1

JAMIA MILLIA ISLAMIA

CAPITAL MARKET AND ROLE OF SEBI

SAMEEKSHA KASHYAP
B.A.-LLB (Hons.)
Self-Finance
Roll No.: 16BLW021
JAMIA MILLIA ISLAMIA
NEW DELHI- 25
 2

ACKNOWLEDGEMENT

Though this project has been presented by me but there are many people who remained in veil,
who gave their all support and helped me to complete this project. First of all I am very grateful
to my subject teacher Dr. Qazi Mohammad Usman for giving me this topic to research on.
I am very thankful to the librarian who provided me several research materials on this topic
which proved beneficial in completing this project. I acknowledge my friends who gave their
valuable and meticulous advice which was very useful and could not be ignored in writing the
project
 3

CONTENTS

1) Introduction…………………………………………………………………04
2) History of Indian Capital Market……………………………………………05
A) Indian Capital Market before Independence……………………………06
B) Indian Capital Market after Independence………………….…………..06
3) Concept of Capital Market………………………………………………….08
4) Nature and Participants………………………………………….………….10
A) Participants in the Capital Market………………………………………10
5) Role of Capital Market……………………………………………………..11
6) Capital Market Instruments………………………………………………...14
7) Types of Capital Market……………………………………………...…….15
8) Role of SEBI in regulations of Capital Market…………………………….16
A) Functions of SEBI………………………………………………………17
B) Regulations of Capital Market………………………………………….17
9) Conclusion ………………………………………………………………….19

Bibliography……………………………………………………………………….20
 4

INTRODUCTION
The capital market is a vital of the financial system. Capital market provides the support of
capitalism to the country. The wave of economic reforms initiated by the government has
influenced the functioning and governance of the capital market. The Indian capital market is
also undergoing structural transformation since liberalisation. The chief aim of the reforms
exercise is to improve market efficiency, make stock market transactions more transparent, curb
unfair trade practices and to bring our financial markets up to international standards. Further,
the consistent reforms in Indian capital market, especially in the secondary market resulting in
modern technology and online trading have revolutionized the stock exchange.

Capital market concerned with the industrial security market, government securities markets, and
long term loan market. Capital market deals with long term loan market. It supplies long-term
and medium term funds. It deals with shares, stocks, debentures and bonds. Security dealt in
capital markets are long-term securities. It provides a market mechanism for those who have
savings and to those who have savings and to those who need funds for productive investments.

The capital market aids economic growth by mobilizing the savings of the economic sector and
directing the same towards channels of productive uses. Companies turn to them to raise funds
needed to finance for the infrastructure facilities and corporate activities. The capital market is
source of income for investors. When stock of other financial assets rise in value, investors
become wealthier, often they spend some of this additional wealth boost sales and promoting
economic growth. Stock value reflects investor reactions to government policy as well, if the
government adopts policies that investors believe will hurt the economy and company profits,
vice-versa.

In the post-reform period, India stands as an economy that is rapidly – modernising, globalising
and growing. India is poised as a fast growing emerging market economy in the face of the
current turmoil and pessimism. The resilience shown by India comes from the strong
macroeconomic fundamentals. India has weathered the storms of the recent financial market
crisis with great strength and stability. The household sector is coming to prominence with
impressive contribution in the national pool of savings. Rising investment levels and improved
 5

productivity are the engines driving growth. Indians have witnessed a doubling of average real
per capital income growth during the tenth plan period. The government has progressed towards
a fiscal correction. There has also been a sharp rise in net capital inflows. The strong institutional
and macroeconomic policy framework in India is further complemented by the gains from trade
and global financial integration.

Over the years, the Indian capital market as experienced a significant structural transformation in
that it now compares well with those in developed markets. This was deemed necessary because
of the gradual opening of the economy and the need to promote transparency in alternative
sources of financing. The regulatory and supervisory structure has been overhauled with most of
the power for regulating the capital market having been vested with the Securities Exchange
Board of India (SEBI).

HISTORY OF INDIAN CAPITAL MARKET

Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200 years ago.
The earliest records of security dealings in India are meager and obscure. The East India
Company was the dominant institution in those days and business in its loan securities used to be
transacted towards the close of the eighteenth century. The history of the Indian capital markets
and the stock market, in particular can be traced back to 1861 when the American Civil War
began. The opening of the Suez Canal during the 1860s led to a tremendous increase in Exports
to the United Kingdom and United States, Several companies were formed during this period and
many banks came to the fore to handle the finances relating to these trades. With many of these
registered under the British Companies Act, the Stock Exchange, Mumbai, came into existence
in 1875.
It was an unincorporated body of stockbrokers, which started doing business in the city under a
banyan tree. Business was essentially confined to company owners and brokers, with very little
interest evinced by the general public. There had been much fluctuation in the stock market on
account of the American war and the battles in Europe. Sir Premchand Roychand remained a
kingpin for many years.
 6

Indian Capital Market before Independence

The Indian capital market was not properly developed before Independence. The growth of the
industrial securities market was very much hampered since there were very few companies and
the number of securities traded in the stock exchanges was still smaller. Most of the British
enterprises in India looked to the London capital market for funds than to the Indian capital
market. A large part of the capital market consisted of the gilt-edged market for government and
semi-government securities.

Indian Capital Market after Independence

Since Independence and particularly after 1951, the Indian capital market has been broadening
significantly and the volume of saving and investment has shown steady improvement. All types
of encouragement and tax relief exist in the country to promote savings. Besides, many steps
have been taken to protect the interests of investors. A very important indicator of the growth of
the capital market is the growth of joint stock companies or corporate enterprises. In 1951 there
were about 28,500 companies both public limited and private limited companies with a paid-up
capital of Rs. 775 crores.

In the 1950s, Century Textiles, Tata Steel, Bombay Dyeing, National Rayon, and Kohinoor Mills
were the favorite scrips of speculators. As speculation became rampant, the stock market came to
know as the satta bazaar. The planning process started in India in 1951, with importance being
given to the formation of institutions and markets. The Securities Contract Regulation Act 1956
became the parent regulation after the Indian Contract Act 1872, a basic law to be followed by
security markets in India. To regulate the issue of share prices, Controller of Capital Issues Act
(CCI) was passed in 1947.

In the 1960-70s was characterized by was and droughts in the country with led to bearish trends.
These trends were aggravated on forward trading its call badla, technically called ‘contracts for
clearing’. Financial institutions such as LIC and GIC helped revive the sentiment by emerging as
the most important group of investors. The markets have witnessed several golden times too.
 7

Retail investors began participating in the stock markets in a small way with the dilution of the
FERA in 1978. Multinational companies, with operations in India, were forced to reduce foreign
share holding to below a certain percentage, which led to a compulsory sale of shares or issuance
of fresh stock. Indian investors, who applied for these shares, encountered a real lottery because
those were the days when the CCI decided the price at which the shares could be issued. There
was no free pricing and their formula was very conservative.

In the 1980s emerged an explosive growth of the securities market in India, with millions of
investors suddenly discovering lucrative opportunities. Many investors come in to the stock
market. The next big boom and mass participation by retail investors happened in 1980, with the
entry of Mr. Dhirubhai Ambani. Dhirubhai can be said to be the father of modern capital
markets. The Reliance public issue and subsequent issues on various Reliance companies
generated huge interest. The general public was so unfamiliar with share certificates that
Dhirubhai is rumoured to have distributed them to educate people.

Mr. V.P. Singh’s fiscal budget in 1984 was path breaking for it started the era of liberalization.
The removal of estate duty and reduction of taxes led to a swell in the new issue market and
there was a deluge of companies in 1985. Mr. Manmohan Singh as Finance Minister came with a
reform agenda in 1991. Liberalisation and globalisation were the new terms coined and marketed
during this decade. The mid-1990s saw a rise in leasing company shares, and hundreds of
companies, mainly listed in Gujarat, and got listed in the BSE. The 1991-92 securities scam
revealed the inadequacies of and inefficiencies in the financial system. It was the scam which
prompted a reform of the equity market. The Indian stock market has change in terms of
technology and market price.

In the 2000s saw the emergence of Ketan Parekh and the information; communication and
entertainment companies came into the limelight. This period also coincided with the dotcom
bubble in the US, with software companies being the most favored stocks. There was a
meltdown in software stock in early 2000. Mr. P Chidambaram continued the liberalization and
reform process, opening up of the companies, lifting taxes on long-term gains and introducing
 8

short-term turnover tax. The markets have recovered since then and we have witnessed a
sustained rally that has taken the index over 21000 during the year 2008.

This history shows us that retail investors are yet to play a substantial role in the market as long-
term investors. Retail participation in India is very limited considering the overall savings of
households. Investors who hold shares in limited companies and mutual fund units are about 20-
30 million. Those who participated in secondary markets are 2-3 million. Capital markets will
change completely if they grow beyond the cities and stock exchange centers reach the Indian
villages. Both SEBI and retail participants should be active in spreading market wisdom and
empowering investors in planning their finances and understanding the markets.

It has been a drastic long journey for the Indian capital market. Recent time’s capital market is
performed very well, fairly integrated, mature, more globally. The Indian capital market is one of
the best in the world in terms of technology. There are many business news channels, news
paper, magazines, are issued in India. Online trading is become a global phenomenon. Indian
capital market would be integrated with international market.

CONCEPT OF CAPITAL MARKET

The capital market is a place where people buy and sell securities. Securities in this sense is
simply a bundle of rights sold to the public by companies, authorities or institutions on which
people then trade in the capital market.

There are different types of securities or bundles of rights. These include shares, debentures,
bonds, etc. There are two levels of the market. The primary market is the market where those
wishing to raise funds from the stock market sell their securities to the public. The secondary
market is where those who bought the securities in the Initial Public Offer (IPO) can sell them
any time they wish.

The reason why people buy securities from the primary market is because they have the
assurance that there is a secondary market where they can sell those shares possibly at a profit.
 9

According to Arun K. Datta, The capital market may be defined as “The capital market is a
complex of institutions investment and practices with established links between the demand for
and supply of different types of capital gains”.

According to F. Livingston defined the capital market as “In a developing economy, it is the
business of the capital market to facilitate the main stream of command over capital to the point
of the highest yield. By doing so it enables control over resources to pass into hands of those
who can employ them most effectively thereby increasing productive capacity and spelling the
national dividend”.

Capital market defined as “The market for relatively long-term financial instruments. It consists
of gilt edged market and the industrial securities market. The gilt edged market refers to the
market for government and semi-government securities backed by the RBI. The securities traded
in this market are stable in value and are much sought after by banks and other institutions”.

As per above definitions, meaning of capital market as follows:

1. The capital market is the market for securities, where companies and governments can
raise long-term funds.
2. The market in which corporate equity and long-term debt securities those maturing in
more than one year are issued and traded.
3. The capital market is market for long-term debt equity shares. In this market, the capital
funds comprising of both equity and debt are issued and traded.
4. The market in which long-term securities such as stocks and bonds are bought and sold.
5. The capital market comprises financial securities, government securities, semi-
government securities.
6. The capital market concerns two broad types of securities traded, debts and equity.
Buying stock allows investors to gain an equity interest in the company and become
owner.
 10

NATURE AND PARTICIPANTS

The nature of the capital market is wider. The capital market consists of a number of individuals
and institution. The government is also an important player in the capital market. The players in
the capital market canalize the supply and demand for long-term capital. The constituents of
exchange, commercial banks, co-operative banks, savings banks, development banks, insurance
companies, investment trust and companies etc.

Participants in the capital market:

The supply in this market comes from savings from different sectors of the economy. These
savings accrue from the following sources:

● Individuals.
● Corporate.
● Governments.
● Foreign countries.
● Banks.
● Provident Funds.
● Financial Institutions.

All these entities contribute to savings in the economy part of these savings naturally flow in the
capital markets. Individuals invest in these markets directly by investing in shares or debentures
of companies through bond issues of public sector units or through mutual funds. Corporate who
have more savings than their requirement for funds also are participants in this market.
 11

ROLE OF CAPITAL MARKET

Capital market plays an extremely important role in promoting and sustaining the growth of an
economy. It is an important and efficient conduit to channel and mobilize funds to enterprises,
and provide an effective source of investment in the economy. It plays a critical role in
mobilizing savings for investment in productive assets, with a view to enhancing a country’s
long-term growth prospects. It thus acts as a major catalyst in transforming the economy into a
more efficient, innovative and competitive marketplace within the global arena..

Capital markets play a vital role in indian economy, the growth of capital markets will be helpful
in raising the per-capita income of the individuals, decrease the levels of un- employment, and
thus reducing the number of people who lie below the poverty line. With the increasing
 12

awareness in the people they start investing in capital markets with long-term orientations, which
would provide capital inflows to the sectors requiring financial assistance
1. Capital arrangement: The capital market promotes capital formation in the country. Rate of
capital formation depends upon savings in the country. Though the banks mobilize savings, they
are not adequate to match the requirements of the industrial sector. The capital market mobilizes
savings of households and of the industrial concern. Such savings are then invested for
productive purposes. Thus savings and investment leads to capital arrangement in country.

2. Economic growth: Capital market smoothes the progress of the growth of the industrial sector
as well as other sectors of the economy. The main purpose of the capital market is to transfer
resources from masses to the industrial sector. The capital market makes it possible to lend funds
to various projects, both in the private as well as public sector.

3. Development of backward areas: The capital markets provide funds for the projects in
backward areas. This facilitates the economic development of backward areas.

4. Generates employment: Capital market generates employment in the country: i) Direct

employment in the capital markets such as stock markets, financial institutions etc. ii) Indirect
employment in all sectors of the economy, because of the funds provided for developmental
projects.

5. Long term capital to industrial sector: The capital market provides a stable long-term capital
for the companies. Once, the funds are collected through issues, the money remains with the
company. The company is left free with the funds while investors exchange securities among
themselves.

6. Generation of foreign capital: The capital market makes possible to generate foreign capital.
Indian firms are able to generate capital from overseas markets by way of bonds and other
securities. Such foreign exchange funds are vital for the economic development of the nation.
 13

7. Developing role of financial institutions The various agencies of capital market such as
industrial financial corporation of India (IFCI), state finance corporations (SFC), industrial
development bank of India (IDBI), industrial credit and investment corporation of India (ICICI),
unit trust of India (UTI), life insurance corporation of India (LIC), etc. there have been rendering
useful services to the growth of industries. They have been financing, promoting and
underwriting the functions of the capital market. 8. Investment opportunities Capital markets
provide excellent investment opportunities to the members of the public. The public can have
alternative source of investment i.e. In bonds, shares and debentures etc.

The capital market play very important role in Indian financial system as follow:

1. To mobilize long-term savings to finance long term investments.

2. To inspirations broader ownership of productive assets.
3. To improve the efficiency of capital allocation through a competitive pricing
mechanism.
4. To provide liquidity with mechanism enabling the investor to see financial assets.
5. To make lower the costs of transactions and information.
6. To make bridge between investors and companies.
7. To make quick valuation of financial instruments both equity and debt.
8. To security against market risk or price risk trough derivative trading and default risk
through investment protection fund.
9. To provide operational efficiency.
10. To direct the flow of funds into efficient channels through investment, disinvestment,
and reinvestment.
11. To make integration between financial sectors and non-financial sectors, Long term
fund and short term fund.
12. To give opportunities to risk taker in term of equity and return taker in term of debt.

Thus, a capital market serves as an important link between those who save and those who aspire
to invest their savings
 14

CAPITAL MARKET INSTRUMENTS

Financial instruments that are used for raising capital resources in the capital market are known
as Capital Market Instruments‟. The changes that are sweeping across the Indian capital market
especially in the recent past are something phenomenal. It has been experiencing metamorphic in
the last decade, thanks to a host of measures of liberalization, globalization, and privatization
that have been initiated by the Government. Pronounced changes have occurred in the realm of
industrial policy, Licensing policy, financial services industry, interest rates, etc. The
competition has become very intense and real in both industrial sector and financial services
industry. As a result of these changes, the financial services industry has come to introduce a
number of instruments with a view to facilitate borrowing and lending of money in the capital
market by the participants. The various capital market instruments used by corporate entities for
raising resources are as follows:

1. Preference shares
2. Equity shares
3. Non-voting equity shares
4. Cumulative convertible preference shares
5. Company fixed deposits
6. Warrants
7. Debentures
8. Bonds
9. Mutual fund
10. Derivatives
11. Commodities
12. Currency exchange
 15

TYPES OF CAPITAL MARKETS

The Capital Market comprises the primary capital market and secondary capital market.

Primary Capital Market

The primary capital market is a market for new or fresh issues. It deals to the long-term flow of
fund from the surplus sector to the government and corporate sector through primary issues and
to banks and non-bank financial intermediary secondary issues, primary issues of the corporate
sector lead to capital formation. The Primary market for securities is the new issues market
which brings together the “supply and demand” or “sources and uses” for new capital funds.

The company will usually issue only primary shares, but may also sell secondary shares.
Typically, a company will hire an investment banker to underwrite the offering and a corporate
lawyer to assist in the drafting of the prospectus.

The sale of stock is regulated by authorities of financial supervision and where relevant by a
stock exchange. It is usually a requirement that disclosure of the financial situation and prospects
of a company be made to prospective investors.

A follow on public offering /Further Issue is when an already listed company makes either a
fresh issue of securities to the public or an offer for sale to the public, through an offer document

Secondary Capital Market

The secondary market also called "aftermarket” is the financial market for trading of securities
that have already been issued in its initial private or public offering. Stock exchanges are
examples of secondary markets. Alternatively, secondary market refers to the market for any
kind of used goods.

Secondary market is also called share market. Share market includes exchange of those securities
which are already sold and listed in the Primary market. Any transaction in the share market can
 16

be executed by the members of the exchange keeping in mind the rules and regulations of the
SEBI.

If any normal investor wants to buy or sell any security then he or she will have to contact with
any broker of the exchange. Then the broker shall buy or sell the contemplated security on behalf
of the investor and thus will be entitled to a certain brokerage.

The secondary capital market is a market where outstanding or exciting securities are traded. An
equity instrument being an external fund provides an all-time market while a debt instrument,
with a defined maturity period, is traded at the secondary market till maturity. Unlike primary
issues in the primary market which result in capital formulation the secondary market facilitates
only liquidity and marketability of outstanding debt and equity instruments. The secondary
market also provides instant valuation of securities made possible by changes in the internal
environment that is, companywide and industry wide facilities the measurement of the cost of
capital and rate of return of economic entities at the micro level. The Indian secondary capital
market classify into two ways as follows:

1. Secondary capital market for corporate and financial intermediaries.

2. Secondary capital market for government securities and public sector bonds.

ROLE OF SEBI IN THE REGULATION OF CAPITAL MARKET

Before the establishment of the securities and exchange board of India, the principal legislations
governing the securities market in India were the capital issues control act 1956 and the
securities contract act 1956. The regulatory powers were vested with controller of capital issues
for the primary market and the stock exchange division for the secondary market in the Ministry
of finance, Government of India.

In the year 1989, SEBI was created by an administrative fiat of the ministry of finance. Since
then, SEBI as gradually was granted more and more powers. With the repeal of the capital issues
control act and the enactment of the SEBI act in 1992, the primary market has become the
 17

preserve of SEBI. Further, the ministry of finance, government of India, has transferred most of
the powers under the securities contracts act 1956 to SEBI.

SEBI protects the interest of investors in securities and promote the development of securities
market.

Functions of the SEBI are as follow:

1. Regulate the business in stock exchanges and any other securities markets.
2. Register and regulate the working of capital market intermediaries like as brokers,
merchant bankers, portfolio managers and so on.
3. Register and regulate the working mutual funds.
4. Promote and regulate self-regulatory organizations.
5. Prohibit fraudulent and unfair trades’ practices in securities markets.
6. Promote investors’ education and training of intermediaries of securities markets.
7. Prohibit insider trading securities.
8. Regulate substantial acquisition of shares and takeover of companies.
9. Perform such other functions as may be prescribed by the government.
10. Review any intermediary or market participant information.
11. Review books of depository participants, issuers of beneficiary owners.
12. Investigate and inspect books of accounts and record of insiders.
13. Suspend the registration of banker if and quarry is there.
14. Suspend certificates and registration if and quarry is there.

Regulations of the Capital Market

Securities and Exchange Board of India (SEBI) was set up as an administrative arrangement in
1988.In 1992, the SEBI Act was enacted, which gave statutory status to SEBI. It mandates SEBI
to perform a dual function: investor protection through regulation of the securities market and
fostering the development of this market. SEBI has been vested most of the functions and powers
under the Securities Contract Regulation (SCR) Act, which brought stock exchanges, their
 18

members, as well as contracts in securities which could be traded under the regulations of the
Ministry of Finance. It has also been delegated certain powers under the Companies Act. In
addition to registering and regulating intermediaries, service providers, mutual funds, collective
investment schemes, venture capital funds and takeovers, SEBI is also vested with the power to
issue directives to any person(s) related to the securities market or to companies in areas of issue
of capital, transfer of securities and disclosures. It also has powers to inspect books and records,
suspend registered entities and cancel registration.

The securities market is regulated by various agencies such as the Department of Economic
Affairs (DEA), The Department of company affairs (DCA), the Reserve Bank of India and the
SEBI. The activities of these agencies are coordinated by a high level committee on capital and
financial markets. The capital market for equity and debt securities is regulated by the Securities
and Exchange Board of India. The SEBI has full autonomy and authority to regulate and develop
the capital market. The government has framed rules under the Securities Contracts Act (SCRA),
the SEBI Act and the Depositories Act. The power in respect of the contracts for sales and
purchase of government securities, money market securities and ready forward contracts in debt
securities are exercised concurrently by the RBI.

The four main legislations governing the capital market are as follows:

1. The SEBI Act, 1992 which establishes the SEBI with four fold objectives of protection of
the interests of investors in securities, development of the securities market, regulation of
the securities market and matter connected therewith and incidental thereto.
2. The Companies Act, 1956 which deals with issue, allotment and transfer of transfer of
securities, disclosures to be made in public issues, underwriting, rights and bonus issues
and payment of interest and dividends.
3. The Securities Contracts Regulation Act, 1956 which provides for regulations of
securities trading and the management of stock exchanges.
4. The Depositories Act, 1996 which provides for establishment of depositories for
electronic maintenance and transfer of ownership of demat securities.
 19

CONCLUSION

This paper is related with the various aspect of the Indian capital market which includes concept,
meaning, nature, and scope of the capital market and origin, history, development of the Indian
capital market. There are many factors influenced on Indian capital market like as macro
economic factors, global stock market performance, foreign investments, government and politic
interferences, behavior of investors etc.
 20

BIBLIOGRAPHY

 http://www.legalservicesindia.com/article/2283/Working-of-Capital-Market-In-
India.html
 http://myimsv2.imsindia.com/2016/05/24/capital-markets-in-india/
 http://finmin.nic.in/the_ministry/dept_eco_affairs/capital_market_div/recent%2
0developments.asp?pageid=6
 Dr. S. Guruswami, “Capital Market”, The Mcgraw-Hill, Company, 2nd Edition, Year-
2010, Chapter-3, Page No 47-48.
 www.investopedia.com
 http://www.rrfinance.com/research