Financial Markets & SEBI
Financial Markets & Instruments
India's financial markets span the money market (T-Bills, CPs, call money) and capital market (equities, G-Secs, corporate bonds). Market cap crossed $4 trillion in 2024. Exams test money market instruments, SEBI functions, stock exchange indices, bond yield dynamics, and mutual fund categories. Know T-Bill maturities, CP minimum rating, and the bond price-yield inverse relationship cold.
Key Dates
Bombay Stock Exchange (BSE) established — Asia's oldest stock exchange
SEBI established as non-statutory body for capital market regulation
SEBI given statutory powers under the SEBI Act 1992; National Stock Exchange (NSE) incorporated
NSE started electronic screen-based trading — revolutionised Indian capital markets
Depositories Act enacted; NSDL (National Securities Depository Limited) established
CDSL (Central Depository Services Limited) established; rolling settlement introduced
Dematerialisation became mandatory; derivatives trading (index futures) began on NSE
FRBM Act limited RBI's participation in primary G-Sec market; Negotiated Dealing System introduced
Currency derivatives (USD-INR futures) launched on NSE; SEBI banned participatory notes (P-Notes) for derivative positions
Gold Monetisation Scheme and Sovereign Gold Bond launched; MUDRA set up for microfinance
IFSCA (International Financial Services Centres Authority) Act passed for GIFT City regulation
India's market capitalisation crossed $4 trillion — 5th largest globally; retail investors crossed 15 crore demat accounts
SEBI introduced T+1 settlement (delivery on next trading day) — India first major market to implement
Financial Markets — Overview & Classification
Financial markets channel savings into productive investment by connecting buyers and sellers of financial instruments. By maturity: Money Market (short-term, up to 1 year) and Capital Market (long-term, over 1 year). By issuance: Primary Market (new securities) and Secondary Market (existing securities traded). By instrument: Debt market (bonds, debentures, G-Secs) and Equity market (shares). By regulation: Organised (SEBI/RBI-regulated, exchange-traded) and Unorganised (informal moneylenders, chit funds — outside regulation). Key participants: Issuers (companies, government), investors (retail, institutional — mutual funds, insurance, pension funds, FPIs), intermediaries (brokers, merchant bankers, underwriters, custodians), and regulators (SEBI for capital market, RBI for money market and G-Secs, IRDAI for insurance, PFRDA for pensions). India's stock market capitalisation: $4+ trillion (2024), ~110% of GDP. Bond market outstanding: ~$2.5 trillion (G-Secs + corporate bonds), ~70% of GDP — still low versus developed markets (US: 150%+). India's corporate bond market remains underdeveloped relative to its equity market, forcing over-reliance on bank lending. Exams ask the four market classifications and regulator assignments.
Money Market — Instruments & Operations
The money market handles short-term funds (up to 1 year). Treasury Bills (T-Bills): RBI issues on behalf of GoI. Maturities: 91-day, 182-day, 364-day. Sold at a discount, redeemed at par — zero-coupon instruments. Minimum investment: Rs 25,000 (in multiples of Rs 25,000). Weekly auctions. Risk-free with sovereign guarantee, they benchmark short-term rates. Commercial Paper (CP): Unsecured promissory notes from corporates rated minimum A3 (CRISIL equivalent). Maturity: 7 days to 1 year. Issued at discount. Minimum: Rs 5 lakh. Cheaper than bank loans for working capital. Certificate of Deposit (CD): Time deposits from scheduled commercial banks (7 days to 1 year) and financial institutions (1-3 years). Issued at discount. Minimum: Rs 1 lakh. Negotiable in the secondary market. Call Money/Notice Money: Overnight (call) or 2-14 day (notice) interbank lending. Only scheduled commercial banks and primary dealers participate. A sharp rise in the call rate signals tight liquidity. Term Money: Interbank deposits for 15 days to 1 year. Repo/Reverse Repo: Part of the LAF. Repo — RBI lends overnight against G-Sec collateral. Reverse repo — RBI absorbs liquidity. TREPS (Tri-Party Repo): Facilitated by CCIL with broader participation including mutual funds, insurance companies, and corporates. Replaced CBLO from November 2018. Banking exams heavily test T-Bill maturities, CP minimum rating, and CD characteristics.
Capital Market — Primary & Secondary Markets
The capital market deals in long-term funds (over 1 year). Primary Market: Companies raise capital directly from investors. IPO (Initial Public Offering): A company's first public share offering meeting SEBI listing requirements. Book-building lets investors bid within a price band; cut-off price is set by demand. Fixed price method sets the price upfront. FPO (Follow-on Public Offer): Listed company issues additional shares. Rights Issue: Offered to existing shareholders proportionally at a discount (e.g., 1:5 = 1 new share for every 5 held). Bonus Issue: Free shares from reserves (e.g., 1:1) — capitalises reserves, no cash raised. OFS (Offer for Sale): Existing shareholders sell through the exchange — used extensively for PSU disinvestment. QIP (Qualified Institutional Placement): Issues to QIBs without a prospectus — faster and cheaper. Secondary Market: Existing securities trade, providing liquidity. BSE benchmark: Sensex (30 stocks, free-float market-cap weighted, base 1978-79). NSE benchmark: Nifty 50 (50 stocks, base November 1995 = 1000). T+1 Settlement: India moved to next-day settlement in January 2023 — first major market globally. This reduces counterparty risk and margin requirements. Circuit breakers halt trading when the index moves 10%, 15%, or 20% from the previous close to prevent panic. SSC asks Sensex stock count and base year. Banking exams test IPO vs FPO vs QIP.
SEBI — Securities & Exchange Board of India
SEBI was established in 1988 as a non-statutory body and gained statutory powers in 1992 under the SEBI Act. HQ: Mumbai. Chairman (2025): Tuhin Kanta Pandey. SEBI is quasi-legislative (makes regulations), quasi-executive (enforces compliance), and quasi-judicial (adjudicates disputes, imposes penalties). Three core functions: (1) Protect investors through education, SCORES grievance portal, and the investor protection fund. (2) Regulate markets through intermediary registration, trading surveillance, and enforcement of insider trading and takeover rules. (3) Promote development through new products, infrastructure, and technology adoption. SEBI regulates: stock exchanges (BSE, NSE, MCX, NCDEX), mutual funds (47 AMCs), credit rating agencies (CRISIL, ICRA, CARE, India Ratings, Brickwork, SMERA, Infomerics), portfolio managers, investment advisers, FPIs, AIFs, REITs, InvITs, depositories (NSDL, CDSL), clearing corporations. Key regulations: (1) Insider Trading (2015): defines "insider" and UPSI. Penalties up to Rs 25 crore or 3x profits. (2) Takeover Code (2011): mandatory open offer at 25%+ acquisition. (3) LODR (2015): corporate governance norms — 1/3 independent directors, audit committee, quarterly disclosures. SEBI can suspend trading, order disgorgement, and bar market participants. SSC asks SEBI establishment year and HQ. Banking exams test SEBI functions and key regulations.
Government Securities & Bond Market
G-Secs are sovereign-guaranteed debt instruments with zero default risk in domestic currency. Dated Securities: Long-term bonds (5-40 years) paying semi-annual coupon interest, traded on NDS-OM. Retail investors can buy via RBI Retail Direct (launched 2021 — direct G-Sec purchase through Gilt Account with RBI). SDLs (State Development Loans): Issued by state governments at slightly higher yield (25-75 bps state risk premium). SLR-eligible. SGBs (Sovereign Gold Bonds): RBI issues on behalf of GoI, denominated in gold grams, paying 2.5% annual interest, with 8-year tenure and 5th-year exit. Capital gains tax-free if held to maturity. Bond terminology: Face value = Rs 100 typically. Coupon rate = annual interest (fixed). Current yield = coupon / market price. YTM (Yield to Maturity) = total return including coupon and capital gain/loss if held to maturity. Prices and yields move inversely: when rates fall, existing higher-coupon bonds become more attractive — price rises, yield falls. When rates rise, prices fall. The yield curve plots yields against maturities. Normal = upward-sloping (longer maturity, higher yield). Flat = similar yields, signals uncertainty. Inverted = short-term yields exceed long-term, historically signals recession. India's curve is typically upward-sloping. The 10-year G-Sec yield (~7% in 2025) benchmarks Indian debt markets. Banking exams test bond price-yield inverse relationship. UPSC asks yield curve shapes and G-Sec auction mechanics.
Corporate Bonds & Debt Market Development
India's corporate bond market is underdeveloped. Outstanding: ~Rs 45 lakh crore ($530 billion, 2024), about 14% of GDP — versus USA 45%, South Korea 80%, China 25%. Four reasons explain the gap. (1) Bank-dominated system: companies prefer bank loans for relationship lending, easier restructuring, and no public disclosure. (2) Illiquid secondary market: insurance companies and provident funds hold most bonds to maturity, generating few trades. (3) Credit rating concentration: issuances cluster at AAA/AA ratings. The BBB and high-yield market barely exists, starving MSMEs of bond financing. (4) Regulatory complexity: stamp duty, TDS on interest, and split SEBI/RBI regulations create friction. Reforms: SEBI's Large Corporate Framework (2019) requires firms with Rs 100 crore+ outstanding borrowing to raise 25% incrementally through bonds. Electronic Book Provider platform improves private placement price discovery. Corporate bond repo (allowed since 2017) improves liquidity. CDS was allowed in 2011 but remains barely used. NaBFID (2021) was established as a DFI to create deep infrastructure bond markets with Rs 1 lakh crore initial corpus. Bond index inclusion (JP Morgan GBI-EM 2024, Bloomberg Global Aggregate) will deepen the overall market through foreign participation. UPSC tests reasons for corporate bond underdevelopment. Banking exams ask about NaBFID's role.
Mutual Funds & Collective Investment
Mutual funds pool investor money for diversified, professionally managed portfolios. Regulated by SEBI. Structure: Sponsor (promoter), AMC (manages), Trustee (oversees), Custodian (holds securities). 47 AMCs registered. Total AUM: Rs 68 lakh crore ($800 billion, December 2024) — 7x growth from Rs 10 lakh crore in 2014. SIP (Systematic Investment Plan) monthly flows exceed Rs 25,000 crore (2024) across 10 crore+ accounts — the backbone of growth. SEBI categorisation (2017): Equity (large-cap, mid-cap, small-cap, multi-cap, sectoral, thematic, ELSS), Debt (liquid, overnight, ultra-short, short, medium, long duration, gilt, credit risk, corporate bond), Hybrid (balanced advantage, aggressive, conservative, arbitrage, equity savings), Solution-oriented (retirement, children), Index funds and ETFs. ELSS: Tax-saving fund with Rs 1.5 lakh deduction under Section 80C and the shortest lock-in at 3 years. NAV = (Total Assets - Total Liabilities) / Units, calculated daily. AMFI's "Mutual Funds Sahi Hai" campaign boosted retail awareness. SEBI caps expense ratios at 2.25% for equity funds (AUM up to Rs 500 crore), reducing with scale. Direct plans (no distributor commission) have lower expense ratios and are increasingly popular. Banking exams test fund categories, ELSS lock-in period, and NAV formula. SSC asks AMFI full form and AUM milestones.
ETFs, REITs, InvITs & Alternative Investments
ETFs trade on exchanges like shares, tracking indices, commodities, or baskets at lower expense ratios than active funds. Types in India: Index ETFs (Nifty 50, Sensex), Gold ETFs, Bharat Bond ETF (invests in CPSE/government entity bonds — series maturing in 2023-2032), international ETFs. Government uses CPSE ETF for PSU disinvestment. REITs (Real Estate Investment Trusts): Let small investors access income-producing real estate (offices, malls) through exchange-traded units. Listed REITs: Embassy Office Parks (India's first, 2019 — Blackstone-Embassy), Mindspace, Brookfield India, Nexus Select Trust. Total AUM: ~Rs 1.3 lakh crore. Must distribute 90% of net distributable cash flows. Minimum: 1 unit (~Rs 300-400). InvITs (Infrastructure Investment Trusts): Similar model for infrastructure — roads, power transmission, gas pipelines. Listed: IRB Infrastructure, India Grid Trust, PowerGrid InvIT (first public sector), National Highways InvIT. AIFs (Alternative Investment Funds): Private pooled vehicles for sophisticated investors. Category I: VC, SME, social venture, infrastructure funds — receive incentives. Category II: PE, debt funds, fund of funds — neutral treatment. Category III: Hedge funds, PIPE funds — complex strategies. Minimum investment: Rs 1 crore (Rs 25 lakh for angel funds). 1,200+ registered AIFs with ~Rs 10 lakh crore commitments. GIFT City IFSC operates under IFSCA with zero GST, 10-year tax holiday, and forex transaction capability. Over 600 entities registered. Banking exams test REIT distribution rules and AIF categories.
Derivatives Market
Derivatives derive value from an underlying asset (equity, commodity, currency, interest rate). Futures: Obligation to buy/sell at a specified price on a future date — standardised exchange-traded contracts with daily mark-to-market settlement. Options: Right (not obligation) to buy (call) or sell (put) at the strike price before/on expiry. Buyer pays a premium. India's derivatives market is one of the world's largest by volume. NSE ranked as the world's largest derivatives exchange by contracts traded (2023-24). Key contracts: stock futures and options (individual stocks), index options (Nifty 50, Bank Nifty, Fin Nifty), currency derivatives (USD/INR, EUR/INR, GBP/INR, JPY/INR), commodity derivatives (gold, silver, crude on MCX; agri on NCDEX). Options dominate: 97%+ of volume. Nifty 50 weekly options are the most traded contracts globally. SEBI flagged concerns — 89% of F&O traders lost money with Rs 1.1 lakh average loss (2023 data). SEBI responded in 2024 with increased lot sizes, reduced weekly expiry days, upfront option premium collection, and removed calendar spread benefit on expiry. Interest rate derivatives: IRS (exchange fixed for floating rate), OIS (referenced to overnight call rate). Credit derivatives: CDS (insurance against bond default) — allowed since 2011 but barely used due to shallow corporate bond markets. Banking exams test futures vs options distinction and SEBI's F&O concerns. SSC asks NSE's global derivatives ranking.
Market Infrastructure & Technology
India's market infrastructure ranks among the world's most advanced. Trading: NSE's NEAT and BSE's BOLT platforms. Co-location servers enable microsecond trading — controversial after the NSE co-location scam (OPG Securities). Clearing and settlement: NSE Clearing and ICCL (for BSE). Central Counterparty (CCP) novation makes the CCP buyer to every seller and seller to every buyer, eliminating bilateral counterparty risk. Settlement guarantee funds ensure completion even if a member defaults. Depositories: NSDL (1996) and CDSL (1999) hold securities in demat form. Total demat accounts: 15+ crore (2024), up from 4 crore in 2019. DPs (banks, brokers, custodians) provide account services. CCIL settles G-Sec and forex trades and runs the NDS-OM and TREPS platforms. Payment systems: RTGS (high-value, real-time, minimum Rs 2 lakh), NEFT (24/7, hourly batch), UPI (instant retail, 14+ billion monthly transactions), NACH (bulk — salaries, dividends, EMIs). Algo trading constitutes 50%+ of cash market and 70%+ of derivatives volume. SEBI requires algo strategy approval and is bringing retail algo trading under regulation (2024 discussion paper). Account Aggregator framework enables consent-based financial data sharing between institutions, improving MSME credit assessment, with 8 AA operators licensed by RBI. Banking exams test NSDL vs CDSL, CCP mechanics, and demat account milestones.
Commodity Markets
India's commodity markets trade physical commodities and derivatives. MCX (Multi Commodity Exchange) is the largest, trading gold, silver, crude oil, natural gas, and base metals (copper, aluminium, zinc, nickel, lead). NCDEX focuses on agricultural commodities: soybean, castor seed, guar, chana, cotton, sugar. SEBI became the commodity regulator in 2015 after FMC merged into it. Key contracts: Gold futures and options (India is 2nd largest gold consumer; MCX gold benchmarks Indian prices). Gold price in India = international price x USD/INR rate + customs duty (15%) + GST (3%). Crude oil: MCX contract linked to WTI/Brent. India imports 85% of crude — price movements directly affect fiscal deficit and CAD. Agricultural futures trading remains controversial. Critics argue it increases price volatility and hurts farmers. Government periodically bans futures in essential commodities — onion, chana, mustard oil were banned in 2021-22 during price spikes. Proponents counter that futures provide price discovery and hedging tools. For farmers, selling futures can lock in prices before harvest — but uptake is limited by illiteracy and contract size. IIBX (India International Bullion Exchange) launched at GIFT City in 2022 for delivery-based gold/silver trading. EGR (Electronic Gold Receipt) bridges physical and financial gold markets. SSC asks which commodities trade on MCX vs NCDEX. Banking exams test gold price calculation and SEBI's FMC merger.
Financial Market Reforms & Investor Protection
Key reforms have strengthened market integrity. Dematerialisation (2000): Mandatory for trading — eliminated forgery, theft, and physical certificate delays. India now has 15+ crore demat accounts. T+1 Settlement (2023): India became the first major market to implement next-day settlement, reducing counterparty risk and releasing margin funds faster. T+0 is under consideration. SEBI SCORES: Online complaint platform against listed companies and intermediaries — 40,000+ complaints resolved annually. IEPF: Unclaimed dividends and shares transfer to the Investor Education and Protection Fund after 7 years. RBI Retail Direct: Retail investors buy G-Secs, SDLs, SGBs, and T-Bills directly through RBI accounts without intermediaries — over 8 lakh accounts by 2024. Insider trading enforcement has intensified — high-profile cases against Reliance (Rs 447 crore penalty, 2020), NDTV promoters, and Satyam. WhatsApp and phone tap evidence are now admissible. Corporate governance reforms: 25% minimum public shareholding, strengthened independent director requirements, mandatory whistle-blower mechanisms. Current challenges: (1) Retail F&O losses (89% lose money). (2) Questionable SME IPO quality — SEBI increasing scrutiny. (3) Finfluencer regulation — SEBI banned registered entities from associating with unregulated social media financial influencers (2024). (4) Cybersecurity threats to market infrastructure — SEBI mandated cyber frameworks for all intermediaries. SSC asks about T+1 settlement. Banking exams test SCORES portal and RBI Retail Direct.
Relevant Exams
Financial markets are heavily tested in banking exams. IBPS PO/Clerk exams regularly ask about money market instruments (T-Bills, CP, CD), SEBI functions, and stock exchange indices. UPSC tests the broader market structure, bond yield dynamics, and government securities. SSC exams ask factual questions about BSE/NSE, mutual fund types, and SEBI headquarters.