Stock Exchanges & SEBI

Stock exchanges and the Securities and Exchange Board of India (SEBI) form the backbone of India's capital market infrastructure. This topic covers the structure of Indian stock exchanges, SEBI's regulatory role, capital market reforms, financial products, and key concepts like demutualisation and QIP. For JAIIB candidates, understanding the capital market framework is essential as banks increasingly participate in securities markets through treasury operations, mutual fund distribution, and merchant banking.

A comprehensive package of reforms was introduced to liberalise, regulate, and expand the capital market with goals of:

• Improving market efficiency
• Increasing transparency
• Integrating national markets
• Preventing unfair trade practices

BSE (1875) → OTCEI (1990) → NSE (1992) → Metropolitan Stock Exchange (2012)

Demutualisation refers to the transition process of a stock exchange from a mutually-owned association to a shareholder-owned company. It converts a non-profit, member-owned exchange into a for-profit, shareholder-owned public limited company by separating ownership and trading rights.

SEBI is the regulator for the securities market in India, established in 1992.

• Regulates stock exchanges, intermediaries, and market participants
• Frames eligibility norms for capital issues and listing
• Regulates mutual funds (though AMFI is the self-regulatory body)
• Oversees merchant banking activities
• Ensures investor protection
• Regulates credit rating agencies (7 SEBI-approved CRAs)

• For public issues: A draft prospectus must be filed with SEBI through a merchant banker
• For rights issues exceeding Rs. 50 lakh (including premium): A draft letter of offer must be filed with SEBI
• QIP (Qualified Institutional Placement): Only for companies listed on NSE or BSE with minimum public float
• No eligibility norms for a listed company making a rights issue (it's an offer to existing shareholders)

• Introduced by SEBI on May 8, 2006
• Allows listed companies to issue equity shares, convertible debentures, or other securities to Qualified Institutional Buyers (QIBs)
• Quick fundraising tool — eliminates several procedural requirements
• No pre-issue filing with SEBI required
• Placement document uploaded on issuer's and stock exchange's websites
• Purpose: Enable Indian companies to access domestic capital markets quickly and reduce reliance on foreign funds (FCCBs/GDRs)

Equity represents ownership interest in a company through common and preferred stocks.

• Tax levied on all transactions on stock exchanges
• Came into effect from October 1, 2004 (Finance Act, 2004)
• Reduced to 0.1% on cash delivery transactions (Budget 2013-14)

• Trades executed during the day are settled based on net obligations for the day
• Currently on T+2 basis (trades on Monday typically settled on Wednesday)

• Primary function: Hold securities in dematerialised form
• Central depository for the Indian capital market

The Green Shoe Option is the option of allotting equity shares in excess of the equity shares offered in the public issue as a post-listing price stabilisation mechanism.

• Proposed by SEBI in 2012
• Company promoters assure buyback of shares from retail applicants at IPO price if stock falls sharply during first six months after listing
• SEBI study showed 62% of 117 companies listed between 2008-2011 fell below IPO price within six months
• Could not be made mandatory

Banks can tie up with MMMFs, Gilt Funds, and Liquid Income Schemes (investing not less than 80% in money market instruments) to offer cheque-writing facilities to investors, subject to:

• Tie-up with sponsor/designated bank
• Drawing account distinct from other accounts
• Pre-funding by MMMF/MF at all times
• Minimum 15-day lock-in for MMMFs
• Daily review of funds position

Grindlays Bank was the first foreign bank to receive a license to operate as a merchant bank in India.

Merchant bankers must:

• Protect investor interests
• Maintain integrity, dignity, and fairness
• Not discriminate among clients
• Ensure prospectus availability to investors
• Inform clients of any penal action by SEBI
• Comply with SEBI Regulations, 2003

1. BSE (1875) = oldest stock exchange; first permanent SEBI recognition
2. NSE established in 1992; other major exchange
3. OTCEI (1990) for cost-effective fundraising
4. Demutualisation = non-profit mutual → for-profit shareholder-owned company
5. FIIs allowed in Indian stock market since 1992
6. QIP introduced by SEBI on May 8, 2006 — no pre-issue filing; for QIBs only
7. STT: 0.1% on cash delivery (Budget 2013-14); effective October 1, 2004
8. Rolling settlement on T+2 basis
9. Green Shoe Option = post-listing price stabilisation mechanism
10. NSDL = holds securities in dematerialised form
11. Safety Net: SEBI 2012 proposal; 62% of companies fell below IPO price within 6 months
12. Grindlays Bank = first foreign merchant bank licensed in India
13. MMMF cheque-writing: minimum 80% corpus in money market instruments; 15-day lock-in