Capital market reformsCapital market reforms

Need for reformsNeed for reforms Unhealthy practicesUnhealthy practices High cost of new issuesHigh cost of new issues Exchanges dominated by elected member brokersExchanges dominated by elected member brokers Excessive speculative activityExcessive speculative activity Default by stock brokersDefault by stock brokers Frequent payment crisisFrequent payment crisis Disruption of market activityDisruption of market activity Inefficient and outdated trading systemInefficient and outdated trading system Inefficient risk management systemInefficient risk management system Margins were not enforced strictlyMargins were not enforced strictly Post trade settlement had serious drawbacksPost trade settlement had serious drawbacks Lack of investor protection guidelinesLack of investor protection guidelines

Policy developments in primary Policy developments in primary marketmarket

1. Issue of IDRs1. Issue of IDRs Issuer must be listed in home countryIssuer must be listed in home country Must not have barred by any regulatory authorityMust not have barred by any regulatory authority Should have a good track record of compliance of security Should have a good track record of compliance of security

market regulationmarket regulation SEBI stipulated the issue sizeSEBI stipulated the issue size Disclosures have to be made in the prospectus regarding:Disclosures have to be made in the prospectus regarding: general informationgeneral information disclaimer clausedisclaimer clause offering detailsoffering details risk factorsrisk factors Financial informarion Financial informarion

2. 2. Continuous listing regulationsContinuous listing regulations

Listed companies have to maintain a minimum level of Listed companies have to maintain a minimum level of public shareholdings at 25% of total shares issued (or)public shareholdings at 25% of total shares issued (or)

Companies can maintain more than 10% or less than 25% if Companies can maintain more than 10% or less than 25% if it has 2cr or more of listed shares and 1000cr or more of it has 2cr or more of listed shares and 1000cr or more of market capitalizationmarket capitalization

3. The shareholding pattern should be indicated under 3 3. The shareholding pattern should be indicated under 3 categoriescategories

Shares held by promoter and promoter groupShares held by promoter and promoter group Shares held by publicShares held by public Shares held by custodians and against which depository Shares held by custodians and against which depository

receipts have been issuedreceipts have been issued

4. 4. Issuers have to be compulsorily graded by credit Issuers have to be compulsorily graded by credit rating agencies.rating agencies.

5. Raising funds through QIPs5. Raising funds through QIPs

6.’no Lock in’ on pre issue of shares available to VCFs 6.’no Lock in’ on pre issue of shares available to VCFs and FVCI shall be limited to and FVCI shall be limited to

a)a) Shares held by them registered with SEBI for a Shares held by them registered with SEBI for a period of 1yrperiod of 1yr

b)b) Shares issued to SEBI registered VCFs/FVCI upon Shares issued to SEBI registered VCFs/FVCI upon conversion of convertible instruments during a conversion of convertible instruments during a period of 1yrperiod of 1yr

7. 7. SEBI amended the disclosure and investor protector SEBI amended the disclosure and investor protector guidelines and introduced “restrictions on pre issue publicity”guidelines and introduced “restrictions on pre issue publicity”

Measures undertaken in secondary Measures undertaken in secondary marketmarket

1.1. VaR margin to be updated 5 times a dayVaR margin to be updated 5 times a day2.2. PAN has been made mandatory with effect from Jan 2007.to PAN has been made mandatory with effect from Jan 2007.to

strengthen KYC normstrengthen KYC norm3.3. Creation of unified platform for trading of corporate bondsCreation of unified platform for trading of corporate bonds SEBI stipulated that BSE would set up a unified trading SEBI stipulated that BSE would set up a unified trading

platformplatform Reporting shall be made for all trades in listed debt Reporting shall be made for all trades in listed debt

securities issueed by all institutionssecurities issueed by all institutions SEBI and RBI have set up an internal working group for SEBI and RBI have set up an internal working group for

creating a single unified exchange-traded marketcreating a single unified exchange-traded market

4. 4. Policies on foreign investmentPolicies on foreign investmentFI in infrastructural companies in stock exchanges, FI in infrastructural companies in stock exchanges,

depositories and clearing corporation have been depositories and clearing corporation have been specified as followsspecified as follows

a) FI upto 49% will be allowed in these companies with a) FI upto 49% will be allowed in these companies with a separate FDI cap of 26% and cap of 23% on FIIa separate FDI cap of 26% and cap of 23% on FII

b) FDI will be allowed with specific approval from b) FDI will be allowed with specific approval from FIPBFIPB

c) FII will be allowed only through purchases in the c) FII will be allowed only through purchases in the secondary marketsecondary market

d) FII shall not seek and get representation on the BODd) FII shall not seek and get representation on the BODe) No foreign investors shall hold hold more than 5% e) No foreign investors shall hold hold more than 5%

equity in the companiesequity in the companies

5. 5. The application process for FIIs was simplified and new categories of The application process for FIIs was simplified and new categories of investment (insurance and reinsurance companies, foreign central banks, investment (insurance and reinsurance companies, foreign central banks, investment managers, international organizations) were included in FIIsinvestment managers, international organizations) were included in FIIs

6. GOI raised cumulative debt instruments limits6. GOI raised cumulative debt instruments limits RBI in its mid-term monetary review policy enhanced the limit of FII on RBI in its mid-term monetary review policy enhanced the limit of FII on

central and state govt. securitiescentral and state govt. securities

7. The aggregate ceiling for the mutual fund industry to invest in ADRs/GDRs 7. The aggregate ceiling for the mutual fund industry to invest in ADRs/GDRs was raisedwas raised

8. In govt. securities market RBI stopped to participate in the primary issues of 8. In govt. securities market RBI stopped to participate in the primary issues of

central govt. securitiescentral govt. securities

9. Change in the ownership structure of BSE9. Change in the ownership structure of BSE

10. FII have been allowed to invest in security receipts10. FII have been allowed to invest in security receipts

IPO NormsIPO Norms1.1. SEBI (disclosure and investor protection) guidelines require SEBI (disclosure and investor protection) guidelines require

a minimum offering of 25% of post issue capital to public a minimum offering of 25% of post issue capital to public later it was minimised to 10%.later it was minimised to 10%.

2.2. SEBI tightened the entry norms for IPO to enhance the SEBI tightened the entry norms for IPO to enhance the quality issues in primary marketquality issues in primary market

3.3. Issue size upto 5 times the net-worth of pre-issue shall be Issue size upto 5 times the net-worth of pre-issue shall be allowed only if the company has a track record of allowed only if the company has a track record of profitability as specified in the guidelinesprofitability as specified in the guidelines

4.4. The book-building process is made compulsory for the The book-building process is made compulsory for the companies who do not have such track record.companies who do not have such track record.

5.5. In case of book-building process issue has to consist of 60% In case of book-building process issue has to consist of 60% of QIPs.of QIPs.

6. Lock in provisions have been rationalized6. Lock in provisions have been rationalized for minimum promoters contribution of 20% shall for minimum promoters contribution of 20% shall

continue to be 3yrscontinue to be 3yrs The remaining balance will be for 1yrThe remaining balance will be for 1yr

7. Shares issued on preferential basis by a listed 7. Shares issued on preferential basis by a listed company have to be in lock in for 1yrcompany have to be in lock in for 1yr

8. The procedure for allotment of shares and refunds 8. The procedure for allotment of shares and refunds were streamlined. (the time for finalizing the were streamlined. (the time for finalizing the allotment has been reduced from 30 to 15 days in allotment has been reduced from 30 to 15 days in book built issues)book built issues)

Primary dealer systemPrimary dealer system

They are the wholesalers of govt. securities. They are the wholesalers of govt. securities. can be referred to as merchant bankers to can be referred to as merchant bankers to govt. of India.govt. of India.

In 1996 RBI framed guidelines for a In 1996 RBI framed guidelines for a enlistment and operations of primary enlistment and operations of primary dealersdealers

Objectives of the PD systemObjectives of the PD system To strengthen the infrastructure in the To strengthen the infrastructure in the

govt.securities marketgovt.securities market To ensure development of underwriting and To ensure development of underwriting and

market making capabilities for govt.market making capabilities for govt. To improve the secondary market trading To improve the secondary market trading

systemsystem To contribute to the price discovery To contribute to the price discovery

mechanismmechanism To make Pds an effective mode for To make Pds an effective mode for

conducting open market operationsconducting open market operations

Who can be the primary dealersWho can be the primary dealers Subsidiary of scheduled commercial Subsidiary of scheduled commercial

banks/all India financial institutionsbanks/all India financial institutions

Company incorporated under companies act Company incorporated under companies act 19561956

Subsidiaries or joint ventures set up by Subsidiaries or joint ventures set up by entities incorporated abroad under the entities incorporated abroad under the approval of foreign investment promotion approval of foreign investment promotion boardboard