Capital market reforms in India

Capital market reforms

The Indian regulatory and supervisory framework of securities market has been adequately strengthened through the legislative and administrative measures in the recent past. The regulatory framework for securities market is consistent with the best international benchmarks, such as, standards prescribed by International Organization of Securities Commissions (IOSCO).

• Extensive Capital Market Reforms were undertaken during the 1990s encompassing legislative regulatory and institutional reforms. Statutory market regulator, which was created in 1992, was suitably empowered to regulate the collective investment schemes and plantation schemes through an amendment in 1999. Further, the organization strengthening of SEBI and suitable empowerment through compliance and enforcement powers including search and seizure powers were given through an amendment in SEBI Act in 2002. Although dematerialization started in 1997 after the legal foundations for electronic book keeping were provided and depositories created the regulator mandated gradually that trading in most of the stocks take place only in dematerialized form.
• Till 2001 India was the only sophisticated market having account period settlement alongside the derivatives products. From middle of 2001 uniform rolling settlement and same settlement cycles were prescribed creating a true spot market.
• After the legal framework for derivatives trading was provided by the amendment of SCRA in 1999 derivatives trading started in a gradual manner with stock index futures in June 2000. Later on options and single stock futures were introduced in 2000-2001 and now India’s derivatives market turnover is more than the cash market and India is one of the largest single stock futures markets in the world.
• India’s risk management systems have always been very modern and effective. The VaR based margining system was introduced in mid 2001 and the risk management systems have withstood huge volatility experienced in May 2003 and May 2004. This included real time exposure monitoring, disablement of broker terminals, VaR based margining etc.
• India is one of the few countries to have started the screen based trading of government securities in January 2003.
• In June 2003 the interest rate futures contracts on the screen based trading platform were introduced.
• India is one of the few countries to have started the Straight through Processing (STP), which will completely automate the process of order flow and clearing and settlement on the stock exchanges.
• RBI has introduced the Real Time Gross Settlement system (RTGS) in 2004 on experimental basis. RTGS will allow real delivery v/s. payment which is the international norm recognized by BIS and IOSCO.
• To improve the governance mechanism of stock exchanges by mandating demutualization and corporatization of stock exchanges and to protect the interest of investors in securities market the Securities Laws (Amendment) Ordinance was promulgated on 12^th October 2004. The Ordinance has since been replaced by a Bill.