RECENT TRENDS IN CAPITAL MARKET

REFORMATION

The recent years witnessed significant reforms in the capital market.

 It is well known that trading platform has become automatic, electronic, anonymous, order-
driven, nation-wide and screen-based. Shouting and gesticulations have yielded place to
punching and clicking. Speed and efficiency are the hallmark of the current system. Across
the system, multitude of market participants trade with one another anonymously and
simultaneously. On any trading day, more than 10,000 terminals come alive, in 400 towns
and cities; information is flashed on real time basis.
Equal opportunity is provided for all concerned to access the information. Transparency is
ensured in respect of dissemination of information, price and quantum of the order; but,
member‟s identity is sought to be hidden to prevent any bias in response. Today, a trading
member need not wend his way to the Jeejeebhoy Tower in Dalal Street, Mumbai or to any
stock exchange building elsewhere; he can comfortably sit at his computer terminal and
execute the order. Laptops, palmtops and hand mobiles, in fact, challenge the relevance of the
brick and mortar.
 An investor, today, need not wait, with his fingers crossed, for a fortnight or more, for getting
crossed cheques or crisp notes for the sale proceeds of his securities. The trading cycle has
been shortened to T+2. This shortening of the cycle has been done in a phased manner but in
a rapid succession – from T+5 to T+3 to T+2, all in a matter of two years.
 Another material development, which proved to be of immense relief to the investors, was
dematerialisation of the scrips. Now 99% of the scrips in the market are dematerialised.
Almost 100% of the trades are in D-mat form. Inconvenience of physical custody and
transfer, tedium of intimating change of address and problems of bad delivery, late delivery,
non delivery and the risks of forgery and frauds have virtually. The benefit is relished but not
the cost.
 At the stock exchanges, robust risk management system has been put in place, Value-at-risk
margining and exposure limits, on-line monitoring of margins and positions, Clearing
Corporation and Settlement Guarantee Fund mechanism for trade settlement – all these have
made Indian capital market now arguably world class, in terms of transparency, efficiency
and safety.
 Antiquated and abused „badla‟ system or ALBM stands abolished. In its place, for hedging
and trading purposes, a number of derivatives – in the form of futures and options, both
index-based and stocks-specific have been introduced. The sophistication of these products
have not scared away our brokers and investors. Instead, with their native intelligence, they
are as comfortable in the F&O Quarter as a fish in the water. The vibrancy of F&O segment
has surpassed the cash segment in terms of daily turnover within a short period.
 Corporate bonds and Government Securities used to be traded via telephone exchange. A
beginning has been made for their trading on the stock exchange now. As is natural, the
weaning takes time.
 Our accounting standards are already principle-based; they have been aligned with
international standards almost in all aspects, barring one or two. Our disclosure requirements,
both initial and continuing, are on par with global practices.
  The corporate governance and corporate performance do reflect and get reflected in the
conditions of capital market. As a market regulator and protector, SEBI is concerned with
corporate governance practice on an ongoing basis. According to the Economic Intelligence
Unit Survey of 2003 regarding corporate governance across the countries, “Top of the country
class, as might be expected, was Singapore followed by Hongkong and, somewhat
surprisingly, India.” It is significant to note that Singapore and Hongkong claiming the top
positions, was not a matter of surprise, but India coming as third, surprised the world. As part
of its endeavour towards continual improvement, SEBI has got corporate governance code
and practice reviewed, by Narayana Murthy Committee. The Committee’s recommendations
for refinement were evolved through consultative process, transparent deliberations and
democratic approach. These were posted on SEBI’s website for 21 long days. Thereafter, they
were got incorporated in Clause 49 of Listing Agreement.
The three major aspects, which disturbed the corporate:
 related to definition of independent directors,
 their nine-year term and
 whistle blowing policy.

“Directors Decalogue”

The session is becoming heavy. Let me try to lighten it to an extent! Let me take the issue of
independent directors, for the purpose. Based on my experience as a nominee director on the Boards
of several companies and having dealt with hundreds of corporates, I am aware, how the so-called
independent directors get selected, moulded or conditioned by the obliging promoters in some cases. -
I am not generalising. And, this is not unique only in India and it happens elsewhere in the world as
well. - When a person is selected by the promoter for induction into the Board, he is dubbed as an
independent director, who probably begins so but loses his independence as time passes, and in course
of time, both the promoter and independent director become mutually dependent! When the promoter
selects someone to act as independent director, to satisfy the requirement of financial institution, the
independent director seems to be given certain unwritten, friendly, advice or code of conduct to
follow: The independent director is cordially welcome to attend – not all the Board meetings
unnecessarily - but only whenever required for quorum or support purposes! The independent
director is also not expected to take the trouble of reading all agenda papers; even if he reads – and
also understands – he is not expected to raise questions - leave alone inconvenient ones! If, for the
sake of digesting the sitting fees, - he feels compulsively the need to raise questions, he should not
hope to get them answered or, whatever be the answer, he should accept it in good faith! In any case,
the independent director need not apply his mind and express his dissent! If he cannot help expressing
dissent, he should not demand its recording! For that matter, he should not unnecessarily poke his
nose or rock the boat or blow the whistle. In short, he should not “act independently”. In partial
adoption of the Directors’ Decalogue of Stanley Vance, the non-ecclesiastical Commandments of the
promoter to Independent Director would be;

Thou shall not –

· Attend all Meetings;

· Read the papers;
· Raise questions;
 · Seek answers;
· Express dissent;
· Demand recording;
· Poke your nose;
· Rock the boat;
· Blow the whistle;
(and, in short)
· Act independently!

Let me hasten to add that not all promoters or independent directors fall in the above category. The
exception is exaggerated in lighter vein to emphasise the imperative of independence in true sense of
the term.

Coming back to the subject of the Clause 49, the Narayana Murthy Committee was asked to revisit its
recommendations. Based on the review, the recommendations have been refined, with an eye on
practicality. These will be formalised shortly. In the ultimate analysis, however, more than the rules
and regulations, codes and principles, the change of mindset is called for. Good Corporate
Governance is, after all, an ethical principle and value-proposition. Today, it is realised that ethics and
business do mix and mix well. I am given to understand that there is empirical evidence to establish
causal relationship between good Corporate Governance and sustained corporate performance. Two
Credit Rating Agencies have come up with their own methodology to rate the corporates according to
their governing standards, linking it with wealth creation, management and distribution. Be rest
assured, such a rating is not mandatory. But, may be, in course of time, the market and economic
compulsions would make it a preferred option.

RESURGENCE

During the last one year, Indian capital market has been regaining its buoyancy. Globally recognised
economic fundamentals of the country and widely perceived robustness of the Indian Capital Market
system have gradually restored the confidence of the investors, global and local, in the Indian market,
to a substantial degree. During the last one year, the sensex has risen by over 75%. The Indian capital
market has outperformed many in the world. More importantly, the primary market too has perked up.
The depth and liquidity of the market and its absorbing capacity has been indisputably proven. The
fear of failure of PSU disinvestments turned out to be unfounded. Some mistakes have occurred. To
err is human and occasional systemic fault / fatigue is not uncommon. Mistakes may happen and do
happen; but they should not lead to paralysis, panic and cynicism; nor should they be allowed to be
exploited. Mistakes if any should be rectified and rectified quickly and their recurrence prevented. If
by ignorance, one mistakes, by mistake one should learn.

VIGILANCE

However sophisticated, efficacious, fail-proof a system or technology may be, human intervention is
inevitable, for, the system is manned, managed or used by human beings. Human nature being what it
is, and as the human ingenuity knows no bounds, constant regulatory surveillance and prompt action
is necessary. That is what SEBI is trying to do. Armed with statutory authority and consumed by
missionary zeal, SEBI keeps vigil, clamps down appropriate surveillance actions. Any market
misconduct or manipulation are sought to be dealt with severely in the interest of the market and the
investors. Investigations into allegations of manipulations etc. are getting speeded up and necessary
regulatory action is taken, without bias or prejudice, with no fear or favour. At times, the action may
turn out to be deterrent in nature, as circumstances warrant.

FURTHERANCE

A few more things are on the anvil. Margin trading and securities lending have been introduced with
adequate checks and balances. The Central Listing Authority has become operational to provide an
independent entry-point scrutiny of the corporates to be listed. Straight through Processing will get
broadened market wide in another 3 month’s time. The Central Registry of market intermediaries and
professionals with unique identification number is under construction. And, when RTGS is being
ushered in, T+1 settlement cannot be far behind! Structural consolidation, infrastructural
improvements, product-innovation, refinement of regulations, and integrated surveillance should be
some of the thrust areas for planned action in the days ahead.