Financial Institutions Reform and Expansion (FIRE) project : final report

Price Waterhouse was the implementing agency. The project had considerable impact on each of its targeted areas. Highlights included the following: (1) A transparent and efficient trade clearance and settlement system reduces the systemic risk faced by investors. The establishment of the National Securities Depository Ltd. (NSDL) as a modern depository with management and operational systems and a continuous training program is a major step forward for the Indian securities market. Technical consultancy to establish a clearing corporation, trade guarantee funds, and a stock lending system has helped establish a more efficient market with appropriate risk containment measures. (2) Technical consultancy to build strong regulatory organizations and enhance transparency in the market was a primary project objective. Training to support the consultancy was provided for regulatory and exchanges personnel. Training topics included investor protection, insider training, and disclosure rules. Testing administration seminars for exchanges and sub-brokers were provided, together with seminars on self-regulatory organization, market surveillance, and the National Association of Securities Dealers' (NASD's) StockWatch Automated Tracking (SWAT) system. (3) Minimal systemic oversight, surveillance, and enforcement for the market were in place at the beginning of the FIRE project. Movements toward reform had made little progress. FIRE was able to develop a consensus among key industry institutions on the steps by which reform could be realized. Best practices were identified and are currently being implemented in stages. (4) The development of the Indian bond market is important if India is to mobilize domestic savings into long-term investments and attract sustainable foreign investment. In addition, a developed bond market will help India finance its ambitious plans for industrial and infrastructure growth. The primary market for bonds, in which banks act as the primary buyers, is relatively active. However, inadequate settlement infrastructure and taxes and restrictions on investments by key institutional investors serve as key impediments to secondary bond market development. The FIRE project was influential in establishing two industry groups, Fixed Income Brokers Association (FIBA) and Fixed Income Money Market and Derivatives Associations (FIMMDA), that will serve as catalysts for development. (5) The Indian mutual fund industry is over 30 years old, and is dominated by the Unit Trust of India (UTI), which accounts for 85% of the market. Since liberalization in 1991, many new funds have been established, including international names such as Alliance Capital, Morgan Stanley, and Franklin Templeton. The mutual fund industry will bring many new investors to the market and thereby broaden ownership and participation in economic growth. During its 4 years in India, the FIRE project sought to increase levels of individual investment in mutual funds by increasing the integration of the industry, enhancing self-regulatory standards, and improving industry regulation. (6) In 1995, a task force began to explore the establishment of exchange traded futures and options. The FIRE project provided technical consultancy experts from the CFTC (unidentified acronym), Chicago Board Options Exchange (CBOE), Chicago Mercantile Exchange (CME), and NASD to help prepare the regulatory framework and outline a procedure for establishing a derivatives exchange. The CBOE technical consultancy team conducted a feasibility study on the benefits and costs of establishing a derivatives market. In July 1998, the Securities and Exchange Board of India (SEBI) approved the establishment of separate affiliate exchange traded derivatives. The industry is expected to begin trading in derivative products in 1999. (7) In other activities, the FIRE project helped review human resource procedures and introduce worldwide innovations at key capital market institutions. Assisted by FIRE project training, key market institutions have appointed experienced training supervisors, institutionalized capital market training and research, and begun to establish and develop their own management training programs. Critical to the project's success was the depth of the team's understanding of the complexities of the Indian capital markets. For effective assistance to be given to India, local solutions need to be devised without sacrificing international standards of market operation. It is imperative that the focus on capital market assistance continues. (Author abstract, modified)