PART I
POLICIES AND PROGRAMMES  

This Annual Report of the Securities and Exchange Board of India (SEBI) reviews the policies and programmes of the SEBI and its working and operations for the fiscal year 1997-98. It describes the manner in which the SEBI has been carrying out its functions and exercising its powers in terms of the Securities and Exchange Board of India Act, 1992; the Securities Contracts (Regulation) Act, 1956; the Companies Act, 1956 and the Depositories Act, 1996. The Report also gives details of developments in Indian securities markets in 1997-98, and their bearing on and relation to the working and function of the SEBI. The Report has been prepared in accordance with the format prescribed in the Securities and Exchange Board of India (Annual Report) Rules, 1994, notified in the official Gazette on April 7, 1994.

During 1997-98, the SEBI continued its operations and initiatives in regulating and developing the Indian Securities markets in fulfillment of the twin objectives of investor protection and market development set forth in the SEBI Act, 1992. Throughout its six year of existence as a statutory body, the SEBI has sought to balance the two objectives by constantly reviewing and reappraising its existing policies and programmes, formulating new policies and crafting new regulations to foster development in areas hitherto unregulated and to implement them to ensure growth of the markets with efficiency, integrity and protection of investors’ interest. The developments and reforms during 1997-98 are given in the box I.1

Box I.1: Securities Market Reforms and Developments During 1997-98

• The SEBI advised stock exchanges to set up either Trade Guarantee Fund or Settlement Guarantee Fund to eliminate counterparty risk.
• Upper limit for gross exposure of member brokers of stock exchanges was fixed at 20 times the base minimum capital and additional capital of the member broker.
• The SEBI appointed Chandratre Committee on delisting of securities which recommended exchanges to collect listing fees from the companies for three year period in advance. Besides, the companies opting for voluntary delisting should mandatorily provide an exit route to investors by offering buy-back facility to them. These recommendations were accepted and suitable directions were issued to the stock exchanges.
• As on March 31, 1998, 20 stock exchanges in the country, accounting for almost 99.8 per cent of the total all-India turnover, had shifted to on-line screen based trading.
• Rolling settlement of T+5 was made mandatory in the exchanges where trading in dematerialised securities was available since January 15, 1998.
• The SEBI appointed J. R. Varma Committee on Modified Carry Forward System which recommended a margin of 10 per cent on carry forward trades instead of earlier 15 per cent, enhancing the over all limit of carry forward trades by a broker to Rs 20 crore from the earlier limit of Rs 7.5 crore, removal of scripwise sub-limits on carry forward positions and removal of limit of Rs 10 crore for badla financier. The recommendations were accepted and suitable directions issued to stock exchanges.
• Brokers were permitted to warehouse trades for firm orders of the Institutional clients.
• The SEBI appointed a committee under the chairmanship of Shri G. P. Gupta to study the concept of market making and to revive the institution of market makers. The recommendations are awaited.
• R. Chandrasekharan committee had recommended adequate safety and security features for security certification. The action for its implementation has been initiated.
• All stock exchanges were required to strengthen their Investor Protection Fund and Investor Services Fund. The Stock exchanges were advised to provide a special facility for attending investor complaints and dummy terminal for showing the on-line trades.
• The SEBI appointed L. C. Gupta Committee which recommended the introduction of derivatives trading in order to provide the facility of hedging in the most cost-efficient way against market risk, and accordingly action for its implementation was initiated.

• The SEBI gave approval to three intermediaries to act as Stock Lenders under the Stock Lending scheme of SEBI.
• Settlement of trades in the depository was made compulsory from January 15, 1998 in selected scrips for institutional investors namely domestic FIs, Banks, Mutual Funds and FIIs having a minimum portfolio of securities of Rs 10 crore.
• The SEBI appointed Working Group on Dematerlisation which recommended that securities in dematerialised form should be treated as ‘good delivery’ in the physical segment with effect from April 6, 1998. Accordingly, action for implementation was initiated.
• The recognition of the Saurashtra-Kutch and Jaipur Stock Exchanges were further renewed for a period of one year.
• The Governing Board of Magadh Stock Exchange was superceeded on account of its working.
• The stock exchanges were permitted to expand their trading terminals to those cities where no other stock exchange was located subject to compliance with certain conditions. As for the cities where a stock exchange already existed, the exchanges seeking expansion were required to enter into a MoU with the concerned stock exchanges. Accordingly, the Stock Exchange, Mumbai(BSE) was permitted to expand outside Mumbai. Similar permissions were also granted to stock exchanges at Pune, Calcutta and Rajkot subject to fulfilment of certain conditions by them.
• The Capital Stock Exchange Kerala Limited and the Inter-Connected Stock Exchange of India were granted "in-principle" recognition subject to compliance with certain conditions.
• 151 brokers from the 22 stock exchanges across the country were inspected.
• There was a steep increase in registration of sub-brokers from 1798 to 3760 i.e. by 109 per cent.
• The SEBI permitted unlisted infrastructure companies making a public issue of pure debt instruments/convertible debt instrument and municipal corporations from the requirements of Rule 19(2)(b) of Securities (Contract) Regulation Rules, 1957, allowing them to list their debt instruments on the stock exchanges without the requirement for equity being listed first.
• The facility of book-building was extended to the entire issue size for issuer companies which propose to make an issue of capital of and above Rs. 100 crore.
• A Committee was set up to examine the draft regulations on Credit Rating Agencies prepared by the SEBI and to recommend suitable modifications.
• Amendments were made to the SEBI (Merchant Bankers) Regulations 1992. Only body corporates were allowed to function as merchant bankers.
• Multiple categories of merchant bankers viz. Category II,III and IV were abolished and henceforth there would be only one category of merchant bankers, i.e. Category I Merchant Banker. This new entity shall undertake only those activities which are related to securities market including issue management activity and which do not require registration/have been granted exemption from registration as NBFC from the RBI. However, such entities shall have to seek separate registration if they wish to act as underwriter or portfolio manager. That is, Merchant Bankers would now require separate registration to act as underwriters as well as portfolio managers.

• Merchant Bankers were prohibited from carrying on fund-based activities other than those related exclusively to the capital market.
• The SEBI (Registrars to an Issue and Share Transfer Agents) Regulations 1993 have been amended to provide for an arms length relationship between the issuer and the Registrar to the Issue.
• The SEBI appointed a Committee under the Chairmanship of Dr S.A. Dave to draft the Regulations on Collective Investment Schemes. Until the Regulations were notified, the provisions of Section 12(1)(B) of the SEBI Act prohibited any new scheme to be sponsored or further fund to be raised by the existing collective investment scheme. Further, the SEBI stipulated that all existing schemes would continue to mobilise funds only after obtaining a rating from any of the recognised Credit Rating Agencies. It was decided that all advertisements by existing collective investment schemes would adhere to the advertisement code prescribed by the SEBI.
• The Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 were amended to address certain issues that are important for investor protection.
• Aggregate investments by a mutual fund in listed or to be listed securities of group companies of the sponsor would not exceed 25 per cent of the net assets of all schemes of the fund.
• Securities transactions with associate brokers would not exceed 5 per cent of the quarterly business done by the mutual fund.
• Unitholders’ approval would no longer be required for rollover of schemes and for converting close-ended schemes into open-ended ones, provided the unitholders were given the option to redeem their holdings in full at NAV based prices.
• Independent trustees who are not associated with the sponsor shall now constitute two-thirds of the Board of Trustees instead of earlier provision of 50 per cent.
• The SEBI gave an option to the issuers to fix the minimum marketable lot on the basis of offer price subject to the condition that the marketable lot shall not be more than 100 shares.
• A Committee was set up under the Chairmanship of Mr P.K. Kaul to recommend the manner of discharge of responsibilities by the trustees as laid down in regulation 18 of the SEBI(Mutual Funds) Regulations, 1996. The report of the Committee is awaited.
• The SEBI set up a working group to work out the modalities and guidelines for investment by domestic mutual funds in overseas markets.
• The SEBI regulations for merchant bankers, stock brokers, registrars to an issue, portfolio mangers, underwriters, debenture trustees, bankers to an issue, custodian of securities, depositories, venture capital funds were amended to specifically include the concept of "fit and proper person" in their eligibility criteria that an applicant should be a fit and proper person.
• The SEBI appointed Justice D.R. Dhanuka Committee which submitted its interim recommendations in respect of working draft of the Companies Bill, 1997.
• The SEBI (Annual Report) Rules has been amended to such that the SEBI shall submit Annual Report to the Central Government within 90 days after the end of each Financial Year instead of 60 days.

While fulfilling its day -to- day functions in setting standards, in supervision and enforcement, the SEBI took several measures aimed at widening and deepening of different segments of securities market and enhance the level of investor protection. Enforcement and surveillance remained a cornerstone of the SEBI’s activities during the year. The SEBI instituted a number of enforcement actions against a wide range of securities law violations. The main focus of reforms in the primary market was to safeguard and stimulate investor interests in capital issues by strengthening norms for raising standards of disclosures and streamlining procedures with a view to reducing the cost of issues. In the secondary market the emphasis remained on making the market transparent, efficient and modern. Trading infrastructure in the stock exchanges which was already modernised by replacing the open outcry system with on-line screen based electronic trading system was given further momentum and by the end of the year trading in 20 out of 22 stock exchanges were automated. The safety and integrity of the market were also further strengthened through the introduction of risk containment measures which included a comprehensive margining system, intra-day trading and exposure limits and setting up of trade guarantee funds. The clearance and settlement system which had suffered from several bottlenecks was considerably improved with measures taken to shorten the settlement period and accelerate the process of electronic book entry transfer through the depository. The new regulations for mutual funds which were notified in 1996-97 were further refined and strengthened during the year under review to help foster the growth of mutual funds and provide increased protection to the investors. There was a revival of investor interest in mutual funds during the year. There was an increase in restructuring activities in the corporate sector through mergers and takeovers. The Takeover Regulations which were notified in the previous year, provided a fair, modern and transparent framework for takeovers to better protect the interest of investors. The year under review was marked by a rise in takeover activity. The Regulations for Foreign Institutional Investors were further simplified with a view to facilitating foreign portfolio flows into the country.

The SEBI Depository and Participants Regulations ,1996 was amended on September 5, 1997, the SEBI (Foreign Institutional Investors) Regulations, 1995 was amended on July 7, 1997, the SEBI (Mutual Funds) (Amendment) Regulations 1996 was amended on April 1, 1997, the SEBI (Registrars to an Issue and Share Transfer Agents) Regulations, 1993 was amended on September 17, 1997, the SEBI (Custodian of Securities) Regulations, 1996 was amended on October 17, 1997, the SEBI (Merchant Bankers) Regulations, 1992 was amended on December 1997, and the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992 was amended on January 21, 1998.