1. Capital Markets (meaning, functions, and constituents); 2 1. Capital Markets (meaning, functions, and constituents); 2. Stock-exchanges; 3. SEBI; and 4. Capital market reforms in India. 1 1

Refer: Francis Cherunilam: Business Environment, “Money and Capital Markets;” Chapter 23, 24. Ruddar Datt, K.P.M. Sundharam (2010): Indian Economy, “Indian Financial System: money and capital markets in India;” Chapter 49. Suresh Bedi: Business Environment, “Indian Capital Market;” Chapter 25.

Capital market is the market for long-term funds; Capital market funds are used by industry and trade for making fixed investments; Capital market, like money market, also has three important components: supplier of funds, the borrowers, and the intermediaries; Main participants in capital markets are – mutual funds, insurance companies, development banks, foreign institutional investors, corporate organisations, as well as individuals; 3 3

Capital markets have two principal segments: The primary or the new issues market – this market is a direct source of funds to the business units; and The secondary market – deals in securities already issued and listed on various stock exchanges. It provides liquidity to the long-term securities already issued. Unlike primary market, it has specific transaction place in form of stock exchanges. Primary market consists of – issuing companies, investors, merchant bankers, underwriters, distributors, bankers to the issue, registrar and share transfer agents and the Securities Exchange Board of India (SEBI) - the market regulator. 4 4

Secondary market consists of – Stock exchanges (NSE, BSE etc Secondary market consists of – Stock exchanges (NSE, BSE etc.), investors – retail / institutional, companies whose stocks are being listed and traded, stockbrokers, share depositories, and the SEBI. 5 5

Stock Exchange is an organized marketplace, corporation or mutual organization, where members of the exchange gather to trade company stocks and other securities. The members may act either as agents for their customers, or as principals for their own accounts. After issue of securities (shares, bonds, debentures etc.) of companies, the same have to be listed on a stock exchange (for their subsequent trading purpose). There is a central computerised record keeping of all trades between members of a stock exchange, who are linked to the central server of the exchange through communication links. 6

SEBI The Securities and Exchange Board of India (SEBI) was established on April 12, 1992 in accordance with the provisions of the Securities and Exchange Board of India Act, 1992. The Preamble of the SEBI Act, 1992 describes the basic functions of the SEBI as follows: - “…..to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto” 7

The establishment of SEBI was a landmark government measure to monitor and regulate capital market activities and to promote healthy development of the market. SEBI is also empowered to issue such directions as may be appropriate to certain person or class of persons or company, intermediary or other persons referred in the Act in the interest of investors. 8

Functions (Regulatory mechanism) of SEBI To protect the interests of investors in securities and to promote the development of the securities market.  To regulate the operations of the securities markets.  To register and regulate the working of stock brokers, sub-brokers, share transfer agents, portfolio managers, investment advisers and such other intermediaries who may be associated with securities markets in any manner. To register and regulate the working of venture capital funds and collective investment schemes including mutual funds. 9

To prohibit fraudulent and unfair trade practices relating to securities markets.  To promote investors' education and training of intermediaries in securities markets. To monitor and regulate substantial acquisition of shares and take-over of companies. To call for information from a company / person(s), inspect, conduct inquiries and audits of the stock exchanges, mutual funds, other persons associated with the securities market. 10

Capital market reforms in India 11 11

Capital market reforms in India – An introduction The functioning of stock exchanges in India has shown many weaknesses – long delays, lack of transparency, price rigging and insider trading etc. To counter these shortcomings and to regulate the capital market, the Govt. of India set up the Securities Exchange Board of India (SEBI) in 1988 initially as a non-statutory body, and as a statutory body, 1992 onwards. Also in 1991, upon the recommendations of the Narasimham Committee on Financial Sector Reforms, the government abolished the ‘Controller of Capital Issues’ (CCI), and assigned its regulatory functions to SEBI. 12

Post 1991, Capital market reforms in primary and secondary markets in India: Free pricing of IPOs; Disclosure of all material facts & specific risks to investors; Issuers to give information regarding basis of calculation of premium to investors; Introduction of a code of advertisement for public issues by SEBI; Introduction of electronic trading; Dematerialisation of securities; Allowing Buy-back of shares (companies allowed to buy-back their own shares from market). 13

Capital market reforms (continued) – Introduction of book building in IPOs; Introduction of newer instruments (F&O etc.) and market participants (allowing private Mutual funds and Foreign Institutional Investors to operate); Registration of market intermediaries (brokers, merchant bankers etc.) by SEBI; Shortening of clearing and settlement procedures; Introduction of circuit breakers in trading; Enhanced informational flows; Emphasis on fair trading practices - insider trading made a punishable offence under SEBI Act; Allowing Indian cos. to raise money abroad (GDRs). 14

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