EMERGING SCENARIO IN THE CAPITAL MARKET AND SEBI'S ROLE

Summary

Delivered as a session at the Forum of Free Enterprise on 28 June 1994 and published shortly thereafter, V.H. Pandya’s address surveys the Indian capital market in the third year of the 1991 economic reforms, written from the perspective of an insider — Pandya retired only days later as Senior Executive Director of the Securities and Exchange Board of India (SEBI). He situates the capital market within a transformed macroeconomy: an annual growth rate of about 5.5 percent through the 1980s, a domestic savings pool of roughly Rs. 1,750 billion, primary issuance leaping from around Rs. 90 crores a year in the late 1970s to Rs. 22,000 crores in 1993-94, market capitalisation rising from Rs. 6,750 crores in 1980 to over Rs. 340,000 crores in 1993-94, and the investor population swelling from about 2 million to around 40 million.

The core of the pamphlet is a stocktaking of SEBI’s regulatory architecture as it was being built. Pandya describes the Government’s decision in February 1992 to give SEBI statutory recognition, the simultaneous repeal of the Capital Issues (Control) Act and removal of pricing controls, and SEBI’s twin charter — investor protection as first priority and market development as second. He walks through the primary-market measures (registration and code of conduct for merchant bankers, underwriters, and registrars; redesigned prospectus formats; mandatory risk-factor disclosure; the abridged-prospectus Memorandum; the ‘Stockinvest’ instrument introduced in March 1992 to address allotment delays; rationalisation of promoters’ contribution and reservations; firm-allotment and proportionate-allotment norms; Euro issues by way of GDRs and Euro-Convertibles totalling about US$ 2.5 billion by March 1994; Code of Advertisement and prudential norms for the now-15 Mutual Funds; registration of over 195 FIIs with about Rs. 6,000 crores invested).

On the secondary market, Pandya describes the older, member-broker-dominated stock exchanges as ‘inadequate, non transparent, hardly regulated and rarely geared for investor protection,’ and reports SEBI’s interventions: reconstitution of governing boards to give equal representation to non-broker public representatives, capital-adequacy norms for brokers, compulsory contract notes, weekly settlement cycles for non-specified scrips, regulation of broker-client relationships, and notification of insider-trading regulations under SCRA. He closes with a survey of investor-protection machinery — grievance redressal in conjunction with Investors’ Associations and Consumer Fora, public representatives overseeing allotments, the March 1994 guidance series on Grey Market operations, and a planned TV/video Investor Education Programme — and a legislative review covering the Capital Issues (Control) Act 1947 (repealed 1992), the Securities Contracts (Regulation) Act 1956, and the SEBI Act 1992 itself, noting that SEBI has exclusive power over the primary market but only concurrent power over the secondary market and Companies Act matters.

Key points

• Frames India’s post-1991 capital market within a transformed macroeconomy — 5.5 percent average annual growth in the 1980s, a domestic savings pool of about Rs. 1,750 billion, and a primary-issuance jump from Rs. 90 crores a year in the late 1970s to Rs. 22,000 crores in 1993-94.

• Argues that primary and secondary markets are ‘equally important while not being mutually exclusive’: a vibrant primary market depends on a transparent and disciplined secondary market that supplies liquidity.

• Locates SEBI’s mandate in the Narasimham Committee-inspired financial-sector reforms, with statutory recognition granted in February 1992 alongside the abolition of the Capital Issues (Control) Act and pricing controls.

• Describes SEBI’s charter as investor protection first, market development second — and recounts how this drove the redesign of prospectus formats, mandatory risk-factor disclosures, the abridged Memorandum, and a Code of Conduct for merchant bankers, underwriters, and registrars.

• Highlights the ‘Stockinvest’ instrument introduced in March 1992 to compensate investors for funds blocked by oversubscription under the earlier pricing-control regime.

• Tracks the new institutional architecture — over 450 registered merchant bankers, 125+ registrars, 195+ FIIs investing about Rs. 6,000 crores, 15 mutual funds, 21 stock exchanges including the OTCEI and the National Stock Exchange, and Euro-market issuance of about US$ 2.5 billion by March 1994.

• Diagnoses the legacy secondary market as ‘inadequate, non transparent, hardly regulated and rarely geared for investor protection,’ and outlines reconstitution of governing boards, capital-adequacy norms for brokers, compulsory contract notes, weekly settlement for non-specified scrips, and insider-trading regulations under SCRA.

• Closes with a legislative map (Capital Issues (Control) Act 1947 repealed in May 1992; Securities Contracts (Regulation) Act 1956; SEBI Act 1992) and notes the asymmetry that SEBI has exclusive power over the primary market but only concurrent power over the secondary market and Companies Act matters.