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UNDERSTANDING SECURITIES MARKETS AND PERFORMANCE

UNDERSTANDING SECURITIES MARKETS AND PERFORMANCE

UNDERSTANDING SECURITIES MARKETS AND PERFORMANCE

  • Definition of Securities Markets: A regulated institutional framework for an efficient flow of capital from investors to businesses in the financial market system.
  • Role of Securities Markets: Provides a channel for allocation of savings to investments, linking savings to investments through a variety of intermediaries and financial products called securities.
  • Key Components of Securities Markets:
    • Issuers: Companies, financial institutions, or the government that issue securities to raise funds.
    • Investors: Buyers of securities who convert their savings into financial assets.
    • Intermediaries: Facilitate interaction between investors and issuers, including merchant bankers, brokers, and regulatory bodies like SEBI and RBI.

Key Concept 1: Securities

  • Definition: Financial instruments issued by companies, financial institutions, or the government to raise funds, as defined in Section 2 (h) of the Securities Contracts (Regulation) Act, 1956.
  • Types of Securities:
    • Shares
    • Bonds
    • Debentures
    • Derivatives
    • Units of collective investment schemes
    • Government securities
  • Features of Securities:
    • Represent terms of exchange of money between two parties.
    • Allow borrowers to raise money at a reasonable cost and investors to convert savings into financial assets.
    • Provide a claim to rights represented by the securities, such as ownership or participation in management.
    • Can be broadly classified into equity and debt securities.

Key Concept 2: Structure of Securities Markets

  • Primary Market: Where issuers raise capital by issuing securities to investors, also known as the new issue market.
  • Secondary Market: Facilitates trade in already-issued securities, enabling investors to exit from an investment, also known as the stock/securities exchange.
  • Participants:
    • Investors: Buy securities and provide capital.
    • Issuers: Supply securities and create demand for capital.
    • Financial Intermediaries: Facilitate interaction between investors and issuers.
    • Regulatory Bodies: Oversee and control the entire process of issuance, subscription, and transaction in securities.

UNDERSTANDING SECURITIES MARKETS AND PERFORMANCE (Part 2)

  • Investors: Individuals or organisations with surplus funds to purchase securities, aiming to convert their surplus into financial assets that earn a return.
  • Types of Investors:
    • Retail Investors: Individual investors who invest money on their personal account.
    • Institutional Investors: Organizations that invest large sums of money, employing specialized knowledge and investment skills, such as mutual funds, insurance companies, and pension trusts.
  • Issuers: Organizations that raise money by issuing securities, including:
    • Companies: Issue securities to raise short-term and long-term capital for business operations.
    • Central and State Governments: Issue debt securities to meet short-term and long-term fund requirements.
    • Financial Institutions and Banks: Issue equity or debt securities for capital needs.
    • Mutual Funds: Issue units of a scheme to investors to mobilize money and invest on their behalf.
  • Intermediaries: Agents responsible for coordinating between investors and issuers, including:
    • Asset Management Companies: Offer investment services in selecting and managing a portfolio of securities.
    • Portfolio Managers: Act on behalf of investors in creating and managing a portfolio.
    • Merchant Bankers: Engage in issue management, evaluating capital needs, structuring instruments, and managing the issue process.
    • Stock Brokers: Facilitate new issuance of securities to investors and conduct secondary market transactions on stock exchanges.
    • Authorized Persons: Agents of brokers, registered with stock exchanges, helping to reach services to a larger number of investors.
    • Clearing Members and Trading Members: Members of stock exchanges, responsible for settling transactions and trading securities.
    • Bankers to an Issue: Appointed bankers who collect application forms and money from investors during a new issue.
    • Registrars and Share Transfer Agents: Maintain records of investors for the issuer, updating ownership changes.
    • Depository Participants: Enable investors to hold and transact securities in dematerialized form.
    • Custodians: Hold securities and bank accounts on behalf of institutional investors, managing transactions and accounts.
    • Trustees: Appointed to supervise asset managers or protect lenders' interests.
    • Credit Rating Agencies: Evaluate debt securities to provide a professional opinion on the issuer's ability to meet obligations.

UNDERSTANDING SECURITIES MARKETS AND PERFORMANCE (Part 3)

  • Investment Advisers: Work with investors to help them choose securities based on their needs, time horizon, return expectations, and risk-bearing ability.
  • KYC Registration Agency (KRA): Provides a centralized system for uploading KYC information by securities market intermediaries, with SEBI mandating a uniform KYC procedure for mutual funds, brokers, depository participants, portfolio managers, and venture capital funds.
  • SEBI's Role in KYC: Ensures digital KYC processes are accessible and inclusive for persons with disabilities, maintains a centralized system for KYC information, and promotes investor awareness through an investor charter.
  • Intermediaries' Role and Responsibilities: Laid down in SEBI (Intermediaries) Regulations, 2008, with specific guidelines for each intermediary, requiring registration with SEBI and adherence to a code of conduct that prioritizes investor interests.

Regulators of Securities Markets

  • Securities and Exchange Board of India (SEBI): The chief regulator of securities markets in India, functioning under the Ministry of Finance, with objectives to facilitate growth and development of capital markets and protect investor interests.
  • SEBI's Functions: Include recognizing and regulating stock exchanges, codifying and notifying regulations for securities markets, overseeing primary markets, and conducting inspections and investigations into intermediaries.
  • Reserve Bank of India (RBI): Regulates the money market, foreign exchange market, government securities market, and the Indian banking system, influencing interest rates and borrowing costs.
  • Ministry of Corporate Affairs (MCA): Regulates the corporate sector through the Companies Act, governing the setting up, functioning, audit, and control of companies, as well as the issuance of securities.
  • Ministry of Finance (MoF): Oversees the banking system, insurance, and pension sectors through its Department of Financial Services, and regulates capital markets through the Department of Economic Affairs.
  • Insurance Regulatory and Development Authority of India (IRDAI): Promotes efficiency in the insurance business and protects policyholders' interests, with powers to register, modify, suspend, or cancel insurance registrations.
  • Pension Fund Regulatory and Development Authority of India (PFRDA): Establishes, develops, and regulates pension funds to promote old-age income security and protect subscribers' interests.
  • Insolvency and Bankruptcy Board of India (IBBI): Oversees insolvency proceedings under the Insolvency and Bankruptcy Code, regulating entities like Insolvency Professional Agencies and Information Utilities.
  • International Financial Services Centres Authority (IFSCA): Regulates international financial services centers in India, headquartered at GIFT City, Gandhinagar.

UNDERSTANDING SECURITIES MARKETS AND PERFORMANCE (Part 4)

  • Introduction to IFSCA: The International Financial Services Centres Authority (IFSCA) is a unified authority for the development and regulation of financial products, financial services, and financial institutions in the International Financial Services Centre (IFSC) in India.
  • Role of Securities Markets: Securities markets enable efficient allocation of financial capital and are associated with strong economic growth.
  • Key functions of securities markets include:
    • Orderly channel for transfer of funds: Primary markets channelize savings from investors to borrowers in an organized and regulated manner.
    • Generate productive investments: Securities investment mobilizes individual savings into generating productive capacity for the country, facilitating long-term growth, income, and employment.
    • Liquidity: Secondary markets provide liquidity to securities, allowing them to be sold and converted to cash.
    • Price discovery: The securities market enables buyers and sellers to arrive at a consensus about the ‘fair price’ of a security.
    • Information signaling through prices: Prices reflect information about the issuer of the security or its assets, signaling potential risks or opportunities.
  • Technological advancements in the securities market: The securities market has evolved from primitive and unorganized systems to electronic trading, online trading, and mobile trading, increasing efficiency and accessibility.
  • Cyber Security and Cyber Resilience Framework (CSCRF): The Securities and Exchange Board of India (SEBI) has designed a framework to address evolving cyber threats, align with industry standards, and ensure compliance by SEBI-regulated entities.
  • Key components of CSCRF:
    • Cyber Resilience Goals: Anticipate, Withstand, Contain, Recover, and Evolve.
    • Cybersecurity Functions: Governance, Identify, Protect, Detect, Respond, and Recover.
    • Market Infrastructure Institutions (MIIs): Stock Exchanges, Depositories, Clearing Corporations, KYC Registration Agencies (KRAs), and Qualified Registrars and Transfer Agents (QRTAs).
  • Implementation of CSCRF:
    • REs must prepare a comprehensive cybersecurity and cyber resilience policy document and implement it with Board/Partner/Proprietor approvals.
    • REs must establish, communicate, and enforce cybersecurity risk management roles, responsibilities, and authorities.
    • REs must identify and classify critical systems, approve the list of critical systems, and identify cyber risks.
    • REs must implement security measures, such as strong password controls, two-factor security, and maintenance of logs of user access.
    • REs must conduct periodic audits by a CERT-In empanelled Information Security (IS) auditing organization to ensure compliance with guidelines under CSCRF.

UNDERSTANDING SECURITIES MARKETS AND PERFORMANCE (Part 5)

Crisis Management and Cyber Resilience

  • Crisis Management Plan (CCMP): In the event of an incident, a root cause analysis should be conducted, and forensic analysis should be undertaken for a detailed investigation of any cybersecurity incident.
  • Cyber Resilience Goal: Recover: Plans should be in place for the timely restoration of systems affected by a cyber-threat or security breach, including arrangements for providing alternate systems or services to customers.
  • Cyber Resilience Goal: Evolve: Adaptive and evolving controls should be created and incorporated into the cybersecurity and cyber resilience strategy to tackle identified vulnerabilities and reduce attack surfaces.
  • Reporting: Regulated entities (REs) are required to submit compliance reporting for the Cybersecurity and Cyber Resilience Framework (CSCRF) in a standardized format specified by SEBI.
  • Vendor-managed systems: Vendors managing systems for REs must adhere to SEBI guidelines.
  • Cyber Audit: All REs are mandated to conduct cyber audits at specified periodicity under the CSCRF.

Innovations in Financial Technology (FinTech) and Regulatory Sandbox

  • Innovation Sandbox: A framework introduced by SEBI for offline testing of proposed FinTech solutions in isolation from the live market.
  • Regulatory Sandbox: A framework established by SEBI to allow 'live testing' of financial innovations by private entities on a small scale in a controlled environment and under the supervision of the regulator.
  • Eligibility criteria: SEBI has specified strict eligibility criteria for SEBI-registered market participants interested in availing facilities under the Regulatory Sandbox.
  • Live testing: The proposed innovation should have a genuine need for live testing, should not pose any risks to the financial system, and should add value to existing offerings in the Indian market.
  • Relaxation from regulatory requirements: SEBI may grant partial or comprehensive relaxation from certain regulatory requirements during the testing period, except for investor protection, Know-Your-Customer (KYC), and Anti-Money Laundering (AML) rules.
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