Reforms continue in the Indian capital markets

Written by Anshuman Jaswal || October 26 2017

The Securities and Exchange Board of India (SEBI) has introduced a number of measures recently in the capital and commodity markets to improve the quality of market infrastructure and the depth of trading that takes place. We will look at three examples of the recent changes being made by the SEBI here.

The SEBI constituted a committee on October 16th to review the norms for market infrastructure institutions including stock exchanges, depositories and clearing corporations. This move is in accordance with the Bimal Jalan Committee recommendations from 2012, which asked the regulator to undertake a review every five years. The committee will also be asked to identify areas that need further improvement, review procedures and practices followed by exchanges and depositories regarding listed entities and make recommendations for their enhancement. The decision comes at a significant time for the Indian capital markets because the BSE and the leading commodity exchange, MCX, have both been listed. The listing of the largest stock exchange, NSE, has had some hiccups, partly because of some questionable trading practices that were prevalent at the exchange for a time. The review will study the development of the capital markets in light of these changes, and recommend norms accordingly.

The SEBI is also in the process of delineating the rules for the entry of domestic and foreign trading and clearing firms in the International Financial Services Centre (IFSC) at GIFT City in Gujarat. The latter is the first offshore financial center being developed by India. Foreign trading firms can set up trading and clearing subsidiaries at GIFT City. These will trade on the offshore exchanges set up there, including the INX that has been set up by the BSE. Foreign exchanges are also allowed to set up a subsidiary exchange, provided they own at least 51% of the equity. The GIFT City is an ambitious effort, particularly as it is being set up at a time when the Indian and Asian economies are not performing at their respective peaks. However, it shows the reform and change-minded approach of the Indian government, which is willing to take such risks to allow the economy room to grow in the next decade or two.

In the commodity markets, the SEBI has instituted first preference for physical delivery as a mode of settlement while trading. The intention is to encourage hedging at the expense of speculative trading, and to also allow for convergence in pricing between the derivatives markets and the spot markets. This could hamper the operations of traders who focus more on speculative trading, which can help deepen the market, at the expense of the physical delivery. The regulator has given a degree of leeway to the exchanges themselves, which should ensure the robustness of their price discovery mechanism.

The Indian government has recently been criticized for being too reform minded, for example when it comes to the unified sales tax (GST) or demonetization, at the expense of economic growth. The recent measures instituted by the SEBI in the capital and commodity markets show that reforms are expected to continue and the efforts are on to deepen and strengthen the capital markets, and the government is not daunted by any temporary setbacks it might have encountered.