Capital market reform allows capital markets to embrace new ideas and techniques that affect the capital market. Capital market liberalisation is one such capital market reform that various countries have implemented in order to strengthen their economies.
The government has launched a number of initiatives from time to time to provide financial and regulatory reforms in the primary and secondary market segments of the capital market. These policies are intended to maintain investors' (both domestic and foreign) confidence in the country's capital market. The primary goal of all policies and reforms was obviously to strengthen a specific country's capital market as much as possible.
After independence, the Parliament passed the Capital Issues Control Act, 1955.
Between 1955 and 1992, issuers in India were required to obtain permission from the government regarding the timing and size of the issue and the price at which the securities were issued.
As a result, the government would invariably ask issuers to issue their securities at a discount to the market-clearing price, just to be safe. Investors quickly recognized this, and primary issues were invariably oversubscribed.
In 1956, the government also passed the Securities Contract (Regulation) Act, which is still in effect today.
Despite the fact that this Act gave the government the authority to regulate the stock markets, it was entirely up to the stock exchanges to discipline their members, and the government rarely looked into the stock exchanges' operations.
India had a tightly controlled primary market and a largely unrestricted secondary market. Our market grew slowly in this controlled environment.
The Government of India decided in 1992 that capital market regulation should be handled by a separate statutory authority, the Securities and Exchange Board of India (SEBI).
Simultaneously, the Government of India repealed the Controller of Capital Issues Act, giving corporates greater leeway over the price, size, and timing of their issues.
The Government of India 1991implemented various trade and industrial policy reforms.
Indian capital market reforms have long been overdue; liberalization of onerous disclosure requirements, improved price discovery mechanisms, and entry of foreign companies into Indian markets would provide the necessary boost to the economy's overall growth.
An active market for foreign companies in India is likely to attract investment from a broader range of sources, both domestic and foreign, and will thus benefit domestic companies that are already listed or are in the process of being listed on Indian bourses.
Increased participation from global institutional investors also ensures increased liquidity and market reputation, resulting in higher valuations for companies listed on Indian exchanges.
Furthermore, such reforms would have ancillary benefits such as job creation in India's financial cities and exposure to global best practices.
The Government of India initiated several capital market reforms as part of its economic reforms program, which began in June 1991, including the abolition of the office of the Controller of Capital Issues (CCI) and the granting of statutory recognition to the Securities Exchange Board of India (SEBI) in 1992 for:
protecting the interests of investors in securities;
promoting the development of the securities market;
regulating the securities market; and
matters connected therewith.
SEBI has been given the necessary powers to regulate various aspects of the capital market, including:
regulating the business of stock exchanges and other securities markets;
registering and regulating the operations of various intermediaries and mutual funds;
promoting and regulating self-regulatory organizations;
promoting investor education and training for intermediaries;
prohibiting insider trading and unfair trade practices;
regulating the significant acquisition of shares and takeover of companies;
requesting information, inspecting, conducting inquiries, and auditing stock exchanges, intermediaries, and self-regulation organizations in the stock market;
performing such functions and exercising such powers under the provisions of the Capital Issues (Control) Act, 1947 and the Securities Contracts (Regulation) Act, 1956.
The following are the major reforms implemented in India's capital market:
The Securities and Exchange Board of India (SEBI) was established in 1988. It was granted legal status in 1992.
SEBI was established primarily to regulate the activities of merchant banks, to control the operations of mutual funds, to act as a promoter of stock exchange activities, and to act as a regulatory authority of new issue activities of various companies.
The SEBI was established with the primary goal of "protecting the interests of investors in the securities market and for matters connected with or incidental thereto."
Three creditors rating agencies have been set up, namely, The Credit Rating Information Services of India Limited (CRISIL - 1988), the Investment Information and Credit Rating Agency of India Limited (ICRA - 1991), and Credit Analysis and Research Limited (CARE).
They were established to assess the financial health of various financial institutions and stock market-related agencies.
It also serves as a guide for investors in assessing the risk of their investments.
In recent years, many Indian and foreign commercial banks have established merchant banking divisions.
These divisions offer financial services such as underwriting, organising issues, and consulting.
It has proven to be beneficial to factors related to the capital market.
The Indian economy has been growing at a rapid pace in recent years. It has attracted a significant amount of Foreign Institutional Investment (FII).
In recent times, the massive entry of FIIs into the Indian capital market has resulted in a positive appreciation for Indian investors.
Similarly, many new companies are emerging on the Indian capital market's horizon to raise capital for their expansions.
As a result of technological advancements in recent years, the physical transaction with regards to the amount of paperwork is reduced.
Paperless transactions are now increasing at an alarming rate. It saves investors money, time, and energy.
As a result, it has made investing more secure and convenient, encouraging more people to participate in the capital market.
The expansion of mutual funds in India has undoubtedly aided the growth of the capital market.
Many new funds have been launched by public sector banks, foreign banks, financial institutions, and joint mutual funds between Indian and foreign firms.
Mutual funds in India have undergone significant diversification in terms of schemes, maturity, and so on.
It has made it easier for ordinary investors to enter the capital market.
Initially, the BSE was the primary exchange, but with the establishment of the NSE and the OTCEI, stock exchanges have spread throughout the country.
A new interconnected stock exchange in India has recently joined the existing stock exchanges.
In 2001, the Central Government of India established the Investors Education and Protection Fund (IEPF) under the aegis of the SEBI.
It is effective in educating and guiding investors. It tries to protect the interests of small investors from capital market frauds and malpractices.
The NSE has allowed derivatives trading in equities since June 2000. It also introduced futures and options transactions in November 2001.
These innovative products have increased the variety of investment options, resulting in the expansion of the capital market.
The Indian insurance sector has undergone massive reforms in recent years.
In the year 2000, the Insurance Regulatory and Development Authority (IRDA) was established.Jaipur Stock
It paved the way for private insurance companies to enter India.
It has grown in size as more insurance companies invest their money in the capital market.
In addition to the trading of ordinary securities, commodity trading has recently been encouraged.
The Multi Commodity Exchange (MCX) has been established.
The volume of such transactions is rapidly increasing.
The Indian capital market underwent significant reforms in the 1990s and after. As a result, the Government of India and SEBI have taken a number of steps to improve the functioning of Indian stock exchanges and make them more progressive and vibrant.
Which regulatory body was established to oversee capital markets in India?
a) RBIJaipur Investment
b) SEBI
c) IRDAI
d) Ministry of Finance
What was one of the key features of capital market reforms in India?
a) Dematerialization of securities
b) Introduction of barter system
c) Reduction in taxation on stocks
d) Abolition of stock exchanges
Which of the following was a direct outcome of capital market reforms?
a) Decrease in foreign investments
b) Improvement in market liquidity
c) Closing down of stock exchanges
d) Reduction of all taxes on securities
Which reform made it possible for investors to buy and sell securities electronically?
a) Introduction of financial derivatives
b) Demutualization
c) Electronic trading platforms
d) Merger of public and private sectors
When was SEBI given statutory powers?
a) 1988
b) 1992
c) 2000
d) 2005
Q1: Analyze the significance of capital market reforms in the liberalization of the Indian economy.
Answer: Capital market reforms played a crucial role in liberalizing the Indian economy by facilitating the flow of capital and increasing investor confidence. The reforms, such as the establishment of SEBI, dematerialization of securities, and the introduction of electronic trading platforms, created a more transparent and efficient financial system. They attracted Foreign Institutional Investors (FIIs) and domestic investors, leading to improved liquidity and economic growth. By opening the markets and regulating them, these reforms helped integrate India with the global economy.
Q2: Evaluate the role of SEBI in improving transparency and protecting investors in India’s capital markets.
Answer: SEBI has been instrumental in improving transparency and safeguarding investor interests in India's capital markets. By implementing stringent regulations on insider trading, promoting electronic trading, and ensuring timely disclosures by listed companies, SEBI has enhanced the credibility of the stock markets. It also introduced grievance redressal mechanisms for investors and imposed penalties on fraudulent practices, thus creating a secure investment environment that attracts domestic and international investors.
Q3: Discuss the challenges and opportunities created by capital market reforms in India.
Answer: While capital market reforms have opened up new opportunities for investment and economic growth, challenges remain in terms of market volatility, regulatory compliance, and ensuring inclusive access for small investors. Reforms such as the introduction of FIIs, demutualization of stock exchanges, and improved regulatory oversight have brought stability and transparency to the markets. However, concerns over speculative trading, market manipulation, and the need for further financial literacy and inclusion continue to be areas where reforms need to evolve further to ensure sustained growth and stability.
Question: Which of the following bodies regulates the capital markets in India?
A. RBI
B. IRDAIJaipur Wealth Management
C. SEBI
D. NITI Aayog
Answer: C
Explanation: SEBI (Securities and Exchange Board of India) is the regulatory authority responsible for overseeing the capital markets, ensuring fair practices, and protecting investors' interests.
Question: Discuss the impact of capital market reforms on India's economic growth and investment climate.
Answer: Capital market reforms have modernized the financial infrastructure, improving transparency, efficiency, and investor confidence. Reforms such as dematerialization, electronic trading, and tighter regulations on insider trading have attracted foreign investments, especially through Foreign Institutional Investors (FIIs). These reforms have enhanced market liquidity, reduced transaction costs, and allowed better price discovery. The introduction of SEBI as the capital market regulator has also instilled confidence, leading to increased domestic and international participation, thereby supporting India's economic growth.
Question: Which reform was introduced to prevent manipulation in stock markets?
A. Introduction of the barter system
B. Dematerialization
C. Abolishment of stock markets
D. Tightening insider trading laws
Answer: D
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