- 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.
Additional Reading !
- 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.