Final CM&SL Book 16-2-2024-pages

Regulatory Framework

  • Securities & Exchange Board of India Act, 1992

  • Reserve Bank of India Act, 1934

  • SEBI (Foreign Portfolio Investors) Regulations, 2019

  • SEBI (Alternative Investment Funds) Regulations, 2012

  • Companies Act, 2013 and related rules

  • SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018

Financial System in India

  • A sound financial system is vital for economic growth.

    • Encourages savings, mobilizes funds, and allocates resources into productive uses (trade, commerce, manufacturing).

    • Manages both cash and credit transactions.

  • Defined as a set of institutional arrangements to mobilize financial surpluses from income-generating units and direct them to those in need.

Key Activities Under the Financial System

  • Production

  • Distribution

  • Exchange and holding of financial assets by financial institutions and intermediaries.

  • Components: Financial markets, assets, services, and institutions.

Influencing Factors for Capital Market Growth

  • Household savings

  • Taxation levels

  • Economic health indicators (GDP growth, inflation, balance of payments)

  • Impact of Corporate Performance: Growth in certain sectors can enhance equity investments.

Components of Financial System in India

  • Financial Market

  • Financial Market Participants

  • Financial Instruments

  • Securities Market

  • Lending and Borrowing Instruments: Shares, debentures, bonds.

  • Qualified Institutional Buyers (QIBs), Alternative Investment Funds, Exchange Traded Funds (ETFs).

  • Investors: High Networth Individuals (HNIs), Merchant Bankers, etc.

Indian Financial Markets Overview

  • One of the oldest and fastest-growing financial markets globally.

  • Developed primarily in Mumbai with origins in the late 18th century.

  • Bombay Stock Exchange (BSE): Recognized as one of the largest stock exchanges, operational since 1875.

Functions of Financial Markets

  • Mobilizes savings for productive uses.

  • Determining fair security prices based on supply and demand.

  • Providing liquidity to investors.

  • Reducing transaction costs and ensuring seamless asset exchanges.

Financial Markets Divisions

1. Money Market

  • Deals in short-term funds (maturity from 1 day to 1 year).

  • Governed by RBI and SEBI.

  • Provides instruments like Treasury Bills, Commercial Papers, Certificates of Deposit.

2. Capital Market

  • Focuses on long-term funding needs (industrial and government securities).

  • Serves as a platform for medium to long-term liquidity among businesses and government agencies.

Importance of Capital Market

  • Provides essential funding for expansion, modernization, and infrastructure projects.

  • Acts as a barometer of the economy illustrating overall economic health.

Functions of Capital Market

  • Source of investment and resource mobilization for secured economic growth.

  • Facilitates buying/selling of securities, thereby enabling price discovery.

  • Supports risk management through portfolio diversification.

Securities Market

  • A venue where securities such as stocks, bonds, and derivatives are traded.

  • Split into two segments:

1. Primary Market

  • Where new securities are issued (e.g., Initial Public Offer (IPO)).

  • Companies raise funds by offering securities directly to the public.

2. Secondary Market

  • Existing securities are traded among investors.

  • Provides liquidity and facilitates price adjustments based on market dynamics.

Key Differences

Aspect

Primary Market

Secondary Market

Nature

Issues new securities

Trades existing securities

Main Objective

Raise capital for companies

Facilitate liquidity for investors

Pricing

Fixed price during issuance

Price fluctuates based on demand

Regulatory Framework for Securities Market

  • Ensures smooth operation of capital markets preventing malpractices.

  • SEBI plays the major regulatory role post 1992 reforms.

Key Regulations

  1. SEBI Act, 1992: Safeguards investor interests and promotes market development.

  2. Securities Contracts (Regulation) Act, 1956: Regulates trading and operations of stock exchanges.

  3. Depositories Act, 1996: Establishes securities depositories to enhance transferability and efficiency.

  4. Companies Act, 2013: Governs corporate disclosures, capital raising, and corporate governance.

SEBI – The Capital Market Regulator

  • Established in 1988; gained statutory power with the SEBI Act, 1992.

  • Aims to protect investor interests and regulate the securities market effectively.

  • Operates under the Ministry of Finance, ensuring adherence to securities regulations.

Participants of Capital Market

Types of Investors

  • Qualified Institutional Buyers (QIBs) and Foreign Portfolio Investors (FPIs): Large-scale investors.

  • Venture Capital and Private Equity: Provide funding for innovative projects and companies.

  • High Net Worth Individuals (HNIs): Significant personal wealth, investing directly or indirectly.

Alternative Investment Funds (AIFs)

  • Category I: Funds investing in start-ups, social ventures, etc.

  • Category II: Funds that do not employ leverage and focus on private equity/debt.

  • Category III: Hedge funds employing diverse strategies and leverage.

Capital Market Instruments

1. Equity Shares

  • Represents ownership in a company with voting rights.

2. Preference Shares

  • Offers fixed dividends with limited voting rights.

3. Debentures

  • Debt securities providing fixed returns without voting rights.

4. Bonds

  • Borrower promises fixed repayment interest over specified time.

5. Foreign Currency Bonds (FCCB)

  • Raised in foreign currency, convertible into shares.

6. Real Estate Investment Trusts (REITs)

  • Allows for investments in real estate through shares, providing dividends.

7. Infrastructure Investment Trusts (InvITs)

  • Facilitates fundraising for infrastructure projects.

Conclusion

  • Capital markets are vital for providing resources for economic growth and fostering investment opportunities, supported by a robust regulatory framework ensuring investor safety and market integrity.