The Securities Market in India

_{^{Facts and opinions expressed in the article on myochrdblog.com are solely the personal statements of respective author/s. Ochre (India) will not be liable with regard to the contents of the article. Thoughts, language, and examples in published research papers are entirely of Authors of research papers. The responsibility of the matter of the research paper is entirely of the author.}}

In recent times, we have heard a lot about the stock market and big bulls and bears. Recently, many movies and series too, have chosen this as their storylines. The scam of 1992 too, has served as a storyline for some series. But what is a stock market? What are the different components of a stock market? What are NSE and BSE? This article tries to explain it as well as a few other interesting concepts. Starting with the ‘securities market’.

Securities market:

A securities market is one where different long-term capital instruments like Shares, Debentures, Bonds, Mutual funds, Securities, etc. are traded. The regulator of the securities market in India is the Securities and Exchange Board of India (SEBI). SEBI, Stock exchanges, Brokers, etc. are all the components or parts of the securities market. The financial market is divided into the money market and the capital market. A securities market comes under the capital market and is further divided into the primary and secondary markets.

Primary market: We come across the term IPO a lot. IPO stands for Initial Public Offering. When a company goes public for the very first time, it comes with an IPO to raise funds in a primary market. Since the securities are issued for the first time, it is also called a New Issue Market (NIM). Some of the functions of the primary market and their basic functions:

New Issue Offer: when a new issue is to be offered to the public, it is done via the primary market.
Underwriting Services: An underwriter purchases the unsold shares if the prescribed minimum subscription isn’t fulfilled during an IPO.
Distribution of New Issue: the distribution of a new issue is started with DRHP (Draft Red Herring Prospectus). The detailed information of a company and issue is provided along with underwriters. The Public is largely invited to buy the shares of a company coming up with an IPO.

Secondary market: It is a platform where, after the shares are distributed through an IPO, they are traded on stock exchanges.

What is a Stock Market?

“The stock market consists of the general activity of buying stocks and shares, and the people and institutions that organize it.” – Collins Dictionary.

The Stock Exchanges are institutions where shares, bonds, debentures, etc., are traded. These are physical institutions. These institutions also offer electronic platforms, like NSE-EBP (Electronic Bidding Platform) for issuing private placements.

The different stock exchanges in India:

National Stock Exchange of India Ltd. (NSE): The incorporation of NSE took place in 1992. In 1993, it was recognized as a stock exchange by SEBI and started its operations in 1994. Its Vision is “To continue to be a leader, establish a global presence, facilitate the financial well-being of people.” – NSE. Its products are organized in three asset classes for trading namely, Derivatives, Fixed income and debt instruments, and Equities. Under the Equity and equity-linked products under the cash market, they offer stocks, IDRs (Indian Depository Receipts), ETF (Exchange Traded Funds) – (include those which are benchmarked on the NIFTY indices), etc.

Under the Derivatives, it offers derivative contracts on Indices, Commodities, Equity, Currency, and Interest Rates.

The fixed income securities and Debt Segment offers products like Corporate Bonds, Sovereign Gold Bonds, etc.

“An Index is used to give information about the price movements of products in the financial, commodities or any other markets…. Stock market indexes are meant to capture the overall behavior of equity markets. A stock market index is created by selecting a group of stocks that are representative of the whole market or a specified sector or segment of the market. An Index is calculated with reference to a base period and a base index value.” – NSE.

The website of NSE shows various Indices such as Broad Market Indices, Sectoral Indices, Thematic Indices, and many more. NIFTY 50 Index, NIFTY Next 50 Index, NIFTY 100 Index, NIFTY 200 Index, NIFTY Midcap 150 Index, NIFTY Smallcap 100 Index, NIFTY LargeMidcap 250 Index, etc. are the Broad Market Indices under NSE. SDL Indices, Corporate Bond Indices, Money Market Indices, etc. come under the Fixed Income Indices. ‘Nifty’ comes from National Stock Exchange fifty; the equity benchmark index for NSE. It comprises of top 50 stocks out of almost 1600 companies that are traded actively on NSE.

Bombay Stock Exchange (BSE):

BSE was established in 1875. It is the first-ever stock exchange in Asia. It is also the first stock exchange in India that was granted permanent recognition under the Securities Contract Regulation Act, 1956. It has seen multiple milestones and achievements in its journey of more than 140 years. Like NSE, BSE too has a different type of indices. The SENSEX is the ‘benchmark index’ of BSE its full form is Sensitive Index, hence, SENSEX. SENSEX tracks and shows the top 30 companies that are very large and the most active. S&P BSE SENSEX, S&P BSE SENSEX Next 50, S&P BSE SENSEX 50, S&P BSE MidCap Index, S&P BSE SmallCap Index, S&P BSE 500, S&P BSE Basic materials, S&P BSE Energy, S&P BSE Private Banks Index, etc. and many more in different categories.

We hear a lot about the NSE and BSE, but those are not the only two stock exchanges in India. There are others as well.

Securities and Exchange Board of India – SEBI:

SEBI is the market regulator for the Indian capital markets. It is a statutory regulatory body that is entrusted with the responsibility of the regulation. It also protects the interests of investors as well as traders by the enforcement of rules and regulations. SEBI has multiple departments under it. To name a few, the Corporate Finance Department, Human Resources Department, Enforcement Department, Debt and Hybrid Securities Department, etc.

Below are a few objectives from the significant objectives of SEBI:

Monitoring the important acquisition of shares and takeover of companies.
Protecting the interest of investors.
Promoting the development of the securities market & regulation of the business
Offering a platform for, sub-brokers, registrars, stockbrokers, portfolio managers, investment advisers, bankers, merchant bankers, share transfer agents, trustees of trust deeds, underwriters and other associated people to register and regulate work.
Keeping a close check to that no fraudulent or unfair practices are done related to the securities market.

And other significant objectives

Functions of SEBI: there are 3 main key functions that SEBI performs and they are further divided into more specific functions.

Protective functions – functions to protect the interests of investors as well as financial institutions.

Price Rigging: The market where securities are traded, the rates change pertaining to the market relations. SEBI’s primary function is to prevent the manipulated fluctuations in the market. Certain groups of people who control the share prices, do certain activities, which can take the people either in losses or profits without any proper justification. For this purpose, there is a circuit filter. This circuit filter breaks when the prices go beyond a limit i.e., the trading for that specific securities stops for some hours or for the day.
Prevent insider trading: It consists of the information about a company which is not yet made public. A few people who have this information can take advantage of it and buy or sell the stocks accordingly.
Financial education for investors and SEBI guidelines are the other functions.

Development functions: SEBI has a primary function of providing training to the intermediaries. Some of the development functions are:

DEMAT form of securities. (DEMAT – Dematerialized Account where the shares and securities are held electronically)
Education of electronic platform for financial market
Underwriting is optional in order to lessen the cost of issue
Training for financial intermediaries,

And other functions.

Regulatory functions: SEBI monitors the functioning of the financial market and ensures transparency. Some of the regulatory functions include:

Registering and regulating functions of mutual funds
To regulate the takeover of companies
To register all share Transfer agents, Intermediaries, Trustees, Brokers, Sub-brokers and other people involved with the stock exchange.
Conducting inquiries and audit of the exchanges.