FINANCIAL MARKET OPERATIONS

Unit 2

What is Capital Market?

A market including all institutions, organisations, and instruments providing

medium and long-term funds is known as a Capital Market.

A market that serves as a link between the savers and borrowers by

transferring the capital or money from those who have a surplus amount of
money to those who are in need of money or investment is known as Financial
Market. Simply put, Financial Market is a market that creates and exchanges
financial assets. In general, the investors are known as the surplus units and
business enterprises are known as the deficit units. Hence, a financial market
acts as a link between surplus units and deficit units and brings the borrowers
and lenders together. One can allocate funds with the help of the following two
main ways:

● Through Banks
● Through Financial Markets

The households (who are the surplus units) may keep their savings in banks or
they may use that amount for buying securities from the capital market. The
financial market and banks, then lend the funds to the business firms (who are
the deficit units). The banks and financial market compete with each other.
Financial Markets are classified into two broad categories; namely, Capital
Market(Primary Market and Secondary Market) and Money Market.

Capital Market

A market including all institutions, organisations, and instruments providing

medium and long-term funds is known as a Capital Market. A capital market
does not include institutions and instruments providing finance for a short term,
i.e., up to one year. Some of the common instruments of a capital market are
debentures, shares, bonds, public deposits, mutual funds, etc. An ideal capital
market is one that allocates capital productively, provides sufficient information
to the investors, facilitates economic growth, where finance is available to the
traders at a reasonable cost, and where the market operations are fair, free,
competitive, and transparent. A capital market is of two types; namely, Primary
Market and Secondary Market.

According to V.K. Bhalla, “Capital Market can be defined as the mechanism

which channelises saving into investment or productive use. Capital market
allocates the capital resources amongst alternative uses. It intermediates flow
of savings of those who save a part of their income from those who want to
invest it in productive assets.”

Nature or Features of Capital Market

The features of a Capital Market are as follows:

1. Serves as a link between Savers and Investment Opportunities

A capital market serves as a crucial link between the saving process and
investment process, as it transfers money from the savers to entrepreneurial
borrowers.

2. Deals in Long-term Investment

A capital market provides funds for the medium and long term, and it does not
deal with channelising savings for less than one year.

3. Utilises Intermediaries

A capital market works by making use of different intermediaries like

underwriters, brokers, depositories, etc. The intermediaries of a capital market
act as the working organs of the capital market. Hence, they are very crucial
elements of a capital market.

4. Determinant of Capital Formation

The activities that take place in a capital market determine an economy’s rate of
capital formation. This market offers various attractive opportunities to those
who have surplus funds so that they can invest more and more in the capital
market, and get encouragement in saving more for profitable opportunities.

5. Government Rules and Regulations

Even though a capital market operates freely, it works under the guidance of
Government policies. A capital market functions within the framework of
government rules and regulations. For example, the stock exchange works
under the regulations of a government body, i.e., SEBI.

Functions of Capital Market

1. Links Borrowers and Investors: Capital markets serve as an

intermediary between people with excess funds and those in need of
funds.
2. Capital Formation: The capital market plays an important role in capital
formation. By timely providing sufficient funds, it meets the financial
needs of different sectors of the economy.
3. Regulate Security Prices: It contributes to securities' stability and
systematic pricing. The system monitors whole processes and ensures
that no unproductive or speculative activities occur. A standard or
minimum interest rate is charged to the borrower. As a result, the
economy's security prices stabilize.
4. Provides Opportunities to Investors: The capital markets have enough
financial instruments to meet any investor's needs, regardless of the risk
 level. Capital markets also provide investors with the opportunity to
increase their capital yields. The interest rate on most savings accounts is
extremely low compared to the rate on equities. Therefore, investors can
earn a higher rate of return on the capital market, though some risks are
involved as well.
5. Minimises Transaction Cost And Time: Long-term securities are
traded on the capital market. The whole trading process is simplified and
reduced in cost and time. A system and program automate every aspect
of the trading process, thus speeding up the entire process.
6. Capital Liquidity: The financial markets allow people to invest their
money. In exchange, they receive ownership of a stock or bond. Bond
certificates cannot be used to purchase a car, food, or other assets, so
they may need to be liquidated. Investors can sell their assets for liquid
funds to a third party on the capital markets.

What are the Different Instruments of the Capital Market?

The types of capital market instruments are broadly classified into two types -

1. Equity Security

a. Equity Shares
These shares are the prime source of finance for a public limited or
joint-stock company. When individuals or institutions purchase
them, shareholders have the right to vote and also benefit from
dividends when such an organization makes profits. Shareholders,
in such cases, are regarded as the owners of a company since they
hold its shares.

b. Preference Shares

These are the secondary sources of finance for a public limited

company. As the name suggests, holders of such shares enjoy
exclusive rights or preferential treatment by that company in
specific aspects. They are likely to receive their dividend before
equity shareholders. However, they do not typically have any voting
rights.

2. Debt Security
 It is a fixed income instrument, primarily issued by sovereign and state
governments, municipalities, and even companies to finance
infrastructural development and other types of projects. It can be viewed
as a loaning instrument, where a bond’s issuer is the borrower.

a. Bonds

Bondholders are considered as creditors concerning such an entity

and are entitled to periodic interest payment. Furthermore, bonds
carry a fixed lock-in period. Therefore, issuers of bonds are
mandated to repay the principal amount on the maturity date to
bondholders.

b. Debentures

Unlike bonds, debentures are unsecured investment options.

Consequently, they are not backed by any asset or collateral. Here,
lending is entirely based on mutual trust, and, herein, investors act
as potential creditors of an issuing institution or company.

All these four instruments are parts of the capital market. Since
each is unique and has distinguishing features, they are useful in
different ways for a company. Therefore, it is crucial to understand
the different types of capital market instruments so that you can
acknowledge their purposes.

3.Derivatives

These are instruments that derive from other securities, which are referred to
as underlying assets (as the derivative is derived from them). The price,
riskiness and function of the derivative depend on the underlying assets since
whatever affects the underlying asset must affect the derivative. The derivative
might be an asset, index or even situation. Derivatives are mostly common in
developed economies.

Some examples of derivatives are:

● Mortgage-Backed Securities (MBS)

● Asset-Backed Securities (ABS)
● Futures
● Options
 ● Swaps
● Rights
● Exchange Traded Funds or commodities

Of all the above stated derivatives, the common one in Nigeria is Rights where
by the holder of an existing security gets the opportunity to acquire additional
quantity to his holding in an allocated ratio.

*Note: a Trust Deed is a document that states the terms of a contract. It is held
in trust by the Trustee.

Classification of Capital Market

A capital market can be classified into two categories; viz., Primary Market and
Secondary Market.

1. Primary Market (New Issue Market)

A market in which the securities are sold for the first time is known as a
Primary Market. It means that under the primary market, new securities are
issued from the company. Another name for the primary market is New Issue
Market. This market contributes directly to the capital formation of a company,
as the company directly goes to investors and uses the funds for investment in
machines, land, building, equipment, etc.

Method of Floatation of Securities in Primary Market

One can issue the securities in the primary market with the help of the
following methods:

i) Public Issue through Prospectus

The first method of floatation of securities in a primary market is ‘Public Issue

through Prospectur’. Under this method, a company issues a prospectus to
inform the general public and attract them to invest in the company. The
prospectus of a company contains information regarding the purpose for which
it wants to raise funds, its past financial performance, its background, and
future prospects. The information provided in the prospectus helps the general
public, get to know about the earning potential of the company and the risks
involved in investing in the company. Based on this information, the public
decides whether or not they want to invest in the company. With the help of an
IPO, a company can easily approach a large number of persons and can
approach the public at large. Sometimes under this method, the companies take
help of the intermediaries like underwriters, brokers, and bankers for raising
capital from the general public.

ii) Offer for Sale

The second method is ‘Offer for Sale’ and under this method, the new securities
are offered to the general public not by the company directly, but by an
intermediary who has bought a whole lot of securities from the company. These
intermediaries are generally the firms of brokers. As the intermediaries offer
the new securities to the general public, the company is saved from the
complexities and formalities of issuing the securities directly to the public.

The sale of securities through Offer for Sale takes place in two steps:

● Firstly, when the company issues the new securities to the

intermediary at face value.

● Secondly, when the intermediaries issue securities to the general

public at a higher price with the motive of earning profit.

iii) Private Placement

It is a method in which a company sells securities to an intermediary at a fixed

price, and then the intermediaries sell these securities to selected clients at a
higher price instead of the general public. The company issuing securities
issues a prospectus providing details about the objective and future prospects
of the company so that the reputed clients will prefer to purchase the securities
from the intermediary. The selected clients to whom securities are issued by the
intermediaries are LIC, UTI, General Insurance, etc. As the company does not
have to incur expenses on manager fees, brokerage, underwriter fees, the
listing of the company’s name on the stock exchange, agent’s commission, etc.,
it is considered as a cost-saving method. This method is preferred by small-
scale companies and new companies that cannot afford to raise funds from the
general public.

iv) Right Issue (For Existing Companies)

Under this method, new shares are issued to the existing shareholders of a
company. It is known as the right issue because it is the pre-emptive right of the
shareholders that the company must offer them the new issue of shares before
subscribing them to outsiders. The existing shareholders have the right to
subscribe to the new shares in the proportion of the shares they already hold.

The Companies Act, 1956 states that it is compulsory for a company to issue a
Right Issue to the existing shareholders. It means that the stock exchange does
not allow a company to issue new shares in the market before giving the pre-
emptive rights to the existing shareholders. It is because if the company directly
issues the new issue to the new subscribers, then the existing shareholders of
the company may lose their share in the capital of the company and cannot have
control over the company.

v) e-IPOs (Electronic Initial Public Offer)

A new method of issuing securities in which an online system of stock exchange

is used is known as e-IPO. Under this method, a company appoints registered
brokers to accept applications and place orders. The company which is issuing
the security has to apply for the listing of its securities on any exchange.
However, it cannot be the same exchange where it has earlier offered its
securities. For this method, the manager coordinates the activities with the help
of various intermediaries connected with the Issue.

2. Secondary Market (Stock Exchange)

A market in which the sale and purchase of newly issued securities and second-
hand securities are made is known as a Secondary Market. In this market, a
company does not directly issue its securities to the investors. Instead, the
existing investors of the company sell the securities to other investors. The
investor who wants to sell the securities and the one who wants to purchase
meet each other in the secondary market and exchange the securities for cash
with the help of an intermediary called a broker.

Primary Market

What is a Primary Market?

A Primary Market is defined as a platform where securities or tradable financial
instruments are introduced to the public for the first time. The governments,
corporations, and other parties raise capital from investors by issuing equity or
debt instruments in the primary market. The investors purchase these securities
from the primary market and then trade them in the secondary market. All of
this trading takes place in the stock market. As corporations or government
agencies raise money from this market, there are underwriters or investment
banks to facilitate this process. They determine a price range for a given
security or financial instrument and then coordinate with the investors to sell
the security. Once an initial selling of security is completed, the entire trading
business shifts to the secondary market.
A Primary Market is where new bonds or stocks are introduced to the public for
the first time. Here, the investors (public) can purchase stocks or bonds directly
from the issuer (e.g., corporations).

How does the Primary Market Work?

1. The primary market works under the transactions system and for this
process, three parties are involved: corporations or issuers, investors, and an
underwriter.
2. A Corporation or Enterprise issues its stocks into the primary market as an
IPO (initial public offering). The selling price of these new issues is set by a
designated underwriter (not necessarily it be a financial institution). The new
public offering is facilitated and observed by the underwriter. The underwriter
or the investment banks who determine the securities’ initial price are given a
commission by the issuer for the sale and the remaining amount is taken by the
issuer.
3. Corporations or Government Entities issue new common and preferred stock,
corporate and government bonds, notes, and bills on the primary market. They
do so to expand their business operations or increase corporate capital. The
corporations issue both debt and equity securities such as debentures and
shares. On the other hand, the government issues treasury bills which are debt
securities. These securities are released either at a face value, discounted
value, or at a premium rate which transforms into debt and equity instruments.
4. These securities are issued in both international and domestic markets. In
the primary market, investors purchase these newly issued stocks and bonds
with a view of generating returns in the future by their investment. This form of
market is under the regulation of the SEBI (Securities and Exchange Board of
India). The primary market comes under the ambit of the capital market.

Functions of Primary Market

The main functions of a new issue sue market can divided into new project.
1. Origination. It refers to the work of investigation analysis and processing of
new project proposals.. It starts before an issue is actually floated in the market.
This function is done by merchant bankers who may be commercial banks, all
India financial institutions or private firms. At present, financial institutions and
private firms also perform this service is highly important the success of the
issue depends, to a large extent on the efficiency of the market.
2. Underwriting. It is an agreement whereby the underwriter promises to
subscribe to specified number of shares or debentures or a specified amount of
stock in the event of public not subscribing to the issue. If the issue is fully
subscribed, then there is no liability for the underwriter. If a part of share issues
remains unsold, the underwriter will buy the shares. Thus, underwriting is a
guarantee for marketability of shares. There are two types of underwriters in
India - Institutional (LIC, UTI, IDBI, ICICI) and Non - institutional are brokers.
3.Distribution.It is the function of sale of securities to ultimate investors. This
service is performed by specialized agencies like brokers and agents who
maintain a regular direct contact with the ultimate investors.

Types of Primary Market Issues

The primary market issues can be of different types, each having different
purposes and fulfilling different needs. Some of the issues in the primary market
are as follows,
1. Initial Public Offering (IPO): The first offering or sale of a company’s
securities to the public is known as the Initial Public Offering (IPO). It is a type
of public issue. IPO takes place when a private or public (unlisted) company
decides to enter the stock market by issuing shares to investors. Here, an
underwriter (investment bank or financial institution) determines the offering
price purchases the securities from the issuer, and further sells them to the
public. The public (or investors) become the shareholders of the issuing
company. Thus, in an IPO, an unlisted company gets listed on the Stock
Exchange.
2. Follow-on or Further Public Offering (FPO): Follow-on public offering is
another form of public issue where the listed company in a stock exchange
issues fresh securities to the public to raise additional funds.
3. Private Placement: Private placement is a type of issue where securities
are sold directly to institutional investors (mutual funds, pension funds, or
insurance companies) rather than the general public. This method is used by
companies who might not meet the regulatory requirements for a public
offering, i.e., small early-stage startups. Additionally, if we compare private
placement and IPO, private placement is much easier to handle than IPO due to
its regulatory norms and time consumption.
4. Rights Issue: In this type, a corporation offers its existing shareholders the
right to purchase extra shares at a discounted or predetermined price. This
helps the existing shareholders to maintain their part of ownership in the
company and further, the company can raise additional funds without extra
charges.
5. Preference Share Issue or Preferential Issue: This is one of the fastest
types of raising capital for a company. Preference shares are securities that can
act as both equity and debt. The shareholders having preference shares receive
a fixed dividend before the normal shareholders and during the liquidation of
the company, these shareholders hold a higher initial claim on the company
assets than the normal shareholders. These types of issues can be used by both
listed and non-listed companies.
6. Qualified Institutional Placement (QIP): QIP is a type of private
placement where equity shares and partial or full convertible debentures
(except warrants) are issued by the listed companies. Qualified Institutional
Buyers (QIB) are the purchasers of these convertible issues. They are experts in
the financial field and can be of different types: foreign venture capital
investors, mutual funds, alternate investment funds, public financial
institutions, scheduled commercial banks, pension funds, and issuers (these are
registered under SEBI). Comparing QIP with preferential share issue, QIP is
much simpler in terms of regulations with SEBI.
7. Bonus Issue: A bonus issue or scrip issue or capitalisation issue is a form of
issue that offers free additional shares to the existing shareholders based on
their proportional holdings. This method only increases the number of
outstanding shares but does not raise additional capital for the company. These
shares are issued from their securities premium account or free reserves.
8. Debenture Issue: A company issues a debt instrument known as debenture
which has a fixed interest rate and a fixed maturity date. This type of primary
issue may be secured, or unsecured and mainly represents a borrowing for the
issuing company.
9. Government Securities Issue: Governments issue bonds and other
securities in the primary market to raise funds for different purposes, for
instance, budgetary needs or infrastructure development. These government
securities can be purchased by investors comprising individuals, institutional
investors, or foreign investors.

Examples of Primary Stock Market Selling

1. One of the well-known examples of primary stock market selling is

Facebook, the giant social media company. Their initial public offering (IPO)
was a remarkable one. In 2012, Facebook opened an IPO and they could raise
around $16 billion. This was one of the largest IPOs in the technology industry.
Their turnover increased by nearly 100% due to this IPO. There was a huge
demand for the shares and hence the underwriters fixed $38 as the rate for
each share in the primary market. Ultimately, the valuation of the company
increased to $104 billion (among the highest newly formed public companies).
2. Another IPO (biggest in India) was undertaken by Coal India in the year
2010. They raised ₹15,200 crore. The shares had an initial pricing of ₹287.75
and later the price increased to ₹340. A 5% discount was offered to the retail
investors, subsidiaries, and employees of the company, on the final IPO price.

Primary market intermediaries

● Merchant bankers Merchant bankers play an important role in issue

management process. Lead managers (category I merchant bankers)
have to ensure correctness of the information furnished in the offer
document. They have to ensure compliance with SEBI rules and
regulations as also Guidelines for Disclosures and Investor Protection. To
this effect, they are required to submit to SEBI a due diligence certificate
confirming that the disclosures made in the draft prospectus or letter of
offer are true, fair and adequate to enable the prospective investors to
make a well informed investment decision. The role of merchant bankers
in performing their due diligence functions has become even more
 important with the strengthening of disclosure requirements and with
SEBI giving up the vetting of prospectuses. SEBI's various operational
guidelines issued during the year to merchant bankers primarily
addressed the need to enhance the standard of disclosures.

It was felt that a further strengthening of the criteria for registration of

merchant bankers was necessary, primarily through an increase in the
net worth requirements, so that their capital would be commensurate
with the level of activities undertaken by them. With this in view, the net
worth requirement for category I merchant bankers was raised in 1995-
96 to Rs. 5 crore. In 1996-97, the SEBI (Merchant Bankers) Regulations,
1992 were amended to require the payment of fees for each letter of offer
or draft prospectus that is filed with SEBI. Part III gives further details of
the registration of merchant bankers during 1996-97.

● Underwriters Underwriters are required to register with SEBI in terms

of the SEBI (Underwriters) Rules and Regulations, 1993. In addition to
underwriters registered with SEBI in terms of these regulations, all
registered merchant bankers in categories I, II and III and stockbrokers
and mutual funds registered with SEBI can function as underwriters. Part
III gives further details of registration of underwriters. In 1996-97, the
SEBI (Underwriters) Regulations, 1993 were amended mainly pertaining
to some procedural matters.

● Bankers to an Issue Scheduled banks acting as bankers to an issue are

required to be registered with SEBI in terms of the SEBI (Bankers to the
Issue) Rules and Regulations, 1994. These regulations lay down eligibility
criteria for bankers to an issue and require registrants to meet periodic
reporting requirements. Part III gives further details of registration of
bankers to an issue.

● Portfolio managers Portfolio managers are required to register with

SEBI in terms of the SEBI (Portfolio Managers) Rules and Regulations,
1993. The registered portfolio managers exclusively carry on portfolio
management activities. In addition all merchant bankers in categories I
and II can act as portfolio managers with prior permission from SEBI.
Part III gives further details of the registration of portfolio managers.

● Debenture trustees Debenture trustees are registered with SEBI in

terms of the SEBI (Debenture Trustees) Rules and Regulations, 1993.
Since 1995-96, SEBI has been monitoring the working of debenture
trustees by calling for details regarding compliance by issuers of the
terms of the debenture trust deed, creation of security, payment of
interest, redemption of debentures and redressal of complaints of
debenture holders regarding non-receipt of interest/redemption proceeds
on due dates. Part III gives further details of the registration of debenture
trustees.

● Registrars to an Issue and Share Transfer Agents Registrars to an

issue (RTI) and share transfer agents (STA) are registered with SEBI in
terms of the SEBI (Registrar to the Issue and Share Transfer Agent)
Rules and Regulations, 1993. Under these regulations, registration
commenced in 1993-94 and is granted under two categories: category I -
to act as both registrar to the issue and share transfer agent and
 category II - to act as either registrar to an issue or share transfer agent.
With the setting up of the depository and the expansion of the network of
depositories, the traditional work of registrars is likely to undergo a
change.

Advantages of Primary Market

One of the major advantages of the primary market is that here the
corporations can raise money directly from the investors. This enables them to
pay off debts, fund their operations, and expand their business. A few other
advantages are,
1. Capital Infusion: Corporations can raise a sufficient amount of capital by
issuing new shares in the primary market. This helps the company in expanding
its business, research and development, debt repayment or taking other
strategic initiatives.
2. Market Presence: A company can increase its visibility and credibility in the
market by attracting investors, analysts, and media if the company goes public
through an IPO.
3. Transparency and Fair Pricing: Due to regulations from SEBI, transactions
in the primary market are transparent and hence are a secure medium of
investment. Further, the pricing of the securities is decided by the underwriters
considering several factors leading to a fair pricing.
4. Subject to Low Risk: Companies offering securities via the primary market
are subject to cut down on risk due to diversification. Investors can reduce their
risk by investing in multiple financial instruments across the market. Further,
the primary market is not exposed to market fluctuations and hence, the
potential market risk does not affect the price of the securities as the price is
set by the underwriter.

Disadvantages of Primary Market

The following are some of the disadvantages that a primary market can possess,
1. High Costs: The process of going public, especially through an IPO, can be
expensive. Companies often incur significant underwriting and legal or
regulatory fees including marketing expenses. This leads to a reduction of net
proceedings from the issue.
2. Regulatory Obstacles: Companies going public must comply with extensive
regulatory requirements, which can be time-consuming and may pose
challenges. The SEBI has set out rules and regulations for going public which
can be cumbersome and complicate the proceedings.
3. Dilution of Ownership: Existing shareholders may experience dilution of
their ownership stake when new shares are issued in the primary market.
4. Risk of Over and Under Subscription: Small investors might lose out on
share allocation if the shares are over-subscribed. Also, if the issue is not
properly received in the market, then it might lead to under-subscription. Thus,
both under and oversubscription are harmful to the issue.
5. Time-Consuming: The proceedings for issuing in the primary market is
time-consuming as a company going for an IPO needs to initially hire an
underwriter, then the underwriter would analyse and study the market and
financials of the company and then decide on the further proceedings. This
whole process takes a lot of time to finally raise the money from the market.

Securities and Exchange Board of India (SEBI)

Introduction of the SEBI:

SEBI commonly known as the Securities and Exchange Board of

India is a regulatory body of the financial markets of India. It was originally
established as a non-statutory body on 12 April 1988, but it was declared an
autonomous body with statutory powers in 1992 under section 3 of the
Securities and Exchange of India Act, 1992, which came into force on 30
January 1992.
SEBI headquarters was set up in Mumbai and established several
regional offices across the country including New Delhi, Ahmedabad,
Kolkata, and Chennai, as well as opened local offices in Jaipur,
Guwahati, Bangalore, Patna, Bhubaneswar, Chandigarh, and Kochi.
Currently, there are 16 stock exchanges in the world, and NYSE [New York
Stock Exchange] is the top in the world, India’s Sensex [Stock Exchange
Sensitive Index] is the oldest and main stock exchange among the seven stock
exchange markets in India. To regulate, govern and monitor these securities
market’s capital, the Government of India created SEBI.
SEBI also regulates the performance of the stock market and the credit
flow of mutual funds. comprehensively we can say, It acts as a watchdog with
the power of an independent body dealing with the progress of the entire
securities exchange in the country as well as the entire stock market credit
flows in the country. It supervises and directs the Indian capital and securities
market while ensuring the interests of investors and financial backers by
framing rules and regulations and framing investment-related guidelines. NSE
and BSE are the two major stock exchanges among the seven stock exchanges
operating in India. All these stock exchange activities are regulated by SEBI.

Evolution of Securities and Exchange Board of India (SEBI):

In the late 1970s, People have seen the booming stock markets in India,
where many irregularities and malpractices such as informal self-styled
merchant bankers, unauthorized private placements, and price rigging began to
take place. The famous 1992 Indian stock market scam by Harshad Shantilal
Mehta falls under this category only. After all these bad results, the Government
of India felt the need to set up an authority to regulate the workflow of stock
markets and curb the malpractices as soon as possible. As a result, SEBI was
created by the Government of India to control malpractices and irregularities in
the stock exchange of India.

Structure of the Securities and Exchange Board of India (SEBI):

 SEBI has been designed with a corporate structure, which consists of a
Board of directors, Senior Management, Departmental Heads, and various key
departments. SEBI’s hierarchical structure consists of the following 9
designated officers.

1. The Chairman – Nominated by the Union Government of India.

2. Two Members – Belonged to the Union Finance Ministry of India.

3. One Member – Belonged to the Reserve Bank of India.

4. Other Five Members – Nominated by the Union Government of India.

Role of the Securities and Exchange Board of India (SEBI):

● SEBI also plays a major role in the Indian economy, to ensure that
safeguard the interests of major participants in the financial markets,
investors in the market, and financial intermediaries. The result of this
increase in investment in the stock markets will boost the Indian
economy.

● This regulatory body ensures a healthy and transparent environment

for its affiliated companies in the corporate sector to raise funds from
various sources to invest in the stock market.

● This regulatory authority is responsible for keeping an environment

free of malpractices and irregular practices as investors invest their
well-deserved hard-earned money in the stock market, where SEBI
plays a major role in this process because financial backers and
investors are the only ones who keep the market sector in an active
mode.

● SEBI should facilitate smooth, secure financial transactions and safe

transactions for intermediaries who act as middlemen between the
financial backers, insurers, and investors.

● SEBI regulates the capital amount in the trading through certain

measures and regulations which protect the interests of traders and
investors and reflect fair publicity on the stock exchange.
 ● This regulatory body has framed rules and regulations to prevent
malpractices and unethical practices related to complaints or tips
raised in the grievance or complaints division.

● SEBI plays a major role in paving the way for how securities markets
and stock exchanges deal with security threats, fraudulent, and unfair
trade practices.

● Another major role of SEBI is to promote the development of

securities market and stock exchanges, encourage the formation of
self-regulatory bodies and promote learning opportunities for
investors as well as provide education and training to intermediaries
regarding stock exchange or securities exchange techniques.

● SEBI conducts registration activities for new brokers, stock brokers,

share transfer agents, financial advisers, and intermediaries. In
addition, it also enrolls working capital funds and collective
investment schemes like mutual funds.

● SEBI protects investors and other financial stakeholders by creating

awareness among the investors and prohibiting fraudulent and unfair
practices by checking price rigging and preventing insider trading.

● Another key role played by SEBI is to check the functioning of

business processes followed by financial markets through conducting
inquiries, audits of inter-dealer exchanges, and regulatory actions
taken by affiliated companies in respect of brokers, merchant brokers,
sub- Brokers, credit registration, rating agencies, etc.

● SEBI also performs some developmental roles like training

intermediaries, conducting research work, promoting advanced self-
regulatory institutions, and buying-selling mutual funds directly from
AMC [Asset Management Company] through a broker.

Reasons for the establishment of SEBI

When the dealings of stock markets grew, it also gave rise to a lot of
malpractices in the stock market like price rigging, delay in delivery of shares,
violation of rules and regulations of stock exchange, etc. The existence of these
malpractices made the customers lose faith and confidence in the stock
exchange. Therefore, the Government of India decided to set up a regulatory
body or an agency known as SEBI(Securities and Exchange Board of
India).

Purpose and Role of SEBI

The main purpose of the formation of SEBI was to keep a check on malpractices
and protect the interest of investors. Simply put, SEBI was set up to fulfil the
needs of three groups, which are:

● Issuers. SEBI provides a marketplace for issuers in which they can

raise finance easily and fairly.

● Investors. SEBI provides protection for investors and supplies

accurate and correct information.

● Intermediaries. SEBI provides a competitive professional market for

intermediaries.

Objectives of SEBI

The main objective of SEBI is protection of the interest of investors, promotion

of the development of stock exchange, and regulation the activities of stock
market. The objectives of SEBI are as follows:

● Regulation of the activities of stock market.

● Protection of the rights of investors and ensuring safety of their

investment.

● Prevention of fraudulent and malpractices by having a balance

between self-regulation of business and its statutory regulations.

● Regulation and development of a code of conduct for the

intermediaries like underwriters, brokers, etc.

Functions of Securities and Exchange Board of India (SEBI)

To meet the three objectives SEBI performs the three main functions; namely,
Protective Functions, Developmental Functions, and Regulatory
Functions.

1. Protective Functions

The functions performed by SEBI to protect the interest of investors and

provide safety of investment are protective functions. The functions performed
by SEBI as protective functions are as follows:
i) Check a Price Rigging

Manipulation of price of securities to inflate or depress the market price of

securities is known as Price Rigging. SEBI through protective functions
prohibits these kinds of practices as it can cheat and defraud the investors.

ii) Prohibits Insider Trading

Any person who is connected with the company such as promoters, directors,
etc., is an insider. They have all the sensitive information about the company
which can affect the price of the securities. However, this sensitive information
is not available to the people at large, and if the insiders use this privileged
information to make profit, it is known as Insider Trading. SEBI to protect the
interest of investors, keep a strict check on the insiders when they buy
securities of the company and takes strict actions against them on insider
trading.
For example, the directors of a company know that the company will be issuing
Bonus Shares to the shareholders at the end of the financial year and they use
this information to make profit by purchasing shares from the market. This
purchase of shares by the directors will be considered insider trading.

iii) SEBI prohibits fraudulent and unfair trade practices

SEBI does not allow the companies to make any statement that can mislead the
people and induce the sale or purchase of securities by any other person.

iv) Educate Investors

SEBI undertakes various steps to educate the investors so that they can easily
evaluate the securities of different companies and select the most profitable
security.

v) SEBI under protective functions, promotes fair practices and code of

conduct in the security market.

To do so, SEBI takes the following steps:

● It has issued guidelines for the protection of the interest of debenture

holders wherein the company cannot change the terms in the mid-
term.

● It empowers investigating cases of insider trading and also has

provisions for imprisonment and a stiff fine.

● It has also stopped the practice of making preferential allotments of

shares that are unrelated to market prices.

2. Developmental Functions
SEBI performs developmental functions to promote and develop the activities in
stock exchange and to increase the business in stock exchange. The functions
performed by SEBI under developmental functions are as follows:
i) It promotes the training of intermediaries of the securities market.
ii) It tries to promote the activities of the stock exchange. To do so, it adopts a
flexible and adaptable approach in the following ways:

● SEBI has given permission for internet trading through registered

stock brokers.

● In order to reduce the cost of issue, SEBI has also made underwriting
optional.

● Lastly, it has permitted initial public offer of primary market through

stock exchange.

3. Regulatory Functions

SEBI performs regulatory functions to regulate the business in stock exchange.

The functions performed by SEBI under regulatory functions are as follows:

● To regulate the intermediaries like underwriters, brokers, etc., SEBI

has framed a set of rules and regulations and a code of conduct.

● It also conducts inquiries and audits of stock exchanges.

● SEBI registers and regulates the working of mutual funds, etc.

● SEBI has brought the intermediaries under the regulatory purview

and has made private placement more restrictive.

● SEBI regulates the takeover of companies.

● Ultimately, it registers and regulates the working of stock brokers,

share transfer agents, sub-brokers, merchant brokers, trustees, and
everyone who is associated with the stock exchange in any manner.

SEBI guidelines

The Securities and Exchange Board of India (SEBI) is the regulatory body for
the securities and commodity markets in India under the jurisdiction of the
Ministry of Finance. SEBI's guidelines cover a wide range of regulations and
rules to ensure the orderly functioning of the securities market and protect
investor interests. Below are some key areas of SEBI guidelines:
1. IPO and Listing Regulations

● Eligibility Criteria: Specifies conditions for companies to be eligible to

list on stock exchanges.
● Disclosure Requirements: Detailed requirements for disclosure in offer
documents.
● Pricing and Allotment: Guidelines for price determination and
allotment procedures.

2. Mutual Funds Regulations

● Scheme Categorization: Classification of mutual fund schemes to avoid

confusion and ensure transparency.
● Investment Restrictions: Limits on where and how much mutual funds
can invest in different asset classes.
● NAV Disclosure: Rules for the disclosure of Net Asset Value (NAV) of
mutual fund schemes.

3. Insider Trading Regulations

● Prohibition: Prohibits trading in securities by insiders who have access

to unpublished price-sensitive information.
● Disclosures: Requirements for disclosures by insiders and connected
persons about their transactions.

4. Takeover Code

● Trigger Points: Specifies thresholds for making an open offer when

acquiring significant shareholding in a company.
● Open Offer Process: Guidelines for making an open offer to
shareholders and the procedure for the same.

5. Corporate Governance

● Board Composition: Rules regarding the composition of the board,

including the requirement for independent directors.
● Audit Committee: Mandates the formation of an audit committee with
specified powers and functions.
● Disclosure Requirements: Detailed requirements for disclosures
related to financials, management, and other governance aspects.

6. Market Intermediaries Regulations

● Registration: Procedures for the registration of brokers, sub-brokers,

and other market intermediaries.
● Code of Conduct: Prescribes a code of conduct for different
intermediaries to ensure ethical behavior.

7. Prohibition of Fraudulent and Unfair Trade Practices

● Market Manipulation: Prohibits any activity that manipulates market

prices or creates a false market.
● False Statements: Prohibits making false or misleading statements to
induce the sale or purchase of securities.
8. Regulations for Alternative Investment Funds (AIFs)

● Categories: Classification of AIFs into different categories based on their

investment strategies.
● Investment Restrictions: Limits on investment concentration and types
of investments AIFs can make.
● Disclosure Requirements: Periodic disclosure requirements to
investors.

9. Credit Rating Agencies Regulations

● Registration: Requirements for the registration of credit rating

agencies.
● Conduct: Code of conduct and compliance requirements for maintaining
the quality and integrity of ratings.

10. Real Estate Investment Trusts (REITs) and Infrastructure

Investment Trusts (InvITs)

● Structure and Listing: Guidelines for the structure, listing, and

operation of REITs and InvITs.
● Investment Conditions: Specific rules regarding the investment
conditions and leverage limits.

These guidelines ensure the smooth functioning of the capital market, protect
investor interests, and promote transparency and accountability among market
participants.

Recent Marketing Strategies for Public Issue

In the context of financial market operations, recent marketing strategies for

public issues (Initial Public Offerings or IPOs) have adapted to leverage
technology, data analytics, and multi-channel approaches to effectively reach
and engage potential investors. Here are the key strategies:

1. Digital Marketing and Social Media

● Social Media Outreach: Financial market operators use platforms like
LinkedIn, Twitter, Facebook, and Instagram to create awareness and buzz
around upcoming IPOs. They share multimedia content, including videos,
infographics, and key information to engage retail investors.
● Influencer Collaborations: Partnering with financial influencers and
bloggers who have credibility and a significant following among investors
to spread information and build trust in the IPO.
● Email Campaigns: Targeted email marketing campaigns to provide
detailed insights, benefits, and procedural guidelines about the IPO to
potential investors.

2. Virtual Roadshows and Webinars

 ● Virtual Investor Meetings: Conducting virtual roadshows where
company executives present the investment case to institutional investors
through online platforms, enabling a broader reach without geographic
limitations.
● Educational Webinars: Hosting live webinars to discuss the IPO details,
business model, growth prospects, and to answer investor questions, thus
increasing transparency and investor confidence.

3. Content Marketing
● Informative Articles and Blogs: Publishing articles and blog posts on
the company’s and third-party financial websites to provide
comprehensive information about the IPO, industry outlook, and
investment potential.
● In-Depth Reports: Offering detailed whitepapers and reports that
analyze the company, its market, and growth prospects to help investors
make informed decisions.

4. Search Engine Optimization (SEO) and Paid Advertising

● Optimized Online Presence: Ensuring the company's website is
optimized for search engines to appear prominently in search results
when investors seek IPO information.
● Pay-Per-Click (PPC) Advertising: Running targeted PPC campaigns on
Google and other search engines to drive traffic to the IPO information
page, capturing interested investors’ attention.

5. Investor Education and Interactive Tools

● Educational Content: Creating short videos, infographics, and articles
that explain the IPO process, company’s business model, and growth
potential in an easy-to-understand format.
● Interactive Investment Tools: Providing tools like IPO calculators and
investment simulators on the company’s website to help investors
understand potential returns and the investment process.

6. Public Relations (PR) and Media Engagement

● Media Coverage: Securing coverage in financial media, including
newspapers, magazines, and online financial portals to build credibility
and reach a wider audience.
● Press Releases: Regularly issuing press releases to announce key IPO
milestones, such as regulatory filings, roadshow schedules, and listing
dates to keep the market informed.

7. Mobile Marketing
● Mobile Apps and Notifications: Utilizing mobile apps for providing
updates and alerts about the IPO. This ensures that potential investors
stay informed about important dates and procedural details.
● SMS Campaigns: Sending SMS alerts to potential investors to remind
them of subscription deadlines, important dates, and other critical
information.
8. Retail Investor Engagement
● Broker Partnerships: Collaborating with brokerage firms to market the
IPO to their retail clients, leveraging the brokers’ existing relationships
and credibility.
● Incentives for Retail Investors: Offering incentives such as discounts
or other benefits to encourage retail investor participation in the IPO.

9. Personalized Communication and AI Tools

● Customized Messaging: Tailoring communication based on investor
segments, such as retail investors, high-net-worth individuals (HNIs), and
institutional investors, to address their specific needs and interests.
● Chatbots and AI Assistance: Deploying AI-driven chatbots to provide
instant responses to investor queries and guide them through the
subscription process.

10. Data Analytics and Performance Tracking

● Behavioral Insights: Using data analytics to understand investor
behavior and preferences, allowing for more targeted and effective
marketing strategies.
● Campaign Optimization: Continuously monitoring the performance of
different marketing channels and strategies to optimize the campaign in
real-time, ensuring maximum engagement and conversion.