FINANCIAL MARKETS IN INDIA
Till the early 1990s most of the financial markets were
characterized by controls over the pricing of financial assets, restrictions on
flows or transactions, barrier to entry, low liquidity and high transaction
costs. These characteristics came in the way of development of the markets and allocation
of resources channeled through them. From 1991 onwards, financial market
reforms have emphasized the strengthening of the price discovery process easing
restrictions on transactions, reducing transaction costs and enhancing systemic
Financial markets in India mainly comprises of capital
market and money market.
Capital market is a market that specializes in trading
long-term and relatively high-risk securities. Financial markets with maturity
of more than 1 year are a part of capital market. It is a market for long-term
capital. The capital market provides long-term debt and equity finance to the
government and the corporate sector. Capital market comprises of two segments
namely the equity market and debt market.
Financial markets in which equity instruments are traded are
called an equity market. It is also known as stock market. There are two types of securities that are traded
in these markets namely equity shares and preference shares. An important
distinction between these two forms of equity securities lies in the degree to
which they may participate in any distribution of earnings, capital and the
priority given to each in the distribution of earnings.
This market is further classified into primary market,
secondary market and derivatives market.
It deals with the issuance of new securities. It is
otherwise called the New Issue market (NIM). The securities are directly
purchased from the issuer in this market.
The money raised from this market provides long-term capital to the
companies. The funds collected from the primary market can be used for
modernization of the business.
Kinds of Issues:
Public Issue: This
is one of the most commonly used methods for issuing new issues in the primary
market. SEBI defined public issue as ?”an invitation by a company to public to
subscribe to the securities offered through a prospectus”. When an existing
company offers its shares in the primary market, it is called a public issue. It
can be further classified into two:
Initial Public Offering: When an unlisted company makes either a fresh
issue of securities or offers its existing securities for sale or both for the
first time to the public, it is called an Initial Public Offer (IPO).
Further Public Offer: When an already listed company makes either a
fresh issue of securities to the public or an offer for sale to the public it
is called Further Public Offer (FPO) or otherwise called as Follow on Offer.
Rights Issue: When
a listed company which proposes to issue fresh securities to its existing
shareholders existing as on a particular dated fixed by the issuer (i.e. record
date), it is called as rights issue.
Bonus Issue: When
an issuer makes an issue of shares to its existing shareholders as on a record
date, without any consideration from them, it is called a bonus issue.
Private Placement: When
a company offers its shares to a select group of persons not exceeding 49, and
which is neither a rights issue nor a public issue, it is called a private
placement. These are usually not traded publically
In India, the primary market is governed mainly by the
provisions of The Companies Act, 2013, which deals with issues, listing and
allotment of various types of securities. The Securities and Exchange Board of
India (SEBI) protect the interests of investors in securities, promote the
development of securities markets as well as regulate them.
SEBI issued the guidelines on primary issue of securities
under Section 11 of the Securities and Exchange Board of India Act of 1992. In
addition to the specific functions under the SEBI Act, the functions vested in
the government as per Securities Contracts Regulations Act (SCRA) of 1956 have
also been delegated to the SEBI. The SEBI now enjoy full powers to regulate the
new issue market.
Disclosure and Investor Protection Guidelines of SEBI (2000)
deals with public issue, offer for sale and the rights issue by listed and
unlisted companies. SEBI framed its DIP guidelines in 1992. SEBI (Disclosure
and investor protection) guidelines 2000 are in short called DIP guidelines The
SEBI guidelines shall be applicable to all public issues by listed and unlisted
companies, all offers for sale and rights issues by listed companies whose
equity share capital is listed, except in case of rights issues where the
aggregate value of securities offered does not exceed Rs 50 lakh.
A financial market for trading of securities that have
already been issued in an initial private or public offering is a secondary
market. Here, the investor purchases shares from other investor and not
directly from the issuing company. The stock exchange along with a host of
other intermediaries provides the necessary platform for trading in secondary
market and for clearing and settlement.
The secondary markets in India are:
National Stock Exchange (NSE): It is the leading stock exchange in India
which is located in Mumbai. It was the first exchange in the country which
provides a modern, fully automated screen-based electronic system for trading
which makes it easy for the investors spread across the country. It offers
Nifty 50 Index which keeps a track of the largest assets in the Indian equity
Bombay Stock Exchange (BSE): It is Asia’s oldest stock exchange which is
located in Mumbai. BSE functions as the first-level regulator in the securities
market, providing monitoring and surveillance mechanisms that are able to
detect irregularities and manipulations in stock prices. It lists close to 6000
companies’ shares. Its overall performance is measured by SENSEX, an index of
30 of BSE’S largest stocks.
A derivative is defined as ?”a contract between a buyer and
a seller entered into today regarding a transaction to be fulfilled at a future
point in time”. Derivative is defined in another way as ?”a contract embodied
with a right and or an obligation to make an exchange of financial asset from
one party to another party.” The term Derivative has been defined in the
securities Contracts (Regulations) Act of 1956. As per the Act derivative
1. A security derived
from a debt instrument share, loan, whether secured or unsecured, risk
instrument or contract for differences or any other form of security.
2. A contract which derives its value form the prices, or
index of prices, of underlying securities.
· Derivatives are financial
· Derivative is derived
from another financial instrument/contract called the underlying.
· Derivative derives its
value from the underlying assets
Development of Derivatives Market in India:
SEBI set up a 24 member committee under the Chairmanship of
Dr. L.C. Gupta on November 18, 1996 to develop an appropriate regulation
framework for derivations trading and to recommend a bye-law for Regulation and
Control of Trading and Settlement of Derivatives Contracts in India. The
committee submitted its report on March 17, 1998 prescribing necessary
pre-conditions for introduction of derivatives trading in India. It recommended
that derivatives should be declared as “securities” so that regulatory
framework applicable to trading of securities could also apply to trading of
derivatives. The Board of SEBI in its meeting held on May 11, 1998 accepted the
recommendations of the Gupta committee and introduced derivatives trading in
India with Stock Index Futures.
SEBI also appointed another group in June 1998 under the
Chairmanship of Prof. J.R. Varma, to recommend measures for risk containment in
derivatives market in India. The report, which was submitted in October 1998,
worked out the-operational details of margining system, methodology for
charging initial margins, broker net worth, deposit requirement and real-time
Derivative products-were introduced in a phased manner
starting “With Index Futures Contracts in June 2000. SEBI permitted the
derivative segments of two stock “exchanges, NSE and BSE, and their
clearing house/corporation to commence trading-and-settlement in approved
derivatives contracts. The derivatives trading on NSE commenced with S
CNX Nifty Index futures on June 12, 2000. The index futures and options contract
on NSE are based on S CNX Trading and I settlement in derivative
contracts is done in accordance with the rules, byelaws, and regulations of
“the respective exchanges and their clearing house/corporation and are
duly approved by SEBI and notified in the official gazette.