DAMODARAM SANJEEVAYYA

NATIONAL LAW UNIVERSITY

SABBAVARAM, VISHAKAPATNAM, A.P., India

IMPACT OF STOCK MARKET REGULATIONS ON CAPITAL MARKET

DEVELOPMENT AND INVESTOR PROTECTION IN INDIA

ECONOMICS II

SUBMITTED
TO

Prof. Abhishek Sinha

BY

SRIVATSA MEDIGA
23LLB110
3RD SEMESTER

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 ACKNOWLEDGEMENT

I would like to express my heartfelt gratitude to Prof. Abhishek Sinha for his invaluable
guidance, insights, and support throughout this project, titled Impact of Stock Market
Regulations on Capital Market Development and Investor Protection in India. His expertise and
encouragement have been instrumental in shaping my understanding of the complexities of stock
market regulations and their influence on investor protection in India. I am deeply appreciative of
his mentorship, which has greatly contributed to the successful completion of this study.

Srivatsa Mediga

23LLB110

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 SYNOPSIS

1. INTRODUCTION

This study examines the role of stock market regulations in shaping India’s capital market and
protecting investors. Stock markets play a crucial role in a nation’s economic growth by
facilitating capital formation and providing a platform for investment. Given India’s rapidly
growing economy, effective regulation is essential to maintain a transparent, efficient, and
investor-friendly market. This project explores the impact of regulatory frameworks, key
institutions, and policies on the development of capital markets in India and the degree to which
they safeguard investors' rights and interests.

2. OBJECTIVES OF THE STUDY

 To analyze the evolution of stock market regulations in India and their contribution to
market stability and investor confidence.
 To assess the effectiveness of current regulatory mechanisms in promoting fair trading
practices and transparency.
 To evaluate the role of stock market regulations in fostering capital market growth and
economic development.
 To explore investor protection mechanisms within the regulatory framework and their
impact on investor behavior and trust.

3. RESEARCH QUESTIONS

1. How have stock market regulations evolved in India to support capital market
development?
2. What impact do regulatory bodies (such as SEBI) have on promoting transparency,
reducing fraud, and ensuring investor protection?
3. What challenges do regulators face in balancing growth with investor protection in the
context of modern market demands?

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4. LITERATURE REVIEW

The literature review will focus on past studies regarding:

o The impact of regulatory reforms on capital markets and investor sentiment.

o Comparative analysis of regulatory frameworks in emerging and developed markets.
o Investor protection measures and their role in fostering economic growth.
o Case studies on SEBI's interventions and market reforms.

5. REGULATORY FRAMEWORK OVERVIEW

This section will outline the legal and regulatory structure governing the stock market in India,
primarily focusing on:

 The role of SEBI (Securities and Exchange Board of India) and its influence on market
development.
 Key laws such as the SEBI Act, 1992, the Securities Contracts (Regulation) Act, 1956, and the
Companies Act, 2013.
 Analysis of specific regulations aimed at enhancing market efficiency, transparency, and
investor protection.

6. RESEARCH METHODOLOGY

This study will employ a qualitative approach, utilizing:

 Data Collection: Secondary sources such as SEBI reports, policy documents, market analysis
papers, and investor surveys.
 Data Analysis: Comparative analysis of pre- and post-regulatory reform periods, evaluating
regulatory impacts on market trends and investor protection.

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 INTRODUCTION

The capital market is the backbone of every country as it can affect the financial position of the
country and regulate the economy. The heart of economic growth lies in the capital market which
helps in providing the allocation of funds and mobilization of resources. The major understanding
and regulation of the capital market have been an important requirement for the industrial and
commercial development of the country. The capital markets cater to the need for a long-term
fund that is required for the development of the industrial and commercial sectors.

CAPITAL MARKET IN INDIA: A BRIEF OVERVIEW

The capital market is the place that acts as the platform between the suppliers and the buyers. The
savings and investments are channelized between the persons who have capital and the person
who needs capital. In simpler terms, the market where buyers and sellers engage in trading of
financial securities like bonds, stocks, etc. However, the market is much wider than securities. The
participants during such transactions can be an individual as well as an institution.

It includes all types of lending and borrowing. The capital market is generally for the raising of
long-term funds. The markets deal mainly with debts and equity securities. There are different
types of buyers such as businessmen, companies, government or it can be general people. The
major regulatory body is the RBI(Reserve bank of India) assisted by the Ministry of Finance and
the SEBI(Security Exchange Board of India).

BACKGROUND

The capital markets of India have a golden history of approximately 200 years or more than 2
centuries. It dates back to the year 1875 when India was under the direct control of the British
Government and the Queen of England, the first time the Bombay Stock Exchange was set up and
led to the introduction of capital markets in India among the local people. There was hardly any
existence and role of the capital market as agriculture was the primary sector of the economy.

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The capital market was mostly dominated by government securities and there were a few
individual investors. It started flourishing in the early nineties with the introduction of
liberalization, globalization, and privatization and Sensex touched more than 4,000 points from
hardly a thousand.

FUNCTIONS OF CAPITAL MARKET

Many such functions depict the need for the capital market as they have primary functions such as
mobilizing resources of investments, helps in the facilitation of buying and selling of securities,
and formulation of effective and efficient price discovery. To settle the transactions as per the due
date or within the given time frame. The market provides an effective source of investment as well
as channels the funds of private and the government. The capital market has many such
institutions which can be classified as holding capital and supply them as securities. For example:

1. Commercial banks such as SBI, Citi Bank, etc.

2. Insurance companies such as LIC, HDFC, Bajaj Finserv, etc.

3. Specialised financial institutions such as IFCI, IDBI, UTI, etc.

4. Provident Fund Societies and other such institutions. There are also individual investors in the
market who supply their funds in the capital market. The market is based on lenders, ones who
supply funds and the borrowers, ones who demand funds.

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 CLASSIFICATION OF MARKET

The capital market can be classified as primary market and secondary market. The primary market
is also known as the Stock Market. This is also known as the new issue market as the investors
can buy securities directly from the company that issues. The securities are also known as primary
offerings or Initial Public Offerings (IPO) or they can also be raised through the right issue. The
company sells its stocks or shares to the general public and investors for generating the fund. It
deals with the securities that were not in existence previously and the fresh securities offered to
the public to invest for the first time.

The secondary market is for the buying and selling of securities that are already existing and
issued by the companies. They are also known as old capital markets. When the securities are first
initially offered to the public or get listed in the stock exchanges then it is dealt exclusively in the
stock exchange and further, the stock exchange is regulated by the Securities Exchange Board of
India. The stocks, shares, and bonds are bought and sold by the general public.

The market can also be classified on the type of securities as the stock market and the bond
market. The stock market is also known as the share market or equity market. It is a place where
the shares are bought and sold or the economic transactions that have a certain monetary value.
The price of shares is highly dynamic as it can change from the fluctuations of demand and supply
or the status of the company. The stock market has all the publicly listed companies that can be
owned by the private, government, or joint ventures.

The bond market is also known as the debt securities market in which the investors purchase the
securities in terms of bonds. The credit market can have various types of issue markets such as the
government issue market, the corporate debt issue market, etc.

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THE REGULATORY FRAMEWORK AND LEGISLATION : A DISCUSSION

The regulation of capital markets has been very important for development and growth as they
provide a stable, steady, and secure platform for both the suppliers and the buyers. If not then
there can be massive loss or gain in finance which would be unfair for the general public. Various
organizations regulate the market to keep the economy stable. The regulatory structure has been
framed under the four pillars that are the Ministry of Finance, Reserve Bank of India, Security and
Exchange Board of India, and the National Stock Exchange.

1. Ministry of Finance(MoF)- The ministry depicts that the Government of India plays a very
important role and their economic policies and manifestos help in market regulation and
framework. They formulate rules and analyze them for the efficient and effective growth
of the market. The Department of Economic Affair which manages the market works
under certain sets of laws that are the Depositories Act, 1996, Securities Contract
(Regulation) Act, 1956, and Securities and Exchange Board of India Act, 1992. There are
many other laws such as the Companies Act, 2013, etc.
2. Reserve Bank of India- The body that was established in 1934 frames the policies,
formulates the bodies and regulates the rules as per the current situation. RBI has active
participation in the stock market and also sets the various parameters that are used in the
transactions of debt, equity, and other types of securities. They are the bank regulators also
as they have access to many bank accounts as they have large funds to control the capital
market since banks have the most generated capital on hold. They also set various
parameters for regulation such as repo rate, reverse repo rate, etc. They are the
intermediary body between the market and the government. They have other various
functions in capital markets such as the implementation of various monetary policies,
managing the foreign exchange system, settlement, and payments systems.
3. Security Exchange Board of India (SEBI)- This body can also be considered as the apex
body of capital market regulators. SEBI is a principal regulatory body that is also a
statutory body established under the SEBI Act,1992. SEBI was earlier established as the
non statutory body in 1988. They not only protect the interest of investors in securities but
also promote the market. It supervises, controls, and manages several institutional brokers,
investors, companies, and all other associated persons related to the market. The body’s
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 primary function is to prohibit malpractice or unfair trade practices such as insider trading
or manipulating funds. The stock exchanges work under the direct control of this body as
they adopt the flexible and adaptable approach for regulating the market. They perform
many other such regulatory functions such as training of intermediaries, auditing of stock
exchanges, regulating and registering the mutual funds.

Recently, the review and merger of SEBI(Issue and Listing of Debt Securities) Regulations, 2008
and SEBI(non-convertible Redeemable preference shares) Regulations 2013 into a single
regulation- SEBI(Issue and Listing of Non-Convertible Securities) Regulations, 2021.

ACTS GOVERNING THE CAPITAL MARKETS

The Depositories Act,1996- The Act regulates the depositories in Securities. The primary
objective of this Act is to ensure free transferability of securities with speed, accuracy and
security. The Act eases the ownership of transferability of ownership from one person to another
in a convenient way. It has made the securities freely transferable in case of Public limited
companies along with the securities.

Securities Contract (Regulation) Act, 1956- The regulatory Act deals in all types of issues related
to Stock trading. The Act aims at smooth functioning of the stock exchanges. It prevents any kind
of defective transactions. It especially deals in listing of stock exchanges and contracts in
securities.

Security and Exchange Board of India Act,1992- This Act provides the statutory powers to the
SEBI organisation. The governing body regulates the market in a multifarious manner by
protecting the interest of the shareholders, preventing any kind of malpractices in the market and
promoting the development of the Securities Market. The Act provides wide powers and scope to
the SEBI in order to effectively and efficiently run the capital market.

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 Investor Protection Measures by SEBI

Investor protection legislation is implemented under the Section 11(2) of the SEBI Act. The
measures are as follows:

 Formulation of Stock Exchange and other securities market business regulations.

 Registering and regulating the intermediaries of the business like brokers, transfer
agents, bankers, trustees, registrars, portfolio managers, investment consultants,
merchant bankers, etc.
 Recording and monitoring the work of custodians, depositors, participants, foreign
investors, credit rating agencies, etc.
 Registering investment schemes like Mutual fund & venture capital funds, and
regulating their functioning.
 Promotion and controlling of self-regulatory companies.
 Keeping a check on frauds and unfair trading methods related to the securities
market.
 Observing and regulating major transactions and take-over of the
companies.
 Carry out investor awareness and education programme.
 Train the intermediaries of the business.
 Inspecting and auditing the security exchanges (SEs) and intermediaries.
 Assessment of fees and other charges.

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 The Role of SEBI in Investor Protection

SEBI has given out various methods and measures to ensure the investor protection from
time to time. It has published various directives, driven many investor awareness
programmes, set up investor protection Fund (IPF) to compensate the investors. Some of are:

1) Issue of guidelines: SEBI has issued guidelines to companies (bringing new issues in
the market) mutual funds, portfolio managers, merchant bankers, underwriters, lead
managers, etc. These guidelines are for bringing transparency in their operations and
also for avoiding exploitation of investors by one way or the other. SEBI has
introduced a code of advertisement for public issues for ensuring fair and truthful
disclosures. In order to reduce the cost of issue, the underwriting is made optional on
certain terms. These steps are also for the protection of investors. SEBI keeps watch
on all intermediaries and see that they follow the guidelines in the right spirit. It also
takes panel actions when the guidelines are not followed. These steps give protection
to investors.

2) Public interest advertisements: SEBI issues public interest advertisements to

enlighten investors on the basic features of various instruments and minimum
precautions they should take before choosing an investment. The SEBI desires to
create awareness among investors about their rights and about remedies if problem
arise. It has published some booklets for the information and guidance of investors.
3) Dealing with complaints of investors: The investors can make complaints to SEBI if
they face problems relating to their investment in industrial securities and financial
assets. SEBI receives thousands of complaints relating to non-receipt of refund orders,
allotment letters, non- receipt of dividend or interest and delays in the transfer of
shares and debentures. SEBI is making efforts to solve such complaints through
appropriate measures.
4) Investor education: SEBI is aware that investor education is important for his
protection. It encourages the formation of investor associations that disseminate
information through news letters. SEBI is bringing out two monthly publications for
the investors.
These are:

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 (a) SEBI- Market Review, (b) SEBI News-letter. These publications are for the
education, guidance and protection of investors.
5) Investor surveys: SEBI has also conducted surveys in respect of investment and
opportunities for the benefit of small investors. The findings of the surveys are given
wide publicity so as to provide proper guidance to investors regarding their
investment decisions.
6) Introduction to stockinvest: SEBI has introduced stockinvest as a new instrument
useful while submitting application for shares. This new instrument introduced
through the co-operation of banks gives protection to investors as they get interest on
the application money till the allotment of shares.
7) Disclosures by companies: SEBI has introduced norms for disclosure of half yearly
unaudited results of companies. It has also revised the format of prospectus to provide
more information to investors. It also insists that every share application form is
accompanied by an abridged prospectus. The provisions relating to disclosures are for
the information and protection of small/average investors.

Investor Education and Protection Fund

To protect the interests of investors in securities and to promote the development of, and to
regulate the securities market and for matters connected therewith or incidental thereto,
the central government (GOI) has established a fund to be called Investor Education and
Protection Fund [IEPF].

Objectives of Investor Education and Protection Fund (IEPF)

 Educating investors about how the market operates.

 Making investors educated enough so that they can analyse and take informed
decisions.
 Educating investors about the volatility of the markets.
 Making investors realise their rights and various laws about Investing.
 Promoting research and surveys to spread knowledge among the
investors.

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 Funding of IEPF

Following amounts shall be part of IEPF, if they remain unpaid for a period of seven
years from the date of declaration except point (f) and (g):

a. Amounts in the unpaid dividend accounts of companies;

b. The application moneys received by companies for allotment of any securities
and due for refund;
c. Matured deposits with companies;
d. Matured debentures with companies;
e. The interest accrued on the amounts referred to in clauses (a) to (d).
f. Grants and donations given to the Fund by the Central Government, State
Governments, companies or any other institutions for the purposes of the
Fund; and
g. The interest or other income received out of the investments made from the Fund.

LOOPHOLES AND RECOMMENDATIONS

As the Indian economy is one of the fastest-growing economies of the world, many such
challenges can hinder the growth as certain regulations have loopholes and there are several
cases of embezzling funds, defrauding, and illegal channelizing of funds. The associates of the
markets use it for unfair trade practices. There is no doubt that in the past few decades the
country’s policymakers have promoted the capitalist theory of economy and eventually led to
the rapid development of the capital market. Capitalism promotes the concentration of wealth
by the few and they invest more and increase the profit up to a maximum extent.

Individual investors can also break the stability of the market by increasing the lending or
borrowing capacity. Several such cases have depicted and identified the need for a more
powerful regulating body. Some of the cases which have showcased the loopholes are Harshad
S. Mehta vs Central Bureau Of Investigation on 1 October 1992, Harshad S. Mehta vs Central
Bureau Of Investigation on 21 September 1998. The case of Harshad Mehta indicates the
loopholes in the system that how the funds were channelized illegally and used to manipulate
the stock market. He understood the gap in the money market. There was a similar story of

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 Ketan Parekh scam 2001 in which he took a loan and channelized funds in the case Ketan
Parekh vs Securities and Exchange Board of India on 14 July 2006.

There is also a provision to appeal in the special court named as Securities appellate tribunal and
the example case is Ashwin K. Doshi, Pankaj G. Joshi, and others vs Securities and Exchange
Board Of India on 25 October 2002. These cases and points depict that there is a problem of
financial scams from the capital market which has caused massive loss and also reduced the
confidence of investors and created distrust among the people. Such losses compel the system
to reform the policies. Another major loophole is insider trading and the manipulation of price
as if some investors take the unpublished information and use it for personal benefit. Such
illegal use negatively impacts the functioning of markets.

The regional stock exchanges development is greatly affected due to the major and premium stock
exchanges such as NSE( National Stock Exchange) and BSE (Bombay Stock Exchange) as
investors prefer to invest in securities listed in major stock exchanges. There is also a lack of
vigilance over the investors as the people can channelize the illegal funds in stock markets.

The market is generally held by a few investors that make the market biased as it diminishes the
opportunity for new investors. There should be a ceiling over the holding of stocks to promote
fairness and to provide the opportunity for new investors. Most of the financial scams that take
place are due to the private dealings with the banks as they have a pool of funds so these
should be strictly prohibited and a systematic way of regulating the funds in banks should be
formulated.

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 CONCLUSION

The Indian capital market has undergone many changes after the challenges and the irreparable
loss faced over years. There have been massive and revolutionary changes over years, and some
significant changes that have reduced the financial scam cases. There has been a reduction of
malpractices of trade over the years. The capital market has made tremendous progress in terms of
institution building. They have transformed and developed the lives of investors and market
intermediaries. The market has been friendlier by boosting performance and eliminating the
challenges.

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 BIBLIOGRAPHY

1.https://economictimes.indiatimes.com/definition/capital-market

2.http://www.legalservicesindia.com/article/2283/Working-of-Capital-Market-In-India.html

3.https://www.icsi.edu/media/webmodules/publications/CapitalMarketandSecuritesLaw.pdf

4.https://www.mondaq.com/india/economic-analysis/949428/capital-market-persevere

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