INVESTMENT BANKING
UNIT II : REGULATION OF
CAPITAL MARKET
1. Regulation of capital market
2. Sebi regulation of merchant
bankers
TOPICS
3. Brokers and sub brokers
4. Intermediaries and portfolio
managers
INTRODUCTION
Capital markets are financial markets where individuals,
institutions, and governments can buy and sell long-term financial
securities such as stocks, bonds, and other financial instruments. These
markets play a crucial role in the economy as they allow companies
and governments to raise capital by issuing and selling securities to
investors.
CAPITAL
MARKET
PRIMARY SECONDARY
MARKET MARKET
Primary Markets:-
In the primary market, new
securities are issued and sold to
investors, The primary market is
where companies raise funds
through initial public offerings
(IPOs) by issuing new securities to
investors. Secondary Markets:-
In the secondary market, existing
securities are traded between
investors. The secondary market, on
the other hand, is where investors
buy and sell securities that were
previously issued in the primary
market.
REGULATION OF CAPITAL MARKET
The regulation of Indian capital markets is overseen by the
Securities and Exchange Board of India (SEBI). SEBI is
the primary regulatory body for the Indian securities market,
responsible for promoting and regulating the development of
the Indian capital markets.
The Securities and Exchange Board of India (SEBI) is the
regulatory body for securities and commodity market in India
under the ownership of Ministry of Finance, Government of
India .It was established on 12 April 1988 as an executive
body and was given statutory powers on 30 January 1992
through the SEBI Act ,1992.
In addition to SEBI, the Reserve Bank of India (RBI) also plays a role in
regulating capital markets. The RBI is responsible for regulating banking
and financial services in India, and it works closely with SEBI to ensure
the safety and stability of the financial system.
Primary market intermediaries Secondary market intermediaries
1. Underwriters - Underwriting services are
1. stock brokers -A stockbroker is a
provided by some large specialists financial financial professional who executes orders in
institutions such as banks, insurance or investment the market on behalf of clients. A stockbroker
houses, whereby they guarantee payment in case of may also be known as a registered
damage or financial loss and accept the financial representative
risk for liability arising from such guarantee.
2. sub brokers -A sub-broker is an agent of a
broker, working with the client, on their behalf. They
2. Merchant bankers - Merchant Bankers play an act as a link between the stockbroker and the client
important role in the issue management process.
Merchant Bankers are mandated by SEBI to manage
public issues (as lead managers) and open offers in
take-overs
3. Portfolio managers - Portfolio managers are
primarily responsible for creating and managing
investment allocations for private clients
ROLE OF SEBI
ISSUERS OF Financial
SECURITIES Intermediaries
Investor
These are entities in Investors are the ones These are the people
the corporate field that who keep the markets who act as middlemen
raise funds from active. This regulatory between the issuers
various sources in the authority is responsible and investors. They
market. This for maintaining an make the financial
organization makes environment that is free transactions smooth
sure that they get a from malpractices to and safe.
healthy and restore the confidence of
transparent the general public who
environment for their invest their hard-earned
needs. money in the markets.
FUNCTIONS OF SEBI
1. Protective 2. Regulatory 3. Development
Functions Functions Functions
As the name suggests, these
These functions are basically This regulatory authority
functions are performed by SEBI
performed to keep a check on the performs certain
to protect the interest of investors
functioning of the business in the development functions
and other financial participants.
financial markets. also that include but they
It includes-
are not limited to-
•Designing guidelines and code of
•Checking price rigging
conduct for the proper functioning of •Imparting training to
•Prevent insider trading
financial intermediaries and corporate. intermediaries
•Promote fair practices
•Regulation of takeover of companies •Promotion of fair trading
•Create awareness among
•Conducting inquiries and audit of and reduction of
investors
exchanges malpractices
•Prohibit fraudulent and unfair
•Registration of brokers, sub-brokers, •Carry out research work
trade practices
merchant bankers etc. •Encouraging self-
•Levying of fees regulating organizations
•Performing and exercising powers •Buy-sell mutual funds
•Register and regulate credit rating directly from AMC
agency through a broker
OBJECTIVES OF SEBI
1. Protection to 2. Prevention of 3. Fair and proper
the investors malpractices functioning
The primary objective SEBI is responsible
of SEBI is to protect for the orderly
the interest of people functioning of the
in the stock market capital markets and
and provide a healthy keeps2.a close check
environment for them. over the activities of
the financial
intermediaries such as
brokers, sub-brokers,
etc.
This was the reason
why SEBI was formed
. Among the main
objectives, preventing
malpractices is one of
them.
National Securities Depository Central Depository Services
Limited (NSDL) is an (India) Ltd. (CDSL), the first listed
Indian central securities depository, Indian central securities depository,
based in Mumbai. It was was founded in 1999.
established in August 1996 as the CDSL facilitates holding and
first electronic securities depository transacting in securities in the
in India with national coverage. It's electronic form and facilitates
demat accounts now hold assets settlement of trades done on stock
worth $4 trillion. exchanges.
NSE, National Stock Exchange,
Bombay Stock Exchange (BSE),
NSE was incorporated in 1992. It was
is an Indian stock exchange located on Dalal
recognised as a stock exchange by SEBI in
April 1993 and commenced operations in EXCHANGES Street in Mumbai. Established in 1875 by
cotton merchant Premchand Roychand, a
1994 with the launch of the wholesale debt
Jain businessman, it is the oldest stock
market, followed shortly after by the
exchange in Asia, and also the tenth oldest in
launch of the cash market segment.
the world.
BROKERS AND SUB BROKERS
Brokers and sub-brokers are both important players in the stock market who act as intermediaries between investors
and the stock exchanges.
Here are the key differences between brokers and sub-brokers :-
• License and Registration: Brokers are registered with the stock exchanges and the Securities and Exchange Board
of India (SEBI) and hold a valid stockbroking license. Sub-brokers, on the other hand, work under the supervision of
a broker and are registered with the SEBI as a sub-broker.
• Authority: Brokers have the authority to trade directly with the stock exchanges on behalf of their clients. They
have a higher level of authority compared to sub-brokers who are authorized to trade only on behalf of their clients
but through their registered broker.
• Responsibility: Brokers are responsible for executing trades, maintaining client relationships, and providing
investment advice. Sub-brokers assist brokers in their tasks and act as intermediaries between brokers and clients.
• Revenue Sharing: Brokers earn revenue by charging commissions on trades and other services they offer. Sub-
brokers earn a percentage of the revenue earned by the broker they work for.
• Capital Requirements: Brokers are required to have a certain amount of capital to register and operate. Sub-
brokers do not have to meet the same capital requirements as brokers, but they must work under a registered
broker.
In summary, brokers are authorized to trade on their own behalf and that of their clients, while sub-brokers work under
the supervision of brokers and have limited authority. Brokers are also responsible for providing investment advice and
maintaining client relationships, while sub-brokers assist in these tasks.
The key takeaway is that brokers are more experienced and have a higher level of responsibility and authority compared
to sub-brokers.
INTERMEDIARIES AND PORTFOLIO MANAGERS
SEBI (Securities and Exchange Board of India) is the regulatory body that oversees the functioning of intermediaries
and portfolio managers in India's securities markets.
• Intermediaries are entities that act as intermediaries between buyers and sellers of securities, such as
brokers, sub-brokers, depository participants, custodians, and merchant bankers. SEBI has set
regulations for intermediaries, including the registration process, code of conduct, capital
requirements, reporting and record-keeping requirements, and penalties for non-compliance.
• Portfolio managers are entities that manage the investments of clients on their behalf. SEBI has set
regulations for portfolio managers, including the eligibility criteria for portfolio managers, the
registration process, the minimum investment amount, the investment restrictions, the disclosure
requirements, the fee structure, and the reporting requirements.
• SEBI's role is to ensure that intermediaries and portfolio managers operate in a transparent and fair
manner, protect the interests of investors, prevent fraudulent activities, and promote the development
of the securities markets. It regularly monitors and audits intermediaries and portfolio managers to
ensure compliance with its regulations.
CONCLUSION
The regulation of capital markets is an essential aspect of ensuring the stability and integrity of the financial
system. Capital markets facilitate the flow of funds from investors to companies and governments in need of
capital, but they can also expose investors to significant risks. Therefore, regulating these markets is critical to
prevent fraudulent practices, ensure transparency, and maintain investor confidence.
Effective regulation can help prevent financial crises by limiting the extent of speculation, insider trading, and
market manipulation. Additionally, regulation can promote market efficiency, lower transaction costs, and provide
investors with adequate information to make informed investment decisions.
In conclusion, the regulation of capital markets is crucial to ensuring the stability and integrity of the financial
system. It is essential to develop and enforce regulations that strike the right balance between promoting market
efficiency and protecting investors, thereby fostering a healthy and sustainable financial system.
REFRENCES
• Prof. Gunjali Trivedi (2023), Investment Banking Unit II: Regulation Of The Capital Market.
• Prof. Gunjali Trivedi (2023), BBA VI, Investment Banking Lecture Notes.
• https://www.google.co.in
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• https://chat.openai.com/
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