Any/all views expressed herein are solely of the author's and do not reflect the views of any organization.
This blogpost traces some of the developments in the second half of 1980s that led to the emergence of the Securities and Exchange Board of India ("SEBI"). During 1987-1990, the Lok Sabha saw various questions being raised and answered in relation to the stock markets and their regulation. Several questions and answers on this subject during this period from eparlib.nic.in were studied for the purposes of this blogpost.
A board for regulation of stock exchanges in India to oversee and regulate their finances was in works since 1987. It was envisaged to ensure inter alia the protection of investors’ rights, the prevention of trading malpractices and the regulation and orderly functioning of the exchanges and securities industry.
1987
The GS Patel Committee Report (discussed in the previous post of the series) had in 1985 highlighted the prevalence of insider trading in Indian securities market. Notably, instances of insider trading continued to be reported from time to time. Per the Government, insider trading was expected to be one of the functions of the proposed board.
Basis the GS Patel Committee’s recommendations, the Government had now issued guidelines/directives to exchanges for improvement of their functioning. These pertained to reducing the cost of public issues, reforming membership norms of exchanges and creating customer protection fund in exchanges. However, distinct from the recommendation of GS Patel Committee to set up a council of securities industries, the Government had envisaged the aforementioned board.
The Prime Minister had also announced the intent of introducing a comprehensive legislation for the orderly regulation of exchanges and to clean up trading malpractices. It was also ideated that the Securities Contracts (Regulation) Act, 1956 may be amended to provide for reorganisation of constitution of all exchanges, broad basing of their governing bodies and increase in memberships in the exchanges.
During 1987 to 1989, the Government issued directives and guidelines to exchanges for setting up market surveillance divisions in exchanges for prevention of malpractices in trading in securities. Further guidelines were issued for amendment in rules/articles of the exchange for permitting corporate membership in the exchanges.
SBI was granted permission to set up a mutual fund, becoming the first public sector bank to operate a mutual fund. This was in furtherance of the central government notifying setting up/ establishing and conducting mutual fund as a lawful form of business for banking companies under Section 6(1)(o) of the Banking Regulation Act, 1949. At this point, there were no guidelines issued basis which such permissions could be granted. RBI thus granted permissions basis financial strength of the applicant banks, their methods of operation and overall management, etc.
The year ended without SEBI’s establishment. However, by this point, exchange were empowered to enforce their bye-laws and regulations and to penalise violations by members. Further, governing boards of all exchanges now had government nominee directors. The Securities Contracts (Regulation) Rules, 1957 were amended to provide under Rule 8(4) that where government recommends exchanges shall admit IFCI, IDBI, LIC, GIC, UTI and/or ICICI as member(s) of the exchange.
Fun Fact - By August 1987, the Bombay Stock Exchange (BSE), Calcutta Stock Exchange (CSE), Delhi Stock Exchange (DSE) and Madras Stock Exchange (MSE) were electronically linked for display of share prices.
1988
Dr. S A Dave (Executive Director of IDBI) had been appointed as an officer on special duty to take up work relating to establishment of SEBI. Finally, on April 12, 1988, SEBI was set up. However, it was not yet a statutory body and hence had limited powers. A comprehensive legislation to arm SEBI with adequate powers to discharge its functions remained in works. The primary task before SEBI back in 1988 was the preparation of a draft legislation for the regulation and orderly development of securities market and for investor protection.
Another update in this year was the commencement of operations of the Credit Rating Information Services of India Limited (CRISIL) and Stock Holding Corporation of India ("SHCIL"). SHCIL was set up by 7 all India financial institutions with a share capital of Rs. 7 Crore. The main function of SHCIL was envisioned to be holding custody of securities of the 7 promoter institutions and to handle transfer of securities and collection of dividend/interest on their behalf.
1989
Report on the development of capital market (1989)
A working group of the Planning Commission on the Development of Capital Market published its report in 1989. It made several recommendations, many of which were critical and are reflected under the Securities and Exchange Board of India Act, 1992. Key highlights include the following.
Role of Merchant Bankers
The report recommended that companies raising capital via public issues be mandated to go through SEBI registered merchant bankers. It suggested that specific eligibility criteria for registration such as minimal capital requirements, past track record etc., may be evolved by SEBI. Further, it noted that SEBI may mandate merchant bankers to certify that they re satisfied about the statements made in prospectuses.
Market Integrity
The report highlighted the urgent need to evolve a regulatory framework to prevent unfair trade practices in the stock market. It recommended better enforcement of ban on kerb trading and making insider trading a major offence punishable with both civil penalties and criminal proceedings. It suggested that SEBI may formulate necessary legislation empowering itself to enforce the provisions in this regard.
Mergers and Acquisitions
The report recommended that takeover and merger bids must be given publicity to enable other parties to make competitive offers. To protect minority shareholders, it suggested mandating open offers. Further, in this regard, it suggested that SEBI should draw up detailed guidelines, specifically indicating a takeover trigger point.
Stock Exchange Activities
The report recommended that to curb excessive speculation and overtrading, a system of price bands, trading volume limits and margins should be implemented. Further, it recommended that SEBI should work out the detailed rules for implementation by stock exchanges. It emphasized also the need to accelerate modernisation of exchanges and to strengthen the infrastructure. Lastly, it recommended demutualisation of the governing bodies of exchanges.
Other recommendations
The report further made several recommendations in relation to broad basing of capital market. Lastly, it also recommended allowing private sector mutual funds post working out a comprehensive regulatory framework to govern the same.
1990
In furtherance of the report of the working group of planning commission discussed above, the Government issued new guidelines for mutual funds. These provided for registration of mutual funds with SEBI as well as minimum contribution amount. Further, it specified disclosure, pricing and valuation norms. It also required for investments in money market instruments by mutual funds to normally be limited to 25% of their assets.
By August 31, 1990, 7 mutual funds were operating, with Unit Trust of India being the first (launched in 1986) and the largest mutual fund in the country. However, the setting up of SEBI as a statutory body remained pending as 1990 also concluded.
コメント