When was Securities and Exchange Board of India (SEBI) set up?- A report by a committee headed
by GS Patel in 1984
recommended major changes in India’s capital markets.
- The government in its 1987-88 budget announced the proposal to set up a board tasked with powers
to regulate stock exchanges.
- The government set up SEBI through an executive order in 1988
appointing SA Dave, the then executive director of IDBI, as its
chairman.
- Dave and a young team of Ravi Narain, (now the vice-chairman of the
National Stock Exchange), Chitra Ramakrishna (current managing director of
the NSE), Raghavan Puthran, GV Nageswara Rao, (now CEO of the IDBI-Federal
Bank insurance venture), and Rajesh Tiwari (now with Axis Bank) among
others drafted the SEBI Act and defined the contours of the organisation.
- SEBI received statutory powers after Parliament passed the SEBI Act
in 1992, the year in which the Rs. 5,000-crore
Harshad Mehta securities scam hit the Indian stock markets.
How were stock markets regulated before SEBI was set up?
- Though stock
exchanges were in operation, there was no legislation for their regulation
till the Bombay Securities Contracts Control Act was enacted in
1925.
- This was,
however, deficient in many respects.
- Under the
Constitution which came into force on January 26, 1950, stock exchanges
and forward markets came under the exclusive authority of the central
government.
- Following the
recommendations of the AD Gorwala Committee
in 1951, the Securities Contracts (Regulation) Act, 1956 was enacted to
provide for direct and indirect control of virtually all aspects of
securities trading and the running of stock exchanges and to prevent
undesirable transactions in securities.
- Controller
of Capital Issues was the regulatory authority for public issues before
SEBI was set up.
When was dematerialisation of shares introduced in India?
- Parliament
passed the Depositories Act in 1996, paving the way for abandoning
physical share certificates and introducing dematerialised (demat) holding
of shares, which laid the foundations of electronic securities trading in
India.
- Introduction
of demat trading was a watershed in India’s capital market history that
hastened the settlement process and prevented the menace of fake share
certificates.
What is T+5 and T+2?
- T+5 and T+2
represent the time taken for settlement of trade.
- India
moved from a T+5 settlement cycle in 2001 to T+2 in 2003, in which shares
were being credited to the buyers’ account within two days of trading from
the earlier five days.
- SEBI is
currently examining measures to reduce the settlement cycle to T+1 for
even faster trading.
What role has the regulator played in
bringing foreign capital into Indian equity markets?
- Foreign
institutional investors (FIIs) were allowed entry into the Indian equity
markets in 1993.
- With time, they
have become one of the major edifices of India’s capital markets.
- FIIs were
allowed to participate in the government’s disinvestment programme.
- The FII
investment ceiling was raised to 49% in March 2001.
- The need for
dual approval for FII registration — by the Reserve Bank of India and SEBI
— was done away with in 2003.
- Over the years,
SEBI has progressively raised the cap on FII investments in India’s
government and corporate bonds.
What measures has SEBI taken to
encourage retail participation in equity markets and foster the MF industry?
- The Indian
mutual fund industry has multiplied from a monopoly of the Unit Trust of
India (UTI) until the 1990s to a highly competitive industry.
- With the entry
of private sector funds in 1993, a new era began in the Indian mutual fund
industry, giving Indian investors a wider choice of fund families.
- The erstwhile
Kothari Pioneer (now merged with Franklin Templeton) was the first private
sector mutual fund registered in July 1993.
- The 1993 SEBI
(Mutual Fund) Regulations were substituted by a more comprehensive and
revised Mutual Fund Regulations in 1996.
- The industry now
functions under the SEBI (Mutual Fund) Regulations 1996.
- In February
2003, following the repeal of the Unit Trust of India Act 1963, UTI was
bifurcated into two separate entities.
- One is the
Specified Undertaking of the Unit Trust of India, the assets of US 64
scheme, assured return and certain other schemes.
- The second is
the UTI Mutual Fund, sponsored by SBI, PNB, BOB and LIC.
- This was done
after a major scam involving UTI’s flagship US-64 scheme comes to light
jeopardising the interest of lakhs of small investors.
- Over the years,
SEBI has taken several steps to increase the popularity of mutual fund
products and prevent mis-selling by distributors including relaxing of
know your customer (KYC) norms for small investors and widening the
distribution network in rural India by roping in postal agents and banning
entry-loads.
What are the key challenges confronting India’s capital markets?
- Enforcement
remains a key challenge.
- India’s
regulatory architecture is not equipped to prevent such systematic
financial swindle of savings of thousands of gullible small
depositors.
- There have been
increased incidences of such firms operating between the regulatory
boundaries at their will, defrauding investors in the name of emus,
plantations, and pyramid formations and experts say that all such schemes
fall under India’s rapidly growing unregulated “shadow banking”
area.
- In addition,
deepening India’s corporate debt market remains a key challenge.
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Additional
Reading !
Recently
FSLRC report under former SC judge Justice B. N. Srikrishna came out which suggested
that - Review
of existing legislation including the RBI Act, the SEBI Act, the IRDA Act,
the PFRDA Act, FCRA, SCRA, FEMA etc., which govern the financial sector’
- creating a
unified regulator for the financial sector by merging SEBI, IRDA, PFRDA
and Forward Markets Commission with it. For the time being, it suggested
to keep the Reserve Bank of India out of the proposed Unified
Financial Agency (UFA). But after sufficient
experience is gained it wanted even RBI to be merged with UFA.
