Regulation of Firms in Securities Market November 1-2, 2002
Visit us at www.nseindia.com Firms Focus areas Issuers Intermediaries Infrastructure providers Visit us at www.nseindia.com
Approach to Regulation Self Regulated Supervised Broad Framework Micro Regulation – Weaknesses Should work for issuers, intermediaries and infrastructure providers Visit us at www.nseindia.com
Issuers – Regulatory goals Good corporate governance True and fair picture of corporate performance Fair deal to all classes of investors Visit us at www.nseindia.com
Issuers- Regulatory framework Effective Board Structure Improved Board Supervision Improved Accounting Standards and Financial Disclosure Improved Continuing Disclosures Ensure various compliances Minority share holder interest Resolving Conflict of Interest Ensuring at all times the information for fair valuation is in the public domain Visit us at www.nseindia.com
Visit us at www.nseindia.com Some Issues Independence of directors? Disclosures Public offerings: fairly adequate Private placements: weak Continuous disclosures: in letter, not in spirit Incentive for self regulation? Non–reporting of price sensitive information is at the heart of insider trading Non-committal/standard responses to news verification Misreporting accounting figures, frequent change in accounting policies, etc. No studies clearly indicate link between corporate governance and valuation. How to provide an incentive for change? Prpbably, there is no incentive for compliance There is a disincentive for compliance ( cost and other issues) There is an incentive for non-compliance There is apparently no disincentive for non-compliance Visit us at www.nseindia.com
Exchange intervention Listing Agreement ineffective Limited powers to impact errant companies Suspension/delisting not the answer Weak for continuous disclosures Even weaker for board structure issues Visit us at www.nseindia.com
Exchange intervention (cont.) Need to filter entry Need to mix objective and subjective criteria Problems with using subjective criteria Alternate to exchange capital? Continuing compliance issues remain Listing criteria fixed too low creates problems for corporates to raise capital as vc etc. limited. Visit us at www.nseindia.com
Intermediaries – Regulatory goals Integrity of market dealings Fair dealings with customers No interference with price discovery Visit us at www.nseindia.com
Intermediaries – regulatory framework Focus on compliance Focus on supervision Board governance ? Disclosures Nature and role? Historically, focus is on laying down micro regulations and supervising compliance In a retail market like India, with thousands of firms, shuting down one window opens another. Reputational damage – limited Nature of market such that he is able to continue business one way or the other. Visit us at www.nseindia.com
Dealings with customers Front running Misuse of customer assets Key role of internal control systems Visit us at www.nseindia.com
Distorting price discovery Intermediary collusion Pyramid of Investment companies Trail of Fund Flows Collusion of brokers with issuers, other brokers, and clients to distort prices and volumes. Pyramid hampers identities, audit trail, delays action Audit trail of funds difficult and thus hampers action. Visit us at www.nseindia.com
Intermediaries -issues Culture of compliance – low but changing Cost of compliance Business structure discourages investment in compliance Gains from compliance not obvious Cost of non-compliance low Cost of compliance: Thin margins More requirements and hence costly Visit us at www.nseindia.com
Exchange intervention Market structure issues Effective supervision and enforcement Disclosure of track record Rating of intermediaries? Nature of retail market –Thousands of brokers/sub-brokers and millions of transactions Visit us at www.nseindia.com
Infrastructure providers Congruence of business & regulatory interest Good governance seen to attract market share Transparency in operations effective Self regulation within a broad supervisory framework? Rules/policies laid down upfront Decisions not made on case to case basis Visit us at www.nseindia.com
Visit us at www.nseindia.com Going Forward Encourage continuous disclosure Track record Data base on errant participants in public domain reputational damage as disincentive Regulations should be reviewed for criticality Visit us at www.nseindia.com
Visit us at www.nseindia.com THANK YOU Visit us at www.nseindia.com