Capital Markets, Money Markets and SEBI

The financial system at a glance

Financial markets bring savers and borrowers together. They are classified by the maturity of the instruments traded:

• The money market deals in short-term funds (up to one year). It is regulated by the RBI.
• The capital market deals in long-term funds (equity and debt). It is regulated mainly by SEBI.

Capital markets have a primary market, where new issues raise fresh capital through IPOs, FPOs and rights issues, and a secondary market, where existing securities trade on stock exchanges.

Money market instruments

• Call money: overnight interbank lending. Notice money runs 2–14 days and term money 15 days to one year.
• Treasury bills (T-bills): issued by the RBI on behalf of the Centre at a discount, in 91-, 182- and 364-day maturities. They are zero-coupon.
• Cash Management Bills: very short-term government paper, used for temporary cash mismatches.
• Commercial Paper (CP): unsecured short-term notes issued by corporates, NBFCs and financial institutions (7 days to 1 year).
• Certificates of Deposit (CDs): issued by banks (7 days to 1 year) and by financial institutions (1–3 years).
• Repo and TREPS (Tri-party Repo): collateralised borrowing. TREPS is cleared through the Clearing Corporation of India (CCIL).

The weighted average call rate is the RBI's operating target.

Government securities (G-secs)

• Dated securities: long-term bonds of the Centre.
• State Development Loans (SDLs): state bonds.

Bond prices and yields move inversely. When yields rise, prices fall.

Access and index inclusion:

• The RBI Retail Direct scheme (2021) lets individuals buy G-secs directly.
• Fully Accessible Route (FAR) bonds were opened to foreign investors in 2020.
• India's inclusion in J.P. Morgan's GBI-EM index began in June 2024, phased over ten months. Bloomberg followed in January 2025.

Sovereign Green Bonds were first issued in January 2023. Sovereign Gold Bonds (2015) are denominated in grams of gold; no new tranches were issued after early 2024.

Capital market structure

Stock exchanges:

• BSE (1875), Asia's oldest, with the Sensex of 30 stocks.
• NSE (1992, started trading in 1994), with the Nifty 50.
• NSE IFSC and India INX operate at GIFT City, an International Financial Services Centre regulated by the IFSCA (2020).

Intermediaries:

• brokers;
• depositories: NSDL (1996) and CDSL (1999), which hold securities in dematerialised form;
• depository participants;
• clearing corporations;
• registrars;
• merchant bankers;
• credit rating agencies such as CRISIL, ICRA and CARE.

Investment vehicles:

• Mutual funds: AUM over ₹70 lakh crore by 2025, with a large and steady inflow through Systematic Investment Plans (SIPs).
• Exchange-traded funds.
• REITs and InvITs (Real Estate and Infrastructure Investment Trusts, regulated by SEBI from 2014), which let infrastructure assets be monetised.
• Alternative Investment Funds (AIFs).
• Municipal bonds: Pune (2017), and Ghaziabad issued the first green municipal bond in 2021.

Settlement: India moved to T+1 settlement for equities (completed January 2023) and introduced an optional T+0 settlement from 2024.

SEBI: the market regulator

• Set up: constituted in 1988 as a non-statutory body. It became statutory under the SEBI Act 1992, after the Harshad Mehta scam.
• Composition: a chairperson, two members from the finance ministry, one from the RBI and five others.
• Powers: quasi-legislative (regulations), quasi-executive (investigations, inspections) and quasi-judicial (penalties).
• Appeals: to the Securities Appellate Tribunal (SAT), then the Supreme Court.

Key reforms:

• the abolition of the Controller of Capital Issues (1992);
• screen-based trading;
• dematerialisation;
• free pricing of IPOs;
• ASBA/UPI-based IPO applications;
• insider trading rules (2015 PIT Regulations);
• listing obligations (LODR 2015);
• ESG and Business Responsibility and Sustainability Reporting (BRSR), mandatory for the top 1,000 listed companies from 2022–23;
• the Social Stock Exchange framework (2022);
• curbs on retail futures and options (F&O) speculation (2024). SEBI studies found that about nine in ten individual F&O traders lose money.

A proposed Securities Markets Code to consolidate the SEBI Act, the Depositories Act and the Securities Contracts (Regulation) Act was announced in the 2025–26 Budget. Treat its status as per the latest Bill.

Commodities: the Forward Markets Commission merged with SEBI in 2015, so SEBI now regulates commodity derivatives on MCX and NCDEX.

Analysis: deepening markets

Strengths:

• India's equity market capitalisation is among the world's largest five, at over $4 trillion.
• Retail participation has surged: demat accounts crossed 19 crore in 2025.
• Domestic institutional investors are increasingly offsetting FPI outflows.

Weaknesses:

• A shallow corporate bond market, dominated by AAA-rated issuers and private placements.
• Household savings still go largely to physical assets.
• Risks from speculative trading, SME IPO irregularities and finfluencers.

Reforms needed:

• deepen the bond market through credit enhancement and repo in corporate bonds;
• strengthen investor education;
• improve SEBI's own governance, after questions raised in 2024 about conflict-of-interest disclosures. A high-level committee on SEBI's conflict rules was formed in 2025.

Common prelims traps

• T-bills are issued by the RBI on behalf of the Centre only. States do not issue T-bills.
• Commercial paper is unsecured; CDs are issued by banks.
• SEBI became statutory in 1992, not 1988.
• CCIL is the central counterparty for G-sec and forex trades, not stock market trades.

Quick self-test

1. *What happens to bond prices when interest rates rise?* They fall.
2. *What is a REIT?* A trust that pools money to own income-producing real estate; its units trade on exchanges.
3. *Where do appeals against SEBI orders go?* The Securities Appellate Tribunal.

Practice: Mains question

*"India's capital market has deepened rapidly, but the corporate bond market remains underdeveloped." Analyse the reasons and suggest measures. (250 words)*

How the pieces connect: a worked example

Suppose a company wants to build a solar park.

Short-term funding: it might first issue commercial paper to fund working capital.

Long-term funding: it would then raise money through some mix of:

• an IPO in the primary market;
• bank loans;
• corporate bonds, rated by a credit rating agency and placed with mutual funds and insurers.

After listing: the shares trade on the NSE/BSE. Investors hold them in demat form with NSDL or CDSL. Trades settle on T+1 through the clearing corporation.

Recycling capital: once the park is generating income, the company can move it into an InvIT and sell units to investors. The proceeds fund new projects.

The same logic underlies the National Monetisation Pipeline (2021), which targeted about ₹6 lakh crore from leasing brownfield public infrastructure assets over 2022–25. A second pipeline was announced in the 2025–26 Budget.

SEBI's protective role: it protects investors at every stage, through:

• disclosure in the offer document;
• fair pricing;
• surveillance against insider trading and price manipulation;
• grievance redressal through SCORES, and the online dispute resolution platform (2023).

Why this matters for UPSC

Financial market questions link to several larger themes:

• mobilising savings for investment (GS3, investment models);
• financial stability (contagion from NBFCs or market crashes);
• governance (regulatory independence and accountability).

Answers should show this link rather than listing instruments.

Key terms

• Market capitalisation: share price multiplied by the number of shares.
• Free float: the shares available for public trading, which is the basis of index weighting.
• Derivatives: contracts whose value derives from an underlying asset, such as futures and options.
• Short selling: selling borrowed securities, expecting their price to fall.