Aug 29, 2008

India - Reforming Capital Markets

Stock markets are currently trading at levels that are at least one-third below the peak touched in January this year. An inevitable consequence of a falling mark is the slackening of interest in capital market activities. There have been fewer initial public offers (IPOs) than last year. Most of the mutual fund schemes have underperformed in relation to their benchmark indices and are under great pressure to maintain their levels of assets. For ordinary investors, stock m arkets of the day present few opportunities but hold plenty of risks. High net-worth individuals, however, get lured by some high-profile banks and mutual funds offering portfolio management schemes that are opaque and complex. In the circumstances, nothing could be more comforting than that the stock markets have not been hit by any scam. India, regarded just a year ago as one of the best investment destinations, finds itself placed this year among the three worst performing markets. Fairly logical explanations can be found for this sharp downturn. The principal causes for the decline in market indices, the economic slowdown, and the outflow of portfolio money are well documented. Market imperfections or aberrant behaviour on the part of intermediaries are not among them.
There is however considerable scope for toning up the machinery for surveillance and detection of frauds in stock markets as also the mechanism for bringing the guilty to justice. SEBI, the capital market regulator, has announced some measures for the benefit of small investors. On the anvil is a pilot scheme under which small investors would be required to pay the money only on allotment, not at the time of making the application. This will check a practice that was adopted rather commonly by some companies: engineering massive over-subscription to their public issues. As a consequence of this practice, while the ordinary investor ultimately got only a fraction of what he had applied for, the companies and the investment bankers profited in the interregnum from the huge amounts collected as application money. SEBI, which is contemplating a reduction in the time span for completion of the IPO allotment process from 21 days to 3-4 days, has decided to cut the time frame for rights issue from 109 days to 41 days. These and other steps envisaged may be just incremental but they are necessary to strengthen the capital market edifice.

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