Recommendations on Capital Markets Governance & Investor Protection
INNOVATION During the discussion on Capital Markets – Challenges, Opportunities for Innovation, the experts suggested as under: Expand the retail investor base - For a developed Capital market, there is need to expand the participation of retail investor and also enhance the investor morale and domestic allocation. Following are the suggested areas to be focused to
increase the participation of retail investors : • Reduction in the complexity and cost of opening dematerialised accounts to encourage people beyond the top-10 centres i.e Metros and ‘A’ Grade Cities to invest directly in equities. • Increased investor education and awareness in semi-urban centres to cover each and every corner of the country. It is necessary to increase the awareness among general public in rural area as they are less aware. Investor Camps / Investor Awareness Programmes should be organized on continuous basis.
• Appropriate measures should be initiated to make financial services companies to focus on ethical selling practices and enhanced disclosures. • Indirect Investor participation should be enhanced through mutual funds and long-term retirement products. • High net-worth Non-resident Indians (NRIs) should be targeted by facilitating account opening and introducing reforms to simplify profit repatriation. • Class Action Suits should be introduced against erring corporates. Special courts should be assigned to deal with these matters. • Market Making should be made compulsory in all illiquid stocks on the same lines as it is applicable to SME Platform of Stock Exchanges at present. • Stringent Rules/ Regulations be introduced for better monitoring of companies post IPO/FPO for use of funds. There should be provision for refund in case the discrepancies are noted. Target Tier II and Tier III cities - The share of household savings invested in equities is low and there is availability of immense potential in Tier II and Tier III cities. These cities should be the focal point to attract investment in Capital Markets. This can be achieved by organizing Investor Awareness Programmes and also few special incentive schemes may be launched for these regions.
Go beyond equities to other instruments and products - For increasing the resource mobilisation, there is a need to focus on other instruments like Mutual Funds where the funds are managed by big firms and portfolio managers. Deepening the Corporate Bonds Market - The reforms has been suggested to deepen corporate bond, warrants and interest-rate futures market and to streamline securities lending and borrowing by: — Allowing pension funds to invest in investment-grade corporate bonds. — Allowing insurance companies to invest in all investment-grade corporate bonds. — Creating a liquid benchmark index that can be used for pricing. — Allowing credit hedging instruments such as Credit Default Swaps. Deepening the Warrants Market - India’s warrants market is underdeveloped due to challenges in participation, product design and pricing, therefore there is need for following reforms: — Allowing registered, well-capitalised entities with risk management
capabilities to act as third-party issuers for warrants. — Introducing allotment of a percentage of equity to minority shareholders along with preferential allotment to promoters (on an optional basis). — Allowing trading of preferentially allotted warrants in the secondary market. 4
— Introducing multiple warrant products to meet diverse investor needs. Deepening the Interest-rate Futures Market - Interest-rate derivatives are needed to hedge rate risks, the largest macro-economic risk. Globally, interest rate derivatives constitute the largest part of derivatives turnover on both exchangetraded as well as OTC products. In India interest-rate derivates account...
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