CAPITAL MARKET REFORMS AND

REGULATIONS- ROLE OF SEBI

Capital market is a market where buyers and sellers engage in trade of
financial securities like bonds, stocks, etc. The buying/selling is
undertaken by participants such as individuals and institutions.

Capital market consists of primary markets and secondary markets.
Primary markets deal with trade of new issues of stocks and other
securities, whereas secondary market deals with the exchange of existing
or previously-issued securities. Another important division in the capital
market is made on the basis of the nature of security traded, i.e. stock
market and bond market.
CAPITAL MARKET
TYPES OF CAPITAL MARKET
There are two types of capital market:
Primary market
Secondary market




PRIMARY MARKET

It is that market in which shares, debentures and other securities are
sold for the first time for collecting long-term capital.

This market is concerned with new issues. Therefore, the primary
market is also called NEW ISSUE MARKET.

In this market, the flow of funds is from savers to borrowers
(industries), hence, it helps directly in the capital formation of the
country.

The money collected from this market is generally used by the
companies to modernize the plant, machinery and buildings, for
extending business, and for setting up new business unit.

FEATURES OF PRIMARY MARKET
It Is Related With New Issues

Here the securities are issued by company directly to the investors
and not through any intermediaries.

On receiving the money from the new issues, the company will issue
the security certificates to the investors.

The amount obtained by the company after the new issues are
utilized for expansion of the present business or for setting up new
ventures.

Prerequisites for Investor to Participate in Primary market Activities:
PAN Number Bank Account Demat Account

Initial public offering (IPO) The first sale of a companys
securities to the general public.

Investment bankers Financial specialists who handle the sales
of most corporate and municipal securities.

Underwriting Process of purchasing an issue from a firm or
government and then reselling the issue to investors.

SECONDARY MARKET
The secondary market is that market in which the
buying and selling of the previously issued
securities is done.

The transactions of the secondary market are
generally done through the medium of stock
exchange.

The chief purpose of the secondary market is to
create liquidity in securities.
If an individual has bought some security and he now wants to sell
it, he can do so through the medium of stock exchange to sell or
purchase through the medium of stock exchange requires the
services of the broker presently, their are 24 stock exchange in
India.
.



FEATURES OF SECONDARY MARKET

It Creates Liquidity
It Comes After Primary Market
It Has A Particular Place
It Encourage New Investments
Aids in financing the industry
Ensures safe & fair Dealing( MEDIA BROADCASTING)


FUNCTONS OF SECONDARY MARKETS
Provides regular information about the value of security.
Helps to observe prices of bonds and their interest rates.
Offers to investors liquidity for their assets.
Secondary markets bring together many interested parties.
It keeps the cost of transactions low.

SIGNIFICANCE OF CAPITAL MARKET
1. Mobilization of savings

2. Capital formation

3. Provision of investment avenue

4. Speed up economic growth and development

5. Proper regulation of funds

6. Service provision

7. Continuous availability of funds

REFORMS IN THE INDIAN
CAPITAL MARKET
The Indian capital market has witnessed major reforms in the decade of
1990s and thereafter. It is on the verge of the growth. Thus, the
Government of India and SEBI has taken a number of measures in order
to improve the working of the Indian stock exchanges and to make it
more progressive and vibrant.


The major reforms undertaken in capital market of India includes:-
1. Establishment of SEBI

The Securities and Exchange Board of India (SEBI) was established in
1988. It got a legal status in 1992. SEBI was primarily set up to regulate
the activities of the merchant banks, to control the operations of mutual
funds, to work as a promoter of the stock exchange activities and to act
as a regulatory authority of new issue activities of companies. The SEBI
was set up with the fundamental objective, to protect the interest of
investors in securities market and for matters connected
therewith or incidental thereto.


The main functions of SEBI are:-

i. To regulate the business of the stock market and other securities
market.
ii. To promote and regulate the self-regulatory organizations.
iii. To prohibit fraudulent and unfair trade practices in securities
market.
iv. To promote awareness among investors and training of
intermediaries about safety of market.
v. To prohibit insider trading in securities market.
vi. To regulate huge acquisition of shares and takeover of companies.
2. Establishment of Creditors Rating Agencies
Three creditors rating agencies viz. The Credit Rating Information Services of India
Limited(CRISIL - 1988), the Investment Information and Credit Rating Agency of India
Limited (ICRA -1991) and Credit Analysis and Research Limited (CARE) were set up in
order to assess the financial health of different financial institutions and agencies related
to the stock market activities. It is a guide for the investors also in evaluating the risk of
their investments.
3. Increasing of Merchant Banking Activities
Many Indian and foreign commercial banks have set up their merchant banking
divisions in the last few years. These divisions provide financial services such as
underwriting facilities, issue organising, consultancy services, etc. It has proved as a
helping hand to factors related to the capital market.


4. Candid Performance of Indian Economy
In the last few years, Indian economy is growing at a good speed. It has attracted a
huge inflow of Foreign Institutional Investments (FII). The massive entry of FIIs in the
Indian capital market has given good appreciation for the Indian investors in recent
times. Similarly many new companies are emerging on the horizon of the Indian capital
market to raise capital for their expansions.

5. Rising Electronic Transactions
Due to technological development in the last few years. The physical transaction with more
paperwork is reduced. Now paperless transactions are increasing at a rapid rate. It saves
money, time and energy of investors. Thus it has made investing safer and hassle free
encouraging more people to join the capital market.


6. Growing Mutual Fund Industry
The growing of mutual funds in India has certainly helped the capital market to grow. Public
sector banks, foreign banks, financial institutions and joint mutual funds between the Indian
and foreign firms have launched many new funds. A big diversification in terms of schemes,
maturity, etc. has taken place in mutual funds in India. It has given a wide choice for the
common investors to enter the capital market.

7. Growing Stock Exchanges
The numbers of various Stock Exchanges in India are increasing. Initially the BSE was the
main exchange, but now after the setting up of the NSE and the OTCEI, stock exchanges have
spread across the country. Recently a new Inter-connected Stock Exchange of India has joined
the existing stock exchanges.
8. Investor's Protection
Under the purview of the SEBI the Central Government of India has set up the Investors
Education and Protection Fund (IEPF) in 2001. It works in educating and guiding investors. It
tries to protect the interest of the small investors from frauds and malpractices in the capital
market.


9. Growth of Derivative Transactions
Since June 2000, the NSE has introduced the derivatives trading in the equities. In
November2001 it also introduced the future and options transactions. These innovative
products have given variety for the investment leading to the expansion of the capital market.


10.Insurance Sector Reforms
Indian insurance sector has also witnessed massive reforms in last few years. The Insurance
Regulatory and Development Authority (IRDA) was set up in 2000. It paved the entry of the
private insurance firms in India. As many insurance companies invest their money in the capital
market, it has expanded.

11.Commodity Trading
Along with the trading of ordinary securities, the trading in commodities is also recently
encouraged. The Multi Commodity Exchange (MCX) is set up. The volume of such
transactions is growing at a splendid rate.

Apart from these reforms the setting up of Clearing Corporation of India Limited (CCIL),
Venture Funds, etc., have resulted into the tremendous growth of Indian capital market.

SEBI vide its press release PR No.59/2010 dated March 6, 2010 has announced the
decisions of the board meeting of SEBI held on the same day.
SECURITIES AND EXCHANGE BOARD OF INDIA
(SEBI)
The regulatory body for the investment market in India. The purpose of
this board is to maintain stable and efficient markets by creating and
enforcing regulations in the marketplace.


The Securities and Exchange Board of India is similar to the U.S. SEC.
The SEBI is relatively new (1992) but is a vital component in improving
the quality of the financial markets in India, both by attracting foreign
investors and protecting Indian investors.
20



FUNCTIONS OF SEBI
Regulating the business in stock exchange and any other securities
market
Registering and regulating the workings of intermediaries
associated with securities market
Registering and regulating the working of collective investment
schemes including mutual funds
Promoting and regulating self-regulatory organizations
Prohibiting fraudulent and unfair trade practices in the securities
market

21
Promoting investors education and training of intermediaries in
securities market
Prohibiting insiders trading in securities
Regulating substantial acquisition of shares and take-over of
companies
Calling for information, undertaking inspection, conducting
enquiries and audits of the stock exchanges, intermediaries and
self-regulatory organizations in the securities market
ROLE OF SEBI IN REGULATING INDIAN
CAPITAL MARKET
1. Power to make rules for controlling stock exchange :

SEBI has power to make new rules for controlling stock exchange in India. For
example, SEBI fixed the time of trading 9 AM and 5 PM in stock market.

2. To provide license to dealers and brokers :

SEBI has power to provide license to dealers and brokers of capital market. If
SEBI sees that any financial product is of capital nature, then SEBI can also
control to that product and its dealers. One of main example is ULIPs case.
SEBI said, " It is just like mutual funds and all banks and financial and
insurance companies who want to issue it, must take permission from SEBI."


3. To Stop fraud in Capital Market :
SEBI has many powers for stopping fraud in capital market.




It can ban on the trading of those brokers who are involved in fraudulent and unfair trade
practices relating to stock market.



It can impose the penalties on capital market intermediaries if they involve in insider
trading.

4. To Control the Merge, Acquisition and Takeover the companies :

Many big companies in India want to create monopoly in capital market. So, these
companies buy all other companies or deal of merging. SEBI sees whether this merge
or acquisition is for development of business or to harm capital market.

5. To audit the performance of stock market :

SEBI uses his powers to audit the performance of different Indian stock exchange for
bringing transparency in the working of stock exchanges.


6. To make new rules on carry - forward transactions :

Share trading transactions carry forward can not exceed 25% of broker's total
transactions.

90 day limit for carry forward.


7. To create relationship with ICAI :

ICAI is the authority for making new auditors of companies. SEBI creates good relationship
with ICAI for bringing more transparency in the auditing work of company accounts
because audited financial statements are mirror to see the real face of company and after
this investors can decide to invest or not to invest. Moreover, investors of India can easily
trust on audited financial reports. After Satyam Scam, SEBI is investigating with ICAI,
whether CAs are doing their duty by ethical way or not.

8. Introduction of derivative contracts on Volatility Index :

For reducing the risk of investors, SEBI has now been decided to permit Stock Exchanges to introduce derivative contracts on
Volatility Index, subject to the condition that;

a. The underlying Volatility Index has a track record of at least one year.

b. The Exchange has in place the appropriate risk management framework for such derivative contracts.

2. Before introduction of such contracts, the Stock Exchanges shall submit the following:

i. Contract specifications

ii. Position and Exercise Limits

iii. Margins

iv. The economic purpose it is intended to serve

v. Likely contribution to market development

vi. The safeguards and the risk protection mechanism adopted by the exchange to ensure market integrity, protection of
investors and smooth and orderly trading.

vii. The infrastructure of the exchange and the surveillance system to effectively monitor trading in such contracts, and

viii. Details of settlement procedures & systems

ix. Details of back testing of the margin calculation for a period of one year considering a call and a put option on the
underlying with a delta of 0.25 & -0.25 respectively and actual value of the underlying.

9. To Require report of Portfolio Management Activities :

SEBI has also power to require report of portfolio management to check the capital
market performance. Recently, SEBI sent the letter to all Registered Portfolio Managers
of India for demanding report.

10. To educate the investors :

Time to time, SEBI arranges scheduled workshops to educate the investors. On 22 may
2010 SEBI imposed workshop. If you are investor, you can get education through SEBI
leaders by getting update information on this page.
SOURCES
www.investopedia.com/terms/c/capitalmarkets.asp
www.academia.edu/3008735/Reform_in_Indian_Capital_Market
www.slideshare.net/shwtjosh25/capital-market-reforms
www.corpgov.deloitte.com/site/caneng/self.../capital-market-
reforms
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