exchanges in particular are regulated by the Securities and
Exchange Board of India. Apart from this, there are the authorities like Ministry of
Company Affairs, Ministry of Finance also which govern the market to some extent.
This chapter presents the status of regulatory authorities in Indian capital market. An
attempt has also been made in this chapter to present the recommendations and the
implications of some of the committees which were specifically entrusted the task for
developing capital market from time to time. Naturally, SEBI has a dominant role in
regulating the Indian capital market and hence more emphasis is given to SEBI, its
functions, objectives, formation and its role in promotion and development of capital
markets in India.

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Since the capital markets have gone through various scams, the need was felt to
regulate and control the activities of the capital markets from time to time. Whenever,
some irregularities were found, the steps have been taken to avoid such things in
future. But this was a reactive and not proactive action in the past. Though the
‘damage control’ was done from time to time, fewer efforts were focused on
preventive measures which may be clear from the following discussion.

7.2 Early Attempts of Regulating Capital Markets in India.

The first move towards regulating the Indian capital market was fallout of the panic
which was created in 1865 in BSE. ‘Share mania’ crisis of 1865 left the brokers, small
investors, bankers and creditors in chaos. This was the first time that Indian capital
markets underwent a crash. In response to this, a ‘Bill for the relief of Insolvent
Debtors in the Presidency of Bombay’ was introduced in then Bombay Legislative
Council’.1 This bill was sent to the ‘Select Committee’, but it remained unnoticed for
almost two years. In September 1867, the Bill was withdrawn and thus, the first
attempt to regulate the Indian capital markets failed.

In the second half of the nineteenth century and during the first half of the twentieth
century, the developments in the capital market in India had a low profile. At that
time, India was ruled by the British Empire, which did not give significance to the
aspect of regulation of the capital market. Before independence, i.e. prior to 1947,
Britishers did not institute any legal mechanism or system which could regulate the
capital markets in India.

After independence, Indian government decided to have a socialistic economy. The

government tried to control the entire economy with various laws which were enacted
during 1950’s. Due to this, the need to control the capital markets was also not felt
seriously. As the markets were not open for foreign as well as private players, the need
for regulation did not arise strongly. But due to increasing participation of small
investors, numbers of scams, manipulation by brokers the policy makers were forced
to think about regulatory system in the Indian capital market.

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During the late 19th century, the then government asked BSE to have self regulatory
system involving rules and guidelines about the functioning of the stock exchange. But
the brokers and stock exchanges refused to come out with any such regulatory
system.2

After the First World War, again the capital markets experienced ups and downs and
this resulted into formation of Atlay committee. This Committee recommended the
strong regulatory network in the Indian capital market. The Bombay Securities and
Contract Act was enacted in 1925. Further, in 1947, the same act was replaced by
Capital Issues Control Act.

Around the same time i.e. in 1949, the Reserve Bank of India which was formed in
1935, was nationalized and became a central bank to regulate the banking sector in
India. Though the RBI dose not directly regulate or govern the Indian capital market,
the policy measures introduced by RBI have implications for the Indian capital
markets. The role of the RBI is significant in promotion and development of the
banking sector in India. It announces monetary and credit policies from time to time
keeping in mind the requirements of the economy as the whole. E.g. in order to control
the inflation, the RBI may come out with increase in interest rates or repo/reverse repo
rates. But due to such move the stock markets may experience downtrend due to
increase in financial charges reducing profit margins of the corporates. Though it does
not regulate the stock exchanges, the RBI has an influence over the stock exchanges in
the country.

In 1956, the Indian Companies Act was passed by the parliament. This act is one of
the important functionaries in governing the entire corporate sector. From the
formation of the companies, to the liquidation of the companies, everything is
regulated and governed as per the provisions of the Companies Act, 1956. As the
corporate sector is connected with the stock exchanges, the compliance of Companies
Act provisions is a primary requisite for all the companies desiring to raise the capital
from the markets. Thus, with enacting the Companies Act, India started controlling
and regulating corporate sector which results into healthy environment in the capital
market.
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When these developments were taking place, the rules and procedure to be followed
for recognition of the stock exchanges were also needed to be formalized. With this
intention, Securities Contracts (Regulation) Rules, 1957 came into existence. 3 These
rules contained provisions relating to recognition of stock exchanges, periodical
returns and annual reports of these exchanges, listing requirements etc. These rules
were made statutory standardized formalities which should be applicable to all
recognized stock exchanges. Later on, after SEBI’s formation, some of these
provisions were shifted and SEBI was made more powerful to apply these rules.

In 1969, the Central Government nationalized 14 major commercial banks with an

objective to increase penetration of banking services in various parts of the country.
This move had not much impact immediately on the capital market, but due to
increases awareness and reach of banks, people started thinking about savings and
investment which ultimately supports the capital market.

7.3 Emergence of SEBI as a Regulatory Authority

Though the formal decision to open the economy was introduced in 1991-92, the plan
of opening up of the economy was being prepared in the late 1980’s. Similarly, to
cope up with the problems associated with opening up of the economy, a committee
was formed by the Central Government in 1985 under the Chairmanship of Mr.
M.J.Pherwani. In 1985, the idea of an autonomous, full fledged and strong capital
market regulator was recommended by the Committee. The then Prime Minister, late
Rajiv Gandhi, in 1987, announced this strong regulation and actually, in 1988,
Securities and Exchange Board of India, came into existence. Initially, the SEBI was
not given the autonomy of a full fledged regulator of the Indian capital markets. But
eventually, SEBI Act was passed in the year 1992 by the Parliament and thus the
authority of an autonomous, independent regulator was given to the SEBI. In its two
decades of functioning as a regulatory authority of Indian Capital markets, SEBI has
totally changed the way of functioning of the stock exchanges. As the liberalization
process required a strong regulator due to whims of capital movement, the SEBI
continues to play a dominant role in controlling and developing the capital market in
India.
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After its setting up in April 1988, SEBI was given some interim functions. These
functions were-

-To collect information and advice the Government on matters relating to capital
markets.

-To license and to regulate merchant bankers, mutual funds etc.

-To prepare legal drafts for regulatory and developmental role

-To perform any other function entrusted by the Government regarding regulation of
capital market.

After three years of setting up of SEBI, in 1992, statutory powers were entrusted to
SEBI. In order to curb the malpractices, SEBI was promoted on the same lines in
which Securities Exchange Commission (SEC) was promoted in the USA. Some of
the malpractices which frequently disturbed the primary market were
brokers/consultants’ speculative motive, grey market, delay in listing and allotment in
shares. Apart from this, some malpractices frequently found in the secondary markets
(stock exchanges) were lack of transparency, delay in settlement, insider trading etc.
In order to curb these malpractices, a strong regulator was needed for development of
capital market.

SEBI, which has been entrusted with such regulatory functions, was formed with the
following broad objectives.

-Investor protection to ensure steady flow of savings into the capital market.

-Ensuring the fair practices by the issuers of securities, namely companies so that they
can raise resources at least cost.

-Promotion and efficient services by brokers, merchant bankers and other

intermediaries so that they become competitive and professional.

7.4 Organization of SEBI

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Though initially SEBI carried out the functions of supervisory and advisory body of
the Government, later on legislation giving powers to the SEBI was passed. SEBI Act
gave powers to SEBI in order to protect interests of the investors in securities and to
promote the development of and to regulate the securities market and other matters
connected therewith or incidental there to.

The whole SEBI Act has been divided into 7 chapters.

Chapter I deals with preliminaries and definitions.

Chapter II gives the details of establishment, incorporation, administration and

management of the Board of Directors.

Chapter III provides for the transfer of assets and liabilities of the existing Boards to
the new Board, under the Act.

Chapter IV incorporates an important part of powers and functions of SEBI. These

powers and functions are spread out to all corners of the primary and secondary
markets.

Chapter V deals with registration of stock brokers, sub-brokers, transfer agents etc. on
which action was already taken by the SEBI, since May,’ 92.

Chapter VI gives the provisions regarding accounts, finance, audit, penalties and
adjudication. It also elaborates authority, establishment, jurisdiction and procedure of
appellate tribunal.

Chapter VII gives the power to issue direction to the SEBI. The final power over SEBI
rest with the Central Government as Central Government is an authority for appeal
against SEBI’s order. If it is necessary to supercede the SEBI and to call for returns
and reports, Central Government may use its powers which are given in Chapter VII

As per Section 11 of the SEBI Act, the functions which are entrusted to the SEBI are
classified into Regulatory and Developmental Functions.

Regulatory Functions

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-Registration of brokers, sub-brokers and other players in the market.

-Registration of collective investment schemes and mutual funds

-Regulation of stock exchanges, merchant banks and portfolio managers.

-Prohibition of all fraudulent and unfair trade practices.

-Controlling insider trading and take-over bids and imposing penalties for such
practices.

Developmental Functions

-Investor education

-Training of intermediaries

-Promotion of fair practices and a code of conduct for all Self Regulatory
Organizations (SROs)

-Conducting research and publishing information useful to all market participants.

SEBI: Organizational Structure

After getting a status of an autonomous and strong regulatory authority, SEBI started
functioning to protect the interest of the investors. While performing the functions,
SEBI works through six different departments which are entrusted specific functions.
These departments are-

i. The Primary Market Department- It looks after policy matters and regulatory issues
regarding primary markets, registration, merchant bankers, portfolio management
services, underwriters etc.

ii. The Issue Management Department- It is responsible for granting the prospectuses
and letters of offers for public issue. It coordinates with primary market policy for
monitoring of issue related intermediaries.

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iii. The Secondary Market Department- It looks after regulatory issues for secondary
market. It also regulates the registration and monitors the members of stock
exchanges. Monitoring of insider trading, price movement, EDP and SEBI’s data base
is also maintained by this Department.

The Institutional Investors’ Department- It stresses on policy, registration, regulation

and monitoring of FIIs, domestic mutual funds, international relations etc.

The Legal Department- It looks after all the legal matters arising out of functioning of
the SEBI. While issuing various guidelines or regulating the financial markets, some
legal complications may come out which are looked after by the Legal Department.

The Investigation Department- It carries out inspection and investigation. Such

investigation may be on its own or as ordered by the Central Government.

The Head Office of the SEBI is situated at Mumbai (Bandra Kurla Complex). It also
has three regional offices at New Delhi, Kolkata and Chennai for northern, eastern and
southern region respectively.

SEBI, being a Board , has the composition of nine distinguished members. The
composition is as under.

-The Chairman

(The Chairman of SEBI is appointed by the Central Government. While appointing the
Chairman and the nominated members, the Central Government has to see that these
persons should have ability, integrity and standing who have shown capacity in
dealing with problems of the securities markets. They are required to have good
knowledge or experience in administration also.)

-Two officials from Central Government (These are nominated from Ministry of
Finance, Law and Company Affairs)

-One official is nominated by the Reserve bank of India

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-Five other members are nominated by the Central Government out of which at least
three should be whole time members.

(While nominating these members of the Board, it is emphasized that these members
have good knowledge or experience in the areas of finance, law, accountancy,
economics etc.)

Investor protection is the major responsibility of the SEBI. For this purpose lot of
guidelines have been issued by the SEBI to control and regulate the capital market in
India and thereby, to shoulder the responsibility of protecting the interest of the
investors in the capital market. To perform this job, SEBI has formed two non
statutory advisory committees- Primary Market Advisory Committee and Secondary
Market Advisory Committee. These committees have members from the categories
like market players, recognized investors’ associations and other eminent persons in
the financial markets.

SEBI is also a member of IOSCO (International Organization of Securities

Commissions) which is an international body comprising of financial market
regulators throughout the world. SEBI also is actively engaged in the Development
Committee of IOSCO which provides platform for the regulators from emerging
markets to share the views and exchange of information with each other.

Presently, SEBI has following members in its organizational structure

Mr. U.K. Sinha ……………...Chairman

Mr. Prashant Saran……………Member

Mr. Rajeev Kumar Agarwal…..Member

Mr.Thomas Mathew ………….Member

Mr. V.K. Jairath……………….Member

Mr. Naved Masood……………Member

Mr. Anand Sinha……………....Member

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From its inception, SEBI’s chairmen from time to time have significantly contributed
in the development and emergence of SEBI as a regulatory authority in Indian Capital
Markets. The following chart gives details about former chairmen and their respective
tenure.

Table No.7.1 SEBI’s Chairmen and their Tenure

Name of the Chairman Tenure

Mr. U.K. Sinha 18th February, 2011 till date

Mr. C.B. Bhave 19th February, 2008 to 17th February, 2011

Mr. M. Damodaran 18th February, 2005 to 18th February, 2008

Mr. G.N. Bajpai 20th February, 2002 to 18th February, 2005

Mr. D.R. Mehta 21st February, 1995 to 20th February, 2002

Mr. S.S. Nadkarni 17th January, 1994 to 31st January, 1995

Mr. G.V. Ramakrishna 24th August, 1990 to 17th January, 1994

Dr. S.A. Dave 12th April, 1988 to 23rd August, 1990

7.5 Powers of SEBI

Earlier, there were various other acts to govern the capital market. Capital Issues
(Control) Act, 1947 played an important role in functioning of the Indian Capital
Market since India’s independence. But after SEBI’s inception, the said Act was
repealed by the Capital Issues (Control) Act, 1992. Now most of the powers under this
Act are administered by SEBI. The powers of SEBI were further wide spread when
Parliament passed the SEBI (Amendment) Bill, 2002. The Bill gave the powers to the
SEBI like seizure of books of accounts, imposing penalty of Rs.25 Crores on insider
trading, penalty of Rs. 1 Lakh per day where small investors are cheated, suspension
of governors of stock exchanges. Even the investigating agencies to be appointed were
also entrusted on SEBI’s governing board.

Some of the other powers entrusted to the SEBI are as follows.

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-Power to call periodical returns from recognized stock exchanges

-Power to call any information or explanation from recognized stock exchanges or

their members

-Power to direct enquiries to be made in relation to affairs of stock exchanges or their

members.

-Power to grant approval to bye – laws of recognized stock exchanges.

-Power to make or amend bye – laws of recognized stock exchanges.

-Power to compel listing of securities by public companies.

-Power to control and regulate stock exchanges.

-Power to grant registration to market intermediaries.

-Power to levy fees or other charges for carrying out the purpose of regulation.

-Power to declare applicability of section 17 of the Securities Contract (Regulation)

Act in any state or area to grant licenses to dealers in securities.

-Power to demand books of accounts and other documents.

-Power to summon and enforce attendance of persons and examining them on oath.

-Power to issue orders/ directions in the interest of the investors.

-Power to hear appeals by companies against the decision of stock exchanges for
refusal of listing their securities.

-Power to suspend or cancel registration of any intermediary.

7.6 Evaluation of SEBI’s Role in Indian Capital Market.

While evaluating the SEBI’s role in the Indian capital market, some important aspects
have been considered. Registration of intermediaries, redressal of grievances of
investors, primary market regulation, secondary market regulation , regulation of

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takeovers, emergence of institutional investors, maintaining fairness and integrity of
the markets are some of the aspects on the basis of which SEBI’s role has been
examined as regulator in capital market in India.

7.6.1.Registration of Intermediaries-

SEBI started the registration of intermediaries in the securities markets for the first
time, by making registration mandatory for categories like merchant bankers,
registrars and transfer agents, brokers, bankers to the issue, debenture trustees,
underwriters, portfolio managers, mutual funds, depositories, foreign institutional
investors etc. Following table gives some highlights regarding registration of
intermediaries from SEBI’s inception.

Table No.7.2 Registration of Intermediaries

Intermediaries 1993 1997 2001 2005 2009

Stock Exchanges 21 22 23 22 19

Brokers (Including sub 5,290 13,025 24,066 27,503 76,789

brokers)

Merchant Bankers 74 1,163 233 128 134

Registrars and Transfer - 386 186 83 71

Agents

Bankers to the Issue - 80 69 59 51

Debenture Trustees - 27 37 35 30

Underwriters - 38 57 59 19

Portfolio Managers 28 16 39 84 232

Mutual Funds - 37 39 39 44

Depositories - 1 2 2 2

Depository Participants - 28 335 477 714

Foreign Institutional - - 1 14 129

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Investors

Source: Annual Report, SEBI (Various Issues)

From Table No.7.2, it can be seen that there is substantial growth in the number of
registered bookers. Especially, the sub brokers registered under SEBI increased in
number sharply during 2005-2009. Due to derecognition of three stock exchanges, the
number of stock exchanges declined to 19 in the year 2009. Portfolio managers,
depository participants and FIIs have shown a remarkable increase after 2005. But
registrars and transfer agents, underwriters, bankers to the issue, merchant bankers
show a declining trend. This implies more reliance on brokers as intermediaries in the
market.

7.6.2. Redressal of Investors Grievances

SEBI has instituted a separate mechanism for redressal of the investors’ grievances.
Due to increasing interest and number of transactions in the capital markets, there was
also increase in number of grievances so also the redressed grievances.

Table No 7.3

Grievances Received and Redressed by SEBI

Year Grievances Received Grievances Redressed Redressal Rate

(cumulative) (cumulative) (%)

1991-92 18,794 4,061 21.61

1994-95 12,29,853 7,18,366 51.35

1997-98 23,35,232 21,42,438 91.74

2000-01 26,29,882 25,01,801 95.13

2003-04 27,85,660 26,32,632 94.51

2006-07 29,07,053 27,40,959 94.28

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2008-09 30,19,560 28,48,566 94.34

Source: Annual Report, SEBI, 2009

The Table No.7.3 gives an idea about grievances received by SEBI and redressal
thereof from 1991-92 to 2008-09. It is clear that initially, the redressal rate was too
low i.e. 21.61%. This is understandable as SEBI was newly instituted and with less
power given to it, SEBI found it difficult to redress the grievances in time. But
especially after 1997-98, the redressal rate is almost around 95 % which means that
SEBI has been very effective in grievance redressal. Thus, the basic objective of SEBI
i.e. to protect the interest of the investors is near to its fulfillment.

7.6.3 Primary Markets

The major step initiated by SEBI in regard to primary market was improvement in
disclosure norms. The full and fair disclosure by issuers of securities is directed by
SEBI for protection of investors’ interest. The various guidelines have been issued by
SEBI in relation to raising the capital from the primary market. Filing of offer
documents has been made mandatory by SEBI and it has also prohibited companies
from giving future projections.

Table No.7.4

Offer documents received and observations* issued by SEBI

Year Offer documents Observations issued Amount involved

received (Rs.Crores)

1999-2000 165 125 12,021

2000-01 197 181 11,156

2001-02 34 28 9,229

2002-03 28 23 4,982

2003-04 98 58 17,872

2004-05 88 59 12,559

2005-06 198 149 5,945

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2006-07 185 140 9,455

Source :- Handbook on Indian Securities Market, 2010, SEBI, pp.76-78

*Observations are the queries raised by the SEBI. If SEBI thinks it necessary to have
additional information from any clause in the offer document, it can issue such
observations. The issue of capital is allowed only after fulfillment and satisfactory
compliance towards these queries raised by the SEBI.

The Table No.7.4 shows that there are number of observations issued by SEBI
consistently, over the last decade to the issuers of securities in primary market.
Amount involved in those observations does not correlate with number of
observations, but observations issued against offer documents received by SEBI for
companies is quiet significant. Therefore, it can be observed from this table that SEBI
has been objectively scrutinizing the offer documents and thus, trying to maintain
fairness in primary market.

7.6.4 Secondary Markets

In order to have cordial development of capital market, investors must have

confidence in the market. In the secondary markets or stock exchanges, the major
reform directed by SEBI is introduction of online and screen based trading system.
SEBI has also introduced capital adequacy norms for the brokers to avoid liquidity
problems. Dematerialization and rolling settlement are some other features which are
advised by SEBI to all stock exchanges. The listing requirements are also directed by
SEBI to be amended by stock exchanges. Quarterly disclosure of financial
performance has also been made mandatory.

Table No.7.5

Secondary Markets after SEBI’s Emergence

1992 2010

Trading Mechanism Open outcry Screen Based Trading System

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Transfer of shares Physical Online trading

Settlement cycle T+7 T+2

No.of depositories - 2

Depository participants - 714

Stock Exchanges (cash) 21 19

Stock Exchanges - 03
(derivatives)

Listed companies (no) 2861 4929

No. of trades (Lakhs) 126 5408

Demat securities (Lakhs) - 7,39,287

Demat turnover (Rs.crore) - 10,99,871

Liquidity 25.1 58.0

Source : www.sebi.org.in/SMBM_2008... extracted on 01.07.2011

Table No.7.5 gives highlights about how the secondary markets have changed the
functioning of stock exchanges. From open outcry, the markets shifted to online and
screen based trading system. There has been faster settlement and clearing. This is also
directed by SEBI and Settlement Guarantee Fund has also been established. Due to the
dematerialization of securities, with the help of depositories, markets have become
more efficient. This can be seen from more number of trades, more turnover and
increased number of demat securities. This has, to some extent, tried to solve the
problem of liquidity.

7.6.5 Regulation on Takeovers/ Acquisitions

SEBI has notified ‘takeover code’ to provide exit route to minority shareholders in the
process of takeover. This code regulates the process of substantial acquisition of
shares in a listed company. Prior to this code, this process was a part of listing
provision. But now, SEBI’s regulatory functions extend the scope towards such
takeovers/acquisitions. The code makes it mandatory for the acquirer to make a public
offer to acquire a further 20 % equity in the target company. The tender offer should
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be handled by a SEBI registered merchant banker. For this purpose, SEBI has directed
acquirers to open an escrow account before making public offer. In case of non-
compliance, such proceeds of escrow account shall be forfeited as per the provisions
of Takeover Code.

Table No.7.6

Takeovers and Acquisitions

Year Open Offer* Exemption#

(No.) Amount (No.) Amount

(Rs.Crores)
(Rs.Crores)

1997-98 40 578 93 3502

1998-99 66 1014 201 1888

1999-00 75 461 252 4677

2000-01 77 1372 248 4873

2001-02 81 3610 276 2539

2002-03 88 6389 238 2428

2003-04 65 1595 171 1436

2004-05 61 4632 212 6958

2005-06 102 4078 245 17132

2006-07 87 11352 223 18608

2007-08 114 28706 232 6458

2008-09 99 4711 227 10502

Source : SEBI : Handbook of Statistics on Indian Securities Market, pp.65

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*Open offer stands for the interest shown by the parties for takeover. This further is
given in quantity as well as amount involved in all these proposed takeovers.

#Exemption is the concession granted to the bidders from open offer as per the
takeover code issued by SEBI. The column of ‘No’ gives the number of cases while the
amount involved in those cases is given in the next column.

The Table No. 7.6 reveals that due to the SEBI’s ‘Takeover code’, more and more
acquirers had to make public offer. This offer straightway comes under the purview of
SEBI. With the advent of this ‘Takeover code’, SEBI is in a position to protect
companies from unwarranted acquisitions. Some unscrupulous acquirers were
identified with this particular move. This has helped in providing relief to minority
shareholders against malafide acquisitions or takeovers.

7.7 Committees on the Issues Relating to the Development in The Capital

Markets in India.

Throughout the various phases of development, SEBI has come out with guidelines
and directions on specific issues of capital markets. While these directions were given
and guidelines being formulated, some committees were appointed to give
recommendations and also to take review of the present system prevailing in the
market. Subsequent paragraphs highlight some of the major committees with reference
to their terms of reference, methodology, constitution and important
recommendations.

7.7.1 Report of the Expert Committee

Appointed for Interpretation of Turnover (1992)4 (Appendix B 1)

Methodology

The committee, in its meetings, carefully considered the questions raised by various
stock exchanges, and also the replies given to SEBI explaining the practices followed
by brokers and stock exchanges. The committee also reviewed SEBI’s guidelines in

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respect of stock brokers and sub brokers. The committee met brokers, jobbers, traders,
financers to make specific recommendations.

Major Recommendations

1. For jobbing transactions identified and included in the turnover as proposed in the
report, the scale of fees to be reduced to 1/200 %.

2. In the case of carry forward, renewal of badla transactions the offsetting entries may
not be counted as a part of turnover.

3. For government securities and PSU bonds and units traded in similar manner, the
turnover may be calculated separately and a registration fee of 1/1000 % be charged
on such turnover rather than present scale of 1/100 %

4. If brokers are carrying out transactions in securities without reporting it to the stock
exchange, those transactions would be taken into account for the purpose of turnover
and the broker would be responsible for registration fee.

5. Stock exchanges to ensure that registration fees are properly calculated and paid to
the SEBI.

6. The trade put through on other stock exchanges, would be included in the turnover
of that exchange.

7. The activities like underwriting and collection of deposits would not be taken into
account for the purpose of calculating the turnover of the brokers.

7.7.2.Report of the Review Committee on

SEBI (Merchant Bankers) Rules and Regulations, 19925(Appendix B 2)

Methodology

Rules existing before 1992 contained provisions which were more oriented towards
issue management but merchant banking business also needed to be covered under the
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regulations. The committee, therefore, examined the rules and regulations and
deliberated upon bringing out the rules and regulations to control the business of
merchant bankers in the capital markets.

Major Recommendations

1. There should be a single regulation governing the merchant bankers. To avoid

multiplicity of regulations, the existing rules to be rationalized and combined.

2. Similarly, to avoid confusion and to have more simplicity, ‘underwriting’ to be

made permitted activity and to be brought under SEBI’s merchant bankers rules.

3. Merchant bankers be allowed to take up both: fund based and non fund based
activities with the changing market conditions. This may include services like
insurance broking, margin lending etc.

4. Net worth requirement should be regarded as a function of level of activity of the

merchant banker. ‘Net worth’ for this purpose should be reckoned as per definition
given by ICAI which states ‘net worth is paid up capital plus free reserves, provided
however, that any fictitious assets will be reduced from the computation of net worth.’

5. The processing fees to be levied are to be adjusted against registration fees in case
of grant of registration. Processing at the time of renewal of registration to be more
simple i.e. automatic renewal on payment of stipulated fee.

7.7.3 Report of the B.D.Shah Committee on Short Sales (November,1996)6

(Appendix B 3)

Methodology

The committee met the different market participants such as stock brokers, office
bearers of stock exchanges, representatives from financial institutions etc. The
committee sought explanation from these market players regarding possible modalities
to regulate short sales and stock lending mechanism along with its operational
modalities.

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Major Recommendations

1. The stock exchanges having online trading system would modify their trading
software within three months and the other stock exchanges which are to begin online
trading, would incorporate necessary features in the software.

2. In the event of a broker having declared a transaction as ‘sale for delivery’ and
subsequently fails to give deliveries, a penalty of 2 % of auction price to be charged on
the broker for the quantity undelivered.

3. The client / broker selling the shares at one stock exchange against his outstanding
purchase position at another stock exchange will be considered as ‘short sale’.

4. SEBI to review any increase/ decrease in the margins as also the threshold limits in
future depending upon the market conditions.

5. Any addition or deletion in the list of the identified scrips for the purpose of
disclosure or for imposition of margin could be reviewed by SEBI depending upon the
market conditions.

6. Operational modalities of the stock lending mechanism needs to be redefined to

take care of eligibility of the participants, tax issues, confidentiality of information,
limit of lending of stocks by financial institutions.

7.7.4 Justice P.N. Bhagwati Committee Report on

Takeovers (January, 1997)7 (Appendix B 4)

Methodology

The committee held a number of meetings to deliberate extensively on all the existing
provisions of regulations and on the issues which came up before SEBI for
administration in financial sector. The committee had deliberations with market
participants, industrialists who have made acquisitions of companies, intermediaries
involved in corporate takeovers. Apart from these, financial and investment
institutions and financial journalists were also invited for deliberations.

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Major Recommendations

1. SEBI should appoint a panel comprising experts of SEBI and the recommendations
of the panel may be taken into account by SEBI while considering exemptions to be
covered under the regulations.

2. Indirect acquisition of control of a company should require compliance to the

regulations and this needs to be clarified by way of suitable explanation.

3. Apart from disclosures about individual holdings, disclosures about persons in

control of management of the company and their shareholding interest in the company
should also be called for.

4. Public announcement be released in all editions of an English national daily with

wide circulation, one Hindi national daily and a regional daily having circulation at the
place where the registered office of the target company is situated and at the place of
stock exchanges where shares of such company are frequently traded.

5. The highest and average price paid by the acquirer of shares of target company
during the twelve month period prior to the date of public announcement be disclosed
in public announcement.

6. Disclosure requirements be clearly and elaborately specified by the Board.

7. The acquirer shall make firm arrangements for finance required and disclose full
details of the arrangements both in the public announcement and in the letter of offer.

8. SEBI Act be amended to expand the scope of adjudication and additionally, the
provisions should be made in company law for personal disqualification of directors of
the acquirer who violates the provisions of the regulations.

7.7.5 Report of Justice Dhanuka Committee on Securities Laws (1998)8

(Appendix B 5)

Methodology
229
The committee sent out a questionnaire to a number of agencies, intermediaries,
market participants and experts and received comments from them. A number of
meetings were held to deliberate extensively upon the issues of new securities law. All
the presidents of the stock exchanges in India, professional agencies like ICSI were
also consulted for this purpose. The status of securities law in other countries was also
compared with Indian context. Finally, the committee came out with the report in three
parts. First part highlights recommendations of the committee and proposed new
legislation. The second part contains the report in relation to Companies Bill 97. The
third part relates with Depositories Act and relevant recommendations.

Major Recommendations

1. There should be a comprehensive legislative framework and the requisite legislative

provisions should support the market regulations.

2. Those pockets which have been excluded from the present legislation have to be
included in the scope of new legislation.

3. Investor protection should be of paramount importance while framing any

amendment/legislation.

4. There has to be a strong market regulator and all the aspects relating to the
regulation be brought under the same.

5. The delegated legislation should be unambiguously expressed for proper

implementation and enforcement.

6. The conflict amongst various legislations be removed and harmonized.

7. The role of SEBI as a regulatory authority be recognized so that it supplements the

development of securities markets.

8. SEBI must be subjected to administrative law jurisprudence in India. It must be

reasonably and fairly given the powers but at the same time, wherever SEBI exceeds
its authority, provisions of the law should provide for correcting SEBI.

230
9. All the market participants which are presently beyond the purview of securities
laws, be brought under these laws and be regulated by SEBI.

10. SEBI to consider organizing investors’ education programmes, for the benefit of
general public.

11. The stock exchanges can entrust the function of clearing house to a clearing
corporation separately constituted.

12. The depository should not be liable for the loss caused to the beneficial owner as a
result of fraud or negligence of the participant.

13. The appeal against the order of SEBI shall lie with the Securities Appellate
Tribunal (SAT) and not to the Central Government.

14. Whenever there is a transfer of securities into physical forms (rematerializing), no

stamp duty is to be leviable.

15. The stamp duty levied at the stage of issue of securities should be made uniform.

16. Pending dematerialization, the securities of an investor entrusted, be held in trust

by the participant (DP).

7.7.6 Report of the Committee on

Carry Forward Under Rolling Settlement (1999)9 (Appendix B 6)

Methodology

The committee had lot of deliberations among themselves. The members exchanged
their views with each other through fax and e-mail continuously. Mr.Himanshu Kazi
and Mr. Ravi Narain also provided valuable inputs and they attended the meetings also
by invitation. The committee also sought the explanation from the stock exchanges.

Major Recommendations

1. There should be a scrip wise position limit, but for ease of implementation, this
position limit should be achieved through the use of prohibitively high margins.
231
2. Stock exchanges should make the necessary software changes to incorporate client
codes in all transactions within a short period of time.

3. The exchanges implementing carry forward should obtain SEBI approval for the
eligibility criteria, process of choosing the scrips for carry forward list and disclosure/
transparency provisions relating to the above.

4. Intra-day margins should be levied on carry forward trades if and only if they are
levied on normal trades.

5. The weekly carry forward system under rolling settlements may be introduced as
carry forward product to make it easier for the market to understand and use the
product.

6. Exchanges must be allowed to introduce futures contracts in individual stocks

directly.

7. Both the products daily and weekly carry forward, be permitted and the exchanges
were free to decide to introduce either of the both or neither. This choice should be left
to the market place.

Notes of Dissent.

Prof. J.R. Varma – The weekly carry forward product will migrate to a full fledged
futures market. Hence, the product will cease to be regulated as carry forward product
and it will be regulated as futures/ derivatives contract.

Dr. R.H. Patil – The weekly carry forward product should be supported by risk
mechanism similar to the futures market.

Mr. Anand Rathi – The weekly carry forward product would amount to introduction of
carry forward system without the checks and balances which modified carry forward
system (MCFS) approved by SEBI has imposed.

7.7.7 Report of the Committee on

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 Internet Based Securities Trading and Services (1999)10 (Appendix B 7)

Methodology

The committee took stock of the developments in the use of internet in securities
business at the international level and within the country. The matters related to
encryption of messages are considered / handled by the committee along with
Department of Telecommunication.

Major Recommendations

1. SEBI registered stock brokers interested in providing internet based trading services
will be required to apply to the respective stock exchange for a formal permission. The
stock exchange, before giving such permission to brokers, shall ensure the fulfillment
of net worth requirements, operational and system requirements, risk management
system.

2. The security measures to be made mandatory like user id, passwords, firewalls,
socket level security etc.

3. Advance security products used for E- Commerce may be made optional like
SMART cards, second level passwords etc.

4. Policy and regulations of Dept. of Telecommunications, will govern the level of

encryption

5. Brokers should follow the similar logic / priorities used by the exchange to treat
client orders.

6. Brokers should make periodic reporting to the exchange as specified by the

exchange.

7. 128 bit encryption should be allowed to be freely used by the DOT, GOI to ensure
safety, security and integrity as well as for maintaining investor trust in the internet
based trading system. (Encryption is a system where a message is encoded into bits of
binary system. This code is sent to the requisite recipient only so that he can decode

233
the same and the message becomes readable. 128 bit encryption adds more safety
while transmitting the messages electronically)

7.7.8 Report of the Kumar Mangalam Birla Committee

On Corporate Governance (2000)11 (Appendix B 8)

Methodology

There are a number of reports and codes which have already been published
internationally. The committee reviewed all the best internationally accepted practices
in corporate governance. Though the committee reviewed these reports, the primary
objective was to view corporate governance from the point of view of investors and
shareholders. The committee identified the three key constituents viz. shareholders,
board of directors and management with reference to their roles and responsibilities in
corporate governance. The draft report was sent to chambers of commerce, investors’
associations, stock exchanges, ICAI, ICSI, AMFI, merchant bankers’ association,
academicians, foreign investors etc.

Major Recommendations

1. It is necessary that the ‘code’ is also reviewed from time to time, keeping pace with
changing expectations of the investors, shareholders and other stakeholders and with
increasing sophistication achieved in capital market.

2. A non-executive chairman should be entitled to maintain a chairman’s office at the

company’s expenses to enable him to discharge the duties effectively.

3. A qualified and independent audit committee should be set up by the board of a

company. This should facilitate credibility in financial disclosures of a company.

4. Audit committee to be chaired by an independent director and should have a

company secretary as committee’s secretary.

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5. Audit committee should meet at least thrice a year. The quorum in the meeting
should be either two members or one-third of committee members, whichever is
higher.

6. Audit committee should review the financial statement, adequacy of internal control
system, findings of internal investigations, discussion with external auditor.

7. A director should not be a member in more than 10 committees or act as a chairman

of more than five committees across all companies in which he is a director.

8. Management discussion and analysis report should form part of the annual report to
the shareholders.

9. Disclosures must be made by the management to the board relating to all material
financial transactions, where they have personal interests that may have potential
conflict with the interest of the company at large.

10. The half yearly declaration of financial performance including summary of the
significant events in the last six months, should be sent to each household of
shareholders.

11. The board committee under the chairmanship of non-executive director, to look
into the redressing of shareholder complains.

12. The company should arrange to obtain a certificate from the auditors of the
company regarding compliance of mandatory recommendations and annexe the
certificate with the director’s report, which is sent annually to all the shareholders of
the company. The same certificate should also be sent to the stock exchanges along
with the annual returns filed by the company.

7.7.9 Report of the Committee on Reduction in the Cost

for the Investors relating to Demat Operations, (June, 2002)12 (Appendix B 9)

Methodology

235
The committee had in all four meetings wherein there were extensive discussions
regarding the question that whether there is a possibility of reduction in the cost for the
investor with regard to demat operations. The committee examined various charges
regarding demat operations especially charged by Depository Participants (DPs).
Before submitting the report and concluding the deliberations, the committee had a
survey of investors through the investors associations.

Major Recommendations

1. The ways and means may be found out to make the companies bear at least a
substantial part of the cost of dematerialization to provide relief to the investors as the
companies are saving lot of costs of printing, postage etc.

2. Simultaneous transfer-cum-demat scheme should be abolished as it is prone to

misuse.

3. Sick companies or BIFR cases should not be included in compulsory demat scrips
as the cost involved in such companies for demat operations may be too large.

4. SEBI may approach Department of Telecommunications for reduction in the

charges that are payable by the DPs who avail the facility of WAN.

5. DPs may be allowed to take money by way of reasonable advance from the clients
or any other suitable safeguards.

6. DPs may have account closing charges at their discretion, but if a DP introduces
such charges for the first time, it should give sufficient time to the clients to exit.

7. SEBI may evolve a mechanism to address the issue of management of risk on demat
shares.

Notes of dissent (Mr. Manubhai Shah)

1. As the committee was working on the cost aspect, it was improper and inconsistent
on the part of depositories to raise their charges during the tenure of committee.

236
2. The insurance policy taken by the depositories to cover the liability of the
depository should be made available to ‘Investor Protection Groups’ recognized by
SEBI

7.7.10 Report of the SEBI’s Accounting Standards Committee

(August, 2002)13 (Appendix B 10)

Methodology

The committee had deliberations with representatives from stock exchanges for
functioning requirements. The members of ICAI were consulted for examining
accounting practices and audit qualifications. Similarly Dept. of Company Affairs was
also consulted for reviewing the regulatory requirements. AMFI, as a financial
intermediary was also consulted by the committee to come out with specific
suggestions.

Major Recommendations

1. It was not desirable to prescribe quarterly disclosure of loans, advances and

investments as well as prohibiting companies from having more than one subsidiary
investment company.

2. The corporate governance code to be reviewed to consider the provisions of parent-

subsidiary company board composition.

3. The risk report shall be prepared, discussed by the Board of Directors of the
company and published in the annual report.

4. The stock exchanges shall be required to inform SEBI in cases where companies
fail to remove audit qualifications.

5. SEBI to constitute an Advisory Committee to examine the cases reported by the

stock exchanges where the companies have failed to remove audit qualifications.

237
6. SEBI may refer the matter to Dept. of Company Affairs to initiate necessary action
under Companies Act and also to ICAI in cases where actions are required against the
auditors of the company.

7.7.11 Report of the Committee on Formation of an ‘SRO’

(Self Regulatory Organization ) for Merchant Bankers.(2002)14 (Appendix B 11)

Methodology

The committee had three meetings where the terms of reference were elaborated/
discussed. Mr. Y.H. Malegam was also invited in one of the meetings, to have expert
advice in the matter. The self regulatory models of various types like- voluntary,
statutory, member-defined, supervised and self- managed -all were discussed at length
during the committee meetings.

Major Recommendations

1. A member-defined SRO model in the short term and a supervised SRO model in the
medium and long term be applied as it would be effective and efficient.

2. Membership of the SRO should be a pre-condition for registration and renewal of

registration as merchant banker with SEBI. On the recommendation of the SRO, SEBI
would issue an in-principle approval to the merchant banker.

3. The SRO should have an independent CEO appointed by its Board.

4. The SRO should have a disciplinary committee comprising five members viz.
chairman, any director of the SRO, two independent directors, an independent member
with judiciary experience/ background.

5. SEBI to provide the details of all registered merchant bankers to facilitate the
calculation of fees to be charged from merchant bankers as registration charges. A
reasonable interest income from corpus of SRO would also be available to meet the
cost of SRO.

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6. SEBI to have the powers to dismantle the SRO’s board of directors or derecognize
the body.

7.7.12 Report of the Group on Corporatisation and Demutualisation of Stock

Exchanges (2002)15(Appendix B 12)

Methodology

The group had deliberations among the members as well as with other legal experts,
stock exchanges and market participants. The group also considered the experiences of
other countries where stock exchanges were already demutualised like Austria,
Hongkong, U.K., Singapore etc. In India NSE has been looked as a demutualised or
corporatized stock exchange and hence the group felt it helpful that capital,
organizational structure and management of NSE be compared with other stock
exchanges in the world.

Major Recommendations

1. The stock exchanges which are setup as association of persons and those which are
setup as companies limited by guarantee be converted into companies limited by
shares.

2. A common model for corporatization and demutualization be adopted for all the
stock exchanges.

3. The provisions of Income Tax Act and Securities Contract (Regulation) Act have to
be amended as the stock exchanges would shift from ‘not for profit entity’ to ‘for
profit Company’.

4. The stakeholders viz. shareholders, brokers, and investing public through the
regulatory body should be equally represented on the governing board of a
demutualised exchange.

5. Adequate disclosures about the directors’ background should be provided to the

shareholders at annual general meetings and annual report.

239
6. The demutualised stock exchanges should follow the relevant norms of corporate
governance applicable to listed companies.

7. The stock exchange should appoint a CEO who shall be responsible for day to day
activities of the exchange and in addition, voluntarily it can have a CFO.

8. The concept of regional stock exchanges needs to be abolished.

9. The stock exchanges could explore the possibility of merger for alternative use of
infrastructure. For this purpose, the stock exchanges may use the ‘Euronext model.’

7.7.13 Report of the Committee for Implementation of

Straight Through Processing (STP)* in Indian Markets (2003)16 (Appendix B 13)

*STP involves electronically capturing and processing transactions in one pass, from
the point of first ‘deal’ to final settlement. It results in reduced settlement cycle,
greater transparency, reduced risk, more timely processing and improves attractiveness
of market.

Methodology

The committee confined its discussion to STP only. It has deliberated on the issues
involved in reducing manual intervention in the trade process, reduction of paper and
standardization of messaging protocols. The committee also discussed issues like
RTGS, stamp duty and other ancillary issues. The committee also invited other
persons from various organizations and associations to provide inputs on various
issues. The committee also studied a few international experiences in achieving STP.

Major Recommendations

1. There has to be online connectivity between the depositories to permit easier

settlement.

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2. Recognition be given to the electronic contract notes as a legal document as an
alternative to paper based contract notes.

3. ISO 15022 standards be adopted for financial messaging.

4. The existing laws/regulation/bye-laws etc. to be amended to provide recognition of

paper less form of data and records.

5. The issues relating to payment system have to be addressed by RBI as SEBI does
not govern or regulate payment system.

6. There is need to have RTGS system so that settlement of funds takes place faster. If
it requires a time period, EFT facility may be increased in terms of its coverage and
value so that the payments may be made faster.

7.7.14 Report of the Committee on Reallocation of Shares in the Matter of IPO

Irregularities. (2007-08)17 (Appendix B 14)

Methodology

The committee deliberated over several sittings and invited relevant parties and
experts in the field to take valuable inputs. The committee’s deliberations and analysis
was confined to 21 IPOs specified by SEBI. These IPOs were taken out of public
issues during 2003-2005.

Major Recommendations

1. For the purpose of reallocation or payment to these deprived applicants only the
closing price at which these shares were listed on the first day of listing will be
considered.

2. The reallocation should therefore be quantified in monetary terms and the

reallocation value for each deprived applicant should be initially computed based upon
shares but subsequently converted into the amount of gains associated with such
shares.

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3. A ‘spillover’ method of reallocation of shares is to be applied. Totally unsuccessful
applicants shall be reallocated shares equally from the available pool, till they each
receive the minimum shares allocated to the lowest category in the IPO.

4. An administrator be appointed by SEBI to handle the process.

5. The reallocation or payment, to the valid deprived applicants, may be made as far as
possible as per the bank records in their demat accounts.

7.7.15 The Report of the Committee on

Model Byelaws of Stock Exchanges.18 (Appendix B 15)

Methodology

The committee extensively reviewed the existing laws governing the stock exchanges.
Initially the draft of the rules was prepared by Dr. S.P. Narang and Mr. V.K. Agarwal.
This draft was the basis of discussions during the committee meetings and
deliberations. Apart from that, rules of BSE were also referred to develop a set of
model rules. Then the draft was hosted on the SEBI’s website for public comments.
After deliberating upon these comments, the recommendations were submitted finally
to the SEBI.

Major Recommendations

1. The bye-laws to be made or amended should be published in gazette of India as well

as respective state. Apart from this these laws to be displayed on the websites of SEBI
and the respective stock exchanges.

2. The stock exchanges be empowered to impose a penalty of Rs. 5 Lakhs for violation
of the rules.

3. Trading members to be made responsible to issue contract notes directly to their

clients hence, issue of confirmation memos by sub-brokers to their clients, be
suspended.

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4. The system of registration of sub-brokers be modified and to be brought under
jurisdiction of respective stock exchange.

5. The primary responsibility for the discharge of surveillance and investigation

functions to rest with stock exchanges.

6. The custodians may be made responsible and liable as professional clearing

members for which they have to acquire professional clearing membership of the
stock exchanges.

7. Investors’ Protection Fund and Investors’ Services Fund be set up pursuant to

guidelines issued by Govt. of India and SEBI.

7.7.16 Report of the Primary Market Advisory Committee19(Appendix B 16)

Methodology

The committee had meetings at regular intervals and accordingly deliberations have
taken place extensively. The committee also received representations from merchant
bankers and other participants in the primary market regarding the various changes
required in SEBI’s guidelines to make them more investor friendly. Some of the
suggestions discussed in the committee meetings were recommended to SEBI.

Major Recommendations

1.The company may be allowed to disclose the floor price, just prior to the bid
opening date, instead of ‘Red herring prospectus’, by way of public advertisement.

2. SEBI may consider providing flexibility to the issuer company by permitting them
to indicate a 20 % price band. Issuer may be given the flexibility to revise the price
band during the bidding period.

3. The issuer may be allowed to have a closed book building. i. e. the book will not be
made public.

4. SEBI may examine the requirement to delete the provision that a company make an
IPO of less than 25 % of paid up capital with minimum 60 % allocation to Q. I. B.*
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*Q.I.B. stands for Qualified Institutional Bidder which include banks, financial
institutions and other bidders who apply for the IPO. These bidders are registered
with SEBI and they also fulfill the eligibility criterion for qualifying as a bidder in
public issue. Therefore they are known as ‘Qualified’ Institutional Bidders (Q.I.B.s)
5. Black out period for research should be restated from 40 days before issue opening
till 40 days after issue closing.

6. The draft and final offer document may be made available on the lead manager’s
and company’s website till listing.

7. ‘Retail investor’ may be redefined in terms of the amount applied for, instead of the
number of shares applied for.

8. SEBI should consider not having a mandatory requirement of 90 % subscription and

allowing the companies to disclose in the prospectus, the amount of minimum
subscription they require and sources for meeting the shortfall.

7.7.17 Report of the Secondary Market Advisory Committee20(Appendix B 17)

Methodology

The committee held in all nine meetings during June-July, 2002. The committee, in
those meetings deliberated upon the issues like liquidity, auction, investor protection
fund, scrutiny of trading activity etc. The issues of short sales, margin trading and
securities lending and borrowing were also considered and discussed in the committee
meetings. Finally, the committee came out with some recommendations for
development in secondary market.

Major Recommendations

1. The short sale be defined as failure to deliver securities at the time of settlement and
this should be monitored at the time of delivery and settlement.

2. The short sales should be regulated by putting in place a sound and efficient
securities lending and borrowing mechanism.

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3. The model of margin trading may be considered for introduction immediately as it
does not require legal amendments/ clarifications.

4. There should not be exchange traded model of margin trading.

5. The model of securities lending for handling settlement shortages by clearing

house / clearing corporation may be considered for introduction.

6. The return of the borrowed securities by the clearing corporation/ clearing house
should be independent of the normal settlement.

7. The existing scheme may be allowed to continue for a period of six months and the
feedback thereon may be obtained from the participants before revising the scheme.

7.7.18 Report of the Malegam Committee on

Disclosure Requirements in Offer Documents21(Appendix B 18)

Methodology

The committee studied the existing rules/regulation in regard to disclosure

requirements. The committee had 25 meetings for deliberations about the disclosure
requirements in offer documents. The committee’s approach was based on the
principle of investors’ protection. The committee reviewed the existing rules and
regulations extensively and suggested the further requirements. The representatives of
stock exchanges, FICCI, investors’ association, chartered accountants were also
invited for deliberations. The representations of Department of Company Affairs,
ASSOCHAM were also invited for committee’s deliberations.

Major Recommendations

1. Risk factors should be determined on the basis of their materiality. Materiality

should be decided by taking the consideration of events which may be collectively
material events, qualitatively material events and potential material events in future.

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2. Risk factors should appear in the offer document in the following manner: risk
envisaged by the management and how these risks are proposed to be addressed.

3. There should be a provision for some minimum financial commitment from

qualified Institutional Brokers and the withdrawal from QIBs should not be allowed
after the closure of the issue.

4. A company shall not be allowed to come out with a public issue unless at least 75 %
of the means of finance are to be raised from public issue.

5. Only one standard financial unit should be used in the offer document.

6. The issuer company to include in the offer documents, the financial statements
prepared on the basis of more than one accounting standard, to disclose all material
facts/events.

7. The draft offer document shall be submitted to SEBI needs to be approved and
signed by the Board of Directors of company.

8. Differentiation should be made in the funds being raised for a financial purpose like
fixed assets and working capital. The requirement should particularly be stated very
clearly and specifically.

9. The initial decision as to whether the issue should be permitted may be taken by
SEBI.

10. If more than one merchant banker is associated with the public issue, the
responsibility of each merchant banker is to be clearly disclosed and demarcated.

7.7.19 Report of the

Takeover Regulations Advisory Committee (July, 2010)22 (Appendix B 19)

Methodology

The committee felt that views from the public on as many issues as possible should be
considered while undertaking a review of such an important corporate activity area. A
246
press release was issued seeking suggestions and inputs in a structured manner from
the public. The committee has also taken into consideration the prevailing practices
and key regulatory requirements relating to takeovers.

Major Recommendations

1. The acquirer promoter / shareholders shall be asked to disclose their acquisition on

periodic as well as transaction specific basis.

2. Unless the acquirer declares an intention in public statement, the acquirer shall be
debarred from alienating any material assets of the target company for two years.

3. The independent directors on the board of directors of the target company should
make a reasoned recommendation on the open offer.

4. If a competing offer is made, there shall be no appointments of directors during the

offer period.

5. An open offer to be withdrawn where any stipulated condition is not met for reasons
outside the reasonable control of the acquirer.

6. Where a change in control over the target company occurs, shareholders of the
target company ought to rightfully get an adequate exit opportunity.

7. The initial acquisition threshold for a mandatory open offer be raised to 25 % of the
voting capital of the target company.

8. Every open offer of substantial acquisition ought to be for every share held by all
shareholders of the target company, as on expected date of the close of the tendering
period.

7.7.20 Report of the Committee on Review of Ownership and Governance of

Market Infrastructure Institutions’ (November,2010)23 (Appendix B 20)

Methodology

247
The committee decided to adopt consultative strategy to have benefit of views of all
the stakeholders, viz. market infrastructure institutions, shareholders, industry
associations, investors and general public. The discussions were also held with
representatives of NSE, BSE, NSDL, CDSL, LIC, MCX and others. The committee
also examined global experience concerning ownership and governance norms of
MIIs.

Major Recommendations

1. The concept of dispersed ownership to be favoured for the well being of the stock
exchanges.

2. Domestic institutions registered in India having a net worth of Rs.1,000 Crores or

more be permitted to be anchor institutional investors for stock exchanges for 10
years.

3. Clearing corporations and depositories not to be allowed to invest in other class of

MIIs.

4. At least 51 % of the paid up equity capital of the clearing corporation should be

held by one or more recognized stock exchanges.

5. No trading / clearing member shall be allowed on the board of a stock exchange.

6. All transactions in securities of the board members of the MIIs and their family
have to be disclosed to the board of the MIIs.

7. Appointment of compliance officer shall be mandatory for stock exchanges and

clearing corporations. The compliance officer shall immediately and independently
report to SEBI, any instance of non- compliance.

8. Working of the MII should be reviewed again by SEBI, after five years once the
suggestion made by the committee is implemented.

7.7.21 Report of The Abid Hussain Committee on

Development of Capital Markets (1985)24

248
Major Recommendations

1. Creation of two-tier stock exchanges along with fiscal measures to streamline the
stock market.

2. Merchant bankers to be made more responsible and accountable.

3. Merchant bankers should enter into a tie up with the brokers, to quote floor price.

4. The complicated and cumbersome procedures of transferring the shares to be

simplified.

5. A highly reputed national level institution to be set up to undertake multiple

memberships in stock exchanges throughout the country.

6. New instruments such as non-voting shares with higher dividends be opened so as

to reduce the fear of capturing the management by purchasing the shares.

7. In order to finance the buying and selling of shares, provision of institutional

financing be made through commercial banks.

7.7.22 Report of The Patel Committee on the

Functioning of Stock Exchanges (1985)25

Major Recommendations

1. Only authorized clerks of the members be permitted to enter the trading ring.

2. The monitoring department or surveillance department of the stock exchange should

watch the price movements and take necessary action, if required to control excessive
speculation.

3. In case of any disputes on trading floor between members and their authorized
assistants, the floor committee shall officially intervene and give judgment in the
dispute.

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4. The operations department of the stock exchange shall supervise the operations,
make announcement at the time of trading, suspension of trading, collection of
quotation etc.

5. There has to be Customers’ Protection Fund and insurance cover to the member of
stock exchanges.

7.7.23 Report of the M. J. Pherwani Committee (1991)26

Major Recommendations

1. There should be some criteria for setting up new stock exchange, which will
develop the National Market System in the country.

2. To strengthen the move towards professionalization of the capital market as also to

provide nation-wide securities trading facilities to investors.

3. To set up a model stock exchange viz. National Stock Exchange.

4. NSE to have license of Additional Trading Floor (ATF) instead of multiplying the
number of stock exchanges in the country.

5. Infrastructure in terms of space, telecommunication, computerization, online

processing, and library for the ‘National Market’ be set up by NSE.

6. By the end of trading day, the exchange system will give out rates and list of
completed transactions for each trading member.

7. Only large and medium sized companies and PSUs to be listed on this exchange.

8. There shall be completely automated system in terms of both trading and settlement
procedures.

9. Compulsory market makers/jobbers to provide liquidity and ready market.

10. The problems of lack of liquidity, inefficient and outdated trading system, outdated
settlement system to be removed by establishment of NSE which would ensure equal

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access to investors all over the country and provides a fair, efficient and transparent
securities market to investors using electronic trading system.

7.7.24 Report of the Committee on Financial System (1991)27

Major Recommendations

1. Improvement in the flexibility and operational efficiency of the markets.

2. Strengthening power to SEBI to make it a strong regulatory authority in Indian

capital markets

3. Vetting the powers of Capital Control Issues Act to SEBI to enable SEBI to perform
supervisory and regulatory functions.

4. Deregulate and liberalize the operations in the capital markets.

7.7.25 Report of the Dave Committee (1996)28

Major Recommendations

1. The companies ineligible for listing on the other stock exchanges should be
provided listing on OTCEI.

2. The companies with a paid up capital of less than Rs.10 Crores, should be listed on
OTCEI to provide liquidity.

3. The upper limit of Rs. 25 Crores for listing on OTCEI, should be removed and
made at par with other stock exchanges.

4. Trading in the equity of all unlisted companies shall be channelized through

OTCEI, as mutual funds, FIs and FFIs trade in them.

5. Companies delisted on other stock exchanges and those with an offer on ‘TAP’
system, should be allowed to be listed only on OTCEI.

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6. There should be a shift from to T+3 to T+7 for the purpose of settlement. This is
particularly relevant in respect of permitted securities traded on other exchanges on
T+7 basis.

7. The promoters should play a more active role in increasing the number of
companies listed and traded.

8. The market making requirements on the sponsors should be liberalized. Issue with a
paid up capital of Rs. 10 Crores should attract compulsory market making. The higher
the paid up capital, the lower is the need for holding inventory by the market makers.

9. The efforts should be made to increase volumes on the OTCEI so as to make it a

viable alternative to other exchange.

7.8 Conclusion

The regulatory authorities in Indian capital markets have been instrumental in the
development of Indian capital markets. Initially, the capital markets in India were
grossly non regulated. As the people attracted towards the capital market were less in
number, the need to regulate these markets was not also felt seriously. During the
initial phase of development of capital markets in India, the then British Government
did not give adequate attention to regulate the capital market. But immediately after
independence, Capital Issues (Control) Act was passed as first attempt of regulation of
Indian capital markets. Though this Act was just a step further to earlier Bombay
Securities and Contract Act of 1925, some significant provisions were enacted in the
law to govern the capital market. In 1949, the RBI was nationalized and made the
Central Bank to regulate the banking sector in India. As there was no other separate
body for regulating financial sector, RBI was also expected to play an important role
in financial sector. The policy measures taken by the RBI to control and regulate
banking sector and economy, as a whole, have direct and indirect implications on the
functioning of stock exchanges in India. Further, in 1956, the Companies Act was
passed and further in 1969, major commercial banks were nationalized. The enactment
of the Companies Act was a major landmark as the Act contains the provisions

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relating to formation and liquidation of companies which raise the capital through the
capital markets.

The major step in regulation of Indian capital market was establishment of SEBI in the
year 1988 which started the functioning from 1992 as a statutory authority in
regulating the Indian capital market. Since last two decades, SEBI has been significant
as a regulatory authority. Though initially, SEBI was reactive, gradually, it became a
strong regulator in financial sector in India. Now, SEBI has been looked as a strong
promotional and developmental authority in Indian capital markets. SEBI has come
out with a number of guidelines on various aspects related to the capital market.
Especially, SEBI has concentrated on investors’ protection and accordingly it has
worked to regulate the market. Apart from issue of guidelines, lot of committees were
appointed by the SEBI from time to time to give recommendations on various critical
issues. The reports of most of these committees have been accepted and accordingly
amendments are made in the existing procedures and laws in the capital market from
time to time.

Recently, some more acts were also enacted like Depositories Act and some earlier
acts like Capital Issues (Control) Act were abolished. This step was taken in line with
the new developments taken place especially after the globalization. But during all
these developments, SEBI has emerged as a strong regulatory authority in
development of capital markets in India.

A careful review of the recommendations of various committees referred to above

clearly highlights the sincerity and integrity of the SEBI in making Indian capital
market more inclusive, transparent, safe, quick and reflective of important influences
emerging from forces governing evolution of Indian economy and aspirations of
investing population at the same time absorbing good and refuting bad from within
and building up for a global financial hub.

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