Rewriting the Rules in Asia
Edited by M. Ramesh and Michael Howlett
Chapter 9: Regulation and Deregulation of the Stock Market in India
Ashima Goyal INTRODUCTION With internationalization, and the entry of new entities, government controls become ineffective. The deregulation movement of the 1980s sought to make regulatory structures for capital markets similar across emerging market economies (EMEs) in order to encourage capital movements yet minimize regulatory arbitrage. But the East Asian currency and banking crises of 1997 pointed to inadequacies in regulation. Deregulation turns out to require reregulation or a smarter regulation that would create incentives for self-regulation. In fast moving and interlinked markets regulators do not have the information or clout to impose the earlier quantitative controls. Capital markets provide effective intermediation of savings, allocation of investment, price discovery, pricing and hedging of risk; but they are subject to information imperfections, excess volatility and market manipulation. Therefore intervention is required to protect investors, increase market transparency and reduce systemic risk. Rigid controls hamper beneficial functions of markets, but a hands-off policy makes market abuse possible. Since, even in developed markets, healthy innovation can easily shade into illegal arbitrage, regulators have a hard time keeping up. EMEs have more problems because of the dominance of insiders, of relationship lending, and a weak rule of law. There are fears of regulatory capture. Stringent investor protection is required to encourage wider retail participation in markets. Technological developments, however, offer the opportunity to create better-designed regulatory institutions and modern automated capital markets that can compensate for other weaknesses. Successful regulation follows general principles adapted to the specific market and context; this gives it the flexibility...
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