OVERVIEW

OF
INDIAN CAPITAL MARKET:
CHANGING DIMENTIONS

Submitted to:

Submitted by:

Mr. Shyamtanu Pal

Vivek Rai
Semester-IX
Section-C
Roll No.147

Page | 1

CERTIFICATE
I, Vivek Rai, hereby declare that the work entitled Overview of Indian Capital Market Changing
Dimensions is my original work. I have not copied from any other students work or from any
other sources except where due reference or acknowledgment is made explicitly in the text, nor has
any part been written for me by another.

Signature of Student

Signature of Faculty

Vivek Rai

Page | 2

DECLARATION
This declaration is made on 9th October of 2014 I, Vivek Rai, hereby declare that the work entitled
Overview of Indian Capital Market Changing Dimensions is my original work. I have not
copied from any other students work or from any other sources except where due reference or
acknowledgment is made explicitly in the text, nor has any part been written for me by another.

Submitted on

Name of Student

13 .10.2014

Vivek Rai

Hidayatullah National Law University

Batch X
Section C
Roll No. 147

Page | 3

ACKNOWLEDGEMENTS
I feel highly elated to work on the topic " Overview of Indian Capital Market Changing
Dimensions " because it has significant importance in the present Social, Political and Legal
scenario. I express my deepest regard and gratitude for our Faculty of Corporate Finance. His
consistent supervision, constant inspiration and invaluable guidance have been of immense help in
understanding and carrying out the importance of the project report.
I would like to thank My Best Friend Pooja Singh without whose support and encouragement, this
project would not have been a reality.
I take this opportunity to also thank the University and the Vice Chancellor for providing extensive
database resources in the Library and through Internet.

Vivek Rai
Section C (Sociology Major)
Semester IX
B.A. L.L.B (Hons.)

Page | 4

REASEARCH METHODOLOGY
This paper is descriptive and analytical in nature. Secondary and Electronic resources have been
largely used to gather information and data about the topic. Books and other reference as guided by
Faculty of Corporate Finance have been primarily helpful in giving this project a firm structure.
Websites, dictionaries and articles have also been referred.
Footnotes have been provided wherever needed to acknowledge the source. Citation has also been
provided.

OBJECTIVES
- To know the meaning of Indian Capital Market.
- To study the History of Indian Capital Market.
- To know as to what extent the Indian Capital Market Changed Through Period of time.
- To know the Issues and challenges of Indian Capital Market.
- The present Scenario of Indian Capital Market.

Page | 5

REVIEW OF LITERATURE
Books-

1. Avadhani V A (1992), Investment & Securities Markets in India: Investment Management,

Himalaya Publishing, Bombay.
2. Barua S K & Raghunathan V (1988), "Testing Stock Market Efficiency Using Risk-Return
Parity Rule : A Reply (Notes & Comments)", Vikalpa, Vol. 13.
3. Sachdeva, Emerging Securities Market Challenges and Prospects, Chartered Financial
Analyst.
4. Indian Securities Market A Review: 2011, National Stock Exchange publication.
5. SEBI, Handbook of Statistics on the Indian Securities Market: 2009.
6. Chopra V.K, Investor Protection: An Indian Perspective, SEBI bulletin, Nov 2006.
7. Chandra Prasanna (1990), "Indian Capital Market : Pathways of Development", ASCI
Journal of Management, Vol. 20, No. 2-3.
8. Nalini Parva TripathyMutual Fund In India: A Financial Service In Capital Market

Page | 6

HYPOTHESIS
The main problem discussed in the project report is the Overview of Indian Capital Market and its
changing trends over the period of time since 1992. This project also deals with the emerging
market trends and the availability of securities in the stock exchange and how to make public offers
and private offers.

NATURE AND TYPE OF STUDY

This study is Doctrinal in nature. This Doctrinal research is descriptive and analytical in nature.
Legal rules, statutes and cases are provided wherever necessary. Discovery and development of
legal doctrines and their meanings are provided which is a part of the concerned topic for this
project report.

Page | 7

TABLE OF CONTENTS

Introduction........................................................................................................................9
Basics of Indian Capital Market........................................................................................11
Indian Capital Market- Before 1990s..............................................................................13
Indian Capital Market- After 1990s.................................................................................14
Securities and Exchange Board of India............................................................................17
SEBI Registered Market Intermediaries............................................................................19
Regulatory Framework for Investor Protection..................................................................23
An overview of Capital Market..........................................................................................26
Issues and challenges of Indian Capital Market.................................................................32
Way Forward to Capital Market.........................................................................................34
Conclusion...........................................................................................................................35
References..........................................................................................................................36

Page | 8

INTRODUCTION

A capital market is a market for securities (debt or equity), where business enterprises (companies)
and governments can raise long-term funds. It is defined as a market in which money is provided
for periods longer than a year, as the raising of short- term funds takes place on other markets (e.g.,
the money market). The capital market includes the stock market (equity securities) and the bond
market (debt). Financial regulators, such as the UK's Financial Services Authority (FSA) or the U.S.
Securities and Exchange Commission (SEC), oversee the capital markets in their designated
jurisdictions to ensure that investors are protected against fraud, among other duties.
The Indian capital market is more than a century old. Its history goes back to 1875, when 22 brokers
formed the Bombay Stock Exchange (BSE). Over the period, the Indian securities market has
evolved continuously to become one o the most dynamic, modern, and efficient securities markets
in Asia. Today, Indian market confirms to best international practices and standards both in terms of
structure and in terms of operating efficiency.
Indian securities markets are mainly governed by:
a) The Companys Act 1956
b) The Securities Contracts (Regulation) Act 1956 (SCRA Act)
c) The Securities and Exchange Board of India (SEBI) Act, 1992.
A brief background of these above regulations is given below.
a) The Companies Act 1956 deals with issue, allotment and transfer of securities and various
aspects relating to company management. It provides norms for disclosures in the public issues,
regulations for underwriting, and the issues pertaining to use of premium and discount on various
issues.
b) SCRA provides regulations for direct and indirect control of stock exchanges with an aim to
prevent undesirable transactions in securities. It provides regulatory jurisdiction to Central
Government over stock exchanges, contracts in securities and listing of securities on stock
exchanges.
c) The SEBI Act empowers SEBI to protect the interest of investors in the securities market, to
promote the development of securities market and to regulate the security market.

Page | 9

Capital market in any country plays a pivotal role in the growth of economy and meeting countrys
socio economic goals. They are an important constituent of the financial system, given their role in
the financial intermediation process and capital formation of the country. The importance of the
capital market cannot be underemphasized for developing economy like India which needs
significant amount of capital for the development of strong infrastructure.
The Indian capital market is one of the oldest capital markets in the world. It dates back to the 18th
century when the securities of the East India Company were traded in Mumbai and Kolkata.
However, the orderly growth of the capital market began with the setting up of The Stock Exchange
of Bombay in July 1875 and Ahmedabad Stock Exchange in 1984. Eventually 19 other Stock
Exchanges sprang up in various parts of the country.
The Indian securities market consists of primary (new issues) as well as secondary (stock) market in
both equity and debt. The primary market provides the channel for sale of new securities, while the
secondary market deals in trading of securities previously issued. The issuers of securities issue
(create and sell) new securities in the primary market to raise funds for investment. They do so
either through public issues or private placement.
There are two major types of issuers who issue securities. The corporate entities issue mainly debt
and equity instruments (shares, debentures, etc.), while the governments (central and state
governments) issue debt securities (dated securities, treasury bills).
The secondary market enables participants who hold securities to adjust their holdings in response
to changes in their assessment of risk and return. A variant of secondary market is the forward
market, where securities are traded for future delivery and payment in the form of futures and
options. The futures and options can be on individual stocks or basket of stocks like index. Two
exchanges, namely National Stock Exchange (NSE) and the Stock Exchange, Mumbai (BSE)
provide trading of derivatives in single stock futures, index futures, single stock options and index
options. Derivatives trading commenced in India in June 2000. In the beginning of the twentieth
century, the industrial revolution was on the way in India with the Swadeshi Movement; and with
the inauguration of the Tata Iron and Steel Company Limited in 1907, an important stage in
industrial advancement under Indian enterprise was reached.
There are two major indicators of Indian capital market

SENSEX

NIFTY

The Sensex is an "index". What is an index? An index is basically an indicator. It gives you a

Page | 10

general idea about whether most of the stocks have gone up or most of the stocks have gone down.
The Sensex is an indicator of all the major companies of the BSE. The Nifty is an indicator of all
the major companies of the NSE. If the Sensex goes up, it means that the prices of the stocks of
most of the major companies on the BSE have gone up. If the Sensex goes down, this tells you that
the stock price of most of the major stocks on the BSE have gone down. Just like the Sensex
represents the top stocks of the BSE, the Nifty represents the top stocks of the NSE. Just in case you
are confused, the BSE, is the Bombay Stock Exchange and the NSE is the National Stock
Exchange. The BSE is situated at Bombay and the NSE is situated at Delhi. These are the major
stock exchanges in the country. There are other stock exchanges like the Calcutta Stock Exchange
etc. but they are not as popular as the BSE and the NSE. Most of the stock trading in the country is
done though the BSE & the NSE. Besides Sensex and the Nifty there are many other indexes. There
is an index that gives you an idea about whether the mid-cap stocks go up and down. This is called
the BSE Mid-cap Index. There are many other types of index. Unless stock markets provide
professionalized service, small investors and foreign investors will not be interested in capital
market operations.

Basics of Indian Capital Market

Savings and Investing
Saving is the excess of your income over your expenditure. Generally, savings is in the form
of savings bank account and cash. Your money is very safe in a savings account, earning a
small rate of interest and you can get back your money as and when you need it (high
liquidity). Whereas when you are investing, you are setting your money aside for long term
goals. It is normal for investments to rise and fall in value over time. However, in the end,
prudent investments can earn a lot more than in your savings account.
Budgeting
The first step in your financial planning is budgeting - a process for tracking, planning and
controlling the inflow and outflow of your income. It entails identifying all the sources of
income and taking into account all current and future expenses, with an aim to meet your
financial goals. The primary aim of a budgeting is to ensure reasonable savings after
providing for all expenses.

Benefits of budgeting
It puts checks and balances in place in order to prevent overspending at various levels;
It takes into account the unexpected need for funds;

Page | 11

 It disciplines you in matters of earning and spending; and

It helps you to maintain same standard of living even after post retirement.
Inflation effects on Investments 1
While planning your investment, it is important to take into account the effects of inflation
on your investments. Inflation is the rise in prices of goods and services. As the prices of
goods and services increase, the value of rupee goes down and you will not be able to
purchase as much with those rupees as you could have in the last month or last year. The
effect of inflation on investment can be better understood with the following illustration:
Say that your monthly consumption of petrol is 10 litres, costing you Rs 500 @ Rs 50 / liter.
Further, you meet this expense out of the monthly interest income of Rs 500, earned from
your fixed deposit. If the inflation rate during the year is 10%, then price of petrol per liter
would increase from Rs 50 to Rs 55 / litre. Accordingly, the next year you will not be able to
purchase 10 liters of petrol, now costing Rs 55 / litre, out your interest income of Rs 500
from your fixed deposit. Hence your financial plan should aim to earn returns above the rate
of inflation.
Risk and Return 2

Risk and return go hand in hand. Risk is loosely defined as the chance of losing all or part of
your money invested. The good news is that investment risk comes with the potential for
return which makes the activity worthwhile. The basic thing to remember about risk is that
it increases as the potential return increases. Essentially, higher the risk, the higher is the
potential return. (Do not forget the two words - potential return. There is no guarantee).
Power of Compounding
As you pursue your financial planning, the most powerful tool for creating wealth safely and
surely is the magical power of compounding. If you park your money in an investment
with a given return, and then reinvest those earnings as you receive them, your investment
grows exponentially over time.
Illustratively, if you set aside a sum of say Rs 5,000 every month from the age of 25, earning
interest at the rate of 10% p.a., in 60 years you will have with you funds worth more than Rs
1 crore. However, if you start at 40 with the same amount and rate of interest, the fund
1

Avadhani V A (1992), Investment & Securities Markets in India: Investment Management, Himalaya Publishing,
Bombay. p 426
2
. Barua S K & Raghunathan V (1988), "Testing Stock Market Efficiency Using Risk-Return Parity Rule : A Reply
(Notes & Comments)", Vikalpa, Vol. 13, (Jul-Sept), p. 82-83

Page | 12

accumulated will amount to only around Rs 33 lakh. Hence, it is always advisable to start
savings early to enjoy the benefits of power of compounding.
Time Value of Money3
Money has time value. As the time passes, the value of money decreases. This means that
the value of a thousand rupee note you have today is higher than its value five years hence,
even if there is no inflation. This is because we prefer consumption today to consumption in
future which is uncertain. That is why, if you invest Rs 1,000 today at 5% per annum, you
would receive Rs 1,050 after a year. Thus, Rs 1,000 today is equivalent to Rs 1,050 received
after a year or its value one year hence.

INDIAN CAPITAL MARKET Before 1990

Indias Capital Market was dormant till the mid 1980s. The long term financing needs of the
corporate sector were met by the Development Financial Institutions (DFIs) namely IDBI, IFCI,
ICICI as well as by other investment institutions like LIC, UTI, GIC etc. Working capital needs
were met by the Commercial Banks through an elaborate network of bank branches spread all over
the country. Capital Market activities were limited mainly due to the easy availability of loans from
banks and financial institutions and administered structure of interest rates. However, three
important legislations namely Capital Issues (control) Act 1947: Securities Contracts (Regulation)
Act, 1956; and Companies Act, 1956 were enacted to provide suitable legal framework for the
development of capital market in India. The pricing of the primary issues was decided by the Office
of the Controller of Capital Issues. A few stock exchanges, dominated by Bombay Stock Exchange
(BSE) provided the trading platforms for the secondary market transactions under an open outcry
system. As of 1992, the Bombay Stock Exchange (BSE) was a monopoly. It was an association of
brokers, and imposed entry barriers; leading to elevated costs of intermediation. Membership was
limited to individuals; limited liability firms could not become brokerage firms. Trading took place
by open outcry on the trading floor, which was inaccessible to users. It was routine for brokers to
charge the investor a price that was different from what is actually transacted at.
Retail investors and particularly users of the market outside Bombay, accessed market liquidity
through a chain of intermediaries called subbrokers. Each subbroker in the chain introduced a
mark-up in the price, in the absence of unbundling of professional fees from the trade price. It was
common for investors in small towns to face four intermediaries before their order reached the BSE
floor, and to face mark-ups in excess of 10% as compared with the actual trade price. The market
3

. Barua S K & Raghunathan V (1988), "Testing Stock Market Efficiency Using Risk-Return Parity Rule : A Reply
(Notes & Comments)", Vikalpa, Vol. 13, (Jul-Sept), p. 85-87.

Page | 13

used futuresstyle settlement with fortnightly settlement. A peculiar market practice called badla
allowed brokers to carry positions across settlement periods.
In other words, even open positions at the end of the fortnight did not always have to be settled. The
efficiencies of the exchange clearing house only applied for the largest 100 stocks. For other stocks,
clearing and settlement were done bilaterally, which introduced further inefficiencies and costs.
The final leg of the trade was physical settlement, where the share certificates were printed on
paper. This was intrinsically vulnerable to theft, counterfeiting, inaccurate signature verification,
administrative inefficiencies, and a variety of other malpractice. Involuntary and deliberate delays
in settlement could take place both at the BSE and at the firm. Many firms used the power of
delaying settlement as a tool to support manipulation of their own stock. The problems were
somewhat simpler for investors in Bombay, who could physically visit the BSE broker, the BSE
clearinghouse, or the companys Registrar, and accelerates transfer. For investors outside Bombay,
who lacked this recourse and were crippled by the exorbitantly expensive telephone system, delays
of six months between purchasing a stock and the transfer of legal title were common. If stock
splits, rights issues, or dividend pay-outs took place during this period, it was common for the
purchaser not to obtain the benefits.
Floorbased trading, the inefficiencies in clearing and settlement entry barriers into brokerage, and
the low standards of technology and organisational complexity that accompanied the ban upon
corporate membership of the BSE led to an environment where order execution was unreliable and
costly. 6 These factors led to an extremely poor functioning of the capital markets till 1992.

INDIAN CAPITAL MARKET After 19904

The Indian capital markets have witnessed a major transformation and structural change during the
past one and half decades, since the early 1990s. The Financial Sector Reforms in general and the
Capital Market Reforms in particular were initiated in India in a big way since 1991 1992. These
reforms have been aimed at improving market efficiency, enhancing transparency, checking unfair
trade practices and bringing the Indian capital market up to the International Standards. The Capital
Issues (control) Act, 1947 was repealed in May 1992 and the office of the Controller of Capital
Issues was abolished in the same year. The National Stock Exchange (NSE) was incorporated in
1992 and was given recognition as a Stock Exchange in April 1993, which has been playing a lead
role as a change agent in transforming the Indian Capital Market to its present form. 8 The
4

. Sachdeva, Emerging Securities Market Challenges and Prospects, Chartered Financial Analyst, Feb 2005, PP.5356

Page | 14

Securities and Exchange Board of India (SEBI) was set up in 1988 and acquired the statutory status
in 1992. Since 1992, SEBI has emerged as an autonomous and independent statutory body with
definite mandate such as: (a) to protect the interests of investors in securities, (b) to promote the
development of securities market and(c) to regulate the securities market.
In order to achieve these objectives, SEBI has been exercising power under:
(a) Securities and Exchange Board of India Act, 1992,
(b) Securities Contracts (Regulation) Act, 1956,
(c) Depositories Act, 1996 and delegated powers under the (d) Companies Act, 1956.
Indian Capital Market has made commendable progress since the inception of SEBI and has been
transformed into one of the dynamic capital markets of the world.

1. Primary Market5
Primary market refers to the set up which helps the industry to raise funds by issuing
different type of securities. Since 1991/92, the primary market has grown fast as a result of
the removal of investment restrictions in the overall economy and a repeal of the restrictions
imposed by the Capital Issues Control Act. In1991/92, Rs62.15 billion was raised in the
primary market. This figure rose to Rs276.21 billion in 1994/95. Since 1995/1996, however,
smaller amounts have been raised due to the overall downtrend in the market and tighter
entry barriers introduced by SEBI for investor protection. The 1990s witnessed the
emergence of the Capital Market as a major source of finance for trade and industry in India.
A growing number of companies have been accessing the Capital Market rather than
depending on loans from financial institutions. Tremendous developments have taken place
in the primary market where the corporate issue fresh securities through public issues as
well as private placements.
Since the early 1990s, there has been a paradigm shift from merit based regulated regime to
disclosure based regime. Comprehensive guidelines on 78disclosures and investor protection
were issued and were amended by SEBI from time to time. The companies accessing the
capital market through public issues have to comply with adequate disclosure norms on
initial as well as continuous basis.
Indias disclosure norms are considered as one of the best in the world and are often cited as
5

. Indian Securities Market A Review: 2011, National Stock Exchange publication, PP.85

Page | 15

benchmark for the global standards. 13 Indian accounting standards are principle based and
aligned to international accounting standards. In terms of consolidation segmental reporting,
deferred tax accounting and related party transactions, the gap between India and the US is
minimal. In addition to sound accounting standards, the issues relating to corporate
governance have been pursued in right earnest consistent with the best international
practices.
In a deregulated regime, the market determines the price of the public issues, i.e., either by
the issuer through fixed price or by the investors through book- building process. A fair
system of proportionate allotment of shares has been put in place. The share of retail
investors in the allotment of book-built issues has been increased to 35 percent. 14
Discretionary allotments to the Qualified Institutional Buyers (QIBs) has been withdrawn.
Companies are allowed to issue ADRs/ GDRs and also raise funds through external
commercial borrowing. The ADR / GDRs have twoway functionality. The Foreign
Institutional Investors have been allowed to invest in primary issues within the sectoral
limits set by the Government.

2. Secondary market
Secondary market refers to the system for the subsequent sale and purchase of securities.
India has seen a tremendous change in the secondary market for equity. Its equity market
will most likely be comparable with the worlds most advanced secondary markets within a
year or two. The key ingredients that underlie market quality in Indias equity market are:
Exchanges based on open electronic limit order book;
Nationwide integrated market with a large number of informed traders and fluency of short
or long positions; and
No counterparty risk.
The securities issued in the Primary Market are traded in the Secondary Market. Exchanges
in India offer screen based, electronic trading. The trading system is connected using the
VSAT technology from around 201 cities. There are 8652 trading members registered with
SEBI at the end of March 2009. Enormous amount of developments have taken place in the
secondary market during the last one decade.
Market capitalization as percentage to GDP in India reached nearly 58 percent in 200809
and still further on a fluctuating trend. The rate of growth in market capitalisation and

Page | 16

turnover over the period indicates that more companies have started using the trading
platform of the Stock Exchanges. Although there are 22 stock exchanges, the National Stock
Exchange (NSE) and the BSE together account for more than 99 percent of the total
turnover. Recently, a separate trading platform, namely BSE Indolent, has been set up
jointly by BSE and the Federation of Indian Stock Exchanges to facilitate transactions of
shares exclusively relating to the small and medium enterprises.

SECURITIES AND EXCHANGE BOARD OF INDIA 6

The Securities and Exchange Board of India (frequently abbreviated SEBI) is the regulator for the
securities market in India. It was formed officially by the Government of India in 1992 with SEBI
Act 1992 being passed by the Indian Parliament. SEBI is headquartered in the popular business
district of Bandra - Kurla complex in Mumbai, and has Northern, Eastern, Southern and Western
regional offices in New Delhi, Kolkata, Chennai and Ahmadabad. Controller of Capital Issues was
the regulatory authority before SEBI came into existence; it derived authority from the Capital
Issues (Control) Act, 1947.
Functions:
Its main functions are providing for:a. Regulating the business in stock exchanges and any other securities markets.
b.

Registering and regulating the working of stock brokers, sub-brokers, share transfer
agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant
bankers, underwriters, portfolio managers, investment advisers and such other
intermediaries who may be associated with securities markets in any manner.

c. Registering and regulating the working of the depositories, participants, custodians

of securities, foreign institutional investors, credit rating agencies and such other
intermediaries as the Board may, by notification, specify in this behalf.
d. Registering and regulating the working of venture capital funds and collective
investment schemes including mutual funds;
e. Prohibiting fraudulent and unfair trade practices relating to securities markets;
f. Prohibiting insider trading in securities;

. SEBI, Handbook of Statistics on the Indian Securities Market: 2009, www.sebi.gov.in PP.22-23

Page | 17

g. Regulating substantial acquisition of shares and takeover of companies;

h. Calling for information from, undertaking inspection, conducting inquiries and
audits of the stock exchanges, mutual funds and other persons associated with the
securities market and intermediaries and self- regulatory organizations in the
securities market;

Market regulation
SEBI prescribes the conditions for issuer companies to raise capital from the pubic so as to protect
the interest of the suppliers of capital (investors). The extensive disclosures prescribed for issuers
facilitate informed investment decision making by investors while simultaneously ensuring quality
of the issuer. Further, it has prescribed norms for such corporates on on going basis and also
during their restructuring (like substantial acquisition, buy back and delisting of shares) to safeguard
the interest of investors.
To ensure fair and high standards of service to investors, SEBI allows only fit and proper entities to
operate in the capital markets as intermediaries. In this regard, it has prescribed detailed and
uniform norms of their registration. Further, to ensure market integrity, it has prescribed norms for
fair market practices including prohibiting fraudulent and unfair trade practices and insider trading.
Detailed norms for safeguarding the interest of investors in secondary markets have also been
prescribed. SEBI also prescribes conditions for operation of collective investor schemes, including
Mutual Funds.

Market development:
On an ongoing basis, SEBI initiates measures to widen and deepen the securities markets by
bringing changes in market micro and macrostructure. The major market development measures
undertaken by SEBI include shift from the non transparent open out cry system to the transparent
screen based on line trading system, elimination of problems of physical certificates by shifting to
electronic mode (demat), implementing robust risk management framework in stock market trading
etc. In the recent past SEBI has initiated ASBA (application supported by blocked amount) to
eliminate problems pertaining to refunds in public issues.
SEBIs major policy decisions are formulated through a consultative process involving expert
committees with representation from industry, academia, investors associations. Further, public
comments are invited before implementation of major changes, rendering the whole process

Page | 18

participative.

Investor protection 7:
The above mentioned regulatory framework and the market development measures of SEBI are
invariably geared towards protecting the interest of investors. Besides, SEBI also has a
comprehensive mechanism to facilitate redressal of investors grievances. Further, in keeping with
its belief that an informed investor is a protected investor, SEBI promotes education and awareness
of investors. Moreover, mechanisms for dispute redressal (arbitration at stock exchanges) and to
compensate investors have also been provided.

Enforcement:
SEBI ascertains compliance to its norms by carrying out inspections of registered intermediaries,
investigations and while processing of documents filed with it, including investors complaints.
SEBI is vested with the power of civil court to call for information and records, to issue summons,
to inspect and to investigate entities associated with securities markets. If breach of norms is
established, SEBI suspends or cancels the license granted to intermediaries. Besides, SEBI issues
prohibitive and cease and desist orders against intermediaries and non intermediaries and also
imposes monetary penalties through adjudication proceedings.

SEBI Registered Market Intermediaries

Various institutions / intermediaries associated with primary as well as secondary markets such as
merchant bankers, registrars to issues, portfolio managers, underwriters, bankers to issues, stock
exchanges, brokers and sub- brokers, share transfer agents, depositories, FIIs, custodians, credit
rating agencies, venture capital funds, collective investment schemes including mutual funds have
to register with SEBI and operate within the guidelines issued from time to time. SEBI also
promotes self-regulatory organizations.

Chopra V.K, Investor Protection: An Indian Perspective, SEBI bulletin, Nov 2006

Page | 19

RECENT INITIATIVES IN CAPITAL MARKET8

1. Mutual Funds
In order to develop the security cult and also to encourage indirect participation of
households in the Indian Securities Market, Mutual Funds have been encouraged, both in the
public and private sectors. Huge resources have been mobilised through Mutual Funds.
2. Derivatives
Introduction of securities related derivatives in India is another milestone which provides an
important avenue to the investors, mainly for hedging. The securities contract (Regulation)
Act, 1956 was amended in December 1999 to expand the definition of securities to include
derivatives so that the entire regulatory framework governing trading of securities could
apply to trading in derivatives. Derivatives trading began in India with the launch of index
futures in June 2000 followed by index options, single stock options and single stock futures
in 2001. 19 Interest rate futures were introduced in June 2003. The derivative products have
a monthly maturity cycle. From September 13 th , 2004 weekly stock and index option was
launched on the derivative segment of BSE .Two premier stock exchanges, namely BSE and
NSE, provide trading platforms for derivative transactions.

3. Foreign Institutional Investments

The Foreign Institutional Investors (FIIs) were allowed to invest in India in 1992 under the
portfolio investment scheme. They are also allowed to participate in the public issues of debt
and equities within the sectoral limits set for equities and the overall limit fixed for the debt
instruments by the Government. India has been a centre of attraction for the FIIS.
4. Screen Based Trading System
The screen based trading system is a landmark achievement of the Indian capital market. 25
The NSE introduced the screen-based trading since its inception followed by other stock
exchanges. The screen-based trading enables the participants for online, electronic,
anonymous and order-driven transaction with the help of over 10,000 terminals spread over
400 cities in India and abroad. This is perhaps the biggest trading network in any country of
8

Chopra V.K. Capital Market Reforms in India: Recent Initiatives, SEBI bulletin Nov 2008

Page | 20

the world. The order matching is done strictly on price/ time priority. The screen-based
trading is transparent and provides equal access to all investors irrespective of their
geographical locations. Screen-based trading has significantly improved depth and liquidity
of the market.
5. Depositories
Depositories Act, 1996 was another landmark development in the history of Indias capital
market. 26 Thereafter two depositories namely, Central Depository Services Limited
(CDSL) and National Securities Depository Limited (NSDL) were set up. NSDL and CDSL
have been successful in the dematerialisation of securities to the extent of 99 percent of the
total market capitalisation. Currently the transfer of ownership is mostly done through bookentry form. This has tremendously improved the speed, accuracy and security of the
settlement system. About 99.9 percent of trades in BSE and 100 percent of trades in NSE.

6. Clearing, Processing and Settlement System

The setting of the Clearing Houses / Clearing Corporations (CCs) has been a critical
institutional arrangement to improve the market microstructure of the Indian stock market.
NSE has a dedicated subsidiary namely, National Securities Clearing Corporation Limited
(NSCCL) which performs the role of a central counterparty. The CCs provide full
innovation with multilateral netting. Trade and Settlement Guarantee Funds have been set
up to guarantee settlement in case of default by brokers. There is also a system of security
lending and borrowing to obviate settlement risk .As CCs provide guaranteed settlement,
there is no counterparty risk in India. Moreover, India is one of the few countries of the
world to implement full- fledged Straight Through Processing (STP). The STP has been
made mandatory for all institutional trades. 28 Another notable achievement has been the
short ending of the settlement cycle and adoption of the rolling settlement. The settlement
cycle was as high as 14 days for specified scrips and 30days for others. The settlement risk
was very high as many things can happen between the transaction and the settlement.
Initially, the settlement cycle was reduced to a week. There after the settlement vehicle was
further reduced to T+3 from April 2002 and to T+2 from April 2003. Efforts are being made
to reduce the settlement cycle further to T+1 basis. Indias settlement cycle is one of the best
in the world.

Page | 21

7. Risk Management System

SEBI has put in place a comprehensive risk management system. The major features of the
dynamic risk management system include, interalia, capital adequacy norms, trading and
exposure limits, margin requirement based or mark to market and Var based margins,
market-wide circuit filters, on-line position monitoring and automatic disablement of
brokers terminals. 30 Indian capital market remained insulated against the South-East Asian
meltdown in the late 90s. The May 17, 2004, crash of the stock market in India was shortlived due to comprehensive risk management system. The T+2 trading cycle, settlement
guarantee funds, guaranteed settlement by CCs together with risk management system have
significantly reduced the risk perception of the Indian stock market.

8. Margin Trading Facility

SEBI has allowed the member brokers to provide margin trading facility to their clients in
the cash segment since April 1, 2004. Securities with mean impact cost of less than or equal
to one and traded at least 80 per cent of the days during the previous 18 months would be
eligible for margin trading. Only corporate brokers with net-worth of at least Rs. 3 crore
would be eligible to offer this facility after obtaining prior permission from the exchanges.

9. Grievances Redressal Mechanism

There is a comprehensive investor grievances redressal mechanism at its head office as well
as at the regional offices of SEBI. The Office of Investor Assistance and Education (OIAE)
is the single window interface through which SEBI interacts with investors. SEBI takes up
investor complaints with companies and registered intermediaries on a regular basis. In
order to file complaints, there is a standardised format which is available at all SEBI offices
and on the SEBI website for the convenience of investors. SEBI has a simple and efficient
internet

based

response

system

for

investor

complaints.

A system

generated

acknowledgement letter is issued to the investors as soon as a complaint is received

electronically. Investors have the option of filing the complaints online or submitting the
same on plain paper. Investors who visit the SEBI offices or access the investor helpline are
guided regarding the appropriate authority to lodge their complaints which are outside the
jurisdiction of SEBI. During the period 1991-92 to 2008-09, the SEBI received 30, 19,560

Page | 22

grievances from the investors of which a total of 28, 48,566 grievances were redressed by
the respective entities, indicating a redressal rate of 94.3 per cent. In case the companies fail
to redress complaints in spite of repeated reminders by SEBI, regulatory actions are initiated
under section 11B (debarring companies form accessing the capital markets) and 15C
(imposing of monetary penalty) of the SEBI Act, 1992. Up to March 31, 2009, 33
companies have been referred for adjudication proceedings under Section 15C of the SEBI
Act, 1992.Prohibitory orders have also been passed under Section 11B of the SEBI Act,
1992 against errant companies which did not redress the investor grievances. Such orders
have been passed against 12 companies and 62 directors till March 31, 2009. 40 Moreover,
SEBI also issues the status of investor grievances every fortnight for public information and
uploads the same on SEBI Website.

10. Investor Education

Investor education plays a crucial role for the securities market awareness, particularly for
the retail investors. A major initiative in this regard during the recent past has been
launching of a comprehensive Securities Market Awareness Campaign (SMAC) on January
17, 2003. The campaign includes workshops, audio-visual clippings, and distribution of
educative materials in English, Hindi and also in regional languages. There is a dedicated
investor website which archives the booklets / pamphlets / FAQs etc. SEBI, in co-ordination
with other agencies, conducted about 2188 workshops throughout the country till date under
the SMAC.

Regulatory Framework for Investor Protection 9

Investors are the major stakeholders in the securities market. It is mandatory for SEBI to protect the
interests of the investors. As a matter of fact, protection of investors interest is pursued by the
securities market regulators throughout the world. Although the objective is more or less the same
for most of the regulators, the means to achieve it varies from one jurisdiction to another. In India,
one of the major achievements has been to shift from merit-based regime to disclosure-based
regime. SEBI issued Disclosure and Investor Protection (DIP) Guidelines in 2000 and amended the
same from time to time keeping in view the investors interest. The disclosure norms in India are
9

. Chopra V.K, Investor Protection: An Indian Perspective, SEBI bulletin, Nov 2006

Page | 23

considered as one of the best in the world. 32 Listed companies have to comply with the disclosure
norms on an initial as well as on a continuous basis. The major objectives of the disclosure norms
have been to ensure transparency and provide adequate protection to the investors.

Pricing of the public issues has been deregulated since the early 1990s. In a deregulated regime,
disclosures play a crucial role for the investors to take informed decisions about their investment.
Nevertheless, many companies, which flooded the primary market in the early 1990s, have
vanished. Hence, the disclosure norms have been tightened from time to time. Disclosure ought to
be done on the stock exchange in addition to filing of regular returns to stock exchange where it is
listed, as well as to the Registrar of Companies. Any price sensitive information about the company
disclosed elsewhere attracts penal action.
SEBI has given in-principle approval for the introduction of IPO grading at the option of the issuer.
35 IPO grading would be done by credit rating agencies registered with SEBI. The grading is
intended to be an independent and unbiased opinion of the concerned agency. It would be a one
time exercise and would focus on assisting the investor, particularly the retail investors, for taking
informed investment decision, SEBI will not certify the assessment made by the rating agency. An
issuer, who has opted for IPO grading, has to disclose all gradings in the offer document. Cost of
IPO grading can be met by stock exchanges or out of the corpus maintained for Investor Education
and Protection Funds.
It has been recognised the world over that investors protection can be strengthened by adhering to
high corporate governance standards. Corporate governance standards prescribed in India are based
on international best practices. 36 Following recommendations of the expert committees, SEBI
prescribed several governance standards to be achieved by the companies by December 31, 2005,
under the revised Clause 49 of the Listing Agreement with the stock exchanges. Violation of this
would now attract penalty under the Listing Agreement. Corporate governance needs to be seen not
as compliance, but as a way of life. In this context, the quality of compliance assumes significance.
High corporate governance standards are not only desirable within the economy, but also helpful for
companies accessing the international capital market. SEBI gives utmost importance to the
corporate governance including mandatory induction of independent directors.
The governance standards of the stock exchanges are also being improved through the process
called Corporatisation and Demutualisation (C & D) of stock exchanges. 37 The stock exchanges
world over have been generally formed as mutual organisations. The ownership, trading rights and
management are often vested with the same set of persons. This leads to conflicting interest

Page | 24

between ownership and management. In order to segregate the management function from the
ownership and trading rights, there is a need for demutualisation of stock exchanges. Moreover,
stock exchanges should function as body corporate similar to any other for-profit corporate entity.
In India, NSE has been a corporate entity while NSE and OTCEI have been demutualised from their
inception. Corporatisation and Demutualisation of stock exchanges is a priority item in the SEBI
agenda. The oldest stock exchange of the country, namely, the Bombay Stock Exchange became a
limited company on August 19, 2005. The Corporatisation and Demutualisation process has been
notified for most of the remaining Regional Stock Exchanges (RSEs). The future of the RSEs postdemutualisation is being worked out so that the viable among them can actively participate in the
mainstream market, besides catering to the regional requirements. A professionally managed stock
exchange with at least 50 per cent non-broking share- holders is expected to play an important role
for investor protection.

Page | 25

An overview of capital market 10

Generally, the personal savings of an entrepreneur along with contributions from friends and
relatives are the source of fund to start new or to expand existing business. This may not be feasible
in case of large projects as the required contribution from the entrepreneur (promoter) would be
very large even after availing term loan; the promoter may not be able to bring his / her share
(equity capital).Thus availability of capital can be a major constraint in setting up or expanding
business on a large scale.
However, instead of depending upon a limited pool of savings of a small circle of friends and
relatives, the promoter has the option of raising money from the public across the country by selling
(issuing) shares of the company. For this purpose, the promoter can invite investment to his or her
venture by issuing offer document which gives full details about track record, the company, the
nature of the project, the business model, the expected profitability etc.

If you are comfortable with this proposed venture, you may invest and thus become a shareholder of
the company. Through aggregation, even small amounts available with a very large number of
individuals translate into usable capital for corporates. Your small savings of, say, even Rs 5,000
can contribute in setting up, say, a Rs 5,000 crore Cement or Steel plant. This mechanism by which
corporate raise money from public is called the primary markets.

Importantly, when you, as a shareholder, need your money back, you can sell these shares to other
or new investors. Such trades do not reduce or alter the companys capital. Stock exchanges bring
such sellers and buyers together and facilitate trading. Therefore, companies raising money from
public are required to list their shares on the stock exchange. This mechanism of buying and selling
shares through stock exchange is known as the secondary markets.

As a shareholder, you are part owner of the company and entitled to all the benefits of ownership,
including dividend (companys profit distributed to owners). Over the years if the company
performs well, other investors would like to become owners of this performing company by buying
its shares. This increase in demand for shares leads to increase in its price. You then have the option
of selling your shares at a higher price than at which you purchased it. You can thus increase your

10

. Chandra Prasanna (1990b), "Indian Capital Market : Pathways of Development", ASCI Journal of Management,
Vol. 20, No. 2-3 (Sept-Dec), p. 129-137

Page | 26

wealth, provided you make the right choice. The reverse is also true!

Apart from shares, there are many other financial instruments (securities) used for raising capital.
Debentures or bonds are debt instruments which pay interest over their life time and are used by
corporate to raise medium or long term debt capital. If you prefer fixed income, you may invest in
these instruments which may give you higher rate of interest than bank fixed deposit, because of the
higher risk. Besides, equity and debt, a combination of these instruments, like convertible
debentures, preference shares are also issued to raise capital.

If you have constraints like time, wherewithal, small amount etc. to invest in the market directly,
Mutual Funds (MFs), which are regulated entities, provide an alternative avenue. They collect
money from many investors and invest the aggregate amount in the markets in a professional and
transparent manner. The returns from these investments net of management fees are available to
you as a MF unit holder.

MFs offer various schemes, like those investing only in equity or debt, index funds, gold funds, etc.
to cater to risk appetite of various investors. Even with very small amounts, you can invest in MF
schemes through monthly systematic investment plans (SIP).
The institutions, players and mechanism that bring suppliers and users of capital together, is known
as capital market. It allows people to do more with their savings by providing variety of assets
thereby enhancing the wealth of investors who make the right choice. Simultaneously, it enables
entrepreneurs to do more with their ideas and talent, facilitating capital formation.
Thus capital market mobilizes savings and channelizes it, through securities, into preferred
entrepreneurs.
It is not that the providers of funds meet the user of and exchange funds for securities. It is because
the securities offered by the users may not match the preference of the providers of funds. There are
a large variety of intermediaries who bring the providers and user of funds together to facilitate the
transactions.
The market is supervised by SEBI. It ensures supply of quality securities and non-manipulated
demand for them. It develops best market practices and takes enforcement actions against the
miscreants. It essentially maintains discipline in the market so that the participants can undertake
transaction safely.

Page | 27

Products available in capital market

1. Equity (instrument of ownership)
Equity shares are instruments issued by companies to raise capital and it represents the title to the
ownership of a company. You become an owner of a company by subscribing to its equity capital
(whereby you will be allotted shares) or by buying its shares from its existing owner(s).
As a shareholder, you bear the entrepreneurial risk of the business venture and are entitled to
benefits of ownership like share in the distributed profit (dividend) etc. The returns earned in equity
depend upon the profits made by the company. Companys future growth etc.

2. Debt (loan instruments)

a. Corporate debt
Debentures are instrument issued by companies to raise debt capital. As an investor, you lend you
money to the company, in return for its promise to pay you interest at a fixed rate (usually payable
half yearly on specific dates) and to repay the loan amount on a specified maturity date say after
5/7/10 years (redemption).
Normally specific asset(s) of the company are held (secured) in favour of debenture holders. This
can be liquidated, if the company is unable to pay the interest or principal amount. Unlike loans,
you can buy or sell these instruments in the market.
Types of debentures that are offered are as follows:
Non convertible debentures (NCD) Total amount is redeemed by the issuer
Partially convertible debentures (PCD) Part of it is redeemed and the remaining is
converted to equity shares as per the specified terms
Fully convertible debentures (FCD) Whole value is converted into equity at a specified
price
Bonds are broadly similar to debentures. They are issued by companies, financial institutions,
municipalities or government companies and are normally not secured by any assets of the company
(unsecured).
Types of bonds
Regular Income Bonds provide a stable source of income at regular, predetermined
intervals

Page | 28

 Tax-Saving Bonds offer tax exemption up to a specified amount of investment, depending

on the scheme and the Government notification.
Examples are:
Infrastructure Bonds under Section 88 of the Income Tax Act, 1961
NABARD/ NHAI/REC Bonds under Section 54EC of the Income Tax Act, 1961
RBI Tax Relief Bonds

b. Government debt:
Government securities (G-Secs) are instruments issued by Government of India to raise money. G
Secs pays interest at fixed rate on specific dates on half-yearly basis. It is available in wide range of
maturity, from short dated (one year) to long dated (up to thirty years). Since it is sovereign
borrowing, it is free from risk of default (credit risk). You can subscribe to these bonds through RBI
or buy it in stock exchange.

c. Money Market instruments (loan instruments up to one year tenure)

Treasury Bills (T-bills) are short term instruments issued by the Government for its cash
management. It is issued at discount to face value and has maturity ranging from 14 to 365 days.
Illustratively, a T-bill issued at Rs. 98.50 matures to Rs. 100 in 91 days, offering an yield of 6.25%
p.a.
Commercial Papers (CPs) are short term unsecured instruments issued by the companies for
their cash management. It is issued at discount to face value and has maturity ranging from 90 to
365 days.
Certificate of Deposits (CDs) are short term unsecured instruments issued by the banks for their
cash management. It is issued at discount to face value and has maturity ranging from 90 to 365
days.

3. Hybrid instruments (combination of ownership and loan instruments)

Preferred Stock / Preference shares entitle you to receive dividend at a fixed rate. Importantly,
this dividend had to be paid to you before dividend can be paid to equity shareholders. In the event
of liquidation of the company, your claim to the companys surplus will be higher than that of the

Page | 29

equity holders, but however, below the claims of the companys creditors, bondholders / debenture
holders.
Cumulative Preference Shares: A type of preference shares on which dividend accumulates if
remains unpaid. All arrears of preference dividend have to be paid out before paying dividend on
equity shares.
Cumulative Convertible Preference Shares: A type of preference shares where the dividend
payable on the same accumulates, if not paid. After a specified date, these shares will be converted
into equity capital of the company.
Participating Preference Shares gives you the right to participate in profits of the company after
the specified fixed dividend is paid. Participation right is linked with the quantum of dividend paid
on the equity shares over and above a particular specified level.

4. Mutual Funds11
Mutual funds collect money from many investors and invest this corpus in equity, debt or a
combination of both, in a professional and transparent manner. In return for your investment, you
receive units of mutual funds which entitle you to the benefit of the collective return earned by the
fund, after reduction of management fees.
Mutual funds offer different schemes to cater to the needs of the investor are regulated by securities
and Exchange board of India (SEBI)
Types of Mutual Funds
At the fundamental level, there are three types of mutual funds:

Equity funds (stocks)

Fixed-income funds (bonds)

Money market funds

Classification of mutual funds

a. By structure
Open-ended Funds\
An open-ended fund does not have a maturity date.
11

. Nalini Parva TripathyMutual Fund In India: A Financial Service In Capital Market, pg no. 85-91, vol I, March 2005.

Page | 30

 Closed-end Funds
Closed-end funds run for a specific period.
b. By investment objective
Growth Funds
A mutual fund scheme investing in equity
Bond / Income Funds
A mutual fund scheme investing primarily in government and corporate debt to
provide income on a steady basis.
Balanced Funds
A mutual fund scheme investing in a mix of equity and debt.
Money Market Funds
A mutual fund scheme investing in money market instruments.

c. Others
Tax savings schemes (Equity Linked Saving Scheme-ELSS)
Equity funds along with tax benefits to the investors and has a lock in period of three
years.
Sector funds
They target at the specific sectors of the economy such as financial, technology,
health, etc.
Index Funds12
This type of mutual fund replicates the performance of a broad market index such as
the SENSEX or NIFTY.
The above mentioned categories of mutual fund schemes are basic in nature and for
full details please refer to SEBIs Beginners guide on mutual funds.

12

. Nalini Parva TripathyMutual Fund In India: A Financial Service In Capital Market, pg no. 85-91, vol I, March 2005

Page | 31

Issues and Challenges of Indian Capital Market 13

Opening of the financial markets will result in competition and greater efficiency .However, foreign
participation will bring increased risk and exposure . Stability is thus need for financial markets for
which safeguarding mechanism need to be established.
The equity market in India is extremely vibrant but equity based funding solely, cannot lead the
economy to growth. The debt market remains underdeveloped with a huge potential for increased
activity. A strong hand is required to drive the long term financing of infrastructure, housing and
private sector development. The road ahead for deepening the capital market need to be paved by
the strong linkage between development of economy and the financial system. A greater measure of
transparency is also required to built regulating procedures, to bring in a new dimension to financial
market and take it to the next level.
One of the challenges before the Indian capital market is expanding the investor base and provide
them access to high quality financial service .With a population of more than a billion, a mere 1%
of population participates in capital market and of that only a fraction is active. Investor
participation is very shallow considering the size of Indian economy.
Trading volume in Indian capital market are lower as compared to other markets such as US, China,
UK, Germany etc.
Another Challenge faced by the investor is the cost involved in trading, which are comparatively
higher in India, than in developed markets.

13

. Sachdeva, Emerging Securities Market Challenges and Prospects, Chartered Financial Analyst, Feb 2005, PP.5356

Page | 32

Way Forward to Capital Market 14

1. Investor education and regulation of mutual fund distributors,
2. Allowing AMCs to the flexibility to charge fees,
3. Innovative products across different asset classes,
4. Amending tax regime to encourage domestic AMCs to manage foreign funds from India.
5. Although higher investment by domestic institutional investors such as insurance companies,
pension funds to make investment in capital markets.
6. Make implementation of proposal of SME stock exchange effective,
7. Allowing institutional investors to participate in commodity markets,
8. Reduction in current withholding tax of 20% on income from debt securities to encourage
investment in debt market.

14

Barua S K & Raghunathan V (1986), "Inefficiency of the Indian Capital Market", Vikalpa, Vol. 11, No. 3,(Jul-Sept),
p. 225-230

Page | 33

CONCLUSION
India being an emerging economy needs innovations and reforms in the financial market.
Innovation and reforms not only add value in the existing technology and system but also lead to
decrease in the cost of capital and mitigate the risk exposure of the capital market instruments. No
doubt that there is a positive correlation between the finance and the economic growth of the
country. Economic growth needs sound financial system which further requires the well developed
financial market. So, if country wants constant economic growth it has to develop its financial
market.
Emerging economies like India depends heavily on the banking system for financing its capital
needs. But banks which are highly protected in India hardly fulfil its funding requirements. Thus,
there is the need to develop its capital market especially its bond market which is underdeveloped
because of policies constraint. Also, India has a huge market for the infrastructure which requires
huge funds. The creation of deep and innovative bond market can fill this gap. Steps have been
taken up to develop the equity market but there is lots to be done in case of the bond market
development. Reforms need to be initiated, bottlenecks need to be removed, policies need to be
changed to deepen the bond market in India and to make it as competitive as the world best bond
markets.

Page | 34

REFERENCES

BOOKS REFERRED

9. Avadhani V A (1992), Investment & Securities Markets in India: Investment Management,

Himalaya Publishing, Bombay.
10. Barua S K & Raghunathan V (1988), "Testing Stock Market Efficiency Using Risk-Return
Parity Rule : A Reply (Notes & Comments)", Vikalpa, Vol. 13.
11. Sachdeva, Emerging Securities Market Challenges and Prospects, Chartered Financial
Analyst.
12. Indian Securities Market A Review: 2011, National Stock Exchange publication.
13. SEBI, Handbook of Statistics on the Indian Securities Market: 2009.
14. Chopra V.K, Investor Protection: An Indian Perspective, SEBI bulletin, Nov 2006.
15. Chandra Prasanna (1990), "Indian Capital Market : Pathways of Development", ASCI
Journal of Management, Vol. 20, No. 2-3.
16. Nalini Parva TripathyMutual Fund In India: A Financial Service In Capital Market.

WEBSITES REFERRED

1. www.wikipedia.com
2. www.slideshare.com
3. www.academia.edu.com
4. www.google.com
5. www.sebi.gov.in

Page | 35