25 Recent changes in Indian Capital Market
After the nationalization of commercial banks, there has been a steady growth in both agriculture and industrial finance. Certain new financial institutions have been created in the country such as NABARD, EXIM Bank, SIDBI, etc., which were responsible for providing funds to the capital market. In the existing development banks, certain operational changes were made, which enabled them to finance more industrial activity in the country. Mutual funds, started in both public and private sector banks have also improved the working of capital market in India.
Recent changes in Indian Capital Market
1. Economic Liberalization due to Indian Capital Market:
The economic liberalization has led to more deregulation, liberalization and privatization of some of the public sector undertakings in India. This has resulted in the shares of some of the public sector undertakings being made available to the public. The Industrial policy adopted by the government earlier did not allow investment in core sector by either individuals or private sector. But, with the privatization of some of the public sector undertakings, the shares are now available to the public for contribution. Example: Steel Authority of India (SAIL). The Navarathna companies, consisting of major public sector undertakings such as ONGC, BHEL, Oil India Ltd, Gas Authority etc., are some of the companies which are yet to be privatized. Recently, the shares of VSNL were bought by TATAs.
2. Promoting more private sector banks:
Opening of more private sector banks has resulted in the public contributing to the shares of these banks in Indian capital Market. Recently, the government has announced 74% equity participation by foreigners in private sector banks in India. This has not only promoted new banks but also paved the way for the merger of existing banks with other banks. Example: The merger of Bank of Madura with ICICI Bank.
3. Promotion of Mutual Funds:
The promotion of mutual funds by nationalized as well as non-nationalized banks has also improved the Indian capital market. They were helpful to the public by way of tax saving schemes. Example: UTI’s monthly income scheme. Mutual Funds promoted by nationalized banks have increased investments. SEBI has regulated the working of mutual funds and the banks have to publish their net asset value every week by furnishing the details in leading newspapers. At present, the condition of some of the mutual funds is very alarming, with the value of their investment going below the face value of the securities. Hence, there is every possibility of the public losing their confidence in the mutual funds. example: Unit Trust of India.
4. Regulation of NRI Investments:
The Amendment of Foreign Exchange Regulation Act (FERA) into Foreign Exchange Management Act (FEMA) has given more encouragement to non resident investors. The percentage of NRI investment in Indian companies has been increased from 5% to 24%. In the year 1991, India faced an acute shortage of foreign exchange and the then finance minister adopted certain methods to improve the foreign exchange reserves. He allowed investment by any individual NRI in any Indian company from the then existing 5% of paid up capital to 24%. This had resulted in more inflow of foreign funds into India. Foreign financial institutions have been made to invest directly in the Indian capital market. The lock-in period of NRIs in equity shares in Indian companies has been reduced from 3 years to 1 year. Any profit earned while diluting the shares will attract 20% tax on profit.
5. Direct Foreign Investment:
The Foreign Investment Promotion Board, consisting of the Secretaries of industries, finance and foreign affairs, have allowed more direct foreign investment in core sector, especially in power sector.
6. FERA Companies:
Under the Foreign Exchange Regulation Act, a FERA company is one which has 40% equity participation by foreigners. This limit has been removed and now even foreign companies are allowed to have 51% equity participation. For example, Colgate Polmolive has increased its foreign equity participation from 40 to 51%. As a result, we are able to attract more foreign capital into Indian capital market. The FERA Act has since been amended and is now known as Foreign Exchange Management Act (FEMA).
7. Online Trading in Indian Capital Market:
Some of the leading stock markets in India have introduced computer system for their trading activities. The brokers can get hooked-up and do their trading on Online basis. The computer terminals will enable the public and the brokers to know the price prevailing in the market at any time. This will prevent speculation activities.
8. Transparency through Online trading:
The online trading through computer has brought in transparency to the transactions in the market. People are able to know prices prevailing in the market at any time and as such the brokers cannot deprive their clients of their profits. The manipulation in the opening and closing prices of shares by the brokers in the market is no longer possible.
9. National Stock Exchange:
A new stock market called National Stock Exchange has been created which has a large number of companies listed. It is a big competitor to the Bombay Stock Exchange and it is able to even influence the Bombay Stock Exchange. The National Stock Exchange deals in shares of companies throughout India and the prices prevailing in the market is a benchmark for stock prices. The creation of National Stock Exchange has not only widened the market, but has also subdued the Bombay Stock Exchange. It has paved the way for all the leading companies’ equities being traded through a single market. Thus, it enables the public to know the true picture of the companies and their real strength.
10. Sensitivity Index in Indian Capital Market:
The calculation of index number has also undergone a change. Sensitivity index has been introduced which represents important 30 companies whose volume and value of shares determines the market condition. The sensitivity index is an indication of the conditions prevailing in the market and the conditions that are likely to be encountered by the market.
11. Circuit-Breaker in Indian Capital Market:
Wild fluctuations in the stock market is a thing of the past. There cannot be any more ‘stock scam’ as engineered by Harshad Metha. For this purpose, the Bombay stock market has introduced a cut-off switch which is called circuit breaker. Whenever the market index goes up by more than 10%, the circuit breaker will go off, bringing the entire operations in the market to a standstill. This will be for a period of 30 minutes after which the market will resume. This will bring down the share price. The stock market operates for two hours each day and any termination in the circuit breaker, after initial 1 and half hours of working will result in the market closing for the day. Since the market operations cannot be resumed for the day, share prices will fall. Wild speculation in shares will be a thing of the past.
12. Demating of shares in Indian Capital Market:
The introduction of demating has resulted in improving transactions further. Demating is a system under which physical delivery of shares is no more adopted. It is called “scripless trade”. The shares of individual investors are held by stock holding company and a pass book is given to individual investors. Any sale or purchase of shares will result in entries made in the pass book. The companies concerned are also informed for making due alterations in the share register. This has prevented blank transfer and speculation. Every transaction in the market is not only recorded but it brings revenue to the Government in the form of registration and stamp charges. Blank transfers will not be possible and short term speculation in shares cannot be done. Every share purchased or sold will have to go for registration and hence bogus or benami share transfer is not possible.
13. Market Makers in Indian Capital Market:
The share price of companies will be decided by the market forces of supply and demand. There are market makers who will ensure the supply and reasonable price for the stocks of companies. By the introduction of these market makers, manipulation of share price by the brokers is prevented.
14. Securities and Exchange Board of India:
The creation of Securities and Exchange Board of India (SEBI) is an important development in Indian capital market of India. SEBI has not only replaced the Controller of Capital issues, but has brought in uniformity in the transactions in all stock exchanges.
15. Renewal of Registration:
All the brokers and sub brokers have to register afresh with SEBI and any complaints against them will be inquired and if found guilty, punishment is given.
16. Over The Counter Exchange of India (OTCEI):
For the purpose of newly promoted companies, another stock exchange with lesser degree of conditions has been promoted and it is called Over The Counter Exchange of India (OTCEI). It may not be possible for all the newly companies to list their shares with the existing stock exchanges. The share capital of these companies will be low and hence there should be an arrangement for listing such companies’ shares. The creation of Over The Counter Exchange of India (OTCEI) is helpful to these newly promoted companies.
17. Merchant banker:
Merchant bankers have been permitted to take part in the stock market. operations and their functions are also regulated by SEBI. They not only help companies in capital budgeting but also guide the foreign investors in the purchase of securities. The merchant bankers, through the financial markets, help some of the Indian companies to obtain fresh capital. They also go in for syndication of loans and help the newly started companies in the issue of shares.
18. Non Banking Financial Companies:
The role of non-financial companies has also been controlled. RBI has introduced new conditions, restricting their activities. New norms with regard to capital of non banking financial companies have been introduced. For chit funds, a separate Act has been passed and it restricts the maximum bidding to 40%.
19. Forward trading in Indian Capital market:
Forward trading has been introduced since 9th June 2000 in Bombay Stock Exchange on a trial basis and if found successful, it will be extended. It will be helpful to the investors in ascertaining the true colors of existing companies.
20. Badla transactions in Indian Capital Market:
Badla is a transfer of a contract from one period to another, where, either the buyer or the seller is unable to execute the contract for which purpose, the defaulting parties will pay Badla charges (which are decided by the Stock exchange). At present, SEBI has banned Badla transactions.
21. Restrictions on Mutual Fund’s Investment:
There have been restrictions on the role of mutual funds in the market. They cannot invest more than 10% of their investable funds in any single company and not more than 10% of single company’s issue of shares can be purchased by mutual funds.
22. Educating Public:
Press and media have contributed a lot in popularizing the Indian capital market and they are highlighting the prices of securities everyday. The mutual funds and merchant banks have been asked to set apart a portion of their funds towards educating the public on the developments in the Indian capital market.
23. Government Securities Market:
After the stock scam, the Central Government has de-linked Government securities from trading along with company securities. In other words, there will be separate market for Government securities and they will not be dealt along with company securities in the stock
market. The measure was taken by Dr. Manmohan Singh when he was the Finance Minister.
24. Future trading in Indian Capital Market:
Future trading is a contract to buy or sell a particular financial instrument on a future date at a specific price. The contract enables the parties to transfer according to the changes in the price from one person to another. By this, the risk is minimized. In every future contract, we have a buyer and a seller. And if one makes a profit in a particular contract, the other person may try to minimize his loss through some other contract. Thus, the future market provides scope for the traders to minimize their loss or the risks in trading of financial instruments. We have different types of ‘financial futures’.
25. Penalty for insider trading in Indian Capital Market:
In 2002, SEBI Act was amended to make insider trading punishable as a serious offense. The penalty rate has been enhanced to Rs. 1 lakh per day and the maximum penalty can go up to Rs. 25 crores.
26. Period of settlement in Indian Capital Market:
After removing the Badla, SEBI has introduced T+2…… – system for settling transactions in Indian capital market. Accordingly, all transactions entered in the capital market, should be completed within 2 days excluding the date of trading.
All the above measures have improved the working of stock markets in India. If the present situation continues, we can expect in future the uplinking of our stock market with that of the developed countries.