Capital Market Regulators – Role of Indian Market Regulators

Often in the haste of becoming a market participant, trader, or investor, we forget to know the roots governing the Stock Market. This means that we overlook the rules, regulations that guide the flow of Indian capital market regulators.

This becomes important for us to know because they have a major impact on our financial decisions. At times, any change in the rules or regulations of the Act, governing the Indian Capital Market tends to bring substantial change in market psychology or sentiments. This eventually affects our financial decisions.

In this article, we will understand Indian capital market regulators, rules & regulations governing the stock market, brief on the Stock Market, roles and functions of capital markets.

While investing in Stock Market some prefer to take less risk and go short-term. Others may prefer to take a long-term leap. On this basis of risk, the financial market is divided into two types – Money Market and Capital Market. Money Market Securities are short-term in nature while Capital Market pitches long-term investments.

The Ministry of Finance (MoF), the Securities & Exchange Board of India (SEBI), and the Reserve Bank of India (RBI) are the three regulatory authorities governing Indian capital market regulators.

Ministry of Finance (MoF)

The Department of Economic affairs directly manages the Capital Markets segment under the directions of MoF. This segment formulates the rules for the efficient growth of the Stock Market which includes derivatives, debt, and equity. It also formulates regulations for safeguarding the interest of the investors.

This segment regulates the Indian Capital Market regulators through the following laws:

• Depositories Act, 1996
• Securities Contract (Regulation) Act, 1956
• Securities and Exchange Board of India Act, 1992

Reserve Bank of India (RBI)

The Reserve Bank of India Act, 1934 governs policies framed by the Reserve Bank of India. The functions of RBI in this regard are as follows:

• Implementation of Monetary and Credit policies
• Issuance of Currency Notes
• Government’s Banker
• Banking System Regulator
• Foreign Exchange through Foreign Exchange Management Act, 1999
• Managing payment & settlement system

Apart from the above functions, RBI is also actively involved in developing the financial market.

Securities & Exchange Board of India (SEBI)

The Securities & Exchange Board of India (SEBI) Act, 1992 regulates the functioning of SEBI. SEBI is the apex body governing the Indian stock exchanges.

The primary functions of SEBI are as follows:

Protective Functions

I. It checks Price rigging
II. Prohibits insider trading
III. prohibits fraudulent and Unfair Trade Practices

Development Functions

I. SEBI promotes the training of intermediaries of the securities market.
II. SEBI tries to promote activities of stock exchange by adopting a flexible and adaptable approach

Regulatory Functions

I. SEBI has framed rules and regulations and a code of conduct to regulate the intermediaries such as merchant bankers, brokers, underwriters, etc.
II. These intermediaries have been brought under the regulatory purview and private placement has been made more restrictive.
III. SEBI registers and regulates the working of stockbrokers, sub-brokers, share transfer agents, trustees, merchant bankers, and all those who are associated with the stock exchange in any manner
IV. SEBI registers and regulates the working of mutual funds etc.
V. SEBI regulates takeover of the companies
VI. SEBI conducts inquiries and audits of stock exchanges.

The participation in the Indian Stock Market of both the domestic or foreign financial intermediaries is governed by the regulations framed by SEBI. Additionally, Foreign Portfolio Investors (FPIs) can participate in the Indian Stock Market after registering them with an authorized Depository Participant.

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National Stock Exchange of India (NSE)

NSE is responsible for formulating and implementing the rules pertaining to:

• Registration of Members
• Listing of Securities
• Monitoring of Transactions
• Compliance
• Other additional functions related to the above functions

NSE itself is regulated by SEBI and is under regular vigilance for all regulatory compliances.

Learn how SEBI functions and ensure market transparency!

Stock Exchange

In simple terms, a Stock Market is a platform where people buy and sell stocks, prices of which are set according to the prevalent demand and supply situation. It is very similar to a marketplace where traders buy and sell goods, quoting prices on the basis of the demand for the good and the availability or supply of it.

The term trade, in the context of the bourses, means the transfer of money from the seller to the buyer in exchange for a security/ share. The price at which the seller sells or the buyer buys is listed on the stock exchange. You can easily trade through a trading member registered on a Stock Exchange.

Also Read: Capital Market – Functions, Structure, Intermediaries, Developments

As per National Securities Clearing Corporation Limited “A Trading Member means any person admitted as a member in any exchange in accordance with the Rules, Bye-laws and Regulations of that Exchange.”

The Stock Market doesn’t differentiate between any citizen of the country. Outside investments were only permitted in the 1990s and can take place through either Foreign Direct Investments (FDIs) or Foreign Portfolio Investments (FPIs). Thus, the Stock Market participants range from small individual investors to Insurance Companies, Banks, Mutual Fund companies, Manufacturing companies etc.

However, the rules and regulations formulated by SEBI remain the same for all types of market participants and everybody is obligated to abide by such rules and mandates.

Functions of Capital Market Regulators

The growth of the Economy:

The capital market reflects the condition of the economy and also accelerates economic growth. It allocates the resources from the people who have surplus capital to those who require capital.

By this, we can conclude that capital market regulators help in the growth of the economy as well as the trade of both public and private sectors. This leads to balanced economic growth in the country.

Encourage people to save:

The development of capital markets has helped the banking institutes to provide facilities and provisions to encourage people to save more. People might have just invested in land or gold in the non-existence of a capital market

Stabilizing stock prices:

Capital Market regulators have reduced speculation activities and also provided capital to the borrowers at the lowest interest rate possible. This helped in keeping away the prices of stocks from fluctuating.

Role of Capital Market Regulators

Proper Allocation of Funds:

The capital market is an important platform for allocating idle savings from the people to productive channels of an economy. It puts the idle funds in proper investment.

Formation of capital:

The capital market helps in the formation of capital by adding capital to the existing capital in the economy. This helps in the expansion of capital in the economy

A platform for Investment:

The capital market raises resources for longer periods of time. Thus it provides an investment avenue for people who wish to invest resources for a long period of time. It provides suitable interest rate returns also to investors. Instruments such as bonds, equities, etc. definitely provide diverse investment avenues for the public.

Accelerates Economic Development: 

The financial requirements of the businesses are met by the capital market regulators as it makes funds available for a longer period. Capital market regulators also help in the research and development. This results in increasing the productivity of the economy.

Provides Service:

Capital Market regulators provide various services like medium and long-term loans consultancy services. export finance etc.

Bottomline:

The above article was an introduction to the capital market regulators, which is just one major aspect. To enrich your knowledge and strengthen your foundation of the capital markets, there are a lot of aspects that need to be covered.

Happy Learning!