An Overview of the Indian Securities Market - Joseph Pookkatt and Awantika Manohar India which is second only to the United States in terms of number of listed companies, has a securities market which is remarkable for the sheer number of market participants, the number of listed securities and the volume of transactions. The National Stock Exchange of India Limited is the third largest exchange in the world in terms of the number of equity transactions, after the New York Stock Exchange and NASDAQ. With the global economy picking up in recent times, key players in the Indian capital markets are innovating with new financial instruments and investment strategies. In recent years, Indian companies have listed themselves overseas on the AIM, the Singapore Exchange and the London Stock Exchange, and have used American Depository Receipts, Global Depository Receipts, convertible alternative reference securities, Foreign Currency Convertible Bonds and qualified institutional placements to raise funds in adverse market conditions. The use of these instruments and leveraged buyouts has helped some major Indian companies to acquire much larger multinational profiles. Aditya Birla Group’s acquisition of Novelis Inc and the Columbian Chemicals Company, Tata Motors' acquisition of Jaguar and Land Rover, United Spirits' acquisition of Whyte & Mackay and Bharti Telecom's acquisition of Zain are cases in point. The corporate sector has relied on a variety of non-bank funding sources such as capital markets, external commercial borrowings and internal generation of funds.
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An Overview of the Indian Securities Market
- Joseph Pookkatt and Awantika Manohar
India which is second only to the United States in terms of number of listed companies, has a securities market which is remarkable for the sheer number of market participants, the number of listed securities and the volume of transactions. The National Stock Exchange of India Limited is the third largest exchange in the world in terms of the number of equity transactions, after the New York Stock Exchange and NASDAQ.With the global economy picking up in recent times, key players in the Indian capital markets are innovating with new financial instruments and investment strategies. In recent years, Indian companies have listed themselves overseas on the AIM, the Singapore Exchange and the London Stock Exchange, and have used American Depository Receipts, Global Depository Receipts, convertible alternative reference securities, Foreign Currency Convertible Bonds and qualified institutional placements to raise funds in adverse market conditions. The use of these instruments and leveraged buyouts has helped some major Indian companies to acquire much larger multinational profiles. Aditya Birla Group’s acquisition of Novelis Inc and the Columbian Chemicals Company, Tata Motors' acquisition of Jaguar and Land Rover, United Spirits' acquisition of Whyte & Mackay and Bharti Telecom's acquisition of Zain are cases in point.The corporate sector has relied on a variety of non-bank funding sources such as capital markets, external commercial borrowings and internal generation of funds. In 2010, India ranked third only to Japan and China in equity capital market issuances among countries in Asia Pacific. Based on the data released by the Reserve Bank of India, the gross cumulative inflows by way of external commercial borrowings (ECBs) in the months from April 2010 to November 2010 totaled US$11.48 billion, higher than the level of the same in the corresponding period in 2009-10. However, the volume of foreign currency convertible bonds (FCCBs) declined to US$1.07 billion during April-November 2010. ECB flows of US$1.82 billion in October- November 2010 were higher than ECB inflow of US$1.66 billion in the corresponding period last year, supported by certain large issuances. Some of the large issuances of ECB/FCCB during the three month period of September-November 2010 include Reliance Industries (US$1 billion), REC (US$470 million), IRFC (US$350 million), Bhushan Steel (US$300 million), Jhajjar Power (US$288 million), Power Finance Corporation (US$240 million),
Nissan Motor (US$156 million), Idea Cellular (USS$150 million), Posco Maharashtra Steel (US$143 million), L&T Sapura Shipping (US$ 141 million).However, the move by the Reserve Bank of India to restrict access to ECBs has led to the mobilisation through commercial paper issuances by corporates to meet their working capital requirements. In 2010, about 53 companies raised about US$ 6226 million through sale of shares to qualified institutional investors, including overseas private equity firms and local and foreign financial services firms like banks, insurers and fund houses. However, during the calendar year 2009, the funds raised through the QIP route amounted to about US$ 7169 million. While there were no ADR issuesin 2010, some action was seen in the area of fund-raising through GDRs. There were 33 GDR issuances, which raised US$879 million. This was almost 43 per cent lower than the funds raised through GDR issues in 2009.Foreign institutional investor investments in the capital markets (which began in January 1993 with inflows of $1m) were approximately US$10.99 billion during the quarter ended December 31, 2010. With this the net equity FII inflows in the first nine months of 2010-2011 financial year stood at around US$24.81 billion, the highest in at least the last four financial years. In addition, venture capitalists invested $895 million in 92 deals in 2010, a 15% increase in deal activity and 14% increase in capital invested. Forty-one percent of capital went to Consumer Services companies, which collected $369 million for 29 deals. Investment in the Business & Financial Services industry was also strong as 28 deals garnered $282 million.Securities regulationThe establishment of the Securities and Exchange Board of India in 1992 led to considerable growth in the capital markets and securities sector. SEBI serves as the autonomous statutory regulator of financial markets in India, and has as its twin objectives the protection of investors' interests and the development and regulation of the Indian securities markets. SEBI has powers to investigate and examine companies, to visit their premises, to inspect records and personnel and to impose penalties that are commensurate with any misconduct.SEBI regulates the markets through its rulemaking powers and has issued a number of regulations and guidelines relevant to the securities market and specifically related to corporate governance norms for listed companies. SEBI regulations, today cover all intermediaries in the securities market, all of whom must be registered with and regulated by SEBI. The regulations also prescribe a code of conduct for each intermediary as well as for their employees, and set out standards
that stipulate who may be considered a fit and proper person.The present capital market scenario features an advanced regulatory environment, steadily increasing market capitalisation, better allocation and mobilisation of resources, a rapidly developing derivatives market, a robust mutual fund industry and increased issuer transparency. SEBI has effectively brought in a strict investor protection regime and various market reforms. Capital adequacy and other norms have been specified and a system for monitoring and inspecting their operation has been instituted to enforce compliance. Disciplinary action is taken against rule breaches. All intermediaries in the market are obliged to have a compliance officer, who reports any observed non-compliance directly and independently to SEBI. Modified regulations that SEBI introduced have enabled Indian companies to raise finances both domestically and internationally.Domestic offeringsThrough resource mobilisation from the primary market through equity investments was sluggish in 2009, both in terms of number of issues and follow-on-public offerings, the year 2010 saw a recovery in the issuances of domestic instruments including initial public offerings of equity or debt instruments, follow-on offerings, rights issues, warrant issues, composite issues, preferential issues of securities, qualified institutional placements and depository receipts The year 2010 featured 70 public issues, i.e. 62 IPOs and 8 FPOs. The funds raised through public issues totaled about US$ 15,625 million. A major chunk of the amount raised through share sale - i.e. US$ 10,974 million - came from the government divesting its stake in public sector companies. In comparison to 2009, the year 2010 saw a clear revival in the Indian primary market when only 20 companies raised close to US$ 4394 million. The largest public issue in 2010 was that of Coal India IPO, making history as the largest public issue of all time in the Indian capital market, with the issue size exceeding US$ 3296 million. The grand success of Coal India’s IPO was also seen in the follow-on offer of NMDC, NTPC’s FPO and Power Grid Corporation of India Ltd’s FPO Public issues were seen across sectors such as banking, power, healthcare, minerals, infrastructure and realty, among others, indicating that investors’ overall confidence in the primary market is on a high.The turbulent markets notwithstanding, innovative structures for financial instruments have been evolved to protect against market volatility, investment restrictions and securities scams, hedge investment risks and other risks. New instruments such as stapled securities, over-the-counter equity swaps, investment trusts, derivatives and convertibles are also gaining popularity.
International offeringsThe growth of Indian companies has been fuelled by investments such as ADRs GDRs, FCCBs, ECBs, euro issues, AIM listings, foreign currency exchangeable bonds and other such new and hybrid instruments. Thirteen Indian companies are already listed on NYSE, and there are currently 66 Indian or India focussed companies on the London Stock Exchange’s markets. Listings on the Singapore Stock Exchange, the Luxembourg Stock Exchange, AIM and various international capital markets by eminent Indian companies such as Indiabulls, Unitech, ICICI and Reliance Petroleum have exposed many international investors to the Indian markets. Essar Energy's $2.5bn initial public offering on the London Stock Exchange would be the biggest ever overseas IPO by an Indian company. The two-way flexibility of these instruments which enhances liquidity has also attracted foreign investors.Other big fund raisers through ADR/GDR route were by the world's sixth largest steel maker Tata Steel Limited, India's largest private power producing company Tata Power and the world's fifth-largest wind-turbine maker Suzlon Energy Limited. The Tata Steel GDR being the largest issue by an Indian company.Banking sector overviewBefore economic reform took place, the Indian banking system catered largely for the needs of planned development in a mixed-economy framework where the public sector had a dominant role in economic activity. This meant that the state met its development expenditure through dominance of bank ownership, automatic monetisation of fiscal deficit and by subjecting the banking sector to large pre- emptions — both in terms of the statutory holding of government securities (statutory liquidity ratio or SLR) and cash reserve ratio.Additionally, there was a complex structure of administered interest rates, largely guided by social concerns and resulting in cross-subsidisation. By the end of the 1980s, these were not only distorting the interest rate mechanism but also adversely affecting banks' viability and profitability. The introduction of the reforms agenda in the early 1990s led to a rapid improvement in the banking sector. Following the liberalisation which took place in the 1990s, India now has 163 scheduled commercial banks, 27 public sector banks, 31 private banks whose shares may be listed and traded on stock exchanges and 38 foreign banks. In the last five years, private sector banking has grown considerably and banks have expanded their portfolios, income levels and asset sizes to the extent that they outperform public sector banks. Simultaneously, there has been a proliferation of private banking
networks across India.Reserve Bank of India — the regulator of banksThe Reserve Bank of India is the Central Bank of India. It was set up in 1935, when it took over the issue of currency and credit control. It performs all the functions of a central bank, e.g., issuing and regulating currency, acting as banker to the central and state governments and to the commercial banks, maintaining the external and internal value of currency, development of rural banking, promotion of financial institutions and the development of money and capital markets in India. The RBI has wide powers of overall control over the management of banks. Apart from selective control of credit, it controls the volume of credit through the use of instruments such as bank rate, open market operations and variable cash reserve requirements.In 1994, a Board for Financial Supervision was constituted which comprised select members of the RBI board with a variety of professional expertise to exercise "undivided attention to supervision". The BFS, which generally meets once a month, provides ongoing direction regarding regulatory policies, including governance issues and supervisory practices. It provides direction on supervisory actions in specific cases and also ensures an integrated approach to the supervision of commercial banks, the development of finance institutions, non-banking finance companies, urban cooperatives banks and primary dealers. A board for regulation and supervision of payment and settlement systems has also been constituted to prescribe policies relating to the regulation and supervision of all types of payment and settlement systems, set standards for existing and future systems, authorise the payment and settlement systems and determine criteria for membership of these systems.Types of banks in IndiaUnder the Banking Regulation Act 1949, the RBI is given the power to issue licences to commercial banks to open branches. No bank can commence the business of banking without obtaining a licence from the RBI. The RBI also has the power to withdraw any licence once granted.Banks in India broadly comprise two types:• Scheduled commercial banks: Listed in the Second Schedule of RBI Act, SCBs maintain accounts with the RBI and borrow money when necessary. The extent to which credit may be extended, however, depends on the impact on price stability. To assist with its assessment of banks' performance, the RBI further categorises commercial banks as public sector banks, old private sector banks, new private
sector banks and foreign banks.• Unscheduled banks: Essentially state or urban cooperative banks, these banks carry on a different kind of banking business but still require a licence under section 22 of the Banking Regulation Act 1949.Basel normsThe introduction of these norms has meant that all commercial banks have: (i) a suitable risk management framework that is oriented towards their requirements, dictated by the size and complexity of business, risk philosophy, market perceptions and the expected level of capital; (ii) risk-based supervision; (iii) formalised their capital adequacy assessment process in alignment with their business plan and performance budgeting system; and (iv) widened the area of disclosures so as to have greater transparency in the financial position and risk profile of banks. To comply with the Basel II additional capital requirements, the overall capital levels of the banks will see an increase. In terms of the RBI guidelines, all foreign banks that operate in India and Indian banks that have presence outside India have already migrated to the standardised approach for credit risk and the basic indicator approach for operational risk under Basel II with effect from March 31, 2008. All other scheduled commercial banks in India were required and have adhered to Basel II norms by March 31, 2009. Most Indian banks that have migrated to Basel II have reported a reduction in their total Capital Adequacy Ratios due to the new operational risk-based capital charges. However, a few banks, those with high exposures to higher rated corporate or to the regulatory retail portfolio, have reported increased CARs. A proposed revision of the Basel accords also known as the Basel III is currently under development. The new norms are based on renewed focus of central bankers on macro-prudential stability, while Basel II focused on macro-prudential regulation.Financial stability in India has been achieved through perseverance with prudential policies of the RBI that prevent institutions from excessive risk taking, and financial markets from becoming extremely volatile and turbulent. Additionally, there are restrictions on investments by residents in credit derivatives issued abroad and regulatory guidelines on securitisation in India do not permit immediate profit recognition. As a result of the adherence to these prudential norms, financial markets have remained orderly, and financial institutions, especially banks, have remained financially sound.
ISMR
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1 Securities Market in India - An overview
Securities Market in India – An Overview
Introduction
This publication reviews the reforms and other market developments in the securities market
in India during April 2003 to June 2004. As a result of the reforms/initiatives taken by the
Government and the Regulators, the market microstructure has been refined and modernized.
The investment choices for the investors have also broadened. The securities market moved
from T+3 settlement period to T+2 rolling settlement with effect from April 1, 2003. Further,
straight through processing has been made mandatory for all institutional trades executed on
the stock exchange. Real time gross settlement has also been introduced by RBI to settle
inter-bank transactions online at real time mode. These reforms along with other market
developments have been discussed in detail in the following chapters. This chapter, however,
takes a general review of the stock market developments. These developments in the securities
market provide the necessary impetus for growth and development, and thereby strengthen
the emerging market economy in India.
Products and Participants
Mobilization of savings from surplus savers to deficit savers is most efficiently carried out
by the securities market through a range of complex products called “securities”. The
definition of securities as per the SCRA, 1956 includes shares, bonds, scrips, stocks or other
marketable securities of like nature in or of any incorporate company or body corporate,
government securities, derivatives of securities, units of collective investment scheme, interest
and rights in securities, security receipt or any other instruments so declared by the central
government.
The securities market has essentially three categories of participants, viz., the issuer of
securities, investors in securities and the intermediaries. The issuers are the borrowers or deficit
savers, who issue securities to raise funds. The investors, who are surplus savers, deploy their
savings by subscribing to these securities. The intermediaries are the agents who match the
needs of users and suppliers of funds for a commission. These intermediaries pack and unpack
securities to help both the issuers and investors to achieve their respective goals. There are a
large variety and number of intermediaries providing various services in the Indian securities
market (Table 1-1).
This process of mobilization of resources is carried out under the supervision
and overview of the regulators. The regulators develop fair market practices and regulate the
conduct of issuers of securities and the intermediaries. They are also in charge of protecting
the interests of the investors. The regulator ensures a high service standard from
the intermediaries and supply of quality securities and non-manipulated demand for them in
the market.www.nseindia.com
ISMR Securities Market in India - An overview 2
Table 1-1: Market Participants in Securities Market
Market Participants Number as on March 31
2003 2004
Securities Appellate Tribunal 1 1
Regulators* 4 4
Depositories 2 2
Stock Exchanges
With Equities Trading 23 23
With Debt Market Segment 1 1
With Derivative Trading 2 2
Brokers 9,519 9,368
Corporate Brokers 3,835 3,746
Sub-brokers 13,291 12,815
FIIs 502 540
Portfolio Managers 54 60
Custodians 11 11
Share Transfer Agents 143 78
Primary Dealers 19 18
Merchant Bankers 124 123
Bankers to an Issue 67 55
Debenture Trustees 35 34
Underwriters 43 47
Venture Capital Funds 43 45
Foreign Venture Capital Investors 6 9
Mutual Funds 38 37
Collective Investment Schemes 5 —
* DCA, DEA, RBI & SEBI.
Source: SEBI Bulletin.
Market Segments
The securities market has two interdependent segments: the primary and the secondary
market. The primary market is the channel for creation of new securities. These securities
are issued by public limited companies or by government agencies. In the primary market
the resources are mobilized either through the public issue or through private placement
route. It is a public issue if anybody and everybody can subscribe for it, whereas if the
issue is made available to a selected group of persons it is termed as private placement.
There are two major types of issuers of securities, the corporate entities who issue mainly
debt and equity instruments and the government (central as well as state) who issue debt
securities.
These new securities issued in the primary market are traded in the secondary market.
The secondary market enables participants who hold securities to adjust their holdings in
response to changes in their assessment of risks and returns. The secondary market operates
through two mediums, namely, the over-the-counter (OTC) market and the exchange-tradedISMR
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3 Securities Market in India - An overview
market. OTC markets are informal markets where trades are negotiated. Most of the trades in
the government securities are in the OTC market. All the spot trades where securities are
traded for immediate delivery and payment take place in the OTC market. The other option is
to trade using the infrastructure provided by the stock exchanges. There are 23 exchanges in
India and all of them follow a systematic settlement period. All the trades taking place over a
trading cycle (day=T) are settled together after a certain time (T+2 day).
The trades executed on the National Stock Exchange (NSE) are cleared and settled by a
clearing corporation. The clearing corporation acts as a counterparty and guarantees settlement.
Nearly 100% of the trades in capital market segment are settled through demat delivery. NSE
also provides a formal trading platform for trading of a wide range of debt securities, including
government securities. A variant of the secondary market is the forward market, where securities
are traded for future delivery and payment. A variant of the forward market is Futures and
Options market. Presently only two exchanges viz., NSE and Stock Exchange, Mumbai (BSE)
provides trading in the derivatives of securities.
International Scenario
Following the implementation of reforms in the securities industry during the last decade,
Indian stock markets have graduated to a better position vis-à-vis the securities market in
developed and emerging markets. As may be seen from Table 1-2, India has a turnover ratio,
which is comparable to the other developed market, and also one of the highest in the
emerging markets. At the end of 2003, Standard and Poor’s (S&P) ranked India 17th in terms of
market capitalization (19th in 2002), 16th in terms of total value traded in stock exchanges
(17th in 2002) and 6th in terms of turnover ratio (7th in 2002). India has the number one
ranking in terms of listed securities on the Exchanges followed by the USA. These data,
though quite impressive, do not reflect the full Indian market, as S&P (even other international
publications) does not cover the whole market. For example, India has more than 9000
listed companies at the end of March 2004, while S&P considers only 5,644 companies.
If whole market were taken into consideration, India’s position vis-à-vis other countries would
be much better.
Table 1-2: International Comparison: end December 2003
Particulars USA UK Japan Germany Singapore Hongkong China India