Government Initiatives and Policies to Develop Capital Markets

Overview

Capital markets mobilize long-term savings and channel them into productive investment. In India, the system has moved from a merit-based, government-controlled framework to a disclosure-based regime regulated mainly by the Securities and Exchange Board of India (SEBI).

Over time, reforms have widened access to primary markets, strengthened trading and settlement systems, deepened debt markets, and introduced newer investment vehicles for retail and institutional investors.

Institutional Framework and Primary Market Reforms

• End of direct control: The Capital Issues (Control) Act, 1947 was repealed in May 1992, ending the office of the Controller of Capital Issues and government control over share pricing and issue timing.
• SEBI Act, 1992: SEBI received statutory powers to protect investor interests, regulate securities markets, and register market intermediaries.
• Disclosure-based system: The market shifted from merit-based approvals to disclosure-led regulation, with companies allowed to price issues through market discovery.
• Book-building: Companies could raise equity at market-determined prices based on investor demand discovered during the issue process.
• ASBA: Application Supported by Blocked Amount was introduced in 2008, keeping investor money in the bank account until allotment.
• UPI in IPOs: Retail investors were allowed to use UPI for bidding in initial public offers, reducing public issue processing time to T+3.
• SME platforms: Dedicated SME exchange platforms were set up in 2010 to help small and medium enterprises raise capital under relaxed listing norms.
• Depositories Act, 1996: It created the legal basis for holding securities in electronic book-entry form, leading to the establishment of NSDL and CDSL.

Secondary Market Modernisation

• Screen-based trading: Physical trading floors were replaced by nationwide electronic trading on the NSE and BSE.
• Rolling settlement: India moved from account-period settlement to T+5 in 2000, then to T+3 in 2002 and T+2 in 2003.
• T+1 settlement: The T+1 cycle was phased in between February 2022 and January 2023, making India the first major economy with full next-day settlement for equity trades.
• T+0 facility: An optional same-day settlement mechanism was introduced for select liquid stocks to improve capital efficiency and reduce margin requirements.
• Dematerialisation: Shares are required to be held electronically for transfer, removing risks of bad delivery, theft, and loss of paper certificates.
• Direct Market Access: Institutional clients can route orders directly to exchange trading systems without manual broker intervention.

Expansion of Debt and Alternative Market Instruments

• Municipal bonds: Regulatory guidelines issued in 2015 enabled urban local bodies to raise funds through municipal revenue bonds for infrastructure projects.
• Corporate Bond Development Fund (CBDF): A backstop facility was created to purchase investment-grade corporate debt during market stress and support liquidity.
• Bharat Bond ETF: Launched as India’s first corporate bond exchange-traded fund, it enabled retail participation in fixed-income papers issued by CPSEs.
• REITs and InvITs: Real Estate Investment Trusts and Infrastructure Investment Trusts were introduced to pool capital for revenue-generating real estate and infrastructure assets.
• Social Stock Exchange (SSE): The SSE provides a platform for NPOs and for-profit social enterprises to raise funds through Zero Coupon Zero Principal instruments.
• ZCZP instruments: These instruments do not carry dividend or capital repayment obligations.

Internationalisation and GIFT-IFSC

• GIFT-IFSC: GIFT International Financial Services Centre was set up as an offshore financial jurisdiction under the IFSCA Act, 2019.
• Unified regulator: The International Financial Services Centres Authority (IFSCA) regulates financial products, services, and institutions in GIFT City.
• NSE IX-SGX Connect: Nifty derivatives trading shifted from Singapore to India International Exchange (NSE IX) at GIFT City.
• Dollar-denominated contracts: The move brought dollar-denominated financial contracts into domestic jurisdiction.

Key Capital Market Facts

• SEBI’s origin: SEBI was set up as a non-statutory body in April 1988 and received statutory status in 1992.
• Depository framework: The Depositories Act, 1996 permits investors to hold securities in dematerialised form through depositories and depository participants.
• Full T+1 transition: India completed the move to T+1 settlement on January 27, 2023 across all listed equities.
• SSE purpose: The Social Stock Exchange allows non-profit entities to issue ZCZP instruments.
• IFSCA role: IFSCA is the unified regulator for financial activities in GIFT City.
• ASBA: ASBA is mandatory for retail investors applying in public share issues.

Key Prelims Takeaways

• SEBI replaced control with disclosure: India’s capital market moved away from government-administered pricing to a market-based regulatory model.
• Dematerialisation is central: NSDL and CDSL made electronic holding of securities the norm.
• Settlement has become faster: India moved from T+5 to T+3, T+2, and finally T+1 settlement.
• ASBA protects investor funds: Money remains blocked in the bank account until allotment is made.
• SME fundraising has a dedicated route: Separate exchange platforms help small firms access capital.
• Debt markets were broadened: Municipal bonds, corporate bond support, and Bharat Bond ETF expanded fixed-income options.
• GIFT-IFSC matters for global finance: It is regulated by IFSCA and is designed to host international financial activity within India.