Government Initiatives and Policies to Develop Capital Markets

Capital markets play a critical role in mobilizing long-term savings and channeling them into productive economic investments. India’s capital market architecture transitioned from a merit-based system managed by the Controller of Capital Issues to a disclosure-based regulatory regime under the Securities and Exchange Board of India (SEBI). Over the last three decades, policy interventions focused on expanding primary market access, modernizing secondary market settlement, deepening debt markets, and encouraging financial inclusion through innovative investment vehicles.

Institutional Framework and Primary Market Reforms

The government established statutory foundations to replace direct administrative controls with independent regulatory oversight and market-determined pricing.

Statutory Evolution

• Repeal of Capital Issues (Control) Act, 1947: Abolished the office of the Controller of Capital Issues in May 1992, ending government control over share pricing and issue timing.
• Enactment of SEBI Act, 1992: Granted statutory powers to SEBI to protect investor interests, regulate securities markets, and register market intermediaries.
• Depositories Act, 1996: Established the legal framework for recording ownership details in electronic book-entry form, leading to the creation of National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL).

Market-Driven Pricing and Issuance Norms

• Free Pricing Regime: Allowed companies to issue equity shares at market-determined prices based on demand discovered through the book-building process.
• ASBA System: Introduced Application Supported by Blocked Amount (ASBA) in 2008, ensuring investor funds remain in their bank accounts until share allotment.
• Unified Payments Interface (UPI) Integration: Permitted retail investors to use UPI for bidding in Initial Public Offers (IPOs), reducing public issue processing time to three days (T+3).
• SME Framework: Established dedicated SME platforms on stock exchanges in 2010, allowing small and medium enterprises to raise capital under relaxed listing norms.

Secondary Market and Technological Interventions

Policy reforms aimed at improving transaction efficiency, lowering counterparty risk, and modernizing market infrastructure.

Settlement Cycles and Clearing Mechanisms

• Rolling Settlement Transition: Shifted from account-period settlement to T+5 rolling settlement in 2000, progressively shortening the cycle to T+3 in 2002 and T+2 in 2003.
• T+1 Settlement Implementation: India phased in the T+1 settlement cycle between February 2022 and January 2023, becoming the first major economy to achieve complete next-day settlement for equity trades.
• T+0 Settlement Mechanism: Introduced an optional same-day settlement facility for select liquid stocks to increase capital efficiency and lower margin requirements.

Digital Infrastructure and Dematerialization

• Screen-Based Trading: Replaced physical trading floors with nation-wide electronic screen-based trading systems on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).
• Mandatory Dematerialization: Required all public company shares to held in electronic form for transfer, eliminating risks of bad delivery, theft, and loss of paper certificates.
• Direct Market Access (DMA): Allowed institutional clients to route orders directly to the exchange trading system without manual broker intervention.

Specialized Market Platforms and Alternative Instruments

The regulatory framework evolved to diversify investment products beyond traditional equities and government securities.

Municipal and Corporate Bond Market Initiatives

• Municipal Bonds Issue Norms: Released regulatory guidelines in 2015 enabling urban local bodies to issue municipal revenue bonds for urban infrastructure projects.
• Corporate Bond Development Fund (CBDF): Established a backstop facility to purchase investment-grade corporate debt securities during market stress, enhancing liquidity in the corporate bond sector.
• Bharat Bond ETF: Launched as India’s first corporate bond exchange-traded fund, allowing retail participation in fixed-income papers issued by Central Public Sector Enterprises (CPSEs).

Social Stock Exchange and SME Platforms

• Social Stock Exchange (SSE): Created a dedicated platform within stock exchanges allowing Non-Profit Organizations (NPOs) and For-Profit Social Enterprises to raise funds through Zero Coupon Zero Principal (ZCZP) instruments.
• Real Estate and Infrastructure Trusts: Introduced Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) to pool institutional and retail capital for revenue-generating real estate and infrastructure assets.

GIFT-IFSC and Internationalization

• GIFT International Financial Services Centre (GIFT-IFSC): Set up as an offshore financial jurisdiction under the International Financial Services Centres Authority (IFSCA) Act, 2019.
• NSE IX-SGX Connect: Transitioned Nifty derivatives trading from Singapore to India International Exchange (NSE IX) at GIFT City, bringing dollar-denominated financial contracts into domestic jurisdiction.

Major Initiatives in Indian Capital Markets

Key Capital Market Facts

• The Securities and Exchange Board of India (SEBI) was initially set up as a non-statutory body in April 1988 before receiving statutory status in 1992.
• The Depositories Act, 1996 permits investors to hold securities in dematerialized form with depositories through depository participants.
• India achieved complete transition to the T+1 trade settlement cycle on January 27, 2023 across all listed equities.
• The Social Stock Exchange framework allows non-profit entities to issue Zero Coupon Zero Principal instruments, which carry no dividend or capital repayment obligation.
• The International Financial Services Centres Authority (IFSCA) acts as the unified regulator for financial products, services, and institutions in GIFT City.
• Application Supported by Blocked Amount (ASBA) is mandatory for all retail investors applying for public share issues.
• Under the Foreign Portfolio Investor (FPI) framework, overseas funds are categorized under Category I (government and sovereign entities) and Category II (corporate entities and fund managers).
• The Corporate Bond Development Fund is managed by SBI Mutual Fund and backed by contributions from debt mutual fund schemes and clearing corporations.