CHAPTER - II
AN ANALYSIS OF CHALLENGES
AND
INSTITUTIONAL IMPROVEMENT
CHAPTER-II
AN ANALYSIS OF CHALLENGES AND INSTITUTIONAL IMPROVEMENT
Indian Capital Market is facing many challenges due to which capital mar-
ket is not board based and retail investor afraid from taking part in capital Market
in India. India capital Market is also skewed. Only certain securities are traded
and limited financial product is available for reducing risk and inure profitability
of investment. In this chapter it is analysed what challenges Indian market is fac-
ing and what institutional arrangement have taken place for creaking confident in
capital market activities.
2.2 CHALLENGES BEFORE ACTIVITIES OF CAPITAL MARKET:-
A big Share scam was noticed in April 1992 Which developed a
feeling of distrust among investors. This shares scam created a big ques-
tion marks on the working of banking system in the country. This scam
conveyed a message to the bank customer that their saving with the bank
are not safe.
Share brokers of Mumbai withdraw millions of rupees from banks
by illegal practices with the co-operation of corrupt high bank official and
directors.
From the stock exchanges crash in 1988-89 there was on upward
trend in the stock market, spearheaded by excellent performance by mar-
ket leaders and Industry friendly policies by successive government such
as liberatisation of Industry Licensing, Liberal fislal measures, liberal and
positive export-import policies. Index-number of ordinary share prices
(1981-82 =100) rose from 189 at the end of March 1988 to 528 at in end
of March 1991 and crossed 1000 at the beginning of February 1992. The
sensex the index of 30 of the key and most treaded script in the BSE was
nearly 2000 crossed 3350 on March 90 and 4300 on April 20, 1992.
The RBI conducted preliminary investigations into certain aspects
of securities treading by Indian and foreign banks and led to exposure of
serious irregularities and fraud in securities transaction of different banks.
Unscrupulous brokers in stock exchanges, colliding with some bank
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officials Violated established rules and guidelines and siphnoed off bank
funds for speculative transaction in stock market.
2.3 MAJOR SCAMS FACED BY MARKET
[Link]. Broker Year Method of Scam Amount
1. Harshad Methta and 1991-92 Withdraw cash from INR54
Hetan Dalai bank without Billion
suitable securities
2. Margan Stanley 1994-95 Price-Rigging INR 170
.Mutual Funds Million
3. C.R. Bhansali 1997 Market Manipulation INR7
Billion
4. Return of 1997 Market Manipulation INR 17,
Harshad Mahata Billion
5. Ketan Parkash 1998 K. 10 Scripand Price 70 Million
Rigging (I.T.,
Entertainment
Telecommunication
by fonds of
co-operative bank)
6. Ramesh Parakh Price Manipulation
2.4 JANKIRAMAN COM
IMITEE :-
The committee stup under chairmanship of [Link] revealed
on April 30, 1992 in it's report a scam of Rs. 4024.45 Crores (CBI esti-
mated this amount to be Rs. 8383 crores.)
The committe identified several types of irregularities in securi-
ties transactions whichwere used to shipon, off out of banking system.
(1) Purchases of securities and other instruments were made by banks and
their subsidiaries where the counter party was ostensibly another bank but
when in reality the proceeds were directly indirectly credited to the ac-
counts of brokers.
(2) Ready forward (sale and purchase) transactions we re-entered into either
own or client's accounts by banks with brokers who used their funds for
speculative activity.
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(3) Brokers in the stock exchanges were directly financed by banks by dis-
counting bill and not supported by Genuine transaction.
(4) Banks and other institutions rediscounted bills of exchange held by other
banks and institutions but not proceeds by repayments were routed through
broker's accounts
(5) Banks and other institutions showed large payments as call money to other
banks. How-ever in the books of the receiving banks. There was not recored
of call money acceptances. Instead the amounts were creadited to the ac-
counts of individual brokers on the due date. These alleged call loans were
re-paid by payment out of the broker accounts in the name of other banks.
(6) Sums received as inter corporate deposite and uder portifolio manage-
ment schemes (PMS) by merchant banking subsidiaries of public sector
and the banks were passed on the brokers through ready forward deals.
There were other type of frauds too. The Jankiram committe estimated
that the extent of unreconciled amounts would be Rs. 4000 crores. These
irregularisation were committed by public sector banks and foreign banks.
2.5 JOINT PARLIAMENTOR Y COMITTEE
All the members of parliament raised a demand for an enquirty into
the securities scam. Accepting this demand a 30 members joint Parlia-
ment committee Under the chairmanship of Mr. Ram Niwas Mizdha was
constituted
This 30 Members committe included 20 members from Lok Sabha
and 10 members form Rajaya Sabha this committe was constituted on Au-
gust 10, 1992. The committe submitted it's report it's report in Dec. 1993.
2.6 STEPSTAKEN FOR IMPROVEMENT OF INSTITUTIONAL
ARRENGEMENTS:
(1) Securities contracts (Regulations Amendment Bill 2005)
(a) Objective of amendment: Facilitate the development of vibrant
and secondary market for trading securitiezed debt instruments
including mortgage backed debt instruments on stock exchanges.
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(b) Proposal to amend the definition of "Securities" Under the securi-
ties (Regulation) Act 1956. All transaction in securities debt
whether based on Asset Backed securities or Residential mortggage
Based securities are covered under the definition and the entire
institutional and regularoty framework for trading of securities is
applicable for securitised debt.
2.7 SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)
(1) Estibilishment And Powers of SEBI
SEBI was initially constituted on 12 April 1988 as a non statutory
body through a resolution of the Government for dealing with all matters
relating to development and regulation of securities market and investor
protection and to advise the Government on all these matters. SEBI was
given statutory status and powers through and ordinance promulgated on
January 30, 1992.
In statutory powers and functions of SEBI was strengthened through
the promulgation of the securities laws (Amendment) ordinance or Janu-
ary 25, 1995 Which was subsequently replaced by an act of Parliament in
terms of this Act SEBI has been vested with regulatory powers over cor-
poration in the issuance of capitals the transfer of securities and other
related matters. Besides SEBI has also been Empowered to impose mon-
etary penalties an capital market intermediaries and other participants for
a range of irregularities.
(2) Orsanisation of SEBI
SEBI managed by Six members:
(1) One Chairman (Nominated by Central Government)
(2) Two Members (Officers of Central Minister)
(3) One member from RBI and remaining two by central Government.
The office of SEBI is situated at Mumbai with it's Regional office
at Calcutta, Delhi and Chennai in 1988 in initial capital of SEBI was Rs.
7.5 crores which was provided by the promoters (IDBI, ICICI, IFCI).
All statutory powers for regulating Indian capital Market are vested
with SEBI Self
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Functions of SEBI
1. To Safeguard the interest of investors and to regulate capital market with
suitable measures.
2. To regulate the business of stock exchanges and other securities market
3. To regulate the working of Stock Brokders, Sub-brokers, Share transfer
agents. Trustes, Merchant Bankers, Underwriters, Protfolio Managers etc.
and- also to make their registration.
4. To register and regulate collective investment plans of mutual funds.
5. To ecourage self-regulatory organisations.
6. To Eliminate malpractices of security markets.
7. To train the persons associated with security markets and also to encour-
age investors education.
8. To check inser trading of securities.
9. To supervise the working of various organisations trading in security mar-
ket and also to ensure systematic dealings.
10. To Promote research and investigations for ensuring the attainment of above
objectives.
Decision taken by SEBI for Ensuring & Healthy capital Market.
SEBI has adopted a number of revolutionary steps to reestablish the credit
of capital Market, which include the following :
1. Control on Utilizing 'Application Amount' Having no Interest by
Companies Releasing Public Issues : At the instance of SEBI, commer-
cial banks introduced stock Investment Scheme under which investor has
to submit stock invests, purchased from banks, with their share applica-
tion. If the investor is allotted shares/debentures. The required amount is
transferred in concerned company's account by the bank issuing 'Stock
Invest'. In other case (If share/debenture is not allotted). Investor gets a
pre-determined interest rate on invested capital. This step of SEBI en-
sured interest earning to the investor untill he got share/debenture
allotement. It also ensures the refund of invested amount to the investor in
case shares are not allotted.
2. Share Price and Premium Determination - According to the latest di-
rections of SEBI, Indian companies are now free to determine their share
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preice and premium on those shares. But determined price and premium
amount will be equally applicable to all without any discrimination.
3. Underwriters : The minimum asset limit has been fixed to be Rs. 20
Lakh to work as underwriter Besides. SEBI has warned under-writers that
their registration can be cancelled if any irregularity is found in the pur-
chase of unsubscribe part of the share issue.
1. Control on Share Brokers :- Under New rules every broker and sub-
broker has to obtain registration with SEBI and any stock exchange in
hidia.
2. Insider Trading : Companies and their employees usually adopt malprac-
tices in Indian Capital Market to variate share prices^ To check this type of
insider trading, SEBI introduced SEBI (Insider Trading) Regulation 1992
Which will ensure honesty in the capital Market and will develop a feeling
of faith among ivestors to promote investments in capital Market in the
Long-run.
3. SEBI's Control on Mutual Funds: SEBI introduced SEBI (Mutual Funds)
Regulation 1993 to take over direct control of all mutual funds to govern-
ment and private sector (excluting UTI). Under this new rule, the company
floating a mutual fund should posses of net assets Rs. 5 crore which should
consist of atleast 40% contribution from promoter's side.
4. Control on Foreign Institutional Investors- SEBI has made it compul-
sory for every foreign institutional investors to get registered with SEBI
for participating in Indian capital Market SEBI has issued directives in this
regard.
SEBI- More Powerful :
Under new provisions SEBI has been given powers for granting rec-
ognition to any stock exchange in the country. SEBI has also been given
the authority of deciding voting right for any member and also of amend-
ing it (Till Now this authority was exercised by Central Government). SEBI
will Now settle the disputes relating to regulation to transactions under
spot delivery and non- listing of Share by the company.
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2.8 REFORMS-AFTER 1991
1. Govt. Passed SEBI Act on 4th April, 1992 to protect, promote of Stock
Market.
2. Govt, transferred creating powers from Companies Act 1956. Securities
ContractAct 1956 to SEBI
3. Establishment of NSE, OTCI (Over the Counter Exchange of India).
4. Discontinued BADLA system in 1993.
REFORMS-AFTER 1994
1. Introduction of Electronic Trading in 1995.
2. Trade on Line, Called BOLT (Bombay On line Trading System)
3 Promote Demate Trading.
4. For Review of BADLA system GS Patel Committee Appointed which sug-
gested a new revised carry for System (RCFS).
5. Later JR Verma Committe Suggested For modified carry forward system
(MCFS).
6. Introduced Circuit breakers to control Volatility of Stock Movements.
REFORMS-AFTER 1997
5. SEBI introduce a new system of settlement called Rolling Settlement sys-
tem Popularly Known as T+5 System in Jan 2000.
6. BGSE introduced the Borrowing and Lending Securities (BLESS) in Jan.
2001.
7. BADLA System Wholly replaced by Rolling settlement System in July
2001 and by Jan, 2002 all the shares listed under this system.
REFORMS-AFTER 2000
1. SEBI Banned BADLA System
2. SEBI Banned BLESS (Borrowing Lending Securities Scheme) and other
stock Lending Schemes.
3. SEBI Launched a New Scientific and Automated System For determining
Margin For scripts in the rolling settlement mode this include 11% Value
of Risk (VAR) Based Model for Calculating Margins.
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k SEBI's Risk Mangement group recommends a 20% Circuit Filter for in
rolling settlement.
5. SEBI introduced Index based filter, Which would shut down the entire
mafket in three stages of index movement of 10%, 15%, and 20%
6. Introduction of Margin Trading In Sep, 2001, It allows investors to invest
in securities beyond their financial capacity.
7. BSE established investor Education and Protection Fund (lEPF) on
Oct.2001 & Investor grievance cell.
8. BSE created history by introducing derivative instruments in securities
and conducted regular training programmes for members & investors.
9. Securities contract Act 1956 was also amended for the introduction of
Derivative trading.
10. Along with Stock based option in Nov. 2001, Stock based Futures were
alsQ introduced.
2.9 NEW ISSUES FOR CAPITAL MARKET
Due to changing Global Scenario, Capital Market faces New issues.
a. Funcation related problems such as-trading, listing of securities, clearing
system, settlement function of BSE.
b. Customer- Centric issue such as- transaction costs, better services to cus-
tomer, introduction of new product are to be sorted out by BSE.
c. Growing competition from NSE, interest of MNSc, technology issue are
also pressuring BSE.
d. Apart from this, regional Stock exchange are in poor shape, expert suggest
for merging of these either in BSE on In NSE and Zonal wise there should
be only four stock exchange in India.
2.10. TRENDS-OFFESTTLEMENTOFNEWISSUES
At international level and trend is towards demutualization of stock
exchanges. Started in 1993 When Stockholm Stock exchange was converted
from "no profict, member owned exchange" to "for profit investor owned
corporation". Subsequenty many stock exchanges followed this model e.g.
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To catch up with international level SBI appoints M.H. Kania Committe
Study the transformation of Stock exchanges into "For Profit shareholder
Owned Companies" This committee recommended for the mutualization.
But due to other reasons. There might be delay in the process of
demutualization of BSE.
MAJOR CHANGES
• Adoption of Modem technologies for trading.
Screen Based trading system
Created BSE Web X. With help of TCS, aiming at providing efficient and
cost effect services.
Aug 9, 2005 BSE Created history by converting itself into Corporate en-
tity and it would raise funds in the form of public issue.
2.11 INVESTOR'S CONFIDENCE AND WORKING OF CAPITAL
MARKET
That eroted the investor's confidence are :
Price manipulations
Inside trading
Circular trading
Mismanagement
Improper Corporate Governance.
Apart From this BSE making efforts to revive itself by demutualization
the exchange through public issue, whereas NSE has emerged as India's
Prernier stock Exchange, which mostly experts perceive it as investor
friendly stock exchange in India.
So, surely BSE can achieve it goal, New heights and protect &
Promote the investors confidence by being more professional, transpar-
ent and Good governance Policies.
2.12. MIBORAND MIBID
To New Reference Rates of National Stock exchange
On June 15, 1998 National Stock Exchange has launched two New
Reference rates for the loans of inter Banks Call Money Market. These
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rates are MIBRO (Mumbai Inter-Banks OfferRate/ And MIBID (Mumbai
Inter Bank Bid Rate).
MIBER Will be the indicator of Landing Rate For Loans while
MIBID will be the Landing rate for recepits.
2.13 Two New Share Price indices for Mumbai Share Market:
For representing changes in share prices in a better [Link] New
share price indices have been introduced in Mumbai Share Market-BSE
200 and DoUex.
BSE 200 includes the share of 200 selected companies (85 of
Specified List A and 115 Of non- Specified List B). This index also in-
cludes the share of 21 Public sector enterprises.
Name of Share Price Indices Changed
On 28 July, 1998, main Share price indices have been renamed as follows :-
Old Name New Name
NSE-50 S & PCNX Nifty
Crisil 500 S & PCNX - 500
DoUex in and index dealing in dollar prices. In other words, dollex is the
dollar price index of BSE 200.
Main Share Price Index in Famous Share Market of the World
Mumbai DOLEX
SENSEX
S & PCNX
NFTYFIFTY
New York DOW JONES
Tokyo NIKKET
Frankfurt MID DAX
(Germany)
Hong Kong HANG SENG
Singapore SIMEX
STRAITS TIMES
BSE 200 and Dollex- Both the indices have 1989-80 as the base year.
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[It should be kept in Mind that share sensex of BSE includes 30 shares and
it has 1978-79 as base year. The base year of National index is 1983-84]
2.14 Concept of Depository System :
Depository System is that system in which owner ship of security is
Changed by an electronic account entry and physical transaction of securities
does not take place. The main functions of depositiory are as follows:-
1. To accept deposites for ensuring safe custody of securities.
2. To Make computerized account entry for ensuring evidence of ownership
transfer.
3. To Keep record to Mortgaged Securites.
Different Countries possess generally two types of depository
(a) Securities immobilisation system of Depositiories.
(b) Securities dematerilaisation system of Depository.
Depository System In India:
Depository system, based on Non-Physical transfer of share certificates,
was introduced in the country on the recommendation of a technical committe.
On September 21, 1995 the President of India gave his acceptance to depository
Ordinance 1995. The Ordinance was passed in Lok Sabha But in could not obtain
the aceptance of Rajaya Sabha. Again on January 7, 1996 Ordinace was released
for Second time which cleared all obstaces of establishing depository in India.
The objective of the depository services is to improve and modernise the Market
and to enhance the level of investor protection through eliminating bad deliver-
ies, forgery of shares and expediting the transfer of shares. This is being done
through electronic book entry form and scriples trading in stock exchanges thereby
reducing settlement risk. The salient features of the system are as follows:
1. Legal provisions have been made for entry of account details relating to
security ownership
2. Investor can either continue with the existing share certificate system or
opt for depository mode. The investors opting for depository system will
have to get their registration with any participant in depository. These
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participants will be registered with SEBI. Generally commercial Banks,
Financial institutions, Custodians of securities and share brokders will
work as participants in depository.
3. Every depository will be registered with SEBI and Will work only after
Security certificate this effect from SEBI.
4. All Payment transactions and transfer under depository system will be
free from stamp [Link], No stamp duty is payable at the time of
joining or leaving depository system.
5. Companies issuing new shares will provide option to investors for obtain-
ing securites or adopting despository system.
6. Under Depository system. Change of ownership will become as electronic
book entry transfer.
2.15 Computerised 'On Line Trading' in Share markets
(Block & Dots system) :
Mumbai Share market 120 years old isnow a modernized which is
share market working on international standard. The new system named
BOLT-BSE ON Line Trading has replaced 120 year old traditional system
named Open Out Cry System. The New system will enableshare brokdrs to
watch fluctuations in share prices on their computer screen itself and mae
transaction accordingly. This new system was introduced in May 1995.
Since January 29, 1996, Delhi Stock exchange also adopted DOTS
(Delhi On line Trading System) For DOTs operations in Delhi Stock Ex-
change, a New campus for DSE has been Made in Indira Gandhi Stadium in
West Plaza. Following Delhi, Pune Stock Exchange also started on Line
Trading Since March 18, 1996. All other share markets in the country will
soon adopt computerised share market system in coming years.
NSE and OTCEI have already adopted computerised On Line Trading.
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2.16 Hypothesis ;
In spite of all efforts made by SEBI, Reserve Bank of India and
Government of India. Retail investor is not still getting it's justified return
on their investment. Still there are various practices Which are withdraw-
ing benefits of small investors. In this study it is analysed although Indian
Market in booming but this big achievement is provideing benifites to few
high networth individuals. This is the main reason due to which small-
Investors is not taking Part in stock market activites.
2.17 Methodology ;
All reference are collected from reference and standard books.
Data and Information about working and achievement are collected
from Economic Times, Business standard, Dalai Street and Capital Mar-
ket Magazines and From various web sites of stocks exchanges, SEBI,
Management institutes and govemement.
Information is also collected froni Economic Survey 2006-2007,
2007-2008 and All interpretation is made on the basis of this information.
On the basis of above study conclusion have been drawn.
2.18 Limitation of Study ;
Capital Market is the main nerve point of economy. Capital Market
side related with finanical activities and an other side with commodity
market. Capital Market influnced by capital Movement and saving and
investment, Institutions activites in economy in this study it is analysed
how much Finanical parts effecting the capital Market. This study have
not analysed effect of commodity market, on capital market.
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