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Transcript of SEBI Annual Report 2004-05
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Highlights of Annual Report of theSecurities and Exchange Board of India 2004-05
The SEBI Annual Report 2004-05 was approved by the SEBI Board in the meetingheld on June 24, 2005 and submitted to the Ministry of Finance (MOF), Government of
India on June 28, 2005. The printed version of the said Report has been placed beforeboth the houses of the Parliament during the Monsoon session.
The SEBI Annual Report 2004-05 has five parts. Part One of the report articulatesthe policies and programmes pursued by SEBI during 2004-05. Part Two reviews thetrends and operations of the Indian securities market. Part Three provides a detailedaccount of regulation of the securities market. Part Four presents the regulatoryamendments including significant court pronouncements. Organisational matters arepresented in part Five of the Report. Part-wise highlights of the SEBI Annual Report2004-05 are furnished below:
Part One: Policies and Programmes.
? The SEBI (DIP) Guidelines, 2000 were amended for enhancing the allocationcategory for retail investors, redefining the retail investors in value terms,reducing the bidding period, timing of disclosure of price band/floor price incase of listed companies and data reporting at the website of stock exchange.
? The SEBI (DIP) Guidelines, 2000 with respect to order of presentation ofdisclosures in prospectus, requirements pertaining to abridged prospectusand issue advertisements were amended.
? SEBI (DIP) Guidelines, 2000 were amended to include provisions relating toissue advertisements on television, facility of shelf prospectus by specificentities such as public sector banks, scheduled banks and public financialinstitutions.
? Amendments to the SEBI (DIP) Guidelines, 2000 were announced withrespect to splitting of shares before IPO, terms of the issue, post issueobligations, public issues of bonds by designated financial institutions undershelf prospectus, definition of employees, reservation for shareholders andavailability of Green Shoe Option (GSO) facility.
? SEBI (Interest Liability Regularisation) Scheme 2004 was launched to provide
a one time opportunity to all the stock brokers to clear their dues.
? Clause 49 of the Listing Agreement was amended for further improving thestandards of corporate governance. The deadline for ensuring compliance inrespect of revised Clause 49 by the companies was extended up toDecember 31, 2005 from April 1, 2005.
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? Straight Through Processing (STP) was made mandatory for all institutionaltrades and STP became effective from July 1, 2004.
? A high level Securities Markets Infrastructure Leveraging Expert Task Force(SMILE Task Force) was constituted to carry out a comprehensive health
check on the securities market infrastructure encompassing all the marketsegments and market participants.
? The position limits and the broad eligibility criteria of stocks and indices onwhich futures and options could be introduced were modified.
? It was notified that all specified intermediaries and their related personsshould quote the Unique Identification Number (UIN) obtained under theCentral Database of Market Participants (MAPIN) Regulations in lieu of theUnique Client Code for all secondary market transactions with effect fromAugust 2, 2004.
? The depository participants (DPs) were permitted to provide statements ofaccount and other documents to the beneficiary owners (BOs)under digitalsignature, as governed under the Information Technology Act, 2000, subjectto the DP entering into a legally enforceable agreement with the BO for thesaid purpose.
? Instructions were issued to stock exchanges to levy, collect and remit theSecurities Transaction Tax (STT) on all transactions from the date ofnotification by the Government of India. The STT became effective fromOctober 1, 2004.
? The stock exchanges and depositories were instructed to inform the issuercompanies to comply with SEBI circular pertaining to mandatory admission ofdebt instruments on both the depositories.
? A model listing agreement for debentures was issued to the stock exchange.This agreement is to be used by companies or entities desiring to list theirdebentures issued to public or privately placed.
? The Clause 16 of the Equity Listing Agreement was amended so that thecompany on whose stocks, derivatives are available or whose stocks formpart of an index on which derivatives are available, shall give a notice periodof 30 days to stock exchanges for corporate actions like mergers, de-mergers, splits and bonus shares.
? The first phase of BSE Indonext trading platform was operationalised onJanuary 7, 2005 for the small and medium enterprises.
? The charge structure for dematerialisation was rationalised.
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? The comprehensive risk management framework for the cash segment wasspecified.
? Modifications to the Margin Trading Facility and Securities Lending and
Borrowing Scheme were specified.
? A committee was constituted to re-examine the coverage of MAPIN, suggestfuture implementation schedule and review the cost of obtaining UIN.
? For encouraging and facilitating the trading and clearing, members of stockexchanges were asked to use special electronic fund transfer facility.
? FII and trading member position limits in the equity index derivative contractswere revised.
?
SC(R)A was amended for corporatisation and demutualisation of stockexchanges.
? The format of the Key Information Memorandum (KIM) being submitted bymutual funds was standardised.
? The MFs and the FIIs were asked to enter the unique client codes (UCCs)pertaining to the parent MF and parent FII at the order entry level and enterthe UCCs for their schemes of the MFs and sub-accounts of the FIIs in thepost closing session.
? The cap of FIIs investments in dated Government securities and Treasurybills was raised from US $ 1 billion to US $ 1.75 billion, both under 100 percent debt route and general 70:30 route. A cumulative sub-ceiling of US $500million outstanding was fixed on FII investments in corporate debt. This wasover and above the ceiling of US $1.75 billion for the Government debt. Boththe sub-ceilings were separate and not fungible.
? The process of registration of FIIs was streamlined and time required for thesame was reduced.
? A Memorandum of Understanding (MoU) was signed with US Commoditiesand Futures Trading Commission (CFTC) to strengthen communicationchannels and to establish a framework for assistance and mutual co-operation.
? The Investor Protection Fund (IPF)/ Customer Protection Fund (CPF)Guidelines were revised and comprehensive guidelines prescribed withrespect to constitution and management of the IPF/CPF, contribution toIPF/CPF, and manner of filing/inviting claims from investors, eligible claims,
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determination of legitimate claims and disbursements of claims from theIPF/CPF.
? The Tripartite Agreement between brokers, sub-brokers and clients whichwas to come into effect from December 1, 2004, was extended up to January
1, 2005. It was further clarified that the model Tripartite Agreement shall beimplemented strictly from April 1, 2005.
? A number of initiatives were taken for education and awareness of investorswhich included, inter alia, workshops, audio-visual aids, distribution ofeducative materials etc.
Part Two : Review of the Trends and Operations
? The primary segment of the capital market was characterised by heightenedactivities during 2004-05. Strong fundamentals of the economy, encouragingcorporate results, buoyant secondary market, revival of structural reforms by
the government and an investor friendly regulatory framework provided bySEBI attracted the investors to the primary market.
? The total amount of capital raised during 2004-05 through public and rightsissues (including offer for sale) stood at Rs. 28,256 crore as compared withRs. 23,272 crore in 2003-04, an increase of Rs. 4,984 crore or 21.42 per centover the year.
? Excluding offer for sale, the total amount mobilised in 2004-05 was Rs.25,056 crore, which was more than three times higher than that of Rs. 8,023crore in the previous year. This indicates the revival of investors interest in
the primary market.
? The sector-wise classification shows that the private sector dominated theresource mobilisation efforts in 2004-05 with 60.7 per cent share in the totalresource mobilisation, followed by the public sector with 39.3 per cent.
? The Indian stock market, which witnessed a strong rally in 2003-04, continuedto maintain its momentum during 2004-05 except subdued conditionwitnessed in the first quarter of the year.
? On a point to point basis, the BSE Sensex posted a return of 16.1 per cent in
2004-05 on top of 83.4 per cent in 2003-04. The S&P CNX Nifty alsorecorded a gain of 14.9 per cent in 2004-05 over and above a gain of 81.2 percent in 2003-04.
? On an average basis, the returns in 2004-05 were at 27.8 per cent and 26.5per cent for BSE Sensex and S&P CNX Nifty, respectively.
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long term capital gains tax, transparent regulatory system, etc., were themajor factors which influenced the FII investment in India during 2004-05.
? Assets under management by the mutual funds as on March 31, 2005 stoodat Rs. 1,49,600 crore as against Rs. 1,39,616 crore a year ago, an increase
of 7.2 per cent over the year.
? Net resource mobilisation by mutual funds declined by 95.3 per cent toRs.2,200 crore in 2004-05 as compared with Rs. 46,808 crore in the previousyear.
? There were 450 mutual funds schemes as on March 31, 2005, of which, 227were income/debt oriented schemes, 188 were growth/equity orientedschemes and the remaining 35 were balanced schemes.
Part Three: Regulation of Securities Market
? During 2004-05, there was a significant increase in the number of variousclasses of intermediaries registered with SEBI.
? Fees and other charges received by SEBI increased by 93.3 per cent to Rs.169.87 crore in 2004-05 over the previous year.
? In order to enhance the efficacy of the surveillance function, SEBI hasdecided to put in place a world-class comprehensive Integrated MarketSurveillance System (IMSS) across stock exchanges and market segments.An Australian vendor has been assigned the job for implementing the IMSSsolution.
? While IMSS is in the process of being fully operationalised, an interimsurveillance mechanism has been put in place under which weeklysurveillance meeting is being held regularly.
? During 2004-05, 130 new cases were taken up for investigation as against121 in the previous year.
? The number of cases for which investigation was completed increased by17.8 per cent to 179 in 2004-05 over the previous year.
? During 2004-05, a total of 1,187 orders have been passed/reports submitted,of which 529 were enquiries and 658 were of adjudication in nature. A total of613 hearings were conducted of which, 338 pertained to enquiries and 275belonged to adjudication proceedings. There were 894 show-cause noticesissued of which, 364 related to enquiries and 530 pertained to adjudicationproceedings.
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? For investor education and training of intermediaries, National Institute ofSecurities Markets was registered as society.
? In order to promote the quality of research in the area of securities market in a
cost effective manner, SEBI instituted the SEBI Award for Excellence inResearch in the Area of Securities Market Initiative. Under the initiative, SEBIshall confer up to three awards on the three best researchers (individuals/institutions) in securities market every year.
Part Four: Regulatory Changes
In order to fine-tune the regulatory framework, the following amendments weremade during 2004-05:
(i) Amendment(s) to SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations, 1997.(ii) Amendment(s) to SEBI (Procedure for Holding Enquiry by Enquiry Officerand Imposing Penalty) Regulations, 2002.
(iii) Notifications under SEBI (Central Database of Market Participants)Regulations, 2003.
(iv) SEBI (Depositories and Participants) (Amendment) Regulations, 2004.(v) SEBI (Venture Capital Funds) (Amendment) Regulations, 2004.(vi) SEBI (Foreign Venture Capital Investors) (Amendment) Regulations, 2004.(vii) SEBI (Portfolio Managers) (Amendment) Regulations, 2004.(viii) SEBI (Buy-back of Securities) (Amendment) Regulations, 2004.(ix) SEBI (Central Database of Market Participants) (Amendment), 2004.
Part Five: Organisational Matters
This part of the Report presents the details regarding SEBI Board, HumanResources, promotion of official language, progress of information technology, physicalinfrastructure, international co-operation, and Parliamentary Committee.
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Part One: Policies and Programmes
The Annual Report of the Securities and
Exchange Board of India (SEBI) presents the
policies and programmes of SEBI and its
working and operations during the financialyear 2004-05 in accordance with the format
prescribed in the Securities and Exchange
Board of India (Annual Report) Rules, 1994
notified in the Official Gazette on April 7, 1994.
The Report articulates the manner in which
SEBI discharged its functions and exercised
its powers in terms of the Securities and
Exchange Board of India Act, 1992; the
Securities Contracts (Regulation) Act, 1956;
the Depositories Act, 1996; and the delegatedpowers under the Companies Act, 1956. The
Report also reviews the developments in the
Indian securities market during the financial
year 2004-05 within the evolving regulatory
framework provided by SEBI. As enshrined in
PART ONE: POLICIES AND PROGRAMMES
the SEBI Act, it has been the continuous
endeavour on the part of SEBI to achieve its
statutory objectives such as (a) protection of
interests of the investors in securities, (b)development of the securities market, (c)
regulation of the securities market, and (d)
matters connected therewith and incidental
thereto. SEBI, as a statutory body, has sought
to balance these objectives by constantly
reviewing and assessing its policies and
programmes, initiating new guidelines and
regulations to nurture areas hitherto
unregulated or inadequately regulated and
implementing them in a manner so as topromote the orderly growth of the capital
market with transparency, fairness, efficiency,
safety, and integrity. The major policy initiatives
and developments in the securities market
during 2004-05 are furnished in Box 1.1.
Allocation of Shares to Retail Individual Investors
v Allocation of shares to retail individual investors has been increased from 25 per cent to 35 per cent of the
total issue of securities in case of book-built issues. The retail individual investor has been redefined as one
who applies or bids for securities of or for a value not exceeding Rs.1 lakh, as against the earlier limit of
Rs. 50,000.
Issue Advertisement
v The SEBI Disclosure and Investor Protection (DIP) Guidelines, 2000 were amended in order to ensure
better readability of the issue advertisements appearing on television and to reduce the cost incurred in
publishing pre-issue advertisements. The pre-issue advertisement which was mandatory for all public issues
(fixed and book-built) should now contain minimum details.
Introduction of Shelf Prospectus
v The facility of shelf prospectus was introduced for public sector banks, scheduled banks and public financial
institutions. They can file a draft shelf prospectus in the first instance disclosing the aggregate amount they
intend to raise through various tranches. Any amount of over-subscription can be retained by the issuer in
each tranche subject to the overall limit set for the year.
Green Shoe Option
v With an objective to widen the facility of Green Shoe Option, the SEBI (DIP) Guidelines, 2000 were amended
to make it available in case of all public issues, viz., initial public offerings, follow-on offerings, public issues
either through book building or fixed price route. All pre-IPO shareholders (including promoters) in case of
IPOs and pre-issue shareholders holding more than 5 per cent shares (including promoters) in case of
follow-on offerings can lend their shares for the purpose of green shoe option.
Issue Norms
v The SEBI (DIP) Guidelines 2000 on issue norms were amended to provide for a floor face value of Re.1 per
share in order to restrict the pre-IPO splitting of shares. The face value has to be necessarily Rs.10 pershare for issue price below Rs.500 and in cases where the issue price is Rs 500 or more, the issuer
companies can fix the face value below Rs. 10 per share.
Box 1.1: Major Policy Initiatives and Developments
in the Capital Market during 2004-05
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Annual Report 2004-05
v The definition of the minimum application lot has been changed from Rs.2,000 to a band of Rs.5,000-Rs.7,000. The applications can be made in multiples of such value.
v The DIP Guidelines for preferential allotment were amended to: a) restrict sale of shares by shareholders
who are allotted shares on preferential basis; b) impose lock-in period on pre-preferential shareholding from
the relevant date till six months after the date of allotment; c) reduce the period for allotment from 30 to 15
days; and d) facilitate corporate debt restructuring.
Corporate Governance
v To improve the standards of corporate governance, SEBI amended Clause 49 of the Listing Agreement. The
major changes in the new Clause 49 include amendments/additions to provisions relating to definition of
independent directors, strengthening the responsibilities of audit committees, improving quality of financial
disclosures, including those pertaining to related party transactions and proceeds from public/rights/preferential
issues, requiring Boards to adopt formal code of conduct, requiring CEO/CFO certification of financial
statements and improving disclosures to shareholders. Certain non-mandatory clauses like whistle blower
policy and restriction of the term of independent directors have also been included.
v The implementation schedule of the amended Clause 49 which was initially proposed to be effective from
April 1, 2005 for listed companies has been extended to December 31, 2005.
Debt Listing Agreement
v In order to further develop the corporate debt market, SEBI prescribed a model debenture listing agreement
for all debenture securities issued by an issuer irrespective of the mode of issuance.
Rationalisation of Dematerialisation Charges
v The existing structure of dematerialisation charges has been rationalised to provide benefits to investors.
With effect from February 1, 2005, certain charges paid by investors were removed which include charges
towards opening of a Beneficiary Owner (BO) account, credit of securities into BO account and custodycharge for BO account opened on or after February 1, 2005. With effect from April 1, 2005, the custody
charges are not levied on any investor.
IndoNext
v The first phase of BSE IndoNext trading platform was inaugurated by the Honourable Finance Minister on
January 7, 2005 to provide for a nation-wide trading platform for the small and medium enterprises (SMEs).
Implementation of STP
v Mandatory processing of all institutional trades executed on the stock exchanges through the Straight Through
Processing (STP) was introduced with effect from July 1, 2004. This was in continuation of the efforts made
by SEBI to ensure the inter-operability between the STP Service Providers through the setting up of STP
Centralised Hub.
SEBI (STP Centralised Hub and STP Service Providers) Guidelines, 2004
v In order to regulate the STP service, SEBI issued the SEBI (STP Centralised Hub and STP Service Providers)
Guidelines, 2004 which also prescribed the model agreement between the STP centralised hub and the
STP service providers. The STP Guidelines prescribe the eligibility criteria and conditions of approval,
obligations and responsibilities and code of conduct for the STP centralised hub and the STP service providers.
v In consonance with the internationally accepted ISO 15022 messaging standards, standardised transaction
work flow and messaging format for the STP system in India was specified by SEBI.
Derivatives
v In order to encourage the trading and clearing members of stock exchanges to use infrastructure of special
electronic fund transfer (SEFT) facility as laid down by RBI to the extent possible, the members are now
given a choice to opt for payment of mark-to-market margins, either before the start of trading next day i.e.,on T day, or on the next day i.e., T+1. In case the members opt to pay mark-to-market margin on T day, no
scaling up of initial margin would be applicable.
Box 1.1: Major Policy Initiatives and Developments
in the Capital Market during 2004-05 (Contd.)
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Part One: Policies and Programmes
v Units of money market mutual funds and units of gilt funds were permitted to be accepted towards cashequivalent as part of the liquid assets of a clearing member.
v The eligbility criteria for indices on which futures and options are permitted to be introduced was modified to
encourage the introduction of derivatives contracts on sectoral indices.
Foreign Institutional Investors (FIIs)
v The Union Government announced, within an overall External Commercial Borrowing (ECB) ceiling of US $
9 billion, a sub-ceiling of US $ 1.75 billion for FII investment in dated Government securities and Treasury
Bills, both under 100 per cent debt route and normal 70:30 route. Further, a cumulative sub-ceiling of US $
500 million for FII investment in corporate debt was announced over and above the sub-ceiling of US $ 1.75
billion. Both the sub-ceilings are separate and not fungible.
v FII position limits in the equity index derivative contracts were revised. Accordingly, FII position limit in all
index options and futures contracts on a particular underlying index shall be Rs.250 crore (separately forfutures and options) or 15 per cent of the total open interest of the market in index futures and index
options, whichever is higher per exchange.
v The frequency of reporting of offshore derivative instruments by registered foreign institutional investors has
been made monthly.
v The mutual funds and FIIs have been advised to enter the Unique Client Code (UCC) pertaining to the
parent entity at the order entry level and enter the UCCs for their individual schemes/sub-accounts on the
post-closing session.
SMILE Task Force
v A Securities Markets Infrastructure Leveraging Expert Task Force (SMILE Task Force) was constituted by
SEBI to carry out a thorough health check on the securities markets infrastructure encompassing all segments
of the markets (viz. equities, debt, derivatives, fund products) and covering all market participants such asexchanges, trading platforms, clearing and settlement systems, payment systems, depositories, issue houses
(registrars) and other intermediaries, The Task Force has submitted reports on Infrastructure and Process
Flow for the Primary Market and Infrastructure and Process Flows for Enhancing Distribution Reach in the
Mutual Fund Industry. The Reports are under consideration of SEBI for implementation.
MoU Signed with Overseas Regulators
v Securities and Exchange Board of India (SEBI) signed a Memorandum of Understanding (MoU) with United
States Commodity Futures Trading Commission (CFTC) at Washington on April 28, 2004. This is the sixth
MoU that SEBI had signed with its international counterparts for strengthening communication channels and
establishing a framework for assistance and mutual co-operation between the two organisations.
In order to fine-tune the regulatory requirements, regulations amended during 2004-05 are as follows :
l SEBI (Venture Capital Funds) (Amendment) Regulations, 2004.
l SEBI (Foreign Venture Capital Investors) (Amendment) Regulations, 2004.
l SEBI (Central Database of Market Participants) (Amendment) Regulations, 2004.
l SEBI (Portfolio Managers) (Amendment) Regulations, 2004.
l SEBI (Depositories and Participants) (Amendment) Regulations, 2004.
l SEBI (Buy-back of Securities) (Amendment) Regulations, 2004.
l SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) (Amendment) Regulations,
2004.
l SEBI (Substantial Acquisition of Shares and Takeovers) (Amendment) Regulations, 2004.
l SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) (Second Amendment)
Regulations, 2004.
Box 1.1: Major Policy Initiatives and Developments
in the Capital Market during 2004-05 (Contd.)
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Annual Report 2004-05
l SEBI (Substantial Acquisition of Shares and Takeovers) (Second Amendment) Regulations, 2004.
l SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) (Third Amendment) Regulations,
2004.
v Amendments to the existing laws entail a detailed procedure. Pending amendment to existing laws,
regulatory pro-activeness was reflected through the following set of notifications:
l Notification under Sub-Regulation (1) of Regulation 6 of Securities and Exchange Board of India (Central
Database of Market Participants) Regulations.
l Notification under Sub-Regulation (2) of Regulation 6 of Securities and Exchange Board of India (Central
Database of Market Participants) Regulations.
l Notification under Sub-Regulation (1) and (3) of Regulation 6 of Securities and Exchange Board of India
(Central Database of Market Participants) Regulations.
l Notification under Sub-Regulation (1) of Regulation 5A of Securities and Exchange Board of India (Central
Database of Market Participants) Regulations.
l Notification under Sub-Regulation (1) of Regulation 4 and Sub-Regulation (1) and (2) of Regulation 6 of
Securities and Exchange Board of India (Central Database of Market Participants) Regulations.
1. GENERAL MACRO-ECONOMIC
ENVIRONMENT
According to the advance estimates ofthe Central Statistical Organisation (CSO), the
real GDP at factor cost grew by 6.9 per cent
in 2004-05 as compared to 8.5 per cent
(revised estimates) during the previous
financial year (Table 1.1). The deceleration
in the real GDP growth was mainly due to
uneven and deficient monsoon which pulled
down the growth rate of agricultural sector
from 9.6 per cent in 2003-04 to 1.1 per cent
in 2004-05 (Table 1.2). Notwithstandingunfavourable monsoon and high base effect,
growth in the agricultural sector turned out to
be better than anticipated signifying its
resilience against erratic monsoon. The
industrial sector grew by 8.3 per cent in 2004-
05 as against 6.5 per cent in 2003-04, partly
mitigating the setback to agriculture. The
service sector, which has been the main
driver of growth in India, continued to sustain
high growth rate i.e, 8.6 per cent in 2004-05as compared with 8.9 per cent in 2003-04.
The average growth rate of real GDP during
the first three years (2002-05) of the Tenth
Plan period was higher at 6.5 per cent than
that of 5.5 per cent achieved in the Ninth Plan
period (1997-2002). With acceleration in the
growth rate, India is one of the fastest growing
economies of the world.
One of the important features of the
macro-economic developments in 2004-05
was the resurgence of the industrial sector.
Led by manufacturing and electricity, gas and
water supply, recovery in the industrial sector
was further strengthened and broadened
during 2004-05. As a result, the contribution
of the industrial sector to the overall GDP
growth went up to 26 per cent in 2004-05 from
17 per cent in 2003-04. Major factors behind
the high growth of the manufacturing sector
were buoyant exports, encouraging domestic
investment climate, increased confidence
among the investors, and significant
improvement in domestic demand.
The services sector continued to remainthe main engine of growth in India with its
contribution to GDP growth reaching a high
Box 1.1: Major Policy Initiatives and Developments
in the Capital Market during 2004-05 (Contd.)
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Part One: Policies and Programmes
Table 1.1: National Income (At 1993-94 prices)(Rs. crore)
2003-04 2004-05
Item 2002-03 (Quick (Advance
Estimate) Estimate)
1 2 3 4
A. Estimates at Aggregate Level
1. National Product
1.1 Gross National Product (GNP) 13,10,471 14,22,479 15,19,535at factor cost (8.5) (6.8)
1.2 Net National Product (NNP) 11,61,902 12,66,005 13,54,385at factor cost (9.0) (7.0)
2. Domestic Product
2.1 Gross Domestic Product (GDP) 13,18,362 14,30,548 15,29,366at factor cost (8.5) (6.9)
2.2 Net Domestic Product (NDP) 11,69,793 12,74,074 13,64,216at factor cost (8.9) (7.1)
B. Estimates at Per Capita Level
1. Population (million) 1,055 1,073 1,091(1.7) (1.7)
2. Per Capita NNP at factor cost (Rs.) 11,013 11,799 12,414(7.1) (5.2)
Note: Figures in the parentheses are percentage change over the previous year.
Source: Central Statistical Organisation.
Table 1.2: GDP at Factor Cost by Economic Activity (At 1993-94 prices)(Rs. crore)
2003-04 2004-05 Percentage Change
Industry 2002-03 (Quick (Advance over Previous Year
Estimate) Estimate) 2003-04 2004-05
1 2 3 4 5 6
1. Agriculture, Forestry & Fishing 2,83,393 3,10,611 3,13,915 9.6 1.1
2. Mining & Quarrying 31,185 33,195 34,955 6.4 5.3
3. Manufacturing 2,27,642 2,43,400 2,65,119 6.9 8.9
4. Electricity, Gas & Water Supply 31,659 32,827 34,903 3.7 6.3
5. Construction 69,911 74,819 79,112 7 5.7
6. Trade, Hotels, Transport 3,26,968 3,65,559 4,06,843 11.8 11.3and Communication
7. Financing, Insurance, Real Estate 1,71,463 1,83,718 1,96,853 7.1 7.1& Business Services
8. Community, Social & Personal Services 1,76,141 1,86,419 1,97,666 5.8 6.0
GDP at Factor Cost 13,18,362 14,30,548 15,29,366 8.5 6.9
Source: Central Statistical Organisation.
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Annual Report 2004-05
of 71 per cent in 2004-05 as compared with
59 per cent in 2003-04. Within the services
sector, the growth rate in 2004-05 was
consolidated in case of trade, hotels,restaurants, transport and communication
(11.3 per cent), maintained in case of
financing, insurance, real estate and business
services (7.1 per cent), and accelerated in
case of community, social and personal
services (6.0 per cent) over the previous year.
The shares of services and industrial sectors
in GDP improved from 56.7 per cent and 21.6
per cent in 2003-04 to 57.6 per cent and 21.9
per cent, respectively in 2004-05, while thatof agricultural sector declined from 21.7 per
cent to 20.5 per cent during the same period
(Chart 1.1).
According to the CSO, gross domestic
savings (GDS) as a proportion of GDP at
current prices increased significantly to 28.1
per cent in 2003-04 from 26.1 per cent in
2002-03 (Table 1.3). Notwithstanding low
interest rates prevailing in the financial
markets, household savings, particularly in
financial assets, rose considerably in 2003-
04 over the previous year. Improvement in
the personal disposable income emanating
from high GDP growth, modest inflation rate
and uncertainty in the financial markets seem
to have contributed to high rate of saving bythe households. Savings by the private
corporate sector increased modestly reflecting
improvement in the financial results of the
joint stock companies, co-operative banks and
societies etc. Significant reduction in the
public sector dis-saving also contributed to a
rise in aggregate savings, indicating better
performance in government administration,
PSUs and commitment of the government for
augmenting revenue and reducing deficitunder the Fiscal Responsibility and Budget
Management Act.
The household savings in financial
assets as proportion of GDP rose from 10.3
per cent in 2002-03 to 11.4 per cent in
2003-04. Within the financial savings by
households, deposits continue to dominate
with its share in financial assets rising from
41.5 per cent in 2002-03 to 42.9 per cent in
2003-04 (Chart 1.2). Other major components
of financial savings were contractual savings,
mainly life insurance (14.5 per cent), followed
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Part One: Policies and Programmes
Table 1.3 Gross Domestic Savings and Investment
Per cent of GDP Amount in Rupees crore
Item 2000- 2001- 2002- 2003- 2000 2001 2002- 2003-
01 02 03@ 04* -01 -02 03@ 04*
1 2 3 4 5 6 7 8 9
1. Household Sector Saving 21.6 22.6 23.3 24.3 4,52,268 5,13,110 5,74,681 6,71,692
a) Financial Assets 10.4 11.2 10.3 11.4 2,16,774 2,53,964 2,54,439 3,14,261
b) Physical Assets 11.3 11.4 13.0 13.0 2,35,494 2,59,146 3,20,242 3,57,431
2. Private Corporate 4.1 3.6 3.8 4.1 86,142 81,076 94,269 1,14,157
Sector Saving
3. Public Sector Saving -2.3 -2.7 -1.1 -0.3 -48,361 -61,912 -26,652 -9,429
4. Gross Domestic 23.5 23.4 26.1 28.1 4,90,049 5,32,274 6,42,298 7,76,420
Saving (GDS)
5. Net Capital Inflow(+)/ 0.4 -0.8 -1.3 -1.8 8,130 -18,731 -32,010 -49,552Outflow(-)
6. Gross Domestic Capital 23.8 22.6 24.8 26.3 4,98,179 5,13,543 6,10,288 7,26,868
Formation (GDCF)
7. Total Consumption 77.7 76.0 76.2 75.3 16,24,255 17,72,054 18,76,679 20,77,958
Expenditure
a) Private Final 65.1 65.5 64.3 64.0 13,60,018 14,88,781 15,85,132 17,65,849
Consumption
Expenditure
b) Government Final 12.6 10.5 11.8 11.3 2,64,237 2,83,273 2,91,547 3,12,109
Consumption
Expenditure
Memo Items
Saving-Investment
Balance (4-6) -0.4 0.8 1.3 1.8 -8,130 18,731 32,010 49,552
Public Sector Balance# -8.6 -8.9 -6.4 -5.9 -1,79,866 -2,02,007 -1,58,618 -1,63,515
Private Sector Balance# 9.4 10.1 9.9 11.0 1,97,207 2,30,269 2,42,958 3,04,241
a) Private Corporate Sector -0.9 -1.0 -0.5 -0.4 -19,567 -23,695 -11,481 -10,020
b ) Household Sector 10.4 11.2 10.3 11.4 2,16,774 2,53,964 2,54,439 3,14,261
Investment in Shares and
Debenture 0.5 0.3 0.2 0.2 10,214 7,777 5,504 5,689
@ : Provisional Estimates. * : Quick Estimates. # :Investment figures are not adjusted for errors and omissions.
Source: Central Statistical Organisation (CSO) and Reserve Bank of India (RBI).
by small savings (13.7 per cent), provident
and pension funds (13.0 per cent), and
currency (10.1 per cent). Investment in shares
and debentures in 2003-04 constituted 1.4 per
cent of the total household savings in financial
assets which was lower than that of 1.6 per
cent in the previous year. Bulk of suchinvestment was in mutual funds. In terms of
ratio to GDP, investment in shares and
debentures in 2003-04 continued to remain
unchanged at the previous years level of 0.2
per cent.
A notable feature of macro-economic
developments during 2004-05 was the sharp
increase in non-food credit. Reflecting arobust and broad-based industrial recovery,
the non-food credit disbursed by the
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scheduled commercial banks went up by 26.5
per cent in 2004-05 as compared to 18.4 per
cent in 2003-04. Food credit also increased
during 2004-05 to support higher procurement
operations, unlike the declining trend
witnessed during the previous two years.
Credit flow to industries also surged from the
non-bank sources. The external commercial
borrowings and equity issues were much
higher in 2004-05 than those in the previous
year in consonance with the resurgence in
industrial activities and buoyancy in the stock
markets. Resource mobilisation through
private placements was also impressiveduring 2004-05. Mainly triggered by the capital
inflows, the liquidity condition was, by and
large, comfortable throughout the year.
Keeping in view the inflationary pressure on
the economy, the Reserve Bank mopped up
excess liquidity from the market through the
Market Stabilisation Scheme (MSS) and the
Liquidity Adjustment Facility and thereby kept
the supply of broad money (M3) at 13.1 percent (net of conversion) which was well within
the projected trajectory of 14.0 per cent.
The price situation, after showing upward
trend during April-August 2004, was under
control by the end of 2004-05.The inflation
rate, measured in terms of changes in the
Wholesale Price Index (WPI), was 5.0 per
cent on a point-to-point basis in 2004-05 as
compared to 4.6 per cent in 2003-04. On an
average basis, the inflation rate at 6.4 per
cent in 2004-05 was much higher than that
of 5.4 per cent in the previous year. The
supply side factors were mainly responsible
for inflationary pressure during the first half
of the year. Increase in the international prices
of crude oil and metals led to the hardeningof domestic prices of coal, petroleum
products, iron and steel and other metals.
Inadequate South-West monsoon also pushed
up the prices of food items and non-food
commodities such as oilseeds and cotton. As
a result, inflation rate accelerated to a peak
of 8.7 per cent by the end of August 2004.
The inflationary pressure has largely receded
since September 2004. Governmentsinitiatives to cut the excise and customs duties
in June and August 2004 moderated the pass
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through of the increase in international crude
oil prices to domestic inflation. Monetary policy
measures by the Reserve Bank such as the
hike in the cash reserve ratio (CRR) andincrease in the reverse repo rate brought
down the inflation expectations. Prospects of
a bumper rabi crop and gradual easing of the
fear of drought softened the prices of
agricultural products like cotton, oilseeds and
edible oils.
The escalation of international crude oil
prices dominated the external sector
developments. According to the Directorate
General of Commercial Intelligence and
Statistics (DGCI&S), merchandise exports in
terms of US dollar witnessed an impressive
growth of 24.1 per cent in 2004-05 as
compared with 21.1 per cent in the previous
year. The merchandise export growth was the
highest in three decades. Reflecting surge in
the international crude oil prices, total imports
in dollar terms increased sharply by 37.0 per
cent in 2004-05 as compared with 27.3 per
cent in 2003-04. Merchandise import growth
was the highest since 1980-81. As a result,
the gap in the merchandise trade account
widened to a historic peak of US $ 27.8 billion
in 2004-05 compared to that of US $ 14.3
billion in the previous year. Net invisible
receipts, mostly in terms of workers
remittances, software exports and travel
earnings bridged the trade gap to a large
extent. Unlike in the previous three years, the
external current account is likely to end-up
with a modest deficit in 2004-05 signaling
higher domestic investment activities and
reversal of net capital exports.
Net capital inflows continued to maintain
its momentum in 2004-05, and were
dominated by portfolio investment by FIIs. An
increased appetite for foreign direct
investment was also observed. This reflected
the on-going reforms in the capital market andthe overall liberalisation programme. During
April-December 2004, net capital flows at
US $ 20.7 billion were significantly higher
than US $ 16.6 billion recorded in the
corresponding period of the previous year.
Reflecting the innate strength of the externalsector, an accretion of US $ 28.6 billion during
2004-05 on top of an unprecedented accretion
of US $ 36.9 billion in 2003-04 took Indias
foreign exchange reserves to US $ 141.5
billion as on March 31, 2005. Indias foreign
exchange reserves (excluding gold) were the
fifth largest in the world and the fourth largest
among the emerging market economies
(EMEs). The present level of foreign
exchange reserves is higher than Indiasexternal debt and provides import cover for
about 15 months. With sustained capital flows
and a general weakening of the US dollar
vis--visother major currencies, Indian rupee
appreciated by 6.6 per cent against the U.S
dollar.
2. REVIEW OF POLICIES AND
PROGRAMMES
SEBI pursued several policy initiatives
during 2004-05 in consultation with the
Government of India to achieve its statutory
objectives. These policies and programmes
are reviewed in this section under six major
heads of primary securities market, secondary
securities market, mutual funds, foreign
institutional investors, corporate restructuring,
investor awareness/education/protection in
addition to retrospect and prospects
indicating the unfinished agenda for the future.
I. Primary Securities Market
Primary securities market continued to
play a crucial role in the process of resource
mobilisation. Wide-ranging reforms in the
primary market undertaken by SEBI over the
years improved confidence of the domestic
as well as foreign investors. The momentum
of resource mobilisation from the primarymarket witnessed in 2003-04 accelerated
further in 2004-05. The response of the FIIs,
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other institutional investors and retail investors
to the public issues has been highly
encouraging. This was evident from over-
subscription to such issues. A detaileddescription of the number of issues, amount
mobilised, variety of investors and their
response to public issues has been analysed
in Part Two of this Report. The policy
initiatives relating to primary market are
presented below.
a. Higher Allocation for Retail
Individual Investors
SEBI amended the Disclosure andInvestor Protection (DIP) Guidelines, 2000
relating to the allocation of shares in case of
book-built issues. Earlier the allocation of
shares to the Retail Individual Investors (RIIs),
the Non-Institutional Investors (NIIs) and the
Qualified Institutional Buyers (QIBs) has been
in the ratio of 25:25:50, respectively. The
allocation to RIIs was enhanced to 35 per
cent of the total issue of securities while it
was reduced to 15 per cent in case of NIIs.
Allocation to QIBs remained unchanged at 50
per cent. However, in case of book-built
issues that are made pursuant to the
requirement of mandatory allocation of 60 per
cent to QIBs in terms of Rule 19(2)(b) of
SC(R)R, RIIs and NIIs would receive an
allocation of 30 per cent and 10 per cent,
respectively. Moreover, the definition of RIIs
has been modified. According to the new
definition, a retail individual investor (RII) is
one who applies or bids for securities of or
for a value not exceeding Rs. 1 lakh as
against the existing limit of Rs. 50,000.
b. Issue Advertisement
The extant market practice for all issues
including book-built issues was to publish an
advertisement in the newspaper having
contents of Form 2A under the CompaniesAct, 1956. However, the cost involved in
publishing the entire Form 2A, i.e., abridged
prospectus in the newspaper was very high.
As the abridged prospectus is otherwise
available to the investors along with the
application forms, SEBI amended the (DIP)Guidelines, 2000 to ensure better readability
of the advertisement and stipulated that pre-
issue advertisement would be mandatory for
all public issues (fixed or book-built) and it
would contain the minimum details, thereby
reducing the issue expense.
c. Order of Presentation of
Disclosures in Prospectus
To make the offer documents more user-friendly, SEBI prescribed a standard order of
presentation of disclosures in the offer
documents. Over and above the previous
requirements of disclosures while issuing the
format, a few requirements / sections like
summary, table of contents, and industry
review have been added to make the
prospectus more effective. The standard order
of presentation did not, however, reduce the
flexibility given to the issuer to include otherdisclosures, not mentioned in the guidelines.
d. Data Reporting at Websites of
Stock Exchanges on Book-
Building
In order to ensure availability of relevant
information in the public domain, it is now
mandated to (i) improve the contents of and
to ensure uniformity in data dissemination on
the websites of the concerned stockexchanges and (ii) to ensure availability of
such data for a further period of 3 days after
the closure of the bids/issue.
e. Disclosure of Price Band/ Floor
Price and Bidding Period in Case
of Listed Companies
The existing guidelines require all issuers
(whether listed or unlisted), making a public
issue through book building process, todisclose the price band/ floor price in the Red
Herring Prospectus (RHP)/application form.
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The listed issuers have now been permitted
to disclose the price band/floor price at least
one day before bid opening. Moreover, the
bidding period, which was 5-10 days(including holidays), has been reduced to 3-
7 working days.
f. Introduction of the Facility of
Shelf Prospectus
As per Sec. 60A of the Companies Act,
1956, the facility of shelf prospectus can be
availed by specific entities like public sector
banks, scheduled banks and public financial
institutions. The SEBI (DIP) Guidelines, 2000have been amended to provide for the same.
These entities can file a draft shelf prospectus
with SEBI in the first instance disclosing the
aggregate amount the issuer intends to raise
through various tranches.
g. Retention of Over-subscription by
DFIs in Tranche Issues
Financial institutions, which come out with
public issue of unsecured redeemable bonds,
regularly file a shelf prospectus with SEBI
stating the total amount to be raised during the
year through various tranches. These bonds
are usually used by investors as a tax-planning
mechanism. Over-subscriptions up to 100 per
cent in each tranche have been allowed to be
retained by the issuers. The Development
Financial Institutions (DFIs) often receive
heavy over-subscriptions, which exceed the
maximum target amount mentioned in the
prospectus. In such a scenario, returning the
excess subscription to the applicants adversely
affects the tax planning drive of the investors.
In view of this, SEBI has changed the
guidelines so that the issuers can retain any
amount of over-subscription subject to the total
amount specified in the shelf prospectus for the
whole year.
h. Guidelines for Preferential Issues
The guidelines pertaining to preferential
allotment have been amended to restrict sale
of shares by shareholders who are allotted
shares on preferential basis. This had been
done, inter alia, by imposing lock-in periodon pre-preferential shareholding from the
relevant date till six months after the date of
allotment, and by reducing the period for
allotment from the existing 30 days to 15
days.
i. Restriction on Splitting of Shares
The issuers were found to be splitting
shares just before an IPO. On
recommendation of the Advisory Committeeon Primary Market, the guidelines have been
amended to restrict splitting of shares before
an IPO. The amendments, inter alia, provide
for a floor face value of Re.1 per share. For
issue price below Rs.500 per share, the face
value would be necessarily Rs.10 per share.
However, the issuer companies have been
permitted to fix the face value below Rs. 10
per share in those cases where the issue
price is Rs. 500 or more.
j. Terms of the Issue
SEBI has now changed minimum
application lot from Rs. 2,000 to a band of
Rs.5,000- Rs.7,000. The applications can be
made in multiples of such value.
k. Green Shoe Option (GSO) Facility
As GSO is essentially a device to ensurepost-issue price stability, the guidelines have
been amended to clarify that this facility is
available in all public issues, viz., initial public
offerings, follow-on offerings, public issues
either through book building or fixed price
route. Further, the guidelines have also been
amended to permit all pre-IPO share holders
(including promoters) in case of IPOs and pre-
issue share holders holding more than 5 per
cent shares, (including promoters) in case offollow-on offerings to lend their shares for the
purpose of GSO.
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l. Corporate Governance
SEBI constituted a Committee on
Corporate Governance headed by Shri N. R.
Narayana Murthy, which submitted its reporton February 8, 2003. Taking a cue from the
same, SEBI amended Clause 49 of the Listing
Agreement to revise the requirements of
corporate governance as mandated by the
listing agreement. For entities seeking listing
for the first time, the corporate governance
requirements are to be complied at the time
of seeking in-principle approval for such
listing. However, for listed entities having a
paid-up share capital of Rs. 3 crore andabove or net worth of Rs. 25 crore or more
at any time in the history of the company,
corporate governance requirements were
proposed to be complied by April 1, 2005.
Taking into account the fact that many
companies are sti l l not in a state of
preparedness to be fully compliant with the
requirements, the date for ensuring
compliance with the corporate governance
requirements of the listing agreement hasbeen extended up to December 31, 2005.
m. Debt Listing Agreement
In order to develop the corporate debt
market, SEBI prescribed a model debenture
listing agreement for listing of all debenture
securities issued by an issuer irrespective of
the mode of issuance. The model agreement
has three parts. Part (I) of this agreementcontains clauses which shall be complied by
all issuers irrespective of the mode of
issuance. Part (II) contains clauses which
shall be complied only if the debentures are
issued either through public issue or rights
issue and Part (III) contains clauses which
are required to be complied only if the
debentures are issued on private placement
basis. In case of issuers whose equity shares
are listed and which have already entered intoa listing agreement for its equity shares,
clauses of equity listing agreement shall have
an overriding effect over the debenture listing
agreement, in case of inconsistency, if any.
II. Secondary Securities Market
a. BSE IndoNext Trading Platform
In the Union Budget 2004-05, the Central
Government proposed to set up a trading
platform to enable the small and medium
enterprises (SMEs) to raise capital, both debt
and equity, as well as provide liquidity to the
securities. This trading platform is expected
to provide the much needed avenue for
financing the SMEs and help redress thepresent imbalance in this regard. SEBI took
the initiative to encourage the BSE and the
Regional Stock Exchanges (RSEs) to set up
this market (Box 1.2). The Government also
amended Section 13 of the Securities
Contract (Regulations) Act, 1956 to facilitate
trading by brokers of RSEs on this market.
b. Securities Transaction Tax (STT)
In the Union Budget 2004-05,
Government proposed a package of tax
measures relating to securities transactions.
The tax on long term capital gains from
securities transactions was abolished while
the short-term capital gains tax was reduced
to a flat rate of 10 per cent. Moreover, it was
proposed to levy a tax on buyers at the rate
of 0.15 per cent of the value of securities
transacted on the stock exchanges in the form
of securities transaction tax (STT).
Pursuant to the representations received
from the market participants, the STT was
modified by the Government in consultation
with SEBI. The revised STT includes inter
alia, the following:
l The delivery-based transactions would
attract STT of 0.15 per cent (i.e., 15 basis
points) to be shared equally between the
buyer and the seller;l For day traders and arbitrageurs, the STT
of 0.015 per cent (1.5 basis points) would
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be imposed on sellers of equities and
settled on net basis;
l For units of equity oriented mutual funds,
the STT of 0.15 per cent (15 basis points)
would be imposed on sellers;
l The rate of STT on sale of derivatives
(Futures and Options) would be 0.01 percent (1 basis points); and
l No STT would be levied on buying and
selling of bonds, including government
bonds, units of MFs other than equity
oriented funds.
The STT was notified on September 28,
2004. The stock exchanges have been
advised to levy and collect STT on all
transactions done by their members and remitthe same to the Government of India with
effect from October 1, 2004.
In the Union Budget 2005-06, the STT
was further revised as under (Table 1.4).
The BSE IndoNext has been set up as a
separate trading platform under the present BombayOn Line Trading System (BOLT) of the BSE. It is a
joint initiative of the BSE and the Federation of Indian
Stock Exchanges (FISE) of which 18 Regional Stock
Exchanges (RSEs) are members. The members of
the RSEs have been allowed to trade in this market.
The BSE IndoNexttrading platform has introduced the
concept of single order book for a security as against
multiple listings permitted in other securities. Once a
security is eligible for trading in the BSE IndoNext
market, it will not be available for trading on any other
exchange and orders from brokers of all exchanges
in that security will flow only to this market. The
objectives of the BSE IndoNext trading platform are:
a) to provide a nation-wide trading platform for the
SMEs already listed with the participating RSEs and
BSE; b) to create liquidity in eligible securities listed
on the participating RSEs; c) to create an avenue for
the existing and new SME companies from various
regions of the country to raise fresh capital, both equity
and debt, which would help achieve balanced regional
growth; and d) to use the available infrastructure of
the participating RSEs for productive purposes.
The BSE IndoNext trading platform is being
implemented in phases. Honourable Finance Minister
has inaugurated the BSE IndoNext trading platform
Box 1.2: BSE IndoNext
on January 7, 2005 and operationalised the first phase
of the BSE IndoNextplatform. The BSE would transfereligible securities within the range of paid-up capital
between Rs.3 crore and Rs.20 crore, currently traded
in the B1 and B2 groups in BSE against which there
is no regulatory action. Similarly, the participating
RSEs will also transfer eligible securities to BSE
IndoNext to be traded as permitted securities. At this
stage, the entire responsibility for monitoring and
surveillance is vested with BSE as the brokers who
would be trading on the BSE IndoNext will be
members of BSE. For this purpose, SEBI has already
granted necessary approvals.
The second phase when implemented will allowparticipation of all brokers of RSEs in the BSE
IndoNext taking benefit of the recent amendment to
the SC(R)A. For this, the BSE and the RSEs will have
to amend the respective Bye-laws as well as enter
into MoUs. These legal requirements are in progress.
Once the Bye-laws are approved by SEBI, the second
phase will be implemented and the responsibility for
surveillance, monitoring and compliance will be jointly
shared between BSE and RSEs. In the third phase,
the BSE as well as the RSEs will have to work out
an effective marketing and business development
strategy.
Table 1.4: Securities Transaction Tax
in India(per cent)
Type of 2004-05 2005-06Transactions (Old (Revised
Rate) Rate) @
1 2 3
A. Equity
1) Delivery-basedTransactions* 0.15 0.20
2) Non-deliverybased Transactions 0.015 0.02
B. Derivative Transactions 0.01 0.0133
@ The revised STT became effective from June1,2005.
* To be equally shared by both buyers and sellers.
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c. SEBI (Central Database of Market
Participants) Regulations, 2003
The SEBI (Central Database of Market
Participants) Regulations, 2003 were notifiedon November 20, 2003. The regulations
provide for the creation of a centralised
database of market participants and investors
(MAPIN database) for the registration of all
the participants i.e., intermediaries, listed
companies, investors, etc., in the Indian
securities market by allotting a Unique
Identification Number (UIN). SEBI has
appointed National Securities Depository
Limited (NSDL) as the Designated Service
Provider for creating and maintaining the
MAPIN database.
SEBI has been issuing notifications from
time to time specifying various intermediaries
and the related persons to obtain an UIN
under the aforesaid regulations. The list of
various intermediaries has been notified for
this purpose and the date by which they have
to obtain the UIN has also been notified. Upto March 31, 2005, as many as 2,94,925
UINs have been allotted (Table 1.5).
Table 1.5: Allocation of Unique
Identification Number
Category No. of UINs
1 2
Retail Individual Investors 1,88,652
Employees/Directors/Promoters 44,069
Total Natural Persons 2,32,721
SEBI Registered Intermediaries 8,187
Other Corporate Bodies 54,017
Total Non-Natural Persons 62,204
Total UINs Allotted 2,94,925
Keeping in view the various repre-
sentations and feedback received from
specified investors, viz. all resident investorsnot being bodies corporate who enter into any
securities market transaction (including any
transaction in units of mutual funds or
collective investment schemes) of value of
one lakh rupees or more, on the difficulties
faced by them in adhering to the time line ofMarch 31, 2005, the notified date was
extended fromMarch 31, 2005 to December
31, 2005. Further, a Committee has been
constituted to look into the coverage of
MAPIN and other related matters.
The terms of reference for the said
committee are as follows:
i) To re-examine the coverage of the
MAPIN, i.e., the category of marketparticipants and investors who would be
required to obtain unique identification
number (UIN);
ii) To suggest future implementation
schedule based on the coverage; and
iii) To review the cost of obtaining the UIN
for the market participants and investors.
d. Investor Protection Measures
(i) Risk Management Framework for the
Cash Market
A comprehensive risk management
framework in T+2 rolling settlement scenario
was specified for the cash market providing
for the various types of margins,
categorisation of stocks for margin purposes
and collection of margins on an upfront basis.
Value at Risk (VaR) based margining systemwas put in place based on the categorisation
of stocks into Groups I, II and III depending
on the stocks liquidity and volatility. It
addresses 99 per cent of the risks in the
market. Additional margins were specified to
address the balance 1 per cent risks. Further,
provisions were specified for shortfall of pay-
in of funds/margin, collections of margins by
members from the client etc. The revised
framework when implemented will be a stepforward in achieving cross-margining between
cash and derivative markets.
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(ii) Comprehensive Guidelines for Investor
Protection Fund (IPF)/Customer
Protection Funds (CPF) at the Stock
ExchangesComprehensive guidelines were issued
for constitution and management of IPF/CPF
and disbursement of the funds out of the IPF/
CPF towards settlement of legitimate investor
claims against the defaulter members of the
stock exchanges. The exchanges are in the
process of amending the Trust Deeds for IPF.
(iii) Duration for Transfer of Funds and
SecuritiesIt was mandated that the brokers should
transfer funds and securities to the clients
within one working day after the pay-out day.
e. Matters Relating to Depositories
(i) Review of Dematerialisation Charges
Investors have been representing to SEBI
seeking a reduction in the charges paid by
them for dematerialisation of securities. As afirst step, it was decided to rationalise the
existing charge structure. Accordingly, effective
February 1, 2005, (a) no investor is required
to pay any charge towards opening of a
Beneficiary Owner (BO) account except for
statutory charges as may be applicable; (b)
no investor is required to pay any charge for
credit of securities into his/her BO account;
and (c) no custody charge is to be levied on
any investor opening a BO account on or afterFebruary 1, 2005. With effect from April 1,
2005, the custody charges are not levied on
any investor. However, the depositories may
levy and collect the charges towards custody
from the issuers, on a per folio (ISIN position)basis as at the end of the financial year.
Issuers have to pay at the rate of Rs.5.00
(plus applicable service tax) per folio (ISIN
position) in the respective depositories, subject
to a minimum amount (Table 1.6). The issuers
are required to pay custody charges to the
depository with whom they have established
connectivity based on the total number of folios
(ISIN positions) as on 31st March of the
previous financial year or the minimumamount, as the case may be, by 30 th April of
each financial year failing which depositories
may charge penal interest subject to a
maximum of 12 per cent per annum.
(ii) Proof of Identity (PoI) and Proof of
Address (PoA) for Opening a BO
Account
The list of documents as PoI and/or PoA
for opening a BO account has been
broadened to include MAPIN card, identity
card issued by Central/State Governments,
Statutory/Regulatory authorities, Public Sector
Undertakings (PSUs), Scheduled Commercial
Banks, Professional Bodies etc.
(iii) Mandatory Admission of Debt Securities
on both Depositories
The issuer companies havebeen advised once again to mandatorily
Table 1.6: Minimum Demat Charges
Nominal Value of Admitted SecuritiesAnnual Custodial Fee payable by
an Issuer to each Depository (Rs.)*
1 2
Up to Rs. 5 crore 4,000
Above Rs. 5 crore and up to Rs. 10 crore 10,000
Above Rs. 10 crore and up to Rs. 20 crore 20,000
Above Rs. 20 crore 30,000
* Plus service tax as applicable.
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(ii) In order to disseminate information
regarding cancellation of registration of
brokers and cautioning the investing
public not to deal with 70 brokers whoseregistration has been cancelled by SEBI
during 2003-04, a public notice was
published in the newspapers. In the
interest of investors, it has been decided
to publish such information at periodic
intervals.
(iii) In order to promote greater disclosure
of information in the interest of investors
and from the point of view of measuringthe adequacy of systems and controls
to meet internal as well as external
compliance requirements, a draft concept
paper on the professional rating of
market intermediaries (viz., stock
brokers, initially to start with) was placed
on SEBI website for public comments.
(iv) SEBI has requested credit rating
agencies to develop an appropriaterating model for stock brokers, based on
the parameters set out in the concept
paper read with public comments.
Considering the public response and
market acceptance to the rating concept
for stock brokers, the concept may be
extended gradually to other
intermediaries as well.
(v) A review of the existing net worthrequirements for stock brokers was taken
up and report of the sub-group on
Secondary Market Advisory Committee
(SMAC) formed for the purpose was
uploaded on SEBI website for public
comments. The comments received on
the paper are being analysed.
(vi) Guidelines were issued for allowing SEBI
registered market intermediaries to floatoverseas subsidiaries so as to undertake
financial services activities/ capital
dematerialise their debt securities with both
the depositories.
(iv) Exemption from giving hard copies of
transaction statements to Beneficiary
Owners (BOs) by Depository
Participants (DPs)
The DPs have been permitted to provide
transaction statements and other documents
to the BOs in the electronic format with digital
signature, as governed under the Information
Technology Act, 2000, subject to the DP
entering into a legally enforceable agreement
with the BO for this purpose.
(v) Shifting Securities from Trade-for-Trade
Segment to Normal Rolling Segment on
a Regular Basis
Based on the information provided by the
depositories regarding the establishment of
connectivity by the listed companies with both
the depositories, the stock exchanges have
been advised on a regular basis to shift suchcompanies which had not established dual
connectivity from the Trade-for-Tradesegment
to normal rolling segment of the stock
exchanges, upon their establishing dual
connectivity, provided there are no other
specific grounds for continuation of the trading
in these scrips in the Trade-for-Trade
segment.
f. Policy Initiatives for MarketIntermediaries
(i) In order to bring about uniformity in
documentary requirements across
different segments and exchanges and
also to avoid duplication and multiplicity
of documents, SEBI in consultation with
stock exchanges (BSE and NSE) has
formulated uniform set of broker client
registration and agreement documents.The same have been made applicable
from April 1, 2005.
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market related activities abroad which
have been approved by the SEBI Board.
g. Policy Initiatives for Derivatives
Currently, a variety of derivative products
are available for trading in India. Index based
derivatives are traded on BSE Sensex on the
derivative segment of BSE and on S&P CNX
Nifty and CNX IT Index on the F&O segment
of NSE. Single Stock Options and Single Stock
Futures are also available on a number of
individual stocks at both the derivative
segment of BSE and the F&O segment of
NSE. Interest rate derivatives were introduced
on a notional 10-year bond and 91 days T-bill
at the F&O segment of NSE.
(i) Risk Containment Measures
The initial margins on derivatives are
computed to cover the probable loss over a
time horizon. Therefore, in the event that the
mark to market margins/ settlements are
being made after the beginning of trade onnext day (T+1), the initial margins are scaled
up by the square root of the days by which
margins are actually collected. With the
functioning of Special Electronic Fund
Transfer facility (SEFT) with many bank
branches, members are now given a choice
to opt for payment of mark to market margins
either before the start of trading next day, i.e.,
T+0 or on the next day, i.e. T+1. If the
member opts for the payment of the mark to
market margins on T+1, then correspondingly
higher initial margins are collected to cover
the potential for losses over the time elapsed
in the collection of mark to market margins.
Another risk containment measure
relates to alignment of collaterals in cash and
derivatives market. Two liquid asset
requirements were included in the derivatives
market: (a) units of money market mutualfunds and units of gilt funds were permitted
to be accepted towards cash equivalents as
part of the liquid assets of a clearing member;
and (b) equity securities classified under
Group I in the underlying cash market were
permitted to be accepted towards the non-cash component (securities) of liquid assets
in the derivative markets. Further, units of all
equity mutual funds are also accepted as the
securities under the liquid assets.
(ii) Eligibility Criteria of Stocks on which
Futures and Options Contracts may be
Permitted
Pursuant to the recommendation of the
Advisory Committee on Derivatives and
Market Risk Management, SEBI revised the
requirement of the stocks quarter sigma order
size from Rs. 5 lakh to Rs. 1 lakh and the
market-wide position limit of the eligible stock
was prescribed at a minimum of Rs. 50 crore.
This provision was introduced to prevent
stocks with a low market capitalisation from
becoming eligible for derivative trading.
(iii) Eligibility Criteria for Selection of Indices
for Futures and Options Contracts
In order to encourage the introduction of
derivative contracts on sectoral indices, the
eligibility criteria for indices on which futures
and options are permitted to be introduced
was also modified. It had earlier been specified
that derivative contracts on a new stock index
shall be permitted if the stocks contributing
80 per cent weightage (earlier 90 per cent) in
the index are individually eligible for derivatives
trading as per the eligibility criteria. However,
no single ineligible stock should have a
weightage of more than 5 per cent in the index.
Additionally, the eligibility criteria for indices
were also made into a continuous requirement
similar to that of stocks.
(iv) Market-wide Position Limits for SingleStock Derivatives
In order to avoid frequent triggering of
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market wide position limits, the market wide
position limits for single stock derivative
contracts was modified to be the lower of 30
times the average number of shares tradeddaily during the previous calendar month, in the
relevant underlying security in the cash
segment; or 20 per cent (instead of 10 per cent
earlier) of the number of shares held by non-
promoters in the relevant underlying security.
(v) Enforcement of Market-wide Position
Limits through Administrative Measures
According to the extant guidelines, the
exchanges were required to double the price
scanning range when 80 per cent of the
market-wide limit was reached. Such a
measure was adopted due to technical issues
involved in implementing market wide position
limits. It was felt that the margining system
should be used only to address the solvency
risk of the market and not for any other
purpose, such as enforcing market-wideposition limits. Therefore, the doubling of price
scanning range was done away with and it
was stipulated that market-wide position limits
may be enforced administratively by the
exchanges / Clearing Corporation / House.
(vi) FII Position Limits in Index Derivatives
Index based derivative contracts are
mainly used by large portfolio investors to
manage their portfolio risk. Further,
considering the growth in the index derivative
markets, and considering that a limit linked
to the value of the portfolio of investment in
the underlying cash market in addition to an
absolute figure would serve better, the FII
position limits in index derivatives were
increased as follows: (a)FII position limit in
all index options contracts on a particularunderlying index has been modified to Rs.250
crore or 15 per cent of the total open interest
of the market in index options, whichever is
higher, per exchange; and (b) FII position limit
in all index futures contracts on a particular
underlying index has been modified to Rs.250crore or 15 per cent of the total open interest
of the market in index futures, whichever is
higher, per exchange.
In addition to the above, the FIIs have
been allowed to take positions in equity index
derivatives in designated accounts subject to
the following limits:
(a) Short positions in index derivatives (short
futures, short calls and long puts) in the
designated account not exceeding (in
notional value) the FIIs holding of stocks
in the designated account.
(b) Long positions in index derivatives (long
futures, long calls and short puts) in the
designated account not exceeding (in
notional value) the FIIs holding of cash,
government securities, T-Bills and similarinstruments in the designated account.
(vii) Trading Member Position Limits in Index
Derivatives
It was earlier specified that the trading
member limit in index derivatives on a
particular underlying index would be Rs. 100
crore or 15 per cent of the total open interest
on the market in index derivatives, whicheveris higher, per exchange. This limit was
increased as follows:
l The trading member position limit in near
month contracts of all index options
contracts on a particular underlying index
was stipulated to be Rs.250 crore or 15
per cent of the total open interest of the
market in index options, whichever is
higher, per exchange.
l The trading member position limit in near
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month contracts of all index futures
contracts on a particular underlying index
was stipulated to be Rs.250 crore or 15
per cent of the total open interest of themarket in index futures, whichever is
higher, per exchange.
l Trading members were allowed to take
an exposure of Rs.500 crore or 15 per
cent of total open interest whichever is
higher, in interest rate derivative
products.
(viii) Alignment of Contract Sizes of Existing
Derivative Contracts
SEBI prescribed the methodology for
alignment of contract sizes of existing
derivative contracts to Rs. 2 Lakh. SEBI, vide
letter dated March 17, 2005, delegated the
authority to the exchanges to align the
contract sizes of derivative contracts
whenever necessary, in consultation with each
other.
h. Implementation of STP
The Straight Through Processing (STP)
was launched in India on November 30, 2002.
To start with, STP was insisted upon to be
adopted by the domestic institutions,
investors, fund managers, brokers and
custodians. However, it was observed that
though the market participants had joined theSTP services, the system could not be widely
used due to various issues like lack of inter-
operability between the STP Service
Providers, lack of message handshake
protocols, lack of common authentication of
digital signatures across the STP Service
Providers, lack of end-to-end compliance to
ISO messaging formats from sender to the
recipient and absence of standardisation offi le formats for clients back office
development etc.
To resolve the issue of inter-operability
between the STP Service Providers and other
issues, SEBI in consultation with the stock
exchanges and the STP Service Providersdecided that a STP Centralised Hub would
be set up. Currently, this STP Centralised Hub
has been set up and made operational by
NSE. NSE obtained the necessary approvals
from the Department of Telecommunications
(DoT) as an Internet Service Provider (ISP).
Subsequently, this STP Centralised Hub
would be further developed jointly with BSE.
Mandatory Use of STP for all Institutional
Trades
SEBI mandated the use of the Straight
Through Processing (STP) system for all
institutional trades with effect from July 1,
2004. SEBI had prescribed a detailed system
flow and the regulatory framework of the STP
system by issuing the SEBI (STP CentralisedHub and STP Service Providers) Guidelines,
2004. SEBI also outlined the transaction work
flow for the system of Straight Through
Processing (STP) and prescribed the
messaging formats based on internationally
accepted ISO 15022 messaging standards.
There are currently four STP service providers
and STP centralised hub has been set up by
NSE. There has been a steady increase innumber of messages passing through STP
network with approximately 2,500 STP users
registered in the system.
SEBI is the first and perhaps the only
regulator in the world to have prescribed and
mandated a market-wide STP system,
prescribe a regulatory framework along with
the system flow, transaction work flow anddetailed messaging standards for the STP
system.
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i. Corporatisation and
Demutualisation (C and D)
of Stock Exchanges
Corporatisation and Demutualisationenables the exchanges to transform from a
mutual entity to a for-profit demutualised
company with the separation of ownership,
trading rights and management (Box 1.3).
To enable the exchanges to corporatise and
demutualise, the Government amended theSC(R)A encouraging SEBI to approve the
schemes.
recommendations of the Group, all the stock
exchanges were advised to submit their proposals for
C and D to SEBI for approval.
In the meantime, the Securities Laws
(Amendment) Ordinance, 2004 was promulgated on
October 12, 2004, which amended the Securities
Contracts (Regulation) Act, 1956 to facilitate the
corporatisation and demutualisation of Stock
Exchanges. The Ordinance was subsequently
replaced by the Securities Laws (Amendment) Act,
on January 7, 2005. The Act makes it mandatory that
all stock exchanges, if not already corporatised and
demutualised, shall be corporatised and demutualised
on and from the appointed date so notified in the
official gazette by SEBI. It obligates the non-corporateand mutual exchanges to submit, within such time as
may be specified by SEBI, a scheme for
corporatisation and demutualisation to SEBI for
approval.
Following the promulgation of the Ordinance, a
meeting of all stock exchanges and the Depositories
was convened by SEBI on November 9, 2004 to
evolve the road map for corporatisation and
demutualisation and a tentative time schedule of its
implementation. Exchanges were advised to adhere
to the time schedule. A press release indicatingtentative time schedule of C&D was issued on January
7, 2005. Thereafter, SEBI had several rounds of
discussions with all the stock exchanges to clarify and
sort out their specific issues and to guide them to
prepare their schemes in compliance with the SCRA.
The discussions were quite protracted as there were
several legal issues involved. The exchanges were
advised to submit their final schemes to SEBI for
approval latest by January 31, 2005. With the
submission of the scheme by BSE on March 9, 2005,
the schemes from all the exchanges were received.
The Corporatisation and Demutualisation of the BSE
was notified on May 20, 2005.
The stock exchanges world over have been
generally formed as mutual organisations. The trading
members not only provide broking services, but also
own, control and manage such exchanges for theirmutual benefit. They dont generally distribute profit
among themselves and therefore, termed as not-for-
profit organisations. Stock exchanges owned by
members may work towards the interest of members
alone which may be detrimental to the rights of other
stakeholders. There could also be conflict of interest
between ownership and management. In order to
eliminate conflict of interest, there is a need to
segregate the management functions from ownership
and trading rights through demutualisation. Moreover,
stock exchanges should ideally work as body
corporate similar to any other for-profit corporateentity.
In India, there are 23 stock exchanges of which
one was derecognised in August 2004. Three of them
namely, The Stock Exchange, Mumbai (BSE),
Ahmedabad Stock Exchange (ASE) and Madhya
Pradesh Stock Exchange (MPSE) are Association of
Persons. The remaining 19 are registered as
companies, either limited by guarantees or by shares.
Except NSE, all stock exchanges are not-for-profit
organisations. Moreover, all exchanges are mutual
organisations except NSE and OTCEI whereownership, management and trading rights are in the
hands of three different sets of people from the
inception.
Pursuant to the announcement made by the
Honourable Finance Minister in the Parliament on
March 13, 2001 that the stock exchanges would be
corporatised and demutualised, SEBI constituted a
Group on Corporatisation and Demutualisation of
Stock Exchanges under the Chairmanship of Justice
M. H. Kania, former Chief Justice of India, for advising
SEBI on corporatisation and demutualisation of
exchanges and to recommend the steps that need to
be taken to implement the same. Based on the
Box 1.3: Corporatisation and Demutualisation (C and D) of Stock Exchanges in India
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As provided in the SC(R)A, SEBI vide
notification dated March 23, 2005, has
specified that the National Stock Exchange
of India Limited, which is already corporatisedand demutualised would not be required to
submit a scheme to SEBI for approval,
subject to the following conditions:
l The National Stock Exchange of India
Limited shall not change its current
corporate and demutualised structure,
without prior approval of SEBI; and
l The National Stock Exchange of India
Limited shall comply with further
conditions as may be imposed by SEBI
in this regard from time to time.
The process of C and D involves transfer
of assets from the exchanges which are
Associations of Persons / Companies limited
by Guarantee / Not-for-profit Companies to
the emerging corporate demutual exchange
and such transfer attracts stamp duty. Tofacilitate the process of corporatisation and
demutualisation and to make it tax-neutral, the
Honourable Finance Minister, in the current
years Budget, has proposed a one-time
exemption from payment of stamp duty on
notional transfer of assets from the exchanges
which are Association of Persons/Companies
limited by Guarantee / Not-for-profit
Companies to the emerging corporate
demutual exchange.
j. Other Developments
l Detailed guidelines have been issued
specifying the disclosures to be made