Basic Primer to the Indian Capital Market

Table of Contents

1. Introduction
2. Capital Market
3. Regulatory Environment
4. Regulators

Check out Taxmann's Depository Operations which covers knowledge competencies related to the basics of depository operations, services provided by the depository participants, account opening formalities and maintenance of the account, and the regulatory framework in which the depositories function and the different business partners of a Depository.

1. Introduction

Transfer of resources from those with idle resources to others who have a productive need for them is perhaps most efficiently achieved through the securities markets. To state formally, securities markets provide channels for allocation of savings to investments and thereby decouple these two activities. As a result, the savers and investors are not constrained by their individual abilities, but by the economy’s abilities to invest and save respectively, which inevitably enhances savings and investment in the economy.

A financial market consists of investors (buyers of securities), borrowers (sellers of securities), intermediaries and regulatory bodies.

2. Capital Market

The capital market has two interdependent segments, the primary market (new issuers) and secondary market (stock market). The primary market is used by issuers for raising fresh capital from the investors by making initial public offers or rights issues or offers for sale of equity or debt; on the other hand the secondary market provides liquidity to these instruments, through trading and settlement on the stock exchanges. An active secondary market promotes the growth of the primary market and capital formation, since the investors in the primary market are assured of a continuous market where they have an option to liquidate their investments.

There are several major players in the primary market. These include the merchant bankers, mutual funds, financial institutions, foreign portfolio investors (FPIs) and individual investors. In the secondary market, there are the stock exchanges, stock brokers (who are members of the stock exchanges), the mutual funds, financial institutions, foreign portfolio investors (FPIs), and individual investors. The Registrars and Transfer Agents, Custodians and Depositories are capital market intermediaries which provide important infrastructure services to both the primary and secondary markets.

3. Regulatory Environment

The securities market transactions are subject to regulations under the four main legislations viz.,

• the Securities and Exchange Board of India Act, 1992;
• the Securities Contracts (Regulation) Act, 1956;
• the Depositories Act, 1996;
• certain provisions of the Companies Act, 2013; and
• Prevention of Money Laundering Act, 2002.

3.1 Securities and Exchange Board of India Act, 1992

The SEBI Act, 1992 vests SEBI with statutory powers for,

(a) protecting the interests of investors in securities market,

(b) promoting the development of the securities market, and

(c) regulating the securities market.

Its regulatory jurisdiction extends over corporates in the issuance of capital and transfer of securities and all intermediaries and persons associated with securities market. It can conduct enquiries, audits and inspection of all concerned and adjudicate offences under the Act. It has powers to register and regulate all market intermediaries and also to penalise them in case of violations of the provisions of the SEBI Act, Rules and Regulations. SEBI has full autonomy and authority to regulate and develop an orderly securities market.

3.2 Securities Contracts (Regulation) Act, 1956

The SC(R)A, 1956 provides for direct and indirect control of virtually all aspects of securities trading and the running of stock exchanges and aims at preventing undesirable transactions in securities. It gives the central government and SEBI the regulatory jurisdiction over (a) stock exchanges through a process of recognition and continued supervision, (b) contracts in securities, and (c) listing of securities on stock exchanges. As a condition of recognition, a stock exchange complies with prescribed conditions from the central government. Organised trading activity in securities takes place on a specified recognised stock exchange. The stock exchanges determine their own listing regulations which have to conform to the minimum listing criteria set out in the Securities Contracts Rules.

3.3 Depositories Act, 1996

The Depositories Act, 1996 provides for the establishment of depositories in securities market with the objective of ensuring free transferability of securities with speed, accuracy and security by (a) making securities freely transferable subject to certain exceptions; (b) dematerialisation of the securities in the depository mode; and (c) providing for maintenance of ownership records in a book entry form. In order to streamline the settlement process, the Act envisages transfer of ownership of securities electronically by book entry. The Act has made the securities of all companies freely transferable in the depository mode, restricting the company’s right to use its discretion in effecting the transfer of securities. The other procedural and the transfer deed requirements stated in the Companies Act have also been dispensed with.

3.4 Companies Act, 2013

The Companies Act, 2013 deals with issue, allotment and transfer of securities and various aspects relating to company management. The Act provides for standard disclosures in public issues of capital, particularly in the fields of company management and projects, information about other listed companies under the same management, and management perception of risk factors. It also regulates underwriting, the use of premium and discounts on issues, rights and bonus issues, payment of interest and dividends, supply of annual report and other information. Act also provides for Insolvency and NCLT/NCLAT provisions.

3.5 The Prevention of Money Laundering Act, 2002

The PMLA, 2002 is a Central Act to prevent money laundering and to provide for confiscation of property derived from money laundering. Anti-Money Laundering is a set of procedures, laws or regulations designed to stop/curb the practice of generating income through illegal actions/ criminal activity such as drug trafficking, terrorist funding and bringing the same into mainstream making it appear to have come from a legitimate source.  KYC Guidelines have been introduced in the Capital Market based on this Act.

This Act requires all the Market participants, Intermediaries and other institutions connected therewith, to maintain a record of all the transactions done through them and to monitor and report suspicious transactions to Financial Intelligence Unit (FIU), Government of India.

4. Regulators

The responsibility for regulating the securities market is shared by the Securities and Exchange Board of India (SEBI), the Reserve Bank of India (RBI), the Department of Economic Affairs (DEA) of the Ministry of Finance, Ministry of Corporate Affairs (MCA).

In 2010, the Financial Stability and Development Council (FSDC) replaced the High Level Coordination Committee on Financial Markets (HLCCFM) which was earlier facilitating regulatory coordination among the above agencies, though informally. The secretariat of HLCCFM was in Ministry of Finance (Capital Market Division, Department of Economic Affairs).

The orders of SEBI under the securities laws are appealable before a Securities Appellate Tribunal. Most of the powers under the SCRA are exercisable by DEA while a few others by SEBI. The powers of the DEA under the SCRA are also con-currently exercised by SEBI. The powers in respect of the contracts for sale and purchase of securities, gold related securities, money market securities and securities derived from these securities and ready forward contracts in debt securities are exercised concurrently by RBI.

The SEBI Act and the Depositories Act are mostly administered by SEBI. The rules under the securities laws are framed by the government and regulations by SEBI, and all these are administered by SEBI. The powers under the Companies Act relating to issue and transfer of securities and non-payment of dividend are administered by SEBI in case of listed public companies and public companies proposing to get their securities listed. The SROs ensure compliance with their own rules as well as with the rules relevant for them under the securities laws.