Financial Markets & SEBI
Financial Markets & Instruments
Money market, capital market, SEBI, stock exchanges, bonds, mutual funds, and key financial instruments in India for competitive exam preparation.
Key Dates
Bombay Stock Exchange (BSE) established — Asia's oldest stock exchange
SEBI established as non-statutory body for capital market regulation
SEBI given statutory powers under the SEBI Act 1992; National Stock Exchange (NSE) incorporated
NSE started electronic screen-based trading — revolutionised Indian capital markets
Depositories Act enacted; NSDL (National Securities Depository Limited) established
CDSL (Central Depository Services Limited) established; rolling settlement introduced
Dematerialisation became mandatory; derivatives trading (index futures) began on NSE
FRBM Act limited RBI's participation in primary G-Sec market; Negotiated Dealing System introduced
Currency derivatives (USD-INR futures) launched on NSE; SEBI banned participatory notes (P-Notes) for derivative positions
Gold Monetisation Scheme and Sovereign Gold Bond launched; MUDRA set up for microfinance
IFSCA (International Financial Services Centres Authority) Act passed for GIFT City regulation
India's market capitalisation crossed $4 trillion — 5th largest globally; retail investors crossed 15 crore demat accounts
SEBI introduced T+1 settlement (delivery on next trading day) — India first major market to implement
Financial Markets — Overview & Classification
Financial markets are platforms where buyers and sellers trade financial instruments — they channel savings into productive investment. Classification: By maturity: Money Market (short-term, up to 1 year) and Capital Market (long-term, over 1 year). By issuance: Primary Market (new securities issued) and Secondary Market (existing securities traded). By instrument: Debt market (bonds, debentures, G-Secs) and Equity market (shares). By regulation: Organised (regulated by SEBI/RBI, traded on recognised exchanges) and Unorganised (informal moneylenders, chit funds — outside regulatory purview). Participants: Issuers (companies, government), investors (retail, institutional — mutual funds, insurance, pension funds, FPIs), intermediaries (brokers, merchant bankers, underwriters, custodians), and regulators (SEBI for capital market, RBI for money market and G-Sec market, IRDAI for insurance, PFRDA for pension). India's financial market depth has improved significantly: Stock market capitalisation: $4+ trillion (2024), ~110% of GDP. Bond market outstanding: ~$2.5 trillion (G-Secs + corporate bonds), ~70% of GDP — still low compared to developed markets (US: 150%+ of GDP). However, India's corporate bond market is underdeveloped relative to its equity market — this creates over-reliance on bank lending for corporate financing.
Money Market — Instruments & Operations
The money market deals in short-term funds (up to 1 year). Key instruments: Treasury Bills (T-Bills): Issued by RBI on behalf of the Government of India. Available in 91-day, 182-day, and 364-day maturities. Sold at a discount, redeemed at par (face value). Zero-coupon instruments — the difference between purchase price and face value is the return. Minimum investment: Rs 25,000 (in multiples of Rs 25,000). Issued through weekly auctions. Risk-free — backed by sovereign guarantee. Used as benchmark for short-term interest rates. Commercial Paper (CP): Short-term unsecured promissory note issued by corporates with high credit ratings (minimum A3 by CRISIL or equivalent). Maturity: 7 days to 1 year. Issued at discount. Minimum denomination: Rs 5 lakh. Used by companies to meet short-term working capital needs at lower cost than bank loans. Certificate of Deposit (CD): Time deposit issued by scheduled commercial banks (maturity: 7 days to 1 year) and financial institutions (1-3 years). Issued at a discount. Minimum: Rs 1 lakh. Negotiable — can be traded in secondary market. Call Money/Notice Money: Overnight (call) or 2-14 day (notice) interbank lending. Only scheduled commercial banks and primary dealers can participate. Interest rate is the "call rate" — highly sensitive indicator of money market liquidity. If call rate rises sharply, it signals tight liquidity. Term Money: Interbank deposits for 15 days to 1 year. Repo/Reverse Repo: Part of LAF (Liquidity Adjustment Facility). Repo — RBI lends short-term against G-Sec collateral. Reverse repo — RBI absorbs liquidity. TREPS (Tri-Party Repo): Tri-party repo facilitated by CCIL (Clearing Corporation of India Ltd) — participants include mutual funds, insurance companies, and corporates (beyond just banks). CBLO (Collateralised Borrowing and Lending Obligation): Replaced by TREPS from November 2018.
Capital Market — Primary & Secondary Markets
The capital market deals in long-term funds (over 1 year). Primary Market: Where new securities are issued — company raises capital directly from investors. IPO (Initial Public Offering): First time a company offers shares to the public. Must meet SEBI listing requirements (profitability track record or QIB allotment). Book-building: Price discovery mechanism — issuer sets a price band (e.g., Rs 1,000-1,050), investors bid. Cut-off price determined based on demand. Fixed price method: Price set by issuer — used less frequently. FPO (Follow-on Public Offer): Listed company issues additional shares. Rights Issue: Offered to existing shareholders in proportion to their holding (e.g., 1:5 means 1 new share for every 5 held) at a discounted price. Bonus Issue: Free shares to existing shareholders from reserves (e.g., 1:1 means 1 free share for every 1 held). No cash raised — capitalises reserves. OFS (Offer for Sale): Existing shareholders (usually promoters or government in PSUs) sell shares through stock exchange mechanism. Used extensively for government disinvestment. QIP (Qualified Institutional Placement): Listed company issues securities to Qualified Institutional Buyers (QIBs — mutual funds, FPIs, insurance companies) without a prospectus. Faster and cheaper than public offer. Secondary Market: Where existing securities are traded — provides liquidity. BSE benchmark: Sensex (30 stocks, free-float market cap weighted, base year 1978-79). NSE benchmark: Nifty 50 (50 stocks, base year November 1995 = 1000). T+1 Settlement: India moved to T+1 (trade day + 1 working day) settlement in January 2023 — first major market globally. Earlier T+2. This reduces counterparty risk and margin requirements. Circuit breakers: Trading halted if index moves beyond specified limits (10%, 15%, 20% from previous close) to prevent panic.
SEBI — Securities & Exchange Board of India
SEBI was established in 1988 as a non-statutory body and given statutory powers in 1992 (SEBI Act). Headquarters: Mumbai. Chairman (as of 2025): Tuhin Kanta Pandey (replaced Madhabi Puri Buch). SEBI is a quasi-legislative (makes regulations), quasi-executive (enforces compliance), and quasi-judicial (adjudicates disputes and imposes penalties) body. Functions: (1) Protect investor interests — investor education, grievance redressal (SCORES portal), investor protection fund. (2) Regulate securities markets — registration of intermediaries, surveillance of trading, enforcement of insider trading and takeover regulations. (3) Promote market development — introduce new products, improve market infrastructure, encourage technology adoption. SEBI regulates: Stock exchanges (BSE, NSE, MCX, NCDEX), mutual funds (47 AMCs registered), credit rating agencies (CRISIL, ICRA, CARE, India Ratings, Brickwork, SMERA, Infomerics), portfolio managers, investment advisers, research analysts, foreign portfolio investors (FPIs), alternative investment funds (AIFs), REITs and InvITs, depositories (NSDL, CDSL), clearing corporations (NSE Clearing, Indian Clearing Corporation). Key regulations: (1) Prohibition of Insider Trading Regulations (2015): Defines "insider" (connected persons), "unpublished price-sensitive information" (UPSI). Trading window closure, mandatory disclosures. Penalties: Up to Rs 25 crore or 3x profits (whichever is higher). (2) Substantial Acquisition of Shares and Takeovers Regulations (SAST/Takeover Code 2011): Mandatory open offer when acquiring 25%+ shares or gaining control. (3) LODR (Listing Obligations and Disclosure Requirements 2015): Corporate governance norms — board composition (1/3 independent directors), audit committee, related party transactions, quarterly results disclosure. SEBI can impose penalties, suspend trading, pass disgorgement orders (return ill-gotten gains), and bar entities from the market.
Government Securities & Bond Market
Government Securities (G-Secs): Debt instruments issued by the central or state government. Sovereign guarantee — zero default risk (in domestic currency). Types: Dated Securities: Long-term bonds with 5-40 year maturities. Pay semi-annual coupon interest (e.g., 7.26% GS 2033 means 7.26% annual coupon, maturing in 2033). Traded on NDS-OM (Negotiated Dealing System — Order Matching) platform. Retail investors can buy via RBI Retail Direct (launched 2021 — allows direct G-Sec purchase through Gilt Account with RBI). State Development Loans (SDLs): Issued by state governments. Slightly higher yield than central G-Secs (state risk premium of 25-75 bps). Eligible for SLR compliance by banks. Treasury Bills: Already covered in money market section. Sovereign Gold Bonds (SGB): Issued by RBI on behalf of GoI — denominated in grams of gold. Pay 2.5% annual interest (semi-annual). 8-year tenure with exit option from 5th year. Exempt from capital gains tax if held to maturity. Inflation-Indexed Bonds (IIBs): Principal adjusted for inflation (linked to CPI). Offered limited success in India due to complex structure. Bond terminology: Face value (par value): Rs 100 typically for G-Secs. Coupon rate: Annual interest rate (fixed). Current yield = Annual coupon / Current market price. Yield to Maturity (YTM): Total return if held to maturity — factors in coupon and capital gain/loss. Bond prices and yields move inversely: When interest rates fall, existing bonds with higher coupons become more attractive — price rises, yield falls. When rates rise, bond prices fall. The yield curve: Plots yields against maturities. Normal: Upward-sloping (longer maturity = higher yield due to risk). Flat: Similar yields across maturities — signals uncertainty. Inverted: Short-term yields > long-term yields — historically signals recession. India's yield curve is typically upward-sloping. The 10-year G-Sec yield is the benchmark for Indian debt markets — currently ~7% (2025).
Corporate Bonds & Debt Market Development
India's corporate bond market is underdeveloped relative to its equity market and compared to international peers. Corporate bond outstanding: ~Rs 45 lakh crore ($530 billion, 2024). As % of GDP: ~14% — versus USA (45%), South Korea (80%), China (25%). Why underdeveloped: (1) Bank-dominated financial system — companies prefer bank loans due to relationship lending, easier restructuring, and absence of public disclosure. (2) Illiquid secondary market — most bonds are held-to-maturity by insurance companies and provident funds. Very few trades. (3) Credit rating infrastructure — Indian market is dominated by AAA/AA rated issuances. BBB and below (high-yield/junk bonds) market barely exists — depriving MSMEs and riskier companies of bond financing. (4) Regulatory complexity — stamp duty, TDS on interest, different regulations by SEBI and RBI for different instruments. Reforms to deepen bond market: SEBI required large corporates (outstanding long-term borrowing > Rs 100 crore) to raise at least 25% of incremental borrowing through bonds (Large Corporate Framework, 2019). Electronic Book Provider (EBP) platform for price discovery in private placements. Repo in corporate bonds allowed since 2017 — improves liquidity. Credit default swaps (CDS) allowed since 2011 but barely used. NaBFID (National Bank for Financing Infrastructure and Development): Established 2021 as a Development Finance Institution (DFI). Expected to create a deep corporate bond market for infrastructure financing. Rs 1 lakh crore initial corpus over 10 years. Bond Index inclusion: India's G-Secs included in JP Morgan GBI-EM (2024) and Bloomberg Global Aggregate — will deepen the overall debt market by attracting foreign participation.
Mutual Funds & Collective Investment
Mutual Funds: Pool money from investors to invest in diversified portfolios — professional management at low cost. Regulated by SEBI. Structure: Sponsor (promoter), Asset Management Company (AMC — manages the fund), Trustee (oversees AMC on behalf of unit holders), Custodian (holds securities). 47 AMCs registered with SEBI (2024). Total AUM (Assets Under Management): Rs 68 lakh crore ($800 billion, December 2024). Growth from Rs 10 lakh crore (2014) — 7x in 10 years. SIP (Systematic Investment Plan): Monthly contributions have become the backbone of mutual fund growth — Rs 25,000+ crore monthly SIP flows (2024). Over 10 crore SIP accounts. Categories (SEBI categorisation, 2017): Equity funds (large-cap, mid-cap, small-cap, multi-cap, sectoral, thematic, ELSS), Debt funds (liquid, overnight, ultra-short, short, medium, long duration, gilt, credit risk, corporate bond), Hybrid funds (balanced advantage, aggressive hybrid, conservative hybrid, arbitrage, equity savings), Solution-oriented (retirement, children), Index funds and ETFs. ELSS (Equity Linked Savings Scheme): Tax-saving mutual fund — Rs 1.5 lakh deduction under Section 80C, shortest lock-in of 3 years among 80C instruments. NAV (Net Asset Value) = (Total Assets - Total Liabilities) / Number of Units. Calculated daily. Investors buy/redeem units at NAV. AMFI (Association of Mutual Funds in India): Industry body. "Mutual Funds Sahi Hai" campaign increased retail awareness. Expense ratio: SEBI capped at 2.25% for equity funds (AUM up to Rs 500 crore), reducing with scale. Direct plans (no distributor commission) have lower expense ratios — increasingly popular among informed investors.
ETFs, REITs, InvITs & Alternative Investments
Exchange Traded Funds (ETFs): Trade on stock exchanges like shares; track an index, commodity, or basket. Lower expense ratio than actively managed mutual funds. Types in India: Index ETFs (Nifty 50, Sensex, Nifty Next 50), Gold ETFs, Bond ETFs (Bharat Bond ETF), international ETFs. Government has used ETFs for disinvestment: CPSE ETF (Central Public Sector Enterprise ETF) — tracks an index of PSU shares. Bharat Bond ETF — invests in bonds of CPSEs and other government entities. Three series: April 2023, April 2025, April 2030, April 2031, April 2032. Real Estate Investment Trusts (REITs): Allow small investors to invest in income-producing real estate (office spaces, malls) through exchange-traded units. India's listed REITs: Embassy Office Parks (India's first REIT, 2019 — Blackstone-Embassy JV), Mindspace Business Parks (K Raheja), Brookfield India Real Estate Trust, Nexus Select Trust (retail malls). Total AUM: ~Rs 1.3 lakh crore. Minimum investment: 1 unit (as low as Rs 300-400). SEBI-regulated. Must distribute 90% of net distributable cash flows as dividends. Infrastructure Investment Trusts (InvITs): Similar to REITs but for infrastructure assets — roads, power transmission, gas pipelines. Listed InvITs: IRB Infrastructure (roads), India Grid Trust (power transmission — Sterlite Power), PowerGrid InvIT (government — first public sector InvIT), National Highways InvIT. Alternative Investment Funds (AIFs): Private pooled investment vehicles for sophisticated investors. SEBI-registered. Category I: Venture capital, SME funds, social venture funds, infrastructure funds — receive government incentives. Category II: Private equity, debt funds, funds of funds — neither incentivised nor restricted. Category III: Hedge funds, PIPE funds — use complex trading strategies. Minimum investment: Rs 1 crore (Rs 25 lakh for angel funds). India has 1,200+ registered AIFs with ~Rs 10 lakh crore commitments. GIFT City IFSC: India's first International Financial Services Centre in Gandhinagar, Gujarat. Regulated by IFSCA (International Financial Services Centres Authority). Offers: Zero GST on financial services, 10-year tax holiday, foreign currency transactions, listing of global securities, international insurance, aircraft leasing, ship leasing, bullion trading. Over 600 entities registered.
Derivatives Market
Derivatives are financial contracts whose value is derived from an underlying asset (equity, commodity, currency, interest rate). Types: Futures: Obligation to buy/sell the underlying at a specified price on a future date. Standardised contracts traded on exchanges. Mark-to-market (daily settlement of gains/losses). Options: Right (not obligation) to buy (call option) or sell (put option) the underlying at a specified price (strike price) before/on expiry date. Premium paid by buyer. India's derivatives market: One of the world's largest by volume. NSE is the world's largest derivatives exchange by number of contracts traded (2023-24). Key contracts: Stock futures and options (individual stocks), Index futures and options (Nifty 50, Bank Nifty, Fin Nifty), Currency derivatives (USD/INR, EUR/INR, GBP/INR, JPY/INR), Commodity derivatives (gold, silver, crude oil — on MCX; agri-commodities on NCDEX). Options dominate: 97%+ of derivatives volume is options trading. Nifty 50 weekly options are the most traded contracts globally. SEBI concerns: Excessive speculative activity — retail investors losing money. SEBI data (2023) showed 89% of F&O traders lost money, with average loss of Rs 1.1 lakh. SEBI introduced measures in 2024: increased lot sizes, reduced weekly expiry days, upfront collection of option premiums, removal of calendar spread benefit on expiry day. Interest rate derivatives: Interest Rate Swaps (IRS) — exchange fixed rate for floating rate (or vice versa). Overnight Indexed Swap (OIS) — referenced to overnight call rate. Used by banks and corporates to manage interest rate risk. Forward Rate Agreements (FRA) — lock in future interest rates. Credit derivatives: Credit Default Swaps (CDS) — insurance against bond default. RBI allowed in 2011 but barely used in India due to shallow corporate bond market and absence of active secondary trading.
Market Infrastructure & Technology
India's financial market infrastructure is among the most advanced globally: Trading platforms: NSE's NEAT (National Exchange for Automated Trading), BSE's BOLT (BSE OnLine Trading). Co-location: High-frequency trading servers placed at exchange premises for microsecond-level speed — controversial (NSE co-location scam involving OPG Securities). Clearing and settlement: NSE Clearing Limited (formerly NSCCL), Indian Clearing Corporation Limited (ICCL for BSE). Central Counterparty (CCP) — novation of all trades (CCP becomes buyer to every seller and seller to every buyer). This eliminates bilateral counterparty risk. Settlement guarantee fund ensures completion even if a member defaults. Depositories: NSDL (National Securities Depository Limited, 1996) and CDSL (Central Depository Services Limited, 1999). Hold securities in dematerialised (demat) form. Total demat accounts: 15+ crore (2024) — up from 4 crore in 2019. Depository Participants (DPs): Banks, brokers, custodians who provide demat account services. CCIL (Clearing Corporation of India Ltd): Settles G-Sec trades, forex trades, and provides TREPS platform. Operates the NDS-OM platform for G-Sec trading. Payment systems: RTGS (Real-Time Gross Settlement — for high-value transfers, minimum Rs 2 lakh), NEFT (National Electronic Funds Transfer — hourly batch processing, 24/7), UPI (Unified Payments Interface — instant retail payments, 14+ billion transactions monthly), NACH (National Automated Clearing House — bulk payments like salaries, dividends, EMIs). Algo trading: Algorithm-based automated trading constitutes ~50%+ of cash market and 70%+ of derivatives market volume. SEBI requires approval for algo strategies. Retail algo trading being brought under regulation (SEBI discussion paper 2024). Account Aggregator framework: Consent-based financial data sharing between financial institutions — enables credit assessment for MSMEs, facilitates investment advisory, and financial planning. 8 AA operators licensed by RBI.
Commodity Markets
Commodity markets in India trade in physical commodities and commodity derivatives. Major exchanges: MCX (Multi Commodity Exchange) — India's largest commodity derivatives exchange. Trades: Gold, silver, crude oil, natural gas, base metals (copper, aluminium, zinc, nickel, lead), energy. NCDEX (National Commodity & Derivatives Exchange) — focuses on agricultural commodities: soybean, castor seed, guar, chana, cotton, sugar. SEBI became the regulator of commodity markets in 2015 (previously regulated by Forward Markets Commission — FMC, which was merged into SEBI). Key commodity contracts: Gold futures and options: India is the world's 2nd largest gold consumer. MCX gold contract is the benchmark for Indian gold prices. Gold price in India = International gold price × USD/INR exchange rate + customs duty (15%) + GST (3%). Crude oil: MCX crude oil contract linked to WTI/Brent. India imports 85% of crude — price movements directly affect fiscal deficit (oil subsidy) and CAD. Agricultural commodity trading: Controversial — critics argue futures trading increases price volatility and hurts farmers. Government has periodically banned futures trading in essential commodities (onion, chana, mustard oil banned in 2021-22 during price spikes). Counter-argument: Futures markets provide price discovery and hedging tools for farmers and traders. Commodity derivatives for hedging: Farmers can sell futures to lock in prices before harvest (not widely used due to illiteracy and contract size). Companies can hedge raw material costs (e.g., airlines hedging jet fuel). Bullion exchanges: India International Bullion Exchange (IIBX) launched at GIFT City (2022) — allows import of gold and silver through exchange mechanism. Spot gold contract allows delivery-based trading. Electronic Gold Receipt (EGR): SEBI-regulated instrument allowing gold to be held and traded electronically — bridge between physical gold and financial gold markets.
Financial Market Reforms & Investor Protection
Key reforms improving market integrity and investor protection: Dematerialisation (2000): Mandatory for trading — eliminated risks of physical share certificates (forgery, theft, delays). India has 15+ crore demat accounts. T+1 Settlement (2023): India became the first major market to implement next-day settlement — reduces counterparty risk, releases margin funds faster, and improves market efficiency. Previously T+2 (moving towards T+0 in future). SEBI SCORES (SEBI Complaints Redress System): Online platform for investors to lodge complaints against listed companies and intermediaries. Over 40,000 complaints resolved annually. Investor Education and Protection Fund (IEPF): Unclaimed dividends, shares, and deposits transferred to IEPF after 7 years. Used for investor education. RBI Retail Direct: Allows retail investors to directly buy G-Secs, SDLs, SGBs, and T-Bills through an account with RBI. No intermediary needed. Over 8 lakh accounts opened (2024). Insider Trading enforcement: SEBI has significantly increased enforcement — high-profile cases against Reliance Industries (Rs 447 crore penalty, 2020), NDTV promoters, Satyam. WhatsApp and phone tap evidence used. Corporate governance reforms: SEBI mandated minimum public shareholding of 25% for listed companies (public sector companies: 10%, being raised to 25%). Strengthened independent director requirements. Mandatory whistle-blower mechanism. Challenges: (1) Retail investor protection in derivatives — 89% of F&O traders lose money. SEBI tightening regulations. (2) SME IPO quality — many small IPOs with questionable financials. SEBI increasing scrutiny. (3) Finfluencer regulation — social media financial influencers giving unregistered investment advice. SEBI banned registered entities from associating with unregulated finfluencers (2024). (4) Cyber security — increasing threat to market infrastructure. SEBI mandated cyber security framework for exchanges, depositories, and intermediaries.
Relevant Exams
Financial markets are heavily tested in banking exams. IBPS PO/Clerk exams regularly ask about money market instruments (T-Bills, CP, CD), SEBI functions, and stock exchange indices. UPSC tests the broader market structure, bond yield dynamics, and government securities. SSC exams ask factual questions about BSE/NSE, mutual fund types, and SEBI headquarters.