Capital Market, SEBI and Stock Exchanges in India

Every economy needs a place where savings meet investment. In India that place is the financial market, and it has two halves. The money market handles short-term funds, up to one year, through instruments such as treasury bills, commercial paper and certificates of deposit, and the Reserve Bank of India regulates it. The capital market handles long-term funds through shares, debentures and bonds, and the Securities and Exchange Board of India regulates it. This division, and the two regulators attached to it, is the first thing an examiner checks.

The two segments of the capital market

The primary market is where securities are issued for the first time and money moves from investors to the company. A company going to the public for the first time makes an Initial Public Offering; a listed company raising more capital from the public makes a Follow-on Public Offer; an offer restricted to existing shareholders is a rights issue; and an issue to a few selected institutions is a private placement or a qualified institutional placement. The secondary market is where securities already issued change hands between investors, and no money reaches the company; this is the stock exchange. The primary market creates the security, the secondary market gives it liquidity, and a healthy primary market depends on the secondary one.

Securities and Exchange Board of India

SEBI was set up in April 1988 as an administrative body without statutory force. It became a statutory regulator through the Securities and Exchange Board of India Act, 1992, passed in the year of the securities scam that exposed how weak supervision had been. Its headquarters is in Mumbai, at the Bandra Kurla Complex, with regional offices at New Delhi, Kolkata, Chennai and Ahmedabad. The preamble of the Act states three objectives: to protect the interests of investors in securities, to promote the development of the securities market, and to regulate it. The Board consists of a Chairman, two members from the ministries of the Union Government dealing with finance and company law, one member from the Reserve Bank of India, and five members appointed by the Union Government; the Chairman and the members are appointed by the Government.

SEBI is described as a quasi-legislative, quasi-executive and quasi-judicial body, because it frames regulations, investigates and inspects, and passes orders imposing penalties. It registers and regulates stock brokers, merchant bankers, depositories, mutual funds and credit rating agencies, prohibits insider trading and fraudulent or unfair trade practices, and lays down disclosure norms for public issues. An appeal against a SEBI order goes to the Securities Appellate Tribunal, and from the Tribunal to the Supreme Court on a question of law. The regulation of commodity derivatives was brought under SEBI when the Forward Markets Commission was merged into it in 2015.

The stock exchanges and their indices

The Bombay Stock Exchange was founded in 1875 as the Native Share and Stock Brokers' Association and is the oldest stock exchange in Asia; it stands on Dalal Street in Mumbai. Its benchmark index, the Sensex, is made up of thirty of the largest and most actively traded companies, with 1978-79 as its base year and a base value of 100. The National Stock Exchange was incorporated in 1992 on the recommendation of the Pherwani Committee and began trading in 1994; it was the first exchange in India to offer fully screen-based electronic trading, which ended the open outcry system and the regional monopolies of brokers. Its benchmark index is the Nifty 50, with 1995 as its base year and a base value of 1000.

Depositories, dematerialisation and the law

Shares are no longer held as paper certificates. Under the Depositories Act, 1996 they are held in electronic form in a demat account, and two depositories keep those records: the National Securities Depository Limited, set up in 1996 as the first depository in India, and the Central Depository Services Limited, which followed in 1999. An investor deals with a depository participant, usually a bank or a broker, rather than with the depository directly. Trading itself is governed by the Securities Contracts (Regulation) Act, 1956, which defines securities and provides for the recognition of stock exchanges, while the Companies Act governs the issue of shares by a company.

The vocabulary of the market

• A bull is an investor who expects prices to rise; a bear expects them to fall. A rising market is a bull market and a falling one a bear market.
• Market capitalisation is the price of a share multiplied by the number of shares issued, and it decides whether a company is called large cap, mid cap or small cap.
• Book building is the process of discovering the issue price from the bids received, instead of fixing it in advance.
• A circuit breaker halts trading when an index moves beyond a set percentage, to stop panic from feeding on itself.
• Insider trading is dealing in a security on the strength of unpublished price-sensitive information, and it is an offence under SEBI regulations.
• Depositary receipts let a company raise money abroad: an American Depositary Receipt is issued in the United States and a Global Depositary Receipt in other foreign markets, while an Indian Depositary Receipt lets a foreign company raise money here.

Examiners also expect the names of the credit rating agencies that assess debt instruments, CRISIL, ICRA and CARE among them, and an awareness that SEBI runs a complaint redress platform for investors and maintains an Investor Protection Fund.