Capital Market

Capital Market
Capital markets are venues
where savings and investments
are channeled between the
suppliers who have capital and
those who are in need of capital.
The entities that have capital
include retail and institutional
investors while those who seek
capital are businesses,
governments, and people.
Functions of Capital Market:
Itacts in linking investors and savers.
Boosts economic growth.
Facilitates the movement of capital to
be used more profitability
productively to boost the national
income.
Mobilization of savings to finance
long term investment.
Capital formation.
Minimizes Transaction Cost and Time.
Components Of Capital Markets
 Primary Market
Origination.
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).

https://investor.sebi.gov.in/pdf/reference
-material/primarymarkets.pdf
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 of an IOP’s
Features of primary
markets
The securities are issued by the
company directly to the investors.
The company receives the money and
issues new securities to the investors.
The primary markets are used by
companies for the purpose of setting up
new ventures/ business or for expanding
or modernizing the existing business.
Primary market performs the crucial
function of facilitating capital formation
in the economy
Primary Market
Operations
Raising Funds from the Primary Market

1. Public issue:
When a company raises funds by selling (issuing) its shares (or
debenture / bonds) to the public through issue of offer document
(prospectus), it is called a public issue.

- Initial Public Offer: When a (unlisted) company makes a public

issue for the first time and gets its shares listed on stock
exchange, the public issue is called as initial public offer (IPO).

- Further Public Offer: When a listed company makes another

public issue to raise capital, it is called further public / follow-
on offer (FPO).
2. Offer for sale: Institutional investors like venture funds,
private equity funds etc., invest in unlisted company when
it is very small or at an early stage. Subsequently, when
the company becomes large, these investors sell their
shares to the public, through issue of offer document and
the company’s shares are listed in stock exchange. This is
called as offer for sale. The proceeds of this issue go the
existing investors and not to the company.

3. Issue of Indian Depository Receipts (IDR): A foreign

company which is listed in stock exchange abroad can
raise money from Indian investors by selling (issuing)
shares. These shares are held in trust by a foreign
custodian bank against which a domestic custodian bank
issues an instrument called Indian depository receipts
(IDR), denominated in `. IDR can be traded in stock
exchange like any other shares and the holder is entitled
to rights of ownership including receiving dividend.
https://www.sebi.gov.in/sebi_data/commondocs/foreigncos1_p
.pdf
4. Rights issue (RI): When a company raises funds from its existing
shareholders by selling (issuing) them new shares / debentures, it is called
as rights issue. The offer document for a rights issue is called as the Letter
of Offer and the issue is kept open for 30-60 days. Existing shareholders are
entitled to apply for new shares in proportion to the number of shares
already held. Illustratively, in a rights issue of 1:5 ratio, the investors have
the right to subscribe to one (new) share of the company for every 5 shares
held by the investor.

5. In a Bonus Issue, the company issues new shares to its

existing shareholders. As the new shares are issued out of
the company’s reserves (accumulated profits), shareholders
need not pay any money to the company for receiving the
new shares. The net worth (owner’s money) of a company
consist of its equity capital and its reserves. After a bonus
issue, there is an increase in the equity capital of the
company with a corresponding decrease in the reserves,
while the net worth remains constant. In a bonus issue of
5:1 ratio, the investor will receive five new shares of the
company for each share the investor held as illustrated
below.
ABC company Before bonus issue After (1:5) bonus issue

Number of shares issued 100 600 (100+500)

Equity capital (Face 1,000 6,000 (1,000+5,000)

value of ` 10)

Reserves (accumulated 10,000 5,000 (10,000-5000)

profits)

Net worth 11,000 11,000

Overview of the IPO Process
Select an
investment
bank
Underwriting
and
regulatory
filings

Pricing

Stabilization

Transition
Select an investment bank
The investment bank is selected
according to the following criteria:
Reputation
The quality of research
Industry expertise
Distribution i.e. if the investment bank
can provide the issued securities to
more institutional investors or to more
individual investors.
Prior relationship with the investment
bank
 Underwriting and regulatory
filings
Underwriting arrangements types

 Firm Commitment

 Complete underwriting

 Partial underwriting.

 Syndicate Underwriting:

 Joint Underwriting:

 Sub-underwriting
 Firm underwriting: Firm underwriting is an
underwriting agreement where an underwriter agrees to
buy a definite number of shares or debentures in
addition to the shares or debentures he has already
promised to subscribe under the underwriting
agreement. In firm underwriting, the underwriters are
liable to take up the agreed number of shares or
debentures even if the issue is over subscribed.

 Complete underwriting: when the whole issue of

shares or debentures of a company is underwritten, it is
called complete underwriting. In such a case the whole
issue is underwritten either by an individual/institution
agreeing to take the entire risk or by a number of firms
or institutions, each agreeing to take the risk to a limited
extent.
 Partial underwriting. When only a part of the issue of
shares or debentures of a company is underwritten, it is
known as partial underwriting. In such a case the part of
the issue is underwritten either by an individual/institution
or by a number of firms or institutions each agreeing to
take the risk to a limited extent.

 Syndicate Underwriting: When the issue is very big and

it is impossible to be underwritten by a single underwriter
syndicate underwriting comes to rescue. In syndicate
underwriting, few underwriting firms form a syndicate and
jointly undertake to underwrite the issue. The amount to
be underwritten and the ratio is determined in advance
among the firms. For example, For an issue of 10,000 6
underwriters may form a syndicate and underwrite in the
ratio of 30:20:20:10:10:10.
 Joint Underwriting: In Joint underwriting, when the issue is too
large, the issuer company itself appoint more than one underwriter to
reduce the burden from a single underwriter. Each Underwriter
underwrites for a specified amount and in a specified ratio. It is
different from a syndicate underwriting in a way that in Syndicate
underwriting the underwriting firm themselves form a syndicate and
represent themselves as single underwriting firm but in Joint
underwriting, the issuer company itself appoint a number of firms to
underwrite the issue.

 Sub-underwriting: If an underwriter has promised to underwrite an

issue and later on it feels that it is beyond his individual capacity, then
he may appoint a sub-underwriter to safeguard himself. For example,
if an underwriter A has underwritten for an amount of 40 crores, and
later on he finds it difficult to underwrite single Handadley he may
appoint a sub-underwriter to underwrite 10 crores. In this case, the
sub-underwriter is liable to underwriter only and he has no connection
with the company. the relationship between underwriter and sub-
underwriter is same as an agent and sub-agent.
 Pricing
On the day before the effective
date, the issuing company and
the underwriter decide the offer
price (i.e. the price at which the
shares will be sold by the issuing
company) and the precise
number of shares to be sold.
 Stabilization
After the issue has been brought
to the market, the underwriter
has to provide analyst
recommendations, after-market
stabilization, and create a market
for the stock issued.
The underwriter carries out after-
market stabilization in the event
of order imbalances by
purchasing shares at the offering
price or below it.
 Transition to Market
Competition
The final stage of the IPO
process, the transition to market
competition, starts 25 days after
the initial public offering, once
the “quiet period” mandated by
the SEC ends.
 Secondary Market
 Thesecondary 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.

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

 Secondary Market Structure and
Participants
Stock Exchange
Trading, Clearing and Settlement
Clearing Corporations
i. The National Securities Clearing
Corporation Ltd. (NSCCL) is the
clearing corporation for trades
done on the NSE.
ii. The Indian Clearing Corporation
Ltd. (ICCL) is the clearinghouse
for BSE.
Risk Management
 There are 24 Stock Exchanges in the country
 UP Stock Exchange, Kanpur.
 Vadodara Stock Exchange, Vadodara.
 Koyambtour Stock Exchange, Coimbatore.
 Meerat Stock Exchange, Meerat.
 Bombay StockExchange, Mumbai.
 Over the Counter Exchange of India, Mumbai.
 National Stock Exchange, Mumbai.
 Ahmedabad Stock Exchange, Ahmedabad.
 Bangalore Stock Exchange, Bangalore.
 Bhubhaneshwar Stock Exchange, Bhubhaneshwar.
 Calcutta Stock Exchange, Kolkata.
 Cochin Stock Exchange, Cochin.
 Delhi Stock Exchange, Delhi.
 Guwahati Stock Exchange, Guwahati.
 Hyderabad Stock Exchange, Hyderabad.
 Jaipur Stock Exchange, Jaipur.
 Canara Stock Exchange, Mangalore.
 Ludhiana Stock Exchange, Ludhiana.
 Chennai Stock Exchange, Chennai.
 MP Stock Exchange, Indore.
 Magadh Stock Exchange, Patna.
 Pune Stock Exchange, Pune.
 Saurashtra Stock Exchange, Rajkot.
Depositories and DPs
i. National Securities Depository Ltd (NSDL)
ii. Central Depository Services Ltd (CDSL)
Investors need to open Demat accounts with
depository participants (DPs), who are banks,
brokers or other institutional providers of this
service to be able to trade.
Custodians:

Custodians are institutional intermediaries,

who are authorized to hold funds and
securities on behalf of large institutional
investors such as banks, insurance
companies, mutual funds, and foreign
portfolio investors (FPIs). They settle the
secondary market trades for institutional
investors.
Broker and stock brokers:
A broker is a member of a
recognized stock exchange who is
registered with SEBI and permitted
to trade on the screen-based
trading system of stock
exchanges.
 Capital
Market Instruments
 Preference Shares
These are shares which are preferred
over equity shares in payment of
dividend, the preference shareholders
are the first to get dividends if the
company decides to distribute or pay
dividends.
Preference shares are shares having
preferential rights to claim dividends
during the lifetime of the company
and to claim repayment of capital on
wind up.
Features of Preference Shares
 These are a long-term source of finance

 FIXED DIVIDENDS

Like debt carries a fixed interest rate, preference shares

have fixed dividends attached to them.
But the obligation of paying a dividend is not as rigid as
debt. Non-payment of a dividend would not amount to
bankruptcy in case of preference share.

 PREFERENCE OVER EQUITY

As the word preference suggests, these type of shares get

preference over equity shares in sharing the income as well
as claims on assets. Alternatively, preference share
dividend has to be paid before any dividend payment to
ordinary equity shares. Similarly, at the time of liquidation
also, these shares would be paid before equity shares.
 NO VOTING RIGHTS

Preference share capital is not allotted any voting rights

normally. They are similar to debenture holders and do not
have any say in the management of the company.

 NO SHARE IN EARNINGS

Preference shareholders can only claim two things. One

agreed on percentage of dividend and second the amount
of capital invested. Equity shares are entitled to share the
residual earnings and residual assets in case of liquidation
which preference shares are not entitled to.

 FIXED MATURITY

Just like debt, preference shares also have fixed maturity

date. On the date of maturity, the preference capital will
have to be repaid to the preference shareholders. A special
type of shares i.e. irredeemable preference shares is an
exception to this. They do not have any fixed maturity.
Types of Preference Shares
 Cumulative Preference Shares:
Shares having right of dividend even in those years in which
it makes no profit are known as cumulative preference
shares. In case the companies do not declare dividends for a
particular year then they are treated as arrears and are
carried forward to next year. When the arrears pertaining to
dividend are cumulative in nature and such arrears are
cleared before any dividend payment to equity shareholders
then it is said to be as cumulative preference shares.
 Non-cumulative Preference Shares:
A non-cumulative preference share does not accumulate any
dividend. In case the dividend by the company is not paid
then they have the right to avail dividends from the profits
earned from the particular year. Dividends are paid only from
the net profit of each year. In case there is no profit
accumulated for a particular year then the arrears of
dividends cannot be claimed in subsequent years.
 Participating Preference Shares :

These shares have the right to participate in

surplus profits of the company during liquidation
after the company had paid to other
shareholders. The preferential shareholders
receive stipulated rate of dividend and also
participate in the additional earnings of the
company along with the equity shareholders.

 Non-participating Preference Shares :

Preference shares having no right to participate

in the surplus profits or in any surplus on
liquidation of the company are referred to as non-
participating preference shares. Here, preference
shareholders receive only stated dividend and
nothing more.
Convertible Preference Shares:

These shares are those which are

converted into equity shares at a
specified rate on the expiry of a stated
period. The shareholders have a right to
convert their shares into equity shares
within a specified period.

Non-convertible Preference Shares:

The shares that cannot be converted to

equity are referred to as non-convertible
shares. These can also be redeemed.
Redeemable Preference Shares:

Redeemable preference shares are

referred to as shares that can be
redeemed or repaid after the fixed
period as issued by the company or
even before that.

Non-Redeemable Preference Shares:

Non redeemable preference shares are

referred to as shares that cannot be
redeemed during the lifetime of the
company.
 Equity Shares

An equity share, normally known

as ordinary share is a part
ownership where each member is
a fractional owner and initiates
the maximum entrepreneurial
liability related with a trading
concern. These types of
shareholders in any organization
possess the right to vote.
 Features of Equity Shares

Equity share capital remains with the

company. It is given back only when
the company is closed.
Equity Shareholders possess voting
rights and select the company’s
management.
The dividend rate on the equity
capital relies upon the obtain-ability of
the surfeit capital. However, there is
no fixed rate of dividend on the equity
capital.
Advantages of Equity Shares

 Equity shares do not create any obligation to pay a

fixed rate of dividend.

 Equityshares can be issued without creating any

charge over the assets of the company.

 Itis a permanent source of capital and the company

has to repay it except under liquidation.

 Equity
shareholders are the real owners of the
company who have the voting rights.

 Incase of profits, equity shareholders are the real

gainers by way of increased dividends and
appreciation in the value of shares.
Disadvantages of Equity
Shares
The enterprise cannot take either the credit
or an advantage if trading on equity when
only equity shares are issued.
There is a risk or a liability over capitalization
as equity capital cannot be reclaimed.
The management can face hindrances by the
equity shareholders by guidance and
systematizing themselves.
When the firm earns more profits, then,
higher dividends have to be paid which leads
to raising in the value of the shares in the
marketplace and its edges to speculation as
well.
 Difference between Equity
Shares and Preference Shares
Basis Preference Share Equity Share

Dividend Rate Has a fixed rate Fluctuates

Vote Rights No voting rights Have voting rights

Participation in Has no right to Has the right to

Management participate in participate in
management management
decision decision

Preferences Get the first Gets second

preference, before preference, after
equity share preference share
 Non-voting Shares
 It'sstock that gives the shareholder little or no vote on
corporate issues such as mergers or the election of the
board of directors. This kind of share might appeal to
investors who want to reap rewards from a company's
performance but are less interested in influencing its
direction.

 Non-voting shares often arise when company founders

or directors seek to raise new share capital but don't
want to dilute their control. In such cases they often
issue large numbers of non-voting shares while keeping
control of the original voting stock.

A company may issue employees with non-voting

shares because they want them to be able to benefit
from dividends or distribution of profits from a sale but
do not want them to participate in decision making.
 Debentures
Debenture is used to issue the loan by
government and companies. The loan is
issued at the fixed interest depending
upon the reputation of the companies.
When companies need to borrow some
money to expand themselves they take
the help of debentures.

Debentures are issued to the public as a

contract of repayment of money borrowed
from them. These debentures are for a
fixed period and a fixed interest rate that
can be payable yearly or half-yearly.
 Features of Debentures
 Debentures are instruments of debt, which means that
debenture holders become creditors of the company.

 They are a certificate of debt, with the date of

redemption and amount of repayment mentioned on it. This
certificate is issued under the company seal and is known
as a Debenture Deed.

 Debentures have a fixed rate of interest, and such interest

amount is payable yearly or half-yearly.

 Debenture holders do not get any voting rights. This is

because they are not instruments of equity, so debenture
holders are not owners of the company, only creditors.

 The interest payable to these debenture holders is a

charge against the profits of the company. So these
payments have to be made even in case of a loss.
Advantages of Debentures
 One of the biggest advantages of debentures is
that the company can get its required funds
without diluting equity. Since debentures are a
form of debt, the equity of the company remains
unchanged.

 Debenturesencourage long-term planning

and funding. And compared to other forms of
lending debentures tend to be cheaper.

 Debenture holders bear very little risk since

the loan is secured and the interest is payable
even in the case of a loss to the company

 Attimes of inflation, debentures are the

preferred instrument to raise funds since they
have a fixed rate of interest
 Disadvantages of Debentures
 Theinterest payable to debenture holders is a
financial burden for the company. It is payable
even in the event of a loss.

 Whileissuing debentures help a company trade on

equity, it also makes it to dependent on debt. A
skewed Debt-Equity Ratio is not good for the
financial health of a company.

 Redemption of debentures is a significant cash

outflow for the company which can imbalance its
liquidity.

 During a depression, when profits are declining,

debentures can prove to be very expensive due to
their fixed interest rate.
 Convertible Cumulative
Debentures (CCD)
Convertible debentures may be converted
into the company’s equity after a set period
of time. That convertibility is a perceived
advantage, so investors are willing to accept
a lower interest rate for purchasing
convertible debentures.
The compulsory convertible
debenture's ratio of conversion is decided by
the issuer when the debenture is issued. The
conversion ratio is the number of shares
each debenture converts in to, and can be
expressed per bond or on a per centum (per
100) basis.
 Why do Companies issue
Compulsory Convertible
Debentures?
The companies usually prefer issuing
CCDs due to the convenience and
flexibility associated with them. These
convertible debentures act as a great
fund-raising alternative especially for
start-ups planning to raise money at the
initial stages in order to expand or
maintain their business.
Also, the market driven valuation of the
new company can be pushed to a later
date since there is no urgency to fix its
valuation straight away.
 Advantages
A Secured Debt:
CCDs seem to be an attractive option owing to the fact
that they shall convert into equity shares in future. The
investor’s belief that conversion of CCDs is correlated
with the company’s performance further strengthens it
to be a good choice being a secured debt. This
encourages more and more investors to put in their
money into this lucrative investment variant.

 ClearTerms & Conditions:

The terms & conditions of a Compulsory Convertible
Debenture are decided upfront at the time of their
issuance. The price/conversion formula of CCDs is also
determined at the time of their issue. This adds more
transparency to the system and makes it a reliable long
term investing option.
 Pricing and Discount benefit:
A Compulsory Convertible Debenture is generally offered at a
discount since the investor is investing at very early stage of
the company. There is no hassle to fix the company valuation
and this can be deferred on to a later stage. This is indeed a
big sigh of relief for the company prior to the valuation of the
next investment round.

 Lower Rate of Interest:

The issuance of CCDs at a discounted price enables the
company to pay a lower rate of interest as compared to Non-
Convertible Debentures (NCD). But, the investors are willing
to accept even lower interest on these convertible
debentures due its ease of conversion into ownership stake
of the company later on. From company’s point of view,
CCDs help to grab the tax benefit on the interest paid to the
CCD holder.

 Investor’s Right to Preferential Payment:

CCD is a debt instrument until its conversion to equity
shares. So, being a CCD holder, you have the preferential
right to payment over other stakeholders of the company.
 Bonds
Bonds can be defined as the negotiable
instrument, issued in relation to
borrowing arrangement, that indicates
indebtedness. It is an unsecured debt
instrument, in which the bond investor
extends credit to the issuer, which in
turn commits to repay the loan amount
on the specified maturity date, along
with interest throughout the life of the
bond. The issuer can be the municipal
corporation, government or company.
The bonds are divided into two main categories:

 Government Bond: At periodic intervals, the

central or state government issues bond, popularly
known as government securities (G-secs) or gilt
edged securities. These are issued by the central
bank of the country on behalf of the Government,
for medium to long term, on which interest is paid
on half yearly basis.

 Corporate Bond: When public companies issues

bonds, they are known as a corporate bond. When
it comes to international market, a secured
corporate debt instrument is known as a corporate
bond, but in the case of the unsecured debt
instrument, it is known as a corporate debenture.
In India, corporate debt instruments are termed as
debentures.
 Features of Bonds
 Par value refers to the value stated on the face
of the bond, which shows the amount which the
company or government body promises to pay
at the time of maturity.

 Coupon Rate is nothing but the fixed rate of

interest payable to the bondholder.

 Maturity Date is the date at which the bond

gets matured, and the principal amount is paid
to the bondholder.

 Redemption Value is the value paid to the

bondholder, at the time of expiry of the term for
which bond is issued.
 American Depositary
Receipt (ADR)
 American Depository Receipt (ADR) is a certified
negotiable instrument issued by an American
bank suggesting the number of shares of a
foreign company that can be traded in U.S.
financial markets.

 EXAMPLE -
Volkswagen, a German company trades on New
York Stock Exchange. The investor in America
can easily invest into the German company,
through the stock exchange. Volkswagen is listed
on the American stock exchange after complying
the required laws. On other hand if the shares of
Volkswagen are listed in stock markets of
countries other than US then it is termed as GDR.
 ADR PROCESS
 The domestic company, already listed in its local stock
exchange, sells its shares in bulk to a U.S. bank to get
itself listed on U.S. exchange.

 The U.S. bank accepts the shares of the issuing company.

The bank keeps the shares in its security and issues
certificates (ADRs) to the interested investors through the
exchange.

 Investorsset the price of the ADRs through bidding

process in U.S. dollars. The buying and selling in ADR
shares by the investors is possible only after the major
U.S. stock exchange lists the bank certificates for trading.

 TheU.S. stock exchange is regulated by Securities

Exchange Commission, which keeps a check on necessary
compliances that need to be complied by the foreign
company.
ADR PROCESS
 Advantages of ADR
 The American investor can invest in foreign companies which
can fetch him higher returns.

 The companies located in foreign countries can get

registered on American Stock Exchange and have its shares
trades in two different countries.

 The benefit of currency fluctuation can be availed.

 It is an easier way to invest in foreign companies as there are

no restrictions to invest in ADR.

 ADR simplifies tax calculations. Trading in shares of foreign

company in ADR would lead to tax under US jurisdiction and
not in the home country of company.

 The pricing of shares of foreign companies in ADR is

generally cheaper. Hence it provides additional benefit to
investors.
 Disadvantages of ADR
 Even though the transactions in ADR take place in US
dollars, still they are exposed to the risk associated
with foreign exchange fluctuation.

 The number of options to invest in foreign companies is

limited. Only a few companies feel the necessity to
register themselves through ADR. This limits the choice
available to US investor to invest.

 The investment in companies opting for ADR often

becomes illiquid as an investor needs to hold the shares
for the long term to generate good returns.

 The charges for the entire process of ADR are mostly

transferred on investors by foreign companies.

 Any violation of compliance can lead to strict action by

the Securities Exchange Commission.
 Global Depository Receipts
(GDR)
Global Depository Receipts are securities
certificates issued by intermediaries such as
banks for facilitating investments in foreign
companies. A GDR represents a certain
number of shares in a foreign company that
is not traded on the local stock exchange.

 The domestic investors invest in the

companies outside their country where the
dividend is paid to the GDR holders in
Euro or GBP.
GDR Process
 Characteristics of GDR
 Exchange-Traded
GDR is exchange-traded instruments where the intermediary
buys a bulk quantity of a foreign company and creates the GDRs
which are traded on the local stock exchange. These GDRs are
then traded on the multiple stock exchanges of multiple
countries other than the US.

 Conversion Ratio
Conversion ration means the number of shares a GDR can hold.
Usually, it varies from a fraction to a very high number. Although
1 GDR certificate holds ten shares, the range is flexible.

 Unsecured
GDR is unsecured securities and is not backed by any asset
other than the value of the shares that are held in that
certificate.

 Price Based on Underlying

The price of a GDR is based on the price of the share that it
holds, the supply and demand of a particular GDR.
 Advantages of GDR
To Issuing Company

 There is an accessibility to foreign capital markets.

 Thereis an increase in the visibility of the issuing

company.

 Rise in the capital of the issuing company because of

foreign investors.

To Investor

 Itprovides more transparency since competitors’

securities can be compared.

 There is the capital gain payment.

Disadvantages of GDR
 Violation
of any regulation can lead to serious
consequences against the company.

 In GDR, the dividends are paid in the

Domestic country’s agency, which is subject
to volatility in the forex market.

 GDR is an expensive source of financing for

any company.

 Itis beneficial to the investors who have the

capacity to invest a high amount in GDR.
 Security Exchange Board of
India SEBI
 SEBI acted as a watchdog and lacked the authority of
controlling and regulating the affairs of the Indian capital
market
 In the year 1992, it got the statutory status and became an
autonomous body to control the activities of the entire stock
market of the country. The statutory status of the SEBI
authorized it to conduct the following activities:-
i. SEBI got the power of regulating and approving the by-
laws of stock exchanges.
ii. It could inspect the accounting books of the recognized
stock exchanges in the country. It could also call for
periodical returns from such stock exchanges.
iii. SEBI became empowered to inspect the books and records
of financial Intermediaries.
iv. It could constrain companies for getting listed on any
stock exchange.
v. It could also handle the registration of stockbrokers.
 Role and Functions of SEBI in
Capital Market
Role of SEBI
 Issuer of securities. These are the companies listed in
the stock exchange which raise funds through the issue
of shares. SEBI ensures that the issue of IPOs and FPOs
can take place in a transparent and healthy way.

 Playersin the capital market i.e. the traders and

investor. The capital markets are functioning only
because the traders exist. SEBI is responsible for
ensuring that the investors don’t become victims of any
stock market manipulation or fraud.

 Financial Intermediaries. They act as mediators in

the securities market and ensure that the stock market
transactions take place in a smooth and secure
manner. SEBI monitors the activities of the stock market
intermediaries like brokers and sub-brokers.
 Functions of SEBI
 Protective Functions: SEBI performs these functions for
protecting the interests of the investors and financial institutions.
Protective functions include checking price rigging, prevention of
insider trading, promoting fair practices, creating awareness
among investors and prohibition of fraudulent and unfair trade
practices.

 Regulatory Functions: Through regulatory functions, SEBI

monitors the functioning of the financial market intermediaries. It
designs the guidelines and code of conduct for financial
intermediaries and regulates mergers, amalgamations, and
takeovers takeover of companies. SEBI also conducts inquiries and
audit of stock exchanges. It acts as a registrar for the brokers, sub-
brokers, merchant bankers and many others. SEBI has the power
to levy fees on the capital market participants. Apart from
controlling the intermediaries, SEBI also regulates the credit rating
agencies.

 Development Functions: Among the list of SEBI’s

development functions, one of them is imparting training to
intermediaries. SEBI promotes fair trading and malpractices
reduction. It also educates and makes investors aware of the
stock market by utilizing the funds available in IEPF.