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Our Corporate Bureau
New Delhi, Dec 28: The Federation of Indian Chambers of Commerce and Industry's task force on capital markets has suggested creation of a new distribution system for financial instruments.
The task force headed by Ashok V Desai has proposed that sub-brokers should have access to one or more stock exchanges through their terminals. It has recommended introduction of a national electronic cash-holding and transfer system to match the electronic holding and transfer of securities through depositories.
Integration of financial intermediaries, competition among stock exchanges and better macro-economic management and corporate governance are other prominent suggestions made by the task force.
Regarding financial intermediaries, it has suggested that the built-in discrimination against investment in companies and equity must be done away with. The task force has recommended unification of regulatory agencies, especially the Securities & Exchange Board of India, Forward Markets Commission, Employees ProvidentFund Commission and the supervisory departments of the government.
The task force has recommended free entry of new firms into the intermediation industry, subject only to prudential regulation. These intermediaries should be allowed to offer financial instruments to personal investors which would give the investors a choice among the assets owned on their behalf by the intermediaries, relate the return to the investors to the return on these assets and pass on to the investors the entire risk attached to these assets.
According to the report, the new distribution system should intensively use electronic communication. The department of telecommunications must allow the emergence of a wholesale market for telecom services using the DoT network.
The task force believes that better macro-economic management, corporate governance and a more diversified stock market will reduce the cost of capital for companies. The report states that equity has to pay the investor a higher return than debt, the differencebeing of equity premium and agency premium. The way to reduce the riskless rate of return is to reduce inflation, broaden the market for government securities and integrate it with the market for corporate bonds and shares.
The report states that the government can reduce the risk of default for all companies by macro-economic stabilisation. Default risk is lower at a higher ratio of equity-to-debt and lower leverage.
The task force has suggested improvement in corporate governance by raising accounting and disclosure standards. The key to more credible management are independent directors, high standards of accounting and disclosure and threat of takeover.
The report states that poor managements would be more quickly removed if takeovers were made easier and bankruptcy proceedings were made speedier.
Reduction in inflation would bring down the cost of capital by reducing the forward premium on foreign exchange.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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