Capital Market
Organised Market
The Capital Market facilitates medium and long-term borrowing or fundraising for Governments, banks, financial institutions, corporations, and foreign markets through the issuance of securities like shares, debentures, bonds, etc. It serves as a platform for trading in securities. SEBI (Securities Exchange Board of India), in conjunction with the Reserve Bank of India, regulates the capital market in India to safeguard investor interests and enhance the microstructure of the country’s capital markets. Types of organised Market (a) Stock Market : Stocks, ETF (b) Loan From Bank and NBFIs, (c) Derivatives Market : Future and Options, (d) Forex Market : Currency Exchange , (e) Commodity Market : Mcx and Ncdex.
There are two types of market
Primary market
Secondary market
A] The Primary Market involves new securities issuances, commonly known as Initial Public Offerings (IPOs), where investors directly purchase shares or bonds from a company.
B] The Secondary Market, also known as the stock market or stock exchange, facilitates the buying and selling of existing securities.
Primary Market
The Primary Market is the birthplace of securities, where companies and institutions raise funds by issuing equity and debt-related securities to investors. All primary issuances are conducted through the depository mode. Companies with dematerialized shares have the flexibility to adjust par values as needed. These securities, representing ownership or debt, hold monetary
value and can be traded on the secondary market, such as stock exchanges.
To safeguard investors, SEBI has implemented reforms, enhancing disclosure standards in public issue documents and introducing prudential norms. IPOs can utilize book building under Section 3 of the SEBI Act 1992, with disclosed price bands and issue sizes. Companies are obligated to reveal all material facts and project-related risk factors during public issues. If an issue is undersubscribed (falls short of 90% collection), the entire amount is refunded to investors.
The Securities Contracts (Regulation) Act, 1956, abbreviated as SCRA, is an Indian parliamentary enactment. It is concerned with overseeing, regulating, or managing activities related to the buying, selling, or dealing in securities, stock exchanges, contracts involving securities, bonds, debentures, and the listing of securities, including ETFs on stock exchanges. The act monitors and supervises stock exchanges in India to prevent undesirable contracts in the securities market through a system of recognition and ongoing supervision.
Following are the function of Capital Market in India
“New Capital Issues – Free Pricing Introduced : Prior to 1992, the raising of capital from the securities market was governed by the Capital Issues (Control) Act, 1947. Under this legislation, firms were mandated to obtain approval from the Controller of Capital Issues (CCI) for fundraising in the market. New companies were permitted to issue shares at par. The free pricing method for new capital issues involves raising capital through shares or bonds, where the price is determined by
the forces of demand and supply. Only a limited number of existing companies with substantial reserves could issue shares at a premium, based on a prescribed formula.
New Capital Issues – Issuing Mechanism : Following the discontinuation of the CCI regime, the determination of the offer price became a significant aspect. Initially, only the fixed-price mechanism was employed for floating new capital issues. Companies utilized a marketing process to raise funds through a public issue or the offer of equity shares to investors. During the public issue, the book for the IPO is open, and bids are collected from investors at various prices, either above or equal to the floor price. The book-building process, being time and cost-effective, has gained popularity. Both BSE and NSE provide platforms for conducting online IPOs through book building.
Participants play role in securities market
Stock Exchanges in India
The Bombay Stock Exchange (BSE), inaugurated in Mumbai, was the first organized stock exchange in India. Subsequently, the Ahmedabad Stock Exchange was established in 1894, and the Kolkata Stock Exchange was launched in 1908. By 1939, there were up to seven stock exchanges in
India, and this number increased to 21 by 1945 due to extensive speculation during the Second World War. Additionally, several unorganized stock exchanges, known as the kerb market, operated in the country without any formal structure. In 1956, the Securities Contracts (Regulation) Act was enacted to recognize and regulate stock exchanges in India.
Currently, there are approximately 23 stock exchanges in India. The National Stock Exchange (NSE) stands out as the most prominent among them. Established in Mumbai, NSE was incorporated in 1992 and began operations in 1994. It is promoted by leading financial institutions in India and operates with a corporate structure. NSE is known for its fully automated screen-based trading system called NEAT, providing nationwide coverage. Stock exchanges play a crucial role by offering the infrastructure and trading platform for securities issued during Initial Public Offerings (IPOs). The prices determined through trading reflect the current value of stocks and contribute to the fair valuation of the stock. Traders and speculators add liquidity to the market, enabling investors to sell shares when they need funds. Stock exchanges also engage clearing and settlement agencies, along with clearing banks, to handle the clearing and settlement of securities.
Regulation of stock exchange
The Securities Contract (Regulation) Act, 1956, empowered the central government to announce the Securities Regulations (Rules) in 1957. These rules outlined procedures for recognizing stock exchanges, mandating periodic and annual