Ayush Patria (Associate)

BACKGROUND

The Indian securities markets have seen notable transformations in recent times. The regulatory body’s efforts to improve and diversify the securities markets are expounded upon in this publication. These include expanding the base of issuers and participants to promote inclusive growth, encouraging innovation in financial products, improving market efficiency through timely and appropriate regulatory actions, and guaranteeing adherence to regulatory standards to preserve market integrity. With its emphasis on current changes and the opportunities they bring, this report offers insightful information to investors, intermediaries, and regulatory agencies outside of India, therefore establishing the Indian securities market as a desirable place to make investments. The crucial conclusions about Investor Interest and Innovative Instruments that are provided in the special issue are summed up in the document’s conclusion.

Keywords: SEBI, REITs, InvITs, Corporate Governance, ESG, Market Liquidity, Market Volatility, Insider Trading

INTRODUCTION

Globally, securities markets are essential for promoting economic expansion and development. The way financial systems have changed over time, moving from largely bank-based intermediation to more diverse market-based processes, highlights how dynamic the world of finance is. The securities market has experienced significant growth over time, offering investors a stable platform to distribute their investments over a wide range of asset types. These consist of, but are not restricted to, insurance, mutual funds, real estate, fixed deposits, pension funds, stocks, commodities, and currencies.

The potential of the securities markets to mobilize savings through indirect routes in addition to direct investments is a significant feature. Institutional investors like mutual funds, banks, and insurance firms channel a significant portion of public savings into the securities market. The fact that there are two ways to invest shows how open and convenient the securities markets are for both individual and institutional users.[1]

Serving the varying requirements of numerous stakeholders is just one aspect of the securities markets’ complicated responsibility. They play a key role in capital production, which is essential for the growth of the economy. They also provide opportunities for investors to make money and for corporations to increase their worth. The securities markets have undergone more diversification recently in order to accommodate novel financing techniques. The real estate and infrastructure sectors can now be invested in thanks to the introduction of Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) as thematic financing vehicles. Furthermore, the introduction of social stock markets has made it easier for investors to make transparent and socially conscious decisions, and green bonds and frameworks for financing environmental, social, and governance (ESG) are advancing sustainable development.[2]

Securities markets are essential for producing jobs, boosting investor wealth, and promoting economic dynamism in addition to their function in financing and investing. They support effective price discovery for underlying assets, which enhances the stability and general effectiveness of the financial system.

However, dishonest, and fraudulent activities like insider trading and price manipulation constantly pose a danger to the integrity of the securities markets. Vigilant regulatory scrutiny is necessary to safeguard investor interests and preserve market integrity in light of these issues. Global regulators endeavour to modify and enhance their regulatory structures in reaction to the dynamic market environment, especially with the introduction of technical breakthroughs in the industry. This entails creating and revising legislation, putting in place thorough risk management frameworks, and improving monitoring and supervision mechanisms. Crucial elements of these regulatory initiatives include rigorous compliance controls, prompt and sufficient disclosure, and efficient investigation procedures.[3]

Expansion and Advancement of the Indian Securities Markets

In the centre of Mumbai (India), the Bombay Stock Exchange (BSE), established in 1875, is a shining example of both innovation and history. Founded under a banyan tree, this historic institution has developed into Asia’s oldest stock market. The BSE’s transition from an antiquated open outcry system to a cutting-edge blend of electronic and physical trading platforms demonstrates how quickly India has adopted new technologies in the financial industry. This development confirms that the Indian securities market is among the world’s most advanced and established.[4]

The Securities and Exchange Board of India (SEBI) is the regulatory pillar supporting the Indian securities market. Founded with the dual objectives of enforcing healthy market behaviours and regulating them, SEBI has played a pivotal role in facilitating the assimilation of technical advancements into the regulatory framework governing the market. Its initiatives have made a major contribution to the establishment of a favourable climate for the creation of new financial instruments, the entry of creative market intermediaries, and the execution of regulatory changes intended to protect the integrity of the market while promoting market expansion. In order to overcome instances of unfair practices and market manipulation, SEBI’s proactive approach has been essential. This has strengthened investor trust and improved the stability of the regulatory ecosystem.

Other important stock exchanges in India, besides the BSE, include the National Stock Exchange of India (NSE) and the Metropolitan Stock Exchange of India (MSEI), which was originally known as the XMSE. As India’s first demutualized computerized stock exchange, the NSE was founded in 1994 and revolutionized trading procedures across the nation. The 2008 establishment of the MSEI changed the face of Indian stock markets even more. The BSE, NSE, and MSEI are at the centre of a more consolidated and effective market structure that has developed over time as a result of the regional stock exchanges’ amalgamation.[5]

Commodity derivatives have a long history in India, having evolved from local commodity exchanges to major national exchanges like the National Commodity and Derivatives Exchange (NCDEX) and the Multi Commodity Exchange (MCX), which were both founded in 2003. The Forward Markets Commission (FMC) and SEBI’s merger in 2015 opened the door for established stock exchanges, such as the BSE and NSE, to enter the commodities trading business, expanding the size of the Indian commodities market.[6]

The formation of the Central Depository Services (India) Limited (CDSL) in 1999 and the National Securities Depository Limited (NSDL) in 1996 significantly strengthened the infrastructure that underpins trading in securities and commodities in India. These depositories have greatly improved the efficiency and security of trading by becoming instrumental in the dematerialization of securities. The number of demat accounts has increased significantly as a result of the implementation of online KYC procedures, which is indicative of the Indian public’s increasing accessibility to and attractiveness of stock market investing.

In contrast, the Indian market offers better returns than both developing and developed markets due to its remarkable resilience and development potential. Over a range of time periods, the Indian market routinely surpasses its worldwide competitors, including the US market, according to the compound annual growth rate (CAGR) research. The strength and dynamism of the Indian market are further highlighted by the country’s considerable contribution to the global landscape of listed firms, which complements this impressive achievement.

With the introduction of stock derivatives in the early 2000s and the subsequent inclusion of commodity, currency, and interest rate derivatives, the derivatives market in India has experienced exponential expansion. Particularly the NSE has become well-known across the world for the volume of derivatives trading it conducts. It is a leader in a number of derivative products, such as currency and index options. This prominence draws attention to how deep and sophisticated the derivatives market is in India.[7]

Since its founding with the Unit Trust of India (UTI) in 1963, the mutual fund sector in India has had a spectacular five-phase expansion, culminating in its current state where the Asset Under Management (AUM) has risen over ₹40 trillion. This growth trajectory has been defined by the gradual opening of the mutual fund industry to international, private, and public sector banks. This has resulted in a competitive and varied sector that currently includes 45 mutual fund firms, with more on the verge of entering the market.

SEBI’S MOST CURRENT INITIATIVES TO DEVELOP INDIAN SECURITIES

Innovative Financial Instruments

The financial market is a sophisticated ecosystem that is home to a wide range of cutting-edge financial products made to satisfy different finance and investing requirements. Among them are Zero Coupon Zero Principal Instruments, Green Bonds, Municipal Bonds, Infrastructure Investment Trusts (InvITs), and Real Estate Investment Trusts (REITs). Each of these tools has a distinct function and supports particular industries or programs, which reflects how the financial markets are changing.

• Zero Coupon Zero Principal Instruments – A new strategy in the financial markets, Zero Coupon Zero Principal Instruments are aimed mainly at the funding needs of nonprofit organizations. These do not pay back the original amount at maturity or provide recurring interest payments (coupons), in contrast to conventional financial instruments. Rather, they are made to be exchanged on the Social Stock Exchange, a platform that makes it easier for social entrepreneurs to raise money by listing and trading shares. Despite the lack of cash returns in the form of coupons or principal repayments, this novel method gives investors the freedom to purchase and sell these instruments on the market while still supporting social causes.[8]
• Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) – Investors can purchase income-producing real estate and infrastructure assets through REITs and InvITs, respectively. In order to acquire, manage, or finance income-producing real estate across a variety of property industries, REITs combine funds. These trusts make high-quality investments more accessible by giving investors the chance to make modest capital outlays while still investing in premium real estate assets. In a similar vein, InvITs are intended to encourage investment in a wide range of assets, including ports, highways, power transmission, and renewable energy projects. Both REITs and InvITs, which were introduced in India in 2013, seek to give investors another way to finance and participate in vital industries while also encouraging asset diversification and introducing them to a new class of assets.[9]
• Green Bonds – Green bonds have become an essential source of funding for sustainable and environmental initiatives. In 2008, the World Bank introduced the first Green Bond, establishing a standard for financing climate change mitigation and environmentally beneficial project promotion. In response to a consultation paper published in 2015,[10] the SEBI established a framework for the issuance of Green Bonds in that country in 2017.[11] The purpose of this action was to promote the fundraising of green initiatives. Since then, fifteen firms have raised a total of ₹4539 crores by issuing Green Bonds using this structure, demonstrating the rising significance of sustainable financing in tackling environmental concerns.
• Municipal Bonds – Municipal corporations and other similar organizations issue municipal bonds, which are debt instruments, to fund public initiatives like building schools, hospitals, and infrastructure. Given that municipalities require access to financial markets in order to get finance, SEBI has approved the issue of Municipal Bonds in India. In 2017, the Pune Municipal Corporation initiated this endeavour by being the first to issue a Municipal Bond. Since then, fourteen municipal corporations have collected a total of ₹2183.90 crores through the issuance of Municipal Bonds, demonstrating their ability to provide funding for public welfare and urban development initiatives around the nation.

New Intermediaries

• Gold Spot Exchange – The Indian Finance Minister announced in the Union Budget of 2021–2022 the creation of a gold spot market operating under the SEBI’s regulatory purview. With the introduction of a regulated trading environment for physical gold, this effort has the potential to completely transform the Indian gold trading market.[12] The following are the main goals of this exchange –
• The goal of the gold spot exchange is to increase investor and trader trust by offering a transparent trading system. This openness reduces the risks related to fraud and impurities by covering price, trading procedures, and gold purity.
• The exchange is made to make it easier to trade as well as efficiently deliver gold in person. With the help of this functionality, traders should be able to easily convert their digital holdings into real gold and vice versa, bridging the gap between virtual trading platforms and the actual gold market.
• Integrating gold trading into the larger financial markets is one of the ground-breaking goals of the gold spot exchange. A wider range of investors are expected to find gold to be a more appealing and accessible asset class as a result of this integration, which is expected to open up new trading and investing options.
• By guaranteeing that the prices of gold on the exchange accurately reflect supply and demand dynamics, the exchange hopes to improve the process of price discovery. Because it helps traders and investors make well-informed decisions based on reliable market data, this efficiency is essential.
• India’s ultimate goal is to become a global gold price-setting nation through the development of a strong and open gold trading platform. This action may have huge effects on the global gold market due to India’s substantial demand for the metal.
• Social Stock Exchange (SSE) – The SSE is a cutting-edge platform that was introduced by the Finance Minister in the 2019-20’s budget address and later launched by SEBI. Its purpose is to link social entrepreneurs with possible investors.[13] The SSE is a cutting-edge idea intended to:
• Social enterprises, such as For-Profit Enterprises (FPEs) and Not-for-Profit Organizations (NPOs), can raise money through the SSE. These organizations have to prove that their main objective is social impact, with an emphasis on helping marginalized or underprivileged groups or areas.
• In 2020, a working group committee was formed by SEBI, and based on their suggestions, a Technical Group was formed to develop a regulatory framework for the SSE. For the SSE to function honourably, transparently, and in accordance with its societal goals, this framework is essential.
• Unusual financial products, including the zero-coupon, zero-principal instrument, have been introduced by the SSE. These instruments provide social entrepreneurs with alternatives to typical financing channels, specifically designed to fulfil their funding needs.

Regulatory Developments

Leading the way in regulatory innovations to improve investor safety and convenience in India’s financial markets is the SEBI. This thorough analysis explores a number of important changes and programs that SEBI has implemented, emphasizing their importance and effects on different parties, including as investors, businesses, and market intermediaries.

• Digital Transformation in KYC Processes – The approval of online KYC standards by SEBI represents a significant advancement in the digitalization of investor onboarding procedures. With this change, anyone may open trading and Dematerialized (Demat) accounts, as well as mutual fund folios, with never-before-seen simplicity. SEBI has streamlined evidence of identity and address verification by doing away with the necessity for physical presence at intermediate offices by utilizing technology like eSign for electronic signatures and DigiLocker for secure document preservation. This program, which addressed the issues of lockdowns and social distancing norms, gained special traction during the COVID-19 epidemic and resulted in a notable rise in Demat account openings.[14]
• Facilitating Capital Raising Amidst the Pandemic – Aware of the financial burden the COVID-19 pandemic was placing on businesses, SEBI temporarily eased capital raising regulations. Among these changes were shortened minimum subscription requirements, lowered average market capitalization thresholds for eligibility, and accelerated procedures for rights and public offerings by listed companies. These actions gave businesses the much-needed cash support they needed to better manage the economic turbulence brought on by the epidemic.[15]
• Introduction of the Accredited Investors Category – An important step in tailoring investment frameworks based on investor characteristics was taken by SEBI with the establishment of the Accredited Investors category, which has distinct investment thresholds for Alternative Investment Funds (AIF) and Portfolio Management Services (PMS). This program allows high net worth people who are willing to take on more risk the opportunity to invest below the conventional minimum investment limitations. By allowing for more specialized and advanced investment techniques, this categorization seeks to widen the investing environment.[16]
• Strengthening of Margin Obligations and Risk Management – SEBI revised margin collection regulations, requiring upfront margin collection at the customer level, in an effort to improve market integrity and safeguard investor interests. This reform guarantees a more transparent and safe trading environment, in conjunction with the implementation of a system for the segregation and client-level monitoring of collateral. By reducing the possibility of client securities being stolen and of one customer using another’s assets to satisfy commitments, these steps increase investor trust.[17]
• Investor Education and Interoperability Among Clearing Corporations – SEBI’s dedication to informed investing is demonstrated by the Securities Market Trainers (SMARTs) initiative, which aims to improve investor awareness and education throughout India. Meanwhile, by enabling market players to combine clearing and settlement activities, independent of the trading venue, the framework for interoperability across clearing firms improves operational efficiency and lowers systemic risk.[18]
• Innovation in Investment Products and Corporate Governance – Additional regulatory actions, such as the implementation of the T+1 settlement cycle, the Business Responsibility and Sustainability Report (BRSR), and modifications to the Offer for Sale (OFS) framework, highlight SEBI’s ongoing efforts to improve market efficiency, investor protection, and transparency. A more inclusive approach to stakeholder engagement in the capital markets, more efficient trading and settlement procedures, and reporting on environmental and social governance are only a few of the areas of market operations that these reforms address.
• Regulatory Measures for Transparency and Market Efficiency – Additional regulatory actions highlight SEBI’s ongoing efforts to improve market transparency, efficiency, and investor protection. These actions include the implementation of the Business Responsibility and Sustainability Report (BRSR), the T+1 settlement cycle, and modifications to the Offer for Sale (OFS) framework. These changes tackle a number of issues related to market operations, such as more inclusive stakeholder engagement in the capital markets, more efficient trading and settlement procedures, and reporting requirements related to social and environmental governance.

CONCLUSION

Following these regulatory changes, the Indian securities market finds itself at a turning point. The need for market players to make short-term changes and the dynamic nature of investment plans highlight the market’s flexibility and durability. Long-term effects, however, are what are most promising and have the most potential for revolutionary development. A more stable regulatory environment is anticipated, which will boost investor confidence and provide a favourable climate for both local and foreign investment. In addition, the launch of novel financial products and the integration of state-of-the-art technology are about to reshape the Indian financial industry and push it to new frontiers of creativity and competitiveness.

REFERENCES

• ESG: How Is India Placed To Adopt The ESG Framework, Mondaq (Apr. 25, 2023), https://www.mondaq.com/india/diversity-equity–inclusion/1308412/esg-how-is-india-placed-to-adopt-the-esg-framework.
• Recent Developments By SEBI On Capital Market Activities, Mandaq (Jul. 14, 2021), https://www.mondaq.com/india/securities/1090490/recent-developments-by-sebi-on-capital-market-activities.
• What’s the Difference Between Saving and Investing?, Morgon Stanley (Feb. 15, 2024; 02:11 PM), https://advisor.morganstanley.com/the-legacy-group-of-huntsville/articles/investing/whats-the-difference-between-saving.
• S.O. 3210(E) – Declaration of zero coupon zero principal instruments as securities under the Securities Contracts (Regulation) Act, 1956, Securities Exchange Board of India (Jul. 15, 2022).
• SEBI/HO/DDHS/DDHS_Div3/P/CIR/2021/674 – Master Circular for Real Estate Investment Trusts (REITs), Securities Exchange Board of India (Nov. 29, 2021).
• CIR/IMD/DF/51/2017 – Disclosure Requirements for Issuance and Listing of Green Debt Securities, Securities Exchange Board of India (May 30, 2017).
• SEBI/HO/CDMRD/DMP/CIR/P/2022/07 – Framework for operationalizing the Gold Exchange in India, Securities Board of India (Jan. 10, 2022).
• SEBI/HO/CFD/PoD-1/P/CIR/2022/120 – Framework on Social Stock Exchange, Securities Exchange Board of India (Sep. 19, 2022).
• PR No.: 25/2020 – SEBI eases the Know Your Client (KYC) Process by enabling online KYC, use of Technology/ App by the registered intermediary, Securities Board of India (Apr. 29, 2020).
• PR No.: 23/2020 – Measures to further facilitate fund raising from capital markets in the backdrop of COVID-19 pandemic, Securities Board of India (Apr. 21, 2020).
• SEBI/HO/IMD/IMD-I DOF1/P/CIR/2021/694 – Investment Advisory Services for Accredited Investors, Securities Exchange Board of India (Dec. 21, 2021).
• SEBI/HO/MIRSD/DOP/CIR/P/2020/28 – Margin obligations to be given by way of Pledge/ Re-pledge in the Depository System, Securities Board of India (Feb. 25, 2020).
• PR No.: 58/2020 – SEBI Chairman launches Securities Market Trainers (SMARTs) Program – a new SEBI initiative for enhancing Investor Education activities, Securities Exchange Board of India (Nov. 25, 2020).
• A flourishing India – ANNUAL REPORT 2021-2022, National Stock Exchange of India Limited, https://static.nseindia.com//s3fs-public/inline-files/NSE%20Annual%20Report%202022%20%281%29.pdf.

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[1] What’s the Difference Between Saving and Investing?, Morgon Stanley (Feb. 15, 2024; 02:11 PM), https://advisor.morganstanley.com/the-legacy-group-of-huntsville/articles/investing/whats-the-difference-between-saving.

[2] ESG: How Is India Placed To Adopt The ESG Framework, Mondaq (Apr. 25, 2023), https://www.mondaq.com/india/diversity-equity–inclusion/1308412/esg-how-is-india-placed-to-adopt-the-esg-framework.

[3] Ibid.

[4] Bombay Stock Exchange (BSE), Equirus Health (Feb. 17, 2024; 02:21 PM), https://www.equiruswealth.com/glossary/bombay-stock-exchange-bse.

[5] A Study on the “Commodity Derivatives Market and Development In India-Towards Sustainability”, 2(8), RESEARCH HUB – International Multidisciplinary Research Journal (RHIMRJ) 1 (2015).

[6] Ibid.

[7] A flourishing India – ANNUAL REPORT 2021-2022, National Stock Exchange of India Limited, https://static.nseindia.com//s3fs-public/inline-files/NSE%20Annual%20Report%202022%20%281%29.pdf.

[8] S.O. 3210(E) – Declaration of zero coupon zero principal instruments as securities under the Securities Contracts (Regulation) Act, 1956, Securities Exchange Board of India (Jul. 15, 2022).

[9] SEBI/HO/DDHS/DDHS_Div3/P/CIR/2021/674 – Master Circular for Real Estate Investment Trusts (REITs), Securities Exchange Board of India (Nov. 29, 2021).

[10] Concept paper for issuance of Green Bonds, Securities Board of India, (Dec. 03, 2015).

[11] CIR/IMD/DF/51/2017 – Disclosure Requirements for Issuance and Listing of Green Debt Securities, Securities Exchange Board of India (May 30, 2017).

[12] SEBI/HO/CDMRD/DMP/CIR/P/2022/07 – Framework for operationalizing the Gold Exchange in India, Securities Board of India (Jan. 10, 2022).

[13] SEBI/HO/CFD/PoD-1/P/CIR/2022/120 – Framework on Social Stock Exchange, Securities Exchange Board of India (Sep. 19, 2022).

[14] PR No.: 25/2020 – SEBI eases the Know Your Client (KYC) Process by enabling online KYC, use of Technology/ App by the registered intermediary, Securities Board of India (Apr. 29, 2020).

[15] PR No.: 23/2020 – Measures to further facilitate fund raising from capital markets in the backdrop of COVID-19 pandemic, Securities Board of India (Apr. 21, 2020).

[16] SEBI/HO/IMD/IMD-I DOF1/P/CIR/2021/694 – Investment Advisory Services for Accredited Investors, Securities Exchange Board of India (Dec. 21, 2021).

[17] SEBI/HO/MIRSD/DOP/CIR/P/2020/28 – Margin obligations to be given by way of Pledge/ Re-pledge in the Depository System, Securities Board of India (Feb. 25, 2020).

[18] PR No.: 58/2020 – SEBI Chairman launches Securities Market Trainers (SMARTs) Program – a new SEBI initiative for enhancing Investor Education activities, Securities Exchange Board of India (Nov. 25, 2020).