Capital Market in India

1. : Explain the role of capital market in the economic development of a
nation?
Ans: SIGNIFICANCE OF CAPITAL MARKETS IN INDIA
*INTRODUCTION:
~ Capital market is the market for leading and borrowing of medium and
long term funds.
~ The demand for long-term funds comes from industry, trade, agriculture
and government (central and state).
~ The supply for funds comes from individual savers, corporate savings,
banks, insurance companies, specialized financial institutions and
government.
~ Capital market has three different categories:-
i) Government securities market:
^ It is also called Gilt-edged market.
^ It deals in interest bearing and dated government securities.
^ This market is regulated by the RBI.
ii) Corporate Debt Market
This market deals in :
^ Binds floated by public sector units, nationalised banks and financial

2. institutions.
^ Debentures floated by corporates.
iii) The Equity Market:
^ Corporates raise preference / equity share capital in this market.
^ These shares can be sold / purchased and thus provide liquidity to
markets.
*SIGNIFICANCE:
~ A sound and efficient capital market is extremely vital for the economic
development of a nation.
~ So, the significance of capital market has increased.
~ The following points clearly bring out the role and significance of capital
market in India.
i)CAPITAL FORMATION:
~ Capital market encourages capital formation as it ensures speedy
economic development. The process of capital formation includes
collection of saving effective mobilisation of these savings for productive
investment.
~ Thus three distinctive inter-related activities i.e. collection of savings,
mobilisation of savings and investment lead to capital formation in the

3. country.
~ The volume of capital formation depend s on the efficiency and intensity
with which these activities are carried on.
ii) ECONOMIC GROWTH:
~ Capital market plays a vital role in the growth and development of an
economy by channelising funds in developmental and productive
investments.
~ The financial intermediaries channel funds into those investments that
are more important for economic development.
iii) INDUSTRIAL DEVELOPMENT:
~ Capital market promotes industrial development and motivates industrial
entrepreneurship.
~ It provides cheap, adequate and diversified funds for industrial purposes
such as expansion, modernisation, technological upgradation,
establishment of new units, etc.
~ It also provides services like provision of underwriting facilities,
participation in equity capital, credit-rating, consultancy services, etc.
vi) MODERNISATION AND REHABILITATION OF INDUSTRIES:
~ Capital markets also contribute towards modernisation and rehabilitation
of industries.

4. ~ Developmental financial institutions like IDBI, IFCI, ICICI, etc provide
finance to industries to adopt modern techniques and new upgraded
machinery.
~ They also participate in the equity capital of industries.
v) RIVIVAL OF SICK UNITS:
~ Commercial and financial institutions provide adequate funds to viable
sick unit to overcome their industrial sickness.
~ Bank and FIs may also write off a part of the loan or re-schedule the loan
to offer payment flexibility to weak units.
vi) TECHNICAL ASSISTANCE:
~ The financial intermediaries in the capital market stimulate industrial
entrepreneurship by providing technical and advisory services like
preparation of feasibility reports, identifying growth potential, and training
entrepreneurs in project management.
~ This promotes industrial investment and leads to economic development.
vii) DEVELOPMENT OF BACKWARD AREAS:
~ Capital markets provide funds for projects in backward area and facilitate
their economic development.
~ Long-term funds are also provided for development projects in
backward / rural areas.

5. viii) EMPLOYMENT GENERATION:
~ Capital markets provide Direct Employment in capital market related
activities like stock markets, banks and financial institutions.
~ Indirect Employment is provided in all the sectors of the economy through
various funds disbursed for developmental projects.
ix) FOREIGN CAPITAL:
~ Capital markets make it possible to generate foreign capital by enabling
Indian firms to raise capital from overseas market through bonds and other
securities.
~ Such foreign exchange funds have a great impact on the economic
development of the nation.
~ Moreover, foreign direct investments (FDIs) also bring in foreign capital
as well as foreign technology that leads to greater economic development.
x) DEVELOPMENT OF STOCK MARKETS:
~ Capital markets lead to development of stock markets by encouraging
investors to invest in shares and debentures and to trade in stocks.
~ FIIs are also allowed to deal in Indian stock exchange.
xi) FINANCIAL INSTITUTIONS:
~ Financial institutions play a major role in capital markets.

6. ~ They provide medium / long term loan to industrial and other sectors and
also undertake project feasibility studies and surveys.
~ They refinance commercial banks and rediscount their bills of exchange.
~ They provide merchant banking services.
~ They subscribe to equity capital of the firms.
xii) INVESTMENT OPPORTUNITY:
~ Capital markets provide various alternative sources of investment to the
people.
~ People can invest in shares and debentures of public companies and
earn good returns.
xiii) INVESTMENT IN INDUSTRIAL SECURITIES:
~ Secondary market in securities encourage investors to invest in industrial
securities by providing facilities for continuous, regular and ready buying
and selling of these securities.
~ This facilitates industries to raise substantial funds from various sectors
of the economy.
xiv) RELIABLE GUIDE TO PERFORMANCE:
~ Capital market serves as a reliable guide to the performance of corporate
institutions.

7. ~ It values companies accurately and thus promotes efficiency.
~ This leads to efficient resource allocation and economic development.
*CONCLUSION:
~ Thus we can say that capital markets play a crucial role in the economic
development of a nation.
~ A sound and efficient capital market is one of the most instrumental
factors in the development of a nation.
Q2: Explain the structure of Capital Market in India?
Ans: STRUCTURE OF CAPITAL MARKET IN INDIA.
*INTRODUCTION:
~ Capital market is the market for lending and borrowing of medium term
and long term funds.
~ A sound and efficient capital market can bring about speedy economic
development of a nation.
*STRUCTURE:
~ Indian Capital Market is broadly composed of:
i) Gild Edged Market / Government Securities Market.
ii) Corporate / industrial Securities market.

8. iii) Long Term Loans market / Developmental Financial Institutions.
iv) Financial Intermediaries.
i)GILD-EDGED MARKET:
~ This market deals in government and semi government securities and so
it is also called ‘Government securities market'.
~ This market deals with securities such as bonds issued by Central / State
Government and these securities carry fixed interest rates.
~ The investors in government securities are mainly financial institutions
like commercial banks, IFCI, LIC, GIC, SFC, SIDC, Provident funds, RBI
and individuals. These institutions are often compelled by the law to invest
a certain % of their funds in government securities.
~ RBI plays a very important role in this market.
ii) CORPORATE / INDUSTRIAL SECURITIES MARKET;
~ The Corporate Security Market provides long – term funds to the
companies.
~ It deals with shares and debentures of old and new companies.
~ This market is further divided into:
^ Primary market (new issues market)
^ Secondary Market (old issues market).

9. # PRIMARY MARKET:
^ It is a market for new issues. It deals with those securities that are issued
to the public for the first time. So, it is also called New Issues Market.
^ It deals with the raising of fresh capital in the form of equity shares,
preference shares, debentures, bonus, right issues, deposits, etc.
^ It includes all institutions dealing in the issue of fresh claims.
^ Resources in equity market can be raised / mobilised through: Equity
Issues (domestic and external)
Debt issues (domestic and external)
^ Domestic equity issues include equity shares, preference shares, right
issues and units of mutual funds in the country.
^ External equity issues include equity shares through the issue of Global
Depository Receipts (GDR) and
American Depository Receipts (ADR).
^ Domestic debt issues include fixed deposits, bonds, debentures
(convertible and non-convertible)
^ External debt issues are funds mobilised in the form of debt from
overseas.
# SECONDARY MARKET:

10. ^ The secondary market deals with securities that are already issued by
companies.
^ It facilitates trading in securities and operates through stock exchanges.
^ The secondary market helps to provide liquidity and marketability to the
outstanding equity and debt instruments.
^ It provides immediate valuation of securities and thus induces company to
perform efficiently.
^ The secondary market has three types of stock exchanges that provide
liquidity to the investor through trading transactions (buying and selling of
securities) with the help of brokers and other financial intermediaries. The 3
types of stock exchanges are: Regional Stock Exchange.
: National Stock Exchange.
: Over the Counter Exchange of India.
^ Out of the 23 recognised stock exchanges in India, The National Stock
Exchange (NSE) and The Bombay Stock Exchange (BSE) are the two
premier stock exchanges.
^ They operate under the rules and regulations of the Government and
SEBI.
^ Thus, the secondary market in India deals in scrips of a large number of
listed companies and provides a world class trading due to wide range of
product availability with a fast growing derivatives market.

11. iii) LONG TERM LOANS MARKET / DEVELOPMENT FINANCIAL
INSTITUTIONS:
~ Developmental financial institutions were established to provide medium
term / long term loans to the industrial sector.
~ These institutions include Industrial Finance Corporation of India (IFCI),
Industrial Development Bank of India (ICICI), Industrial Development Bank
of India (IDBI), Industrial Investment Bank of India (IIBI), The Export and
Import Bank of India (EXIM BANK), State Finance Corporations (SFCs),
state Industrial Corporations (SIDCs), etc.
~ The long term loans obtained from these institutions can be used for
expansion and modernisation
~ These institutions also subscribe to shares and debentures of new /old
companies and underwrite new issues.
~ These institutions raise funds by way of term deposits, Certificates of
deposits and borrowings.
~ Long term loans can be classified into: Term Loans Market
: Mortgages Market
: Financial Guarantees Market.
*Term loans market: Developmental financial institutions provide term loans
for a period of 1 year.

12. ^ Thus, they encourage new entrepreneurs, help in identifying investment
opportunities and support modernisation efforts.
*Mortgages market: financial institutions provide loans against security of
immovable assets such as land and building.
^ The transfer of interest in an immovable property to the lender is called
‘mortgage'.
*Financial guarantee market: Financial Institutions provide financial
guarantee on behalf of their clients.
^ Incase the client does not perform the contract appropriately; a penalty is
imposed on the client. If the client fails to pay the imposed penalty the
financial institution issuing the guarantee is held liable.
iv) FINANCIAL INTERMEDIARIES:
~ They comprise of merchant banks, mutual funds, leasing companies,
venture capital companies, etc.
~ Merchant banks manage and underwrite new issues, and advise
corporate on various financial aspects.
~ Leasing companies provide funds for purchasing plant and machinery.
~ Mutual funds mobilise savings of the people and invest them in stock
markets.
~ Venture capital companies provide financial support to new ideas and

13. technology.
*CONCLUSION:
~ Thus the capital market structure in India is complex and covers wide
range of activities.
~ Through provision of long term loans, the capital market brings about
effective functioning of various sectors of the economy. This is very
instrumental for the economic development of a nation.
Q3) Which factors are responsible for the growth of capital markets in
India?
Ans: FACTORS RESPOSIBLE FOR THE GROWTH OF CAPITAL
MARKRTS IN INDIA.
*INTRODUCTION:
~ Capital markets deal in lending and borrowing of long term and medium
term funds.
~ So, capital markets play a significant role in the economic development of
a nation.
~ Capital markets in India have grown considerably over the years and this
has been very crucial for the nation's economic development.
~ Various factors are responsible for the growth of capital markets in India.

14. *FACTORS RESPONSIBLE L,DNKLFOR THE GROWTH OF CAPITAL
MARKETS IN INDIA:
i)GROWTH OF STOCK EXCHANGES IN INDIA:
~ Capital Markets originated with the setting up of Bombay Stock
Exchange, followed by the formation of stock exchanges in Ahmedabad,
Calcutta and Madras.
~ At present, there about 24 stock exchanges in India recognized by the
Government, The National Stock Exchange (NSE) being the largest in the
country, followed by the Bombay Stock Exchange (BSE).
~ The stock exchanges lead to growth of capital markets as they make it
possible to: List the shares of public companies trade in share.
ii) GROWTH OF FINANCIAL INSTITUTIONS:
~ Growth of developmental financial institutions in India has given a boost
to capital markets.
~ Developmental financial institutions raise funds by way of bonds and
securities and then lend such funds to corporate firms.
~ They also subscribe to the issue of shares and debentures in the primary
markets and trade in secondary markets.
~ These institutions include Industrial Finance Corporation of India (IFCI),
Industrial Development Bank of India (ICICI), Industrial Development Bank
of India (IDBI), Industrial Investment Bank of India (IIBI), The Export and

15. Import Bank of India (EXIM BANK), State Finance Corporations (SFCs),
state Industrial Corporations (SIDCs), etc.
iii) GROWTH OF MUTUAL FUNDS:
~ The investment by mutual funds has also enhanced the capital markets
in India.
~ The first mutual fund to be set up in India was the Unit Trust of India (UTI)
in 1964.
~ Mutual funds collect funds from the people and invest them in primary /
secondary markets.
iv) GROWTH OF MERCHANT BANKING IN INDIA:-
~ Merchant Banking plays an important role in the capital market.
~ It provides a number of services like capital issue market, provision of
consultancy services, corporate restructuring etc.
~ Merchant Bank services were first initiated in India by the Grindlays Bank
(1967) followed by the Citibank (1970).
v) DEVELOPMENT OF CREDIT RATING AGENCIES:
~ The development of Credit rating agency in India was CRISIL.
~ Other credit rating agencies are CARE, ICRA, etc.
~ Investment in companies depend on the credit rating of the company.

16. vi) DEVELOPMENT OF VENTURE CAPITAL FUNDS:
~ Venture Capital is the investment made in a highly risky project with a
view to earn a high rate of return.
~ Venture Capital proved profitable for those firms who find in difficult to
raise funds from primary market or obtain medium / long term loans from
banks or financial institution.
vii) SETTING UP OF SEBI:
~ SEBI (The Securities and Exchange Board of India) was set up by the
Government of India to regulate the activities connected with the marketing
of securities and investments in the capital market.
~ The main objective of the SEBI is to protect the interest of the investors in
the primary and secondary capital markets.
~ this has helped the growth of capital market in India.
viii) THE NATIONAL SECURITIES CLEARING CORPORATION LTD
(NSCL):
~ The NSCL was setup to guarantee all trades on the NSE (National Stock
Exchange).
~ NSCL interposes between parties to the trade to ensure that every trade
on the NSE is freed from the risk of counterparty defaulting.
~ This helps to avoid the risk of payment crisis on the NSE.

17. ix) GENERAL AWARENESS:
~ There is a general awareness about the capital market among the
people.
~ Massive publicity campaigns and public issue of shares and debentures
has created this awareness among the people.
~ Thus, more and more people are investing money in the primary and
secondary capital markets and also in the bonds issued by FIs and other
organizations.
x) CORPORATE GOVERNANCE:
~ Corporate Governance has been very conducive to the growth of capital
market in India.
~ It ensures proper governance on the part of Board of Directors and good
management by the companies to protect the interest of its stakeholders.
~ The code of corporate governance has been divided into mandatory and
non-mandatory requirement on the part of the companies listed on the
stock exchange.
xi) GROWTH OF MULTI-NATIONAL COMPANIES (MNCs):
~ Post –liberalization a lot of MNCs have evolved in India.
~ MNCs need long-term / medium term funds for setting up new projects or
for expansion and modernisation.

18. ~ They collect these funds through capital markets by issue of shares and
debentures or through loans from banks and financial institutions.
xii) PUBLIC CONFIDENCE:
~ A good number of the members of the public have started developing
confidence and trust in the capital market.
~ They purchase bonds issued by financial institutions and also invest in
primary and secondary capital markets.
xiii) GROWTH OF ENTREPRENEURS:
~ The growth of entrepreneurs has resulted in more demand for short-term
and long-term funds.
~ Financial institutions, banks and stock markets enable entrepreneurs to
raise the funds required by them.
~ This has also led to the growth of capital markets in India.
Q4: Write a note on Capital Market Reforms?
Ans: CAPITAL MARKET REFORMS:
*INTRODUCTION:
~ Capital market is the market for borrowing and lending of medium term /
long term loans.
~ A sound an efficient capital market act as a catalyst in the process of

19. economic development of a nation.
~ So, the Government of India and the SEBI introduced various reforms in
the capital market to strengthen it and make it more effective.
*REFORMS:
~ The reforms in the capital market can be explained with respect to:
Primary market reforms.
: Secondary market reforms
# PRIMARY MARKET REFORMS:
~ The following reforms were taken to develop and strengthen primary
capital market in India:-
i) ABOLITION OF CONTROLLER OF CAPITAL ISSUE:
~ The Capital Issues (Control) Act, 1947 governed capital issue in India.
~ The Narshimam Committee recommended the abolition of the Controller
of Capital issues and induced SEBI to take over the regulatory and
administrative functions of the CCI.
~ Thus, companies are allowed to approach the capital market without prior
consent of the Government, provided all documents are cleared by SEBI.
ii) SETTING UP OF SEBI:
~ Securities And Exchange Board Of India (SEBI) became a statutory body

20. and was given wide regulatory powers.
~ SEBI has become an important part of the financial regulatory system in
the country.
iii) DISCLOSURE STANDARDS:
~ It is mandatory for companies to disclose all material facts and specific
risk factors associated with their projects.
~ SEBI has also introduced a code of advertisement for public issues for
ensuring fair and truthful disclosures.
iv) FREEDOM TO DETERMINE THE PAR VALUE OF SHARES:
~ SEBI has permitted companies to determine the par value of shares
issued by them.
~ Thus, companies can issue IPOs through "book building" process.
v) UNDERWRITING MADE OPTIONAL:
~ In India, underwriting of shares is made optional to reduce the cost of
public issue.
~ However, if the issue is not underwritten and the issuer fails to collect
90% of the amount offered to the public, the entire amount collected should
be refunded to investors.
vi) ENTRY OF FOREIGN INSTITUTIONAL INVESTORS: (FIIs)

21. ~ SEBI has permitted the foreign institutional investors to invest in the
Indian Capital Markets.
~ FIIs such as mutual funds and pension funds can invest in equity shares
and debt market as well as in dated Government Securities and treasury
bills.
vii) ACCESS TO GLOBAL MARKET FUNDS:
~ With the introduction of the Foreign Exchange Management Act 1999,
Indian companies can raise funds from global finance markets and benefit
from the lower cost of funds.
~ Indian companies can issue American Depository Receipts (ADRs),
Global Depository Receipts (GDRs) , Foreign Currency Convertible Bonds
(FCCBs) and External Commercial Borrowings.(ECBs)
~ They can list their shares on Foreign Stock Exchanges.
~ Also, Indian financial system is opened up for investment of foreign funds
through NRIs, FIIs and OCBs (Overseas Corporate Bodies).
viii) BAN ON MERCHANT BANKING CARRYING FUND BASED
ACTIVITIES:
~ Merchant Bankers are prohibited from undertaking funds based activities
other than those related exclusively to the capital market.
~ The activities undertaken by Non-Banking Finance Companies (NBFCs)
such as accepting deposits, leasing, bill discounting, etc cannot be carried

22. out by merchant bankers.
ix) INTERMEDIARIES UNDER SEBI's REGULATION:
~ Financial Intermediaries have been brought under the purview of the
SEBI.
~ These include merchant bankers, mutual funds, portfolio managers,
underwriting agents, share transfer agents, registrars to an issue, bankers
to an issue, debenture trustees, custodian of securities and venture capital
funds.
x) CREDIT-RATING AGENCIES:
~ Various credit rating agencies such as Credit Rating and Information
Services of India Ltd. (CRISIL), Investment Information and Credit Rating
Agency (ICRA), Credit Analysis and Research Ltd (CARE), etc were set up
by the Government to meet the emerging needs of the growing capital
markets.
~ Credit Rating Agencies provide rating to the issue of securities in the
primary markets.
~ This imposes a healthy discipline on the borrowers and provides
guidance to the investors.
~ They also help financial intermediaries in discharging their functions
related to debt issues.
# SECONDARY MARKET REFORMS:

23. ~ A number of reforms were initiated by the Government and the SEBI for
the growth of secondary capital market in India.
~ The following are the important reforms:
i) SETTING UP OF NATIONAL STOCK EXCHANGE (NSE):
~ The National Stock Exchange was set up in 1992 and it started its
operations in 1994.
~ It was sponsored by the IDBI. The co-sponsorers were other
developmental financial institutions, LIC, GIC, Commercial Banks, SBI,
Stock Holding Corporation of India LTD, etc
~ The NSE was set up to provide a nation-wide trading facility in equities,
debt, instruments and hybrids.
~ It also facilitated equal access to investors across the country by
providing a fair, efficient and transparent securities trading system.
~ It also offered shorter settlement cycles and book entry settlement
system.
~ These measures brought the Indian Stock market at par with international
markets.
~ At present, the NSE has spread its business in 200 cities with more than
1000 terminals and its ranks 3rd among the biggest exchange in the world.
ii) OVER THE COUNTER EXCHANGE OF INDIA (OTCEI):

24. ~ Over the Counter Exchange of India was set up in 1992 by a consortium
of leading financial institutions in India like IDBI, ICICI, LIC, UTI, IFCI, etc.
~ It is an electronic national stock exchange that lists entirely new set
companies which will not be listed on other Stock exchanges i.e. the
companies listed on OTCEI cannot be listed on any other stock exchanges.
~ Companies with issued capital from Rs 30 lakhs to Rs 25 crores.
~ OTCEI gives an access to small and medium sized companies to capital
market as well as a convenient mode of investment to investors.
~ It eliminates the problem of illiquid securities, delayed settlements and
unfair prices faced by investors.
iii) DISCLOSURE AND INVESTOR PROTECTION (DIP) GUIDELINES
FOR NEW ISSUES:
~ SEBI has given DIP guidelines to govern the new issue activities so as to
remove the systematic deficiencies and to protect the interests of investors.
~ Companies issuing capital in the primary market are now required to
disclose all material facts and specify risk factors with their projects.
~ If the company issues IPO through ‘book-building', it will have to disclose
the price, the issue size and number of securities to be offered to the
public.
iv) SCREEN BASED TRADING:

25. ~ The Indian Stock Exchanges underwent modernisation with
computerised Screen Based Trading System (SBTS).
~ It electronically matches orders on a strict price / time priority.
~ It considerably reduces time, cost, risk of error and fraud and thereby
improves operational efficiency.
~ This trading system also provides complete on line market information
and thus increases the depth and liquidity of the market.
v) CORPORATION AND DEMUTUALISATION OF STOCK EXCHANGES:
# Corporatisation: -
^ BSE has ceased to be an Association of persons and became a company
under the Companies Act.
^ This leads to segregation of ownership, management and trading rights
from each other.
^ The change in ownership is expected to make BSE a modern,
professionally managed, transparent, competitive and an efficient stock
exchange.
# Demutualisation:-
^ Demutualisation of BSE is in process whereby the BSE will be converted
into a join stock company.

26. ^ It will change from ‘not-for-profit' organisation to a ‘for profit' organisation.
This will clearly strengthen the capital markets.
vi) DEPOSITORY SYSTEM:
~ A major reform in the Indian Stock Market has been the introduction of
depository system and scripless trading mechanism.
~ This system overcomes problems based on physical transfer of securities
like inordinate delays, bad deliveries, counterfeit scrips, forged certificates,
wrong signatures, etc.
~ Depository is an organisation that holds the securities of shareholders in
electronic form, transfers securities between account holders, facilitates
transfer of ownership without handling securities, etc.
~ Dematerialisation of share certificates through depositories is an
essential aspect of securities with speed, accuracy and security.
~ National Securities Depositories LTD. (NSDL) and Central Depositories
Services LTD ( CDSL) have been established for this purpose.
vii) ROLLING SETTLEMENT:
~ ‘Rolling Settlement' is an important measure to improve the integrity and
efficiency of the securities market.
~ The shift from the traditional settlement to rolling settlement is a welcome
change in the stock market.

27. ~ Under the rolling system all trades executed on a trading day (T) have to
be settled after certain days (N).
~ This is called ‘T+N' rolling settlement.
~ In April 2003, the NSE introduced T+2 rolling settlement.
~ This has considerably reduced undue speculation in the market.
viii) INVESTOR PROTECTION MEASURES:
~ The SEBI has introduced an automated complaints handling system to
deal with investor complaints.
~ It spreads awareness among the investors on various issues related to
the securities market and their rights and remedies.
~ The Government has also set up the IEPF (Investor Education and
protection fund) that will be utilized for promotion of awareness amongst
investors and protection of their interest.
ix) THE NATIONAL SECURITIES CLEARING CORPORATION LTD
(NSCL):
~ The NSCL was set up in 1996 to guarantee all trades in NSE.
~ The NSCL is responsible for post-trade activities of the NSE like clearing
and settlement of trades and risk management.
~ It interposes between parties to trade on the NSE.

28. ~ It, thus, avoids the risk of payment crisis on the NSE.
x) DERIVATIVE TRADING:
~ Derivatives are contracts between counterparties whose value is derived
from the value of the underlying asset like equity, forex, etc.
~ Financial markets are highly volatile due to fluctuations in asset prices.
~ So the investors resort to derivative trading whereby they lock-in asset
prices and reduce the price risks.
~ At present, there are four equity derivative products in India:
^ Stock options
^ Stock futures
^ Index options
^ Index futures.
~ Derivatives trading is permitted only on the NSE and the BSE.
xi) TRADING IN CENTRAL GOVERNMENT SECURITIES:
~ Trading in Central Government Securities has been introduced since Jan
2003 so as to encourage wider participation of all classes of investors,
including retail investors.
~ Trade in government securities can be carried out throughout the country

29. through screen-based trading system of stock exchanges.
~ Retail investors can now buy and sell govt- securities participation in
retail market is open to individuals, firms, companies, corporate bodies,
institutions, or any other entity approved by the RBI.
xii) ENTRY OF FIIs:
~ Foreign Institutional Investors (pension funds, mutual funds, investment
trust, portfolio management companies, etc.) have been allowed to invest
in Indian capital markets.
~ However, they have to be registered with the SEBI.
xiii) PAN MADE MANDATORY:
~ PAN has been made mandatory since Jan 2007 so as to strengthen the
‘know your client' norms and to facilitate sound auditing in the securities
market.
~ It is mandatory for operating a beneficiary Owner Account and for trading
in cash segments.
xiv) REGULATION OF MUTUAL FUNDS:
~ Emergence of diversified mutual funds is an important development of
Indian Capital Market.
~ It mobilises the savings of the general public and invests them in stock
market securities.

30. ~ Thus, they have emerged as significant avenues for finance and a
notable intermediary in the Indian capital market.
~ SEBI supervises and regulates the working of mutual funds.
xv) STOCK EXCHANGES PERMITTED TO SET TRADING HOURS:
~ Stock Exchanges have been permitted to set trading hours (in cash and
derivative segments).
~ However, the trading hours should be between 9.00a.m to 5.00p.m.
~ Corporate Governance and buy back of shares are other secondary
market reforms.
*CONCLUSION:-
~ Thus, the reforms in the capital market have been conducive to its growth
and development.
~ Also, it has made the capital markets have shown greater efficiency and
now provide world class trading and settlement systems.
~ This leads to speedy development of an economy.
Q5: Write a note on SEBI?
Ans: SECURITIES AND EXCHANGE BOARD OF INDIA
*INTRODUCTION:

31. ~ The Securities and Exchange Board of India (SEBI) was established as a
non-statutory organisation but it received its statutory status in January
1992.
~ SEBI has wide regulatory powers and is a very important constituent of
the financial regulatory network of India.
~ In fact, it is under the overall control of the Finance Ministry of the
country.
~ SEBI aims at protecting the interest of investor, brining professionalism in
the working of intermediaries in the capital markets and creating a good
financial environment in the markets.
*ROLE OF SEBI:
i)PROMOTION AND DEVELOPMENT OF CAPITAL MARKET:
~ The promotion and development of the capital market is one of the most
important roles of SEBI.
~ It regulates the business in stock exchanges and other securities market
and prevents trading malpractices.
~ It creates a healthy financial environment for the development of capital
markets.
ii) GUIDELINES ON CAPITAL ISSUES:
~ As a part of its regulatory role, SEBI issues guidelines in respect of

32. matters related to the issue of capital.
~ These include information disclosures, operational transparency and
investor protection, development of financial institutions, pricing of issues,
preferential issues, etc.
iii) REGULATES WORKING OF MUTUAL FUNDS:
~ In order to regulate the working of mutual funds, SEBI has laid down
rules and regulations.
~ All mutual have to comply with the regulations paid down by the SEBI.
~ Necessary modifications are made in the regulations from time to time.
iv) REGULATES MARCHANT BANKING:
~ SEBI has laid down regulations on merchant banking activities in India.
~ They are in respect of registration, code of conduct, submission of half
yearly results, etc.
v) REGULATES STOCK BROKERS ACTIVITIES:
~ SEBI regulates the activities of brokers and sub-brokers.
~ No broker / sub-broker is allowed to buy, sell or trade in securities without
registration with the SEBI.
vi) PORTFOLIO MANAGEMENT:

33. ~ SEBI also regulates the working of portfolio managers.
~ No person / institution can operate as a portfolio manager without
registration with the SEBI.
~ They have to follow relevant regulations.
vii) REGULATES TAKE-OVER / MERGERS:
~ SEBI has issued guidelines to be followed by corporations at the time of
mergers / take – overs.
~ These guidelines protect the interest of investors in case of take-overs or
mergers.
viii) RESTRICTION ON INSIDER TRADING:
~ SEBI prohibit insider trading in order to prevent price manipulations.
~ SEBI has also banned negotiated and cross deals to ensure greater
market transparency.
ix) PROTECTION OF INTEREST OF INVESTORS:
~ SEBI aims at protecting the interest of investors in securities and it has
taken various measures for the same.
~ It spreads awareness among investors and provides them a high degree
of protection of their rights and interests through adequate, accurate and
authentic information on a continuous basis.

34. x) INVESTOR'S EDUCATION:
~ SEBI educates investors about securities market.
~ It spreads awareness among investors on various issue related to
securities market and on their rights and remedies.
xi) INVESTOR'S GRIEVANCES REDRESSAL:
~ SEBI has introduced automated complaints handling system to deal with
investor complaints.
~ The Investor Grievances Redressal and Guidance Division of SEBI helps
investors who want to make complaints to SEBI against listed companies.
xii) PRIMARY MARKET POLICY:
~ SEBI looks after all the policy matters and regulatory issues related to
primary markets.
~ These include vetting of prospectuses and letters of offer for public and
right issues, co-ordinating with primary market policy, registration,
regulation and monitoring issue related intermediaries.
xiii) SECONDARY MARKET POLICY:
~ SEBI is responsible for all policy and regulatory issues for secondary
market.
~ It is also responsible for registering and monitoring of members of stock

35. exchanges.
~ It also inspects all stock exchanges and regulates non-member
intermediaries such as sub-brokers.
xiv) INSTITUTIONAL INVESTMENT POLICY:
~ SEBI registers, regulates and monitors FIIs and domestic mutual funds.
xv) MOBILISATION OF RESOURCES:
~ SEBI facilitates efficient mobilisation and allocation of resources through
the securities market.
~ It stimulates competition and encourages innovations.
*POLICY MEASURES BY SEBI:
i) It prohibits fraudulent and unfair trade practise relating to securities.
ii) It imposes penal margins on net undelivered portion at the end of the
settlement.
iii) It has issued guidelines to tighten entry norms for companies accessing
capital market.
iv) SEBI has allowed stock exchanges to expand their on-line screen based
trading terminals.
v) It has notified ‘Custodian of Securities Regulations' and ‘Depositories
and Participant Regulators' to contain prudential norms.

36. vi) It has taken various investor protection measures.
vii) It has tightened norms for share transfer.
viii) It has prohibited ‘insider trading' and ‘badla'.
ix) It has taken various steps to improve corporate Governance.
x) It has allowed companies to raise funds from abroad through ADRs,
GDRs, FCCBs and ECBs,
xi) It registers and regulates the intermediaries associated with the capital
market.
xii) It has issued guidelines for Anti Money Laundering measures.
*CONCLUSION:
~ Thus, the SEBI's task is challenging and complex SEBI has taken various
measures to bring sufficiency in the capital markets leading to growth and
development of the economy