Regulations and market microstructure

Abstract

Every country requires foreign exchange reserves, which the counter-trading partners are willing newlineto accept for the trade. A country can avail foreign exchange through various means, such newlineas exporting domestic goods, attracting FDI (Foreign Direct Investment), and getting FIIs newline(Foreign Institutional Investors) to invest in the domestic capital market. Foreign investors newlineinvest in the capital market of the host country to be a part of the growing economy and earn newlinehigher returns than developed countries. However, they are not committed to the economy newlinefor the long term and hold their investments as long as they can avail better and safer returns. newlineLike any other investors, foreign investors look for an economy where they can earn higher newlinereturns and protect their investments. Hence, they prefer countries where sound institutional newlineframeworks are in place, markets are well-regulated, and firms observe adequate corporate newlinegovernance structures. newlineEmpirical evidence suggests that foreign equity mutual funds allocate higher investments newlinein open emerging countries with sound accounting standards, where shareholder rights are protected newlineand have reasonable legal environments, and firms in the economy observe accounting newlinetransparency (Aggarwal et al. (2005)). Further, the funds are more inclined toward firms with newlinesuitable corporate governance structures, such as good board characteristics and independent newlineauditors (Das (2014)). Moreover, because of the limited information due to geographical distance, newlinefunds rely on firms corporate governance, which has more impact than a country-level newlineinvestor protection framework. newlineA sound and well-ordered institutional framework is the critical building block for boosting newlineforeign investors confidence in the economy. The Government of India constituted the newlineSecurities and Exchange Board of India (SEBI) in April 1988 to develop the capital market. newlineThe government gave more autonomy and power to SEBI, conferring statutory status and newlinepower on January 30th, 1992, strengthening SEBI to carry out its