From 1985 to 1986, the government permitted public sector undertakings (PSUs) to raise money from capital markets by issuing bonds, with their outstanding amounts being significant at least until 1992. By June 1992, the outstanding amount of these bonds issued by 19 of the PSUs was about INR 20,500 crore. More than 50 percent of them, in terms of value, were tax free and carried a coupon rate of 9–10 percent. In the aftermath of the 1992 stock market scam, the Janakiraman Committee published around half a dozen reports on loopholes in the financial system. The Securities and Exchange Board of India Act of 1992 was enacted, granting statutory powers to the Securities and Exchange Board of India to monitor securities and commodities markets. But the work was not complete. The high volume of transactions involving the bonds issued by PSUs constituted a significant portion of the losses that had been incurred by several major banks. These transactions, in turn, proceeded through the misuse of bank receipts. S. S. Nadkarni, a prominent banking executive and one of the first chairs of IDBI, led a new committee, set up by the Reserve Bank of India to review these issues and suggest measures for transparency and efficiency. Members included S. A. Dave (Chairman, Unit Trust of India); V. Mahadevan (Managing Director, State Bank of India); W.S. Saraf (Executive Director, RBI); Bansi S. Mehta (CA); Representatives from the Department of Economic Affairs and Securities and Exchange Board of India; and R. Chandrashekharan (Managing Director, Stock Holding Corporation of India and Member-Secretary).

The Nadkarni Committee called for broadening the market for public sector bonds and putting in place a central settlement and depository system. It recommended reviewing the terms of issuance of PSUs, creating and regulating an open market for PSUs, marketing PSU bonds to more public investors, and listing PSUs on stock exchanges. The committee thought it ill advised to ban repo transactions but emphasized using prudential guidelines and restricting the set of actors that could use repos. It stated that the Unit Trust of India, which had a monopoly over the mutual fund business then, ought to reevaluate the 1964 Unit Scheme to differentiate the needs of corporate investors from individual investors. The committee also suggested reintroducing ready-forward transactions to create more liquidity in the market for bonds or units. This restoration required placing checks on transactions to ensure transparency and prevent dummy deals, which in turn required setting up an electronic clearance, settlement, and depository system.

The report also stated that a facility akin to the one in the PSU bond market could be instituted by the Stock Holding Corporation of India. To expand the bond market, the report suggested encouraging cash-based transactions on the stock exchanges. The committee examined inefficiencies and malpractice in the trading of PSU bonds and mutual fund units, focusing on structural weaknesses and limited market access. It proposed creating a central depository, increasing transparency, expanding investor participation, and implementing stricter controls to improve the functionality and integrity of these markets