1. Regulation of Firms in Securities Market
November 1-2, 2002

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Firms
Focus areas
Issuers
Intermediaries
Infrastructure providers
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3. Approach to Regulation
Self Regulated
Supervised
Broad Framework
Micro Regulation – Weaknesses
Should work for issuers, intermediaries and infrastructure providers
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4. Issuers – Regulatory goals
Good corporate governance
True and fair picture of corporate performance
Fair deal to all classes of investors
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5. 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
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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
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7. 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
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8. 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.
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9. Intermediaries – Regulatory goals
Integrity of market dealings
Fair dealings with customers
No interference with price discovery
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10. 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.
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11. Dealings with customers
Front running
Misuse of customer assets
Key role of internal control systems
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12. 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.
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13. 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
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14. 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
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15. 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
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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
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THANK YOU
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