Wednesday, 20 November 2019

Unit 2: Financial Market Reforms

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                                                                     Unit 2: Financial Market Reforms    



The new issue market in India until the pre-liberalization period remained undeveloped and lopsided in terms of quantum and kinds of new issues, participation of agencies in new issue activity and investors' apathy towards new security issues.

However, theIndian Financial System    government undertook a range of measures during the post-liberalization period to rev up new issue market.

Consequent upon these measures, the new issue market in India witnessed phenomenal changes, both quantitatively and qualitatively, increasing depth and sophistication of the operations of the market as also resilience of the market to cope with the new economic challenges.

Although the Indian new issue market compares well with other emerging economies in terms of sophisticated market design of equity market, widespread retail participation and liquidity, participation of FIIs, mobilization of funds through Euro issues, the growth of the debt and equity markets remains low and largely skewed in comparison to the U.S., Malaysia and South Korea, indicating immense latent potential.

Further, the new issue market of the country continues to be shallow.

Despite inflation, only 2 percent of Indian household savings are invested in the market as against 20 percent in developed economies and about 51 percent in the US.

A host of factors has stonewalled the full-fledged growth of the new issue market of the country.

One such factor is inadequate disclosures of information needed by the investors to make informed decisions regarding investment in new offerings.

Despite the SEBI's clear directives in this regard, Indian corporates are mostly indifferent in supplying the required details.

This has ostensibly eroded the confidence of the investing community.

Overpricing of issues is another pernicious weakness of the new issue market in India responsible for its stymied development.

This created problem for the holders to exit from the market.

The major concern for the issuing companies at present is to fix the right price of the issue.

In fact, price discovery price is not perfect because of conflict of interests.

At present, a Dutch auction process for the institutional bidders, where the price band is decided before the bidding begins, is followed.

The French auction process works on the principle of "Winner takes all".

This follows a top-down approach where the highest bidder gets the first allocation, followed by the second highest bidder and so on.

The French method can be used to determine the price offered to retail investors who could be allotted shares at the lowest auction price or the average price.

However, merchant bankers do not seem to like the idea.

With proportionate allocation, a French auction does not make sense as there is no incentive for the institutional buyers.

In a proportionate allocation, irrespective of the number of shares or the price one bids for, any institutional bidders that make the cutoff receive an equal number of shares among each other.

The SEBI is attempting to find alternatives to improve the pricing process.

High transaction costs, that drive companies to other avenues for mopping up capital, have also hampered the growth of the market.

Due to the latest global financial meltdown, the new issue market has suffered grievously with investors' confidence at its lowest ebb.

To rev up the new issue market and sustain its growth, it would be the much-needed measure to restore investors' confidence.

For this purpose, it is necessary for the SEBI to protect the investors' interests by making listing requirements more stringent in phases so as to discourage the participation of unhealthy companies in the new issue activity, installing an efficient institutional arrangement, and directing the companies to adhere strictly codes of corporate governance.

It will also be useful to offer a mechanism of safety net/exit option on new issues to retail investors so that the shares at the issue price of the price of a share drops below a certain level within a certain specified time.

This will, besides exuding confidence among the investors, induce the market to move to a more realistic pricing.

Market making spread should be made compulsory at least for a period of 6 to 12 months from the date of listing.

This would go a long way in improving liquidity of the scrips.

Issuing companies and the syndicates should be mandated to sell the IPOs.






Credit available to market makers would help ensure more active participation in the Notes secondary market.

They must be allowed to lend against shares.

Financial institutions: Provide a variety of financial products and services to fulfil the varied needs of the commercial sector.

Money market: Is a market for short-term funds and covers money and financial assets that are close substitutes for money.

Primary market of a country renders three major services: investigating and processing of proposals for new issues, underwriting of new security issues and distribution of new securities to ultimate investors.

Secondary market is a market where the sale of previously issued securities takes place.




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