The regulation of buying, selling, and trading in securities—such as company shares, mutual fund units, derivatives, and operations on stock exchanges, commodity derivative exchanges, and depositories—falls under the jurisdiction of the Securities and Exchange Board of India (SEBI). Established on April 12, 1992, SEBI operates under the SEBI Act, 1992, along with various SEBI regulations, circulars, guidelines, and directives. SEBI’s primary mission is to safeguard investors’ interests, foster the development of the securities market, and ensure its proper regulation.
Currently, four key pieces of legislation govern the securities market:
A. Equity shares, commonly known as shares, represent ownership stakes in a company. Investors who purchase shares become shareholders and are entitled to corporate benefits such as dividends from the company’s profits. Shareholders also have voting rights in the decision-making processes of the company during general meetings.
B. Debt securities signify funds borrowed by a company or institution from investors, which must be repaid. They are often referred to as debentures or bonds. Investors in debt securities receive interest payments and the repayment of the principal amount invested. These securities have a fixed term, at the end of which they can be redeemed by the issuer. Debt securities can be either secured, backed by collateral, or unsecured.
C. Derivatives are financial instruments whose value is derived from the value of another asset, such as shares, debt securities, or commodities. The primary types of exchange-traded derivatives are futures and options.
D. Mutual funds are investment vehicles consisting of pooled money from multiple investors. These funds invest in various securities like shares, bonds, money market instruments, and other assets.
The market serves as a platform where companies can raise capital by issuing securities such as equity shares and debt securities to investors, and where investors can buy or sell various securities. Once securities are issued to the public, companies are required to list them on recognized stock exchanges. The securities market is an integral part of the capital market.
The primary function of the securities market is to facilitate the allocation of savings from investors to entities in need of funds. This process occurs when investors invest in securities of companies or entities requiring capital. Investors receive benefits such as interest, dividends, capital appreciation, and bonus shares. Such investments contribute to the economic development of the country.
2. Preferential Issue: In this method of issuance, securities are allocated to specific groups of investors, such as promoters, strategic investors, employees, and other identified parties.
3. Rights Issue: A rights issue occurs when a company offers its current shareholders the opportunity to purchase additional shares, typically in proportion to their existing holdings.
4. Bonus Issue: A bonus issue refers to the issuance of additional shares to existing shareholders, distributed proportionally to their current holdings, without any extra cost.
To raise capital from the public, companies must submit an offer document to SEBI, known as the draft red herring prospectus or draft prospectus. This document includes the company’s history, promoter details, business model, financial history, risks, purpose of fundraising, terms of issue, and other relevant information to help investors make informed decisions. Securities issued in the primary market are listed on recognized stock exchanges within six working days of the issue’s closure. Once listed, shares are traded on these exchanges.
Shares allocated by the company are credited to investors’ Demat accounts held with a depository via a SEBI-registered Depository Participant (DP). Investors can sell shares on stock exchanges through a SEBI-registered stockbroker and receive funds.
In the secondary market, securities issued in the primary market are listed on stock exchanges, allowing investors to buy or sell them. Stock exchanges typically comprise a Cash Market segment and a Derivatives Market segment.
Market Infrastructure Institutions: The infrastructure that facilitates transactions in the securities market, such as issuing, purchasing, and selling securities, is provided by Stock Exchanges, Depositories, and Clearing Corporations. These are collectively known as Market Infrastructure Institutions (MIIs). A list of SEBI-registered market infrastructure institutions can be found at this link: SEBI Intermediaries.
Stock Exchanges: Stock Exchanges offer a nationwide computerized trading platform that enables the buying and selling of securities through registered stock brokers at market-determined prices in a fair manner. The list of SEBI-recognized stock exchanges in India is available at this link: SEBI Stock Exchanges. Major nationwide stock exchanges include BSE Limited (BSE), National Stock Exchange of India Limited (NSE), and Metropolitan Stock Exchange of India Limited (MSE).
Clearing Corporations: Clearing Corporations play a crucial role in guaranteeing the settlement of trades executed on Stock Exchanges. They ensure that every buyer receives the securities they purchased and every seller receives the money for the securities they sold.
Depositories: Depositories are institutions that hold investors’ securities in dematerialized (electronic) form and provide demat services through their Depository Participants (DPs). In India, there are two depositories: National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL). Each depository has registered DPs (similar to bank branches) that offer various services to investors, such as opening and maintaining Demat accounts, and the dematerialization of shares.
Market Intermediaries: Market Intermediaries play a vital role in the smooth functioning of both primary and secondary markets. They facilitate the execution of buy and sell orders, deal in securities, and provide relevant trading information. Key intermediaries include stock brokers, depository participants, merchant bankers, share and transfer agents, and registrars. All intermediaries are registered with SEBI and must adhere to prescribed norms to protect investors. A list of SEBI-recognized market intermediaries can be accessed at this link: SEBI Market Intermediaries.
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Investments in securities markets are subject to market risks. Please read all related documents carefully.
