sebi annual report 2004-05

8/9/2019 SEBI Annual Report 2004-05

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Highlights of Annual Report of theSecurities and Exchange Board of India 2004-05

The SEBI Annual Report 2004-05 was approved by the SEBI Board in the meetingheld on June 24, 2005 and submitted to the Ministry of Finance (MOF), Government of

India on June 28, 2005. The printed version of the said Report has been placed beforeboth the houses of the Parliament during the Monsoon session.

The SEBI Annual Report 2004-05 has five parts. Part One of the report articulatesthe policies and programmes pursued by SEBI during 2004-05. Part Two reviews thetrends and operations of the Indian securities market. Part Three provides a detailedaccount of regulation of the securities market. Part Four presents the regulatoryamendments including significant court pronouncements. Organisational matters arepresented in part Five of the Report. Part-wise highlights of the SEBI Annual Report2004-05 are furnished below:

Part One: Policies and Programmes.

? The SEBI (DIP) Guidelines, 2000 were amended for enhancing the allocationcategory for retail investors, redefining the retail investors in value terms,reducing the bidding period, timing of disclosure of price band/floor price incase of listed companies and data reporting at the website of stock exchange.

? The SEBI (DIP) Guidelines, 2000 with respect to order of presentation ofdisclosures in prospectus, requirements pertaining to abridged prospectusand issue advertisements were amended.

? SEBI (DIP) Guidelines, 2000 were amended to include provisions relating toissue advertisements on television, facility of shelf prospectus by specificentities such as public sector banks, scheduled banks and public financialinstitutions.

? Amendments to the SEBI (DIP) Guidelines, 2000 were announced withrespect to splitting of shares before IPO, terms of the issue, post issueobligations, public issues of bonds by designated financial institutions undershelf prospectus, definition of employees, reservation for shareholders andavailability of Green Shoe Option (GSO) facility.

? SEBI (Interest Liability Regularisation) Scheme 2004 was launched to provide

a one time opportunity to all the stock brokers to clear their dues.

? Clause 49 of the Listing Agreement was amended for further improving thestandards of corporate governance. The deadline for ensuring compliance inrespect of revised Clause 49 by the companies was extended up toDecember 31, 2005 from April 1, 2005.


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? Straight Through Processing (STP) was made mandatory for all institutionaltrades and STP became effective from July 1, 2004.

? A high level Securities Markets Infrastructure Leveraging Expert Task Force(SMILE Task Force) was constituted to carry out a comprehensive health

check on the securities market infrastructure encompassing all the marketsegments and market participants.

? The position limits and the broad eligibility criteria of stocks and indices onwhich futures and options could be introduced were modified.

? It was notified that all specified intermediaries and their related personsshould quote the Unique Identification Number (UIN) obtained under theCentral Database of Market Participants (MAPIN) Regulations in lieu of theUnique Client Code for all secondary market transactions with effect fromAugust 2, 2004.

? The depository participants (DPs) were permitted to provide statements ofaccount and other documents to the beneficiary owners (BOs)under digitalsignature, as governed under the Information Technology Act, 2000, subjectto the DP entering into a legally enforceable agreement with the BO for thesaid purpose.

? Instructions were issued to stock exchanges to levy, collect and remit theSecurities Transaction Tax (STT) on all transactions from the date ofnotification by the Government of India. The STT became effective fromOctober 1, 2004.

? The stock exchanges and depositories were instructed to inform the issuercompanies to comply with SEBI circular pertaining to mandatory admission ofdebt instruments on both the depositories.

? A model listing agreement for debentures was issued to the stock exchange.This agreement is to be used by companies or entities desiring to list theirdebentures issued to public or privately placed.

? The Clause 16 of the Equity Listing Agreement was amended so that thecompany on whose stocks, derivatives are available or whose stocks formpart of an index on which derivatives are available, shall give a notice periodof 30 days to stock exchanges for corporate actions like mergers, de-mergers, splits and bonus shares.

? The first phase of BSE Indonext trading platform was operationalised onJanuary 7, 2005 for the small and medium enterprises.

? The charge structure for dematerialisation was rationalised.


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? The comprehensive risk management framework for the cash segment wasspecified.

? Modifications to the Margin Trading Facility and Securities Lending and

Borrowing Scheme were specified.

? A committee was constituted to re-examine the coverage of MAPIN, suggestfuture implementation schedule and review the cost of obtaining UIN.

? For encouraging and facilitating the trading and clearing, members of stockexchanges were asked to use special electronic fund transfer facility.

? FII and trading member position limits in the equity index derivative contractswere revised.

?

SC(R)A was amended for corporatisation and demutualisation of stockexchanges.

? The format of the Key Information Memorandum (KIM) being submitted bymutual funds was standardised.

? The MFs and the FIIs were asked to enter the unique client codes (UCCs)pertaining to the parent MF and parent FII at the order entry level and enterthe UCCs for their schemes of the MFs and sub-accounts of the FIIs in thepost closing session.

? The cap of FIIs investments in dated Government securities and Treasurybills was raised from US $ 1 billion to US $ 1.75 billion, both under 100 percent debt route and general 70:30 route. A cumulative sub-ceiling of US $500million outstanding was fixed on FII investments in corporate debt. This wasover and above the ceiling of US $1.75 billion for the Government debt. Boththe sub-ceilings were separate and not fungible.

? The process of registration of FIIs was streamlined and time required for thesame was reduced.

? A Memorandum of Understanding (MoU) was signed with US Commoditiesand Futures Trading Commission (CFTC) to strengthen communicationchannels and to establish a framework for assistance and mutual co-operation.

? The Investor Protection Fund (IPF)/ Customer Protection Fund (CPF)Guidelines were revised and comprehensive guidelines prescribed withrespect to constitution and management of the IPF/CPF, contribution toIPF/CPF, and manner of filing/inviting claims from investors, eligible claims,


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determination of legitimate claims and disbursements of claims from theIPF/CPF.

? The Tripartite Agreement between brokers, sub-brokers and clients whichwas to come into effect from December 1, 2004, was extended up to January

1, 2005. It was further clarified that the model Tripartite Agreement shall beimplemented strictly from April 1, 2005.

? A number of initiatives were taken for education and awareness of investorswhich included, inter alia, workshops, audio-visual aids, distribution ofeducative materials etc.

Part Two : Review of the Trends and Operations

? The primary segment of the capital market was characterised by heightenedactivities during 2004-05. Strong fundamentals of the economy, encouragingcorporate results, buoyant secondary market, revival of structural reforms by

the government and an investor friendly regulatory framework provided bySEBI attracted the investors to the primary market.

? The total amount of capital raised during 2004-05 through public and rightsissues (including offer for sale) stood at Rs. 28,256 crore as compared withRs. 23,272 crore in 2003-04, an increase of Rs. 4,984 crore or 21.42 per centover the year.

? Excluding offer for sale, the total amount mobilised in 2004-05 was Rs.25,056 crore, which was more than three times higher than that of Rs. 8,023crore in the previous year. This indicates the revival of investors interest in

the primary market.

? The sector-wise classification shows that the private sector dominated theresource mobilisation efforts in 2004-05 with 60.7 per cent share in the totalresource mobilisation, followed by the public sector with 39.3 per cent.

? The Indian stock market, which witnessed a strong rally in 2003-04, continuedto maintain its momentum during 2004-05 except subdued conditionwitnessed in the first quarter of the year.

? On a point to point basis, the BSE Sensex posted a return of 16.1 per cent in

2004-05 on top of 83.4 per cent in 2003-04. The S&P CNX Nifty alsorecorded a gain of 14.9 per cent in 2004-05 over and above a gain of 81.2 percent in 2003-04.

? On an average basis, the returns in 2004-05 were at 27.8 per cent and 26.5per cent for BSE Sensex and S&P CNX Nifty, respectively.


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long term capital gains tax, transparent regulatory system, etc., were themajor factors which influenced the FII investment in India during 2004-05.

? Assets under management by the mutual funds as on March 31, 2005 stoodat Rs. 1,49,600 crore as against Rs. 1,39,616 crore a year ago, an increase

of 7.2 per cent over the year.

? Net resource mobilisation by mutual funds declined by 95.3 per cent toRs.2,200 crore in 2004-05 as compared with Rs. 46,808 crore in the previousyear.

? There were 450 mutual funds schemes as on March 31, 2005, of which, 227were income/debt oriented schemes, 188 were growth/equity orientedschemes and the remaining 35 were balanced schemes.

Part Three: Regulation of Securities Market

? During 2004-05, there was a significant increase in the number of variousclasses of intermediaries registered with SEBI.

? Fees and other charges received by SEBI increased by 93.3 per cent to Rs.169.87 crore in 2004-05 over the previous year.

? In order to enhance the efficacy of the surveillance function, SEBI hasdecided to put in place a world-class comprehensive Integrated MarketSurveillance System (IMSS) across stock exchanges and market segments.An Australian vendor has been assigned the job for implementing the IMSSsolution.

? While IMSS is in the process of being fully operationalised, an interimsurveillance mechanism has been put in place under which weeklysurveillance meeting is being held regularly.

? During 2004-05, 130 new cases were taken up for investigation as against121 in the previous year.

? The number of cases for which investigation was completed increased by17.8 per cent to 179 in 2004-05 over the previous year.

? During 2004-05, a total of 1,187 orders have been passed/reports submitted,of which 529 were enquiries and 658 were of adjudication in nature. A total of613 hearings were conducted of which, 338 pertained to enquiries and 275belonged to adjudication proceedings. There were 894 show-cause noticesissued of which, 364 related to enquiries and 530 pertained to adjudicationproceedings.


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? For investor education and training of intermediaries, National Institute ofSecurities Markets was registered as society.

? In order to promote the quality of research in the area of securities market in a

cost effective manner, SEBI instituted the SEBI Award for Excellence inResearch in the Area of Securities Market Initiative. Under the initiative, SEBIshall confer up to three awards on the three best researchers (individuals/institutions) in securities market every year.

Part Four: Regulatory Changes

In order to fine-tune the regulatory framework, the following amendments weremade during 2004-05:

(i) Amendment(s) to SEBI (Substantial Acquisition of Shares and Takeovers)

Regulations, 1997.(ii) Amendment(s) to SEBI (Procedure for Holding Enquiry by Enquiry Officerand Imposing Penalty) Regulations, 2002.

(iii) Notifications under SEBI (Central Database of Market Participants)Regulations, 2003.

(iv) SEBI (Depositories and Participants) (Amendment) Regulations, 2004.(v) SEBI (Venture Capital Funds) (Amendment) Regulations, 2004.(vi) SEBI (Foreign Venture Capital Investors) (Amendment) Regulations, 2004.(vii) SEBI (Portfolio Managers) (Amendment) Regulations, 2004.(viii) SEBI (Buy-back of Securities) (Amendment) Regulations, 2004.(ix) SEBI (Central Database of Market Participants) (Amendment), 2004.

Part Five: Organisational Matters

This part of the Report presents the details regarding SEBI Board, HumanResources, promotion of official language, progress of information technology, physicalinfrastructure, international co-operation, and Parliamentary Committee.


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Part One: Policies and Programmes

The Annual Report of the Securities and

Exchange Board of India (SEBI) presents the

policies and programmes of SEBI and its

working and operations during the financialyear 2004-05 in accordance with the format

prescribed in the Securities and Exchange

Board of India (Annual Report) Rules, 1994

notified in the Official Gazette on April 7, 1994.

The Report articulates the manner in which

SEBI discharged its functions and exercised

its powers in terms of the Securities and

Exchange Board of India Act, 1992; the

Securities Contracts (Regulation) Act, 1956;

the Depositories Act, 1996; and the delegatedpowers under the Companies Act, 1956. The

Report also reviews the developments in the

Indian securities market during the financial

year 2004-05 within the evolving regulatory

framework provided by SEBI. As enshrined in

PART ONE: POLICIES AND PROGRAMMES

the SEBI Act, it has been the continuous

endeavour on the part of SEBI to achieve its

statutory objectives such as (a) protection of

interests of the investors in securities, (b)development of the securities market, (c)

regulation of the securities market, and (d)

matters connected therewith and incidental

thereto. SEBI, as a statutory body, has sought

to balance these objectives by constantly

reviewing and assessing its policies and

programmes, initiating new guidelines and

regulations to nurture areas hitherto

unregulated or inadequately regulated and

implementing them in a manner so as topromote the orderly growth of the capital

market with transparency, fairness, efficiency,

safety, and integrity. The major policy initiatives

and developments in the securities market

during 2004-05 are furnished in Box 1.1.

Allocation of Shares to Retail Individual Investors

v Allocation of shares to retail individual investors has been increased from 25 per cent to 35 per cent of the

total issue of securities in case of book-built issues. The retail individual investor has been redefined as one

who applies or bids for securities of or for a value not exceeding Rs.1 lakh, as against the earlier limit of

Rs. 50,000.

Issue Advertisement

v The SEBI Disclosure and Investor Protection (DIP) Guidelines, 2000 were amended in order to ensure

better readability of the issue advertisements appearing on television and to reduce the cost incurred in

publishing pre-issue advertisements. The pre-issue advertisement which was mandatory for all public issues

(fixed and book-built) should now contain minimum details.

Introduction of Shelf Prospectus

v The facility of shelf prospectus was introduced for public sector banks, scheduled banks and public financial

institutions. They can file a draft shelf prospectus in the first instance disclosing the aggregate amount they

intend to raise through various tranches. Any amount of over-subscription can be retained by the issuer in

each tranche subject to the overall limit set for the year.

Green Shoe Option

v With an objective to widen the facility of Green Shoe Option, the SEBI (DIP) Guidelines, 2000 were amended

to make it available in case of all public issues, viz., initial public offerings, follow-on offerings, public issues

either through book building or fixed price route. All pre-IPO shareholders (including promoters) in case of

IPOs and pre-issue shareholders holding more than 5 per cent shares (including promoters) in case of

follow-on offerings can lend their shares for the purpose of green shoe option.

Issue Norms

v The SEBI (DIP) Guidelines 2000 on issue norms were amended to provide for a floor face value of Re.1 per

share in order to restrict the pre-IPO splitting of shares. The face value has to be necessarily Rs.10 pershare for issue price below Rs.500 and in cases where the issue price is Rs 500 or more, the issuer

companies can fix the face value below Rs. 10 per share.

Box 1.1: Major Policy Initiatives and Developments

in the Capital Market during 2004-05


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Annual Report 2004-05

v The definition of the minimum application lot has been changed from Rs.2,000 to a band of Rs.5,000-Rs.7,000. The applications can be made in multiples of such value.

v The DIP Guidelines for preferential allotment were amended to: a) restrict sale of shares by shareholders

who are allotted shares on preferential basis; b) impose lock-in period on pre-preferential shareholding from

the relevant date till six months after the date of allotment; c) reduce the period for allotment from 30 to 15

days; and d) facilitate corporate debt restructuring.

Corporate Governance

v To improve the standards of corporate governance, SEBI amended Clause 49 of the Listing Agreement. The

major changes in the new Clause 49 include amendments/additions to provisions relating to definition of

independent directors, strengthening the responsibilities of audit committees, improving quality of financial

disclosures, including those pertaining to related party transactions and proceeds from public/rights/preferential

issues, requiring Boards to adopt formal code of conduct, requiring CEO/CFO certification of financial

statements and improving disclosures to shareholders. Certain non-mandatory clauses like whistle blower

policy and restriction of the term of independent directors have also been included.

v The implementation schedule of the amended Clause 49 which was initially proposed to be effective from

April 1, 2005 for listed companies has been extended to December 31, 2005.

Debt Listing Agreement

v In order to further develop the corporate debt market, SEBI prescribed a model debenture listing agreement

for all debenture securities issued by an issuer irrespective of the mode of issuance.

Rationalisation of Dematerialisation Charges

v The existing structure of dematerialisation charges has been rationalised to provide benefits to investors.

With effect from February 1, 2005, certain charges paid by investors were removed which include charges

towards opening of a Beneficiary Owner (BO) account, credit of securities into BO account and custodycharge for BO account opened on or after February 1, 2005. With effect from April 1, 2005, the custody

charges are not levied on any investor.

IndoNext

v The first phase of BSE IndoNext trading platform was inaugurated by the Honourable Finance Minister on

January 7, 2005 to provide for a nation-wide trading platform for the small and medium enterprises (SMEs).

Implementation of STP

v Mandatory processing of all institutional trades executed on the stock exchanges through the Straight Through

Processing (STP) was introduced with effect from July 1, 2004. This was in continuation of the efforts made

by SEBI to ensure the inter-operability between the STP Service Providers through the setting up of STP

Centralised Hub.

SEBI (STP Centralised Hub and STP Service Providers) Guidelines, 2004

v In order to regulate the STP service, SEBI issued the SEBI (STP Centralised Hub and STP Service Providers)

Guidelines, 2004 which also prescribed the model agreement between the STP centralised hub and the

STP service providers. The STP Guidelines prescribe the eligibility criteria and conditions of approval,

obligations and responsibilities and code of conduct for the STP centralised hub and the STP service providers.

v In consonance with the internationally accepted ISO 15022 messaging standards, standardised transaction

work flow and messaging format for the STP system in India was specified by SEBI.

Derivatives

v In order to encourage the trading and clearing members of stock exchanges to use infrastructure of special

electronic fund transfer (SEFT) facility as laid down by RBI to the extent possible, the members are now

given a choice to opt for payment of mark-to-market margins, either before the start of trading next day i.e.,on T day, or on the next day i.e., T+1. In case the members opt to pay mark-to-market margin on T day, no

scaling up of initial margin would be applicable.


in the Capital Market during 2004-05 (Contd.)


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v Units of money market mutual funds and units of gilt funds were permitted to be accepted towards cashequivalent as part of the liquid assets of a clearing member.

v The eligbility criteria for indices on which futures and options are permitted to be introduced was modified to

encourage the introduction of derivatives contracts on sectoral indices.

Foreign Institutional Investors (FIIs)

v The Union Government announced, within an overall External Commercial Borrowing (ECB) ceiling of US $

9 billion, a sub-ceiling of US $ 1.75 billion for FII investment in dated Government securities and Treasury

Bills, both under 100 per cent debt route and normal 70:30 route. Further, a cumulative sub-ceiling of US $

500 million for FII investment in corporate debt was announced over and above the sub-ceiling of US $ 1.75

billion. Both the sub-ceilings are separate and not fungible.

v FII position limits in the equity index derivative contracts were revised. Accordingly, FII position limit in all

index options and futures contracts on a particular underlying index shall be Rs.250 crore (separately forfutures and options) or 15 per cent of the total open interest of the market in index futures and index

options, whichever is higher per exchange.

v The frequency of reporting of offshore derivative instruments by registered foreign institutional investors has

been made monthly.

v The mutual funds and FIIs have been advised to enter the Unique Client Code (UCC) pertaining to the

parent entity at the order entry level and enter the UCCs for their individual schemes/sub-accounts on the

post-closing session.

SMILE Task Force

v A Securities Markets Infrastructure Leveraging Expert Task Force (SMILE Task Force) was constituted by

SEBI to carry out a thorough health check on the securities markets infrastructure encompassing all segments

of the markets (viz. equities, debt, derivatives, fund products) and covering all market participants such asexchanges, trading platforms, clearing and settlement systems, payment systems, depositories, issue houses

(registrars) and other intermediaries, The Task Force has submitted reports on Infrastructure and Process

Flow for the Primary Market and Infrastructure and Process Flows for Enhancing Distribution Reach in the

Mutual Fund Industry. The Reports are under consideration of SEBI for implementation.

MoU Signed with Overseas Regulators

v Securities and Exchange Board of India (SEBI) signed a Memorandum of Understanding (MoU) with United

States Commodity Futures Trading Commission (CFTC) at Washington on April 28, 2004. This is the sixth

MoU that SEBI had signed with its international counterparts for strengthening communication channels and

establishing a framework for assistance and mutual co-operation between the two organisations.

In order to fine-tune the regulatory requirements, regulations amended during 2004-05 are as follows :

l SEBI (Venture Capital Funds) (Amendment) Regulations, 2004.

l SEBI (Foreign Venture Capital Investors) (Amendment) Regulations, 2004.

l SEBI (Central Database of Market Participants) (Amendment) Regulations, 2004.

l SEBI (Portfolio Managers) (Amendment) Regulations, 2004.

l SEBI (Depositories and Participants) (Amendment) Regulations, 2004.

l SEBI (Buy-back of Securities) (Amendment) Regulations, 2004.

l SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) (Amendment) Regulations,

2004.

l SEBI (Substantial Acquisition of Shares and Takeovers) (Amendment) Regulations, 2004.

l SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) (Second Amendment)

Regulations, 2004.




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l SEBI (Substantial Acquisition of Shares and Takeovers) (Second Amendment) Regulations, 2004.

l SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) (Third Amendment) Regulations,

2004.

v Amendments to the existing laws entail a detailed procedure. Pending amendment to existing laws,

regulatory pro-activeness was reflected through the following set of notifications:

l Notification under Sub-Regulation (1) of Regulation 6 of Securities and Exchange Board of India (Central

Database of Market Participants) Regulations.

l Notification under Sub-Regulation (2) of Regulation 6 of Securities and Exchange Board of India (Central


l Notification under Sub-Regulation (1) and (3) of Regulation 6 of Securities and Exchange Board of India

(Central Database of Market Participants) Regulations.

l Notification under Sub-Regulation (1) of Regulation 5A of Securities and Exchange Board of India (Central


l Notification under Sub-Regulation (1) of Regulation 4 and Sub-Regulation (1) and (2) of Regulation 6 of

Securities and Exchange Board of India (Central Database of Market Participants) Regulations.

1. GENERAL MACRO-ECONOMIC

ENVIRONMENT

According to the advance estimates ofthe Central Statistical Organisation (CSO), the

real GDP at factor cost grew by 6.9 per cent

in 2004-05 as compared to 8.5 per cent

(revised estimates) during the previous

financial year (Table 1.1). The deceleration

in the real GDP growth was mainly due to

uneven and deficient monsoon which pulled

down the growth rate of agricultural sector

from 9.6 per cent in 2003-04 to 1.1 per cent

in 2004-05 (Table 1.2). Notwithstandingunfavourable monsoon and high base effect,

growth in the agricultural sector turned out to

be better than anticipated signifying its

resilience against erratic monsoon. The

industrial sector grew by 8.3 per cent in 2004-

05 as against 6.5 per cent in 2003-04, partly

mitigating the setback to agriculture. The

service sector, which has been the main

driver of growth in India, continued to sustain

high growth rate i.e, 8.6 per cent in 2004-05as compared with 8.9 per cent in 2003-04.

The average growth rate of real GDP during

the first three years (2002-05) of the Tenth

Plan period was higher at 6.5 per cent than

that of 5.5 per cent achieved in the Ninth Plan

period (1997-2002). With acceleration in the

growth rate, India is one of the fastest growing

economies of the world.

One of the important features of the

macro-economic developments in 2004-05

was the resurgence of the industrial sector.

Led by manufacturing and electricity, gas and

water supply, recovery in the industrial sector

was further strengthened and broadened

during 2004-05. As a result, the contribution

of the industrial sector to the overall GDP

growth went up to 26 per cent in 2004-05 from

17 per cent in 2003-04. Major factors behind

the high growth of the manufacturing sector

were buoyant exports, encouraging domestic

investment climate, increased confidence

among the investors, and significant

improvement in domestic demand.

The services sector continued to remainthe main engine of growth in India with its

contribution to GDP growth reaching a high




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Table 1.1: National Income (At 1993-94 prices)(Rs. crore)

2003-04 2004-05

Item 2002-03 (Quick (Advance

Estimate) Estimate)

1 2 3 4

A. Estimates at Aggregate Level

1. National Product

1.1 Gross National Product (GNP) 13,10,471 14,22,479 15,19,535at factor cost (8.5) (6.8)

1.2 Net National Product (NNP) 11,61,902 12,66,005 13,54,385at factor cost (9.0) (7.0)

2. Domestic Product

2.1 Gross Domestic Product (GDP) 13,18,362 14,30,548 15,29,366at factor cost (8.5) (6.9)

2.2 Net Domestic Product (NDP) 11,69,793 12,74,074 13,64,216at factor cost (8.9) (7.1)

B. Estimates at Per Capita Level

1. Population (million) 1,055 1,073 1,091(1.7) (1.7)

2. Per Capita NNP at factor cost (Rs.) 11,013 11,799 12,414(7.1) (5.2)

Note: Figures in the parentheses are percentage change over the previous year.

Source: Central Statistical Organisation.

Table 1.2: GDP at Factor Cost by Economic Activity (At 1993-94 prices)(Rs. crore)

2003-04 2004-05 Percentage Change

Industry 2002-03 (Quick (Advance over Previous Year

Estimate) Estimate) 2003-04 2004-05

1 2 3 4 5 6

1. Agriculture, Forestry & Fishing 2,83,393 3,10,611 3,13,915 9.6 1.1

2. Mining & Quarrying 31,185 33,195 34,955 6.4 5.3

3. Manufacturing 2,27,642 2,43,400 2,65,119 6.9 8.9

4. Electricity, Gas & Water Supply 31,659 32,827 34,903 3.7 6.3

5. Construction 69,911 74,819 79,112 7 5.7

6. Trade, Hotels, Transport 3,26,968 3,65,559 4,06,843 11.8 11.3and Communication

7. Financing, Insurance, Real Estate 1,71,463 1,83,718 1,96,853 7.1 7.1& Business Services

8. Community, Social & Personal Services 1,76,141 1,86,419 1,97,666 5.8 6.0

GDP at Factor Cost 13,18,362 14,30,548 15,29,366 8.5 6.9

Source: Central Statistical Organisation.


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of 71 per cent in 2004-05 as compared with

59 per cent in 2003-04. Within the services

sector, the growth rate in 2004-05 was

consolidated in case of trade, hotels,restaurants, transport and communication

(11.3 per cent), maintained in case of

financing, insurance, real estate and business

services (7.1 per cent), and accelerated in

case of community, social and personal

services (6.0 per cent) over the previous year.

The shares of services and industrial sectors

in GDP improved from 56.7 per cent and 21.6

per cent in 2003-04 to 57.6 per cent and 21.9

per cent, respectively in 2004-05, while thatof agricultural sector declined from 21.7 per

cent to 20.5 per cent during the same period

(Chart 1.1).

According to the CSO, gross domestic

savings (GDS) as a proportion of GDP at

current prices increased significantly to 28.1

per cent in 2003-04 from 26.1 per cent in

2002-03 (Table 1.3). Notwithstanding low

interest rates prevailing in the financial

markets, household savings, particularly in

financial assets, rose considerably in 2003-

04 over the previous year. Improvement in

the personal disposable income emanating

from high GDP growth, modest inflation rate

and uncertainty in the financial markets seem

to have contributed to high rate of saving bythe households. Savings by the private

corporate sector increased modestly reflecting

improvement in the financial results of the

joint stock companies, co-operative banks and

societies etc. Significant reduction in the

public sector dis-saving also contributed to a

rise in aggregate savings, indicating better

performance in government administration,

PSUs and commitment of the government for

augmenting revenue and reducing deficitunder the Fiscal Responsibility and Budget

Management Act.

The household savings in financial

assets as proportion of GDP rose from 10.3

per cent in 2002-03 to 11.4 per cent in

2003-04. Within the financial savings by

households, deposits continue to dominate

with its share in financial assets rising from

41.5 per cent in 2002-03 to 42.9 per cent in

2003-04 (Chart 1.2). Other major components

of financial savings were contractual savings,

mainly life insurance (14.5 per cent), followed


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Table 1.3 Gross Domestic Savings and Investment

Per cent of GDP Amount in Rupees crore

Item 2000- 2001- 2002- 2003- 2000 2001 2002- 2003-

01 02 03@ 04* -01 -02 03@ 04*

1 2 3 4 5 6 7 8 9

1. Household Sector Saving 21.6 22.6 23.3 24.3 4,52,268 5,13,110 5,74,681 6,71,692

a) Financial Assets 10.4 11.2 10.3 11.4 2,16,774 2,53,964 2,54,439 3,14,261

b) Physical Assets 11.3 11.4 13.0 13.0 2,35,494 2,59,146 3,20,242 3,57,431

2. Private Corporate 4.1 3.6 3.8 4.1 86,142 81,076 94,269 1,14,157

Sector Saving

3. Public Sector Saving -2.3 -2.7 -1.1 -0.3 -48,361 -61,912 -26,652 -9,429

4. Gross Domestic 23.5 23.4 26.1 28.1 4,90,049 5,32,274 6,42,298 7,76,420

Saving (GDS)

5. Net Capital Inflow(+)/ 0.4 -0.8 -1.3 -1.8 8,130 -18,731 -32,010 -49,552Outflow(-)

6. Gross Domestic Capital 23.8 22.6 24.8 26.3 4,98,179 5,13,543 6,10,288 7,26,868

Formation (GDCF)

7. Total Consumption 77.7 76.0 76.2 75.3 16,24,255 17,72,054 18,76,679 20,77,958

Expenditure

a) Private Final 65.1 65.5 64.3 64.0 13,60,018 14,88,781 15,85,132 17,65,849

Consumption

Expenditure

b) Government Final 12.6 10.5 11.8 11.3 2,64,237 2,83,273 2,91,547 3,12,109

Consumption

Expenditure

Memo Items

Saving-Investment

Balance (4-6) -0.4 0.8 1.3 1.8 -8,130 18,731 32,010 49,552

Public Sector Balance# -8.6 -8.9 -6.4 -5.9 -1,79,866 -2,02,007 -1,58,618 -1,63,515

Private Sector Balance# 9.4 10.1 9.9 11.0 1,97,207 2,30,269 2,42,958 3,04,241

a) Private Corporate Sector -0.9 -1.0 -0.5 -0.4 -19,567 -23,695 -11,481 -10,020

b ) Household Sector 10.4 11.2 10.3 11.4 2,16,774 2,53,964 2,54,439 3,14,261

Investment in Shares and

Debenture 0.5 0.3 0.2 0.2 10,214 7,777 5,504 5,689

@ : Provisional Estimates. * : Quick Estimates. # :Investment figures are not adjusted for errors and omissions.

Source: Central Statistical Organisation (CSO) and Reserve Bank of India (RBI).

by small savings (13.7 per cent), provident

and pension funds (13.0 per cent), and

currency (10.1 per cent). Investment in shares

and debentures in 2003-04 constituted 1.4 per

cent of the total household savings in financial

assets which was lower than that of 1.6 per

cent in the previous year. Bulk of suchinvestment was in mutual funds. In terms of

ratio to GDP, investment in shares and

debentures in 2003-04 continued to remain

unchanged at the previous years level of 0.2

per cent.

A notable feature of macro-economic

developments during 2004-05 was the sharp

increase in non-food credit. Reflecting arobust and broad-based industrial recovery,

the non-food credit disbursed by the


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scheduled commercial banks went up by 26.5

per cent in 2004-05 as compared to 18.4 per

cent in 2003-04. Food credit also increased

during 2004-05 to support higher procurement

operations, unlike the declining trend

witnessed during the previous two years.

Credit flow to industries also surged from the

non-bank sources. The external commercial

borrowings and equity issues were much

higher in 2004-05 than those in the previous

year in consonance with the resurgence in

industrial activities and buoyancy in the stock

markets. Resource mobilisation through

private placements was also impressiveduring 2004-05. Mainly triggered by the capital

inflows, the liquidity condition was, by and

large, comfortable throughout the year.

Keeping in view the inflationary pressure on

the economy, the Reserve Bank mopped up

excess liquidity from the market through the

Market Stabilisation Scheme (MSS) and the

Liquidity Adjustment Facility and thereby kept

the supply of broad money (M3) at 13.1 percent (net of conversion) which was well within

the projected trajectory of 14.0 per cent.

The price situation, after showing upward

trend during April-August 2004, was under

control by the end of 2004-05.The inflation

rate, measured in terms of changes in the

Wholesale Price Index (WPI), was 5.0 per

cent on a point-to-point basis in 2004-05 as

compared to 4.6 per cent in 2003-04. On an

average basis, the inflation rate at 6.4 per

cent in 2004-05 was much higher than that

of 5.4 per cent in the previous year. The

supply side factors were mainly responsible

for inflationary pressure during the first half

of the year. Increase in the international prices

of crude oil and metals led to the hardeningof domestic prices of coal, petroleum

products, iron and steel and other metals.

Inadequate South-West monsoon also pushed

up the prices of food items and non-food

commodities such as oilseeds and cotton. As

a result, inflation rate accelerated to a peak

of 8.7 per cent by the end of August 2004.

The inflationary pressure has largely receded

since September 2004. Governmentsinitiatives to cut the excise and customs duties

in June and August 2004 moderated the pass


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through of the increase in international crude

oil prices to domestic inflation. Monetary policy

measures by the Reserve Bank such as the

hike in the cash reserve ratio (CRR) andincrease in the reverse repo rate brought

down the inflation expectations. Prospects of

a bumper rabi crop and gradual easing of the

fear of drought softened the prices of

agricultural products like cotton, oilseeds and

edible oils.

The escalation of international crude oil

prices dominated the external sector

developments. According to the Directorate

General of Commercial Intelligence and

Statistics (DGCI&S), merchandise exports in

terms of US dollar witnessed an impressive

growth of 24.1 per cent in 2004-05 as

compared with 21.1 per cent in the previous

year. The merchandise export growth was the

highest in three decades. Reflecting surge in

the international crude oil prices, total imports

in dollar terms increased sharply by 37.0 per

cent in 2004-05 as compared with 27.3 per

cent in 2003-04. Merchandise import growth

was the highest since 1980-81. As a result,

the gap in the merchandise trade account

widened to a historic peak of US $ 27.8 billion

in 2004-05 compared to that of US $ 14.3

billion in the previous year. Net invisible

receipts, mostly in terms of workers

remittances, software exports and travel

earnings bridged the trade gap to a large

extent. Unlike in the previous three years, the

external current account is likely to end-up

with a modest deficit in 2004-05 signaling

higher domestic investment activities and

reversal of net capital exports.

Net capital inflows continued to maintain

its momentum in 2004-05, and were

dominated by portfolio investment by FIIs. An

increased appetite for foreign direct

investment was also observed. This reflected

the on-going reforms in the capital market andthe overall liberalisation programme. During

April-December 2004, net capital flows at

US $ 20.7 billion were significantly higher

than US $ 16.6 billion recorded in the

corresponding period of the previous year.

Reflecting the innate strength of the externalsector, an accretion of US $ 28.6 billion during

2004-05 on top of an unprecedented accretion

of US $ 36.9 billion in 2003-04 took Indias

foreign exchange reserves to US $ 141.5

billion as on March 31, 2005. Indias foreign

exchange reserves (excluding gold) were the

fifth largest in the world and the fourth largest

among the emerging market economies

(EMEs). The present level of foreign

exchange reserves is higher than Indiasexternal debt and provides import cover for

about 15 months. With sustained capital flows

and a general weakening of the US dollar

vis--visother major currencies, Indian rupee

appreciated by 6.6 per cent against the U.S

dollar.

2. REVIEW OF POLICIES AND

PROGRAMMES

SEBI pursued several policy initiatives

during 2004-05 in consultation with the

Government of India to achieve its statutory

objectives. These policies and programmes

are reviewed in this section under six major

heads of primary securities market, secondary

securities market, mutual funds, foreign

institutional investors, corporate restructuring,

investor awareness/education/protection in

addition to retrospect and prospects

indicating the unfinished agenda for the future.

I. Primary Securities Market

Primary securities market continued to

play a crucial role in the process of resource

mobilisation. Wide-ranging reforms in the

primary market undertaken by SEBI over the

years improved confidence of the domestic

as well as foreign investors. The momentum

of resource mobilisation from the primarymarket witnessed in 2003-04 accelerated

further in 2004-05. The response of the FIIs,


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other institutional investors and retail investors

to the public issues has been highly

encouraging. This was evident from over-

subscription to such issues. A detaileddescription of the number of issues, amount

mobilised, variety of investors and their

response to public issues has been analysed

in Part Two of this Report. The policy

initiatives relating to primary market are

presented below.

a. Higher Allocation for Retail

Individual Investors

SEBI amended the Disclosure andInvestor Protection (DIP) Guidelines, 2000

relating to the allocation of shares in case of

book-built issues. Earlier the allocation of

shares to the Retail Individual Investors (RIIs),

the Non-Institutional Investors (NIIs) and the

Qualified Institutional Buyers (QIBs) has been

in the ratio of 25:25:50, respectively. The

allocation to RIIs was enhanced to 35 per

cent of the total issue of securities while it

was reduced to 15 per cent in case of NIIs.

Allocation to QIBs remained unchanged at 50

per cent. However, in case of book-built

issues that are made pursuant to the

requirement of mandatory allocation of 60 per

cent to QIBs in terms of Rule 19(2)(b) of

SC(R)R, RIIs and NIIs would receive an

allocation of 30 per cent and 10 per cent,

respectively. Moreover, the definition of RIIs

has been modified. According to the new

definition, a retail individual investor (RII) is

one who applies or bids for securities of or

for a value not exceeding Rs. 1 lakh as

against the existing limit of Rs. 50,000.

b. Issue Advertisement

The extant market practice for all issues

including book-built issues was to publish an

advertisement in the newspaper having

contents of Form 2A under the CompaniesAct, 1956. However, the cost involved in

publishing the entire Form 2A, i.e., abridged

prospectus in the newspaper was very high.

As the abridged prospectus is otherwise

available to the investors along with the

application forms, SEBI amended the (DIP)Guidelines, 2000 to ensure better readability

of the advertisement and stipulated that pre-

issue advertisement would be mandatory for

all public issues (fixed or book-built) and it

would contain the minimum details, thereby

reducing the issue expense.

c. Order of Presentation of

Disclosures in Prospectus

To make the offer documents more user-friendly, SEBI prescribed a standard order of

presentation of disclosures in the offer

documents. Over and above the previous

requirements of disclosures while issuing the

format, a few requirements / sections like

summary, table of contents, and industry

review have been added to make the

prospectus more effective. The standard order

of presentation did not, however, reduce the

flexibility given to the issuer to include otherdisclosures, not mentioned in the guidelines.

d. Data Reporting at Websites of

Stock Exchanges on Book-

Building

In order to ensure availability of relevant

information in the public domain, it is now

mandated to (i) improve the contents of and

to ensure uniformity in data dissemination on

the websites of the concerned stockexchanges and (ii) to ensure availability of

such data for a further period of 3 days after

the closure of the bids/issue.

e. Disclosure of Price Band/ Floor

Price and Bidding Period in Case

of Listed Companies

The existing guidelines require all issuers

(whether listed or unlisted), making a public

issue through book building process, todisclose the price band/ floor price in the Red

Herring Prospectus (RHP)/application form.


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The listed issuers have now been permitted

to disclose the price band/floor price at least

one day before bid opening. Moreover, the

bidding period, which was 5-10 days(including holidays), has been reduced to 3-

7 working days.

f. Introduction of the Facility of

Shelf Prospectus

As per Sec. 60A of the Companies Act,

1956, the facility of shelf prospectus can be

availed by specific entities like public sector

banks, scheduled banks and public financial

institutions. The SEBI (DIP) Guidelines, 2000have been amended to provide for the same.

These entities can file a draft shelf prospectus

with SEBI in the first instance disclosing the

aggregate amount the issuer intends to raise

through various tranches.

g. Retention of Over-subscription by

DFIs in Tranche Issues

Financial institutions, which come out with

public issue of unsecured redeemable bonds,

regularly file a shelf prospectus with SEBI

stating the total amount to be raised during the

year through various tranches. These bonds

are usually used by investors as a tax-planning

mechanism. Over-subscriptions up to 100 per

cent in each tranche have been allowed to be

retained by the issuers. The Development

Financial Institutions (DFIs) often receive

heavy over-subscriptions, which exceed the

maximum target amount mentioned in the

prospectus. In such a scenario, returning the

excess subscription to the applicants adversely

affects the tax planning drive of the investors.

In view of this, SEBI has changed the

guidelines so that the issuers can retain any

amount of over-subscription subject to the total

amount specified in the shelf prospectus for the

whole year.

h. Guidelines for Preferential Issues

The guidelines pertaining to preferential

allotment have been amended to restrict sale

of shares by shareholders who are allotted

shares on preferential basis. This had been

done, inter alia, by imposing lock-in periodon pre-preferential shareholding from the

relevant date till six months after the date of

allotment, and by reducing the period for

allotment from the existing 30 days to 15

days.

i. Restriction on Splitting of Shares

The issuers were found to be splitting

shares just before an IPO. On

recommendation of the Advisory Committeeon Primary Market, the guidelines have been

amended to restrict splitting of shares before

an IPO. The amendments, inter alia, provide

for a floor face value of Re.1 per share. For

issue price below Rs.500 per share, the face

value would be necessarily Rs.10 per share.

However, the issuer companies have been

permitted to fix the face value below Rs. 10

per share in those cases where the issue

price is Rs. 500 or more.

j. Terms of the Issue

SEBI has now changed minimum

application lot from Rs. 2,000 to a band of

Rs.5,000- Rs.7,000. The applications can be

made in multiples of such value.

k. Green Shoe Option (GSO) Facility

As GSO is essentially a device to ensurepost-issue price stability, the guidelines have

been amended to clarify that this facility is

available in all public issues, viz., initial public

offerings, follow-on offerings, public issues

either through book building or fixed price

route. Further, the guidelines have also been

amended to permit all pre-IPO share holders

(including promoters) in case of IPOs and pre-

issue share holders holding more than 5 per

cent shares, (including promoters) in case offollow-on offerings to lend their shares for the

purpose of GSO.


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l. Corporate Governance

SEBI constituted a Committee on

Corporate Governance headed by Shri N. R.

Narayana Murthy, which submitted its reporton February 8, 2003. Taking a cue from the

same, SEBI amended Clause 49 of the Listing

Agreement to revise the requirements of

corporate governance as mandated by the

listing agreement. For entities seeking listing

for the first time, the corporate governance

requirements are to be complied at the time

of seeking in-principle approval for such

listing. However, for listed entities having a

paid-up share capital of Rs. 3 crore andabove or net worth of Rs. 25 crore or more

at any time in the history of the company,

corporate governance requirements were

proposed to be complied by April 1, 2005.

Taking into account the fact that many

companies are sti l l not in a state of

preparedness to be fully compliant with the

requirements, the date for ensuring

compliance with the corporate governance

requirements of the listing agreement hasbeen extended up to December 31, 2005.

m. Debt Listing Agreement

In order to develop the corporate debt

market, SEBI prescribed a model debenture

listing agreement for listing of all debenture

securities issued by an issuer irrespective of

the mode of issuance. The model agreement

has three parts. Part (I) of this agreementcontains clauses which shall be complied by

all issuers irrespective of the mode of

issuance. Part (II) contains clauses which

shall be complied only if the debentures are

issued either through public issue or rights

issue and Part (III) contains clauses which

are required to be complied only if the

debentures are issued on private placement

basis. In case of issuers whose equity shares

are listed and which have already entered intoa listing agreement for its equity shares,

clauses of equity listing agreement shall have

an overriding effect over the debenture listing

agreement, in case of inconsistency, if any.

II. Secondary Securities Market

a. BSE IndoNext Trading Platform

In the Union Budget 2004-05, the Central

Government proposed to set up a trading

platform to enable the small and medium

enterprises (SMEs) to raise capital, both debt

and equity, as well as provide liquidity to the

securities. This trading platform is expected

to provide the much needed avenue for

financing the SMEs and help redress thepresent imbalance in this regard. SEBI took

the initiative to encourage the BSE and the

Regional Stock Exchanges (RSEs) to set up

this market (Box 1.2). The Government also

amended Section 13 of the Securities

Contract (Regulations) Act, 1956 to facilitate

trading by brokers of RSEs on this market.

b. Securities Transaction Tax (STT)

In the Union Budget 2004-05,

Government proposed a package of tax

measures relating to securities transactions.

The tax on long term capital gains from

securities transactions was abolished while

the short-term capital gains tax was reduced

to a flat rate of 10 per cent. Moreover, it was

proposed to levy a tax on buyers at the rate

of 0.15 per cent of the value of securities

transacted on the stock exchanges in the form

of securities transaction tax (STT).

Pursuant to the representations received

from the market participants, the STT was

modified by the Government in consultation

with SEBI. The revised STT includes inter

alia, the following:

l The delivery-based transactions would

attract STT of 0.15 per cent (i.e., 15 basis

points) to be shared equally between the

buyer and the seller;l For day traders and arbitrageurs, the STT

of 0.015 per cent (1.5 basis points) would


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be imposed on sellers of equities and

settled on net basis;

l For units of equity oriented mutual funds,

the STT of 0.15 per cent (15 basis points)

would be imposed on sellers;

l The rate of STT on sale of derivatives

(Futures and Options) would be 0.01 percent (1 basis points); and

l No STT would be levied on buying and

selling of bonds, including government

bonds, units of MFs other than equity

oriented funds.

The STT was notified on September 28,

2004. The stock exchanges have been

advised to levy and collect STT on all

transactions done by their members and remitthe same to the Government of India with

effect from October 1, 2004.

In the Union Budget 2005-06, the STT

was further revised as under (Table 1.4).

The BSE IndoNext has been set up as a

separate trading platform under the present BombayOn Line Trading System (BOLT) of the BSE. It is a

joint initiative of the BSE and the Federation of Indian

Stock Exchanges (FISE) of which 18 Regional Stock

Exchanges (RSEs) are members. The members of

the RSEs have been allowed to trade in this market.

The BSE IndoNexttrading platform has introduced the

concept of single order book for a security as against

multiple listings permitted in other securities. Once a

security is eligible for trading in the BSE IndoNext

market, it will not be available for trading on any other

exchange and orders from brokers of all exchanges

in that security will flow only to this market. The

objectives of the BSE IndoNext trading platform are:

a) to provide a nation-wide trading platform for the

SMEs already listed with the participating RSEs and

BSE; b) to create liquidity in eligible securities listed

on the participating RSEs; c) to create an avenue for

the existing and new SME companies from various

regions of the country to raise fresh capital, both equity

and debt, which would help achieve balanced regional

growth; and d) to use the available infrastructure of

the participating RSEs for productive purposes.

The BSE IndoNext trading platform is being

implemented in phases. Honourable Finance Minister

has inaugurated the BSE IndoNext trading platform

Box 1.2: BSE IndoNext

on January 7, 2005 and operationalised the first phase

of the BSE IndoNextplatform. The BSE would transfereligible securities within the range of paid-up capital

between Rs.3 crore and Rs.20 crore, currently traded

in the B1 and B2 groups in BSE against which there

is no regulatory action. Similarly, the participating

RSEs will also transfer eligible securities to BSE

IndoNext to be traded as permitted securities. At this

stage, the entire responsibility for monitoring and

surveillance is vested with BSE as the brokers who

would be trading on the BSE IndoNext will be

members of BSE. For this purpose, SEBI has already

granted necessary approvals.

The second phase when implemented will allowparticipation of all brokers of RSEs in the BSE

IndoNext taking benefit of the recent amendment to

the SC(R)A. For this, the BSE and the RSEs will have

to amend the respective Bye-laws as well as enter

into MoUs. These legal requirements are in progress.

Once the Bye-laws are approved by SEBI, the second

phase will be implemented and the responsibility for

surveillance, monitoring and compliance will be jointly

shared between BSE and RSEs. In the third phase,

the BSE as well as the RSEs will have to work out

an effective marketing and business development

strategy.

Table 1.4: Securities Transaction Tax

in India(per cent)

Type of 2004-05 2005-06Transactions (Old (Revised

Rate) Rate) @

1 2 3

A. Equity

1) Delivery-basedTransactions* 0.15 0.20

2) Non-deliverybased Transactions 0.015 0.02

B. Derivative Transactions 0.01 0.0133

@ The revised STT became effective from June1,2005.

* To be equally shared by both buyers and sellers.


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c. SEBI (Central Database of Market

Participants) Regulations, 2003

The SEBI (Central Database of Market

Participants) Regulations, 2003 were notifiedon November 20, 2003. The regulations

provide for the creation of a centralised

database of market participants and investors

(MAPIN database) for the registration of all

the participants i.e., intermediaries, listed

companies, investors, etc., in the Indian

securities market by allotting a Unique

Identification Number (UIN). SEBI has

appointed National Securities Depository

Limited (NSDL) as the Designated Service

Provider for creating and maintaining the

MAPIN database.

SEBI has been issuing notifications from

time to time specifying various intermediaries

and the related persons to obtain an UIN

under the aforesaid regulations. The list of

various intermediaries has been notified for

this purpose and the date by which they have

to obtain the UIN has also been notified. Upto March 31, 2005, as many as 2,94,925

UINs have been allotted (Table 1.5).

Table 1.5: Allocation of Unique

Identification Number

Category No. of UINs

1 2

Retail Individual Investors 1,88,652

Employees/Directors/Promoters 44,069

Total Natural Persons 2,32,721

SEBI Registered Intermediaries 8,187

Other Corporate Bodies 54,017

Total Non-Natural Persons 62,204

Total UINs Allotted 2,94,925

Keeping in view the various repre-

sentations and feedback received from

specified investors, viz. all resident investorsnot being bodies corporate who enter into any

securities market transaction (including any

transaction in units of mutual funds or

collective investment schemes) of value of

one lakh rupees or more, on the difficulties

faced by them in adhering to the time line ofMarch 31, 2005, the notified date was

extended fromMarch 31, 2005 to December

31, 2005. Further, a Committee has been

constituted to look into the coverage of

MAPIN and other related matters.

The terms of reference for the said

committee are as follows:

i) To re-examine the coverage of the

MAPIN, i.e., the category of marketparticipants and investors who would be

required to obtain unique identification

number (UIN);

ii) To suggest future implementation

schedule based on the coverage; and

iii) To review the cost of obtaining the UIN

for the market participants and investors.

d. Investor Protection Measures

(i) Risk Management Framework for the

Cash Market

A comprehensive risk management

framework in T+2 rolling settlement scenario

was specified for the cash market providing

for the various types of margins,

categorisation of stocks for margin purposes

and collection of margins on an upfront basis.

Value at Risk (VaR) based margining systemwas put in place based on the categorisation

of stocks into Groups I, II and III depending

on the stocks liquidity and volatility. It

addresses 99 per cent of the risks in the

market. Additional margins were specified to

address the balance 1 per cent risks. Further,

provisions were specified for shortfall of pay-

in of funds/margin, collections of margins by

members from the client etc. The revised

framework when implemented will be a stepforward in achieving cross-margining between

cash and derivative markets.


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(ii) Comprehensive Guidelines for Investor

Protection Fund (IPF)/Customer

Protection Funds (CPF) at the Stock

ExchangesComprehensive guidelines were issued

for constitution and management of IPF/CPF

and disbursement of the funds out of the IPF/

CPF towards settlement of legitimate investor

claims against the defaulter members of the

stock exchanges. The exchanges are in the

process of amending the Trust Deeds for IPF.

(iii) Duration for Transfer of Funds and

SecuritiesIt was mandated that the brokers should

transfer funds and securities to the clients

within one working day after the pay-out day.

e. Matters Relating to Depositories

(i) Review of Dematerialisation Charges

Investors have been representing to SEBI

seeking a reduction in the charges paid by

them for dematerialisation of securities. As afirst step, it was decided to rationalise the

existing charge structure. Accordingly, effective

February 1, 2005, (a) no investor is required

to pay any charge towards opening of a

Beneficiary Owner (BO) account except for

statutory charges as may be applicable; (b)

no investor is required to pay any charge for

credit of securities into his/her BO account;

and (c) no custody charge is to be levied on

any investor opening a BO account on or afterFebruary 1, 2005. With effect from April 1,

2005, the custody charges are not levied on

any investor. However, the depositories may

levy and collect the charges towards custody

from the issuers, on a per folio (ISIN position)basis as at the end of the financial year.

Issuers have to pay at the rate of Rs.5.00

(plus applicable service tax) per folio (ISIN

position) in the respective depositories, subject

to a minimum amount (Table 1.6). The issuers

are required to pay custody charges to the

depository with whom they have established

connectivity based on the total number of folios

(ISIN positions) as on 31st March of the

previous financial year or the minimumamount, as the case may be, by 30 th April of

each financial year failing which depositories

may charge penal interest subject to a

maximum of 12 per cent per annum.

(ii) Proof of Identity (PoI) and Proof of

Address (PoA) for Opening a BO

Account

The list of documents as PoI and/or PoA

for opening a BO account has been

broadened to include MAPIN card, identity

card issued by Central/State Governments,

Statutory/Regulatory authorities, Public Sector

Undertakings (PSUs), Scheduled Commercial

Banks, Professional Bodies etc.

(iii) Mandatory Admission of Debt Securities

on both Depositories

The issuer companies havebeen advised once again to mandatorily

Table 1.6: Minimum Demat Charges

Nominal Value of Admitted SecuritiesAnnual Custodial Fee payable by

an Issuer to each Depository (Rs.)*

1 2

Up to Rs. 5 crore 4,000

Above Rs. 5 crore and up to Rs. 10 crore 10,000

Above Rs. 10 crore and up to Rs. 20 crore 20,000

Above Rs. 20 crore 30,000

* Plus service tax as applicable.


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(ii) In order to disseminate information

regarding cancellation of registration of

brokers and cautioning the investing

public not to deal with 70 brokers whoseregistration has been cancelled by SEBI

during 2003-04, a public notice was

published in the newspapers. In the

interest of investors, it has been decided

to publish such information at periodic

intervals.

(iii) In order to promote greater disclosure

of information in the interest of investors

and from the point of view of measuringthe adequacy of systems and controls

to meet internal as well as external

compliance requirements, a draft concept

paper on the professional rating of

market intermediaries (viz., stock

brokers, initially to start with) was placed

on SEBI website for public comments.

(iv) SEBI has requested credit rating

agencies to develop an appropriaterating model for stock brokers, based on

the parameters set out in the concept

paper read with public comments.

Considering the public response and

market acceptance to the rating concept

for stock brokers, the concept may be

extended gradually to other

intermediaries as well.

(v) A review of the existing net worthrequirements for stock brokers was taken

up and report of the sub-group on

Secondary Market Advisory Committee

(SMAC) formed for the purpose was

uploaded on SEBI website for public

comments. The comments received on

the paper are being analysed.

(vi) Guidelines were issued for allowing SEBI

registered market intermediaries to floatoverseas subsidiaries so as to undertake

financial services activities/ capital

dematerialise their debt securities with both

the depositories.

(iv) Exemption from giving hard copies of

transaction statements to Beneficiary

Owners (BOs) by Depository

Participants (DPs)

The DPs have been permitted to provide

transaction statements and other documents

to the BOs in the electronic format with digital

signature, as governed under the Information

Technology Act, 2000, subject to the DP

entering into a legally enforceable agreement

with the BO for this purpose.

(v) Shifting Securities from Trade-for-Trade

Segment to Normal Rolling Segment on

a Regular Basis

Based on the information provided by the

depositories regarding the establishment of

connectivity by the listed companies with both

the depositories, the stock exchanges have

been advised on a regular basis to shift suchcompanies which had not established dual

connectivity from the Trade-for-Tradesegment

to normal rolling segment of the stock

exchanges, upon their establishing dual

connectivity, provided there are no other

specific grounds for continuation of the trading

in these scrips in the Trade-for-Trade

segment.

f. Policy Initiatives for MarketIntermediaries

(i) In order to bring about uniformity in

documentary requirements across

different segments and exchanges and

also to avoid duplication and multiplicity

of documents, SEBI in consultation with

stock exchanges (BSE and NSE) has

formulated uniform set of broker client

registration and agreement documents.The same have been made applicable

from April 1, 2005.


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market related activities abroad which

have been approved by the SEBI Board.

g. Policy Initiatives for Derivatives

Currently, a variety of derivative products

are available for trading in India. Index based

derivatives are traded on BSE Sensex on the

derivative segment of BSE and on S&P CNX

Nifty and CNX IT Index on the F&O segment

of NSE. Single Stock Options and Single Stock

Futures are also available on a number of

individual stocks at both the derivative

segment of BSE and the F&O segment of

NSE. Interest rate derivatives were introduced

on a notional 10-year bond and 91 days T-bill

at the F&O segment of NSE.

(i) Risk Containment Measures

The initial margins on derivatives are

computed to cover the probable loss over a

time horizon. Therefore, in the event that the

mark to market margins/ settlements are

being made after the beginning of trade onnext day (T+1), the initial margins are scaled

up by the square root of the days by which

margins are actually collected. With the

functioning of Special Electronic Fund

Transfer facility (SEFT) with many bank

branches, members are now given a choice

to opt for payment of mark to market margins

either before the start of trading next day, i.e.,

T+0 or on the next day, i.e. T+1. If the

member opts for the payment of the mark to

market margins on T+1, then correspondingly

higher initial margins are collected to cover

the potential for losses over the time elapsed

in the collection of mark to market margins.

Another risk containment measure

relates to alignment of collaterals in cash and

derivatives market. Two liquid asset

requirements were included in the derivatives

market: (a) units of money market mutualfunds and units of gilt funds were permitted

to be accepted towards cash equivalents as

part of the liquid assets of a clearing member;

and (b) equity securities classified under

Group I in the underlying cash market were

permitted to be accepted towards the non-cash component (securities) of liquid assets

in the derivative markets. Further, units of all

equity mutual funds are also accepted as the

securities under the liquid assets.

(ii) Eligibility Criteria of Stocks on which

Futures and Options Contracts may be

Permitted

Pursuant to the recommendation of the

Advisory Committee on Derivatives and

Market Risk Management, SEBI revised the

requirement of the stocks quarter sigma order

size from Rs. 5 lakh to Rs. 1 lakh and the

market-wide position limit of the eligible stock

was prescribed at a minimum of Rs. 50 crore.

This provision was introduced to prevent

stocks with a low market capitalisation from

becoming eligible for derivative trading.

(iii) Eligibility Criteria for Selection of Indices

for Futures and Options Contracts

In order to encourage the introduction of

derivative contracts on sectoral indices, the

eligibility criteria for indices on which futures

and options are permitted to be introduced

was also modified. It had earlier been specified

that derivative contracts on a new stock index

shall be permitted if the stocks contributing

80 per cent weightage (earlier 90 per cent) in

the index are individually eligible for derivatives

trading as per the eligibility criteria. However,

no single ineligible stock should have a

weightage of more than 5 per cent in the index.

Additionally, the eligibility criteria for indices

were also made into a continuous requirement

similar to that of stocks.

(iv) Market-wide Position Limits for SingleStock Derivatives

In order to avoid frequent triggering of


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market wide position limits, the market wide

position limits for single stock derivative

contracts was modified to be the lower of 30

times the average number of shares tradeddaily during the previous calendar month, in the

relevant underlying security in the cash

segment; or 20 per cent (instead of 10 per cent

earlier) of the number of shares held by non-

promoters in the relevant underlying security.

(v) Enforcement of Market-wide Position

Limits through Administrative Measures

According to the extant guidelines, the

exchanges were required to double the price

scanning range when 80 per cent of the

market-wide limit was reached. Such a

measure was adopted due to technical issues

involved in implementing market wide position

limits. It was felt that the margining system

should be used only to address the solvency

risk of the market and not for any other

purpose, such as enforcing market-wideposition limits. Therefore, the doubling of price

scanning range was done away with and it

was stipulated that market-wide position limits

may be enforced administratively by the

exchanges / Clearing Corporation / House.

(vi) FII Position Limits in Index Derivatives

Index based derivative contracts are

mainly used by large portfolio investors to

manage their portfolio risk. Further,

considering the growth in the index derivative

markets, and considering that a limit linked

to the value of the portfolio of investment in

the underlying cash market in addition to an

absolute figure would serve better, the FII

position limits in index derivatives were

increased as follows: (a)FII position limit in

all index options contracts on a particularunderlying index has been modified to Rs.250

crore or 15 per cent of the total open interest

of the market in index options, whichever is

higher, per exchange; and (b) FII position limit

in all index futures contracts on a particular

underlying index has been modified to Rs.250crore or 15 per cent of the total open interest

of the market in index futures, whichever is

higher, per exchange.

In addition to the above, the FIIs have

been allowed to take positions in equity index

derivatives in designated accounts subject to

the following limits:

(a) Short positions in index derivatives (short

futures, short calls and long puts) in the

designated account not exceeding (in

notional value) the FIIs holding of stocks

in the designated account.

(b) Long positions in index derivatives (long

futures, long calls and short puts) in the

designated account not exceeding (in

notional value) the FIIs holding of cash,

government securities, T-Bills and similarinstruments in the designated account.

(vii) Trading Member Position Limits in Index

Derivatives

It was earlier specified that the trading

member limit in index derivatives on a

particular underlying index would be Rs. 100

crore or 15 per cent of the total open interest

on the market in index derivatives, whicheveris higher, per exchange. This limit was

increased as follows:

l The trading member position limit in near

month contracts of all index options

contracts on a particular underlying index

was stipulated to be Rs.250 crore or 15

per cent of the total open interest of the

market in index options, whichever is


l The trading member position limit in near


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month contracts of all index futures

contracts on a particular underlying index

was stipulated to be Rs.250 crore or 15

per cent of the total open interest of themarket in index futures, whichever is


l Trading members were allowed to take

an exposure of Rs.500 crore or 15 per

cent of total open interest whichever is

higher, in interest rate derivative

products.

(viii) Alignment of Contract Sizes of Existing

Derivative Contracts

SEBI prescribed the methodology for

alignment of contract sizes of existing

derivative contracts to Rs. 2 Lakh. SEBI, vide

letter dated March 17, 2005, delegated the

authority to the exchanges to align the

contract sizes of derivative contracts

whenever necessary, in consultation with each

other.

h. Implementation of STP

The Straight Through Processing (STP)

was launched in India on November 30, 2002.

To start with, STP was insisted upon to be

adopted by the domestic institutions,

investors, fund managers, brokers and

custodians. However, it was observed that

though the market participants had joined theSTP services, the system could not be widely

used due to various issues like lack of inter-

operability between the STP Service

Providers, lack of message handshake

protocols, lack of common authentication of

digital signatures across the STP Service

Providers, lack of end-to-end compliance to

ISO messaging formats from sender to the

recipient and absence of standardisation offi le formats for clients back office

development etc.

To resolve the issue of inter-operability

between the STP Service Providers and other

issues, SEBI in consultation with the stock

exchanges and the STP Service Providersdecided that a STP Centralised Hub would

be set up. Currently, this STP Centralised Hub

has been set up and made operational by

NSE. NSE obtained the necessary approvals

from the Department of Telecommunications

(DoT) as an Internet Service Provider (ISP).

Subsequently, this STP Centralised Hub

would be further developed jointly with BSE.

Mandatory Use of STP for all Institutional

Trades

SEBI mandated the use of the Straight

Through Processing (STP) system for all

institutional trades with effect from July 1,

2004. SEBI had prescribed a detailed system

flow and the regulatory framework of the STP

system by issuing the SEBI (STP CentralisedHub and STP Service Providers) Guidelines,

2004. SEBI also outlined the transaction work

flow for the system of Straight Through

Processing (STP) and prescribed the

messaging formats based on internationally

accepted ISO 15022 messaging standards.

There are currently four STP service providers

and STP centralised hub has been set up by

NSE. There has been a steady increase innumber of messages passing through STP

network with approximately 2,500 STP users

registered in the system.

SEBI is the first and perhaps the only

regulator in the world to have prescribed and

mandated a market-wide STP system,

prescribe a regulatory framework along with

the system flow, transaction work flow anddetailed messaging standards for the STP

system.


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i. Corporatisation and

Demutualisation (C and D)

of Stock Exchanges

Corporatisation and Demutualisationenables the exchanges to transform from a

mutual entity to a for-profit demutualised

company with the separation of ownership,

trading rights and management (Box 1.3).

To enable the exchanges to corporatise and

demutualise, the Government amended theSC(R)A encouraging SEBI to approve the

schemes.

recommendations of the Group, all the stock

exchanges were advised to submit their proposals for

C and D to SEBI for approval.

In the meantime, the Securities Laws

(Amendment) Ordinance, 2004 was promulgated on

October 12, 2004, which amended the Securities

Contracts (Regulation) Act, 1956 to facilitate the

corporatisation and demutualisation of Stock

Exchanges. The Ordinance was subsequently

replaced by the Securities Laws (Amendment) Act,

on January 7, 2005. The Act makes it mandatory that

all stock exchanges, if not already corporatised and

demutualised, shall be corporatised and demutualised

on and from the appointed date so notified in the

official gazette by SEBI. It obligates the non-corporateand mutual exchanges to submit, within such time as

may be specified by SEBI, a scheme for

corporatisation and demutualisation to SEBI for

approval.

Following the promulgation of the Ordinance, a

meeting of all stock exchanges and the Depositories

was convened by SEBI on November 9, 2004 to

evolve the road map for corporatisation and

demutualisation and a tentative time schedule of its

implementation. Exchanges were advised to adhere

to the time schedule. A press release indicatingtentative time schedule of C&D was issued on January

7, 2005. Thereafter, SEBI had several rounds of

discussions with all the stock exchanges to clarify and

sort out their specific issues and to guide them to

prepare their schemes in compliance with the SCRA.

The discussions were quite protracted as there were

several legal issues involved. The exchanges were

advised to submit their final schemes to SEBI for

approval latest by January 31, 2005. With the

submission of the scheme by BSE on March 9, 2005,

the schemes from all the exchanges were received.

The Corporatisation and Demutualisation of the BSE

was notified on May 20, 2005.

The stock exchanges world over have been

generally formed as mutual organisations. The trading

members not only provide broking services, but also

own, control and manage such exchanges for theirmutual benefit. They dont generally distribute profit

among themselves and therefore, termed as not-for-

profit organisations. Stock exchanges owned by

members may work towards the interest of members

alone which may be detrimental to the rights of other

stakeholders. There could also be conflict of interest

between ownership and management. In order to

eliminate conflict of interest, there is a need to

segregate the management functions from ownership

and trading rights through demutualisation. Moreover,

stock exchanges should ideally work as body

corporate similar to any other for-profit corporateentity.

In India, there are 23 stock exchanges of which

one was derecognised in August 2004. Three of them

namely, The Stock Exchange, Mumbai (BSE),

Ahmedabad Stock Exchange (ASE) and Madhya

Pradesh Stock Exchange (MPSE) are Association of

Persons. The remaining 19 are registered as

companies, either limited by guarantees or by shares.

Except NSE, all stock exchanges are not-for-profit

organisations. Moreover, all exchanges are mutual

organisations except NSE and OTCEI whereownership, management and trading rights are in the

hands of three different sets of people from the

inception.

Pursuant to the announcement made by the

Honourable Finance Minister in the Parliament on

March 13, 2001 that the stock exchanges would be

corporatised and demutualised, SEBI constituted a

Group on Corporatisation and Demutualisation of

Stock Exchanges under the Chairmanship of Justice

M. H. Kania, former Chief Justice of India, for advising

SEBI on corporatisation and demutualisation of

exchanges and to recommend the steps that need to

be taken to implement the same. Based on the

Box 1.3: Corporatisation and Demutualisation (C and D) of Stock Exchanges in India


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As provided in the SC(R)A, SEBI vide

notification dated March 23, 2005, has

specified that the National Stock Exchange

of India Limited, which is already corporatisedand demutualised would not be required to

submit a scheme to SEBI for approval,

subject to the following conditions:

l The National Stock Exchange of India

Limited shall not change its current

corporate and demutualised structure,

without prior approval of SEBI; and

l The National Stock Exchange of India

Limited shall comply with further

conditions as may be imposed by SEBI

in this regard from time to time.

The process of C and D involves transfer

of assets from the exchanges which are

Associations of Persons / Companies limited

by Guarantee / Not-for-profit Companies to

the emerging corporate demutual exchange

and such transfer attracts stamp duty. Tofacilitate the process of corporatisation and

demutualisation and to make it tax-neutral, the

Honourable Finance Minister, in the current

years Budget, has proposed a one-time

exemption from payment of stamp duty on

notional transfer of assets from the exchanges

which are Association of Persons/Companies

limited by Guarantee / Not-for-profit

Companies to the emerging corporate

demutual exchange.

j. Other Developments

l Detailed guidelines have been issued

specifying the disclosures to be made

sebi annual report 2004-05

Documents