REFORMS IN FINANCIAL MARKET

PRE REFORM PERIOD

The period from the mid-1960s

to the early

1990s. Characterized by administered interest rates, industrial licensing and controls, dominant public sector and limited competition. Led to the emergence of uneconomic and inefficient production system with high costs.

The Government of India introduced economic and financial sector reforms in 1991 and banking sector reforms were part and parcel of financial sector reforms. These were initiated in 1991 to make Indian banking sector more efficient, strong and dynamic.

In the post liberalization-era, Reserve Bank of India (RBI) has initiated quite a few measures to ensure safety and consistency of the banking system in the country and at the same point in time to support banks to play an effective role in accelerating the economic growth process.

In 1991, the RBI had proposed to form the committee chaired by M. Narasimham, former RBI Governor in order to review the Financial System viz. aspects relating to the Structure, Organizations and Functioning of the financial system.

The recommendations of the Narasimham CommissionI in 1991 provided the blue print for the first generation reforms of the financial sector, the period 1992-97 witnessed the laying of the foundations for reforms in the banking system.
the Report of the Narasimham Committee-II in 1998 provided the road map of the second generation reforms processes

RECOMMENDATIONS OF THE COMMITTEE

Reduction of Statutory Liquidity Ratio (SLR) to 25 per cent over a period of five years Progressive reduction in Cash Reserve Ratio (CRR) Imparting transparency to bank balance sheets and making more disclosures . Liberalizing the policy with regard to allowing foreign banks to open offices in India.

SOME OTHER MAJOR COMMITTEES

1.KHAN COMMITTEE: Exploring the possibility of gainful mergers. Developing a function-specific regulatory framework. Speedy implementation of legal reforms. Establishment of a super regulator.

2.VERMA COMMITTEE: Need for greater use of IT. Restructuring of weak banks. VRS.

MONEY MARKET REFORMS

In 1985 ,committee was set up under the chairmanship of Sukhmoy Chakarvorty to develop money market instruments. In 1987 , Vaghul committee was set up under the chairmanship of N.Vaghul.

REFORMS BY VAGHUL COMMITTEE

In 1988, Discount and finance House of India(DFHI) was set up as a Money Market Institutions. Money Market Instruments were Introduced. 182 day T-Bills, CDs, inter bank Participation (198889). CPs (jan.1990) Interest rate ceiling on call money was freed (In oct.1988). Gradual Shift from Govt. administered Interest rate to Market based interest rate.

NARASIMHA COMMITTEE

Set up under the chairmanship- M. Narasimha.(Aug. 1991) To examine all aspects of structure, functions Organization , & procedure of Financial System.

REFORMS BY NARASIMHA COMMITTEE

The Security Trading Corporation Of India (STCI) was set up in June, 1994. Withdrawing the regulatory restriction (bank guarantee in respect to CPs ). Increasing no.of participants.(FIIs, MFs,NBFCs) T- bills of varying maturities and RBI repos, Auctioned T-Bills were introduced. Ways And Means Advances (WMA) linked to bank rate replaced Ad hoc and on tap 91 day T-Bills.

Liquidity adjustment Facility (LAF) was introduced in June 2000. Minimum Lock in period was brought down to 15 days. Interim liquidity adjustment Facility(ILAF) was introduced in April 1999. Inter bank liabilities were exempted from CRR and SLR stipulates for the development of a term money market.

Money market Derivatives were introduced FRAs- forward rate agreements & IRSs interest rate swaps (1999). Payment system was strengthened Negotiated Dealing System (NDS) in Feb.2002. Clearing Corporation Of India Limited (CCIL) in April 2002. Real Time gross settlements system(RTGS) from April 2004. Collateral Borrowing and Lending Obligations(CBLO) as money market Instruments through CCIL on Jan.2003

REFORMS IN THE PRIMARY CAPITAL MARKET

1.

ESTABLISHMENT OF SEBI
The main functions of SEBI areTo regulate the business of the stock market and other securities market. To promote and regulate the self regulatory organisations. To prohibit fraud and unfair trade practices in securities market. To promote awareness among investors and training of intermediaries about safety of market. To prohibit insider trading in securities market. To regulate huge acquisition of shares takeovers of companies.

2.

3. 4.

5.

Freedom to determine a Fixed Value Per Share by companies. Reduction in cost of the issue. Permission given to Foreign Institutional Investors to invest in the Indian Capital Market. Indian companies allowed to raise capital from the international capital market. Through issue of GDR, ADR, FCCBs and ECBs.

6.

7. 8. 9.

IT, Telecom, Media and Entertainment sector companies allowed a minimum offering of 10% of their equity. Public offer of shares in the demat form only. Introduction of green shoe option facility in IPOs. Change in the eligibility criteria for IPOs.

10. 11. 12.

Allotment of shares on a proportionate basis. Companies permitted to take multiple routes. Disclosure requirements rationalised.

SECONDARY CAPITAL MARKET REFORMS

The open outcry trading system, prevalent till 1995 was replaced by on-line screen based electronic trading. 3 new stock exchanges at the national level were set up in the 1990sa. Over the counter exchange of India(1992), b. National stock Exchange of India(1994) c. Inter connected Stock Exchange of India(1999) Trading and settlement cycles were uniformly trimmed from 14 days to 7 days in all stock exchanges in Aug 96. settlement cycle for all securities was shortened from T+5 to T+3 wef apr 1 2002. It was further contracted to T+2 wef Apr 1 2003.

 Companies

are allowed to buy back their own shares for capital restructuring subject to the condition that the it doesnt exceed 25% of paid up capital and free reserves of the concerned company. The insider trading regulations have been formulated prohibiting insider trading and making it a criminal offence, punishable in accordance with the provisions under the SEBI Act, 1992. Since 2000 trading of futures has begun. The Securities Contracts Act, 1956 has been amended for introduction of options trading. It is mandatory for listed companies to announce quarterly results.

 Central

government has notified the establishment of the Investor Education and Protection Fund(IEPF) wef oct 1, 2001. It is mandatory for all brokers to disclose all details of block deals. SEBI has made it mandatory for every intermediary, to make an application for allotment of Unique Identification numbers for itself and for its related persons under SEBI Regulations 2003.

 SEBI

allowed mutual funds to invest in derivative securities. They were also permitted to invest up to 10% of the net assets as on Jan 31 of each year in foreign securities with the limit of min US $ 5 million and max $ 50 million FIIs and NRIs were permitted to invest in all exchange traded derivative contracts.

RECENT REFORMS
IPO

grading-SEBI has made it compulsory for companies coming out with IPOs of equity shares to get their IPOs graded by at least one credit rating agency registered with SEBI from May 1, 2007. Till January 2008 45 IPOs have been graded by credit rating agencies. Investment options for Navaratna and Miniratna Public Sector Enterprises-The Navaratna and Miniratna Public Sector Enterprises have been allowed to invest in public sector mutual funds subject to the condition that they would not invest more than 30% of the available surplus funds in equity mutual funds and the Boards of PSEs would decide the guidelines, procedures and management control systems for such investment in consultation with their administrative Ministries.

 Mutual

Funds migrate from commission based system of remuneration to fee based system.SEBI has stipulated that since August 2009 no entry load shall be there for any mutual fund scheme and the upfront commission to distributors will be paid by the investor directly based on his assessment of various factors including the service rendered by the distributor. PAN as the sole identification number.