The document discusses the financial environment in India, focusing on the structure and functions of money and capital markets, including various financial institutions and instruments. Key components include investment banks, commercial banks, and money market instruments such as treasury bills and commercial papers, while highlighting the importance of the financial markets in resource allocation. It also covers the role of derivatives, hedge funds, and the legal framework governing these markets, shedding light on their operation, regulation, and evolution over time.

1. FINANCIAL ENVIRONMENT

2. Contents
 Indian money and capital markets: meaning,
functions and constituents,
 Stock exchange- importance and functions,
 SEBI,
 Capital market reforms and development,
 Industrial financial institutions (IDBI, SIDBI,
ICICI, IFCI etc.).

3. Financial Environment
Financial environment emerges when different individual and
institutional investors enter in this market with different investment
objectives.
The complete system of financial environment comprises of four important
components.
These include
(1) Financial managers
(2) Investors
(3) Financial markets and
(4) Financial instruments.

4. Financial institutions
 An intermediary that channels the savings of individuals,
businesses and governments into loans or investments
 Investment banks: underwrites and distributes new investment
securities and helps businesses obtain financing
 Commercial banks: the traditional department store of finance serving
a variety of savers and borrowers
 Financial services corporations: conglomerate that offers financial
services including investment banking, brokerage operations,
insurance and commercial banking

5.  Credit unions – members have a common bond, savings are loaned to other members,
cheap source of finance
 Pension funds – retirement plans funded by corporations for their workers and
administered by the trust departments of commercial banks/life insurance companies
 LIC take savings in the forms of annual premiums and invest in stocks, bonds, real estate;
make payments to beneficiaries of insured parties, also offer tax deferred savings plans
for retirement
 Mutual funds: An investment vehicle that is made up of a pool of funds collected from
many investors for the purpose of investing in securities such as stocks, bonds, money
market instruments and similar assets. It is operated by money managers, who invest the
fund's capital and attempt to produce capital gains and income for the fund's investors.
 Exchange traded funds: A security that tracks an index, a commodity or a basket of assets
like an index fund, but trades like a stock on an exchange.

6. Financial markets
 Financial markets : Any marketplace where buyers
and sellers participate in the trade of assets such as
equities, bonds, currencies and derivatives.
 Financial markets are typically defined by having
transparent pricing, basic regulations on trading,
costs and fees, and market forces determining the
prices of securities that trade.

7. Functions of financial markets
 Facilitate price discovery
 Market forces fix the price
 Provide liquidity to investor in financial assets
 Negotiability and transferability
 Reduce the cost of transacting
 Search costs
 Information costs

8. Money Markets
Capital Market
Money Market
Cash or Spot Market
Derivative Market
Forex & The Interbank Market
TYPES OF FINANCIAL MARKETS

9. ➤ The money market refers to trading in very short-term debt investments.
 At the wholesale level, it involves large-volume trades between institutions and
traders.
 At the retail level, it includes money market mutual funds bought by individual
investors and money market accounts opened by bank customers.
 the money market is characterized by a high degree of safety and relatively low
rates of return.
➤ Within the one year, depending upon the tenors, money market is
classified into:
Overnight market : The tenor of transactions is one working day.
Notice money market : The tenor of the transactions is from 2 days to
14 days.
Term money market : The tenor of the transactions is from 15 days to
one year.
MONEY MARKETS

10. A capital market is one in which individuals and institutions
trade financial securities.
➤ Organisations and institutions in the public and private sectors
also often sell securities on the capital markets in order to raise
funds(Long-Term).
➤ Thus, this type of market is composed of both the primary and
secondary markets.
➤ Stock markets allow investors to buy and sell shares in publicly
traded companies.
➤ A bond is a debt investment in which an investor loans money to
an entity (corporate or governmental), which borrows the funds
for a defined period of time at a fixed interest rate.
Capital Market

11. Investing in the cash or "spot" market is highly sophisticated, with opportunities
for both big losses and big gains.
➤ In the cash market, goods are sold for cash and are delivered immediately.
➤ Prices are settled in cash "on the spot" at current market prices. This is notably
different from other markets, in which trades are determined at forward prices.
➤ For example, if you wish to purchase Company XYZ shares and own them
immediately, you would go to the cash market on which the shares are traded (the
New York Stock Exchange, for example). If you wanted to buy gold on the spot
market, you could go to a coin dealer and exchange cash for gold.
The foreign exchange (FOREX) market is one of the largest spot markets in the
world. People and companies all over the world are constantly exchanging one
currency for another as transactions occur all over the globe.
CASH OR SPOT MARKETS

12. For example, an investor wishing to purchase shares of common
stock of a publicly traded company can conduct this transaction on
a stock exchange. The exchange of cash for shares of common
stock is typically facilitated by a broker, who charges a commission
when executing the order.

13.  The derivative is named so for a reason: its value is derived
from its underlying asset or assets.
➤ A derivative is a contract, but in this case the contract price is
determined by the market price of the core asset.
“
➤ Derivatives are financial securities and are financial
contracts that obtain value from something else, known as
underlying securities.
Underlying securities may be stocks, currency, commodities
or bonds, etc.”
DERIVATIVE MARKETS

14. Derivative Market Example
 The best examples of derivative markets are currency futures
and options U.S. and other developed countries.
 Futures contracts in currencies are contracts trade- able and
contracts for specific quantities of given currencies, the
exchange rate being fixed at the time that contract is entered
into and delivery dates set by the controlling authority.
 The International Money Market Division of Chicago Mercantile
Ex­
change (IMM) sets the terms of the contracts and contract
specifications.

15. Derivatives market in India
 Derivatives market in India has a history dating back in 1875. The Bombay Cotton
Trading Association started future trading in this year. History suggests that by 1900
India became one of the world’s largest futures trading industry.
 However after independence, in 1952, the government of India officially put a ban on
cash settlement and options trading. This ban on commodities future trading was
removed in the year 2000. The creation of National Electronics Commodity Exchange
made it possible.
 In 1993, the National stocks Exchange, an electronics based trading exchange came
into existence. The Bombay stock exchange was already fully functional for over 100
years then.
 Over the BSE, forward trading was there in the form of Badla trading, but formally
derivatives trading kicked started in its present form after 2001 only.

16. Derivatives trading risk with stocks future
Situtation 1: Now suppose you purchased 100 TCS futures @ INR 1740 on May 15.
The expiry date is May 28. Your total Investment is INR 1,74,000. You paid an initial
margin of INR 17,40. On May 28, the price per shares of TCS was INR 1800.
 You gain (1800 – 1740) X 100 = INR 6000.
 Situation 2: Suppose you purchased 100 Nifty 50 futures @ Rs. 10724 on May 10.
The expiry date is May 28. Your total Investment was INR 10,72,400. On May 28,
Nifty 50 index future closes at 10678.
 Your loss is (1072400 – 1067800) X 100 = INR 4,60,000. In this situation your
entire initial investment (i.e. INR 1,07,240) is lost. Additionally you need to pay
INR 3,52,760 (4,60,000 – 1,07,240).

17. Hedge fund
 Hedge fund is a private investment partnership and funds pool that uses varied and
complex proprietary strategies and invests or trades in complex products, including
listed and unlisted derivatives.
 A hedge fund is a pool of money that takes both short and long positions, buys and sells
equities, initiates arbitrage, and trades bonds, currencies, convertible securities,
commodities and derivative products to generate returns at reduced risk.
 Hedge fund investors typically include high net worth individuals (HNIs) and families,
endowments and pension funds, insurance companies, and banks.
 The goal of the fund manager is to minimise market risks by investing in long/short
equity funds, convertible bonds, arbitrage funds, and fixed income products.
 There are others such as Singlar India Opportunities Trust, Motilal Oswal’s offshore
hedge fund and India Zen Fund.
 The minimum ticket size for investors putting money in these hedge funds is Rs 1 crore.

18. The interbank market is the financial system and trading of
currencies among banks and financial institutions, excluding retail
investors and smaller trading parties.
➤ The forex market is where currencies are traded.
The forex market is the largest, most liquid market in the world
with an average traded value that exceeds $1.9 trillion per day.
FOREX & THE INTERBANK
MARKETS

19. Money Market
 Money market basically refers to a section of the financial market where financial
instruments with high liquidity and short-term maturities are traded.
 Money market has become a component of the financial market for buying and selling of
securities of short-term maturities, of one year or less, such as treasury bills and
commercial papers.
 Money market consists of negotiable instruments such as treasury bills, commercial
papers. and certificates of deposit.
 It is used by many participants, including companies, to raise funds by selling commercial
papers in the market.
 Money market is considered a safe place to invest due to the high liquidity of securities.
 Money market consists of various financial institutions and dealers, who seek to borrow or
loan securities.
 It is the best source to invest in liquid assets.
 The money market is an unregulated and informal market and not structured like the

20. Constituents of Money Market

21. To provide a parking place to employ short term surplus
funds.
➤ To provide room for overcoming short term deficits.
➤ To enable the central bank to influence and regulate
liquidity
in the economy through its intervention in this market.
➤ To provide a reasonable access to users of short-term funds
to
meet their requirement quickly, adequately at reasonable cost.
OBJECTIVES OF MONEY MARKETS

22. The definition of money for money market purposes is not confined to
bank notes but includes a range of assets that can be turned into cash
at short notice.
➤ The average turnover of the money market in India is over Rs. 40,000
crores daily.
➤ This is more than 3 percents of the total money supply in the Indian
economy and 6 percent of the total funds that commercial banks have
let out to the system. This implies that 2 percent of the annual GDP of
India gets traded in the money market in just one day.
➤ The major player in the money market are Reserve Bank of India
(RBI),
Discount and Finance House of India (DFHI), banks, financial
institutions, mutual funds, government, big corporate houses.
MONEY MARKET IN INDIA

23. Existence of Unorganised Money Market.
➤ Absence of Integration
➤ Diversity in Money Rates of Interest
➤ Seasonal Stringency of Money
➤ Absence of the Bill Market
➤ Highly volatile call money market
➤ Absence of a well organised Banking System
➤ Availability of credit instruments
FEATURES OF INDIAN MONEY
MARKETS

24. ➤ The Reserve Bank of India is the most important constituent of the
money market.
➤ The aims of the Reserve Bank’s operations in the money market are:
To ensure that liquidity and short term interest rates are maintained
at levels consistent with the monetary policy objectives of
maintaining price stability.
To ensure an adequate flow of credit to the productive sector of the
economy and
To bring about order in the foreign exchange market.
➤ The Reserve Bank of India influence liquidity and interest rates through a
number of operating instruments - cash reserve requirement (CRR) of banks,
conduct of open market operations (OMOs), repos, change in bank rates and
ROLE OF RESERVE BANK OF INDIA

25. MONEY MARKETS INSTRUMENTS
A variety of instrument are available in a developed money
market.
In India till 1986, only a few instrument were available. They
were,
Treasury bills
Money at call and short notice in the call loan market.
Commercial bills, promissory notes in the bill market.
Following new instrument are available:
Commercial papers.
Certificate of deposit.
Bankers Acceptance.
Repurchase agreement (Repo Markets).

26. Treasury Bills (T-Bills)
 (T-bills) are the most marketable money market security.
 They are issued with three-month, six-month and one-year maturities.
 Treasury Bills are short term (up to one year) borrowing instruments of the Government
of India or by a central authority of any country which enable investors to park their
short term surplus funds while reducing their market risk.
 They are auctioned by the Reserve Bank of India (RBI) at regular intervals and issued at
a discount to face value.
 Individuals, Firms, Trusts, Institutions and banks can purchase T-Bills. Treasury bills or
T-bills, which are money market instruments, are short term debt instruments issued by
the Government of India and are presently issued in three tenors, namely, 91 days, 182
days and 364 days.

27. Certificate of deposit (CD)
• A CD is a time deposit with a bank.
• Certificate of Deposit or CD is a fixed-income financial instrument
governed under the Reserve Bank and India (RBI) issued in a
dematerialized form.
• Like most time deposit, funds can not withdrawn before maturity
without paying a penalty.
• CD’s have specific maturity date, interest rate and it can be issued in
any denomination.
• The main advantage of CD is their safety.
• Anyone can earn more than a saving account interest.

28. Commercial paper (CP)
• Commercial Paper (CP) is an unsecured money market instrument issued in the
form of a promissory note.
• It was introduced in India in 1990 with a view to enabling highly rated
corporate borrowers to diversify their sources of short-term borrowings and to
provide an additional instrument to investors. Subsequently, primary dealers
and all-India financial institutions were also permitted to issue CP to enable
them to meet their short-term funding requirements for their operations.
• Corporates, primary dealers (PDs) and the All-India Financial Institutions (FIs)
are eligible to issue CP.
• CP is very safe investment because the financial situation of a company can
easily be predicted over a few months. Only company with high credit rating

29. Repurchase agreement (Repos)
• Repo is a form of overnight borrowing and is used by those who deal
in government securities.
• They are usually very short term repurchases agreement, from
overnight to 30 days of more.
• The short term maturity and government backing usually mean that
Repos provide lenders with extremely low risk.
• Repos are safe collateral for loans.
• In the case of a repo, a dealer sells government securities to
investors, usually on an overnight basis, and buys them back the
following day at a slightly higher price. That small difference in price
is the implicit overnight interest rate.
• The difference between the securities’ initial price and their
repurchase price is the interest paid on the loan, known as the repo

30. Banker's Acceptance
• A banker’s acceptance (BA) is a short-term credit
investment created by a non-financial firm.
• BA’s are guaranteed by a bank to make payment.
• Acceptances are traded at discounts from face value in
the secondary market.
• BA acts as a negotiable time draft for financing imports,
exports or other transactions in goods.
• This is especially useful when the credit worthiness of a
foreign trade partner is unknown.

31. Money Market mutual fund.
 Money market mutual funds (MMF) invest in short-term debt instruments, cash, and cash
equivalents that are rated high quality.
 It is for this reason that money market mutual funds are considered safe or investment with
minimal to low risk.
 As these funds invest in high-quality instruments, they offer a predictable risk-free return
rate.
 . Money market securities have an average maturity of one-year; that is why these are
termed as money market instruments.
 The fund manager invests in high-quality liquid instruments such as treasury bills (T-Bills),
repurchase agreements (Repos), commercial papers, and certificates of deposit.
 Money market funds mainly target earning interest for the unit holders. The primary aim
of money market funds is to minimise the fluctuation of the Net Asset Value (NAV) of the
fund.

33. Security Market
Securities are financial instruments issued to raise funds.
The primary function of the securities markets is to enable
the flow of capital from those that have it to those that need
it.
Securities market help in transfer of resources from those
with idle resources to others who have a productive need
for them.

35. GILT-EDGED MARKET
 The gilt-edged market refers to the market for government and semi-government
securities, backed by the RBI.
 The securities traded in this market are stable in value and are much sought after by
banks and other institutions.
 Government securities market for both ‘old’ and ‘new’ issues has been on ‘over-the-
counter market’ where securities of the Un­
ion Government and State Governments
are issued.
 State Governments’ securities are is­
sued by government undertakings, munici­
palities and corporations, etc.
 Gilt-edged market – is the market for government securities or securities guaranteed
by the government including treasury bills and bonds.
 In this gilt-edged market, finan­
cial institutions like commercial banks, the RBI itself, LIC, GIC,
the provident fund organisa­
tions are the statutory holders of such govern­
ment securities.

36. Capital Market
 Capital market is referred to as a place where saving and
investments are done between capital suppliers and those who
are in need of capital. It is, therefore, a place where various
entities trade different financial instruments.
 There are two types of capital market:
 Primary Market
 Secondary Market
 Capital market is where both equity and debt instrument like
equity shares, preference shares, debentures, bonds, etc. are
bought and sold.

37. Features of Capital Market:
1. Serves as a link between Savers and Investment Opportunities:
Capital market serves as a crucial link between saving and investment process as it transfers money from
savers to entrepreneurial borrowers.
2. Long term Investment:
It helps the investors to invest their hard earned money in long term investments.
3. Helps in Capital formation:
Capital market offers opportunities for those investors who have surplus amount of money and want to
park their money in some type of investment and also take the benefit of the power of compunding.
4. Helps Intermediaries:
While transferring of shares and money from one investor to another, it takes helps of intermediatries like
brokers, banks etc. thus helping them in conducting their business.
5. Rules and Regulations:
The capital markets operates under the regulation and rules of the Government thus making it a safe place
to trade.

38. Primary Market
 The primary market is a new issue market; it solely deals with the
issues of new securities.
 A place where trading of securities is done for the first time.
 The main objective is capital formation for government, institutions,
companies, etc. also known as Initial Public Offer (IPO).
 An initial public offering (IPO) refers to the process of offering shares of
a private corporation to the public in a new stock issuance.
 Companies must meet requirements by exchanges and the Securities
and Exchange Commission (SEC) to hold an initial public offering (IPO).

39. Functions of primary market
 Origination: Origination is referred to as examine, evaluate, and process
new project proposals in the primary market. It begins prior to an issue
is present in the market. It is done with the help of commercial bankers.
 Underwriting: For ensuring the success of new issue there is a need for
underwriting firms. These are the ones who guarantee minimum
subscription. In case, the issue remains unsold the underwriters have to
buy. But if the issues are completely subscribed then there will be no
liability left for them.
 Distribution: For the success of issue, brokers and dealers are given job
distribution who directly contact with investors.

40. Secondary Market
The secondary market is a place where trading takes place for existing securities. It
is known as stock exchange or stock market. Here the securities are bought and sold
by the investors.
It is the place where stocks, bonds, options and futures, issued previously, are
bought and sold. Simply put, it is a marketplace where securities issued earlier, are
sold and purchased.
Secondary market provides real time valuation of securities on the basis of
demand and supply.
Functions of secondary market:
 Regular information about the value of security
 Offers liquidity to the investors for their assets
 Continuous and active trading
 Provide a Market Place

41. Types of Secondary Market:
Over the Counter market:
 OTC market refers to the process where securities are traded in an informal way i.e.
that is not listed on a formal exchange.
 Under this the securities that didn’t fulfill the requirements to have a listing on a
standard market exchange. It is a bilateral contract, where two parties are involved
i.e. the investor and dealer.
 Stocks traded in OTC market are basically of smaller companies that cannot meet
exchange requirements for formal exchange.
Exchange traded market:
 Exchange-traded market also known as auction market is a place where all the
transactions are routed through a central source (exchange) that is completely
responsible for being the intermediary that connects buyers and sellers.

44. How to Purchase Equity in Secondary Market?
 Open a Demat and Trading Account with the depository participant/broker
 Link your bank account with Demat and Trading account
 With help of broker and use of multiple trading platforms it is made easier to buy or sell
shares
 The broker buys or sells the shares by executing orders on the electronic terminal provided
by the stock exchange
 A contract note is issued by the broker detailing the value of shares purchased plus his
brokerage cost
 The broker collects shares via settlement process(T+1) and makes payment on behalf of the
investors
 Order gets executed on the final settlement date(T+2)
 The shares get credited or debited in your demat account

45. Stock Exchanges and its regulations
Meaning:
According to Securities contract (Regulation) Act, 1956 stock exchange
means any body of individuals, whether incorporated or not, constituted
for the purpose of assisting, regulating or controlling the business of
buying, selling or dealing in securities
Regulations of Stock Exchanges:
 In India the development of stock market is directed and the dealings
on the stock exchanges are regulated by the Central Government in
accordance with
 The Securities Contracts (Regulation) Act 1956 (SCRA)
 The Securities and Exchange board of India (SEBI)

46. Securities Contracts (Regulation) Act 1956 (SCRA)
Objectives:
 To empower the Central Government to regulate the
dealings in and functioning of the stock exchange in India
 To promote healthy and orderly development of the stock
market in India
 To prevent unhealthy speculation and other undesirable
activities in the stock exchanges
 To protect the interest of the investors
 To provide for reasonable uniformity in respect of the
byelaws and rules of the different stock exchanges in
India

47. Main Provisions:
 The important provisions of the Act encompass the authority given to the
Central Government, or, in certain cases the SEBI pertaining to
 The grant of recognition and withdrawal of recognition of stock exchanges
 Approval of the bye-laws and rules of stock exchanges
 Power to direct the stock exchanges to make or amend roles and bye-laws
in certain cases
 Power to make or amend bye-laws or roles for stock exchanges
 Power to suspend business of stock exchanges
 Power to supersede governing body of any stock exchange on account of
specific reason
 Regulation of listing of securities

48. Recognition of Stock Exchanges
Conditions for recognition prescribed by the Central Government
for recognition are
 Qualification of membership of the stock exchange
 The manner in which the contracts shall be entered and
enforced between members
 The representation of the Central government on the stock
exchange
 The maintenance of accounts of members and their proper
audit

49. Application for recognition of stock exchanges:
 Any stock exchange, which is desirous of being recognized for the purposes of this Act may make an
application in the prescribed manner to the Central Government.
 Every application under sub- section (1) shall contain such particulars as may be prescribed, and shall
be accompanied by a copy of the bye- laws of the stock exchange for the regulation and control of
contracts and also a copy of the rules relating in general to the constitution of the stock exchange and in
particular, to-
a. the governing body of such stock exchange,its constitution and powers of management and the
manner in which its business is to be transacted;
b. the powers and duties of the office bearers of the stock exchange;
c. the admission into the stock exchange of various classes of members, the qualifications, for
membership, and the exclusion, suspension, expulsion and re-admission of members there from or there
into;
d. the procedure for the registration of partnerships as members of the stock exchange in cases where
the rules provide for such membership; and the nomination and appointment of authorized
representatives and clerks

50. Grant of recognition to stock exchange:
1. If the Central Government is satisfied, after making such inquiry as may be necessary in
this behalf and after obtaining such further information, if any, as it may require:
a. that the rules and bye-laws of a stock exchange applying for registration are in conformity
with such conditions as may be prescribed with a view to ensure fair dealing and to
protect investors;
b. that the stock exchange is willing to comply with any other conditions (including
conditions as to the number of members) which the Central Government, after consultation
with the governing body of the stock exchange and having regard to the area served by the
stock exchange and its standing and the nature of the securities dealt with by it, may impose
for the purpose of carrying out the objects of this Act; and
c. That it would be in the interest of the trade and also in the public interest to grant
recognition to the stock exchange; It may grant recognition to the stock exchange subject to
the conditions imposed upon it as aforesaid and in such form as may be prescribed.

51. 2. The conditions which the Central Government may prescribe under
clause (a) of sub-section (1) for the grant of recognition to the stock
exchanges may include, among other matters, conditions relating to-
 The qualifications for membership of stock exchanges;
 The manner in which contracts shall be entered into and enforced as
between members;
 the representation of the Central Government on each of the stock
exchanges by such number of persons not exceeding three as the Central
Government may nominate in this behalf; and
 The maintenance of accounts of members and their audit by chartered
accountants whenever such audit is required by the Central Government.

52. Renewal of Recognition
 Three months before the expiry of the period of recognition, a
recognized stock exchange desirous of renewal of such recognition
may make an application to the Central Government
Withdrawal of Recognition
 If the Central Government is of the opinion that the recognition
granted to a stock exchange under the provisions of this Act should, in
the interest of the trade or in the public interest, be withdrawn, the
Central Government may serve on the governing body of the stock
exchange a written notice that the Central Government is considering
the withdrawal of the recognition for the reasons stated in the notice
and after giving an opportunity to the governing body to be heard in
the matter, the Central Government may withdraw, by notification in
the Official Gazette, the recognition granted to the stock exchange

53. Listing of Securities
 Listing of securities refers to the sanction of the right
to trade the securities on the stock exchange
 Advantages
 Enhances the marketability and liquidity of the
security
 Higher collateral value for the purpose of bank credit
 Prestige to securities and widens the market
 Enjoys public confidence as the stock exchanges
compels the issuer to comply high standard
 Greater publicity

54. SEBI
 It was officially established by The Government of India in the year 1988 and given
statutory powers in 1992 with SEBI Act 1992 being passed by the Indian Parliament.
 SEBI has its Headquarters at the business district of Bandra Kurla Complex in
Mumbai, and has Northern, Eastern, Southern and Western Regional Offices in New
Delhi, Kolkata, Chennai and Ahmedabad respectively.
 Controller of Capital Issues was the regulatory authority before SEBI came into
existence; it derived authority from the Capital Issues (Control) Act, 1947.
 Initially SEBI was a non statutory body without any statutory power.
 However in the year of 1995, the SEBI was given additional statutory power by the
Government of India through an amendment to the Securities and Exchange Board
of India Act, 1992.
 In April, 1988 the SEBI was constituted as the regulator of capital markets in India
under a resolution of the Government of India.

55. The SEBI is managed by its members, which consists of
following:
 The chairman who is nominated by Union Government of
India.
 Two members, i.e. Officers from Union Finance Ministry.
 One member from The Reserve Bank of India.
 The remaining 5 members are nominated by Union
Government of India; out of them at least 3 shall be whole-
time members.

56. Functions and responsibilities
1.The Preamble of the Securities and Exchange Board of India
describes the basic functions of the Securities and Exchange
Board of India as to protect the interests of investors in securities
and to promote the development of, and to regulate the securities
market and for matters connected therewith or incidental thereto.
2. SEBI has to be responsive to the needs of three groups, which
constitute the market:
 a) the issuers of securities
b)the investors
c)the market intermediaries.

57. SEBI has three functions rolled into one body: quasi-legislative, quasi-
judicial and quasi-executive.
4. It drafts regulations in its legislative capacity, it conducts investigation
and enforcement action in its executive function and it passes rulings and
orders in its judicial capacity.
5. Though this makes it very powerful, there is an appeal process to create
accountability.
6. There is a Securities Appellate Tribunal which is a three-member tribunal
7. A second appeal lies directly to the Supreme Court.
8. SEBI has taken a very proactive role in streamlining disclosure
requirements to international standards.

58. Power of SEBI
For the discharge of its functions efficiently, SEBI has been vested
with the following powers:
 To approve by laws of stock exchanges.
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 To require the stock exchange to amend their by laws.
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 Inspect the books of accounts and call for periodical returns from
recognized stock exchanges.
 Inspect the books of accounts of financial intermediaries.
 Compel certain companies to list their shares in one or more stock
exchanges.
 Registration of brokers.

59. Capital Market Reforms and Developments:
The objectives of reforms in capital market are as
follows:
 Provide for effective control of the stock exchange
operations
 Increase the information flow and disclosures so as to
enhance the transparency
 Protect the interests of investors
 Check insider trading
 Improve the operational efficiency of the stock
exchange
 Promote healthy development of the capital market

60. Free Pricing:
 Before 1992 the securities market was regulated under the
capital Issues (Control) Act,1947
 In 1992 the Capital Issues (Control) Act was repealed
 New as well as established companies are able to price their
issues according to their assessment of market conditions
 Prices are determined in a decentralized fashion by trades that
occur as a result of sellers' asking prices matching buyers' bid
prices as a result of subjective value judgement in a market
economy.

61. Book Building:
 Book building mechanism was introduced in 1995
 Offer price of an IPO is based on investors demand
 Invite investors, normally large scale buyers and fund managers, to submit
bids on the number of shares that they are interested in buying and the
prices that they would be willing to pay.
 The book is 'built' by listing and evaluating the aggregated demand for the
issue from the submitted bids. The underwriter analyzes the information
then uses a weighted average to arrive at the final price for the security,
which is termed the 'cut off' price.
 Book building is the de facto mechanism by which companies price their
IPOs and is highly recommended by all the major stock exchanges as the
most efficient way to price securities.

62. The Process:
 The Issuer who is planning an offer nominates lead merchant banker(s) as 'book
runners'.
 The Issuer specifies the number of securities to be issued and the price band for the
bids.
 The Issuer also appoints syndicate members with whom orders are to be placed by
the investors.
 The syndicate members input the orders into an 'electronic book'. This process is
called 'bidding' and is similar to open auction.
 The book normally remains open for a period of 3 days.
 Bids have to be entered within the specified price band.
 Bids can be revised by the bidders before the book closes.
 On the close of the book building period, the book runners evaluate the bids on the
basis of the demand at various price levels.
 The book runners and the Issuer decide the final price at which the securities shall
be issued.
 Generally, the number of shares are fixed, the issue size gets frozen based on the
final price per share.
 Allocation of securities is made to the successful bidders. The rest get refund orders.

63. Trading, Clearing and Settlement systems:
 Execution is the transaction whereby the seller agrees to sell and the
buyer agrees to buy a security in a legally enforceable transaction.
 Clearing is the process of updating the accounts of the trading
parties and arranging for the transfer of money and securities. There
are 2 types of clearing: bilateral clearing and central clearing.
 Settlement is the actual exchange of money and securities between
the parties of a trade on the settlement date after agreeing earlier
on the trade.

64. Circuit Breakers/Price Bands
 A circuit breaker is a kind of regulatory measure that is used to
temporarily halt trading on an exchange.
 Circuit breakers are pre-defined values in percentage terms,
which trigger an automatic check when there is a runaway
move in any security or index on either direction.
 The values are calculated from the previous closing level of the
security or the index.
 They temporarily halt trading if prices rapidly move outside of
pre-determined bounds.