By Nilesh A.

Mandlik

Structure of Indian Capital Market (Until the early 1990s)

All stock exchanges was through open outcry.

Settlement systems were paper-based.

Market intermediaries were largely unregulated. The regulatory structure was fragmented and there was neither

comprehensive registration nor an apex body of regulation of the securities market. Stock exchanges were run as brokers clubs as their management was largely composed of brokers. No prohibition on insider trading, or fraudulent and unfair trade practices.

Capital Market Reforms and Developments

Over the last few years several reforms in the secondary market have focused on three main areas: Structure and functioning of stock exchanges. Automation of trading and post trade systems, and the introduction of surveillance and monitoring system. As Computerized online trading of securities, setting up of clearing houses or settlement guarantee funds were made compulsory for stock exchanges, expand their trading to locations outside their jurisdiction.

Still there is an absence of meaningful price discovery or liquidity in markets other than the equity market.

Policy Issues
There are mainly six areas for financial sector reform where there is broad consensus
Mistakes in regulation of institutional investors Flawed regulatory architecture Flawed legal framework

Inadequacies of financial firms

Tax distortions Capital controls

Mistakes in Regulation of Institutional Investors

In the regulation of institutional investors, there are three key difficulties Over-prescriptive and irrational rules: Which often intrude against rational behavior on the part of institutional investors. Eg. RBI rule about banks Resource pre-emption by the government: With banks, insurance companies and pension funds, the existing framework of rules forces financial firms to hold government bonds to a considerable extent, much in excess of what prudence demands Entry barriers: Foreign participation in banking, insurance and pensions is restricted, thus hurting entry by competent firms and adversely affecting competition.

Regulatory Architecture
India has an alphabet soup of regulatory agencies dealing with finance like: Reserve Bank of India, RBI Securities and Exchange Board of India, SEBI Insurance Regulatory and Development Agency, IRDA Pension Fund Regulatory and Development Agency, PFRDA Employees Provident Fund Organization, EPFO Forward Markets Commission, FMC Department of Company Affairs, DCA

Legal Framework
The drafting of law is supposed to be flexible and the courts refine the

interpretation of law under changing circumstances. A transformation of the regulatory architecture will undoubtedly require legislative activism: to place all organized financial trading at SEBI and to create a new independent banking regulator. This drafting needs to be accompanied by a shift of both banking and securities law toward broad principles, a removal of various bans, and the elimination of resource pre-emption by the government.

Financial Firms
Indian financial firms have to compete by becoming multi-product

firms instead of traditional India silo model

Tax Distortions
The excess burden of taxation, also known as the distortionary cost or

deadweight loss of taxation, is the economic loss that society suffers as the result of a tax, over and above the revenue it collects. Eg. Securities transaction tax, Difficulties of taxation of corporations etc

Removing Capital Controls

Without capital controls in the picture, trading in shares of Indian

firms at Singapore or Dubai could compete with trading in India. The trading in international commodity derivativessuch as gold or crude oilthat takes place onshore will come under severe competitive pressure from global derivatives exchanges once capital controls are removed.