STOCK MARKET AND GDP GROWTH POST GLOBAL RECESSION A COMPARATIVE STUDY ON CHINA & INDIA PART- III: CAPITAL MARKET REGULATION

MARKET REGULATION IN CHINA

Overview and history

  • Chinese state brought in an exclusive regulator when the Shanghai and Shenzhen exchanges were about to complete a decade of operation.
  • China’s Securities Law (passed December 1998, effective July 1, 1999) established China Securities Regulatory Commission(CSRC).  The law grants CSRC authority to implement a centralized and unified regulation of the nationwide securities market in order to ensure their lawful operation.
  • The CSRC oversees China’s nationwide centralized securities supervisory system, with the power to regulate and supervise securities issuers, as well as to investigate, and impose penalties for, “illegal activities related to securities and futures. The CSRC is empowered to issue Opinions or Guideline Opinions, non-legally binding guidance for publicly traded corporations
  • CSRC’s primary functions are :
    • Formulating policies, laws and regulations concerning markets in securities and futures contracts.
    • Overseeing issuing, trading, custody and settlement of equity shares, bonds, investment funds.
    • Supervising listing, trading and settlement of futures contracts; futures exchanges; securities and futures firms.
  • Though CSRC is technically like any other stock market regulator like SEC in US or SEBI in India, for all practical purpose, it has to works under tight control of the state as it happens with all arms of the state in China.
  • Still, within the confines of its limited power, CSRC appears to have attempted to strengthen eh transparency and discipline in the capital market functioning in China and contributed to its growth.
  • Some of the major timelines are tabulated below:

Specific Aspects

  • By far the most significant aspects faced by Chinese financial market regulator have been protection of retail investors spread far and wide across the country. This took the form of regular focus on the following aspects :
    • Balancing the growth of Primary market while controlling overheating on account of flooding of Initial Public Offers leading to subsequent crashes experienced often
    • Controlling insider trading.
  • Besides, development of market intermediaries, continued integration of Chinese market with global markets amongst others.
  • In fact, from the perspective of global investors and financial analysts, the major criticism about Chinese stock market has been its supposedly low transparency owing to influence of the state machinery in regulatory sphere. The Chinese stock market has been found to experience unreasonable volatility even after many major economies settled down post global crisis.
  • This criticism got accentuated during the 2015 market crash which wiped out about 30%.
  • The impact of market crash of mid-2015 (June to Aug period) was felt all across the world cumulatively wiping out trillions of dollars’ worth investor wealth. The tremors transcended stocks and bonds and even commodities like oil and gold were not spared.
  • Though the market pulled back by the autumn of 2015, the crash again occurred in the beginning of 2016.
  • In respect of regulatory outreach, what stood out in case of China ( when compared to established markets) was application of market circuit breakers only exacerbated the problem because investors – especially millions of retail investors – felt they were not able to get out of the market and hence the moment circuit breakers were lifted saw the market falling again.
  • By far the overarching reasons attributed for the large volatility experienced is the lack of transparency in ‘books’ of firms listed across the exchanges which are China’s large state controlled firms and investing community predicts such behavior of the markets are going to recur till state regulatory authorities get ‘real’ freedom in enforcing discipline.

MARKET REGULATION IN INDIA.

Overview and history

  • Though Indian capital market is today about less than a third of Chinese market in terms of valuation, in respect of regulatory aspects, the overwhelming view is that the former is far more transparent than the latter.
  • Perhaps two reasons can be attributed to this aspect :
    • The regulator in India (SEBI) was established well before the market started attaining critical mass.
    • While Chinese market ( especially Shanghai and Shenzhen exchanges) is dominated by large state controlled firms of China which precludes critical assessment of company books.
  • Perhaps a third reason could be establishment of NSE with professional management as a counterweight to BSE which was by and large a broker controlled exchange.
  • SEBI was established in 1988 almost 11 years before CSRC came into existence. Though SEBI got legal cover only in 1992, the intervening period helped it to trudge through the maze of stock market ‘minefields’ and thus plan out the framework of the regulatory regime.
  • Further, two major scams involving the stock brokers ( 1992 and 2001) helped SEBI to get further bearings about the ways and means of those who may intend to break established code of conduct of the broking business.
  • Like all established markets, a regulator was thought required for India also with exclusive focus on capital market transactions in order to render disciplined growth with transparency. Hence SEBI was established with functions across three fronts:
    • Investor protection
    • Development of intermediaries
    • Market regulation
  • Major timelines on capital market regulations issued by SEBI are tabulated below:

Specific issues faced by SEBI

  • P-Notes : Since investing through P-Notes was permitted it became very popular amongst foreign institutional investors. The absolute value of P-Notes investments rose to a record of Rs 4.5 lakh crore in October 2007. Confronted with excess liquidity, SEBI had banned P-Notes for a short time. However, since P-Notes had formed a significant proportion of the overall market volume at that point of time, market reaction was swift leading to about 9% intra-day fall in the M-Cap, partly owing to clarity issues related to the regulation. The reaction forced both the Govt and regulator to take a more cautious view on the matter.
    A decade later, very recently, SEBI has finally tightened the norm without causing any adverse reaction from the market mainly owing to the maturing of the market itself.
  • Sahara case: is the case of the issuance of Optionally Fully Convertible Debentures issued by the two companies of Sahara India Pariwar to which Securities and Exchange Board of India had claimed its jurisdiction and objected on why Sahara has not taken permission from it. The long drawn case finally resulted in the arrest of the Chairman of the Company, tough the case is still ongoing.
  • Insider trading: This is an issue the stock market regulator world over has been facing as a systemic – hard to get foolproof evidence- issue. Even in India, though there were more than half a dozen cases were pursued by SEBI, few met with logical outcome. The tightened regulations brought in 2015 are expected to curb the practice owing to severe penalties associated with this white collar crime.

RECENT DEVELOPMENTS

  • After the Mainland – Hong Kong connect program launched by CSRC, substantial investments have been pouring into Hongkong stock exchange from Chinse mainland leading to the ‘overheating’ of HK exchange (rising ‘too high too quickly’) with its attendant risks. This has prompted CSRC recently to delay approval for new mutual funds that are meant for investing in Hong Kong’s equity market.
  • Indian market regulator SEBI recently gave its nod to the convergence of both equities and commodity-backed stocks on exchanges from October 2018.
    The move is expected to allow major players like BSE, NSE and Multi-Commodity Exchange of India (MCX) to list both equities and commodity-backed financial instruments on their platforms.

SASINDRAN AYADAKANDIYIL
CEO, ERGONOMIX INTELLECTUAL CAPITAL ASSETS
www.ergonomix.in

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