Also, while SEBI is the primary regulatory authority for the Indian stock market, the Reserve Bank of India (RBI) supports its efforts by ensuring overall financial stability, implementing monetary policies, and regulating aspects related to banking and foreign investments.
Additionally, these bodies contribute to the nation's economic progress by facilitating capital formation. To understand how stock markets are regulated in India, let us first understand the meaning of stock markets.
Stock Market
The stock market is where individuals or companies can come together and buy or sell securities and financial instruments like bonds, ETFS, commodities and derivatives among others. Stock markets are governed by SEBI as the body ensures the protection of investors' interests by enforcing fair practices, preventing fraudulent activities, and promoting transparency in the securities market.
It regulates intermediaries, i.e., brokers, merchant bankers, and depositories, to ensure they adhere to the prescribed code of conduct.
Stock exchanges in India
The Bombay Stock Exchange (BSE), is among the oldest markets in Asia and serves as a benchmark for assessing the economic well-being and development of the nation.
Trading in India takes place at two significant stock exchanges: the National Stock Exchange of India (NSE) and the Bombay Stock Exchange (BSE). The NSE was founded in Mumbai in 1992 and commenced trading in 1994. On the other hand, the BSE, established in Mumbai in 1875 and has a long-standing presence in the Indian stock market.
NSE is the largest stock exchange in India and the 8th largest stock exchange in the world by market capitalization. It is a major driver of the Indian economy and has helped to make India a more attractive destination for foreign investment. It is also largest stock exchange in India and also the largest in terms of option volume across the globe. It accounts for over 90% of the option trading in India.
Market Indices
In the Indian stock exchange, there are two prominent indices known as Sensex and Nifty. Sensex represents a weighted average of the market capitalization of 30 reputable and financially strong companies across various important sectors in India.
On the other hand, NSE's flagship index is the NIFTY 50, which is a 50-stock index that is used to measure the performance of the Indian stock market
Sensex is an abbreviation for 'Stock Exchange Sensitive Index', and represents the stock market index for the Bombay Stock Exchange while Nifty stands for 'National Stock Exchange Fifty' and is the index for the National Stock Exchange.
Stock market regulations in India
The stock market in India is mainly regulated by five important laws that mainly aim to ensure transparency in transactions and the protection of shareholder rights. Here are some key laws applicable to the regulation of stock markets in India:
- Securities and Exchange Board of India Act, 1992: This is the primary act that empowers SEBI with regulatory and enforcement authority over the securities market. It outlines SEBI's powers, functions and responsibilities with regard to all the participants in the stock market.
- Securities Contracts (Regulation) Act, 1956: This act provides the legal framework for the regulation of securities contracts, including the regulation of stock exchanges and the listing of securities.
- Companies Act, 2013: This act governs the formation, operation, and regulation of companies in India. It includes provisions related to the issuance and transfer of securities, shareholder rights and corporate governance.
- SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015: These regulations prescribe the listing requirements for companies listed on Indian stock exchanges. It includes provisions related to corporate governance, disclosures and shareholder rights.
- SEBI (Prohibition of Insider Trading) Regulations, 2015: These regulations aim to prevent insider trading in securities. They define insider trading, prescribe codes of conduct and establish disclosure requirements for insiders.
Role of SEBI in regulating Indian stock markets
SEBI was established as an independent authority in 1992 and serves as the regulatory body overseeing the entire stock exchange in India. SEBI possesses the authority to enforce fines and penalties in the event of rule violations. It plays a crucial role in safeguarding the interests of investors within the Indian stock exchange. Additionally, SEBI actively promotes the education and training of intermediaries involved in the stock market.
SEBI's actions are subject to scrutiny through a specialized appellate tribunal. The Securities Appellate Tribunal (SAT), consisting of three members, handles appeals against SEBI's and stock exchanges' decisions. In case of dissatisfaction with the SAT's ruling, further appeals can be made to the Supreme Court.
Role of RBI in regulating Indian stock markets
The RBI is the central bank of India. It is responsible for formulating and implementing monetary policy measures that affect interest rates and liquidity conditions. These policies play an important role on the stock market as they affect the cost of borrowing and overall market liquidity. Furthermore, the central bank also oversees the payment and settlement systems in the securities market, thereby ensuring a secure mechanism for the clearing and settlement of stock market transactions.
In consultation with SEBI, RBI also regulates foreign investments in the Indian stock market and monitors foreign direct investment (FDI) limits, portfolio investment schemes, and other capital flow restrictions.
Conclusion
The regulatory bodies in India play a vital role in upholding stock prices, which, in turn, contribute to the overall expansion of the country's economy. Additionally, Indian financial authorities actively encourage citizens to enhance their savings and invest in the stock market. By safeguarding investors' capital, these regulators foster trust and confidence in the market. This promotes the generation of capital, thereby facilitating the acceleration of the nation's economic growth.