Indias emerging stock market had been witness to the approximately Rs 5000 crore Harshad Mehta scam in 1991-92 and it compelled the government to intervene and protect the interest of investors in Indian Capital markets and regulate the markets to avoid malpractices.
The Securities Exchange board of India (SEBI) is a regulatory authority that was established in 1988 and was granted statutory status post Liberalization in 1992 under the provisions of the Securities and Exchange Board of India Act, 1992. It is the watchdog that ensures orderly functioning and smooth growth of the Indian Securities market through regulations and its preamble states its functions as: "…..to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto"
SEBI Reforms: IPO Market
The primary market has not seen any major issue for a very long time now. Even the smaller ones have found the going tough and have even failed in some cases such as Samvardhana Motherson Finance Ltd. while most of the others barely scrapped through on the last day. According to data released by NSE, the recent uptrend in the secondary market has also largely been on the back of FII buying and retail participation still remains a big concern.
Therefore, in order to boost investor sentiment, especially the retail investors, SEBI has come up with a number of reforms for the IPO market which are primarily aimed at ensuring that the proceeds are used for the purpose stated in the RHP, greater transparency and better disclosure standards by companies as well as bankers handling the issue and allotment of a minimum number of shares to the retail investors in order to improve retail participation.
The reforms in the IPO process that have been recently enacted by SEBI are as follows:
Issuer would need to inform the market about the issue at least three days before filing the RHP
Issuer would need to declare the price band at least five days before the issue opens
Issuer would need to allot a minimum lot of shares to each retail investor
Retail individual investors allowed either withdrawing or revising their bids until finalization of the allotment
Minimum application size for all investors has been increased to Rs 10,000 - Rs 15,000
Merchant banker who is handling the issuer, would have to limit its role to marketing of the offer and declare itself as a marketing lead manager
Disclosures made in the red herring prospectus while making an IPO, would need to be updated on an annual basis and made public by the issuer
Issuers coming through the 'profitability route' need to have a minimum average pre-tax operating profit of Rs 15 crores
The first two measures would provide the investors more time to better analyze the company's future prospects which would enable them to make much more informed decisions. The next three are aimed at improving the retail participation in the primary market by ensuring that everyone is allotted a certain minimum number of shares irrespective of the bid quantity. The final three will result in better disclosure standards and will provide assurance to the investors that they are not being cheated in any way by the promoters or the bankers.
SEBI Reforms: Mutual Fund Market
To stimulate financial savings among households and give a boost to the Mutual Fund Industry by luring investors away from the gold market, SEBI enacted the following reforms recently to re-energize the market:
Fund houses will have to make more disclosures in the interest of investors.
Fund houses will have to offer only one plan per scheme and drop the practice of offering one scheme with many plans.
Fund houses will have to set aside a portion of their assets for investor education and awareness.
Brokerage and transaction costs can now be levied in addition to the total expenses.
Fund houses can charge investment and advisory fee on their schemes and these charges must be explicitly mentioned in the offer document.
Net Asset Value (NAV) of mutual fund schemes has to be calculated on a daily basis and published in at least two national newspapers.
Monthly portfolio and half yearly financial results disclosures have to be made by mutual fund companies.
A new set of distributors such as postal agents, retired government officials, teachers and bank officers with a service of 10 years would be allowed to sell units of simple and performing unit fund schemes.
The first three reforms are aimed at increasing investor security and awareness about the schemes on offer and make it simpler for them to invest in Mutual Funds. The next two reforms however, will make investing in Mutual Funds costlier as taxes would be passed on to the investor and not the asset management company (AMC) as earlier. The last three reforms are aimed at regulating the industry in a better way and expanding the distribution network of mutual funds in smaller cities.
SEBI future plans:
There are various classes of foreign investors in India. They are categorized as FIIs, NRIs, foreign venture capital investors (FVCIs) and QFIs (qualified financial investors). SEBI plans to harmonize the investment process for the various classes of foreign investors in India by issuing uniform guidelines for all.
When it comes to investing in government and corporate debt, FIIs can hope for more legroom as SEBI will allow re-investment up to 50% of the debt holdings during the previous calendar year since January 2014.
(http://articles.economictimes.indiatimes.com/2012-10-06/news/34293833_1_government-debt-market-regulator-sebi-fiis)
In order to make life easier for investors, SEBI has also proposed to introduce electronic forms of saving instruments such as fixed deposits, insurance policies, warehouse receipts etc. It has already initiated steps that would enable an investor to view his investments across all asset classes in a consolidated statement.
(http://www.moneycontrol.com/news/market-news/sebi-for-fds-insurance-postal-savingsdemat-format_765941.html)
In view of the recent flash crash of 900 points in NSE due to erroneous trades by a broker at Emkay Capital , SEBI is contemplating coming out with a policy to tackle such trades. But it is not keen on doing it in a rush. SEBI is also looking at improving the time gap between the order placing and reworking of the index. Currently it is reworked three times in a minute.
(http://www.dnaindia.com/money/report_sebi-looking-at-policy-on-annulment-of-trades_1752063)
SEBI has also come out with a plan to promote financial education in India to ensure more and more financial inclusion.
(http://www.sebi.gov.in/cms/sebi_data/attachdocs/1342416428845.pdf)
Sebi seeks special courts for speedy trials in market frauds
(http://articles.economictimes.indiatimes.com/2012-10-22/news/34653489_1_special-courts-chairman-uk-sinha-sebi-chairman ), (http://www.business-standard.com/india/news/insiders-everywhere-impossible-to-catch/490616/ )
Sebi has decided to sign MoUs with six countries -- namely Argentina, Turkey, Kuwait, Qatar, Ireland and Latvia to attract more investments form QFIs
(http://www.moneycontrol.com/news/economy/sebi-to-sign-bilateral-mous-to-attract-foreign-investors_768775.html )
Resources
http://www.sebi.gov.in/acts/OrgStru.html
http://www.sebi.gov.in/acts/act15ac.html#ch4
http://www.sebi.gov.in/sebiweb/home/document_detail.jsp?link=http://www.sebi.gov.in/cms/sebi_data/docfiles/20615_t.html
http://www.sharegyan.com/learn-stock-market/investment-basics/
