Regulation of the Indian Stock Market: Understanding SEBI and Its Functions
Investing in the stock market is a common practice in India, with two major stock exchanges—Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). These stock markets provide a platform for both primary and secondary trades, but their smooth functioning is heavily reliant on the Securities and Exchange Board of India (SEBI).
Introduction to the Indian Stock Market
Stock markets are the backbone of the Indian economy, offering avenues for both companies to raise capital and for investors to participate in the nation's growth. The two major stock exchanges in India, BSE and NSE, facilitate the trading of securities such as shares, bonds, and derivatives. Companies list their shares in the primary market, allowing investors to buy them in the secondary market during Initial Public Offerings (IPOs).
Regulation of the Indian Stock Markets
The regulation and supervision of the Indian stock markets are vested with SEBI. As an independent regulatory authority formed under the SEBI Act of 1992, SEBI conducts inspections of stock exchanges to ensure fair and equitable trading practices. SEBI's role encompasses ensuring compliance with the Securities Contracts Regulation Act (SCR Act) of 1956 and implementing guidelines and directions issued by the board.
Main Functions of SEBI
Ensure a fair and equitable market for investors to grow in. Ensure compliance of the exchange organization, the system, its practices, in accordance with the rules framed under the Securities Contracts Regulation Act (SCR Act) of 1956. Ensure implementation of the guidelines and directions issued by SEBI. Check if the exchange has complied with all the conditions and has renewed the grants if needed under Section 4 of the SCR Act of 1956.Types of Share Markets
There are two types of share markets, namely the primary and secondary markets, each serving distinct purposes:
Primary Share Market
In the primary market, companies register to issue their shares and raise capital. This process is often referred to as listing on the stock exchange. When a company initially sells its shares to the public for the first time, it is called an Initial Public Offering (IPO). Through this process, the company becomes a public entity, accessible to investors in the secondary market.
Secondary Share Market
The secondary market facilitates the trading of shares that have already been issued by companies in the primary market. Investors can buy and sell these shares among themselves, making the marketplace for buyers and sellers to transact and potentially profit or incur losses.
How Share Markets Work
To understand how the share markets in India work, it's crucial to delve into specific components:
Understanding the Stock Exchange Platform
A stock exchange is a platform where financial instruments are traded, including stocks and derivatives. Participants must register with SEBI and the stock exchange to conduct trades legally. Trading activities include brokerages and issuing of shares by companies, all regulated by SEBI.
Listing of the Company in the Primary Market
The process of listing a company in the primary market involves an Initial Public Offering (IPO). Detailed information about the company and the stocks being issued is disclosed during this process. Investors bid for shares, and the allotment of stocks occurs during the listing process.
Trading in the Secondary Market
Once a company is listed and its stocks are issued, investors can trade these securities in the secondary market. This marketplace is used for buying and selling shares, where buyers and sellers negotiate and complete transactions.
Stock Brokers
Given the large number of investors, stock brokers and brokerage firms act as intermediaries between investors and the stock exchange. Registered with the exchange and SEBI, brokers facilitate the buying and selling of shares, processing orders and matching them with potential sellers.
Passing of Your Order
Your order to buy a share is passed to the exchange via the broker, where it is matched against a sell order. When both parties agree on a price, the order is considered confirmed and the transaction is processed.
Settlement
Once the transaction is confirmed, the exchange facilitates the transfer of ownership of the shares, known as settlement. This process, earlier taking weeks, now occurs within two working days, T2 days, ensuring that trades are reflected in your demat account promptly.
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