Financial Markets, Stock Exchanges, SEBI.pdf

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Financial Markets and Instruments (First Sem DPU)
FINANCIAL MARKETS
Financial Market refers to a marketplace, where creation and trading of financial assets,
such as shares, debentures, bonds, derivatives, currencies, etc. take place. It plays a crucial
role in allocating limited resources, in the country‘s economy. It acts as an intermediary
between the savers and investors by mobilising funds between them.
Nature of Financial Market
A financial market is as vital to the economy as blood is to the body. The nature of financial
markets is mentioned below:
1. It acts as a link between the investors and borrowers
2. These markets are readily available at anytime for both the investors and the borrowers
3. Financial markets initiate buying and selling of marketable commodities.
4. The government controls the operations of a financial market in the country by imposing
different rules and regulations.
5. These markets require financial intermediaries such as a bank, non-banking financial
companies, stock exchanges, mutual fund companies, insurance companies, brokers, etc. to
function.
6. Financial markets provide an opportunity of putting in their funds into various securities
or schemes for short or long-term investing benefits.
Functions of Financial Market
The functions of the financial market are explained with the help of points below:
1. It facilitates mobilisation of savings and puts it to the most productive uses.
2. It helps in determining the price of the securities. The frequent interaction between
investors helps in fixing the price of securities, on the basis of their demand and
supply in the market.
3. It provides liquidity to tradable assets, by facilitating the exchange, as the investors
can readily sell their securities and convert assets into cash.
4. It saves the time, money and efforts of the parties, as they don‘t have to waste
resources to find probable buyers or sellers of securities. Further, it reduces cost by
providing valuable information, regarding the securities traded in the financial
market.

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1. By Nature of Claim
i. Debt Market: The market where fixed claims or debt instruments, such as debentures or
bonds are bought and sold between investors.
ii. Equity Market: Equity market is a market wherein the investors deal in equity
instruments. It is the market for residual claims.
2. By Maturity of Claim
i. Money Market: The market where monetary assets such as commercial paper, certificate
of deposits, treasury bills, etc. which mature within a year, are traded is called money
market. It is the market for short-term funds. No such market exists physically; the
transactions are performed over a virtual network, i.e. fax, internet or phone.
ii. Capital Market: The market where medium- and long-term financial assets are traded in
the capital market. It is divided into two types:
a. Primary Market: A financial market, wherein the company listed on an exchange, for
the first time, issues new security or already listed company brings the fresh issue.
b. Secondary Market: Alternately known as the Stock market, a secondary market is an
organised marketplace, wherein already issued securities are traded between
investors, such as individuals, merchant bankers, stockbrokers and mutual funds.
3. By Timing of Delivery

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i. Cash Market: The market where the transaction between buyers and sellers are settled in
real-time.
ii. Futures Market: Futures market is one where the delivery or settlement of commodities
takes place at a future specified date.
4. By Organizational Structure
i. Exchange-Traded Market: A financial market, which has a centralised organisation with
the standardised procedure.
ii. Over-the-Counter Market: An OTC is characterised by a decentralised organisation, having
customised procedures.
MONEY MARKET & CAPITAL MARKET
Money Market
The money market is a market for short-term funds, which deals in financial assets whose
period of maturity is up to one year. It should be noted that money market does not deal in
cash or money as such but simply provides a market for credit instruments such as bills of
exchange, promissory notes, commercial paper, treasury bills, etc. These financial
instruments are close substitute of money. These instruments help the business units, other
organisations and the Government to borrow the funds to meet their short-term
requirement.
Money market does not imply to any specific market place. Rather it refers to the whole
networks of financial institutions dealing in short-term funds, which provides an outlet to
lenders and a source of supply for such funds to borrowers. Most of the money market
transactions are taken place on telephone, fax or Internet. The Indian money market
consists of Reserve Bank of India, Commercial banks, Co-operative banks, and other
specialised financial institutions. The Reserve Bank of India is the leader of the money
market in India. Some Non-Banking Financial Companies (NBFCs) and financial institutions
like LIC, GIC, UTI, etc. also operate in the Indian money market.
Money Market Instruments
Following is some of the important money market instruments or securities.
(a) Call Money: Call money is mainly used by the banks to meet their temporary
requirement of cash. They borrow and lend money from each other normally on a daily
basis. It is repayable on demand and its maturity period varies in between one day to a
fortnight. The rate of interest paid on call money loan is known as call rate.
(b) Treasury Bill: A treasury bill is a promissory note issued by the RBI to meet the short-
term requirement of funds. Treasury bills are highly liquid instruments, that means, at any
time the holder of treasury bills can transfer of or get it discounted from RBI. These bills are
normally issued at a price less than their face value; and redeemed at face value. So the
difference between the issue price and the face value of the treasury bill represents the
interest on the investment. These bills are secured instruments and are issued for a period

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of not exceeding 364 days. Banks, Financial institutions and corporations normally play
major role in the Treasury bill market.
(c) Commercial Paper: Commercial paper (CP) is a popular instrument for financing
working capital requirements of companies. The CP is an unsecured instrument issued in
the form of promissory note. This instrument was introduced in 1990 to enable the
corporate borrowers to raise short-term funds. It can be issued for period ranging from 15
days to one year. Commercial papers are transferable by endorsement and delivery. The
highly reputed companies (Blue Chip companies) are the major player of commercial paper
market.
(d) Certificate of Deposit: Certificate of Deposit (CDs) are short-term instruments issued by
Commercial Banks and Special Financial Institutions (SFIs), which are freely transferable
from one party to another. The maturity period of CDs ranges from 91 days to one year.
These can be issued to individuals, co-operatives and companies.
(e) Trade Bill: Normally the traders buy goods from the wholesalers or manufactures on
credit. The sellers get payment after the end of the credit period. But if any seller does not
want to wait or is in immediate need of money, he/she can draw a bill of exchange in favor
of the buyer. When buyer accepts the bill, it becomes a negotiable instrument and is termed
as bill of exchange or trade bill. This trade bill can now be discounted with a bank before its
maturity. On maturity the bank gets the payment from the drawee i.e., the buyer of goods.
When trade bills are accepted by Commercial Banks it is known as Commercial Bills. So
trade bill is an instrument, which enables the drawer of the bill to get funds for short period
to meet the working capital needs.
Capital Market
Capital Market may be defined as a market dealing in medium and long-term funds. It is an
institutional arrangement for borrowing medium and long-term funds and which provides
facilities for marketing and trading of securities. So it constitutes all long-term borrowings
from banks and financial institutions, borrowings from foreign markets and raising of
capital by issue various securities such as shares debentures, bonds, etc.
The market where securities are traded known as Securities market. It consists of two
different segments namely primary and secondary market. The primary market deals with
new or fresh issue of securities and is, therefore, also known as new issue market; whereas
the secondary market provides a place for purchase and sale of existing securities and is
often termed as stock market or stock exchange.
Primary Market
The Primary Market consists of arrangements, which facilitate the procurement of long-term
funds by companies by making fresh issue of shares and debentures. You know that
companies make fresh issue of shares and/or debentures at their formation stage and, if
necessary, subsequently for the expansion of business. It is usually done through private
placement to friends, relatives and financial institutions or by making public issue. In any
case, the companies have to follow a well-established legal procedure and involve a number
of intermediaries such as underwriters, brokers, etc. who form an integral part of the

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primary market. You must have learnt about many initial public offers (IPOs) made recently
by a number of public sector undertakings such as ONGC, GAIL, NTPC and the private sector
companies like Tata Consultancy Services (TCS), Biocon, Jet-Airways and so on. The major
players in the primary market are merchant bankers, mutual funds, financial institutions,
and the individual investors.
Secondary Market
The secondary market known as stock market or stock exchange plays an equally important
role in mobilising long-term funds by providing the necessary liquidity to holdings in shares
and debentures. It provides a place where these securities can be encashed without any
difficulty and delay. It is an organised market where shares, and debentures are traded
regularly with high degree of transparency and security. In fact, an active secondary market
facilitates the growth of primary market as the investors in the primary market are assured
of a continuous market for liquidity of their holdings. The major players in the secondary
market include all the players in the money market and the stockbrokers who are members
of the stock exchange who facilitate the trading.
Difference between Money Market and Capital Market

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Difference Between Primary and Secondary Market
MARKETS FOR DERIVATIVES
Derivatives
Derivatives are financial contracts whose value is dependent on an underlying asset or
group of assets. The commonly used assets are stocks, bonds, currencies, commodities and
market indices. The value of the underlying assets keeps changing according to market
conditions. The basic principle behind entering into derivative contracts is to earn profits by
speculating on the value of the underlying asset in future.
Advantages of Derivative contracts
1. Hedging risk exposure: Since the value of the derivatives is linked to the value of
the underlying asset, the contracts are primarily used for hedging risks. For example,
an investor may purchase a derivative contract whose value moves in the opposite
direction to the value of an asset the investor owns. In this way, profits in the
derivative contract may offset losses in the underlying asset.
2. Arbitrage advantage: Arbitrage trading involves buying a commodity or security at
a low price in one market and selling it at a high price in the other market. In this
way, one can be benefited by the differences in prices of the commodity in the two
different markets.

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3. Protection against market volatility: A price fluctuation of an asset may increase
the probability of losses. Investors can find products in the derivatives market which
will act as a shield against a reduction in price in the stocks already owned by them.
4. Market efficiency: It is considered that derivatives increase the efficiency of
financial markets. By using derivative contracts, one can replicate the payoff of the
assets. Therefore, the prices of the underlying asset and the associated derivative
tend to be in equilibrium to avoid arbitrage opportunities.
5. Access to unavailable assets or markets: Derivatives can help organizations get
access to otherwise unavailable assets or markets. By employing interest rate swaps,
a company may obtain a more favorable interest rate relative to interest rates
available from direct borrowing.
Types of Derivatives
1. Forwards and futures
These are financial contracts that obligate the contract buyers to purchase an asset at a pre-
agreed price on a specified future date. Both forwards and futures are essentially the same
in their nature. However, forwards are more flexible contracts because the parties can
customize the underlying commodity as well as the quantity of the commodity and the date
of the transaction. On the other hand, futures are standardized contracts that are traded on
the exchanges.
2. Options
Options provide the buyer of the contracts the right, but not the obligation, to purchase or
sell the underlying asset at a predetermined price. Based on the option type, the buyer can
exercise the option on the maturity date (European options) or on any date before the
maturity (American options).
3. Swaps
Swaps are derivative contracts that allow the exchange of cash flows between two parties.
The swaps usually involve the exchange of a fixed cash flow for a floating cash flow. The
most popular types of swaps are interest rate swaps, commodity swaps, and currency
swaps.
Underlying assets and derivative products
While forwards, futures, options and swaps can be viewed as the mechanics of derivation,
the value of these contracts are based on the prices of the underlying assets. In this section,
we discuss a range of derivatives products that derive their values from the performance of
five underlying asset classes: equity, fixed-income instrument, commodity, foreign currency
and credit event. However, given the speed of financial innovation over the past two
decades, the variety of derivatives products have grown substantially
i. Equity derivatives
Equity futures and options on broad equity indices are perhaps the most commonly cited
equity derivatives securities. Way back in 1982, trading of futures based on S&P‘s composite

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index of 500 stocks began on the Chicago Mercantile Exchange (CME). Options on the S&P
500 futures began trading on the CME in the following year. Today, investors can buy
futures based on benchmark stock indices in most international financial centres. It can be
an extremely useful hedging tool. For example, an investor with a stock portfolio that
broadly matches the composition of the Hang Seng index (HSI), he will suffer losses should
the HSI record a fall in market value in the near future. Since he means to hold the portfolio
as a long-term strategy, he is unwilling to liquidate the portfolio. Under such circumstances,
he can protect his portfolio by selling HSI index futures contracts so as to profit from any fall
in price. Of course, if his expectations turned out to be wrong and the HSI rose instead, the
loss on the hedge would have been compensated by the profit made on the portfolio.
ii. Interest rate derivatives
One of the most popular interest rate derivatives is interest rate swap. In one form, it
involves a bank agreeing to make payments to a counterparty based on a floating rate in
exchange for receiving fixed interest rate payments. It provides an extremely useful tool for
banks to manage interest rate risk. Given that banks‘ floating rate loans are usually tied
closely to the market interest rates while their interest payments to depositors are adjusted
less frequently, a decline in market interest rates would reduce their interest income but not
their interest payments on deposits. By entering an interest rate swap contract and
receiving fixed rate receipts from a counterparty, banks would be less exposed to the
interest rate risk. Meanwhile, interest rate futures contract allows a buyer to lock in a future
investment rate.
iii. Commodity derivatives
The earliest derivatives markets have been associated with commodities, driven by the
problems about storage, delivery and seasonal patterns. But modern-day commodity
derivatives markets only began to develop rapidly in the 1970s. During that time, the
breakup of the market dominance of a few large commodity producers allowed price
movements to better reflect the market supply and demand conditions. The resulting price
volatility in the spot markets gave rise to demand of commodity traders for derivatives
trading to hedge the associated price risks. For example, forwards contracts on Brent and
other grades of crude became popular in the 1970s following the emergence of the
Organisation of Petroleum Exporting Countries. Deregulations of the energy sector in the
United States since the 1980s also stimulated the trading of natural gas and electrical power
futures on the New York Mercantile Exchange (NYMEX) in the 1990s.
iv. Foreign exchange derivatives
The increasing financial and trade integration across countries have led to a strong rise in
demand for protection against exchange rate movements over the past few decades. A very
popular hedging tool is forward exchange contract. It is a binding obligation to buy or sell a
certain amount of foreign currency at a pre-agreed rate of exchange on a certain future date.
Consider a Korean shipbuilder who expects to receive a $1 million payment from a US cruise
company for a boat in 12 months. Suppose the spot exchange rate is 1,200 won per dollar
today. Should the won appreciate by 10 per cent against the dollar over the next year, the
Korean shipbuilder will receive only 1,090 million of won (some 109 million of won less
than he would have received today). But if the shipbuilder can hedge against the exchange
risk by locking in buying dollars forwards at the rate of say 1,100 won per dollar

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Participants in the Derivatives Market
1. Hedgers
Hedging is when a person invests in financial markets to reduce the risk of price volatility in
exchange markets, i.e., eliminate the risk of future price movements. Derivatives are the
most popular instruments in the sphere of hedging. It is because derivatives are effective in
offsetting risk with their respective underlying assets.
2. Speculators
Speculation is the most common market activity that participants of a financial market take
part in. It is a risky activity that investors engage in. It involves the purchase of any financial
instrument or an asset that an investor speculates to become significantly valuable in the
future. Speculation is driven by the motive of potentially earning lucrative profits in the
future.
3. Arbitrageurs
Arbitrage is a very common profit-making activity in financial markets that comes into effect
by taking advantage of or profiting from the price volatility of the market. Arbitrageurs
make a profit from the price difference arising in an investment of a financial instrument
such as bonds, stocks, derivatives, etc.
4. Margin traders
In the finance industry, margin is the collateral deposited by an investor investing in a
financial instrument to the counterparty to cover the credit risk associated with the
investment.
Stock Exchange
Stock exchange is the term commonly used for a secondary market, which provide a place
where different types of existing securities such as shares, debentures and bonds,
government securities can be bought and sold on a regular basis. A stock exchange is
generally organised as an association, a society or a company with a limited number of
members. It is open only to these members who act as brokers for the buyers and sellers.
The Securities Contract (Regulation) Act has defined stock exchange as an ―association,
organisation or body of individuals, whether incorporated or not, established for the
purpose of assisting, regulating and controlling business of buying, selling and dealing in
securities‖.
The main characteristics of a stock exchange are:
1. It is an organised market.
2. It provides a place where existing and approved securities can be bought and sold easily.
3. In a stock exchange, transactions take place between its members or their authorised
agents.
4. All transactions are regulated by rules and by laws of the concerned stock exchange.
5. It makes complete information available to public in regard to prices and volume of
transactions taking place every day.
It may be noted that all securities are not permitted to be traded on a recognised stock
exchange. It is allowed only in those securities (called listed securities) that have been duly
approved for the purpose by the stock exchange authorities. The method of trading now-a-
days, however, is quite simple on account of the availability of on-line trading facility with

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the help of computers. It is also quite fast as it takes just a few minutes to strike a deal
through the brokers who may be available close by. Similarly, on account of the system of
scrip-less trading and rolling settlement, the delivery of securities and the payment of
amount involved also take very little time, say, 2 days.
Functions of a Stock Exchange
1. Provides ready and continuous market:
By providing a place where listed securities can be bought and sold regularly and
conveniently, a stock exchange ensures a ready and continuous market for various shares,
debentures, bonds and government securities. This lends a high degree of liquidity to
holdings in these securities as the investor can encash their holdings as and when they want.
2. Provides information about prices and sales:
A stock exchange maintains complete record of all transactions taking place in different
securities every day and supplies regular information on their prices and sales volumes to
press and other media. In fact, now-a-days, you can get information about minute-to- minute
movement in prices of selected shares on TV channels like CNBC, Zee News, NDTV and
Headlines Today. This enables the investors in taking quick decisions on purchase and sale
of securities in which they are interested. Not only that, such information helps them in
ascertaining the trend in prices and the worth of their holdings. This enables them to seek
bank loans, if required.
3. Provides safety to dealings and investment:
Transactions on the stock exchange are conducted only amongst its members with adequate
transparency and in strict conformity to its rules and regulations which include the
procedure and timings of delivery and payment to be followed. This provides a high degree
of safety to dealings at the stock exchange. There is little risk of loss on account of non-
payment or non-delivery. Securities and Exchange Board of India (SEBI) also regulates the
business in stock exchanges in India and the working of the stock brokers.
Another thing is that a stock exchange allows trading only in securities that have been listed
with it; and for listing any security, it satisfies itself about the genuineness and soundness of
the company and provides for disclosure of certain information on regular basis. Though
this may not guarantee the soundness and profitability of the company, it does provide some
assurance on their genuineness and enables them to keep track of their progress.
4. Helps in mobilisation of savings and capital formation:
Efficient functioning of stock market creates a conducive climate for an active and growing
primary market. Good performance and outlook for shares in the stock exchanges imparts
buoyancy to the new issue market, which helps in mobilising savings for investment in
industrial and commercial establishments. Not only that, the stock exchanges provide
liquidity and profitability to dealings and investments in shares and debentures. It also
educates people on where and how to invest their savings to get a fair return. This
encourages the habit of saving, investment and risk-taking among the common people. Thus
it helps mobilising surplus savings for investment in corporate and government securities
and contributes to capital formation.

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5. Barometer of economic and business conditions:
Stock exchanges reflect the changing conditions of economic health of a country, as the
shares prices are highly sensitive to changing economic, social and political conditions. It is
observed that during the periods of economic prosperity, the share prices tend to rise.
Conversely, prices tend to fall when there is economic stagnation and the business activities
slow down as a result of depressions. Thus, the intensity of trading at stock exchanges and
the corresponding rise on fall in the prices of securities reflects the investors‘ assessment of
the economic and business conditions in a country, and acts as the barometer which
indicates the general conditions of the atmosphere of business.
6. Better Allocation of funds:
As a result of stock market transactions, funds flow from the less profitable to more
profitable enterprises and they avail of the greater potential for growth. Financial resources
of the economy are thus better allocated.
ADVANTAGES OF STOCK EXCHANGE
(a) To the Companies
(i) The companies whose securities have been listed on a stock exchange enjoy a better
goodwill and credit-standing than other companies because they are supposed to be
financially sound.
(ii) The market for their securities is enlarged as the investors all over the world become
aware of such securities and have an opportunity to invest
(iii) As a result of enhanced goodwill and higher demand, the value of their securities
increases and their bargaining power in collective ventures, mergers, etc. is enhanced.
(iv) The companies have the convenience to decide upon the size, price and timing of the
issue.
(b) To the Investors:
(i) The investors enjoy the ready availability of facility and convenience of buying and selling
the securities at will and at an opportune time.
(ii) Because of the assured safety in dealings at the stock exchange the investors are free
from any anxiety about the delivery and payment problems.
(iii) Availability of regular information on prices of securities traded at the stock exchanges
helps them in deciding on the timing of their purchase and sale.
(iv) It becomes easier for them to raise loans from banks against their holdings in securities
traded at the stock exchange because banks prefer them as collateral on account of their
liquidity and convenient valuation.
(c) To the Society
(i) The availability of lucrative avenues of investment and the liquidity thereof induces
people to save and invest in long-term securities. This leads to increased capital formation in
the country.

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(ii) The facility for convenient purchase and sale of securities at the stock exchange provides
support to new issue market. This helps in promotion and expansion of industrial activity,
which in turn contributes, to increase in the rate of industrial growth.
(iii) The Stock exchanges facilitate realization of financial resources to more profitable and
growing industrial units where investors can easily increase their investment substantially.
(iv) The volume of activity at the stock exchanges and the movement of share prices reflects
the changing economic health.
(v) Since government securities are also traded at the stock exchanges, the government
borrowing is highly facilitated. The bonds issued by governments, electricity boards,
municipal corporations and public sector undertakings (PSUs) are found to be on offer quite
frequently and are generally successful.
Limitations of Stock Exchange
One of the common evils associated with stock exchange operations is the excessive
speculation. You know that speculation implies buying or selling securities to take
advantage of price differential at different times. The speculators generally do not take or
give delivery and pay or receive full payment. They settle their transactions just by paying
the difference in prices. Normally, speculation is considered a healthy practice and is
necessary for successful operation of stock exchange activity. But, when it becomes
excessive, it leads to wide fluctuations in prices and various malpractices by the vested
interests. In the process, genuine investors suffer and are driven out of the market.
Another shortcoming of stock exchange operations is that security prices may fluctuate due
to unpredictable political, social and economic factors as well as on account of rumors
spread by interested parties. This makes it difficult to assess the movement of prices in
future and build appropriate strategies for investment in securities. However, these days
good amount of vigilance is exercised by stock exchange authorities and SEBI to control
activities at the stock exchange and ensure their healthy functioning, about which you will
study later.
Stock Exchanges in India
The first organised stock exchange in India was started in Mumbai known as Bombay Stock
Exchange (BSE). It was followed by Ahmedabad Stock Exchange in 1894 and Kolkata Stock
Exchange in 1908. The number of stock exchanges in India went up to 7 by 1939 and it
increased to 21 by 1945 on account of heavy speculation activity during Second World War.
A number of unorganised stock exchanges also functioned in the country without any formal
set-up and were known as kerb market. The Security Contracts (Regulation) Act was passed
in 1956 for recognition and regulation of Stock Exchanges in India. At present we have 23
stock exchanges in the country. Of these, the most prominent stock exchange that came up is
National Stock Exchange (NSE). It is also based in Mumbai and was promoted by the leading
financial institutions in India. It was incorporated in 1992 and commenced operations in
1994. This stock exchange has a corporate structure, fully automated screen-based trading
and nation-wide coverage.
Another stock exchange that needs special mention is Over the Counter Exchange of India
(OTCEI). It was also promoted by the financial institutions like UTI, ICICI, IDBI, IFCI, LIC etc.
in September 1992 specially to cater to small and medium sized companies with equity

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capital of more than Rs.30 lakh and less than Rs.25 crore. It helps entrepreneurs in raising
finances for their new projects in a cost-effective manner. It provides for nationwide online
ringless trading with 20 plus representative offices in all major cities of the country. On this
stock exchange, securities of those companies can be traded which are exclusively listed on
OTCEI only. In addition, certain shares and debentures listed with other stock exchanges in
India and the units of UTI and other mutual funds are also allowed to be traded on OTCEI as
permitted securities. It has been noticed that, of late, the turnover at this stock exchange has
considerably reduced and steps have been afoot to revitalize it. In fact, as of now, BSE and
NSE are the two Stock Exchanges, which enjoy nation-wide coverage and handle most of the
business in securities in the country.
BSE
Established in 1875, BSE (formerly known as Bombay Stock Exchange), is Asia's first & the
Fastest Stock Exchange in world with the speed of 6 micro seconds and one of India's
leading exchange groups. Over the past 143 years, BSE has facilitated the growth of the
Indian corporate sector by providing it an efficient capital-raising platform. Popularly
known as BSE, the bourse was established as ‗The Native Share & Stock Brokers'
Association‘ in 1875. In 2017 BSE become the 1st listed stock exchange of India.
NSE
The National Stock Exchange of India Ltd. (NSE) is the leading stock exchange in India and
the second largest in the world by nos. of trades in equity shares from January to June 2018,
according to World Federation of Exchanges (WFE) report. NSE was incorporated in 1992. It
was recognised as a stock exchange by SEBI in April 1993 and commenced operations in
1994 with the launch of the wholesale debt market, followed shortly after by the launch of
the cash market segment. NSE's identity crafted in the nineties has for the last 25 years,
stood for reliability, expertise, innovation and trust. In the last 25 years, the Indian economy
and technology landscape has changed dramatically. And so has NSE. NSE was the first
exchange in the country to provide a modern, fully automated screen-based electronic
trading system that offered easy trading facilities to investors spread across the length and
breadth of the country. Vikram Limaye is Managing Director & Chief Executive Officer of
NSE. National Stock Exchange has a total market capitalization of more than US$3 trillion,
making it the world's 9th-largest stock exchange as of May 2021.
Regulations of Stock Exchanges
The stock exchanges suffer from certain limitations and require strict control over their
activities in order to ensure safety in dealings thereon. Hence, as early as 1956, the
Securities Contracts (Regulation) Act was passed which provided for recognition of stock
exchanges by the central Government. It has also the provision of framing of proper bylaws
by every stock exchange for regulation and control of their functioning subject to the
approval by the Government. All stock exchanges are required submit information relating
to its affairs as required by the Government from time to time. The Government was given
wide powers relating to listing of securities, make or amend bylaws, withdraw recognition
to, or supersede the governing bodies of stock exchange in extraordinary/abnormal
situations. Under the Act, the Government promulgated the Securities Regulations (Rules)
1957, which provided inter alia for the procedures to be followed for recognition of the
stock exchanges, submission of periodical returns and annual returns by recognised stock

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exchanges, inquiry into the affairs of recognized stock exchanges and their members, and
requirements for listing of securities.
SEBI
SEBI is a regulator for the securities market in India. It was established during the year 1988
and given statutory powers on 12th April 1992 through the SEBI Act.
Objectives:
➢ To protect the interest of the investors.
➢ To regulate the securities market
➢ To promote efficient services by brokers, merchant bankers and other intermediaries.
➢ To promote orderly and healthy growth of the securities market in India.
➢ To create proper market environment.
➢ To regulate the operations of financial intermediaries.
➢ To provide suitable education and guidance to investors.
Role of SEBI
As part of economic reforms programme started in June 1991, the Government of India
initiated several capital market reforms, which included the abolition of the office of the
Controller of Capital Issues (CCI) and granting statutory recognition to Securities Exchange
Board of India (SEBI) in 1992 for:
(a) protecting the interest of investors in securities;
(b) promoting the development of securities market;
(c) regulating the securities market; and
(d) matters connected there with or incidental thereto.
SEBI has been vested with necessary powers concerning various aspects of capital market
such as:
(i) regulating the business in stock exchanges and any other securities market;
(ii) registering and regulating the working of various intermediaries and mutual funds;
(iii) promoting and regulating self-regulatory organisations;
(iv) promoting investors education and training of intermediaries;
(v) prohibiting insider trading and unfair trade practices;
(vi) regulating substantial acquisition of shares and takeover of companies;
(vii) calling for information, undertaking inspection, conducting inquiries and audit of stock
exchanges, and intermediaries and self-regulation organisations in the stock market;

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(viii) performing such functions and exercising such powers under the provisions of the
Capital Issues (Control) Act, 1947 and the Securities Contracts (Regulation) Act, 1956 as
may be delegated to it by the Central Government.
As part of its efforts to protect investors‘ interests, SEBI has initiated many primary market
reforms, which include improved disclosure standards in public issue documents,
introduction of prudential norms and simplification of issue procedures. Companies are now
required to disclose all material facts and risk factors associated with their projects while
making public issue. All issue documents are to be vetted by SEBI to ensure that the
disclosures are not only adequate but also authentic and accurate. SEBI has also introduced
a code of advertisement for public issues for ensuring fair and truthful disclosures. Merchant
bankers and all mutual funds including UTI have been brought under the regulatory
framework of SEBI. . A code of conduct has been issued specifying a high degree of
responsibility towards investors in respect of pricing and premium fixation of issues. To
reduce cost of issue, underwriting of issues has been made optional subject to the condition
that the issue is not under-subscribed. In case the issue is under- subscribed i.e., it was not
able to collect 90% of the amount offered to the public, the entire amount would be
refunded to the investors. The practice of preferential allotment of shares to promoters at
prices unrelated to the prevailing market prices has been stopped and private placements
have been made more restrictive. All primary issues have now to be made through
depository mode. The initial public offers (IPOs) can go for book building for which the price
band and issue size have to be disclosed. Companies with dematerialized shares can alter
the par value as and when they so desire.
As for measures in the secondary market, it should be noted that all statutory powers to
regulate stock exchanges under the Securities Contracts (Regulation) Act have now been
vested with SEBI through the passage of securities law (Amendment) Act in 1995.

Financial Markets, Stock Exchanges, SEBI.pdf

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Financial Markets, Stock Exchanges, SEBI.pdf