Policies and Programmes

This Annual Report of the Securities and Exchange Board of India (SEBI) reviews the policies and programmes of SEBI and its working and operations for the fiscal year 1996-97. It describes the manner in which 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 1996-97, and their bearing on and relation to the work of 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 1996-97 SEBI continued its operations and initiatives in regulating and developing the Indian securities markets in fulfilment of the twin objectives of investor protection and market development set forth in the SEBI Act, 1992. Throughout its five year existence as a statutory body, 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 in areas hitherto unregulated to foster development in these areas and implementing them to ensure growth of the markets with efficiency, integrity and protection of investors' interest. The developments and reforms in Indian securities markets since January 1992, when SEBI was given statutory powers are given in the box below.

Securities Markets Reforms and Development January 1992 to March 1996

1. The Securities and Exchange Board of India, set up in 1988 under an administrative arrangement, given statutory powers with the enactment of the SEBI Act, 1992
2. Capital Issues(Control) Act, 1947 repealed and the Office of Controller of Capital Issues abolished; control over price and premium of shares removed. Companies now free to raise funds from securities markets after filing letter of offer with SEBI
3. SEBI introduces regulations for primary and secondary market intermediaries, bringing them within the regulatory framework
4. New reforms by SEBI in the primary market include improved disclosure standards, introduction of prudential norms and simplification of issue procedures. Companies required to disclose all material facts and specific risk factors associated with their projects while making public issues.
5. Disclosure norms further strengthened by introducing cash flow statements
6. Listing agreements of stock exchanges amended to require listed companies to furnish annual statement to the stock exchanges showing variations between financial projections and projected utilisation of funds in the offer document and at actuals, to enable shareholders to make comparisons between performance and promises
7. New issue procedures introduced - partial book building for institutional investors - aimed at reducing costs of issue
8. SEBI introduces a code of advertisement for public issues for ensuring fair and truthful disclosures
9. The power to regulate stock exchanges delegated to SEBI by the government
10. SEBI reconstitutes the governing boards of the stock exchanges, introduces capital adequacy norms for brokers and issues rules for making the client/broker relationship more transparent, in particular, segregating client and broker accounts
11. Over the Counter Exchange of India (OTC) set up with computerised on line screen based nation-wide electronic trading and rolling settlement
12. National Stock Exchange of India (NSE) set up as a stock exchange with computerised on line screen based nation- wide electronic trading
13. The Stock Exchange, Mumbai (BSE) introduces on line screen based trading
14. Capital adequacy requirement for brokers introduced
15. System of mark to market margins introduced on the stock exchanges
16. "Revised carry forward" system introduced in place of "badla"
17. National Securities Clearing Corporation Limited set up by the NSE
18. SEBI frames regulations for mutual funds. Private mutual funds permitted and several such funds have already been set up. All mutual funds allowed to apply for firm allotment in public issues - also aimed at reducing issue costs
19. SEBI introduces regulations governing substantial acquisition of shares and take-overs and lays down the conditions under which disclosures and mandatory public offers are to be made to the shareholders
20. Indian companies permitted to access international capital markets through Euroissues
21. Foreign Direct Investment allowed in stock broking, asset management companies, merchant banking and other non- bank finance companies
22. Foreign Institutional Investors (FIIs) allowed to access to Indian capital markets on registration with SEBI
23. Guidelines for Offshore Venture Capital Funds announced by the government
24. SEBI strengthens surveillance mechanisms in SEBI and directs all stock exchanges to have separate surveillance departments
25. SEBI strengthens enforcement of its regulations. Begins the process of prosecuting companies for mis-statements, issues show cause notices to merchant bankers, ensures refunds of application money in several issues on account of mis-statements in the prospectus

1996-97 has been another eventful and challenging year for SEBI. At the same time as carrying on its day-to-day work in setting standards, in supervision and enforcement, SEBI introduced an array of reforms in the primary and secondary markets and catalysed modernisation of the market infrastructure to prepare the markets for the new century. Enforcement and surveillance remained a major priority for SEBI. SEBI continued to use its powers to the full and instituted a number of enforcement actions against a wide range of securities law violations. The past year marked an important turning point in primary market regulation, which helped in further streamlining and simplifying the issue procedure, imparted greater flexibility to the issue process and strengthened the criteria for accessing the securities market. In the secondary market, reforms aimed at improving the market efficiency, transparency and integrity. Trading infrastructure was modernised with majority of the stock exchanges replacing the open outcry system by computerised on line screen based trading systems. Improvements were made in the clearance and settlement systems which still form a weak link in the securities markets.

A major step in this direction was taken with the establishment of a depository - the National Securities Depository Limited (NSDL). The development of mutual funds which are important investment vehicles in a mature securities market, was given a major impetus, with the revision of the mutual fund regulations which now provide greater operational flexibility to the fund managers and increase their accountability and supervision. Far reaching changes were made to the SEBI regulations for substantial acquisition of shares and take- overs. The take-over regulations were revised based on the recommendations of the committee appointed by SEBI under the chairmanship of Justice P N Bhagwati, former Chief Justice of India. The new regulations, while enhancing the level of investor protection and transparency recognise the new freedom in the corporate sector as an outcome of the reforms. The regulations for the Foreign Institutional Investors (FIIs) were liberalised to provide greater flexibility and widening the scope of their investment in Indian securities markets.

Five new regulations were notified by SEBI, during the year. These were the SEBI (Custodian of Securities) Regulations, 1996 notified on May 16, 1996; the SEBI (Depository and Participants) Regulations, 1996 notified on May 16, 1996; the SEBI (Venture Capital Funds) Regulations, 1996 notified on December 4, 1996; the revised SEBI (Mutual Funds) Regulations, 1996 notified on December 9, 1996; and the revised SEBI (Substantial Acquisitions of Shares and Take- overs) Regulations, 1997 notified on February 20, 1997. Besides, the regulations for Foreign Institutional Investors were also amended to give effect to the liberalisation in policy on foreign portfolio investment. Changes were also made to the SEBI (Merchant Bankers) Regulations, 1992 and the SEBI (Underwriters) Regulations, 1993. A list of all rules and regulations notified under the SEBI Act is given as an Annexure to this Report.

While introducing these and other reforms and policy changes, SEBI has followed an open, transparent, consultative and participative approach. SEBI has kept in close touch with investors, market participants and professionals. This feedback, as well as expert advice has helped SEBI formulate regulations which have conceptual underpinnings and address market needs.