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Capital Market Reforms and Developments

SEBI has announced a number of far-reaching reforms to promote the capital market and protect investor interests. Reforms in the secondary market have focused on three main areas: structure and functioning of stock exchanges, automation of trading and post trade systems, and the beginning of surveillance and monitoring systems. Computerized online trading of securities, and setting up of clearing houses or resolution guarantee funds were made compulsory for stock exchanges. Stock exchanges were allowed to expand their trading to locations outside their jurisdiction through computer terminals. Thus, major stock exchanges in India have in progress of locating computer terminals in far-flung areas, while minor regional exchanges are planning to consolidate by using centralized trading under a federated structure. Online trading systems have been started in almost all stock exchanges. Trading is much more transparent and faster than in the past.

Until the early 1990s, the trading and settlement infrastructure of the Indian capital market was deprived, trading on all stock exchanges was through open outcry, settlement systems were paper-based, and market intermediaries were largely unregulated. The regulatory structure was fragmented and there was neither complete registration nor an apex body of regulation of the securities market. Stock exchanges were run as “brokers clubs” as their management was mainly composed of brokers. There was no prevention on insider trading, or fraudulent and unfair trade practices.

Since 1992, there has been intensified market reform, resulting in a big development in securities trading, particularly in the secondary market for equity. The majority stock exchanges have introduced online trading and set up clearing houses/corporations. A depository has become operational for scripless trading and the regulatory arrangement has been overhauled with most of the powers for amendable the capital market vested with SEBI. The Indian capital market has practiced a process of structural transformation with operations conducted to standards equal to those in the developed markets. It was opened up for investment by foreign institutional investors (FIIs) in 1992 and Indian companies were permitted to increase resources abroad through Global Depository Receipts (GDRs) and Foreign Currency Convertible Bonds (FCCBs). The primary and secondary segments of the capital market extended rapidly, with greater institutionalization and wider participation of individual investors accompanying this growth. But, various problems, including lack of confidence in stock investments, institutional overlaps, and other governance issues, continue as obstacles to the improvement of Indian capital market efficiency.

Capital Markets