Capital Market Regulation - a Need for Development Perspective

SEBI has undertaken a large number of admirable steps in development of  a modern capital market infrastructure and regulatory framework. A large number of new initiatives have been introduced on the lines of developed international markets including electronic trading, T+2 Settlement, demat shares, option, future and other derivatives, index funds, alternative investment fund, real estate investment trust (REIT), infrastructure investment trust besides detailed regulation on initial public offering (IPO), private placement, listing, trading, stock brokers, insider trading, market manipulation and many other. In spite of so many initiatives, regulations, vigilance, inspection, show cause notices, suspension from capital market and financial penalties, the confidence of investors for investment in the capital market is getting eroded further in last 5 years. The capital market sensex is on its highest level, arising out of significantly improved sentiments on the basis of Modi Government initiatives and action plan. In spite of attaining a record level, in case we consider the impact of inflation the share market prices are at 50% to 60% level as compared to 2008 index levels. The stock market is not able to channelize the genuine investments from the household savings and from other small, medium and large investors. The retail capital market at the primary market level as well as at the level of secondary market investment are at record low level in terms of participation of the retail investors. The cash market delivery transactions are very low. The poor level of activity at the primary market level is seriously impacting availability of Risk capital and resultant growth. It is, therefore, important for SEBI and the Government to examine following important suggestions to bring back necessary confidence in the capital market:

• Mandatory valuation: Free pricing of equity shares has to be replaced by mandatory valuation as contemplated in the Companies Act 2013. The promoters and the Companies need to take responsibility of projection and estimated discounted cash flow. Alternatively the valuation can be taken from independent Valuers appointed by SEBI.
• Over Priced Issues - mandatory dilution: In case the actual market price of an Initial Public Offer or FPO fall substantially (more than 20%) below their issue price during the 1st year of the issue (on the basis of a weighted average of delivery transaction during the 1st year of listing), the company must be legally mandated to issue additional shares against consideration already paid to the suffering shareholders to adequately compensate them. The promoters may also be permitted as an option to bring in matching equity in case do not want dilution of their shareholding.
• Independent Auditors: The Companies Act initiative to not to permit interested shareholders to participate in voting in favour of related party resolution, need to be extended to appointment of auditors. The shareholders who are directly or indirectly connected with those charged with Governance should not be permitted to appoint or retire or remove the statutory auditors. The statutory auditors need to be empowered to look after the interest of minority and of those who are not in day-to-day governance.
• Limit Derivatives to only actual real hedging: SEBI need to curtail unnecessary speculation and manipulation of market by limiting derivatives and hedging to only underlying existing exposure of the transacting party. The current derivative market is intensely speculative and is in the nature of gambling in majority of cases. The derivative market is also being used to manipulate prices by false turnover and transactions, just to make money at the cost of genuine investor.
• Unfair and non-competitive market practices: The algo trading (based on mechanized software) and co-location of server of certain specific parties in the premises of Stock Exchange are a completely unfair practice against principles of equal competition and equal opportunity to all investors and traders in the market. The investors of far-flung locations in Assam, Bengal, Orissa , Tamil Nadu, Kerala, Kashmir, Haryana, Punjab and U.P. etc. are completely at a disadvantage vis a vis co-located servers. How can SEBI justify such a wrongful action against the interest of the general investors.
• The buying and selling based on an electronic software result into large scale fluctuations in the price without bringing any value to the market.
• Development Role of SEBI: SEBI need to concentrate on development of capital market by inculcating financial literacy and improving corporate governance, credibility and integrity of the capital market.
• Investor Protection role: SEBI's role need to be limited to making regulations, vigilance, inspection and launching of investigations
• Independent court prosecution: The decision to commence prosecution and adjudication has to be completely left to specialized courts and cannot be and should not be done internally by SEBI to ensure proper justice and control corruption. The imposition of hefty fines cannot be left to regulator SEBI & should be left to judiciary.
• Confidentiality: SEBI should not publicize any disciplinary action initiatives by SEBI, till the time the accused is held prima facie guilty by an appropriate court/ independent judicial process and charges are framed. The current practice being unnecessary sensation & impact reputation of accused even before they are prima facie guilty.
• The Interim orders to suspend promoters, companies or intermediaries and investors from participation in the capital market, without providing an opportunity of being heard, after a proper independent judicial process is completely against the interest of natural justice. In any case no such order should be continued unless confirmed by judiciary within 15 days.
• Security Disposal right need to be intact: No investor should be prohibited to sell their investment except when such securities are fraudulently acquired or money laundering cases even in cases of suspension from capital market.
• Investors' Protection Mechanism: SEBI should introduce a proper fast track judicial mechanism under which investors can file cases against market intermediaries, promoters and companies and other participants in the capital market to redress their grievances and to claim compensation for the misstatement, manipulation or fraudulent action. It is important that investors are adequately safeguarded against any manipulative practices. Even NGO's, uninterested independent parties and class action suites may be permitted before such judicial authority with appropriate appellate process. The vibrant capital market and sustained growth in the equity segment as well as in the debt segment are crucial for the Indian economy. The general investors can channelize huge risk capital to the capital market fuelling growth momentum, subject to having credibility, integrity and fair treatment in addition to transparency.