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Regulatory Changes in Indian Capital Markets: Recent Developments and Their Impact

-By Koninika Mitra

The Indian growth story has dominated news headlines and economic forecasts over the last few years. All eyes are fixed on the country's performance at the global stage as it prepares to claim two key milestones in the coming decade: emerging as the world's third largest economy by 2027 and reaching a GDP of USD 10 trillion by 2033. Several macro trends serve as tailwinds, from a widening working population to favourable supply chain environment, but India's capital markets stand out as a critical growth lever, encouraging economic activity and attracting investment domestically and from across the World. 

In search of higher returns, Indian investors are increasingly choosing capital markets, often over bank deposits. Interest from retail investors is particularly high, evidenced by a sharp 20% per annum growth in demat accounts since FY13, to the current 151 million.2 India’s depth of investor coverage has also increased substantially - today, only 31 pin codes out of over 19000 do not have capital market investors in India. There are several factors driving this shift. 

 

The Major Modifications initiated in Capital Market of India includes:-

SEBI primarily began to regulate the pursuit of the merchant banks, to check the operations of mutual funds, to work as a supporter of the stock exchange activities and to operate as a regulatory authority of additional issues of companies. SEBI started with the fundamental objective, "to secure the interest of investors in securities market and for consequences connected with that."

  • Grow of merchant banking activities: A quite few, Indian and foreign commercial banks established their merchant banking divisions over the past few years. These divisions came up with financial services such as funding facilities, issue systematize, consultancy services, etc. It has demonstrated as a support to factors related to the capital market.

  • Candid performance of Indian economy: In recent years, Indian economy is expanding rapidly. It has captivated a huge income of Foreign Institutional Investments (FII). The enormous entry of FIIs in the Indian capital market has given great value for the Indian investors in recent times. Likewise, many new companies are growing on the perspective of the Indian capital market to raise capital for their growth.

  • Rising electronic transactions: Due to technological innovations in the recent years. The physical deal with paper work is reduced. Now paperless transactions are rising at a fast rate. It is cost effective, saves time and saves energy of investors. Thus, it had produced investing safer and ease for more people to join the capital market.

  • Growing mutual fund industry: The growing of mutual funds in India has helped the capital market to expand. Public sector banks, foreign banks, financial institutions and joint mutual funds between the Indian and foreign firms initiated many new funds. A wide ranging in terms of schemes, maturity, etc. has taken place in mutual funds in India. It has given large choice for the common lender to enter the capital market. 

  • Growing stock exchanges: A few of various Stock Exchanges in India are increasing. At the start, BSE was the main exchange, but now after the raise of the NSE and the OTCEI, stock exchanges have stretched over the country. Recently a new integrated Stock Exchange of India has added with the existing stock exchanges.


  • Investor's protection: Under the sphere of the SEBI the Central Government of India has elevated the Investors Education and Protection Fund (IEPF). It works in instructing and guiding investors. It strives to protect the concern of the small investors from frauds in the capital market.

  • Growth of derivative transactions: SEBI introduced the future and options transactions. These ingenious products have given variation for the investment leading to the growth of the capital market.

  • Insurance sector reforms: The Insurance Regulatory and Development Authority (IRDA) facilitated the entry of the private insurance firms in India. Many insurance companies invested their money in the capital market, it has expanded.

  • Commodity trading: Beside with the trading of ordinary securities, the trading in commodities also promoted. The Multi Commodity Exchange (MCX) is established. The magnitude of such trades is growing at a magnificent rate. Apart from these reforms the setting up of Clearing Corporation of India Limited (CCIL), Venture Funds, etc., have led to the enormous growth of Indian capital market.

 

RISK MANAGEMENT

SEBI has launched several initiatives and is developing new measures to strengthen the capital markets and ensure they stay resilient. Doing so enhances overall market integrity and protects investor interests. Introduction of ASBA for primary and secondary markets: Application Supported by ASBA allows investors to apply for shares in IPOs and rights issues without making the upfront payment. While ASBA for primary markets has existed since 2009, UPI-based ASBA was introduced in 2019, offering a simplified IPO application process for retail investors. Under this feature, investors authorize their bank accounts to block the requisite application amount, which remains in investors’ bank account until the finalization of share allotment. The UPI interface facilitates seamless fund blocking and ensures a smoother and more efficient IPO application experience for investors. Introduction of ASBA in primary markets could potentially accrue up to INR 320 crore.

In June 2023, SEBI introduced an ASBA-like facility for secondary markets which went live in January 2024. Investors can trade in secondary markets based on blocked funds in their own bank accounts, eliminating the need to transfer funds to brokers. It can also unlock interest income on investors’ funds, otherwise remaining with brokers till settlement of the trades. ASBA in secondary market can potentially unlock up to INR 2800 crore42 of annual benefits for investors, in the scenario where all investors shift to ASBA-based trading.

IMPACTS ON PRIMARY MARKET AND SECONDARY MARKET:

IPO listings grew six times to 209 in FY24 from 33 in FY13. SME listings jumped six times too in the same period. In fact, India was ranked 1st globally, in terms of number of IPO listings and 5th in terms of capital raised through IPOs in FY24. Among economic well-being and a favourable funding environment, primary markets remained firm during FY24, facilitating capital formation of ₹10.9 lakh crore, which approximates 29% of the gross fixed capital formation of private and public corporations during FY24, compared to ₹9.3 lakh crore in FY23.

Nifty 50 has outperformed leading global indices over recent years and India is the 4th largest capital market by market capitalization. Domestic institutional investors have played a significant role in driving optimism by investing aggressively in Indian equities; with their increasing share of holding in listed companies. Further, Indian exchange continues to be largest derivatives exchange in the world, fifth year in a row, by number of contracts traded.

 

FUTURE OPPORTUNITIES:

Empowered by progressive policies and comprehensive reforms, the Indian capital markets have established a resilient foundation. However, to strengthen their position across the three regulatory functions—investor enablement, market development, risk management and governance. An analysis of gaps in comparison to other global hubs, along with market survey data, has revealed five key categories and 11 specific areas of opportunity that could be considered.


CONCLUSION

Indian capital markets are amid a transformational phase, spurred by pivotal, industry first technological innovations and reforms. At the heart of these changes is the vision to offer ample benefits, access and control to the Indian investor community while ensuring guardrails for protection. As the world moves into an era chiefly influenced by technology and more investors participate in these markets, the regulators and MII leaders can help foster a culture of innovation. Achieving this could mean continued collaboration among diverse stakeholders, consistent review of regulations, and swift tackling of emerging risks. It could also mean India developing critical reforms that emerge as the gold standard for capital market innovation and investor experience.

 

 

 

 

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