Capital Market

For starting a business, an entrepreneur needs investment in the form of capital. Depending on the magnitude of the project, the requirement of capital will vary. The promoters will have to decide the financing aspect of the project, taking into consideration the various costs involved. Sometimes, they may choose to raise a significant part of their requirement of capital money from the public by offering them with certain instruments like equity shares, debentures, bonds and so on. This article talks about Capital Markets, where promoters can raise their financial requirement under specific rules and regulations.

Capital Market and SEBI

To raise money from the public, The Securities and Exchange Board of India (SEBI) has prescribed specific rules and regulations, and by complying with the same, the promoters can raise their funds in a market known as the Capital Market. Capital Markey is a market for long-term debt and equity shares. In this market, capital funds comprising of both debt and equity are issued and traded. This also involves private placement sources of debt and investment as well as established markets like stock exchanges. Capital Markets can be further branched into Primary and Secondary Markets.

Primary Market

In the primary market, securities such as shares, bonds or debentures are offered to the public for access or subscription, to raise capital or fund. The issue of securities, bonds and stocks in the primary market is subject to the fulfilment of many pre-issued guidelines by SEBI and compliance with various provisions of the Company Act. The primary market is classified into 'public issue' market and 'private placement' market. There are many intermediaries in the primary market such as merchant banker, issue manager, lead arranger, etc. Even banks participate in the Capital Market as bankers to the issue, arrangers, underwriters etc.

Secondary Market

A secondary market is where shares are traded after being offered initially to the public in the primary market and listed on the Stock Exchange. The secondary market comprises equity markets and debt markets. A secondary market is the trading avenue in which already existing/ pre-issued securities are traded amongst investors. Secondary market could be either an auction or a dealer markets. While the stock exchange is the part of an auction market, Over the Counter (OTC) market is a part of the dealer market. For the general investors, the secondary market provides an efficient platform for trading of securities and price discovery. For the managers of the company, secondary (equity) markets serve as a monitoring and control conduit by facilitating value enhancing control activities, enabling implementation of incentive-based management contracts and aggregating information (via price discovery) that guides management decisions. Banks facilitate secondary market transactions by opening direct trading and

Demat accounts to individuals and companies. Banks also extend credit against securities. The may also act as clearinghouse banks.

Stock Exchanges in India

In India, there are twenty-two recognised stock exchanges. Regarding legal structure, the stock exchanges in the country could be segregated into two general groups - 19 stock exchanges which were set up as companies, either limited by guarantees or by shares and the three stock exchanges which were Association of Persons (AOPs), viz. Bombay Stock Exchange (BSE), Ahmedabad Stock Exchange (ASE) and Madhya Pradesh Stock Exchange (MSPE). The 19 stock exchanges which have been functioning as companies include the Stock Exchanges of Bangalore, Bhubaneswar, Kolkata, Cochin, Coimbatore, Delhi, Guwahati, Hyderabad, Interconnected SE, Jaipur, Ludhiana, Madras, Magadh, Pune, Saurashtra-Kutch, Uttar Pradesh, Vadodara, National Stock Exchange (NSE) and Over the Counter Exchange of India (OTCEI). Apart from the NSE, all stock exchanges, whether established as corporate bodies or as AOPs, were non-profit making organisations.

Regulatory Requirements

All securities issued by a public issue must be listed in one or more stock exchanges. The effect of debt securities having a maturity period of more than 365 days by companies including listed companies (i.e. which have any of their securities, either as equity or debt, offered through an offer document and listed on a recognised stock exchange and also involves public sector projects whose securities are listed on a well known stock exchange) on a private placement basis must comply with the conditions prescribes by SEBI from time to time for getting them listed on the stock exchanges. Further, unlisted companies/ statutory corporations/ other entities, if they so desire, may get their privately placed debt securities listed on the stock exchanges by complying with the relevant conditions. The debt securities may carry a credit rating from a credit rating agency registered with SEBI. The debt securities may be issued and traded in the Demat form.

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Frequently Asked Questions

Common questions about Capital Market Regulations by SEBI in India.

The Capital Market is a market where long-term debt and equity shares are issued and traded. It is a platform for promoters to raise funds for their business ventures by offering instruments like equity shares, debentures, and bonds to the public, subject to specific rules and regulations prescribed by the Securities and Exchange Board of India (SEBI).

The Primary Market is where securities like shares, bonds, or debentures are initially offered to the public for subscription to raise capital or funds. The Secondary Market, on the other hand, is where these pre-issued securities are traded among investors after their initial offering in the Primary Market and listing on Stock Exchanges.

SEBI, the Securities and Exchange Board of India, has prescribed specific rules and regulations for companies to raise funds from the public through the Capital Market. These regulations ensure compliance with various provisions of the Company Act and fulfill pre-issue guidelines to protect the interests of investors.

In India, there are twenty-two recognized stock exchanges. These stock exchanges can be classified into two main groups: 19 stock exchanges set up as companies (limited by guarantees or shares), and three stock exchanges established as Associations of Persons (AOPs) - Bombay Stock Exchange (BSE), Ahmedabad Stock Exchange (ASE), and Madhya Pradesh Stock Exchange (MSPE).

All securities issued through a public issue must be listed on one or more stock exchanges. Debt securities with a maturity period of more than 365 days, issued on a private placement basis by listed companies or public sector projects, must comply with SEBI's conditions for listing on stock exchanges.

Yes, unlisted companies, statutory corporations, or other entities can list their privately placed debt securities on stock exchanges by complying with the relevant conditions prescribed by SEBI.

Debt securities issued in the Capital Market may carry a credit rating from a credit rating agency registered with SEBI. Credit ratings provide an assessment of the creditworthiness and risk associated with the debt instrument, helping investors make informed decisions.

Yes, debt securities issued in the Capital Market can be issued and traded in dematerialized (Demat) form, which allows for easier and more efficient trading and settlement of transactions.

In the Primary Market, there are various intermediaries involved, such as merchant bankers, issue managers, lead arrangers, and bankers to the issue. These intermediaries facilitate the process of issuing securities and raising capital for companies.

For investors, the Secondary Market provides an efficient platform for trading securities and facilitating price discovery. For companies, the Secondary (equity) Market serves as a monitoring and control mechanism, enabling value-enhancing control activities, implementing incentive-based management contracts, and aggregating information through price discovery to guide management decisions.