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Securities
Market
The securities market reflects and regulates corporate
governance standards. Many jurisdictions use securities
market as a tool to improve corporate governance.
In India the securities market is undergoing a cleansing
over the last decade or so and building resilience
to corporate scandals?. With the objectives of improving
market efficiency, enhancing transparency, preventing
unfair trade practices and bringing the Indian market
up to international standards, a package of reforms
consisting of measures to liberalise, regulate and
develop the securities market was introduced in the
1990s. The practice of allocation of resources among
different competing entities as well as its terms
by a central authority was discontinued. The issuers
complying with the eligibility criteria now have freedom
to issue the securities at market determined rates.
The secondarymarket overcame the geographical barriers
by moving to screen based trading, which made trading
system accessible to every body anywhere in the Indian
sub-continent. Trades enjoy counter-party guarantee.
The trading cycle shortened to a day and trades are
settled within 2 working days, while all deferral
products are banned. Physical security certificates
have almost disappeared. A variety of derivatives
are available. In fact, some reforms such as straight
through processing in securities, T+2 rolling settlement,
clearing corporation being the central counterparty
to all the trades on the exchanges, real time monitoring
of brokers’ positions and margins, and automatic
disabling of brokers’ terminals are singular
to the Indian securities market. Indian disclosure
and accounting standards are as modern, updated, potent
and versatile as those of any other market. Today,
the Indian securities market stands shoulder to shoulder
with most developed markets in North America, Western
Europe and Far East.
Role of Securities & Exchange Board of India.
As
the regulator for the securities market, the Securities
and Exchange Board of India (SEBI) has been focussing
on the following areas to improve corporate governance:
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Ensuring
timely disclosure of relevant information, |
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Providing
an efficient and effective market system, |
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Demonstrating
reliable and effective enforcement, and |
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Enabling
the highest standards of governance. |
A. Disclosure Standards
Disclosure standards in the Indian Regulatory jurisdiction
are at par with the best in the world - a feedback
from several global organisations, both regulatory
and market participants. Similar views have been expressed
by various academicians and researchers. Research
by Prof. Florencio Lopez-de-Silanes, the findings
of which have been circulated as background paper
for this forum, grants India 100% marks on disclosures.
A company is required to make specified disclosures
at the time of issue and make continuous disclosures
as long as its securities are listed on exchanges.
The standards for these disclosures, including the
content, medium and time of disclosure, have been
specified in the Companies Act, Disclosure and Investor
Protection Guidelines, Listing Agreement, Regulations
relating to insider trading and takeovers etc. These
disclosures are made through various documents such
as prospectus, quarterly statements, annual reports
etc. and are disseminated through media, web sites
of the company and the exchanges, and through EDIFAR
(Electronic Data Information Filing and Retrieval)
System maintained by the regulator. These disclosures
relate to Financial Performance, Shareholding Pattern,
Trading by Insiders, Substantial Acquisitions, Related
Party Disclosures, Audit Qualifications, Buyback Details,
Corporate Governance, Actions taken against Company,
Risk Management, Utilization of Issue Proceeds, Remuneration
of Directors etc. All listed companies and organisations
associated with securities markets including the intermediaries,
asset management companies, Trustees of mutual funds,
SROs, stock exchanges, clearing house / corporations,
public financial institutions, professional firms
such as auditors, accountancy firms, law firms, analysts,
consultants, etc. assisting or advising listed companies
are required to abide by the Code of Corporate Disclosure
Practices specified in SEBI (Insider Trading) Regulations.
B. Efficient and Effective Market System
Indian securities market has a large infrastructure
to meet the demands of a sub continental market. There
are 23 stock exchanges, and about 10,000 brokers,
15,000 sub-brokers, 10,000 listed companies, 500 foreign
institutional investors, 400 depository participants,
150 merchant bankers, 40 mutual funds offering over
450 schemes, and 20 million investors. Yes, there
is only one regulator. Not only the numbers are gigantic,
but also the systems and infrastructure are equally
atlantean and sophisticated. All stock exchanges in
India offer online, fully automated, nation wide,
anonymous, order-driven screen based trading system.
The clearing corporation performs full novation and
settles the transactions on T +2 rolling settlement.
(Never ever has the exposure to the networth of the
clearing corporations in the last two years has been
more than 5%). It has a comprehensive risk management
system, including Value at Risk (VaR) based margining
system, which is monitored on real time basis with
built in mechanism of automatic disablement of terminals
of the trading/clearing members. The depositories
legislation ensures free transferability of securities
with speed, accuracy and security. The securities
are transferred electronically in demat form. Further,
Indian accounting standards follow International Accounting
Standards (principle based) and are by and large aligned.
In addition to creating an efficient trading platform
and clearing and settlement mechanism, our focus is
substantially directed towards:
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Provision
of timely availability of high quality price sensitive
information to the market participants to enable
them to take informed decision and ensure efficient
price discovery. |
| b) |
Maintenance
of high quality of services and fair conduct for
market participants. The regulations specify high
standards to become market intermediaries and
require them to abide by a code of conduct. |
| c) |
Ensuring
that the market is fair, transparent and safe
so that issuers and investors are at ease to carry
out transactions. |
C. Reliable and Effective Enforcement
The regulator aims to ensure that no misconduct goes
unnoticed or unpunished. It keeps an eagle eye on the
happenings in the market and identifies anything unusual
or undesirable, which may adversely affect the efficacy
of the market. Every market participant, irrespective
of his size and influence in the market or in the polity,
is held accountable for his misdeeds very expeditiously.
The proactive and aggressive approach of the regulator
in enforcement can be gauged from the fact that during
the financial year 2002-2003, SEBI passed 561 orders,
out of which over 350 were punitive
D. Highest Standards of Governance
If Indian securities market is a model for others, it
is natural that it leads in the area of corporate governance
also. The Kumar Mangalam Birla Committee of the Indian
jurisdiction outlined a code of good Corporate Governance,
which compared very well with the recommendations of
the Cadbury Committee and the OECD codes. The code was
operationalised by inserting a new clause (Clause 49)
to the Listing Agreement, and have been made applicable
to all the listed companies in India in a phased manner.
Following the implementation of the Birla Committee
recommendations, substantial developments took place
in corporate world and securities market which required
revisit of the issue. The Narayan Murthy Committee has
refined the corporate governance norms which are proposed
to be implemented through modification in the listing
agreement. Government also appointed a few committees.
Based on their recommendations, Government is trying
to provide statutory back up to corporate governance
standards.
The initiatives for improvement in corporate governance
are coming mainly from three sources namely,
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Market,
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Regulator
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Legislature. |
While the legislative initiative is directed towards
bringing about amendments to the basic law - India’s
Companies Act - to include certain fundamental provisions
related to corporate governance, dynamic aspects of
corporate governance such as disclosures, accounting
standards, etc. are being pursued through the regulatory
initiatives by bringing about amendments to the Listing
Agreement. Such an approach is aimed at because a comparatively
more complicated and protracted process is involved
in the amendments to legislation in a truly democratic
society like India’s. The most important initiative
comes from market forces and mechanisms which encourage
and insist on the management’s improving the quality
of corporate governance. Indian market has formalised
such forces in the form of a rating called ‘Corporate
Governance and Value Creation Rating’, which is
quite unique in the World and is sought after voluntarily
by the companies. Let me discuss these three initiatives
in the reverse order.
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