Capital Market Reforms.

The period since 1991 has witnessed significant reforms in the Indian capital market, aimed at promoting transparency, efficiency, and investor protection. Some key measures and reforms include:

1. SEBI's Statutory Status:
• SEBI (Securities and Exchange Board of India) was granted statutory status through an Act of Parliament. This move enhanced SEBI's regulatory authority over the securities market.
2. Introduction of Electronic Trade:
• The adoption of electronic trading systems facilitated faster and more efficient transactions in the stock market.
3. Entry of Foreign Institutional Investors (FIIs):
• Since 1992, foreign institutional investors (FIIs) were permitted to participate in the Indian securities market, contributing to increased capital inflows.
4. Settlement Guarantee Funds:
• Settlement guarantee funds were established at all stock exchanges to enhance the security and reliability of settlement processes.
5. Compulsory Dematerialization:
• To eliminate issues associated with paper trading and accelerate the transfer process, the compulsory dematerialization of share certificates was introduced.
6. Corporate Governance Mandate (Clause 49):
• Clause 49 of the listing agreement was introduced to enhance corporate governance practices. It mandates that listed companies have at least half of their directors on the board as independent directors.
7. Anchor Investors in IPOs:
• The introduction of anchor investors in Initial Public Offerings (IPOs) ensures a smooth listing process and prevents price manipulation. Anchor investors are allotted a substantial number of shares and commit to not selling them immediately after listing.
8. Regulation of Participatory Notes:
• Stringent regulations were introduced for participatory notes to enhance transparency and curb potential misuse.
9. Strengthening SEBI through Legislation (2014):
• The Securities Laws (Amendment) Act, 2014, provided SEBI with enhanced powers to address fraudulent investment schemes, including Ponzi schemes. The legislation also facilitated the merger of the Forward Markets Commission (FMC) with SEBI.
10. Rules for Credit Rating Agencies:
• The regulatory framework for credit rating agencies was strengthened, ensuring greater accountability and reliability in credit assessments.

These reforms reflect the commitment of regulatory authorities to create a robust and investor-friendly capital market in India. The measures have played a crucial role in fostering investor confidence, market integrity, and the overall development of the securities market.

Demutualization in Stock Exchanges:

Definition: Demutualization is a process in which the ownership and management of a stock exchange, traditionally held by its member-brokers, are separated. This involves the divestment of ownership from the brokers, and shares of the exchange are sold to external investors. The primary aim of demutualization is to eliminate the inherent conflict of interest that arises when brokers, who are also owners, are involved in the management of the exchange.

Key Points:

1. Ownership and Management Separation:
• Demutualization involves breaking the link between ownership and management in a stock exchange. Previously, brokers held both ownership stakes and managerial positions.
2. Conflict of Interest:
• Mutualization, where brokers own and manage the exchange, can lead to conflicts of interest. For example, decisions made by the management may favor the interests of the broker-owners over those of other market participants.
3. Divestment of Ownership:
• As part of the demutualization process, broker-owners partially divest their ownership stakes in the exchange. This allows for the entry of new investors who are not involved in the day-to-day operations of brokerage.
4. External Investment:
• External investors, who may include institutional investors, financial institutions, and the public, are given the opportunity to acquire shares in the demutualized exchange. This broadens the ownership base and brings in fresh capital.
5. Regulatory Mandate:
• In many cases, governments or regulatory authorities mandate the demutualization of stock exchanges to enhance transparency, corporate governance, and overall market efficiency.
6. Enhanced Governance:
• Separating ownership from management is seen as a means to enhance governance structures within the stock exchange. The management can focus on operational efficiency and market development without being influenced by conflicting ownership interests.
7. Global Trend:
• Demutualization has been a global trend, with many stock exchanges around the world undergoing this transformation. It aligns with efforts to modernize and streamline financial markets.
8. Legal Framework:
• Demutualization often requires changes to the legal framework governing stock exchanges. Regulations are put in place to guide the demutualization process and ensure a smooth transition.

By demutualizing, stock exchanges aim to create a more transparent, competitive, and investor-friendly environment. The separation of ownership and management contributes to the overall development and integrity of the financial markets.