Understanding Securities Markets and the Indian Regulatory Framework
Domain focus
The exam checks that you can place any transaction or institution in the right market segment and name the statute and regulator behind it.
Primary and secondary markets
In the primary market issuers raise capital: initial and further public offers, rights issues, preferential allotments, qualified institutional placements and bond issues. In the secondary market investors trade already-issued securities on exchanges or over the counter. Price discovery happens in the secondary market; capital formation in the primary market.
Statutes and regulators
- SEBI Act, 1992: creates SEBI to protect investors and regulate and develop the securities market.
- Securities Contracts (Regulation) Act, 1956: governs contracts in securities and recognition of exchanges.
- Depositories Act, 1996: dematerialised holding and transfer.
- Companies Act, 2013: issuance, prospectus, share capital.
- The FSDC coordinates SEBI, RBI, IRDAI and PFRDA. Securities fall to SEBI, banking to RBI, insurance to IRDAI, pensions to PFRDA.
Market infrastructure
Exchanges (NSE, BSE) provide trading. Clearing corporations novate and settle trades. Depositories (NSDL, CDSL) hold securities in demat form through depository participants. Most equity trades now settle on T+1, that is trade day plus one business day.
Worked example
A client applies in an IPO using ASBA: the bank blocks the application money, the registrar makes the allotment, and shares are credited to the demat account before listing. Funds move to the issuer only if shares are allotted. If the client later sells on the exchange, that is a secondary market trade settled by the clearing corporation, not by the issuer.
Traps
Believing SEBI approves IPO pricing (it reviews disclosure, not valuation). Forgetting that commodity derivatives moved to SEBI after the FMC merger. Confusing the depository with the depository participant.