Transaction Costs are a 'Deadweight Loss'
Mr. Mehta, Chairman, Securities and
Exchange Board of India, Distinguished Members of the Asia Pacific Regional Committee,
Enforcement Directors' of APRC Securities Commission and Friends.
- I have great pleasure in joining you
today. I am thankful to Shri Mehta, Chairman, Securities Exchange Board of India (SEBI),
for giving me this opportunity to be associated with your meeting and to share some
thoughts with this distinguished audience. I understand that your meeting will focus
essentially on the issues of market regulation, market development, surveillance and
enforcement. The meeting spreads over three days and the technical sessions will cover the
detailed analysis of these issues handled by experts with formidable experience and
expertise. I also understand that this is the first time that any meeting of International
Organisation of Securities Commission(IOSCO) is being held in India. I am particularly
happy that this is happending in the 50th year of Independence, and that representtives of
our neighbouring countries are here with us on this important occasion.
- For this audience, I hardly need to
emphasise the importance of meetings such as this one. Financial markets play a vital role
in mobilisation and allocation of savings in the economy, transmitting signals for policy
and facilitating liquidity management which is consistent with macroeconomic policy
objectives. As you are all aware, world over, the Governments, the securities commissions
and the Central banks, as regulators of the market, play crucial roles both proactively
and reactively in the developments of the financial markets. Regulatory concerns over
financial markets have assumed greater significance when the process of liberalisation and
deregulation combined with the revolution in information technology, has created strong
linkages among national markets. These developments have made funds instantly mobile
around the world around the clock. While it has integrated various segments of the markets
across national borders, both domestic and international markets have become more
susceptible to new information and expectations emerging in any part of the world. In view
of enormous volume of cross border flows and exposures of contingent nature, internatinoal
policy co-ordinationin the area of regulation has become extremely important. In this
context, the international forum like this goes a long way in contributing to soundness
and health of domestic and global financial system.
- Over the years, IOSCO has been doing a
commendable job towards establishing international regulatory standards and harmonising
securities regulation across countries. Such standards are necessary for promoting
integrity of markets, enhancing confidence in cross border trading and in fostering the
healthy development of securities market. I am also glad to hear from Mr.Mehta that SEBI
has been playing an active role in the deliberations within IOSCO.
- A regional Conference such as this
represents a new opportunity to analyse the financial markets of the region and the
possibilities of linking them to real economic sectors. Markets need the framework of a
productive structure that promotes savings and generates growth and employment. The
meeting of the APRC is important in more sense than one. For one, such meetings afford the
member countries an opportunity to set forth proposals and reflections on the role of the
IOSCO in pefecting regulatory systems and standardising them at the international level.
Second, it allows countries in the region with common issues to share information and
experience with each other.
- This meeting is also significant as it
brings together the heads of securities regulatory commissions of markets which have been
passing through a turbulent phase during an exciting and long period of consistent rapid
economic growth and development. It is in these times that countries at the regional level
could make valuable contributions towards evolving a regional espirit de corps as it were,
in order to promote solidarity and economic stability. I have noted that a large part of
your agenda will focus on recent developments in regional markets. This is as it should
- Let me take this opportunity to briefly
mention some of the developments that have taken place in our markets. As you know, there
has been a sea change in our markets over the past six years, largely as an outcome of the
implementation of the economic reforms agenda. Indeed SEBI itself is an offspring of the
reform process. This change has taken place in terms of the size of the market which have
expanded phenomenally. For example, in the financial year 1991-92, Rs.62.15 billion were
raised from the market through public and rights issues. Since then, on an average Rs.200
billion have been raised from the market annually. The trading volume on the stock
exchanges have also increased more than six fold during this period. Market capitalisation
stands at US$ 180 billion.
- The character of the market has also
undergone a change with as many as 35 domestic mutual funds and over 160 FIIS operating
actively in our markets. More noteworthy than these changes has been the significant
improvement in the market infrastructure. Today with 19 out of 22 stock exchanges having
screen based trading 98 per cent of trading in Indian securities market is automated. This
change in the market infrastructure have not only contributed to the growth in the trading
volumes but also enhanced the degree of transparency and improved surveillance and
monitoring. The functioning of the stock exchanges have improved significantly with better
regulation, better monitoring and better surveillance. The exchange administration has
been revamped with 50-50 representation of outsiders in the governing Boards, and measures
have been taken to ensure market integrity and safety. Capital adequacy norms for brokers,
margin systems, marked to market margins have all been introduced. The settlement cycles
have been shortened. The stock lending system has also been introduced to facilitate
- One of the problems faced by investors
in our markets has been the delay in registration and transfer of securities. These
problems arise from physical settlement of securities. The National Securities Depository
Limited has been set up for dematerialisation of securities. Unlike many of the major
developed markets, we have skipped the stage of immobilisation and moved directly into
dematerialisation of scrips in stages. Meanwhile, for the paper based system, steps are
being taken to significantly shorten the time for registration of securities. Measures
have also been taken by the Reserve Bank of India and SEBI to facilitate the development in liquid and
transparent markets in corporate debt and government paper. Today, our markets, therefore,
have most of the features of mature modern markets.
- What is also significant in this context
is that there has been an attitudinal change in the market amongst all sections of market
participants towards greater compliance, improved standards and better investor service.
SEBI, as a regulatory body for the securities market, has been the driving force behind
these changes. I must take this opportunity to commend SEBI on excellent progress it has
made in the short span of its existence as a statutory body.
- An analysis of market trends would not
be complete without an evaluation of institutional investment. In most countries, an
increasing proportion of savings are mobilised through mutual and pension funds. So also
in India. The mutual funds represent a key participant in our markets as a consequence of
economic reforms and recently we have laid down new Regulations, which on the one hand
would give freedom to the Fund Managers and on the other enhance the level of investor
protection. The take-over of companies is a relatively new phenomenon in our markets and
Regulations provide that take-overs take place with greater degree of transparency and in
an orderly mannner.
- A new dimension to the Indian capital
market has been international capital flows in response to financial market
liberalisation. This is reflected in the following facts:
- funds raised by Indian companies through
GDR and convertible bonds which during the period April 1992 to December 1997 have
amounted to a cumulative figure of US$ 6.5 bio; and,
- the net cumulative investment made by
the foreign institutional investors which during April 1992 to December 1997 amounted to
US$ 7.9 bio.
- An integral part of the capital market
development is an active debt market. Thus far, the development of an active government
securities market in India was constrained by the fact that the rates of interest offered
on Government Paper did not closely reflect the prevailing market perceptions. But in the
recent reform process, Government Paper is being sold through the mechanism of auctions,
at rates of interest, which are very nearly market determined. Thus, a major prerequisite
for the development of the Government Securities market has been met. However, even now
the major holders of Government Paper are institutions, such as, banks, Life Insurance and
others. In order to improve the payments infrastructure governing the functioning of the
Government Securities market, the Reserve Bank is putting in place a Delivery Versus
Payment (DVP) system under, which the transfer of securities from the seller to the buyer,
and the payment therefore by the buyer to the seller would be simultaneous in respect of
those who have an SGL Account and a Current Account with the Reserve Bank of India. This will reduce the
counter party risk and risk of diversion of funds through security transactions.
- Effective and efficient capital market
requires a stable and sturdy infrastructure of payment, settlement and clearing system and
setting up of depositories. This infrastructure is the lifeline of the securities market
as it helps market participants to exercise economic choices by prompt and credible
transfer of value. Someone has rightly drawn an analogy of an effective payment,
settlement and clearing infrastructure with that of an effective transportation and
distribution system, which is required for the efficient movement of physical commodities.
With growing activity in domestic securities market, significant increases have been
witnessed in both the volume and value transferred. We therefore require a payments system
with the principal attributes of accuracy, security, reliability, timeliness and
certainty. For its optimal design, the system must address in an integrated manner, the
related legal, structural, technological and regulatory issues. As regards the setting up
of depositories a draft legislation has already been prepared and is under the active
consideration of the Government. Meanwhile, SEBI has already undertaken preliminary steps
towards the process of setting up depositories.
- Legal infrastructure is also crucial.
The legal procedure regarding sale of shares, enforcement of the rights of the holder of
the security and rules defining the issuers obligations, etc., must be simple and smooth.
As most of the activity in the capital market is in the nature of a private contract, the
investor and the intermediary must not get inhibited by cumbersome procedures.
Enforceability must be prompt which facilitates confidence in contractual arrangements in
the capital market.
- In view of the need to meet the
requirements of new technology, infrastructure and the legal framework for efficient
functioning of financial markets, the work of international co-operative organisations
like the APRC and IOSCO becomes more vital and more important than ever before. I am
certain that your deliberations in Mumbai will provide crucial inputs into the work of
national authorities, and contribute to the emergence of a regional as well as
international perspective on the appropriate framework for regulation of financial
- I wish all our overseas guests,
specially those visiting India for the first time, a very pleasant and memorable stay in
Inaugural Address at the meeting of
International Organisation of Securities Commissions at Mumbai on 11th February 1998
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