ASM E-NOTES

The capital market in India is a crucial part of the country’s financial system, facilitating long-term funding and investment. It includes a wide range of institutions, instruments, and practices aimed at raising and managing capital for the government, companies, and investors. Below is an overview of the Indian capital market, its structure, significance, and recent trends.

1. Concept and Meaning of Capital Market

• Definition: The capital market is a financial market where long-term debt or equity-backed securities are bought and sold. It serves as a platform for companies, governments, and other entities to raise long-term funds.
• Components: The capital market includes primary markets, where new securities are issued, and secondary markets, where existing securities are traded.

2. Structure of the Indian Capital Market

The Indian capital market is broadly categorized into two segments:

a. Primary Market

• Initial Public Offerings (IPOs): Companies raise capital by issuing new shares to the public for the first time.
• Follow-on Public Offers (FPOs): Companies issue additional shares after an IPO to raise more capital.
• Rights Issues: Existing shareholders are offered additional shares at a discounted price.
• Private Placements: Securities are sold to a select group of investors, usually institutional investors, without going public.

b. Secondary Market

• Stock Exchanges: The secondary market operates through stock exchanges like the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Here, investors buy and sell securities that were initially issued in the primary market.
• Over-the-Counter (OTC) Markets: Trades are conducted directly between parties without the use of a centralized exchange.
• Derivatives Market: Includes trading in financial instruments like futures and options, which are derived from underlying assets such as stocks, bonds, and commodities.

3. Significance of the Indian Capital Market

• Mobilization of Savings: The capital market channels savings from individuals and institutions into productive investments, promoting economic growth.
• Capital Formation: It facilitates the raising of long-term funds for infrastructure projects, business expansion, and development, contributing to capital formation in the economy.
• Liquidity and Price Discovery: The secondary market provides liquidity to investors, allowing them to buy and sell securities easily. It also helps in the price discovery of securities, reflecting their true market value.
• Economic Growth: By providing a platform for raising long-term funds, the capital market plays a crucial role in the economic development of the country.
• Wealth Distribution: Through the wide participation of retail investors, the capital market contributes to the distribution of wealth across different sections of society.

4. Regulatory Framework

• Securities and Exchange Board of India (SEBI): SEBI is the primary regulator of the Indian capital market, ensuring transparency, investor protection, and fair practices. It regulates the issuance and trading of securities, oversees stock exchanges, and enforces legal standards.
• RBI’s Role: The Reserve Bank of India (RBI) regulates the bond market and oversees the activities of financial institutions that participate in the capital market.
• Companies Act: Governs the legal framework for the issuance of shares, debentures, and other securities by companies.

5. Instruments Traded in the Indian Capital Market

• Equity Shares: Represent ownership in a company and come with voting rights and the potential for dividends.
• Debentures and Bonds: Long-term debt instruments issued by companies and the government to raise capital. Bonds are typically more secure, often backed by collateral, while debentures may be unsecured.
• Preference Shares: Equity instruments that provide a fixed dividend before any dividends are paid to common shareholders but usually come without voting rights.
• Derivatives: Financial contracts like futures and options, whose value is derived from underlying assets like stocks, indices, and commodities.
• Mutual Funds: Investment vehicles that pool funds from multiple investors to invest in a diversified portfolio of securities.
• Exchange-Traded Funds (ETFs): Investment funds traded on stock exchanges, holding assets such as stocks, commodities, or bonds.

6. Recent Trends in the Indian Capital Market

• Growth of IPOs: There has been a significant increase in the number of IPOs, reflecting the growing confidence of companies in raising funds through the equity market.
• Rise of Retail Participation: Increased awareness, digital platforms, and easy access to markets have led to a rise in retail participation in the capital market.
• Digital Trading Platforms: The use of online trading platforms and mobile apps has surged, providing greater accessibility to the capital market for individual investors.
• Growth of Mutual Funds and ETFs: Mutual funds and ETFs have become popular investment vehicles, offering diversification and professional management with relatively low costs.
• SEBI Reforms: SEBI has introduced several reforms to enhance transparency, improve governance standards, and protect investor interests, including stricter norms for disclosures and regulations on related-party transactions.
• Sustainable and ESG Investing: There is a growing trend toward sustainable investing, with a focus on environmental, social, and governance (ESG) factors. Companies are increasingly required to disclose their ESG practices, and investors are showing a preference for companies with strong ESG credentials.
• Foreign Investor Participation: Foreign institutional investors (FIIs) have increased their participation in the Indian capital market, reflecting confidence in India’s economic growth prospects.
• Increased Focus on Corporate Governance: SEBI and other regulatory bodies have emphasized the importance of corporate governance, leading to higher standards of transparency and accountability in companies.

7. Challenges Facing the Indian Capital Market

• Market Volatility: The Indian capital market is prone to volatility due to global economic uncertainties, political developments, and domestic economic factors.
• Regulatory Hurdles: Despite improvements, regulatory complexities can sometimes create barriers to market entry and growth.
• Financial Literacy: A lack of financial literacy among a significant portion of the population limits broader participation in the capital market.
• Corporate Governance Issues: While there has been progress, challenges related to corporate governance, such as related-party transactions and minority shareholder rights, still persist.

3.1 Concept of the Security Market

The security market is a critical component of the broader financial market where securities such as stocks, bonds, and other financial instruments are issued, bought, and sold. It plays a vital role in the economy by facilitating the flow of funds between investors and companies or governments that need capital.

1. Definition of Security Market

• Security Market: A security market is a marketplace where investors can buy and sell securities, including stocks, bonds, debentures, and other financial instruments. It includes both the primary market, where new securities are issued, and the secondary market, where existing securities are traded among investors.

2. Types of Security Markets

The security market can be broadly categorized into two types:

a. Primary Market

• Initial Offerings: The primary market is where new securities are issued for the first time. This could be in the form of Initial Public Offerings (IPOs), where a company offers its shares to the public for the first time, or new bond issues by governments or corporations.
• Capital Raising: Companies and governments use the primary market to raise capital by issuing new securities. The funds raised are typically used for expansion, debt repayment, or other financial needs.
• Pricing and Allotment: In the primary market, the price of securities is typically determined through book-building processes or fixed pricing methods. The allotment of shares or bonds is done directly by the issuer to the investors.

b. Secondary Market

• Trading of Existing Securities: The secondary market is where investors buy and sell securities that have already been issued. This market provides liquidity and an opportunity for investors to sell their holdings.
• Stock Exchanges: The secondary market operates through stock exchanges like the New York Stock Exchange (NYSE), Bombay Stock Exchange (BSE), and National Stock Exchange (NSE), where stocks and other securities are traded.
• Price Determination: The prices of securities in the secondary market are determined by supply and demand dynamics, with investors trading based on their expectations of the securities’ future performance.

3. Participants in the Security Market

The security market involves various participants, each playing a specific role:

• Issuers: Companies or governments that issue securities to raise capital.
• Investors: Individuals or institutions that buy securities with the expectation of earning returns in the form of dividends, interest, or capital appreciation.
• Intermediaries: Brokers, dealers, and financial institutions that facilitate the buying and selling of securities.
• Regulators: Authorities like the Securities and Exchange Board of India (SEBI) in India or the Securities and Exchange Commission (SEC) in the United States, which oversee the functioning of the security markets to ensure fairness, transparency, and investor protection.

4. Functions of the Security Market

The security market performs several critical functions that contribute to the overall health and efficiency of the financial system:

• Capital Formation: By providing a platform for raising funds, the security market supports capital formation, enabling companies and governments to finance projects and development.
• Liquidity: The secondary market provides liquidity, allowing investors to easily buy and sell securities. This liquidity is crucial for maintaining investor confidence and attracting investment.
• Price Discovery: Through the interactions of buyers and sellers, the security market helps in determining the fair market value of securities, reflecting the collective assessment of their future prospects.
• Risk Management: Investors can use the security market to diversify their portfolios, reducing risk by spreading investments across different types of securities.
• Economic Indicator: The security market often reflects the economic health of a country. Rising stock prices generally indicate economic growth, while falling prices may signal economic troubles.

5. Types of Securities Traded

Various types of securities are traded in the security market, including:

• Equities (Stocks): Represent ownership in a company and provide shareholders with voting rights and a share in the company’s profits through dividends.
• Bonds: Long-term debt instruments issued by governments or corporations to raise capital, typically offering fixed interest payments.
• Debentures: A type of long-term debt instrument that is not backed by physical assets or collateral but relies on the creditworthiness and reputation of the issuer.
• Derivatives: Financial contracts like futures and options whose value is derived from underlying assets such as stocks, bonds, or commodities.
• Mutual Funds: Investment vehicles that pool money from multiple investors to purchase a diversified portfolio of securities.
• Exchange-Traded Funds (ETFs): Funds that track an index, commodity, or basket of assets, and are traded on stock exchanges like individual stocks.

6. Importance of the Security Market

• Economic Growth: The security market contributes to economic growth by enabling efficient allocation of capital. Companies can raise funds to invest in new projects, create jobs, and foster innovation.
• Wealth Creation: The market provides opportunities for wealth creation through capital gains, dividends, and interest earnings for investors.
• Market Efficiency: By allowing continuous trading and the dissemination of information, the security market ensures that prices of securities reflect all available information, contributing to market efficiency.
• Investment Opportunities: It offers a wide range of investment options for different risk appetites, helping investors achieve their financial goals.
• Global Integration: Security markets are increasingly integrated globally, allowing for cross-border investment and the flow of capital between countries.

3.2 Primary and Secondary Market- Functions and Role

The primary and secondary markets are integral components of the capital market, each serving distinct functions and playing crucial roles in the financial system. Understanding their functions and roles is essential for comprehending how capital is mobilized, allocated, and traded in the economy.

1. Primary Market: Functions and Role

Definition

• The primary market, also known as the new issue market, is where securities are created and sold for the first time. It provides a platform for issuers such as companies and governments to raise capital by issuing new stocks, bonds, or other financial instruments to investors.

Functions of the Primary Market

1. Capital Formation:
   • The primary function of the primary market is to facilitate capital formation. By issuing new securities, companies can raise funds to finance expansion, innovation, debt repayment, and other corporate activities. Governments also issue securities to fund public projects and manage fiscal deficits.
2. Direct Fund Mobilization:
   • In the primary market, funds flow directly from investors to issuers. This direct relationship allows issuers to tap into public or private capital to meet their funding needs, without involving intermediaries like in the secondary market.
3. Investment Opportunities:
   • The primary market provides investors with opportunities to invest in new securities, often at initial prices that could appreciate in value. Investors can participate in Initial Public Offerings (IPOs), Follow-on Public Offers (FPOs), and private placements.

4. Price Discovery:
   • The initial pricing of securities is determined in the primary market, often through mechanisms like book-building or fixed pricing. This price discovery process is crucial as it sets the stage for how the securities will be valued and traded in the secondary market.
5. Economic Growth and Development:
   • By enabling the issuance of new securities, the primary market contributes to economic growth. Companies can fund new projects, leading to job creation, infrastructure development, and overall economic progress.
6. Diversification of Risk:
   • The primary market allows issuers to diversify their funding sources and risk by attracting a broad base of investors. Investors, in turn, can diversify their portfolios by investing in newly issued securities across different sectors and asset classes.

Role of the Primary Market

1. Initial Public Offerings (IPOs):
   • The primary market is the venue for IPOs, where companies offer shares to the public for the first time. This is a critical step for private companies transitioning to public ownership, enabling them to access a broader pool of capital.
2. Follow-on Public Offers (FPOs):
   • Companies that have already gone public can issue additional shares through FPOs in the primary market to raise more capital. This is often used to fund expansion, reduce debt, or acquire other businesses.
3. Rights Issues:
   • Existing shareholders are offered the opportunity to purchase additional shares at a discounted price before the company offers them to the public. This helps companies raise capital while giving existing investors a chance to maintain their ownership percentage.
4. Private Placements:
   • In private placements, securities are sold directly to a small group of institutional or accredited investors rather than the general public. This is a quicker and less regulated way to raise capital.
5. Government Securities:
   • The government issues bonds and other securities in the primary market to finance public expenditures, manage liquidity, and implement monetary policy.

2. Secondary Market: Functions and Role

Definition

• The secondary market, also known as the stock market or aftermarket, is where existing securities are traded among investors. Unlike the primary market, where securities are sold for the first time, the secondary market facilitates the buying and selling of previously issued securities.

Functions of the Secondary Market

1. Liquidity Provision:
   • The primary function of the secondary market is to provide liquidity to investors. It allows them to quickly buy and sell securities, converting investments into cash. This liquidity is essential for maintaining investor confidence and encouraging participation in the capital markets.
2. Price Discovery:
   • The secondary market plays a critical role in price discovery. Through the continuous trading of securities, the market reflects the collective judgment of investors about the value of securities, which is influenced by factors like company performance, economic conditions, and market sentiment.
3. Capital Allocation:
   • The secondary market helps in the efficient allocation of capital by directing funds to companies that are performing well. Investors shift their capital to securities with better returns, which signals to companies and the broader market where resources should be allocated.
4. Risk Management:
   • Investors can manage and diversify their portfolios by trading in the secondary market. The ability to buy and sell different securities allows investors to adjust their risk exposure according to their financial goals and market conditions.
5. Market Efficiency:
   • The secondary market contributes to market efficiency by ensuring that security prices reflect all available information. This transparency and efficiency benefit both issuers and investors, leading to fairer and more competitive markets.
6. Continuous Market for Securities:
   • The secondary market provides a continuous market for securities, enabling investors to trade whenever the market is open. This continuous trading helps in maintaining stable prices and reduces the impact of large trades on market volatility.

Role of the Secondary Market

1. Stock Exchanges:
   • The secondary market operates through stock exchanges like the Bombay Stock Exchange (BSE), National Stock Exchange (NSE), New York Stock Exchange (NYSE), etc. These exchanges provide a regulated environment where securities are traded, ensuring transparency and investor protection.
2. Market for Bonds:
   • In addition to stocks, the secondary market includes a market for bonds and other debt instruments. Investors can buy and sell corporate bonds, government bonds, and other fixed-income securities, providing liquidity and price discovery for these instruments.
3. Derivatives Trading:
   • The secondary market also facilitates trading in derivatives such as futures and options. These instruments allow investors to hedge risks, speculate on price movements, or enhance returns, contributing to overall market depth and liquidity.
4. Investor Protection:
   • Regulatory bodies like the Securities and Exchange Board of India (SEBI) in India and the Securities and Exchange Commission (SEC) in the U.S. oversee the secondary market to protect investors from fraud, manipulation, and unfair practices. They ensure that markets operate smoothly and transparently.
5. Economic Indicator:
   • The performance of the secondary market, particularly stock indices like the Sensex or Nifty in India, serves as a barometer for the overall health of the economy. Rising indices typically indicate economic growth, while declining indices may signal economic challenges.
6. Facilitation of Corporate Governance:
   • By allowing public trading of shares, the secondary market promotes corporate governance. Companies with publicly traded shares are subject to greater scrutiny from investors, analysts, and regulatory bodies, encouraging transparency and accountability.

3.3 Functions of Stock Exchange – Brokers, Sub-Brokers, Jobbers

The stock exchange is a crucial component of the financial system, providing a platform for the buying and selling of securities like stocks, bonds, and derivatives. Several key participants play specific roles in ensuring the smooth functioning of the stock exchange, including brokers, sub-brokers, and jobbers.

1. Functions of the Stock Exchange

The stock exchange serves several essential functions in the financial market:

a. Liquidity and Marketability

• Continuous Trading: The stock exchange provides a continuous and regulated marketplace where securities can be bought and sold, ensuring liquidity and marketability of investments. This liquidity allows investors to easily convert their securities into cash.

b. Price Discovery

• Fair Price Determination: Through the forces of supply and demand, the stock exchange helps in determining the fair market value of securities. Prices are continuously adjusted based on trading activities, reflecting the collective judgment of investors.

c. Capital Formation

• Raising Funds: The stock exchange enables companies to raise capital by issuing new shares to the public through Initial Public Offerings (IPOs). This capital is used for business expansion, research, and development, contributing to economic growth.

d. Investor Protection

• Regulation and Transparency: Stock exchanges are governed by regulatory bodies such as the Securities and Exchange Board of India (SEBI), ensuring that trading activities are transparent, fair, and free from manipulation, thereby protecting investor interests.

e. Economic Barometer

• Market Indicator: The performance of stock indices (like the Sensex or Nifty in India) serves as an indicator of the overall economic health. Rising indices generally suggest economic growth, while falling indices may indicate economic downturns.

f. Ensuring Corporate Governance

• Disclosure Requirements: Companies listed on the stock exchange are required to disclose their financials and other significant information, promoting transparency and accountability. This helps in enforcing better corporate governance.

g. Risk Management

• Hedging Opportunities: Stock exchanges offer derivative instruments like futures and options, enabling investors to hedge against market risks, thereby managing their investment portfolios more effectively.

2. Brokers, Sub-Brokers, and Jobbers: Roles and Functions

a. Brokers

• Role: Brokers are licensed intermediaries who facilitate the buying and selling of securities on behalf of investors. They act as agents for their clients, executing trades on the stock exchange.
• Functions:
  1. Trade Execution: Brokers execute buy and sell orders for their clients, ensuring that transactions are completed efficiently and at the best possible price.
  2. Advisory Services: Many brokers offer investment advice, providing insights on market trends, stock analysis, and portfolio management to help clients make informed decisions.
  3. Custody of Securities: Brokers often hold securities on behalf of their clients, managing the safekeeping of shares, bonds, and other financial instruments.
  4. Settlement of Transactions: Brokers are responsible for ensuring that the settlement of trades (i.e., the transfer of securities and funds) is completed accurately and within the stipulated time frame.
  5. Margin Trading: Brokers may offer margin trading services, allowing clients to borrow funds to trade larger volumes of securities than their own capital would allow.

b. Sub-Brokers

• Role: Sub-brokers are intermediaries who work under a main broker, facilitating trades and providing services to clients on behalf of the broker. They are typically smaller entities or individuals who do not have direct access to the stock exchange.
• Functions:
  1. Client Acquisition: Sub-brokers often focus on acquiring and maintaining clients for the main broker, expanding the broker’s customer base.
  2. Order Collection: They collect buy and sell orders from clients and pass them on to the main broker for execution on the stock exchange.
  3. Investment Guidance: Similar to brokers, sub-brokers may provide investment advice and insights to their clients, helping them with portfolio management.
  4. Client Servicing: Sub-brokers offer personalized services to their clients, managing their accounts, providing market updates, and ensuring client satisfaction.
  5. Documentation Assistance: They assist clients in completing the necessary paperwork for account opening, trade execution, and compliance with regulatory requirements.

c. Jobbers

• Role: Jobbers, also known as market makers in some markets, are specialized traders who deal in specific securities on the stock exchange. They trade on their own account, buying and selling securities to maintain liquidity in the market.
• Functions:
  1. Market Making: Jobbers buy and sell securities continuously to provide liquidity in the market, ensuring that there are always buyers and sellers for a particular stock.
  2. Bid-Ask Spread: Jobbers quote two prices for a security – the bid price (the price at which they are willing to buy) and the ask price (the price at which they are willing to sell). The difference between these two prices is known as the bid-ask spread, which represents their profit margin.
  3. Price Stability: By continuously buying and selling, jobbers help stabilize prices and reduce volatility in the market. Their activity ensures that prices do not fluctuate wildly due to a lack of liquidity.
  4. Risk Bearing: Jobbers take on significant risk as they trade on their own account. They must manage the risk of holding securities that might decline in value before they can be sold.
  5. Facilitating Large Trades: Jobbers play a crucial role in facilitating large trades without causing significant price disruptions. They can absorb large buy or sell orders, maintaining market stability.

3.4 Comparison of National Stock Exchange and Bombay Stock Exchange 

The National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) are the two primary stock exchanges in India. Both play crucial roles in the Indian financial system, offering platforms for trading in various securities, but they differ in several aspects including history, market share, technology, and products offered.

1. History and Establishment

• Bombay Stock Exchange (BSE):
  • Established: 1875
  • History: The BSE is the oldest stock exchange in Asia and was initially started by a group of stockbrokers under a banyan tree in Mumbai. It has a long history of serving as a major trading platform in India.
  • Significance: As the first stock exchange in India, BSE has played a pivotal role in shaping the Indian securities market.

• National Stock Exchange (NSE):
  • Established: 1992
  • History: The NSE was established to bring transparency and efficiency to the Indian stock market. It was the first exchange in India to offer a fully automated, electronic trading platform.
  • Significance: NSE introduced modern trading practices and technology, significantly improving the efficiency and transparency of the Indian market.

2. Trading Platform and Technology

• BSE:
  • Platform: BSE operates on the BOLT (BSE On-Line Trading) platform, which is an electronic trading system introduced in 1995.
  • Technology: BSE has continuously upgraded its technology to match global standards, offering fast and efficient trade execution.
  • Recent Developments: BSE launched BSE StAR MF, a platform for trading mutual funds, and BSE SME, a platform for small and medium enterprises.
• NSE:
  • Platform: NSE operates on the NEAT (National Exchange for Automated Trading) system, which was India’s first fully automated screen-based trading system.
  • Technology: NSE is known for its advanced technology, offering high-speed trading and robust infrastructure that ensures minimal downtime.
  • Recent Developments: NSE has introduced various innovative products like Exchange-Traded Funds (ETFs) and derivatives and has been a leader in offering high-frequency trading solutions.

3. Market Capitalization and Indices

• BSE:
  • Market Capitalization: As of 2023, BSE has a market capitalization of over $3 trillion, making it one of the largest exchanges in the world by market capitalization.
  • Index: The BSE’s benchmark index is the S&P BSE Sensex, which comprises 30 of the largest and most actively traded stocks on the exchange. The Sensex is one of the most widely followed equity indices in India.
• NSE:
  • Market Capitalization: NSE’s market capitalization is similar to BSE’s, with over $3 trillion as of 2023. It often leads in trading volumes, particularly in the derivatives segment.
  • Index: NSE’s flagship index is the Nifty 50, which consists of 50 of the largest companies listed on the exchange. The Nifty 50 is a benchmark for Indian equities and is widely used by investors domestically and globally.

4. Trading Volumes and Liquidity

• BSE:
  • Trading Volume: BSE has a lower trading volume compared to NSE, especially in the equity and derivatives segments.
  • Liquidity: While BSE is highly liquid, it typically sees lower liquidity compared to NSE in certain segments like futures and options.
• NSE:
  • Trading Volume: NSE leads in trading volumes across most segments, particularly in equity derivatives, where it is one of the largest exchanges globally.
  • Liquidity: NSE provides high liquidity, especially in index options and futures, making it the preferred choice for institutional and retail investors alike.

5. Product Offerings

• BSE:
  • Equities: BSE offers trading in a wide range of equities, including shares, warrants, and rights issues.
  • Derivatives: BSE provides a platform for trading in equity derivatives, commodity derivatives, and currency derivatives, though its market share in derivatives is smaller compared to NSE.
  • Debt Instruments: BSE has a well-established platform for trading government securities and corporate bonds.
  • Mutual Funds: BSE StAR MF is a popular platform for trading in mutual funds.
• NSE:
  • Equities: NSE offers a comprehensive platform for trading in equities, including stocks, ETFs, and indices.
  • Derivatives: NSE dominates the derivatives market in India, offering a wide range of products including futures and options on equities, indices, currency pairs, and commodities.
  • Debt Instruments: NSE also offers a platform for trading in debt instruments, including government bonds and corporate bonds.
  • Innovative Products: NSE introduced index-based derivatives in India and continues to innovate with new products like interest rate futures and exchange-traded currency futures.

6. Governance and Regulation

• BSE:
  • Regulation: BSE is regulated by the Securities and Exchange Board of India (SEBI), ensuring compliance with market regulations and protecting investor interests.
  • Governance: BSE is a publicly listed company, and its governance is overseen by a board of directors that includes representatives from various sectors of the economy.
• NSE:
  • Regulation: NSE is also regulated by SEBI and follows stringent rules and guidelines to ensure transparency, fairness, and investor protection.
  • Governance: NSE is structured as a demutualized exchange, meaning that its ownership, management, and trading rights are separated. It is governed by a board of directors, including representatives from various industries and independent directors.

7. Market Reach and Investor Base

• BSE:
  • Market Reach: BSE has a broad market reach, particularly among retail investors. It also has a strong presence in the SME sector through the BSE SME platform.
  • Investor Base: BSE’s investor base includes retail investors, institutional investors, mutual funds, and foreign institutional investors (FIIs).
• NSE:
  • Market Reach: NSE has a vast market reach, with a significant share of institutional trading. It is particularly popular among domestic and foreign institutional investors.
  • Investor Base: NSE’s investor base is diverse, including high-frequency traders, mutual funds, FIIs, and retail investors.

8. Global Recognition and Listings

• BSE:
  • Global Recognition: BSE is recognized globally, particularly for its benchmark index, the Sensex. It is a member of various international organizations and is known for its role in the global financial markets.
  • International Listings: BSE has partnerships with several international exchanges and offers a platform for trading international securities through its India International Exchange (India INX).
• NSE:
  • Global Recognition: NSE is widely recognized for its innovation and technology in trading. It is one of the leading exchanges in the world in terms of trading volumes in derivatives.
  • International Listings: NSE has collaborations with global exchanges and provides a platform for trading international securities through its subsidiary, NSE IFSC.

3.4 SEBI- Functions and Role

The Securities and Exchange Board of India (SEBI) is the regulatory body for securities and commodity markets in India under the jurisdiction of the Ministry of Finance, Government of India. Established in 1988 and given statutory powers through the SEBI Act, 1992, SEBI is tasked with overseeing and regulating the Indian capital and securities markets, protecting investor interests, and promoting the development of these markets.

1. Objectives of SEBI

SEBI was established with the following primary objectives:

• Protection of Investor Interests: Ensuring that investors are protected from fraudulent practices and are provided with accurate and timely information.
• Regulation of the Securities Market: Regulating the securities market to ensure fair practices, transparency, and efficiency.
• Promotion of Market Development: Promoting and developing the securities market to enhance its depth, liquidity, and attractiveness for investors.

2. Functions of SEBI

SEBI performs a wide range of functions to fulfill its objectives, broadly categorized into three main functions: regulatory, developmental, and protective.

a. Regulatory Functions

• Regulation of Stock Exchanges: SEBI regulates stock exchanges and other securities markets in India. It lays down rules and regulations for the functioning of these markets to ensure fair trading practices.
• Registration and Regulation of Market Intermediaries: SEBI is responsible for registering and regulating the activities of market intermediaries like brokers, sub-brokers, underwriters, portfolio managers, investment advisors, and others involved in the securities market.
• Prohibition of Insider Trading: SEBI monitors and prevents insider trading practices, which involve the buying or selling of securities by individuals who have access to confidential, non-public information about the company.
• Regulation of Mutual Funds and Collective Investment Schemes: SEBI formulates guidelines and monitors the functioning of mutual funds and other collective investment schemes to protect the interests of investors.
• Oversight of Corporate Governance: SEBI enforces strict corporate governance standards, requiring companies to follow specific norms regarding disclosure, transparency, and accounting practices.
• Approval of Mergers and Acquisitions: SEBI oversees the process of mergers, acquisitions, and takeovers to ensure they are conducted in a fair and transparent manner.

b. Developmental Functions

• Development of the Securities Market: SEBI plays a crucial role in the development of the securities market by introducing innovative financial products, improving market infrastructure, and encouraging the adoption of new technologies.
• Investor Education and Awareness: SEBI conducts various educational programs and initiatives to increase awareness among investors about their rights, responsibilities, and the risks involved in investing in the securities market.
• Encouragement of Research and Analysis: SEBI promotes research and analysis in the securities market to provide valuable insights and data to market participants, thereby enhancing market efficiency.
• Promotion of Electronic Trading Systems: SEBI has been instrumental in promoting the use of electronic trading systems to improve the speed, efficiency, and transparency of the securities market.

c. Protective Functions

• Investor Protection Measures: SEBI implements various measures to protect investors from unfair practices like price rigging, market manipulation, and fraudulent schemes.
• Redressal of Investor Grievances: SEBI has established a mechanism for addressing investor grievances. It investigates complaints related to market intermediaries, companies, and other entities operating in the securities market.
• Prohibition of Unfair Trade Practices: SEBI actively works to curb unfair trade practices in the securities market, including price manipulation, fraudulent advertising, and deceptive practices.
• Surveillance and Enforcement: SEBI maintains a vigilant surveillance system to detect and prevent market manipulation and fraudulent activities. It also has the authority to take enforcement actions, such as imposing penalties, suspending trading activities, and canceling registrations of market intermediaries involved in malpractices.

3. Role of SEBI in the Indian Financial System

SEBI plays a pivotal role in ensuring the smooth functioning of the Indian financial system by:

• Ensuring Market Integrity: By regulating market participants and enforcing rules, SEBI ensures that the securities market operates with integrity, transparency, and fairness.
• Boosting Investor Confidence: Through its protective measures and enforcement actions, SEBI builds and maintains investor confidence, which is essential for the growth and stability of the financial markets.
• Facilitating Capital Formation: SEBI’s regulatory framework facilitates the raising of capital by companies, which in turn supports business growth, job creation, and overall economic development.
• Promoting Innovation: SEBI encourages the introduction of new financial products and the adoption of advanced technologies, making the Indian securities market more competitive and efficient.
• Global Integration: By aligning its regulations with international standards, SEBI helps integrate the Indian securities market with global markets, attracting foreign investment and enhancing the country’s financial standing globally.