Securities Market in India

A financial security is a fungible, tradable financial instrument that holds some form of monetary value. It represents an ownership position, creditor relationship, or rights to ownership as specified in a contract.

A financial instrument is a set of all such money contracts that can be traded, modified or settled. Financial Securities are a class of Financial instruments. Even cash, cheques and forex are financial instruments.

Concept of Fungibility

When a unit of a product is exactly similar in every aspect to another unit and therefore can be replaced with any loss of value, it is called Fungible. For example, A share of a company is similar to every other share of that company. It is therefore fungible. Non-Fungible assets: for example, a T-shirt of a company, even if it is of the same size and colour, minor variations would occur in its production process. Such an asset is non-fungible, i.e. it cannot be replaced by any product. Non-fungible tokens (NFTs) are one such example.

In this chapter, we will understand all types of securities, the mechanism of their issuance, tradability in the Indian market and other related issues.

Investment through a Financial Security

Securitisation is a process of converting an asset (or a pool of assets) into smaller financial instruments, known as securities.

For example, it is difficult to open a business that demands a huge amount of investment. This amount can be divided into a number of shares which can be issued to a number of investors depending on their respective amount of investment. They can now share profits as per the percentage of shares held by them.

Advantages of investment through Financial securities:

Investment through financial securities is one of the greatest innovations made by humans, which has facilitated the existence of large multinational companies.

• Raising Capital: Companies and governments can raise funds for expansion or projects.
• Risk Management: Securities allow investors to manage and diversify their risk exposure.
• Easy Participation in Businesses: It allows ordinary individuals to participate in the market.
• Easy Exit: It is often not possible for the investors to easily liquidate assets like property, or shareholding through direct investment. However, the investor can sell securities like bonds and shares at any time.
• Diversification of Income: Investors can earn returns through interest, dividends, and capital appreciation.

Types of Financial Securities

Financial Securities can take a variety of forms

1. Equity
2. Debt Instruments
3. Commodities
4. Investment Funds

Equity Securities:

Equity refers to the ownership of a company or a business. It is generally done in various forms.

• Shares or Equity: It is an indivisible unit of capital, expressing the ownership in a company. It is also known as the “stock“, which refers to the total equity of a company as well as to the concept of ownership in general.

The companies can issue different types of stocks referring to different types of ownerships:

1. Common Stock: It is the ordinary share of the company. It gives several rights to the owner of the stock: voting rights such as in electing the board of directors, equal dividends, first rights over the rights issue, and equal claim over the company’s assets in the event of liquidation but is paid after creditors and preferred shareholders.
2. Preferred Stock: Such stock does not give voting rights to its owner, but has a better dividend pay-out. They also have a higher claim on assets in the event of liquidation, making it less risky than common stock. These might also be convertible to common stock.

• Venture Capital Investments: Investments in early-stage companies with high growth potential.
• Angel Investments: Early-stage investments made by individuals in start-ups.

Debt Securities:

Bonds are instruments of indebtedness of the bond issuer to the holders. Under it, the issuer is obliged to pay interest (the coupon) or to repay the principal at a later date, termed the maturity date. They can be Corporate Bonds or Government Bonds.

Debentures: Unsecured debt instruments are based on the issuer’s creditworthiness and are typically not backed by collateral.

Convertible Securities

• Convertible Debentures: Corporate Debt securities that can be converted into a predetermined number of shares of the issuing company.
• Contingent Convertible Bonds (CoCo Bonds): Hybrid securities that convert into equity when a certain trigger event occurs, typically related to the issuer’s financial condition. Conversion to equity is “contingent” on a specified event, such as the stock price of the company exceeding a particular level for a certain period.

Short-term debt Securities

• Commercial paper is a commonly used type of unsecured, short-term debt instrument issued by corporations, typically used for the financing of payroll, accounts payable and inventories, and meeting other short-term liabilities. Maturities on commercial paper typically last several days, and rarely range longer than 270 days.
• A certificate of deposit (CD) is a savings account that holds a fixed amount of money for a fixed period of time, such as six months, one year, or five years, and in exchange, the issuing bank pays interest. When you cash in or redeem your CD, you receive the money you originally invested plus any interest.  [It might be long term or short term]
• Call money, also known as “money at call,” is a short-term financial loan that is payable immediately, and in full, when the lender demands it. Unlike a term loan, which has a set maturity and payment schedule, call money does not have to follow a fixed schedule, nor does the lender have to provide any advanced notice of repayment.
• A zero-coupon bond, also known as an accrual bond, is a debt security that does not pay interest but instead trades at a deep discount, rendering a profit at maturity, when the bond is redeemed for its full face value.

Advantages of Contingent Convertibles(CoCo) bonds

Accounting advantage of CoCo: They do not have to be included in a company’s diluted earnings per share until the bonds are eligible for conversion. It is also a form of capital that regulators hope could help buttress a bank’s finances in times of stress. They provide a boost to capital levels if a pre-set trigger is breached and reassure investors more generally.

Development of the Corporate bond market

A developed corporate Bond market alleviates the pressure on the government, RBI and the banks to enable adequate liquidity in the market. H.R. Khan Committee had given recommendations on the development of the corporate bond market. RBI has set up a task force under TR Manoharan to examine the possibilities of a secondary market for corporate loans in India.

Commodities

Commodities like gold, food grains etc. can be traded in the forms of future contracts and derivates. We will study derivative contracts later in this chapter.

This trade primarily takes place through commodity exchanges such as the Multi Commodity Exchange (MCX) and National Commodity and Derivatives Exchange (NCDEX) in India. Commodities can be traded via futures contracts, options, and spot markets, allowing investors to hedge risks, speculate, or diversify their portfolios.

Commodity trading operates on the principles of demand and supply, geopolitical events, and macroeconomic trends. Traders and institutional investors use commodity derivatives to protect themselves against price fluctuations. For example, a farmer may sell wheat futures to lock in a price, while an airline may buy crude oil futures to hedge against rising fuel costs.

Regulatory bodies like the SEBI oversee commodity trading to prevent manipulation and ensure transparency. Retail investors can access commodity markets through brokers and online platforms, engaging in margin-based trading. However, commodity trading carries risks such as price volatility, geopolitical uncertainties, and regulatory changes.

Commodities play a crucial role in the securities market, offering traders diversification, hedging opportunities, and profit potential, making them a vital component of modern financial markets.

Investment Funds:

• Mutual Funds: These are Pooled investment vehicles that gather money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. The whole fund is divided into units that can be bought or sold only at the end at a value known as the “Net Asset Value (NAV)”. The NAVs reflect the net value of the fund’s total assets.
• Exchange-Traded Funds (ETFs): These are Funds that hold a diversified portfolio of stocks or bonds. Unlike Mutual Funds, ETFs can be traded on stock exchanges like individual stocks, and therefore price fluctuates during the day.
• Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs): These are investment trusts (similar to Mutual Funds) that allow individuals to invest in income-generating assets without directly owning the properties. REITs focus on commercial and residential real estate, whereas InvITs focus on infrastructure projects such as roads, railways etc.

SEBI’s Definition of a Mutual Fund

A “Mutual fund” is a fund established in the form of a trust to raise monies through the sale of units to the public or a section of the public under one or more schemes for investing in securities including money market instruments or gold or gold related instruments or real estate assets. It is regulated under the SEBI (Mutual Funds) Regulations, 1996.

Apart from these, derivative products (futures and options) are also known as Financial Securities, which we shall discuss later.

Now, let’s study about the dynamics of the tradability of these securities.

Tradable Securities

Not all securities are tradable, i.e. not open for the public to trade freely through “stock exchanges” (also known as the Secondary market). Those securities that can be easily traded are simply known as tradable securities.

Non-tradable securities, i.e. financial instruments that cannot be bought or sold on secondary markets, include private placements and securities with restrictions.

Private Placement is a method by which a company raises capital by selling securities directly to a select group of investors, rather than through a public offering. This method can be used to raise direct investment.

Primary and Secondary markets

How can one invest in financial securities or trade in these instruments?

There are essentially two ways to invest in tradable financial securities. These are through:

1. Primary Markets
2. Secondary Markets

Primary Market

The primary market is where new securities are created and sold for the first time directly by the issuer (e.g., a corporation or government). The Companies can raise capital through this method, i.e. the funds invested by the investor go directly to the company. Such funds can be used by the company for expansion, projects, or debt repayment.

Through this mechanism, a company becomes a Public company from a Private company.

Private Limited Companies do not invite the general public to subscribe, unlike a Public company. It can have a minimum of 2 and a maximum of 200 shareholders. Public Limited Companies can have a minimum of 7 shareholders and no upper restriction.  There is no restriction on the transferability of shares. These can be traded in the stock markets.

Mechanisms of raising funds from the Primary market:

• Initial Public Offering (IPO): IPO is the mechanism through which a Private company goes public for the first time. The funds raised through IPO generally go to the company directly.
• Follow-on Public Offers (FPO): FOP is a process through which a company that is already publicly traded issues additional shares to raise more capital from the public directly.
• Right issue: In a rights issue, a company offers the opportunity to purchase additional shares to the existing shareholders, usually at a discounted price, before the shares are offered to the public.
• New Fund Offer (NFO): In the primary market, mutual funds raise capital by issuing new units to investors through a process known as an Initial Offer or New Fund Offer (NFO). During an NFO, investors can purchase units of a mutual fund at a fixed price, usually at the Net Asset Value (NAV) determined at the end of the offer period.
• Qualified Institutional Placement (QIP): Listed companies can raise capital by issuing securities to qualified institutional buyers (QIBs) without having to undergo the lengthy process of an initial public offering (IPO). Equity shares, fully and partly convertible debentures, or any securities that are convertible to equity shares (except warrants) can be issued through this mechanism.

Secondary Market

The secondary market is where previously issued securities are bought and sold among investors. The company that issued the securities does not receive any proceeds from these transactions. Such trade is facilitated by brokers and Stock exchanges like the NSE or BSE.

Components of a Secondary market

• Exchanges: The secondary market is mainly facilitated through an exchange. For example:
  • Stock Exchange (where stocks are traded) and
  • Commodity exchange (where commodities are traded).

National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) are major stock exchanges of India.

• Brokers act as the trade facilitators in the market set-up at the exchanges. There are certified entities that are allowed to register on the Stock exchanges and conduct trade on behalf of their clients (i.e. investors or traders or security).
• Depository: A depository is a financial institution that holds securities (shares/bonds etc.) safely on behalf of investors. It allows for the conversion of physical securities into electronic form (dematerialised or DMAT form), making trading and holding securities easier and more secure. It means all our shares are actually held in depositories such as NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Limited).

How is a trade done?

When we sell a security, the Exchanges allow for the price discovery and enable the buyer and the seller to agree to trade the security at the said price. Then our security which is kept at the Depository on our behalf, is shifted to the account of the buyer. The payment of this trade is made by the broker of the buyer to the broker of the seller, which is reflected in our DMAT account.

The broker provides the necessary infrastructure to make this trade.

Securities Traded in the Secondary Market

In the secondary market, generally following types of financial securities are traded:

1. Equity, Bonds, Mutual funds, Exchange-traded funds, commodities, REITs and InvITs are all traded in the Secondary markets.
2. Derivates Contracts: Derivative Products are financial contracts whose value is derived from the performance of an underlying asset, index, or rate. These include Futures, Options, Forward Contracts, Swaps and Warrants.

Derivative contracts

Derivative Contracts derive their value from the underlying assets and are used for hedging and speculation.

1. Futures

A futures contract is a standardized agreement to buy or sell an underlying asset (like commodities, stocks, or indices) at a predetermined price on a specific future date.

Obligation: Both parties (buyer and seller) are obligated to fulfil the contract at maturity.

2. Options

An options contract gives the buyer the right, but not the obligation, to buy (call option) or sell (put option) an underlying asset at a specified price (strike price) before or at expiration. The buyer pays a premium for the option, which is the cost of acquiring the right. These are of two types:

• Call Options: Give the right to buy the underlying asset.
• Put Options: Give the right to sell the underlying asset.

3. Forwards

A forward contract is a customized agreement between two parties to buy or sell an asset at a specific future date for a price agreed upon today.

Unlike futures, forwards are not standardized or traded on exchanges, making them more flexible but also riskier due to counterparty risk.

4. Warrants

A warrant is a security that gives the holder the right to purchase shares of a stock at a specific price before expiration. Warrants are often issued by companies as part of a new equity issue and can lead to dilution if exercised.

5. Swaps

A swap is a contract in which two parties exchange cash flows or other financial instruments over a specified period.

• Currency Swaps: Exchange principal and interest payments in different currencies.
• Commodity Swaps: Exchange cash flows related to the price of a commodity.
• Interest Rate Swaps: Exchange fixed interest rate payments for floating rate payments.
• Credit Default Swaps (CDS): Contracts that protect against the default of a borrower. The buyer pays a premium and receives a payoff if the borrower defaults. It acts as an insurance product for a credit, i.e. if a credit fails, CDS would pay.
• Total Return Swaps: An agreement where one party pays the total return of an asset while receiving a fixed or floating rate payment in return.

CDS and Total Return Swaps are also known as Credit Derivatives, i.e. those financial instruments that transfer credit risk from one party to another.

International Stock Exchanges in India

International Financial Services Centre (IFSC) in Gujarat International Financial Tech City (GIFT) is located in Gandhinagar (on the banks of Sabarmati). 1. India International Exchange (INX) is a wholly-owned subsidiary of the Bombay Stock Exchange (BSE). It facilitates trades in equity (stocks), equity derivatives, indices, currency derivatives, commodity derivatives, depository receipts and bonds. India INX is one of the world’s most advanced technology platforms with a turn-around time of just 4 microseconds. It operates for 22 hours a day, 6 days a week. It acts as a gateway to raise capital for the country’s infrastructure and development needs and provides cross-border opportunities for investment with a comparatively low cost of transaction. 2. NSE IFSC (NSE International Exchange) has received approval for allowing trading in select US-based stocks. The NSE IFSC is a wholly owned subsidiary of the National Stock Exchange of India Ltd (NSE). Investors can buy US stocks and issue depositary receipts (DR) against shares and such DRs in their own DEMAT accounts and will be entitled to receive corporate action benefits pertaining to the underlying stock. Receipts of 50 stocks are permitted to trade; The 1st 8 of which include: Alphabet Inc., Amazon Inc., Tesla Inc., Meta Platforms, Microsoft Corporation, Netflix, Apple, and Walmart. Trade will be conducted under the regulatory structure of the IFSC Authority. Indian retail investors will be able to transact on the NSE IFSC platform under the Liberalized Remittance Scheme (LRS) limits prescribed by the RBI. Investors will be provided with an option to trade in fractional quantity value when compared to the underlying shares traded in US markets. It will make the entire process of international investment easy and affordable.

Advantages of investment through Secondary Markets:

• Easy Participation: It provides liquidity and marketability to investors, allowing them to buy and sell securities easily.
• Easy Exit: It allows the investors to exit their investments easily, reducing the risk.
• Allows Public Participation: Easy entry and exit enable everyone to participate in the corporate growth stories of India.

This however also creates risks for the small-capital investors who often invest in securities without adequate information about the risks involved.

Regulation of the Securities Market

Since the general public can participate in the Securities market, it is essential that a regulatory agency works as an advocate of the public to ensure transparency and corporate accountability towards the investors.

In India, this responsibility has been given to the Securities and Exchange Board of India (SEBI).

Securities and Exchange Board of India (SEBI)

Securities and Exchange Board of India (SEBI) was constituted in 1988 as the regulator of securities and commodity markets in India. It gained statutory powers through the SEBI Act of 1992. SEBI has to be responsive to the needs of three groups, which constitute the market: Issuers of securities Investors Market intermediaries Functions of SEBI: SEBI has three functions rolled into one body: Quasi-legislative: It drafts regulations in its legislative capacity. Quasi-executive: it conducts investigation and enforcement action in its executive function. Quasi-judicial: it passes rulings and orders in its judicial capacity. There is a Securities Appellate Tribunal which is a three-member tribunal. It also hears appeals from PFRDA and IRDA. The Second appeal lies directly to the Supreme Court.

FMC – SEBI merger:

Before 2015, FMC (Forwards Market Commission) was the chief regulator of the commodities market and SEBI (Securities and Exchange Board of India) was the regulator of the securities market.

The government merged FMC into SEBI in 2015, promoting SEBI as the main regulator over the Commodities and Stock Exchanges of India. This was done through the following mechanism:

1. The Forward Contracts Regulation Act (FCRA), which dealt with FMC is now repealed.
2. The Securities Contracts Regulation Act (SCRA), 1956 is a stronger law that gives more powers to SEBI than FCRA offered to FMC.

SEBI’s power over Commodities and Securities:

After the merger, SEBI has the following powers:

1. The FMC only regulated the exchanges and had no direct control over brokers. SEBI can do both
2. Also, SEBI has a far superior surveillance, risk-monitoring and enforcement mechanism that market participants say will give more confidence to investors, and may help businesses grow.
3. Among other powers, SEBI now also has the power to access call data records.

Market players feel that commodity markets will now be better regulated, with more stringent processes — and will thus evoke greater confidence.

Traditional investment v/s Alternate investment:

Depending on the investor’s ability to convert the investment into cash, investments can be classified either as Traditional investment or Alternate investment:

Traditional investment:

That investment that can easily be converted into cash is known as Traditional investment. These are heavily regulated and more transparent.

Shares, Bonds and mutual funds are classified as Traditional Investments.

Alternate investment:

Anything alternative to traditional forms of investments. These are less liquid and have different risks and a variety of return policies.

Such instruments include:

• Private Equity – Equity or shareholding in companies that are not publically listed.
• Hedge Funds, Angel investment funds, Venture Capital Funds etc.
• Commodities (even though they are traded in traditional markets)

Alternative Investment Fund

An Alternative Investment Fund or AIF is any fund established or incorporated in India that is a privately pooled investment vehicle that collects funds from sophisticated investors for investing in accordance with a defined investment policy for the benefit of its investors.

Any fund that is not covered under SEBI (Mutual Funds) Regulations, 1996, SEBI (Collective Investment Schemes) Regulations, 1999 or any other fund management regulations.

Importance: It is more flexible according to the nature of the situation.

Categories of AIF

Based on its importance for the Indian economy, SEBI has categorised all alternate investment funds into three categories:

1. Category I AIF: has positive spill-over effects on the economy, for which certain incentives or concessions might be considered by SEBI or the Government of India. They are of 4 types:
   1. Venture capital funds (Including Angel Funds):
      • Angel Investor: who puts their finance into the growth of a small business.
      • Venture Capital: Enters in the later stages of development of a start-up.
   2. SME Funds: to invest in listed/unlisted small and medium enterprises.
   3. Social Venture Funds:to provide seed-funding investment, usually in a for-profit social enterprise, in return to achieve a reasonable gain in financial return while delivering social impact to the world.
   4. Infrastructure funds: to invest in companies that are either directly or indirectly involved in the infrastructure development in India, such as in the industry like energy, power, metals, estate, etc.
2. Category II AIF: for which no specific incentives or concessions are given. They also can not undertake leverage or borrowing other than to meet the permitted day-to-day operational requirements. For example, Private Equity, debt funds, REITs and InvITs.
3. Category III AIFare funds that are considered to have some potential negative externalities in certain situations and which undertake leverage to a great extent; These funds may speculate with a view to making short-term returns. For example, Hedge Funds.

Angel fund

“Angel fund” is a sub-category of Venture Capital Fund under Category I AIF that raises funds from angel investors. “Angel investor” means any person who proposes to invest in an angel fund and satisfies one of the following conditions, namely, An individual investor who has net tangible assets of at least ₹2 crores excluding the value of his principal residence, and  who: Has early-stage investment experience (i.e. experience investing in start-ups), or Has experience as a serial entrepreneur (i.e. promoted or co-promoted more than one start-up), or Is a senior management professional with at least 10 years of experience; A body corporate with a net worth of at least ten crore rupees; or A registered AIF or a VCF registered under the SEBI (Venture Capital Funds) Regulations, 1996. Angel funds shall accept, up to a maximum period of 3 years, an investment of not less than `25 lakh from an angel investor.

 

National Investment Infrastructure Fund (NIIF):

NIIF is a fund of funds with a total corpus of ₹40,000 Cr. It is set up as a trust; the Government will invest ₹20,000 Cr (49%) and the remaining ₹20,000 Cr is expected to come from private investors. It will have two dedicated funds: Roads fund: Clean Energy Fund: Source of Funds: Government budgetary funds, PSUs and Private investors (including anchor partners). Overseas investors: For example, ADB (Asian Development Bank) will invest $100mn in NIIF. Institutional investors: Domestic pension, provident funds and NSSF. International pension funds and sovereign wealth funds from Singapore, Russia and the UAE have shown interest in investing in the fund.

REITs and InvITs:

Both REITs and InvITs are considered Category II AIFs.

1. Real estate investment trust (REIT): Through REITs the physical real estate asset is broken into several parts and converted into a paper investment, or securitised allowing small investors to make investments in large projects.
   • It works like a mutual fund, pooling funds from various investors into one basket.
   • Two major kinds of REITs:
     • Equity: develop properties, either individually or through SPV; Investors earn dividends.
     • Mortgage: Properties are mortgaged.

2. Infrastructure Investment Trusts (InvITs): Modified version of REITs used only for Infrastructure projects. The sponsor of the Trust is required to hold a minimum prescribed proportion of the total units issued. These assets can be transferred at the construction stage or after they have started earning revenues.

Advantages of REITs and InvITs:

• Public ownership ensured: The public authority continues to own the rights to a significant portion of the cash flows and to operate the assets.
• Market-determined valuation: the issues that arise with the transfer of assets to a private party — such as incorrect valuation or an increase in price to the consumer — are less of a problem.

Steps Taken for Promotion of InvITs and REITs:

• Foreign Portfolio Investors can invest in listed debt securities of REITs and InvITs: announcement made in the Budget speech 2021-22. In this context, the GoI as part of the Finance Bill, 2021 has proposed amendments in the Securities Contracts (Regulation) Act, 1956 and SEBI Act, 1992 to confer the power to Pooled Investment Vehicles (Hedge funds/Mutual funds etc.) to borrow and issue debt securities.
• For Retail investors: SEBI, for instance, has recently reduced the minimum investment amount for InvITs and REITs to ₹10,000-₹15,000 to enable retail investors to participate.
• Mutual funds: regulated by the SEBI can invest up to 10% of their assets in a single InvIT/REIT.
• Institutional Investors: PFRDA and EPFO have permitted investments of up to 5% of their corpus in InvITs, albeit with onerous conditions.
• Insurance Companies: IRDA has allowed exposure to InvITs and REITs up to 3% of their own funds’ size or 5% of the units issued by a single trust, whichever is lower.

Other investment Mechanisms

Accredited Investors:

Accredited investors are classified as “a class of investors who may be considered to be well informed or well advised about investment products”. They are generally high-net-worth individuals (NHIs) or entities that have access to complex and high-risk investments.

1. Accredited investors usually enjoy special status under financial regulation laws.
2. They have the flexibility to participate in investment products with an investment amount lesser than the minimum amount mandated in the AIF Regulations and Portfolio Managers (PMS) Regulations.

Accreditation agencies: These are eligible subsidiaries of depositories, specified stock exchanges, and other specified institutions, which are empowered to grant accreditation status and issue Accreditation certificates to accredited investors.

Eligibility to be Accredited Investors:

• A business entity or institution that wishes to invest in listed startups is required to have a net worth of Rs.25 crore to be considered an accredited investor.
• Similarly, for an individual to be considered an accredited investor, a liquid net worth of at least Rs.5 crore and a total annual gross of Rs. 50 lakh is to be maintained.

Fund of funds (FOF)

Also known as a multi-manager investment, a Fund of funds is a pooled investment fund that invests in other types of funds, i.e. its portfolio contains different underlying portfolios of other funds. FOFs usually invest in other mutual funds or hedge funds.

Participatory Notes

Participatory Notes (P-Notes or PNs) are instruments issued by registered foreign portfolio investors (FPI) to overseas investors, who wish to invest in the Indian stock markets without registering themselves with SEBI. SEBI permitted foreign institutional investors to register and participate in the Indian stock market in 1992.

Problems of P-Notes

• The FIIs issue PNs to funds/companies whose identity is not known to the Indian authorities.
• The SIT on Black Money in 2015 raised concerns about P-Notes, especially over the investment coming from the Cayman Islands, the top destination for P-Note investors investing in the Indian securities market.
• Indian investors often siphon money out of India to tax havens like the Cayman Islands and Singapore etc. and then invest back into India using P-Notes through FPI, evading the stringent taxation regime in India.

SEBI tightened norms for P-Notes in 2016, which included steps like:

• Increased KYC requirements,
• Curbs on transferability
• Stringent reporting for P-Notes issuers and holders.
• It mandated issuers to follow anti-money laundering laws.

Gold sector reforms:

Investment in commodities like gold has been one of the most attractive investments. The government has introduced the following reforms in this regard:

• Regulated Gold Exchanges: SEBI is to be notified as a  regulator and the Warehousing Development and Regulatory Authority is to be strengthened
• Regulated vault managers.
• It paves the way for gold exchanges to be set up for trading in ‘Electronic Gold Receipt’. (EGR) like in the case of other securities.

However, investment in gold has certain disadvantages for India. It drains a lot of foreign exchange out of India and produces no physical or otherwise productive asset. In order to encash the Indian public’s thirst for gold, the government has launched the Sovereign gold bond scheme.

Sovereign Gold Bonds

SGBs are government securities denominated in grams of gold:

1. They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity.
2. The Bond is issued by the Reserve Bank on behalf of the Government of India.
3. The Government would also pay interest at the rate of 2.5% (fixed rate) per annum on the amount of initial investment.

This way these would turn out to be an even better investment instrument than gold in terms of return.

Social Stock Exchange:

Non-profit organisations and Non-Governmental Organisations (NGOs) are one of the major sources of investment in India. There are even investors and philanthropists who seek investment opportunities in such NGOs.

Social Stock exchanges were built to bridge this gap. These exchanges list of non-profit organisations, for-profit social enterprises, NGOs etc. that are engaged in 15 broad eligible social activities are approved by SEBI.

Importance of Social Stock Exchanges:

• Social entities can raise funds via equity, issue of zero-coupon, zero-principal bonds, mutual funds, social impact funds and development impact bonds.

Social Venture Funds will be rechristened Social Impact Funds and can have a reduced corpus of ₹5 crore against ₹20 crore prescribed earlier.

FAQs related to Securities Market in India