Financial markets: SEBI, capital markets & financial inclusion
SEBI's regulatory architecture, primary and secondary capital markets, money markets, and India's financial-inclusion drive from Jan Dhan to JAM.
The regulator: SEBI
The Securities and Exchange Board of India was constituted as a non-statutory body in April 1988 and given statutory teeth by the SEBI Act, 1992, in the aftermath of the Harshad Mehta securities scam (1992). SEBI's three-fold mandate under the Act's preamble is to protect investor interests, develop the securities market, and regulate it. It is a quasi-legislative, quasi-executive and quasi-judicial body: it frames regulations, conducts investigations and search-and-seizure (powers strengthened after the 2002 amendment), and adjudicates penalties. Appeals against SEBI orders go to the Securities Appellate Tribunal (SAT), and from SAT to the Supreme Court on a question of law.
SEBI regulates stock exchanges (BSE, established 1875, Asia's oldest; NSE, operational 1994), depositories (NSDL, 1996; CDSL, 1999, operating under the Depositories Act, 1996, which dematerialised shares), mutual funds, FPIs, credit-rating agencies, merchant bankers and market intermediaries. The SEBI (LODR) Regulations, 2015 govern listing and disclosure obligations.
Primary versus secondary markets
The primary market is where securities are first issued — Initial Public Offerings (IPOs), Follow-on Public Offers, rights issues and private placements. It channels household savings directly into corporate capital formation. The secondary market is where already-issued securities are traded between investors, providing liquidity and price discovery; it does not raise fresh capital for the issuer.
The capital market deals in long-term instruments (equity, debentures, bonds), while the money market handles short-term instruments of up to one year — Treasury Bills, Commercial Paper, Certificates of Deposit, and the Call Money market — and is regulated primarily by the RBI, not SEBI. This regulatory division (RBI for money/debt and government securities, SEBI for equity and corporate capital markets) is a frequent Prelims trap.
Instruments and reforms
Key instruments candidates must distinguish: ADRs/GDRs (depository receipts letting Indian firms raise capital abroad), P-Notes (participatory notes issued by FPIs to investors who do not register with SEBI, long flagged for opacity), REITs and InvITs (introduced via SEBI regulations in 2014 to monetise real estate and infrastructure), and municipal bonds (Pune issued India's first SEBI-regulated muni bond in 2017).
Major reforms include the switch to the rolling settlement T+2 (2003), then T+1 (phased from 2022, completed January 2023) — making India one of the first large markets on T+1; the abolition of the badla system; introduction of ASBA (Applications Supported by Blocked Amount) for IPOs; and margin trading and the SECC framework. The Securities Contracts (Regulation) Act, 1956 remains the foundational statute governing exchanges and contracts. India's GIFT City IFSC, regulated since 2020 by the International Financial Services Centres Authority (IFSCA), marks the next frontier of capital-market liberalisation.
