The SEBI has been consistently endeavoring to promote a market which is both efficient and fair and also one which protects the rights of investors. Modernisation of market infrastructure improves market transparency and trading efficiency. Risk containment measures improves market integrity and credibility. These have been the main focus of the SEBI’s efforts in the secondary market. The SEBI also directed its efforts towards encouraging the stock exchanges to become effective and self regulatory organisations. The measures taken by the SEBI in 1997-98 in the secondary market are discussed below.

Strengthening the safety and integrity of the secondary securities market

Intra-day trading and exposure limits

During 1997-98, with a view to enhancing market safety, the SEBI decided that the upper limit for gross exposure of the member brokers of the stock exchanges would be fixed at 20 times the base minimum capital and additional capital of the member brokers. Gross exposure is the sum total of overall open positions of a broker. This is in addition to the existing intra-day trading limits of 33 1/3 times the base minimum capital and the additional capital of the broker, which were implemented by all the stock exchanges in the previous year. Together they will be strengthening the risk management in the secondary market.

Setting up of Trade/Settlement Guarantee Fund by stock exchanges

One of the shortcomings of the clearing and settlement process of the Indian stock markets was the absence of a system to reduce counter-party risk. Managing this risk is an essential need of a safe and efficient market, which can be achieved through setting up of a Trade or Settlement Guarantee Fund. The principal objective of this Fund is to provide the necessary funds and ensure timely completion of settlements in cases of failure of member brokers to fulfill their settlement obligations. Thus establishment of such funds would give greater confidence to investors in the settlement and clearing procedures of the stock exchanges. Keeping this objective in view, the SEBI had advised all stock exchanges to set up a Trade or Settlement Guarantee Fund.

The National Stock Exchange of India Ltd (NSEIL) is operating a Clearing Corporation viz., the National Securities Clearing Corporation Limited which guarantees all trades executed in a settlement. During the year under review, the Settlement Guarantee Funds of stock exchanges at Mumbai, Ludhiana, Calcutta and Bangalore were also granted approval by the SEBI. In addition, the stock exchanges at Delhi, Hyderabad and Cochin were also granted ‘in-principle’ approvals to set up Settlement Guarantee Funds.

Chandratre Committee on delisting of securities

The SEBI had set up a committee under the Chairmanship of Dr. K R Chandratre, to principally look into the issue of delisting of securities by the exchanges. Delisting is an extreme measure of disciplinary action which an exchange might take against a company, which if indiscriminately used, would adversely affect the interests of the investors. Also the exchanges were adopting different approaches and procedures towards the delisting of securities. The Committee prescribed the uniform conditions and norms under which delisting can take place and the manner in which the interests of the investors can be safeguarded in such cases.

The SEBI accepted most of the recommendations of the Committee and initiated steps to implement them. The major recommendations of the Committee are given in box 1.2.

Box I.2: Recommendations of Chandratre Committee on delisting of securities

• The concept of ‘Listing Agreement’ be done away with and the contents thereof be prescribed as part of the SCR Rules under the heading ‘Conditions for Listing and Continued :Listing’, consisting of two parts:

Part B - Additional conditions optional for the stock exchanges which may vary from exchange to exchange, and the stock exchanges be given freedom to modify Part B to suit their requirements subject to the prior approval of the SEBI.

• The Companies Act be suitably amended to provide that in respect of certain specified matters the Listing Agreement may contain in the interests of the investors, a provision different from what is provided in the law but within the outer limit thereof.
• Section 23(2) of SCR Act be amended to enhance the fine from one thousand rupees to ten thousand rupees and to provide for a further fine of one thousand rupees for every day in the case of a continuing default.
• Section 29A of SCR Act be amended to make an enabling provision for delegation of powers of the Central Government under that Act to the recognised stock exchanges, and in pursuance of such provision, the power to institute prosecution against the listed companies and its directors/officers for breach of any of the conditions of the Listing Agreement under sections 23(2) and 24, be delegated to the stock exchanges. Alternatively, either section 26 of SCR Act be amended in this regard or a new provision be inserted in the Act to give effect to the above recommendation.
• The stock exchange should strengthen their machinery for stricter enforcement of the Listing Agreement and institution of prosecution against the erring companies and their directors/officers.
• In order to bring about uniformity and avoid confusion, a specific provision be made with regard to the procedure for amendments to the Listing Agreement and the authority to notify the amendments.
• If, as recommended herein above, the Listing Agreement is incorporated in the SCR Rules, a provision be made in the Rules providing for the procedure for amendments to the Listing Agreement.
• The basic minimum norms for listing of securities on any recognised stock exchange should be uniform for all the exchanges and stock exchanges be permitted to prescribe additional norms over and above the minimum norms. These norms should be a part of the bye-laws of the stock exchanges. Both the sets of the norms should be clearly spelt out and publicised.
• The SEBI be given exclusive power in this regard with the stipulation that before amending the Listing Agreement, the SEBI will consult the stock exchanges.
• The requirement of the listing of securities on the regional stock exchanges as required in terms of circular no. F14(2)/SE/85 dated September 23, 1985, issued by the Ministry of Finance, Government of India, should be done away with.
• The stock exchanges be allowed to fix the quantum of listing fees and there need not be uniformity in this regard. The stock exchanges should be free to determine the manner and the periodicity of payment of the fees.
• A specific provision be made in the SCR Act, empowering the SEBI to prescribe rules/ guidelines in regard to delisting of securities listed on recognised stock exchanges.
• Specific provisions should be made on the compulsory delisting, and precise procedure should be laid down to be followed by each stock exchange in the matter of delisting of any of the securities listed on it. The suggested norms and procedures are set out in the Report. There should also be a provision for appeal against the delisting.
• The stock exchanges should not resort to delisting of securities on the ground of non-payment of listing fees unless the efforts made for recovery of the fees by persuasion or force through all other remedies available have failed.

• Mechanism for the compulsory delisting of securities should expressly provide for adequate and effective intimation to be given to the holders of the securities which are proposed to be delisted, and also right of hearing to those holders.
• Such mechanism should also provide for a remedy to make the investment in the securities liquid after they are delisted. For this purpose, a facility akin to dealings in permitted securities may be considered to provide facility of liquidity of the securities for a certain period after these are delisted.
• A public notice before and after the delisting of securities should be given by the concerned stock exchange.
• The two circulars issued by the Ministry of Finance and referred to hereinabove be withdrawn and SCR Rules be amended to insert therein rules and procedures for voluntary delisting of securities on the request of the listed companies.
• The company should obtain a specific prior approval of the holders of the securities which are sought to be delisted by a special resolution passed at a general meeting after giving due notices thereof in the manner provided in the Companies Act and also by special notice in newspapers with detailed explanation and justification for the proposed delisting.
• The holders of securities in the region where the concerned stock exchange is located should be given an exit opportunity requiring the promoters or those who are in the control of the management of the company to buy, or to make arrangement for buying the securities of such holders after fixing a record date specifically for this purpose and at a price which should not be less than the weighted average of the traded price of the security in the preceding six months at any of the exchanges on which the securities are listed and where the highest of the volume of the securities was traded. In case there was no trading at any of the exchanges during the preceding six months, the price for the purposes of the buying of the securities should be a fair price to be computed by the auditors of the company.
• In case after the proposed delisting, the securities are not going to remain listed on any recognised stock exchange. ‘the buy offer’ should be given to all the holders of securities of the company irrespective of their location.
• The Directors’ report should disclose the fact of delisting, together with a statement of reasons and, in the case of voluntary delisting justification therefor. Likewise, disclosure as to suspension of trading in the securities should be made by the company in its Directors’ report.
• Every listed company should in each annual report specify the name and address of each stock exchange at which the company’s securities are listed and whether the company has paid the annual listing fees to each such exchange.
• The reinstatement of the delisted securities should be permitted by the stock exchange within a period of one year after the date of delisting, without requiring the company to make an application as if it were the case of fresh listing. However, if listing of the delisted securities is sought after one year, it should be treated as a case of fresh listing.

The SEBI had appointed a Committee under the chairmanship of Shri C B Bhave, to recommend measures for improving the continuing disclosure standards by corporates and timely dissemination of price sensitive information to the public. The Report of the Committee was submitted to the SEBI. The SEBI accepted the recommendations and initiated steps to implement them by issuing appropriate directions to the stock exchanges. The major recommendations are given in the box I.3.

Box I.3: C.B. Bhave Committee Report on Disclosure Standards

• As per existing Clause 41 of the Listing Agreement, the company is required to furnish to the stock exchange and to publish un-audited financial results on half-yearly basis. The clause may be modified to make these requirements quarterly.
• Clause 43 of the Listing Agreement may be amended to provide for publishing by the companies which mobilise funds from the public through public/rights issues, the details of deployment of such funds on an half-yearly basis instead of the yearly basis.
• The un-audited results sent to the stock exchange and published in newspapers should be based on the same set of accounting policies as those followed in the previous year. In case, there are changes in the accounting policies, the results of previous year will be recast as per the present accounting policies, to make it comparable with current year results.
• At present, the Clause 36 of the Listing Agreement requires the company to inform immediately to the stock exchange of events such as strike, power cuts, etc. This should be applicable for all events which will have bearing on the performance/operations of the company as well as price sensitive information. The material events may include as follows:

Without prejudice to the generality of Clause 29 of the Listing Agreement, the Issuer will promptly notify the exchange of any material change in the general character or nature of its business where such change is brought about by the Issuer entering into or proposing to enter into any arrangement for technical, manufacturing, marketing or financial tie-up or by reason of the Issuer, selling or disposing of or agreeing to sell or dispose of any unit or division or by the Issuer, enlarging, restricting or closing the operations of any unit or division or proposing to enlarge, restrict or close the operations of any unit or division or otherwise.

Disruption of operations due to natural calamity

The issuer will soon after the occurrence of any natural calamity like earthquake, flood or fire disruption of the operation of any one or more units of the Issuer, keep the exchange informed of the details of the damage caused to the unit thereby and whether the loss/damage has been covered by insurance, and without delay furnish to the exchange an estimate of the loss in revenue or production arising therefrom, and the steps taken to restore normalcy, in order to enable the security holders and the public to appraise the position of the issue and to avoid the establishment of a false market in its securities.

Commencement of commercial production/commercial operations

The Issuer will promptly notify the exchange the commencement of commercial/production or the commencement of commercial operations of any unit/division where revenue from the unit/division for a full year of production or operations is estimated to be not less than ten per cent of the revenues of the Issuer for the year.

Developments with respect to pricing/realisation arising out of change in the regulatory framework

The Issuer will promptly inform the exchange of the developments with respect to pricing of or in realisation on its goods or services (which are subject to price or distribution, control/restriction by the Government or other statutory authorities, whether by way of quota, fixed rate of return, or otherwise) arising out of modification or change in Government’s or other authority’s policies provided the change can reasonably be expected to have a material impact on its present or future operations or its profitability.

Litigation/dispute with a material impact

The issuer will promptly after the event inform the exchange of the developments with respect to any dispute in conciliation proceedings, litigation, assessment, adjudication or arbitration to which it is a party or the outcome of which can reasonably be expected to have a material impact on its present or future operations or its profitability or its profitability or financials.

Revision in ratings

The Issuer will promptly notify the exchange, the details of any rating or revision in rating assigned to any debt or equity instrument of the Issuer or to any fixed deposit programme or to any scheme or proposal of the Issuer involving mobilisation of funds whether in India or abroad provided the rating so assigned has been quoted, referred to, reported, relied upon or otherwise used by or on behalf of the Issuer.

Any other information having bearing on the operation/performance of the company as well as price sensitive information which includes but not restricted to;

• Issue of any class of securities.
• Acquisition, merger, de-merger, amalgamation, restructuring, scheme of arrangement, spin off of setting divisions of the company, etc.,
• Change in market lot of the companies shares, sub-division of equity shares of company.
• Voluntary delisting by the company from the stock exchange(s).
• Forfeiture of shares,
• Any action which will result alteration in the terms regarding redemption/cancellation/retirement in whole or in part of any securities issued by the company.
• Information regarding opening, closing of status of ADR, GDR or any other class of securities to be issued abroad,
• Cancellation of dividend/rights/bonus, etc.

The amendments indicated above would be effective for all the listed companies from the quarter ending June 1998 and the maximum period for publishing the above results by the companies shall be one month from the end of the quarter. In case, the company prefers to give audited results instead of unaudited results for the last quarter of the financial year of the company, then the company shall publish /submit the audited results within two months from the end of the last quarter of the financial year. This is a continuous disclosure requirement and so the companies should publish the quarterly statements even when the previous year results are not available during the intervening period.

Enhancing efficiency and transparency in the stock exchanges

Computerised screen based trading

Electronic trading is transparent, cost efficient and faster mode for executing trades. Also it permits spreading of trading facilities and instant dissemination of information. Recognising this need, the SEBI advised all the stock exchanges in the country to introduce electronic trading system in a time bound manner.

Till the previous year , 16 exchanges in the country had shifted to electronic trading and in the year under review four more exchanges introduced this facility as indicated in the table. Thus, 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.

Clearing House or Clearing Corporation

To ensure an effective clearing mechanism, the SEBI advised all stock exchanges to set up a clearing house or a corporation and settle all transactions through the clearing house only. In response to the above advice, 20 stock exchanges in the country, had established clearing houses till March 31, 1998. The National Stock Exchange of India Ltd(NSEIL) has already set up a clearing corporation viz., the National Securities Clearing Corporation Limited, which guarantees settlements of all trades by acting as a counter party to every trade executed on the Capital Market segment of the exchange.

Rolling settlement

The trading and settlement cycles have been shortened from 14 to 7 days. Rolling settlement is a logical extension to further shortening of the trading and settlement cycles. So far, OTCEI has been the only exchange with a rolling settlement system. Further shortening of trading and settlement cycles would generate additional pressure on the clearing mechanism of the stock exchanges on account of the present paper based system.

With the introduction of dematerialised trading, it has now become feasible to contemplate the introduction of rolling settlement. Accordingly, the SEBI introduced T+5 rolling settlement cycles from January 15, 1998 in respect of those securities for which dematerialised trading was made compulsory for institutional investors namely; banks, financial institutions, domestic mutual funds and foreign institutional investors.

Introduction of modified carry forward system

The SEBI had appointed a committee under the chairmanship of Prof. J R Verma to review the existing Revised Carry-Forward System recommended earlier by the G S Patel Committee. In October 1997, the Modified Carry-Forward System (MCFS) recommended by the J R Verma Committee was approved by the SEBI and all exchanges desirous of implementing Modified Carry Forward System were advised to apply to SEBI for prior approval.

Some of the features of the Modified Carry Forward System, as recommended by the Committee, are given in the box I.4:

Box I.4: Features of Modified Carry Forward System

• The scrips under carry forward system should have sufficient floating stock and high

• 10 per cent margin on the carry forward trades instead of 15 per cent earlier.
• Members to maintain capital adequacy ratios at such level as SEBI may mandate from time to time.
• Enhancing the over all limit of carry forward trades by a single brokers to Rs.20 crore from the earlier limit of Rs.7.5 crore.
• Removal of scrip-wise sub-limits on carry forward positions.
• Removal of limit of Rs.10 crore for a badla financier.

Warehousing of shares

The SEBI had received requests from institutional investors, stock brokers and stock exchanges to permit "warehousing" of trades. Warehousing implies execution of firm orders in parts and the execution is done in the same trading cycle. A consolidated contract note at the weighted average price is issued at the end of the trading cycle. This facility is helpful where large orders are to be executed but due to liquidity constraints it is either costly or not possible to execute the orders immediately. The SEBI permitted brokers to warehouse trades for firm orders of the institutional clients only. Certain safeguards like reporting of the warehouse trades, non carry forwarding of un-executed portion of the trade and compulsory delivery of the warehouse trades have been put in place.

Market making

One of the mechanism which is absent in the secondary market is ‘Market Making’. This concept was first introduced by OTCEI and though it is still prevalent there, it has not been able to serve its purpose. Market making is an important activity which infuses liquidity in the capital market by way of two-way quotes given by jobbers or market makers.

Illiquidity of scrips on our exchanges has been a major concern of the SEBI. In an effort to provide necessary liquidity to the comparatively less traded though fundamentally good scrips, the SEBI constituted 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.

Committee on regulation of derivatives trading

Derivative products are being intensively used in most of the major markets of the world. These products have been used as tools for risk management and hedging by investors. Derivatives, though are highly complex products, have found an increasing international acceptability among the market intermediaries, corporates and retail investors.

Presently, in India, a few derivative products in currency and commodity markets are available. The SEBI felt the need to introduce derivative products in the Indian securities market and accordingly appointed a Committee under the Chairmanship of Dr. L. C. Gupta. The Committee submitted its report to SEBI on March 17, 1998. The main recommendations of the Committee are given in the box I.5

Box I.5: Major Recommendations of L. C. Gupta Committee

• The Committee strongly favours the introduction of financial derivatives in order to provide the facility for hedging in the most cost-efficient way against market risk. This serves an important economic purpose. At the same time, it recognises that in order to make hedging possible, the market should also have speculators who are prepared to be counter-parties to hedgers. A derivatives market wholly or mostly consisting of speculators is unlikely to be a sound economic institution. A soundly based derivatives market requires the presence of both hedgers and speculators.
• The Committee is of the opinion that there is need for equity derivatives, interest rate derivatives and currency derivatives. In the case of equity derivatives, while the Committee believes that the type of derivatives contracts to be introduced will be determined by market forces under the general oversight of the SEBI and that both futures and options will be needed. The Committee suggests that a beginning may be made with stock index futures.
• The Committee favours the introduction of equity derivatives in a phased manner so that the complex types are introduced after the market participants have acquired some degree of comfort and familiarity with the simpler types. This would be desirable from the regulatory angle too.
• The Committee's recommendations on regulatory framework for derivatives trading envisage two-level regulation, i.e. exchange-level and the SEBI-level. The Committee’s main emphasis is on exchange-level regulation by ensuring that the derivative exchanges operate as effective self-regulatory organisations under the overall supervision of the SEBI.
• Since the Committee has placed considerable emphasis on the self-regulatory competence of derivatives exchanges under the over-all supervision and guidance of the SEBI, it is necessary that the SEBI should review the working of the governance system of stock exchanges and strengthen it further. A much stricter governance system is needed for the derivative exchanges in order to ensure that a derivative exchange will be a totally disciplined market place.
• The Committee is of the opinion that the entry requirements for brokers/dealers for derivatives market have to be more stringent than for the cash market. These include not only capital adequacy requirements but also knowledge requirements in the form of mandatory passing of a certification programme by the brokers/dealers and the sales persons. An important regulatory aspect of derivatives trading is the strict regulation of sales practices.
• Many of the SEBI's important regulations relating to exchanges, brokers-dealers, prevention of fraud, investor protection, etc., are of general and over-riding nature and hence, these should be reviewed in detail in order to be applicable to derivatives exchanges and their members.
• The Committee has recommended that the regulatory prohibition on the use of derivatives by mutual funds should go. At the same time, the Committee is of the opinion that the use of derivatives by mutual funds should be only for hedging and portfolio balancing and not for speculation. The responsibility for proper control in this regard should be cast on the trustees of mutual funds. The Committee does not favour framing of detailed SEBI regulations for this purpose in order to allow flexibility and development of ideas.
• The SEBI, as the overseeing authority, will have to ensure that the new futures market operates fairly, efficiently and on sound principles. The operation of the underlying cash markets, on which the derivatives market is based, needs improvement in many respects. The equity derivatives market and the equity cash market are part of the equity market mechanism as a whole.
• The SEBI should create a Derivatives Cell, a Derivatives Advisory Committee, and Economic Research Wing. It would need to develop a competence among its personnel in order to be able to guide this new development along sound lines.

The circulation of forged, stolen, counterfeit security certificates and transfer deeds, coupled with inordinate delay on the part of the transfer agents and the issuer companies in effecting transfer of securities, created bottlenecks in the smooth functioning of the secondary capital market. The SEBI appointed a committee under the chairmanship of Shri R Chandrasekaran to recommend speedy transfers of shares.

The committee has recommended the following (see box I.6):

Box I.6: R. Chandrasekaran Committee Recommendations

• Standard Operating Procedures and Benchmark Standards for Registrars and Share Transfer Agents.
• Reclassification of RTA’s, infrastructure, systems and human resources for RTAs.
• Certificate Authentication Programme.
• Signature Guarantee programme.
• Amendment to Listing Agreement to provide for;
• Appointment of compliance officer for monitoring share transfer.
• Due diligence survey of RTAs capabilities.
• RTAs to produce a certificate for completion of transfers within the stipulated time.
• Furnishing of information regarding the loss and the issue of duplicate share certificates.

All the stock exchanges are required to set up a fund called ‘Investor Protection Fund’. The purpose of the fund is to provide compensation, arising out of disputes or defaults of the member brokers of the exchange to small investors. The amount of compensation available against a single claim of an investor arising out of default by a member broker of a stock exchange is Rs. 1 lakh in case of major stock exchanges, Rs. 50,000 in case of medium stock exchanges and Rs.25,000 in case of smaller stock exchanges. Another Fund being maintained by the exchanges is the Investor Services Fund, whose purpose is, as the name indicates, to provide investor related services. A Committee was set up to bring about uniformity in the functioning of these funds. Based on the initial recommendations of the Committee, SEBI advised the stock exchanges to provide various services including a desk for attending investor complaints and dummy terminals for showing the trades of the exchange. The number of Investor Service Centres will be set up by the stock exchanges at various places is also being increased.

The Securities Lending Scheme, 1997

The Securities Lending Scheme introduced by the SEBI provides for lending of securities through an approved intermediary to a borrower under an agreement for a specified period. The scheme facilitates the timely delivery of securities which improves the efficiency of the settlement system and corrects the temporary imbalance between demand and supply. It also provides for the mobilization of idle stocks in the hands of FIs, FIIs, Mutual Funds and other large investors leading to additional income to the holder of securities. Till March 31, 1998, the SEBI had already given approval to three intermediaries to act as Stock Lenders.

Setting up of depositories and expediting dematerialisation

Consequent upon enactment of the Depositories Act to enable scripless trading, the first depository in the country, namely, National Securities Depository Ltd (NSDL), commenced operations. A depository enables fast and efficient settlement as well as eliminates physical handling of securities and reduces the problems related to transfer of shares, bad deliveries, loss of share certificates etc.

Further, to expedite the process of dematerialisation of securities and settlement of transactions in the depository, the SEBI decided that settlement of trades in the depository would be compulsory from January 15, 1998 for institutional investors namely FIs, Banks, Mutual Funds and FIIs having a minimum portfolio of securities of Rs. 10 crore. The SEBI also announced the list of eight securities which were to be settled in dematerialised form by the above class of investors, from January 15, 1998 onwards. To provide liquidity in dematerialised trading the SEBI allowed dematerialised securities as good delivery in the physical segment for the purpose of settlement. It was decided to expand the list of scrips for compulsory dematerialised trading to 30 from June 1998 and further to 50 from August 1998. In order to popularise dematerialised trading a Core Group with NSDL, NSEIL, BCL and SHCIL under the leadership of SEBI was set up.