RECENT TRENDS IN CAPITAL MARKET*

- T.M. NAGARAJAN
I have great pleasure in meeting you all, this evening. Let me start with a note of disagreement;
I do not agree with Mr. Ravi that Madurai is a village, unless it is so referred to in the global
context. Madurai is a historically and culturally famous city, known for its commerce and
literature! My pleasure gets tripled to have the opportunity of addressing this audience,
comprising of professionals of not one, but three disciplines – Company Secretaries, Chartered
Accountants, and Cost Accountants –all connected with the corporate world and the capital
market. You professionals are hailed as “Corporate Gate Keepers” in the dignified sense of the
term, and are expected to stop any corporate wrong doings at the gate itself. We in SEBI
charged with the responsibility of protecting the integrity of the securities market and
safeguarding the interest of the investors, look to you for your professional support and willing
co-operation for the development and regulation of capital market. As Mr. Ravi observed,
professional bodies like ICSI have been extending a helping hand to SEBI in its Investor
Awareness programme for which SEBI is thankful.

RETROSPECTION

Before we look at the recent trends in the Indian capital market, a retrospective glance at the
market will be relevant. Fortunately, India has been spared of any major corporate debacles of
the kind and magnitude the world witnessed in the recent years. But, certain developments like
widespread industrial sickness - not attributable entirely to external

Abridged version of the address of Shri T.M. Nagarajan, Whole Time Member at the meeting of ICSI, ICAI and
ICWAI at Madurai on April 12, 2004.

factors -capacity overhang constricting growth, unsustainably high IPO pricing by companies
who chose not to mix business with scruples, vanishing acts of vampire companies, robbed the
market of its buoyancy. Two scams of serious ramifications skimmed the investors’ confidence
Bitten badly - not once, but twice – investors became noticeably shy and even perceptibly
paranoid. As a consequence, secondary market slipped into slumber; primary market passed
into passivity. The damaging developments, however, had one redeeming feature; one
favourable fall out: Least resistance to the reform at the market. The reform was needed to
address the inadequacies and enhance the efficacy of the market.
REFORMATION

The recent years witnessed significant reforms in the capital market. It is well known that trading
platform has become automatic, electronic, anonymous, order-driven, nation-wide and screen-
based. Shouting and gesticulations have yielded place to punching and clicking. Speed and
efficiency are the hallmark of the current system. Across the system, multitude of market
participants trade with one another anonymously and simultaneously. On any trading day, more
than 10,000 terminals come alive, in 400 towns and cities; information is flashed on real time
basis. Equal opportunity is provided for all concerned to access the information. Transparency
is ensured in respect of dissemination of information, price and quantum of the order; but,
member’s identity is sought to be hidden to prevent any bias in response. Today, a trading
member need not wend his way to the Jeejeebhoy Tower in Dalal Street, Mumbai or to any
stock exchange building elsewhere; he can comfortably sit at his computer terminal and execute
the order. Laptops, palmtops and hand mobiles, in fact, challenge the relevance of the brick and
mortar.

An investor, today, need not wait, with his fingers crossed, for a fortnight or more, for getting
crossed cheques or crisp notes for the sale proceeds of his securities. The trading cycle has
been shortened to T+2. This shortening of the cycle has been done in a phased manner but in a
rapid succession – from T+5 to T+3 to T+2, all in a matter of two years.

Another material development, which proved to be of immense relief to the investors, was
dematerialisation of the scrips. Now 99% of the scrips in the market are dematerialised. Almost
100% of the trades are in D-mat form. Inconvenience of physical custody and transfer, tedium of
intimating change of address and problems of bad delivery, late delivery, non delivery and the
risks of forgery and frauds have virtually disappeared – or shall I say - have been
dematerialised! The benefit is relished but not the cost. We should bear in mind the maxim – no
cost, no benefit. There is no free lunch in this world. Still, there is no denying the fact that there
could be a possibility for reduction in the cost; such possibilities are explored.

At the stock exchanges, robust risk management system has been put in place, Value-at-risk
margining and exposure limits, on-line monitoring of margins and positions, Clearing
Corporation and Settlement Guarantee Fund mechanism for trade settlement – all these have
made Indian capital market now arguably world class, in terms of transparency, efficiency and
safety.

Antiquated and abused badla system or ALBM stands abolished. In its place, for hedging and
trading purposes, a number of derivatives – in the form of futures and options, both index-based
and stocks-specific have been introduced. The sophistication of these products have not scared
away our brokers and investors. Instead, with their native intelligence, they are as comfortable
in the F&O Quarter as a fish in the water. The vibrancy of F&O segment has surpassed the
cash segment in terms of daily turnover within a short period.

Corporate bonds and Government Securities used to be traded via telephone exchange. A
beginning has been made for their trading on the stock exchange now. As is natural, the
weaning takes time!
Our accounting standards are already principle-based; they have been aligned with international
standards almost in all aspects, barring one or two. Our disclosure requirements, both initial and
continuing, are on par with global practices.

The corporate governance and corporate performance do reflect and get reflected in the
conditions of capital market. As a market regulator and protector, SEBI is concerned with
corporate governance practice on an ongoing basis. According to the Economic Intelligence
Unit Survey of 2003 regarding corporate governance across the countries, “Top of the country
class, as might be expected, was Singapore followed by Hongkong and, somewhat surprisingly,
India.” It is significant to note that Singapore and Hongkong claiming the top positions, was not
a matter of surprise, but India coming as third, surprised the world! It shall be our collective
endeavour to eliminate the“surprise element”. As part of its endeavour towards continual
improvement, SEBI has got corporate governance code and practice reviewed, by Narayana
Murthy Committee. The Committee’s recommendations for refinement were evolved through
consultative process, transparent deliberations and democratic approach. These were posted
on SEBI’s website for 21 long days. Thereafter, they were got incorporated in Clause 49 of
Listing Agreement. No sooner was this done, the corporate quietitude was disturbed and a
spate of representations followed. The three major aspects, which disturbed the corporates,
related to definition of independent directors, their nine-year term and whistle blowing policy.

“Directors Decalogue”

The session is becoming heavy. Let me try to lighten it to an extent! Let me take the issue of
independent directors, for the purpose. Based on my experience as a nominee director on the
Boards of several companies and having dealt with hundreds of corporates, I am aware, how
the so-called independent directors get selected, moulded or conditioned by the obliging
promoters in some cases. - I am not generalising. And, this is not unique only in India and it
happens elsewhere in the world as well. - When a person is selected by the promoter for
induction into the Board, he is dubbed as an independent director, who probably begins so but
loses his independence as time passes, and in course of time, both the promoter and
independent director become mutually dependent! When the promoter selects someone to act
as independent director, to satisfy the requirement of financial institution, the independent
director seems to be given certain unwritten, friendly, advice or code of conduct to follow: The
independent director is cordially welcome to attend – not all the Board meetings unnecessarily -
but only whenever required for quorum or support purposes! The independent director is also
not expected to take the trouble of reading all agenda papers; even if he reads – and also
understands – he is not expected to raise questions - leave alone inconvenient ones! If, for the
sake of digesting the sitting fees, - he feels compulsively the need to raise questions, he should
not hope to get them answered or, whatever be the answer, he should accept it in good faith! In
any case, the independent director need not apply his mind and express his dissent! If he
cannot help expressing dissent, he should not demand its recording! For that matter, he should
not unnecessarily poke his nose or rock the boat or blow the whistle. In short, he should not “act
independently”. In partial adoption of the Directors’ Decalogue of Stanley Vance, the non-
ecclesiastical Commandments of the promoter to Independent Director would be;
Thou shall not –

• Attend all Meetings;

• Read the papers;
• Raise questions;
• Seek answers;
• Express dissent;
• Demand recording;
• Poke your nose;
• Rock the boat;
• Blow the whistle;
(and, in short)
• Act independently!

Unwritten and unspoken though, these are expected to be understood and acted upon by the
so-called independent director, to retain the pleasure of the promoter!

Let me hasten to add that not all promoters or independent directors fall in the above category.
The exception is exaggerated in lighter vein to emphasise the imperative of independence in
true sense of the term.

Coming back to the subject of the Clause 49, the Narayana Murthy Committee was asked to
revisit its recommendations. Based on the review, the recommendations have been refined,
with an eye on practicality. These will be formalised shortly. In the ultimate analysis, however,
more than the rules and regulations, codes and principles, the change of mindset is called for.
Good Corporate Governance is, after all, an ethical principle and value-proposition. Today, it is
realised that ethics and business do mix and mix well. I am given to understand that there is
empirical evidence to establish causal relationship between good Corporate Governance and
sustained corporate performance. Two Credit Rating Agencies have come up with their own
methodology to rate the corporates according to their governing standards, linking it with wealth
creation, management and distribution. Be rest assured, such a rating is not mandatory. But,
may be, in course of time, the market and economic compulsions would make it a preferred
option.
RESURGENCE

During the last one year, Indian capital market has been regaining its buoyancy. Globally
recognised economic fundamentals of the country and widely perceived robustness of the
Indian Capital Market system have gradually restored the confidence of the investors, global
and local, in the Indian market, to a substantial degree. During the last one year, the sensex has
risen by over 75%. The Indian capital market has out performed many in the world. More
importantly, the primary market too has perked up. The depth and liquidity of the market and its
absorbing capacity has been indisputably proven. The fear of failure of PSU disinvestments
turned out to be unfounded. Some mistakes have occurred. To err is human and occasional
systemic fault / fatigue is not uncommon. Mistakes may happen and do happen; but they should
not lead to paralysis, panic and cynicism; nor should they be allowed to be exploited. Mistakes if
any should be rectified and rectified quickly and their recurrence prevented. If by ignorance, one
mistakes, by mistake one should learn.

VIGILANCE

However sophisticated, efficacious, fail-proof a system or technology may be, human

intervention is inevitable, for, the system is manned, managed or used by human beings.
Human nature being what it is, and as the human ingenuity knows no bounds, constant
regulatory surveillance and prompt action is necessary. That is what SEBI is trying to do. Armed
with statutory authority and consumed by missionary zeal, SEBI keeps vigil, clamps down
appropriate surveillance actions. Any market misconduct or manipulation are sought to be dealt
with severely in the interest of the market and the investors. Investigations into allegations of
manipulations etc. are getting speeded up and necessary regulatory action is taken, without
bias or prejudice, with no fear or favour. At times, the action may turn out to be deterrent in
nature, as circumstances warrant.

FURTHERANCE

A few more things are on the anvil. Margin trading and securities lending have been introduced
with adequate checks and balances. The Central Listing Authority has become operational to
provide an independent entry-point scrutiny of the corporates to be listed. Straight Through
Processing will get broadened market wide in another 3 month’s time. The Central Registry of
market intermediaries and professionals with unique identification number is under construction.
And, when RTGS is being ushered in, T+1 settlement cannot be far behind! Structural
consolidation, infrastructural improvements, product-innovation, refinement of regulations, and
integrated surveillance should be some of the thrust areas for planned action in the days ahead.

We in SEBI look forward to continued support from professionals like you in our endeavour to
make the Indian capital market safe and secure and an attractive arena even for global players.

Thank you.