Development finance institutions have played a constructive role in establishing India's industrial base. However, these institutions seem to have moved away from their developmental role and are getting entangled deeper in management and control of private sector industries. Corporate circles have been pleading for a re-examination of the role and appointment of nominee directors to avoid day-to-day interference in company operations. Furthermore, some argue that financial institutions should keep their funds rolling by disposing of shares with a ready market. The concept of growth or mutual funds has yet to take root in the country, but such funds could prove successful in mobilising and canalising community savings for industrial development.

Role of financial institutions

The unrepentant tone of the letter sent by Mr. Harshad Mehta to the CBI focuses attention on reforms urgently needed to make financial markets level playing fields for all. While big operators liquidated positions before prices fell, India lacks laws against such insider trading, allowing operators to take markets sky high with unauthorised bank accommodation. Furthermore, Mr. Mehta accused the Reserve Bank of India of quietly countenancing unconventional practices now called into question. What is now needed is enlightened leadership with the foresight to direct reform along correct lines

Reform Markets

The Government of India have appointed a committee, with Mr. A. D. Gorwala as its chairman, to assist them in formulating legislation for the regulation of stock exchanges and contracts in securities. While a Bill has already been introduced in Parliament for the regulation of forward contracts, it does not cover trading in securities. The Committee will consider the draft proposals of Government and submit a revised draft Bill. It will meet in Bombay on June 26 and will submit its report within a month.

Regulation of Stock Exchanges

The government has amended the Securities Contracts (Regulation) Rules, 1957, to allow a company to become a member of a stock exchange if it satisfies certain conditions. The conditions are that the company is formed in compliance with the provisions of section 322 of the Companies Act, that a majority of the directors are shareholders of the company and members of the stock exchange, and that the directors have "unlimited liability" in the company. Under the amended rules, notified in the Gazette of India Extraordinary, the stock exchanges would admit these members on the recommendations of several financial institutions, including the Industrial Finance Corporation and the Industrial Development Bank of India

Securities contract rules amended

The Securities and Exchange Board of India (SEBI) has framed rules to register and regulate stock dealers, share shoppes, and unauthorised stock exchanges under Section 12 of the SEBI Act. These rules are proposed with a view to redressing the grievances of investors in semi-urban and rural areas who have been experiencing difficulties in getting services for disposal of securities or consolidating odd lots. The regulations impose a statutory duty on stock dealers to deal only on a spot delivery basis and issue receipts in a specified form. Additionally, every applicant eligible for grant of a certificate must pay an initial fee of Rs 50,000 to keep the certificate in force. Stock dealers will have to submit information relating to their activities as and when required by SEBI.

Rules framed for stock dealers-

A Select Committee has proposed a Central Advisory Council to advise the Government on development and regulation of scheduled industries. The revised Bill includes provisions to levy a cess on manufactured goods to fund the administration of the Act and a new clause has been inserted for safeguarding the interests of the consumers. The measure aims to balance industrial development with consumer protection.

Regulation of Scheduled Industry

The improved and improving economic prospect has not had any impact on the stock market, which continues to present a picture of utter despondency. The cult of equity stands thoroughly discredited, as many relatively new issues once considered a rage now go abegging. While the state of the stock market is dominated by speculators, the capital market is influenced by financial institutions. More than anything else, gross mismanagement of companies and enormous cost overruns have undermined investor confidence. Although the link between the stock and capital markets is not as strong as often made out, the equity market must still play an important role in mobilizing national savings.

Reviving cult of equity Management holds key

Stock brokers on India's 20 exchanges have initiated a dialogue with the Securities and Exchange Board of India (SEBI) following a spontaneous strike regarding quantum of registration fees to be charged by SEBI. While the broker community resists regulation, it is fairly certain that deregulation and liberalization in the economy will bring a drastic change in the way Indian brokers do their business. Currently, exchanges are riddled with problems like unbridled speculation and insider trading. SEBI requires substantial funds to monitor these activities, conduct research, and provide investor protection. Ultimately, the core of these reforms will be the stock exchanges themselves, as securities regulation must be tightened to maintain investor confidence.

Reforms will change stock market operations

The Bombay Native Share and Stock Brokers' Association has formally applied for recognition under the Bombay Securities Contracts Control Act, 1925. The Association has submitted rules for the regulation and control of transactions in securities other than ready delivery contracts for sanction by the Governor-in-Council. Membership is restricted to British subjects or natives of India resident in the Presidency for ten years, with strict solvency requirements to ensure the integrity of the exchange

Recognition sought for - Bombay Native Share and Stock Brokers' Association

A report by Dr. P.J. Thomas calls for the establishment of a National Investment Commission, modelled after the US SEC, to suppress objectionable practices on Indian stock exchanges. Identifying "violent fluctuations" caused by reckless speculation as a major evil, Thomas recommends strict regulation of blank transfers, the abolition of "kerb" trading, and the enforcement of compulsory margins. He argues that only an independent quasi-judicial authority can effectively police the market.

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