SEBI
Topic22 SEBI Capital Market Primary Secondary
SEBI and Capital Market — Role in Primary & Secondary Markets
Topic 22 — SEBI's Regulatory Role in IPOs, FPOs, Rights Issues, Trading & Market Infrastructure | SEBI Law Officer
SEBI's role in the capital market is comprehensive — covering both the primary market (where new securities are issued) and the secondary market (where existing securities are traded). The primary market regulation ensures that companies accessing public funds do so with full disclosure and fair practices. The secondary market regulation ensures that trading is fair, orderly, and free from manipulation. Together, these functions implement SEBI's three-fold mandate of investor protection, market development, and market regulation.
1. Primary Market — Overview
Primary Market: The primary market is where securities are issued for the first time — where companies, governments, or other issuers raise funds from investors. New securities are created and sold directly by the issuer. Key transactions include: Initial Public Offerings (IPOs), Follow-on Public Offerings (FPOs), Rights Issues, Qualified Institutions Placements (QIPs), Private Placements, and Non-Convertible Debenture (NCD) issuances. |
Primary Market Instrument | Description | Key SEBI Regulation |
|---|---|---|
Initial Public Offering (IPO) | First-ever public offer of shares by a company — listing on BSE/NSE | SEBI (ICDR) Regulations, 2018 |
Follow-on Public Offering (FPO) | Additional public offer by an already-listed company | SEBI (ICDR) Regulations, 2018 |
Rights Issue | Issue of new shares to existing shareholders in proportion to holdings | SEBI (ICDR) Regulations, 2018 |
Qualified Institutions Placement (QIP) | Preferential placement to Qualified Institutional Buyers (QIBs) — no prospectus required | SEBI (ICDR) Regulations, 2018 |
Private Placement | Issue to a select group (max 200 investors per financial year) | Companies Act, 2013 + SEBI |
NCD Public Issue | Public offer of Non-Convertible Debentures (bonds) | SEBI (Issue & Listing of Debt Securities) Regulations, 2008 |
Infrastructure Investment Trusts (InvITs) / REITs | Public offer of InvIT/REIT units | SEBI (InvIT) Regulations 2014; SEBI (REIT) Regulations 2014 |
2. SEBI's Role in Primary Market Regulation
2.1 SEBI (ICDR) Regulations, 2018 — Key Framework
The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR) are the primary legislation governing public issues in India. SEBI's role under ICDR:
- DRHP review: Draft Red Herring Prospectus (DRHP) is filed with SEBI — SEBI reviews and issues observations. Observations do NOT mean SEBI endorses the issue; SEBI only reviews for compliance with disclosure norms.
- Mandatory disclosures: Risk factors, litigation, financial statements, promoter background, use of proceeds, related party transactions — all mandatory in the prospectus.
- Book Building Process: Most IPOs use price discovery through book building — 75% of issue reserved for Qualified Institutional Buyers (QIBs); 15% for Non-Institutional Investors (NIIs); 10% for Retail Individual Investors (RIIs).
- Promoter lock-in: Promoters must hold minimum 20% post-IPO equity locked in for 18 months (excess promoter holding: 6 months).
- T+6 listing: Securities must be listed within 6 working days of issue closing. SEBI has further reduced this to T+3 for main board IPOs.
2.2 Merchant Bankers — Key Role in Primary Market
Merchant bankers (lead managers/book running lead managers) play the central role in primary market issuances:
- Due diligence — verify all disclosures in the prospectus.
- Coordinate the issue process — legal advisers, registrars, bankers to the issue, auditors.
- Liability: Merchant bankers are jointly and severally liable for the accuracy of the prospectus. SEBI can take action against merchant bankers for inadequate due diligence.
3. Secondary Market — Overview
Secondary Market: The secondary market is where previously issued securities are bought and sold among investors — without the issuer receiving proceeds. The secondary market provides liquidity to investors and enables price discovery. Key components: stock exchanges (BSE, NSE), clearing corporations (NSCCL, ICCL), depositories (NSDL, CDSL), and market intermediaries (brokers, DPs, custodians). |
Secondary Market Segment | Description | Regulator |
|---|---|---|
Equity Cash Segment | Buying/selling of listed shares — T+1 settlement | SEBI / Stock Exchanges |
Equity Derivatives (F&O) | Index/stock futures and options — monthly/weekly expiry | SEBI / Stock Exchanges |
Currency Derivatives | USD-INR, EUR-INR currency futures/options | SEBI (with RBI oversight) |
Interest Rate Futures | G-Sec based futures — T-bill, 10-year bond | SEBI (with RBI oversight) |
Debt Market (Corporate Bonds) | Secondary trading of corporate bonds on BSE/NSE | SEBI |
SME Platforms | BSE SME, NSE Emerge — smaller companies' equity | SEBI / Stock Exchanges |
Commodity Derivatives | Crude oil, gold, agri futures/options | SEBI (merged with FMC in 2015) |
4. SEBI's Role in Secondary Market Regulation
4.1 Market Surveillance
SEBI operates the Integrated Market Surveillance System (IMSS) — a real-time market monitoring platform that:
- Monitors trading patterns across all exchanges for unusual price movements and volumes.
- Identifies concentrated positions, circular trading, and potential front-running.
- Generates automatic alerts triggering investigation orders under Section 11C.
- Exchanges also conduct first-level surveillance — SEBI provides oversight of exchange surveillance systems.
4.2 Circuit Breakers and Price Bands
SEBI has mandated market-wide circuit breakers to prevent extreme intraday volatility:
Index Movement | Circuit Breaker Action | Duration of Halt |
|---|---|---|
10% movement in BSE Sensex or NSE Nifty | 15-minute trading halt on all exchanges | 15 minutes (before 1 PM); 45 minutes (1 PM–2:30 PM); rest of day (after 2:30 PM) |
15% movement | 45-minute halt (before 1 PM); rest of day (after 1 PM) | As specified |
20% movement | Trading halted for remainder of the day | Rest of trading day |
4.3 Short Selling Regulation
SEBI regulates short selling through its Short Selling Framework (2008):
- Naked short selling (selling shares you don't own without borrowing) is prohibited.
- Covered short selling (with Securities Lending and Borrowing — SLB) is permitted.
- Institutional investors must declare short positions at the time of order placement.
- SEBI can temporarily ban short selling in specific securities under Section 15 SCRA.
5. Market Infrastructure Institutions (MIIs)
SEBI regulates Market Infrastructure Institutions — the backbone of the securities market:
MII | Function | Regulation |
|---|---|---|
Stock Exchanges (NSE, BSE) | Trading platform; first-line regulator of members | SEBI (Stock Brokers) Regulations; SCRA |
Clearing Corporations (NSCCL, ICCL) | Settlement guarantee; counterparty risk; margining | SEBI (Clearing Corporations) Regulations, 2012 |
Depositories (NSDL, CDSL) | Demat account maintenance; transfer of securities | Depositories Act, 1996; SEBI (Depositories & Participants) Regulations |
✅ FMC-SEBI Merger (2015) In September 2015, the Forward Markets Commission (FMC) — regulator of commodity derivatives — was merged into SEBI. SEBI became the unified regulator for all securities and commodity derivatives. This merger eliminated regulatory arbitrage between securities and commodity markets and brought commodity exchanges (MCX, NCDEX) under SEBI's oversight. |
6. Key Legislative Framework — Primary & Secondary Markets
Market Segment | Key Legislation / Regulation |
|---|---|
Public Issues (IPO/FPO/Rights) | SEBI (ICDR) Regulations, 2018 + Companies Act, 2013 (Sections 23-42) |
Listing & Continuous Disclosure | SEBI (LODR) Regulations, 2015 + SCRA Section 21 |
Secondary Trading | SCRA, 1956 + SEBI (Stock Brokers) Regulations, 1992 |
Derivatives | SCRA Section 18A + SEBI (F&O) Regulations |
Takeovers | SEBI (SAST) Regulations, 2011 |
Insider Trading | SEBI (PIT) Regulations, 2015 |
Market Manipulation/Fraud | SEBI (PFUTP) Regulations, 2003 |
Mutual Funds | SEBI (Mutual Funds) Regulations, 1996 |
AIFs | SEBI (AIF) Regulations, 2012 |
REITs/InvITs | SEBI (REIT) Regulations 2014; SEBI (InvIT) Regulations 2014 |
7. Model Examination Questions
Q1. Describe SEBI's regulatory role in the primary and secondary capital markets in India.
SEBI's Role in Primary & Secondary Capital Markets Model Answer — PRIMARY MARKET: SEBI regulates all public offers of securities under the SEBI (ICDR) Regulations, 2018 (source: Section 11A SEBI Act). Key functions: DRHP review (SEBI issues observations — NOT endorsement); mandatory disclosure framework (prospectus requirements — risk factors, financials, promoter background); book building process regulation (QIB 75% / NII 15% / RII 10%); promoter lock-in (18 months for minimum 20% post-IPO equity); T+3/T+6 listing timeline. Merchant bankers are primary market gatekeepers — SEBI can take action for inadequate due diligence. SECONDARY MARKET: SEBI regulates through: (i) Market surveillance (IMSS — real-time monitoring; circuit breakers at 10/15/20% index movement); (ii) Short selling regulation (naked short selling banned; SLB permitted for covered shorts); (iii) PFUTP Regulations 2003 (anti-manipulation); (iv) PIT Regulations 2015 (insider trading prevention); (v) SAST Regulations 2011 (takeover regulation). SEBI regulates Market Infrastructure Institutions — stock exchanges (NSE/BSE), clearing corporations (NSCCL/ICCL), and depositories (NSDL/CDSL). Post-2015 FMC merger, SEBI is the unified regulator for securities AND commodity derivatives. |
🎯 EXAM POINTERS — Topic 22: SEBI and Capital Market
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