Stocks represent fragmental possession and ownership of a company in the record and therefore, a stock/security market is a platform where investors connect to trade investments and ownership of such possessions. The stock market refers to the venue where trading of financial instruments, exchanging equity shares of public corporations, issuance of shares takes place. Equity markets are an essential instrument of a free-market economy hence they allow democratized access to mercantilism and exchange of capital for different categories of investors that facilitates trading by engaging investors in such transactions.
Functioning of Indian Capital Market
The Indian Capital Market operates in a structured mechanism in which companies participating for the first time are required to list their shares through an Initial Public Offering (IPO) on a stock exchange thereafter, investors are called forth to trade in these shares via a secondary medium. Various indices have been formulated to evaluate the performance of the security market. These indices act as an indicator and evaluate market performance in their entirety. Sensex and Nifty are the prime indices of the Indian Stock Market.
- Sensex – It is the oldest market index for It is a figure indicating the relative shares prices of the 30 leading companies listed on the BSE.
- Nifty – It stands for National Stock Exchange Fifty as the term defines it comprises of the shares listed on the NSE of the leading 50 companies.
The Regulatory authority of the Indian Capital market issues guidelines, notifications, circulars, and draft legislation to govern the equity market in India. All the Investors and market participants are under surveillance of these Regulatory authorities. The stock exchanges are also authorized to formulate their guidelines, bye-laws, and regulations to regulate the markets. The Indian Stock and Security markets are governed and regulated primarily by the:
The Securities and Exchange Board of India (SEBI) is the primary body that administers Security trading and exchanges in India. The fundamental responsibility of SEBI is to shield investors’ interests and promote the Indian Capital markets. SEBI monitors the participation of domestic and foreign Portfolio Investors. All financial intermediaries are governed by SEBI regulations. As per the SEBI ordinance Foreign Portfolio Investors can engage and contribute to the Indian securities markets by registering with DDPs.
- Reserve Bank of India (RBI)
The Reserve Bank of India (RBI) is governed and established under the Reserve Bank of India Act, 1934. The role of RBI in the Indian Capital Market, a regulator of banking & settlement systems, is to issue credit policies, currency notes, implement regulations. The RBI also administers the foreign exchange markets.
The prominent ordinance, statutes, and Act administering the Capital markets in India are as follows:
Companies Act, 2013: Companies Act, 2013 defines the authority of the Securities and Exchange Board to regulate the issuance and exchange of stocks. As per the provisions of Section 40 of the Act every company that makes a public offer is required to apply to recognized security exchanges for demanding assent for the securities to be dealt with in the stock exchange. The Act elaborates the procedure of issuing stock by way of a bonus issue, private placement, rights issue, public offer, etc.
Depositories Act, 1996: A depository can be defined as a corporation in which a shareholder’s securities are held electronically with the assistance of a depository participant. Section 3 of the Act stipulates that a business commencement certificate obtained from SEBI is required which can be can be acquired as per the instructions stated in the Act. The depository shall be recognized SEBI (Depositories and Participants) Regulations, 2018. Section 9 of the Act stipulates that the stocks which are held by the depositories will be considered fungible. Hence, if the investor requests the security certificate, he shall lose the right to obtain the same certificate that he submitted.
Securities Contracts Regulation Act (SCRA) 1956: The Securities Contracts (Regulation) Act, 1956 (hereinafter referred to as SCRA) is an Act to curb unfavourable stock exchanges by administering security dealing business.
- Recognized stock exchanges
According to Section 3 of the SCRA stock exchange shall be recognized by moving an application to the Central Government. A copy of the regulations pertaining to the configuration of the stock exchange and a copy of the bye-laws of the stock exchange for the regulation and management of contracts shall be accompanied by the application.
- Corporatization and Demutualization of stock exchanges
Section 4 of the Act makes it compulsory for all recognized stock exchanges to be demutualized and corporatized as per the conditions defined in Section 4(B). All recognized stock exchanges shall submit a scheme, a scheme shall scheme serves the trading and public interest in case SEBI is satisfied it will be published in the Official Gazette. Further, SEBI has the authority to limit the rights and restrict the power of appointing representatives by the shareholders, voting rights, etc. SEBI is empowered to reject the scheme in case it is found detrimental to the public interest, rejection of a scheme will be notified in the Gazette.
SEBI has framed numerous regulations to develop various areas of the Security Market. These regulations are:-
- SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018
- SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Market) Regulations, 2003
- SEBI (Prohibition of Insider Trading) Regulations, 2015
- SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
- SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
In particular, the responsibilities of these governing bodies are:
- To bring institutional reforms in the Equity markets
- To build an efficient legislative framework for securities markets
- To develop regulatory and market institutions
- To strengthen investor protection mechanism.
The Indian equity security market is the instrument of growth for the Indian economy. The investors, traders and the participating companies engaged in the transaction of these securities shall be well aware of the laws and guidelines by which they are governed. The Indian Government and regulatory authorities have issued numerous notifications, Acts, circulars to facilitate the exchange of stocks and in safeguarding all the intermediaries, depositaries, investors by any fraud or fallacious activities.
Author(s) Name: Tanya Dodeja (LCIT Law College)