Capital Markets

Indian capital markets are markets for medium- and long-term funds where businesses, governments, and individuals raise and invest capital through instruments such as shares, bonds, and debentures. Unlike money markets, which deal in short-term funds, capital markets channel savings into long-term productive investments, supporting capital formation and economic growth. Stock and bond markets are their main components.

Capital markets directly connect investors with fund-seekers, ensure continuous fund availability, provide liquidity through tradable securities, enable efficient price discovery, mobilize savings, support long-term investment, and contribute to wealth creation and economic development.

Evolution of Indian Capital Markets

The Indian capital market originated in the 18th–19th centuries with trading in East India Company securities.

• The Bombay Stock Exchange was established in 1875, followed by exchanges in Ahmedabad, Calcutta, and Madras. These early markets were lightly regulated and broker-driven.
• After Independence, strict controls were imposed through the Capital Issues (Control) Act, 1947, requiring government approval for new issues and pricing. While aimed at safeguarding public savings, this regime restricted market growth, keeping it shallow until the 1980s.
• Major transformation began with economic liberalization in 1991. The Capital Issues Control Act was repealed in 1992, pricing controls were removed, and regulation shifted to a disclosure-based system. SEBI was granted statutory powers to regulate markets and protect investors, marking the start of modern capital market regulation.
• National Stock Exchange was set up in 1992 and began electronic trading in 1994, improving transparency and efficiency. OTCEI was launched for smaller firms, and exchanges shifted from floor trading to computerized systems.
• The Depositories Act, 1996 enabled electronic holding and transfer of securities through NSDL and later CDSL, eliminating paper certificates. Settlement cycles were progressively shortened from weekly to T+2 by 2003, and to T+1 from 2023, enhancing liquidity and reducing risk.

Further reforms included introduction of derivatives, internet trading, FII participation, demutualization of exchanges, merger of commodity regulation with SEBI in 2015, and listing of BSE in 2017.

Segments of the Indian Capital Market

The Indian capital market is classified by instruments and functions.

Equity (Stock) Market

This segment deals in company shares and includes the primary market for new issues (IPOs, rights issues) and the secondary market for trading existing shares on stock exchanges. NSE and BSE provide nationwide electronic platforms. Equity markets enable firms to raise ownership capital and investors to earn dividends and capital gains.

Debt Market

This market facilitates borrowing through long-term debt instruments such as government securities, corporate bonds, and debentures. Government debt is well-developed, while the corporate bond market is smaller but expanding. Debt instruments offer fixed income and trade both OTC and on exchanges. Regulation is shared between RBI (government securities) and SEBI (corporate bonds).

Derivatives Market

Derivatives are contracts derived from underlying assets such as equities, indices, currencies, and commodities. The segment mainly consists of futures and options, introduced in 2000, and is widely used for hedging and speculation. Exchange-traded derivatives are regulated by SEBI, including commodity derivatives since 2015.

Other Segments

The capital market also includes mutual funds, ETFs, REITs, and InvITs, which channel pooled savings into securities, real estate, and infrastructure. Venture capital and private equity form part of the broader capital market but operate largely in unlisted space.

Functional Classification

By function, the capital market consists of the primary market for new issues and the secondary market for trading existing securities. Both are interdependent and together form the core of the capital market system.

Primary Market (New Issue Market)

The primary market is the segment where new securities are issued for the first time, allowing companies and governments to raise fresh capital. Investors buy securities directly from the issuer, and funds flow to the issuer, supporting capital formation.

Initial Public Offerings (IPOs)

An IPO is the first public issue of shares by a company, converting it from private to public. It may involve fresh issues, offers for sale by promoters, or both. The process includes preparation and SEBI vetting of the DRHP, price discovery (usually through book building), allotment, and listing. IPO funds raised through fresh issues do not require repayment. A strong IPO market reflects investor confidence.

Follow-on and Further Issues

Listed companies raise additional equity through Follow-on Public Offers (FPOs), rights issues to existing shareholders, or private placements such as preferential allotments and QIPs. Bonus shares are issued from reserves but do not raise fresh capital.

Corporate Debt Issuance

Companies and financial institutions raise long-term funds by issuing bonds or debentures through public issues or private placements, the latter being more common. Government securities are issued via RBI auctions. Corporate debt issues are regulated by SEBI, while government bonds follow RBI procedures.

Primary Market Processes

Issues are managed by merchant bankers and follow a disclosure-based framework. Equity issues use the ASBA system, ensuring funds remain blocked until allotment. Securities are issued in demat form, refunds are quick, and underwriting may be used if required.

SME Platform

Dedicated SME platforms launched in 2012 enable small and medium enterprises to raise equity with lower compliance requirements. Many firms list here and later migrate to main boards as they grow.

Secondary Market – Stock Exchanges and Trading of Securities

The secondary market is the segment where existing securities are traded among investors after issuance. It provides liquidity and price discovery but does not raise fresh funds for issuers. A strong secondary market supports the primary market by assuring investors of easy exit and continuous valuation.

Stock Exchanges in India

Secondary trading in India is concentrated on organized exchanges, mainly the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).

• BSE, established in 1875, is India’s oldest exchange and has the highest number of listed companies. Its benchmark index, the Sensex, tracks 30 major stocks and is widely used as a market barometer.
• NSE, incorporated in 1992, introduced nationwide electronic trading and is India’s largest exchange by trading volume. Its flagship index, the Nifty 50, represents 50 leading companies.

Earlier regional stock exchanges declined after liberalization due to consolidation of trading on NSE and BSE. Both exchanges are corporatized, demutualized, and regulated by SEBI under the SCRA, 1956.

Trading Mechanism

Trading is conducted through an electronic, order-driven system based on price-time priority. Investors place orders via brokers, and trades are matched anonymously by the exchange. All securities are traded in dematerialized form through demat accounts held with depositories.

Clearing and Settlement

India follows a T+1 rolling settlement system, where trades are settled one working day after execution. Clearing corporations act as central counterparties, manage risk through margins, and guarantee settlement of funds and securities, making India one of the fastest-settling major markets globally.

Market Instruments and Segments

The secondary market includes equity shares, equity derivatives, currency derivatives, commodity derivatives, debt instruments, mutual fund units, and ETFs. While equity trading is highly active on exchanges, most bond trading remains OTC, with limited exchange-based retail participation.

Stock Market Indices

Indices such as the Sensex and Nifty 50 reflect overall market performance and are used as benchmarks by investors and fund managers. Sectoral, mid-cap, small-cap, and broad-market indices provide deeper market representation.

Market Participants

Participants include retail investors, domestic institutions, foreign portfolio investors, corporates, traders, and market makers. In recent years, domestic investors have gained prominence, supported by growth in demat accounts and mutual fund investments.

Trading Volume and Liquidity

The Indian secondary market is highly liquid for large-cap stocks, with NSE ranking among global leaders by number of trades. Derivatives turnover often exceeds cash market turnover, ensuring active price discovery.

International Exchange at IFSC

International exchanges at GIFT City enable foreign-currency trading of securities and derivatives, aiming to attract global capital and offshore trading activity.

Regulatory Framework and Institutions in Capital Markets

India’s capital markets operate under a comprehensive regulatory framework aimed at transparency, integrity, and investor protection. The system involves multiple regulators, with SEBI as the apex authority.

Securities and Exchange Board of India (SEBI)

SEBI, established in 1988 and granted statutory powers under the SEBI Act, 1992, is the chief regulator of India’s capital markets. Its mandate covers investor protection, regulation, and development of the securities market. SEBI regulates stock exchanges, intermediaries, mutual funds, depositories, credit rating agencies, and market participants. It frames regulations on capital issues, insider trading, takeovers, listing obligations, mutual funds, and derivatives, and has investigative and enforcement powers against fraud and market manipulation.
SEBI’s role includes regulation and supervision of intermediaries and exchanges, ensuring disclosure and fair practices; investor protection through corporate governance norms, insider trading prohibition, disclosures, education programs, and the SCORES grievance system; market development through reforms such as electronic trading, T+1 settlement, REITs/InvITs, SME platforms, and integration of commodity markets; and surveillance and enforcement using technology, penalties, bans, and prosecutions. Appeals against SEBI orders lie with the Securities Appellate Tribunal, with further appeal to the Supreme Court.

Ministry of Finance

The Ministry of Finance, through the Department of Economic Affairs, formulates capital market policy and legislation such as the SEBI Act, SCRA, and Depositories Act. It also coordinates regulators through the Financial Stability and Development Council (FSDC), chaired by the Finance Minister, ensuring unified oversight of the financial system.

Reserve Bank of India (RBI)

RBI regulates the money market, banking system, and government securities market. It manages issuance of government bonds and treasury bills and operates platforms like NDS-OM. RBI and SEBI coordinate on debt, forex, and related markets.

Legislative Framework

Key laws governing capital markets include the Securities Contracts (Regulation) Act, 1956; SEBI Act, 1992; Depositories Act, 1996; Companies Act, 2013; and detailed SEBI regulations such as ICDR, LODR, Insider Trading, Takeover Code, and Mutual Fund Regulations. FEMA and other allied laws also apply.

Market Infrastructure Institutions

Stock exchanges and clearing corporations operate under SEBI oversight and guarantee settlement. Depositories (NSDL and CDSL) enable dematerialized holding and transfer of securities. All intermediaries must be SEBI-registered and comply with conduct and prudential norms.

Investor Protection Measures

Investor safety is supported through Investor Protection Funds, mandatory KYC norms, grievance redressal mechanisms, arbitration, and widespread investor awareness initiatives.

Regulatory Coordination

Besides SEBI, IRDAI regulates insurance funds, PFRDA regulates pension funds, and MCA oversees corporate compliance. Coordination is ensured through FSDC and formal cooperation mechanisms between regulators.

Recent Developments and Trends in Indian Capital Markets

Growth of Retail Investors

Retail participation has surged since 2020, with tens of millions of new demat accounts and strong involvement of younger investors via mobile platforms. Mutual fund SIP inflows reached nearly ₹30,000 crore per month by 2025. Rising domestic participation has reduced dependence on foreign investors, a trend described as the “equitization of savings,” strengthening market depth and capital formation.

Technological Advancements

Technology adoption has accelerated through algorithmic and high-frequency trading, advanced online trading platforms, and UPI-based IPO applications. SEBI has strengthened real-time surveillance using data analytics, while exchanges and depositories explore blockchain for settlement and record-keeping to improve efficiency and competitiveness.

New Products and Market Expansion

Capital markets have diversified with the introduction of REITs and InvITs, green bonds, municipal bonds, interest rate and cross-currency futures, and Electronic Gold Receipts (2023). Commodity derivatives are now integrated under SEBI, expanding investment and hedging options.

Market Infrastructure Reforms

The shift to T+1 settlement in 2022–23 placed India among the fastest-settling markets globally. Risk controls such as peak margin norms and clearing corporation interoperability have enhanced stability and reduced systemic risk. T+0 settlement is under examination.

Sustainable and Responsible Investing

ESG investing is growing, supported by mandatory Business Responsibility and Sustainability Reporting (BRSR) for large listed firms, ESG-focused funds, green bonds, and ESG indices like the Nifty100 ESG.

GIFT IFSC and Global Integration

GIFT City IFSC is emerging as an international financial hub, offering foreign-currency products, tax incentives, and global trading access. Initiatives such as the NSE–SGX linkage aim to bring offshore trading activity back to India.

Challenges and Outlook

Key challenges include limited liquidity in the corporate bond market, concentration of trading in few stocks, investor protection issues, and the need for wider financial literacy. Despite this, strong reforms, favorable demographics, and sustained economic growth suggest continued expansion, with a robust IPO pipeline into 2026.