Unit-II

Overview of Financial Market

1. Security Market
A security market (also known as a stock market or financial market for securities) is a
marketplace where financial instruments, such as stocks, bonds, and derivatives, are issued and
traded. It provides a platform for borrowers (governments, corporations) to raise capital and for
investors to deploy their savings.
Key Functions:
• Mobilization of Savings: Channels funds from savers to investors.
• Capital Allocation: Directs capital to the most productive uses within the economy.
• Liquidity: Provides a ready market for investors to convert their securities into cash.
• Price Discovery: Through the interaction of buyers and sellers, it determines the fair value of
securities.
• Risk Transfer: Allows for the transfer of risk from those unwilling to bear it to those willing to
take it on (e.g., through derivatives).
1.1 Features of a Well-Functioning Security Market
1. Liquidity:
• The ease and speed with which a security can be bought or sold without significantly
affecting its price.
• Importance: High liquidity attracts investors, as they know they can exit their positions
quickly if needed.
• Example: Shares of large-cap companies like Reliance Industries are highly liquid, while
shares of a small, unlisted company are illiquid.
2. Price Discovery:
• The process by which the market determines the fair and efficient price of a security
through the interaction of supply and demand.
• Importance: Ensures that securities are traded at prices that reflect all available
information.
• Mechanism: Order book matching (for exchanges), negotiation (for OTC).
1.1 Features of a Well-Functioning Security Market
3. Transparency:
• The extent to which information about trades (prices, volumes) and underlying assets
(company financials, economic data) is readily available to all market participants.
• Importance: Promotes fairness, reduces information asymmetry, and builds investor
confidence.
• Regulators: SEBI (Securities and Exchange Board of India) ensures transparency through
disclosure norms.

4. Efficiency:
• The degree to which security prices reflect all available information.
• Types:
• Allocative Efficiency: Capital is directed to its most productive uses.
• Operational Efficiency: Low transaction costs and quick execution of trades.
• Informational Efficiency: Prices quickly and fully reflect new information.
• Importance: A more efficient market leads to better capital allocation and fairer pricing.
1.1 Features of a Well-Functioning Security Market
5. Regulation:
• The set of rules and oversight mechanisms designed to ensure fair, orderly, and
transparent functioning of the market and to protect investors.
• Importance: Prevents fraud, manipulation, and ensures market integrity.
• Regulators: SEBI in India, SEC in the USA.
1.2 Structure of Security Market
1. Primary Market (New Issues Market):
• Function: Where new securities are issued for the first time by companies or
governments to raise capital directly from investors.
• Purpose: Capital formation for issuers (e.g., funding new projects, expanding operations,
repaying debt).
• Key Activity: Initial Public Offerings (IPOs), Further Public Offerings (FPOs), Rights Issues,
Private Placements.
• Process: Issuers work with investment banks (underwriters) to facilitate the sale of new
securities to investors.
• Funds Flow: Funds flow directly from investors to the issuing company/government.
• Example: Zomato's IPO in 2021, where the company directly raised funds from the public.
1.2 Structure of Security Market
2. Secondary Market (Stock Market):
• Function: Where previously issued securities are traded among investors. Issuers are not
directly involved in these transactions.
• Purpose: Provides liquidity to investors (allows them to buy/sell existing securities),
facilitates price discovery.
• Key Activity: Buying and selling of existing stocks, bonds, and other securities on
exchanges or OTC.
• Process: Investors trade with each other through brokers.
• Funds Flow: Funds flow between investors, not to the issuing company.
• Example: Buying or selling shares of Reliance Industries on the NSE or BSE.
1.2 Structure of Security Market
Relationship:
• The primary market facilitates capital formation, while the secondary market provides
the necessary liquidity and price discovery that makes primary market issues attractive to
investors.

Is the Security Market Primary or Secondary?

• The term "Security Market" generally encompasses both the Primary and Secondary
markets.
• However, when people refer to "the stock market" or "the bond market" in daily
conversation, they are most often referring to the Secondary Market, as this is where the
vast majority of trading activity of existing securities takes place.
1.2 Structure of Security Market
Feature Primary Market Secondary Market
(New Issues) (Trading Existing)
Nature of Sale First-time sale of new Resale of existing securities
securities
Funds Flow Investor to Issuer Investor to Investor
Issuer Involvement Direct (raises capital) Indirect (doesn't raise capital)
Purpose Capital formation for issuer Liquidity & Price Discovery for
investors
Key Activities IPOs, FPOs, Private Placements Buying/Selling shares on
exchanges
1.3 Types of Issue in Primary Market
1. Public Issue:
• Definition: An offer of securities to the general public for subscription. This is the most common way
for companies to raise large amounts of capital from a broad base of investors.
• Types:
• Initial Public Offering (IPO): The first time a privately held company offers its shares to the public.
This marks its transition from a private to a public company.
• Further Public Offering (FPO) / Follow-on Public Offer: An issue of shares by a company that is
already listed on an exchange to the public. This is done to raise additional capital after the IPO.
• Process: Involves a detailed prospectus, regulatory approvals (e.g., SEBI), extensive marketing, and
often a book-building process to determine the issue price.
• Target: Retail investors, institutional investors, high-net-worth individuals.
• Advantages for Issuer: Access to a large pool of capital, enhanced public image, increased liquidity for
shares.
• Disadvantages for Issuer: High issuance costs, stringent regulatory compliance, loss of control for
existing owners (in IPOs).
1.3 Types of Issue in Primary Market
2. Private Placement:
• Definition: An offer of securities to a select group of sophisticated investors (e.g., institutional
investors, high-net-worth individuals) rather than to the general public.
• Purpose: To raise capital quickly and cost-effectively from a limited number of investors.
• Process: Direct negotiation between the issuer and a few identified investors. Less regulatory
scrutiny and fewer disclosure requirements compared to a public issue.
• Target: Qualified Institutional Buyers (QIBs), venture capitalists, private equity firms, large
corporations.
• Advantages for Issuer: Faster process, lower issuance costs, less regulatory burden, greater
flexibility in terms, no dilution of control to general public.
• Disadvantages for Issuer: Smaller pool of capital, potentially higher cost of capital (as investors
demand liquidity premium), limited market visibility.
1.3 Types of Issue in Primary Market
3. Rights Issue:
• Definition: An offer of new shares by a company to its existing shareholders in proportion to
their current shareholding.
• Purpose: To raise additional capital from existing owners without diluting their ownership
percentage (if they subscribe to the rights issue).
• Process: Existing shareholders are given "rights" to purchase new shares at a pre-determined
price (usually at a discount to the market price) within a specific period. If they don't exercise
their rights, they can sell them in the market (if the rights are tradable).
• Target: Existing shareholders of the company.
• Advantages for Issuer: Lower issuance costs than a public issue, builds investor loyalty, avoids
dilution of control for existing shareholders who participate.
• Advantages for Investor: Opportunity to increase stake at a discount, maintain proportional
ownership.
• Disadvantages for Investor: If not subscribed, existing shareholding gets diluted.
1.4 Participants in the Security Market

Security Market
Participants

Issuers Investors Intermediaries Regulators

1.4 Participants in the Security Market
Issuers:
• Role: Entities that raise capital by issuing securities.
• Examples:
• Corporations: Issue equity (stocks) and debt (bonds/debentures) to fund operations,
expansion, R&D.
• Governments (Central & State): Issue bonds (G-Secs, SDLs) to finance public
expenditure and infrastructure projects.
• Public Sector Undertakings (PSUs): Issue bonds and sometimes equity.
1.4 Participants in the Security Market
Investors:
• Role: Individuals or institutions who provide capital by purchasing securities, expecting a
return.
• Types:
• Retail Investors: Individual investors trading for their personal accounts.
• Institutional Investors: Large organizations that pool money from many sources and
invest professionally.
• Mutual Funds: Pool money from small investors to invest in diversified portfolios.
• Pension Funds: Invest retirement savings on behalf of employees.
• Insurance Companies: Invest policyholders' premiums.
• Foreign Institutional Investors (FIIs) / Foreign Portfolio Investors (FPIs): Overseas
entities investing in domestic markets.
1.4 Participants in the Security Market
Intermediaries:
• Role: Facilitate the smooth functioning of the market by connecting issuers and investors, and
providing various services.
• Examples:
• Investment Banks (Merchant Bankers/Underwriters): Advise issuers on raising capital,
manage IPOs, and underwrite new issues.
• Stock Brokers: Licensed entities that execute buy and sell orders on behalf of investors on
exchanges.
• Depositories: Hold securities in dematerialized (electronic) form (e.g., NSDL, CDSL in India).
• Depository Participants (DPs): Agents of depositories (often banks or brokers) that interact
directly with investors for demat accounts.
• Custodians: Hold securities and other assets on behalf of institutional investors.
• Registrars and Transfer Agents (RTAs): Maintain records of shareholders/bondholders and
handle transfer of ownership.
• Credit Rating Agencies: Assess the creditworthiness of debt issuers (e.g., CRISIL, ICRA, CARE
in India).
1.4 Participants in the Security Market
Regulators:
• Role: Government bodies responsible for overseeing the market, enforcing rules, and
protecting investors.
• Examples:
• Securities and Exchange Board of India (SEBI): Primary regulator for the Indian
securities market.
• Reserve Bank of India (RBI): Regulates government securities market and influences
overall financial stability.
• Ministry of Finance: Formulates overall economic and financial policy.
1.5 Trading Mechanisms:
Exchange Traded & Over-the-Counter (OTC)
Exchange-Traded Markets (Organized Exchanges):
• Definition: Centralized marketplaces where securities are bought and sold according to
standardized rules and procedures.
• Characteristics:
• Centralized Location: Physical trading floors (historically) or electronic trading platforms
(today).
• Standardization: Securities are standardized (e.g., lot sizes, trading hours).
• Transparency: Prices and volumes are publicly displayed in real-time.
• Regulation: Highly regulated by market authorities (e.g., SEBI).
• Liquidity: Generally high due to a large number of buyers and sellers.
• Counterparty Risk: Reduced by clearing corporations that act as central counterparties,
guaranteeing trades.
• Examples: National Stock Exchange (NSE), Bombay Stock Exchange (BSE) in India; New York Stock
Exchange (NYSE), NASDAQ in the USA.
1.5 Trading Mechanisms:
Exchange Traded & Over-the-Counter (OTC)
Over-the-Counter (OTC) Markets:
• Definition: Decentralized markets where securities are traded directly between two parties
(dealers) without the supervision of an organized exchange.
• Characteristics:
• Decentralized: No physical location; trades occur electronically (phone, computer networks).
• Customization: Transactions can be highly customized to meet specific needs of the parties.
• Less Transparency: Prices and volumes may not be publicly disclosed. Information is often
proprietary to dealers.
• Less Regulation: While still regulated, the oversight may be less stringent than for exchanges.
• Liquidity: Can vary significantly; some OTC markets are highly liquid, others are very illiquid.
• Counterparty Risk: Higher, as trades are directly between two parties, requiring due diligence
on the counterparty's creditworthiness.
• Examples: Bond markets (many corporate bonds are traded OTC), currency markets (forex),
derivatives that are not exchange-traded.
1.5 Trading Mechanisms:
Exchange Traded vs Over-the-Counter (OTC)
Over-the-Counter (OTC)
Feature Exchange-Traded Market
Market
Structure Centralized, organized Decentralized, dealer network

Transparency High (public price/volume) Lower (negotiated, often

private)
Standardization High (standardized contracts) Low (customizable contracts)

Regulation High Moderate (less direct oversight)

Liquidity Generally High Varies (can be low or high)

Counterparty Risk Low (clearing house guarantee) Higher (direct between parties)
Discussion Point
Where would a large institutional investor prefer to trade a significant
block of corporate bonds:
• in the Over-the-Counter (OTC) market or
• on an exchange?
A large institutional investor might prefer to trade a significant block of corporate bonds in the
Over-the-Counter (OTC) market rather than on an exchange for several key reasons:
• Minimizing Market Impact (Price Impact): When an institutional investor wants to buy or sell a
very large quantity (a "block") of a security, placing such a large order directly on an exchange's
public order book could significantly move the price against them. In the OTC market, they can
negotiate directly with a dealer or another institution, often at a pre-agreed price, without
immediately disclosing their full intent to the broader market. This helps prevent "slippage" or
adverse price movements that would occur if the market reacted to the large order.
• Customization and Flexibility: Corporate bonds, especially less common or newly issued ones,
can be highly customized with unique features (e.g., specific maturities, coupon structures,
embedded options). The OTC market allows for direct negotiation and tailoring of trade terms to
meet the precise needs of both parties, which is not possible on standardized exchanges.
• Liquidity for Illiquid Securities: Many corporate bonds, particularly those from smaller issues or
older vintages, trade infrequently on exchanges. The OTC market, with its network of dealers,
provides liquidity by allowing institutions to find counterparties for these less liquid securities.
Dealers often hold inventories of such bonds and can facilitate trades that might not find a
match on an exchange.
• Privacy and Confidentiality: Institutional investors often prefer to keep their trading strategies
and large positions confidential. OTC trades are typically private transactions between two
parties and are not immediately visible on public order books, offering a higher degree of
discretion.
• Direct Negotiation and Potentially Better Pricing: For large blocks, institutional investors can
directly negotiate prices with multiple dealers to find the best available terms, potentially
achieving a better average price than they might by executing numerous smaller trades on an
exchange. Dealers, in turn, can manage their inventory and risk more effectively in a bilateral
negotiation.
• Reduced Transaction Costs (in some cases): While there might be a dealer spread, for very large,
customized trades, the overall transaction costs (including implicit costs from market impact)
might be lower in the OTC market compared to breaking up the trade and executing it on an
exchange.
• In essence, the OTC market offers a more adaptable and discreet environment for large,
complex, or illiquid bond transactions, which are often the domain of institutional investors.
2. Investment in Debt Market
A financial market where debt instruments are traded. It's a platform where
governments, corporations, and other entities borrow money by issuing debt securities,
and investors lend money by purchasing these securities.
Also known as the "credit market" or "bond market."

Key Role in the Economy:

• Capital Raising: Enables borrowers to raise funds for various purposes (government
spending, corporate expansion).
• Investment Avenue: Provides investors with opportunities for stable income and
capital preservation.
• Interest Rate Mechanism: Plays a crucial role in the transmission of monetary policy
and the determination of interest rates.
• Liquidity Management: Helps financial institutions and corporations manage their
short-term liquidity needs.
2.1 Characteristics of Debt Instruments
1. Face Value (Par Value):
The nominal value of the bond, which the issuer promises to repay at maturity.
2. Coupon Rate (Interest Rate):
The fixed or floating interest rate paid by the issuer to the bondholder, usually expressed as a
percentage of the face value.
3. Maturity Date:
The date on which the principal amount (face value) of the debt instrument is repaid to the
investor. Can range from a few days (money market) to many years (long-term bonds).
4. Yield:
The actual return an investor earns on a debt instrument. It can differ from the coupon rate,
especially if the bond is bought or sold at a discount or premium in the secondary market.
5. Credit Rating:
An assessment of the issuer's creditworthiness and ability to repay its debt obligations.
Provided by credit rating agencies (e.g., CRISIL, ICRA, CARE, S&P, Moody's, Fitch).
Importance: Higher rating (e.g., AAA) indicates lower default risk and usually implies a lower
interest rate for the issuer.
2.2.1 Segment 1: Money Market Instruments
Short-term borrowing and lending take place, typically for periods ranging from overnight
to one year. It deals with highly liquid, low-risk, and short-maturity debt instruments.

Purpose:
• For borrowers (governments, banks, corporations): To meet short-term liquidity needs
and working capital requirements.
• For investors (banks, financial institutions, corporations): To park surplus funds safely for
short periods and earn a small return.

Characteristics:
• Short Maturity: Generally less than one year.
• High Liquidity: Easily convertible to cash with minimal price impact.
• Low Risk: Due to short maturity and often high credit quality of issuers.
• Low Returns: Reflects the low risk and short duration.
2.2.1 Segment 1: Money Market Instruments

Certificate of
Treasury Bills Commercial Paper
Deposit

• Issuer: Govt • Issuer – highly rated • Issuer – Commercial

• Zero coupon bonds corporations Banks & Financial
• Issued at discount & • Unsecured promissory Institutions
redeemed at par notes • FD in dematerialized
• Issued at discount & form
redeemed at face
value
2.2.2 Segment 2: Bonds
Long-term debt instruments issued by governments, corporations, or other entities to
raise capital.

Characteristics:
• Longer Maturity: Typically more than one year, ranging from 1 year to 30-40 years.
• Fixed or Floating Coupon: Interest payments can be fixed throughout the bond's life or
linked to a benchmark rate.
• Principal Repayment: The face value is repaid at maturity.
• Tradability: Most bonds are tradable in the secondary market, allowing investors to sell
them before maturity.
• Credit Risk: Varies significantly based on the issuer's financial health and credit rating.
2.2.2 Segment 2: Bonds - Types
Secured Bonds:
• Nature: Backed by specific assets of the issuing company as collateral. In case of default,
bondholders have a claim on these assets.
• Risk: Lower risk compared to unsecured bonds due to the collateral.
• Example: A bond secured by the company's real estate or equipment.

Unsecured Bonds:
• Nature: Not backed by any specific asset. Their repayment relies solely on the financial
strength and creditworthiness of the issuing company.
• Risk: Higher risk compared to secured bonds. Often offer a higher interest rate to
compensate for this increased risk.
• Example: A bond issued by a company based on its strong reputation and cash flow,
without specific collateral.
2.2.2 Segment 2: Bonds - Types
Fixed Interest Rate Bonds:
• Nature: Pay a constant interest rate (coupon) throughout their life, regardless of market
interest rate fluctuations.
• Advantage for Investor: Predictable income stream.
• Risk: Higher interest rate risk (market value changes significantly when prevailing rates
change).

Floating Interest Rate Bonds (Floater Bonds):

• Nature: The interest rate paid on these bonds is not fixed but adjusts periodically (e.g.,
every 3 or 6 months) based on a benchmark interest rate (e.g., RBI's repo rate, LIBOR).
• Advantage for Investor: Reduces interest rate risk, as the coupon adjusts to market
conditions.
• Disadvantage for Investor: Income stream is variable and less predictable.
2.2.2 Segment 2: Bonds - Types
Zero-Coupon Bonds:
• Nature: Issued at a significant discount to their face value and redeemed at par at maturity.
• Return: The difference between the purchase price and the face value is the investor's return.
• Purpose: Often used for specific future financial goals where a lump sum is needed at a
particular time.
• Example: You buy a 5-year zero-coupon bond with a face value of ₹1,000 for ₹700. At maturity,
you receive ₹1,000.

Deep Discount Bonds:

• Nature: A type of zero-coupon bond issued at a very steep discount to its face value, often with a
very long maturity period. The entire return is realized at maturity.
• Purpose: Primarily for long-term wealth accumulation.
• Example: A bond with a face value of ₹100,000 might be issued for ₹5,000 and mature in 25
years.
2.2.2 Segment 2: Bonds - Types

Present Value = Face Value of the Bond

(1 + R)^n

where,
R = interest rate
n = number of years
2.2.2 Segment 2: Bonds - Types
Perpetual Bonds (Irredeemable Bonds):
• Nature: Do not have a fixed maturity date. The principal is not repaid by the company
during its lifetime, but interest is paid perpetually (forever).
• Characteristics: Often treated more like equity or preference shares in terms of their
long-term nature and lack of principal repayment.
• Risk: High interest rate risk and liquidity risk due to no maturity.
• Note: These are rare in many markets, including India, where most bonds have a definite
maturity.

Redeemable Bonds:
• Nature: The principal amount is repaid by the company on a specified maturity date or
in installments during the lifetime of the bond.
• Most Common Type: The vast majority of bonds issued are redeemable.
2.2.2 Segment 2: Bonds - Types
Capital Indexed Bonds:
• Nature: Bonds whose principal value is adjusted periodically based on an inflation index
(e.g., Consumer Price Index - CPI). The coupon rate is applied to this inflation-adjusted
principal.
• Purpose: To protect investors from inflation risk, ensuring that the real value of their
investment is preserved.
• Risk: Low default risk (often government-issued), but still subject to real interest rate
risk.
• Example: If inflation is 5%, the principal of a ₹1,000 bond might increase to ₹1,050, and
the coupon will be paid on this new principal.
2.2.3 Segment 3: Debentures
In the Indian context, "Debentures" are typically long-term debt instruments issued by
companies to raise capital. While often used interchangeably with "corporate bonds"
globally, in India, the term "debenture" specifically refers to unsecured corporate bonds
or sometimes secured ones.

Key Characteristics:
• Issued by Companies: Unlike government bonds, debentures are exclusively issued by
corporations.
• Fixed Interest Rate: Usually carry a fixed coupon rate, paid periodically (e.g., semi-
annually or annually).
• Maturity Period: Have a fixed maturity date when the principal amount is repaid.
• Tradability: Can be traded on stock exchanges, providing liquidity.
• Credit Rating: Essential for assessing the risk of the debenture.
2.2.3 Segment 3: Debentures - Types
Secured Debentures:
• Nature: Backed by specific assets of the issuing company as collateral. In case of default,
debenture holders have a claim on these assets.
• Risk: Lower risk compared to unsecured debentures due to the collateral.
• Example: A company might secure its debentures against its plant and machinery or a
specific piece of land.

Unsecured Debentures (Naked Debentures):

• Nature: Not backed by any specific asset. Their repayment relies solely on the financial
strength, creditworthiness, and reputation of the issuing company.
• Risk: Higher risk compared to secured debentures. Often offer a higher interest rate to
compensate for this increased risk.
• Example: A highly reputable company might issue unsecured debentures, relying on its
strong balance sheet and brand name.
 2.2.3 Segment 3: Debentures - Types
Convertible Debentures:
• Nature: Give the holder the option to convert them into equity shares of the company after a
specified period or under certain conditions.
• Types:
• Fully Convertible Debentures (FCDs): Entire debenture amount is converted into equity shares.
• Partially Convertible Debentures (PCDs): Only a part of the debenture amount is converted
into equity, and the remaining part is redeemed as a regular debenture.
• Advantage: Combines the stability of debt with the growth potential of equity.
• Example: An FCD of ₹10,000 might convert into 100 shares of ₹100 each.

Non-Convertible Debentures (NCDs):

• Nature: Cannot be converted into equity shares. They offer pure fixed income returns.
• Purpose: Ideal for investors seeking regular income and capital preservation without exposure to
equity market volatility.
• Risk: Primary risk is credit/default risk of the issuer.
• Example: A company issues NCDs to raise long-term funds, offering a fixed interest rate for 5 years.
2.2.4 Other Debt Instruments

• Preference Shares

• Fixed Deposits

• Public Provident Funds

• Mutual Funds (Debt Funds)

2.3 Advantages of Investing in the Debt Market
1. Stability and Predictable Income:
• Most debt instruments offer fixed interest payments (coupons) at regular intervals, providing a
stable and predictable income stream. This is highly attractive for income-seeking investors (e.g.,
retirees).

2. Capital Preservation:
• For high-quality debt instruments, especially government bonds and highly-rated corporate
bonds, there is a high probability of getting the principal amount back at maturity. This makes
them suitable for capital preservation goals.

3. Lower Volatility:
• Compared to equities, debt instruments generally experience less price fluctuation, making them
a less volatile component of a diversified portfolio.
2.3 Advantages of Investing in the Debt Market
4. Diversification:
• Debt instruments often have a low or negative correlation with equities. When stock markets fall,
debt markets may remain stable or even rise, thereby reducing overall portfolio risk.
5. Priority in Repayment:
• In case of the issuer's bankruptcy or liquidation, bondholders and debenture holders have a
higher priority claim on the company's assets than equity shareholders, increasing the likelihood
of recovering capital.
6. Suitable for Specific Goals:
• Their fixed maturity and predictable returns make them ideal for matching specific future
liabilities (e.g., child's education in 5 years, retirement in 10 years).
7. Tax Efficiency (for some instruments):
• Certain debt instruments (like PPF) offer significant tax benefits on investment, interest, and
maturity.
2.4 Disadvantages of Investing in the Debt Market
1. Interest Rate Risk:
• This is the most significant risk. Bond prices move inversely to interest rates. If prevailing interest
rates rise, the market value of existing bonds (with lower fixed coupon rates) will fall, making
them less attractive in the secondary market.
• Impact: Higher for long-term bonds.

2. Inflation Risk:
• The fixed payments from debt instruments may lose purchasing power during periods of high
inflation. The real return (nominal return minus inflation) can be significantly eroded, especially
for long-term fixed-rate bonds.
• Mitigation: Inflation-indexed bonds.

3. Credit Risk (Default Risk):

• The risk that the issuer will be unable to make its promised interest payments or repay the
principal at maturity. This risk is higher for corporate bonds with lower credit ratings.
• Mitigation: Diversification, investing in highly-rated issuers, credit rating analysis.
2.4 Disadvantages of Investing in the Debt Market
4. Reinvestment Risk:
• The risk that when a bond matures or a coupon payment is received, the prevailing interest rates
will be lower, meaning the investor will have to reinvest the funds at a lower yield.

5. Lower Returns:
• Historically, debt instruments have offered lower potential returns over the long term compared
to equities, as they compensate for lower risk with lower potential upside.

6. Liquidity Risk (for some bonds):

• While government bonds are highly liquid, some corporate bonds, especially those of smaller
issues or less-known companies, might have limited liquidity in the secondary market, making
them difficult to sell quickly without a significant price discount.
3. Investment in Equity Market
The equity market is where ownership stakes (shares or stocks) in companies are bought
and sold. It serves as a vital platform for companies to raise capital and for investors to
participate in corporate growth.
Ownership/ High Growth Variable
Voting Rights
Residual Claim Potential Dividends
• If liquidation, • Highest • Dividends - • Right to vote
paid last, after potential for not fixed. on corporate
all creditors & capital Declared policies &
preferred appreciation based on election of
shareholders. as the profitability. If board of
company poor directors.
grows and its performance, Thus, say in
profits dividends company's
increase. reduced or management.
skipped.
3.1 Investing in the Primary Equity Market - IPOs
An Initial Public Offering (IPO) is the process by which a privately held company offers its
shares to the general public for the first time. This transforms the company from private to
public.

Purpose for the Issuer:

• Capital Raising: To raise substantial capital for expansion, debt repayment, research &
development, etc.
• Liquidity for Early Investors/Promoters: Provides an exit route for venture capitalists,
private equity firms, and founders.
• Enhanced Public Image: Increases visibility, credibility, and brand recognition.
• Future Fundraising: Makes it easier to raise funds in the future through follow-on
offerings.
3.1 Investing in the Primary Equity Market - IPOs
Process (Simplified):
• Preparation: Company decides to go public, appoints investment banks (merchant
bankers).
• Due Diligence: Investment banks conduct thorough analysis of the company.
• Regulatory Filings: Draft Red Herring Prospectus (DRHP) filed with SEBI (in India).
• Marketing & Book Building: Roadshows, investor meetings, and price discovery through
bids from institutional and retail investors.
• Allotment & Listing: Shares are allotted, and the company's shares get listed and begin
trading on stock exchanges.

Advantages for Investors: Opportunity to invest in a growing company early, potential for
listing gains.
Disadvantages for Investors: Price volatility post-listing, limited historical data, risk of
overvaluation.
3.1 Investing in the Primary Equity Market - IPOs
Book Building Process:
• Price Discovery: The company, with the help of its underwriters, establishes a price
band (a minimum and maximum price) for the IPO.
• Bidding: Investors (both institutional and retail) submit bids indicating how many shares
they want to buy and at what price within the band.
• Demand Analysis: The company analyzes the bids to gauge market demand and
identify the price point where the most shares can be sold.
• Price Finalization: The final price is set based on the demand and the number of shares
the company wants to issue, ensuring optimal price discovery.
3.2 Other Primary Equity Market Issues
Further Public Offering (FPO) / Follow-on Public Offer:
• Nature: An issue of shares by a company that is already listed on a stock exchange to the public.
• Purpose: To raise additional capital after the initial IPO, often for expansion or debt reduction.
• Difference from IPO: The company is already public; hence, less uncertainty about its operations.
• Example: A listed company issues new shares to fund a major acquisition.

Rights Issue:
• Nature: An offer of new shares by a company exclusively to its existing shareholders in
proportion to their current shareholding.
• Purpose: To raise capital from existing owners without diluting their ownership percentage (if
they subscribe).
• Mechanism: Shareholders receive "rights" to buy new shares at a discounted price. These rights
can sometimes be traded.
• Example: A company announces a 1:5 rights issue, meaning existing shareholders can buy 1 new
share for every 5 shares they own.
3.2 Other Primary Equity Market Issues
Private Placement:
• Nature: Issuance of shares to a select group of sophisticated investors (e.g., Qualified
Institutional Buyers - QIBs) rather than the general public.
• Purpose: Faster, less costly way to raise capital, often used when a company needs funds quickly
or wants to avoid the extensive regulatory requirements of a public issue.
• Example: A company sells a large block of shares directly to a mutual fund or a private equity
firm.
4. Beyond Traditional Equities: Other Investment Markets
Beyond stocks and bonds, the financial landscape offers several other significant markets
that investors can explore for diversification, hedging, or speculative purposes.

These markets often have unique characteristics, risk profiles, and regulatory frameworks.

Key Categories:
• Foreign Exchange (Forex)
• Commodities
• Gold (often considered a separate asset class due to its unique role)
• Derivatives (which derive their value from underlying assets in any of the above markets)
4.1 Foreign Exchange (Forex) Market
Definition: The global decentralized market for the trading of currencies. It is the largest
and most liquid financial market in the world.

Purpose:
• Facilitating International Trade & Investment: Enables businesses to convert currencies
for international transactions.
• Hedging: Companies and investors use it to protect against adverse currency
movements.
• Speculation: Traders attempt to profit from currency price fluctuations.
• Participants: Central banks, commercial banks, multinational corporations, hedge funds,
institutional investors, and retail traders.
4.1 Foreign Exchange (Forex) Market
How it Works: Currencies are traded in pairs (e.g., USD/INR, EUR/USD). The value of one
currency is expressed against another. Trading occurs 24 hours a day, five days a week.

Risks:
• Exchange Rate Volatility: Currency values can change rapidly due to economic data,
geopolitical events, and interest rate differentials.
• Leverage Risk: High leverage is common in forex trading, amplifying both gains and
losses.

Example: An Indian company importing goods from the USA might buy USD in the forex
market to pay its supplier, or use a forward contract to lock in an exchange rate.
4.2 Commodities Market
Definition: A market where raw materials or primary products are bought and sold. These are tangible
assets used in the production of other goods and services.

Types of Commodities:
• Energy: Crude oil, natural gas, gasoline.
• Metals: Gold, silver, copper, platinum.
• Agricultural Products: Wheat, corn, sugar, coffee, cotton.
• Livestock: Cattle, hogs.

How to Invest:
• Physical Commodity: Directly owning the physical asset (e.g., gold bars).
• Commodity Futures Contracts: Agreements to buy or sell a commodity at a predetermined price on a
future date. Most common way for investors to gain exposure.
• Commodity ETFs/Mutual Funds: Funds that invest in commodity futures or physical commodities.
• Stocks of Commodity-Producing Companies: Indirect exposure through companies involved in
extraction, production, or processing.
4.2 Commodities Market
Reasons to Invest:
• Diversification: Often have low correlation with stocks and bonds.
• Inflation Hedge: Prices tend to rise during inflationary periods.
• Speculation: Opportunity to profit from price movements.

Risks:
• Price Volatility: Highly sensitive to supply-demand dynamics, weather, geopolitical
events, and economic cycles.
• Storage Costs: For physical commodities.

Example: An airline might buy crude oil futures to hedge against rising fuel prices. An
investor might buy a gold ETF to diversify their portfolio.
4.3 Gold as an Investment
Definition: Gold is a precious metal widely regarded as a store of value and a safe-haven
asset, especially during times of economic uncertainty or geopolitical instability.

Forms of Investment:
• Physical Gold: Gold bars, coins, jewelry. (Requires storage and security).
• Gold Exchange Traded Funds (ETFs): Financial instruments that track the price of
physical gold. Traded on stock exchanges.
• Sovereign Gold Bonds (SGBs): Government securities denominated in grams of gold.
Issued by the RBI in India, offering interest in addition to capital appreciation linked to
gold price.
• Gold Mutual Funds: Funds that invest in gold ETFs or gold mining companies.
4.3 Gold as an Investment
Reasons to Invest in Gold:
• Safe Haven: Tends to perform well when other assets (stocks, real estate) are under pressure.
• Inflation Hedge: Historically, gold has maintained its purchasing power during inflationary periods.
• Diversification: Often has a low correlation with traditional financial assets.
• Liquidity (ETFs/SGBs): Electronic forms offer good liquidity.

Risks:
• No Income Generation (physical): Physical gold does not yield interest or dividends.
• Price Volatility: Gold prices can fluctuate significantly based on global demand, central bank
policies, and geopolitical events.
• Storage/Insurance Costs: For physical gold.
• Making Charges (jewelry): Significant costs when buying jewelry.

Example: During a stock market crash, many investors might shift funds into gold as a perceived safe
asset.
4.4 Derivative Market
Definition: A financial market where instruments (derivatives) are traded that derive their value
from an underlying asset or benchmark. The underlying asset can be a stock, bond, commodity,
currency, interest rate, or index.

Purpose:
• Hedging: To mitigate or offset the risk of price fluctuations in an underlying asset.
• Speculation: To profit from anticipated price movements of the underlying asset.
• Arbitrage: To profit from price discrepancies between different markets or instruments.
• Price Discovery: Contributes to the efficient pricing of underlying assets.

Key Characteristics:
• Leverage: Often involve a small initial margin for a large notional value, amplifying both
potential gains and losses.
• Expiration Date: Most derivatives have a finite life.
• No Intrinsic Value: Their value is purely derived from the underlying asset.
4.4.1 Types of Derivatives
1. Futures Contracts:
• Nature: Standardized agreements to buy or sell a specific quantity of an underlying asset
at a predetermined price on a specified future date.
• Trading: Traded on organized exchanges (e.g., NSE F&O segment).
• Obligation: Both parties are obligated to fulfill the contract at expiration.
• Example: A farmer sells wheat futures to lock in a price for their harvest.
4.4.2 Types of Derivatives
2. Options Contracts:
• Nature:
• Give the buyer the right, but not the obligation,
• to buy (Call Option)
• or sell (Put Option)
• an underlying asset
• at a specified price (strike price)
• on or before a certain date (expiration date).
• The seller (writer) has the obligation.
• Premium: The buyer pays a premium to the seller for this right.
• Trading: Traded on exchanges or OTC.
• Example: An investor buys a Call Option on a stock, hoping its price will rise above the
strike price.
4.4.3 Types of Derivatives
3. Forward Contracts:
• Nature: Customized (non-standardized) agreements between two parties to buy or sell
an asset at a specified price on a future date.
• Trading: Traded Over-the-Counter (OTC).
• Obligation: Both parties are obligated to fulfill the contract.
• Difference from Futures: Customized, OTC traded, higher counterparty risk.
• Example: Two companies agree to exchange a specific amount of foreign currency at a
fixed rate on a future date.
4.4.4 Types of Derivatives
4. Swaps:
• Nature: Agreements between two parties to exchange cash flows or liabilities from two
different financial instruments over a specified period.
• Trading: Traded Over-the-Counter (OTC).
• Types: Interest Rate Swaps (most common), Currency Swaps, Commodity Swaps.
• Purpose: Primarily used by institutions to manage interest rate or currency risk.
• Example: A company with a floating-rate loan might enter an interest rate swap to
exchange its floating payments for fixed payments with another party.
4.4.5 Advantages of Derivatives
• Risk Management (Hedging): Allows businesses and investors to protect themselves from
adverse price movements in underlying assets (e.g., currency risk, commodity price risk, interest
rate risk).
• Leverage: Enables investors to control a large amount of an underlying asset with a relatively
small amount of capital, potentially amplifying returns (but also losses).
• Price Discovery: The trading of derivatives can contribute to more efficient price discovery in the
underlying spot markets.
• Market Efficiency: Facilitate the transfer of risk from those unwilling to bear it to those willing to
take it on, improving overall market efficiency.
• Arbitrage Opportunities: Allow sophisticated traders to profit from temporary price
discrepancies between the derivative and its underlying asset.
• Access to Markets: Can provide indirect access to markets (e.g., commodities, foreign currencies)
that might otherwise be difficult or expensive to invest in directly.
4.4.6 Disadvantages of Derivatives
• High Risk (Leverage): While leverage can amplify gains, it also magnifies losses, potentially
leading to losses exceeding the initial investment.
• Complexity: Derivatives can be highly complex instruments, making them difficult for average
investors to understand and value accurately.
• Counterparty Risk (for OTC Derivatives): The risk that the other party to an OTC contract will
default on their obligations. This is a major concern for forwards and swaps.
• Liquidity Risk: Some derivatives, especially highly customized OTC contracts, may have limited
liquidity, making it difficult to exit a position.
• Speculative Nature: Their leveraged nature makes them attractive for speculation, which can
lead to significant losses if market movements are misjudged.
Key Takeaways:
• The Equity Market is fundamental for long-term wealth creation, offering ownership and growth
potential, but with inherent volatility.
• Debt Instruments (like bonds and debentures) are crucial for stability, predictable income, and
capital preservation, balancing risk in a portfolio.
• Primary Market Issues like IPOs, FPOs, and Rights Issues are crucial mechanisms for companies
to raise capital.
• Other Investment Markets (Forex, Commodities, Gold) provide avenues for diversification,
inflation hedging, and unique risk-return profiles.
• Derivatives are powerful, leveraged instruments used for hedging, speculation, and arbitrage,
deriving value from underlying assets.
• A well-rounded understanding of these diverse markets is essential for effective Security
Analysis and Portfolio Management, enabling investors to build robust and resilient portfolios
aligned with their financial goals and risk tolerance.
5. Regulatory Bodies in Indian Financial Markets
Objective: To understand the critical roles played by the Reserve Bank of India (RBI) and
the Securities and Exchange Board of India (SEBI) in ensuring the stability, integrity, and
development of the Indian financial system.

Importance of Regulation:
• Investor Protection: Safeguarding the interests of individual and institutional investors.
• Market Integrity: Preventing fraudulent and unfair trade practices (e.g., insider trading,
price manipulation).
• Financial Stability: Maintaining confidence in the banking and capital markets to
prevent systemic crises.
• Orderly Development: Promoting the growth and efficiency of financial markets.
• Fairness & Transparency: Ensuring a level playing field and adequate disclosure of
information.
5.1 Regulatory Body – Reserve Bank of India (RBI)
Establishment: Established on April 1, 1935, under the Reserve Bank of India Act, 1934.
Nationalized in 1949.

Status: India's central bank and the apex monetary authority.

Primary Mandate: To maintain monetary stability and ensure financial stability in the
country.

Governing Body: Central Board of Directors appointed by the Government of India.

Key Takeaway: RBI is the guardian of India's monetary system and the regulator of the
banking sector.
5.1.1 RBI - Key Roles & Responsibilities (Monetary Authority)
1. Formulates, Implements, and Monitors Monetary Policy:
• Objective: To maintain price stability (control inflation) while keeping in mind the
objective of growth.
• Tools: Repo Rate, Reverse Repo Rate, Cash Reserve Ratio (CRR), Statutory Liquidity Ratio
(SLR), Open Market Operations (OMOs).
• Example: Increasing the repo rate to curb inflation by making borrowing more expensive.

2. Issuer of Currency:
• Monopoly: Sole authority to issue currency notes (except one rupee notes and coins,
which are issued by the Government of India but circulated by RBI).
• Objective: To ensure an adequate supply of clean and genuine notes and to manage
currency circulation.

Key Takeaway: RBI's monetary policy decisions directly influence interest rates, liquidity,
and inflation in the economy.
5.1.1 RBI - Key Roles & Responsibilities (Monetary Authority)
• Repo Rate: The Repo Rate is the interest rate at which commercial banks borrow money from the
RBI by selling their securities to the RBI with an agreement to repurchase them later.
• Reverse Repo Rate: The Reverse Repo Rate is the interest rate at which the RBI borrows money
from commercial banks by selling them securities with an agreement to repurchase them later.
• Cash Reserve Ratio (CRR): CRR is the percentage of a bank's total deposits that it must hold as
reserves with the RBI.
• Statutory Liquidity Ratio (SLR): SLR is the percentage of a bank's total deposits that it must
maintain in the form of liquid assets like cash, gold, or government securities.
• Open Market Operations (OMOs): OMOs refer to the RBI's buying and selling of government
securities in the open market.
• The current Repo Rate is 5.50%, the Reverse Repo Rate is 3.35%, the Cash Reserve Ratio (CRR) is
4.5%, and the Statutory Liquidity Ratio (SLR) is 18.00%.
5.1.2 RBI - Key Roles & Responsibilities (Regulator & Supervisor of
Financial System)
1. Regulator and Supervisor of Commercial Banks:
• Function: Prescribes broad parameters of banking operations, including licensing, branch
expansion, capital requirements, lending norms, and asset classification.
• Objective: To maintain public confidence in the banking system, protect depositors' interests, and
ensure the solvency and liquidity of banks.
• Tools: On-site inspections, off-site surveillance, scrutiny, and periodic meetings.
2. Regulator of Non-Banking Financial Companies (NBFCs):
• Function: Issues guidelines and directives for the functioning of NBFCs to ensure their healthy
growth and prevent systemic risks.
3. Maintains Financial Stability:
• Function: Monitors key economic indicators and takes measures to prevent financial crises and
ensure the orderly functioning of financial markets.
Key Takeaway: RBI is the primary watchdog for the banking and broader financial system, ensuring
its health and stability.
5.1.3 RBI: Other Important Functions
1. Banker to the Government:
• Function: Manages government accounts, receives and makes payments on behalf of
central and state governments, manages public debt, and issues new loans (government
securities).
• Role: Acts as an advisor to the government on monetary and financial matters.

2. Banker to Banks:
• Function: Maintains banking accounts of all scheduled commercial banks, acts as a lender
of last resort (providing liquidity to banks in distress), and facilitates inter-bank
transactions through clearing and settlement systems.
5.1.3 RBI: Other Important Functions
3. Custodian and Manager of Foreign Exchange Reserves:
• Function: Manages India's foreign exchange reserves, intervenes in the forex market to
stabilize the rupee's exchange rate, and administers the Foreign Exchange Management
Act (FEMA), 1999.
• Objective: To facilitate external trade and payments and promote orderly development
and maintenance of the foreign exchange market.

4. Developmental Role:
• Function: Promotes financial inclusion, develops financial markets, and supports various
national development projects.
• Key Takeaway: RBI's functions extend beyond monetary policy to encompass broad
financial system management and development.
5.2 Securities and Exchange Board of India (SEBI): Overview
• Establishment: Established in 1988 as a non-statutory body, granted statutory powers on
January 30, 1992, under the SEBI Act, 1992.

• Status: The primary regulator for the Indian securities market (capital market).

• Preamble's Objective: "...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."

• Key Takeaway: SEBI is the guardian of investor interests and the regulator for all
participants in the stock and bond markets.
5.2.1 SEBI – Core Objectives
1. Investor Protection:
Aim: To safeguard the rights and interests of investors, especially small and retail investors, by
ensuring transparency, fairness, and preventing fraudulent practices.
Example: Mandating disclosures by companies, regulating intermediaries.

2. Market Development:
Aim: To promote the orderly growth and development of the securities market by introducing new
instruments, improving market infrastructure, and fostering efficient trading practices.
Example: Introduction of dematerialization, screen-based trading, new derivative products.

3. Market Regulation:
Aim: To regulate the business in stock exchanges and any other securities markets to ensure fair
and transparent operations.
Example: Regulating stockbrokers, merchant bankers, mutual funds, credit rating agencies.

Key Takeaway: SEBI balances investor protection with market growth and efficient regulation.
5.2.2 SEBI Functions – Protective
1. Prohibits Insider Trading:
• Function: Prevents individuals with access to unpublished price-sensitive information
from using it to make unfair profits.
• Action: Imposes penalties and takes legal action against violators.

2. Checks Price Rigging & Manipulation:

• Function: Monitors trading activities to prevent artificial fluctuations in security prices
caused by unfair practices.
• Action: Investigates and takes action against market manipulators.

3. Promotes Fair Practices & Code of Conduct:

• Function: Formulates and enforces codes of conduct for various market participants
(brokers, merchant bankers, etc.) to ensure ethical behavior.
5.2.2 SEBI Functions – Protective
4. Educates Investors:
• Function: Conducts investor awareness programs to educate them about their rights,
risks, and responsible investing.
• Example: "SEBI Investor Protection Fund," awareness campaigns.

5. Prohibits Fraudulent & Unfair Trade Practices:

• Function: Acts against any deceptive or misleading practices in the securities market.
• Key Takeaway: SEBI's protective functions are crucial for building and maintaining
investor confidence.
5.2.2 SEBI Functions – Protective
Market Manipulation is a broad term referring to intentional interference with the free
and fair operation of financial markets. It involves deceptive practices designed to
artificially affect the supply or demand for a security, thereby influencing its price, to
benefit the manipulator financially. The goal is to create a false or misleading appearance
of active trading or price movement.

• Pump and Dump Schemes:

• How it works: Manipulators (often with large holdings of a low-volume stock) spread
false or misleading positive information about a company to artificially "pump up" its
stock price. As the price rises and attracts retail investors, the manipulators "dump"
their shares at inflated prices, leaving other investors with worthless or significantly
depreciated stock.
• SEBI's check: Surveillance systems detect unusual trading volumes and price spikes in
thinly traded stocks, and investigations follow up on suspicious promotional activities or
rumors.
5.2.2 SEBI Functions – Protective
Wash Trading / Painting the Tape:
• How it works: An individual or group repeatedly buys and sells the same security, often through
different accounts, without any change in beneficial ownership. This creates an artificial
impression of high trading volume and activity, making the stock appear more attractive.
"Painting the tape" specifically refers to placing successive orders at increasing or decreasing
prices to create a false trend.
• SEBI's check: Advanced surveillance systems analyze trading patterns to identify matched orders
or circular trading where the same entities are on both sides of trades.
Spoofing / Layering:
• How it works: Traders place large buy or sell orders with no intention of executing them. These
"fake" orders are quickly canceled before they can be filled. The purpose is to create a false
impression of supply or demand, influencing other traders to move the price in a desired
direction, at which point the manipulator executes their real trades.
• SEBI's check: High-frequency trading surveillance tools are used to detect rapid order
placements and cancellations, especially large orders that are never intended to be executed.
5.2.2 SEBI Functions – Protective
Marking the Close:
• How it works: Manipulators place a series of buy or sell orders just before the market
closes to artificially push the stock's closing price up or down. This can impact valuations
(e.g., for mutual funds) or create a false impression of momentum for the next trading
day.
• SEBI's check: Real-time monitoring of trading activity, particularly in the last few minutes
of the trading session, to identify unusual volume or price movements.

Bear Raiding / Trash and Cash:

• How it works: This is the reverse of "pump and dump." Manipulators spread false
negative information or engage in heavy selling (including short selling) to drive down a
stock's price, then buy it back at a lower price or profit from their short positions.
• SEBI's check: Surveillance for unusual short-selling activity coupled with negative rumors
or false news dissemination.
5.2.2 SEBI's Measures to Combat Manipulation
• Robust Regulatory Framework: The SEBI (Prohibition of Fraudulent and Unfair Trade
Practices relating to Securities Market) Regulations, 2003 (PFUTP Regulations) explicitly
prohibit various forms of market manipulation.
• Advanced Surveillance Systems: SEBI invests in sophisticated Integrated Market
Surveillance Systems (IMSS) that monitor trading activities across exchanges in real-time.
These systems use data analytics, artificial intelligence (AI), and machine learning (ML) to
detect unusual patterns, anomalies, and suspicious trading behaviors.
• Enforcement Actions: When manipulation is detected, SEBI has quasi-judicial powers to
conduct investigations, issue show-cause notices, impose heavy monetary penalties,
disgorge ill-gotten gains, and even ban individuals or entities from participating in the
market.
5.2.2 SEBI's Measures to Combat Manipulation
• Investor Education: SEBI runs awareness campaigns to educate investors about common
manipulative schemes and how to identify and avoid them.
• Technology Upgrades: Continuously updates its surveillance and enforcement
technologies to keep pace with evolving manipulative tactics, including those related to
high-frequency trading and social media influence.
5.2.3 SEBI Functions – Regulatory
1. Registration of Market Participants:
• Function: Registers and regulates stockbrokers, sub-brokers, share transfer agents,
merchant bankers, portfolio managers, mutual funds, custodians, depositories, credit
rating agencies, etc.
• Objective: To ensure only eligible and responsible entities operate in the market.

2. Regulates Stock Exchanges & Intermediaries:

• Function: Oversees the operations of stock exchanges, including their by-laws, rules, and
trading systems. Conducts inquiries and audits.

3. Regulates Company Takeovers & Acquisitions:

• Function: Lays down regulations for substantial acquisition of shares and takeovers of
companies to protect minority shareholders' interests.
5.2.3 SEBI Functions – Regulatory
4. Conducts Inquiries & Audits:
• Function: Has quasi-judicial powers to conduct investigations into violations of securities
laws and pass orders.

5. Levying Fees & Charges:

• Function: Collects fees and other charges from market participants for its regulatory
services.

Key Takeaway: SEBI's regulatory functions ensure orderly conduct and compliance across
the securities market ecosystem.
5.2.4 SEBI Functions – Developmental
1. Training of Intermediaries:
• Function: Promotes and regulates the training of intermediaries in the securities market to
enhance professionalism.
2. Promotion of Research:
• Function: Encourages research and development in the securities market to foster innovation
and efficiency.
3. Introduction of New Products & Practices:
• Function: Works to introduce new and efficient trading systems, market products (e.g., electronic
trading, new derivatives), and practices to improve market efficiency.
• Example: Promoting dematerialization of shares.
4. Making Underwriting Optional:
• Function: Has made underwriting optional to reduce the cost of issue for companies, promoting
easier access to capital.
Key Takeaway: SEBI's developmental role is vital for the continuous evolution and modernization
of the Indian securities market.
5.2.4 RBI vs SEBI: Key Distinctions
Securities and Exchange Board of India
Feature Reserve Bank of India (RBI)
(SEBI)
Primary Focus Monetary Policy, Banking System, Financial Securities Market (Capital Market)
Stability
Main Act RBI Act, 1934; Banking Regulation Act, 1949 SEBI Act, 1992

Regulates Commercial Banks, NBFCs, Payment Stock Exchanges, Brokers, Mutual Funds,
Systems, Forex Market Depositories, Companies (listing/issuance)

Key Objective Price Stability, Credit Flow, Financial System Investor Protection, Market Development,
Health Fair Trading
Instruments Currency, Government Securities (primary Shares, Debentures, Mutual Fund Units,
market), Bank Deposits, Loans Derivatives (traded on exchanges)

Role in Economy Central Bank, Macroeconomic Stability Capital Market Regulator, Facilitates Capital
Formation
Example Activity Setting Repo Rate, Licensing a new bank, Approving IPOs, Investigating insider trading,
Managing forex reserves Regulating mutual funds