Haunted by the recent stock scam, the Economic Survey on Thursday expressed concern over the subdued stock markets that were concealing reforms and asked the Centre to strengthen regulatory and surveillance mechanism to prevent market manipulation.
"The most difficult area in terms of obtaining a sound secondary market, concerns the problem of market manipulation, and those of estabilishing sound procedures of surveillance," the pre-budget document, tabled in Parliament, said.
Hoping that recent legislative changes in the Sebi Act to enable the regulator enforce proper market conduct would help the market, the Survey said, "the sudued conditions in the domestic markets, however, conceal important structural reforms."
The structural reforms included the completion of the move to rolling settlement and the start of equity derivatives market and on the bond markets, it consisted of controlling settlement risk by using Clearing Corporation of India and initiating a new transparent screen-based market for secondary trading in Government of India bonds.
The Survey asked the Centre to focus on the need for greater regulatory and market-based mechanisms for giving incentives to firms for better disclosure and at the same time to make it mandatory to use the Permanent Account Number with every trade in the secondary market.
The survey highlighted the constraints for the Securities and Exchange Board of India in shortening the three-day delay between the transaction and settlement date due to poor payment infrastructure across the country, even as the market regulator expressed confidence on introducing T+1 system.
"Sebi has been working towards shortening the three-day delay between the transaction date and settlement date. This effort is constrained by the ability of the payments to move across the country, and thus awaits improvements in the payment infrastructure," the Survey said.
The pre-Budget Survey said it required electronic data exchange, which is Straight Through Processing towards which the Sebi was working to put in place T+1 settlement.
Airing that globalisation would pose challenges to the Indian capital markets, it said "there is a need for greater thought and policy initiatives, in fully integrating a global perspective into the plans of firms, exchanges, regulators and policy makers."
On the need for tagging the PAN number with every trade in the secondary market, the economic survey said, "it would simultaneously serve to establish the identity of the customer and limit the extent to which the parallel economy is able to trade on public securities markets."
In the debt market, the Survey was noted that both the government and corporate bonds markets continued to be "opaque", characterised by bilateral negotiation.
"Many synchronised policy efforts are required in order to bring both these markets up to the standards of the equity market," it said.
The survey said institutional investor had not yet been able to utilise the opportunities for better management of risk and return using the equity derivative market.
"It suggests a need to re-examine the policy impediments for institutional participation on the derivatives market," the Survey said, adding that the role of mutual funds in the economy continued to be small as compared to that of the banks.
The derivatives trading in the country was "fragmented" across some exchanges, which offer commodity derivatives only, and other exchanges offering equity derivatives only, it said.
The government has announced that the trading interest rate futures would commence, which would mark one-step towards addressing this fragmentation, it said.
At present the currency and interest rates derivatives were not traded on exchanges, it noted.
PTI