Investment Laws Contact Programme- Class I

Investment LawsInvestment LawsContact Programme- Class IContact Programme- Class I

Securities Market in India

………………..Prof. S.Krishnaswamy

Securities Market in IndiaSecurities Market in India

• What and Why of Securities Market?

In every economic System, some units which may be individual or Institution are surplus-generating while others are deficit-generating.


• Surplus-Generating Units are called Savers while Deficit-generating units are called spenders.

• Households are surplus-generating and Corporates and Government are deficit generators.

• By placing the surplus funds in Financial claims or Financial securities the Spending community gets funds at a cost and saving community gets various benefits like interest, dividend, capital appreciation, Bonus etc.


• The Surplus generating units (Savers) are investors and Deficit generating units (spenders) are issuers.

• These investors and issuers of financial securities constitute two important elements of the securities markets.


• The third critical element of markets is the intermediaries who act as conduits between the investors and issuers.

• Regulatory bodies, which regulate the functioning of the securities markets, constitute the last but very significant element of securities markets.


• Thus the four important elements of securities markets are:

• Investors

• Issuers

• Intermediaries

• Regulators


Securities Can be

• Government or Industrial

• Long-term or short-term

• Primary Market or Secondary Market


Primary Market is the segment in which new issues are made whereas secondary market is the segment in which outstanding issues are traded. It is for this reason that the Primary Market is called the New issues Market and the secondary market is called Stock Market.


History of Indian Stock Market• From Scattered and small beginning in the 19th Century,

India’s stock market has risen to great heights.• By 1990, we had 19 stock exchanges in the country.• There were around 6,000 listed companies and the

investors population stood around 15 Million.


Role & Functions of Stock Exchange

In Union of India Vs. Allied International Products Ltd. [ (1971) 41 Comp Cas 127 SC]: (1970) 3 SCC 5941), the Supreme Court of India has enunciated the role of the Stock Exchanges in these words:


Role & Functions of Stock Exchange“ A Stock Exchange fulfills a vital function in

the economic development of a nation: its main function is to ‘liquify’ capital by enabling a person who has invested money in, say a factory or railway, to convert it into cash by disposing off his shares in the enterprise to someone else.

……contd


Role & Functions of Stock ExchangeInvestment in Joint stock companies is attractive to

the public, because the value of the shares is announced day after day in the stock exchanges, and shares quoted on the exchanges are capable of almost immediate conversion into money. In modern days a company stands little chance of inducing the public to subscribe to its capital,

………..contd


Role & Functions of Stock Exchange

unless its shares are quoted in an approved stock exchange. All public companies are anxious to obtain permission from reputed exchanges for securing quotations of their shares and the management of a company is anxious to inform the investing public that the shares of the company will be quoted on the stock exchange”.


The stock exchange is really an essential pillar of the private sector corporate economy. It discharges three essential functions:


First, the stock exchange provides a market place for purchase and sale of securities viz. shares, bonds, debentures etc. It, therefore, ensures the free transferability of securities which is the essential basis for the joint stock enterprise system.


Secondly, the stock exchange provides the linkage between the savings in the household sector and the investment in the corporate economy. It mobilizes savings, channelises them as securities into these enterprises which are favoured by the investors on the basis of such criteria as future growth prospects, good returns and appreciation of capital.


Thirdly, by providing a market quotation of the prices of shares and bonds- a sort of collective judgment simultaneously reached by many buyers and sellers in the market- the stock exchange serves the role of a barometer, not only of the state of health of individual companies, but also of the nation’s economy as a whole.


Regulation of Stock Market

Since the savings of the investing community namely, public, needs to be protected from various kinds of malpractices, frauds, defaults etc., it was obligatory on the part of the Governing system to establish Regulatory bodies.


Regulation of Stock Markets

UK and USA had long back created separate boards for the regulation of the securities market. U.K has the Securities and Investment Board (SIB) and U.S. has the Securities and Exchange Commission (SEC). The Indian Government’s intention to set up a separate board for the regulation and orderly functioning of the capital market was first declared in the Budget speech by Shri. Rajiv Gandhi, the then Prime Minister and Minister of Finance, while presenting the Budget for the year 1987-88. He stated:



“ The Capital Markets in India have shown tremendous growth in the last few years. Approvals for capital issues have exceeded Rs.5,000 crores in 1986-87. They were only about Rs.500 Crores in 1980-81. For a healthy growth of capital markets, investors must be fully protected. Trading malpractices must be prevented. Government have decided to set up a separate board for the regulation and orderly functioning of stock exchange and the securities industry”.



By a notification issued on 12th April’1988, Securities and Exchange Board of India (SEBI) was constituted as an interim administrative body to function under the overall administrative control of the Ministry of Finance of the Central Government.



In July 1988, the SEBI, constituted as a foresaid, published an approach paper on comprehensive legislation for securities market.



The SEBI was given a statutory status on 30th January,1992 by an ordinance to provide for the establishment of SEBI. A Bill to replace the Ordinance was introduced in parliament on 3rd march, 1992 and was passed y both houses of parliament on 1st April’1992. The Bill became an act on 4th April’1992 the date on which it is received the President’s assent. However, as provided for in section 1(3), this act is to be deemed to have come into force on 30th January, 1992, i.e. the date on which the SEBI ordinance was promulgated.


FUNCTIONS OF SEBI

Section 11 of the SEBI Act


Organisation Structure of SEBI

-a Chairman( to be appointed by Central Govt.)

- two members from amongst the officials of the Ministries of the C.Govt. dealing with Finance and Law.

- One Member from RBI

- two members to be appointed by Central Govt.


Activities of SEBI

-Rules regarding registration of intermediaries

- Guidelines and Code of Conduct for Merchant Bankers

- Categorisation of Merchant Bankers

- Guidelines for Portfolio Management Services

- Ciruclars on various issues (Periodical)

- Guidelines for Leadmanagers


Activities of SEBI

-Regulation for Registrars and Share-Transfer agents

-Guidelines for IPO’s, Debt. Instruments

- Regulation on Insider trading

- Guidelines for Mutual funds

- Regulation on take overs

- Code for Corporate Governance


Activities of SEBI

-Consultative Paper on free market pricing of Capital Issues.

- Advisory committees for Primary and Secondary Market reviews

-Investor Protection guidelines

- Guidelines on SRO’s for Merchant Bankers- Regulation of Futures and Options, Index Market

- Informal Guidance

Economy & Finance

Investment Laws Contact Programme- Class I