Regulation of Capital Market in India

Institutional regulation
o It is also known as structural regulations
o Each institution’s activities are regulated by one
regulator
o These regulation call for a clear demarcation of
activities of financial institution
o Apex agencies are SEBI & RBI
o SEBI- regulates the functioning of mutual funds, stock
exchanges & stock brokering companies
o RBI -regulates the activities of commercial banks & non-
 Prudential regulations
• Regulations associated with the internal
management of the financial institution & financial
services
• Regulation relates capital adequacy, liquidity &
solvency
• Aim of regulation is to prevent the entry of firms
without adequate resources into the market & ensure
the proper functioning of firms within the market
• Eg: SEBI fixes the minimum net worth requirement
 Investors regulation
• They ensure protection for investors
• Eg:- SEBI issues guidelines to protect the
interest of investors from time to time.
 Legislative regulations

• Govt enacted such regulation for overall

development of financial service industry
• Banking regulation act, security contract act
 Regulation of Capital Market
• The SEBI Act, 1992, which established the SEBI, has four objectives:
protecting the interests of investors in securities market: the securities
market & other incidental matters connected there with.

• The companies act 2012, deals with the issue, allotment & transfer
securities, disclosures to be made in public issue, underwriting,
borrowing powers, payment of dividend & winding up of companies

• The securities contract regulation act,1956, provides for the regulation of

securities trading and the management of stock exchanges

• The Depository act, 1996, provides for the establishment of depositories

for the electronic maintenance of Demat securities & transfer ownership
 Various Regulators of Capital Market

• Ministry of Finance (MoF)

• Reserve Bank of India (RBI)
• Securities & Exchange Board of India (SEBI)
• Stock Exchanges
 Ministry of Finance (MoF)
The Department of Economic affairs directly manages the
Capital Markets segment under the directions of MoF.
This segment formulates the rules for the efficient growth
of the Stock Market which includes derivatives, debt, and
equity. It also formulates regulations for safeguarding the
interest of the investors.
This segment regulates the Indian Capital Markets
through the following laws:
• Depositories Act, 1996
• Securities Contract (Regulation) Act, 1956
• Securities and Exchange Board of India Act, 1992
Reserve Bank of India (RBI)
The Reserve Bank of India Act, 1934 governs
policies framed by the Reserve Bank of India. The
functions of RBI in this regard are as follows:
 Implementation of Monetary and Credit policies
 Issuance of Currency Notes
 Government’s Banker
 Banking System Regulator
 Foreign Exchange through Foreign Exchange
Management Act, 1999
 Managing payment & settlement system
Apart from the above functions, RBI is also actively
involved in developing the financial market.
 Securities & Exchange Board of India (SEBI)

The Securities & Exchange Board of India (SEBI) Act, 1992 regulates

the functioning of SEBI. SEBI is the apex body governing the Indian
stock exchanges.
The primary functions of SEBI are as follows:
Protective Functions
I. It checks Price rigging
II. Prohibits insider trading
III. prohibits fraudulent and Unfair Trade Practices

Development Functions
I. SEBI promotes training of intermediaries of the securities market.
II. SEBI tries to promote activities of stock exchange by adopting a
flexible and adaptable approach
Regulatory Functions

I. SEBI has framed rules and regulations and a code of conduct to

regulate the intermediaries such as merchant bankers, brokers,
underwriters, etc.

II. These intermediaries have been brought under the regulatory

purview and private placement has been made more restrictive.

III. SEBI registers and regulates the working of stock brokers, sub-
brokers, share-transfer agents, trustees, merchant bankers and all
those who are associated with stock exchange in any manner

IV. SEBI registers and regulates the working of mutual funds etc.

V. SEBI regulates takeover of the companies

VI. SEBI conducts inquiries and audit of stock exchanges.

 Role of SEBI in Indian Capital Market
• Power to make rules for controlling stock exchange : SEBI has power to make new
rules for controlling stock exchange in India. For example, SEBI fixed the time of
trading 9 AM and 3:30 PM in stock market.

• To provide license to dealers and brokers : SEBI has power to provide license to
dealers and brokers of capital market. If SEBI sees that any financial product is of
capital nature, then SEBI can also control to that product and its dealers.

• To Stop fraud in Capital Market : SEBI has many powers for stopping fraud in capital
market. > It can ban on the trading of those brokers who are involved in fraudulent
and unfair trade practices relating to stock market. > It can impose the penalties on
capital market intermediaries if they involve in insider trading.

• To Control the Merge, Acquisition and Takeover the companies : SEBI sees whether
this merge or acquisition is for development of business or to harm capital market.
•   To make new rules on carry - forward transactions : > Share trading
transactions carry forward can not exceed 25% of broker's total transactions. >
90 day limit for carry forward.

• To create relationship with ICAI : SEBI creates good relationship with ICAI for
bringing more transparency in the auditing work.

• To Require report of Portfolio Management Activities : SEBI has also power to

require report of portfolio management to check the capital market
performance.

• To educate the investors : Time to time, SEBI arranges scheduled workshops

to educate the investors.

• To audit the performance of stock market : SEBI uses his powers to audit the
performance of different Indian stock exchange for bringing transparency in
the working of stock exchanges. 18
 The participation in the Indian Stock Market of both the domestic or foreign financial
intermediaries are governed by the regulations framed by SEBI. Additionally, Foreign
Portfolio Investors (FPIs) can participate in Indian Stock Market after registering them with
an authorized Depository Participant.
 National Stock Exchange of India (NSE)

NSE is responsible for formulating and implementing the rules pertaining to:
 Registration of Members
 Listing of Securities
 Monitoring of Transactions
 Compliance
 Other additional functions related to the above functions
NSE itself is regulated by SEBI and is under regular vigilance for all regulatory compliances .