REGULATION OF THE CAPITAL MARKET AND THE ROLE OF SEBI

By G.V. RAMAKRISHNA

Summary

Based on a talk delivered on 17 September 1992 at the Forum of Free Enterprise in Bombay, G. V. Ramakrishna — then Chairman of the Securities & Exchange Board of India — surveys the Indian capital market a year into liberalisation. He argues that India’s economy must take off on two engines: exports, to retire external debt and finance imports, and capital markets, to channel household and institutional savings into productive use now that bureaucratic and public-sector intermediation is shrinking. Both engines, he insists, require an institutional substrate that India still lacks — a strong contract-law regime, an effective supervisory body, and observance of the spirit (not merely the letter) of regulation.

Ramakrishna anchors the case for a credible securities regulator in the history of the US SEC under Roosevelt, Landis, Douglas and Frankfurter, and in the IOSCO code of conduct adopted at Santiago, which India is observing ‘in the breach’. He notes that 69 of 70 IOSCO members — Mauritius, Malaysia and Indonesia among them — had statutory regulators before India did. SEBI itself, set up by administrative order in 1988, only became a statutory body in April 1992 after years of being called a ‘toothless tiger’. Despite India’s 6,500 listed companies, 21 exchanges, 15 million investors and a tenfold rise in annual capital raised during the eighties (from Rs. 200 to Rs. 10,000 crores), Ramakrishna stresses that quantitative growth has outrun qualitative integrity, exposing investors to fraud, weak disclosure and broken contracts.

The bulk of the address is a granular account of market-integrity pathologies SEBI confronts: a complaint volume that has grown from 500 a month in 1990 to 30,000 a month, of which only about 30% are redressible; issuers who hide abridged prospectuses behind perforated edges to avoid disclosing material information; employees’ quotas absorbing 98,000 applications at companies with 600–700 employees; ‘telephone directory’ applications using fictitious names; and Rs. 1,500 crores of 1991 refund money withheld by companies and their banks, prompting the Stockinvest scheme and litigation taken to the Supreme Court. He criticises the prevailing ‘zero sum’ framing that pits investor against issuer, calls for higher corporate ethics, and signals a shift from complaint-by-complaint redress to systemic reform of intermediaries — especially registrars to the issue, whom he identifies as the primary market’s weakest link.

Key points

• Frames Indian liberalisation as requiring two engines — exports and capital markets — once the role of government and public-sector finance is minimised.

• Argues that an orderly capital market presupposes the rule of law: strong contract law, effective supervision and speedy redressal, without which investors demand a risk premium that raises the cost of capital.

• Uses the US SEC’s evolution under Roosevelt, Landis, Douglas and Frankfurter, and the IOSCO Santiago code of conduct, as the institutional template India must catch up to.

• Notes that 69 of 70 IOSCO member countries — including Mauritius, Malaysia and Indonesia — had statutory securities regulators before India; SEBI became statutory only in April 1992.

• Quantifies the Indian market: 6,500 listed companies (second only to the USA), 21 exchanges, 15 million investors, and an increase in annual capital raised from Rs. 200 crores to Rs. 10,000 crores over the eighties.

• Reports a surge in investor complaints from 500 per month in 1990 to roughly 30,000 per month, with ~30% redressed; many of the rest involve sick, BIFR or fly-by-night companies.

• Catalogues specific malpractices: hidden or unreadable abridged prospectuses, abuse of the employees’ quota, telephone-directory applications, and non-return of Rs. 1,500 crores of 1991 oversubscription refunds — the impetus for the Stockinvest scheme.

• Rejects the ‘zero sum’ framing of issuer versus investor, calls for higher corporate ethics, and signals SEBI’s shift from individual complaint redressal to systemic reform of intermediaries, especially the registrar to the issue.

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