Features of the Indian Capital Market and the Role of SEBI

8. Comprehensively regulated by statute. Which is the rest of the chapter.

The Securities and Exchange Board of India

Its creation. SEBI existed from 1988 as an administrative body without powers. Section 3 of the SEBI Act 1992 established it as a body corporate with perpetual succession and the power to sue and be sued. The change from an administrative body to a statutory one is the hinge of the modern Indian capital market, and it should be dated: 1992.

Section 11: the duty, and the measures

Section 11(1) states the duty in one sentence: it shall be the duty of the Board to protect the interests of investors in securities and to promote the development of, and to regulate, the securities market, by such measures as it thinks fit.

Three objects, and they are not always compatible. Protection, development and regulation. A rule that protects investors may slow development; one that develops the market may relax protection. Every controversy about a SEBI decision is an argument about the balance among these three, and saying so is worth marks.

Section 11(2) lists the measures, and the list is what an examiner marks. They include:

• (a) regulating the business in stock exchanges and any other securities markets;
• (b) registering and regulating stock brokers, sub brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and other intermediaries;
• (ba) registering and regulating depositories, participants, custodians of securities, foreign institutional investors, credit rating agencies and other specified intermediaries;
• (c) registering and regulating venture capital funds and collective investment schemes, including mutual funds;
• (d) promoting and regulating self regulatory organisations;
• (e) prohibiting fraudulent and unfair trade practices relating to securities markets;
• (f) promoting investors' education and the training of intermediaries;
• (g) prohibiting insider trading in securities;
• (h) regulating substantial acquisition of shares and takeover of companies;
• (i) calling for information from, and undertaking inspection, inquiries and audit of, stock exchanges, mutual funds, intermediaries, other persons associated with the securities market and self regulatory organisations;
• (ia) calling for information and records from any person, including any bank or any authority, board or corporation established under a Central or State Act, which in the Board's opinion is relevant to an investigation or inquiry.

Learn (e), (g) and (h) together. Fraudulent and unfair trade practices, insider trading, and takeovers are the three subjects on which SEBI's regulations are most often litigated, and they are the three where the interests of the ordinary investor are most directly at stake.

The enforcement provisions

Section 11B: directions. Where the Board is satisfied, after an inquiry, that it is necessary in the interests of investors or of the orderly development of the securities market, or to prevent the affairs of an intermediary being conducted in a manner detrimental to investors or to the market, it may issue directions to any person associated with the securities market or to any intermediary. This is the provision under which SEBI restrains a person from dealing in securities.

Section 11C: investigation. Power to appoint an investigating authority where transactions are being dealt with in a manner detrimental to investors or the market, or where an intermediary or a person associated with the securities market has violated the Act, rules or regulations.

Section 12: registration. No stock broker, sub broker, share transfer agent, banker to an issue, trustee of a trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser or other specified intermediary shall buy, sell or deal in securities except under a certificate of registration granted by the Board. Registration is the master control: SEBI regulates the market largely by deciding who may operate in it.

Section 15Y: the civil court's jurisdiction is barred. No civil court shall have jurisdiction to entertain a suit or proceeding in respect of any matter which an adjudicating officer appointed under the Act or the Securities Appellate Tribunal is empowered to determine.

Section 15T: appeal to the Securities Appellate Tribunal. An appeal against an order of the Board lies to the Tribunal. Section 15Z: appeal to the Supreme Court, which any person aggrieved by a decision or order of the Tribunal may file within sixty days of its communication, on any question of law.

Section 20 of the Act, headed Appeals, is a spent provision: it applies only to an order of the Board made before the commencement of the Securities Laws (Second Amendment) Act 1999, and provided an appeal to the Central Government. A student citing it as the present appeal route is citing the pre 1999 position.

Why the features are the way they are

Match each feature to the instrument that produced it, because that is what turns a list into an explanation.

A worked example: how one rule changes the market

The problem, before SEBI's framework matured. A company announces good results at four o'clock. Persons who knew the figures in advance had already bought. The ordinary investor, buying at the published price the next morning, is systematically on the wrong side of every such trade.

What the statute does about it. Section 11(2)(g) makes the prohibition of insider trading one of the measures SEBI may take, and the regulations made under it define unpublished price sensitive information, the persons connected with a company who may not deal on it, and the disclosures they must make. Under section 11C the Board may appoint an investigating authority; under section 11B it may direct a person to cease dealing; and under section 12 it may act against the registration of an intermediary involved.

Why this is a features question and not only a law question. An investor who believes the market is rigged does not participate. Every one of the participation figures in this chapter, 21.6 crore demat accounts, 12 crore unique investors, 5.9 crore mutual fund investors, rests on a belief that the ordinary buyer is not being systematically exploited. Investor protection is not a constraint on market development; in a retail market it is the precondition of it. That is the sentence to end an answer on SEBI with.

What beginners get wrong

"SEBI was established in 1992." SEBI existed from 1988 as an administrative body. Section 3 of the SEBI Act 1992 gave it statutory status as a body corporate, and that is the date that matters.

"SEBI's job is to protect investors." That is one of three objects in section 11(1). The others are to promote the development of and to regulate the securities market, and the three can conflict.

"SEBI regulates all financial markets." It regulates the securities market. Banking and the money market belong to the Reserve Bank, insurance and pensions to their own regulators.

"An aggrieved person can sue SEBI in a civil court." Section 15Y bars the civil court's jurisdiction over any matter which an adjudicating officer or the Securities Appellate Tribunal is empowered to determine, and bars an injunction in respect of anything done under the Act. The route is an appeal to the Tribunal under section 15T and then to the Supreme Court under section 15Z, within sixty days, on a question of law.

"Registration is a formality." Section 12 makes dealing without a certificate of registration unlawful for the listed intermediaries, and it is the principal lever by which the market is regulated.

Limits and criticism

The corporate bond market has not developed in proportion to the equity market, so risk that could be spread among many investors sits on bank balance sheets.

Retail participation is concentrated. The headline counts are large, but a small proportion of accounts accounts for most of the trading, and the rapid growth of retail participation in derivatives has raised its own concerns about losses among small investors.

Regulation is only as good as enforcement. The powers under sections 11B, 11C and 12 are wide; the constraint is the time an investigation takes and the difficulty of proving what a person knew.

The market is exposed to flows it does not control. Foreign portfolio investment responds to conditions abroad, so prices can move sharply for reasons unconnected with Indian companies.

Quick revision

1. Features: a very wide and rapidly growing investor base; spread beyond the metropolitan cities; fully electronic and screen based; dematerialised; settled by clearing corporations on a short cycle; deep in equity and shallow in corporate debt; substantial institutional and foreign participation; and comprehensively regulated by statute.
2. The numbers, Economic Survey 2025-26: 235 lakh demat accounts added in FY26 to December 2025, total beyond 21.6 crore; 12 crore unique investors crossed in September 2025, nearly a fourth women; 5.9 crore mutual fund investors at end December 2025, of whom 3.5 crore as of November 2025 were from beyond tier one and tier two cities.
3. Section 3, SEBI Act 1992: SEBI established as a body corporate. It had existed administratively since 1988.
4. Section 11(1): three objects, to protect investors, to promote the development of and to regulate the securities market. They can conflict.
5. Section 11(2) measures: regulate stock exchanges; register and regulate intermediaries, depositories, custodians, foreign institutional investors and credit rating agencies; register venture capital funds and collective investment schemes including mutual funds; promote self regulatory organisations; prohibit fraudulent and unfair trade practices; investor education; prohibit insider trading; regulate substantial acquisition and takeover; and call for information, inspect, inquire and audit, including from any bank or authority.
6. Enforcement: section 11B directions and penalty; section 11C investigation; section 12 compulsory registration; section 15Y bars the civil court and any injunction; section 15T appeal to the Securities Appellate Tribunal; section 15Z appeal to the Supreme Court within sixty days on a question of law. Section 20 is spent, applying only to Board orders made before the 1999 amendment.
7. The closing idea: investor protection is the precondition of a retail market, not a constraint on it.

Test yourself

1. State the features of the Indian capital market. A very wide and rapidly expanding investor base, with 235 lakh demat accounts added during FY26 to December 2025 taking the total beyond 21.6 crore, unique investors crossing twelve crore in September 2025 and 5.9 crore unique mutual fund investors at the end of December 2025. A spread of participation beyond the metropolitan cities, 3.5 crore of those mutual fund investors coming from beyond tier one and tier two cities. Fully electronic screen based trading with nationwide reach and no trading floor. Securities held in dematerialised form with depositories. Settlement through clearing corporations acting as central counterparties on a short cycle. A deep and active equity market alongside a corporate bond market that remains shallow relative to bank credit. Substantial participation by domestic institutions and by foreign portfolio investors. And comprehensive statutory regulation by the Securities and Exchange Board of India.

2. What is the statutory duty of SEBI, and why is it difficult? Section 11(1) of the SEBI Act 1992 provides that it shall be the duty of the Board to protect the interests of investors in securities and to promote the development of, and to regulate, the securities market, by such measures as it thinks fit. It is difficult because the three objects can pull against one another. A requirement of disclosure or a restriction on a product protects investors but raises the cost of raising capital and may slow the development of the market. A relaxation that develops the market by admitting new instruments or participants may expose investors to risks they cannot assess. And regulation itself has a cost borne by everyone in the market. Every contested decision of the Board is in substance an argument about where the balance among protection, development and regulation should lie.

3. List the measures SEBI may take under section 11(2). Regulating the business in stock exchanges and other securities markets; registering and regulating stock brokers, sub brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and other intermediaries; registering and regulating depositories, participants, custodians of securities, foreign institutional investors and credit rating agencies; registering and regulating venture capital funds and collective investment schemes including mutual funds; promoting and regulating self regulatory organisations; prohibiting fraudulent and unfair trade practices relating to securities markets; promoting investors' education and the training of intermediaries; prohibiting insider trading; regulating substantial acquisition of shares and takeover of companies; and calling for information, undertaking inspection, conducting inquiries and audits of exchanges, mutual funds, intermediaries and self regulatory organisations, including calling for information and records from any person, bank or statutory authority relevant to an investigation.

4. What powers does SEBI have to enforce its regulations? Section 11B empowers the Board, where it is satisfied after an inquiry that it is necessary in the interests of investors or the orderly development of the securities market, or to prevent the affairs of an intermediary being conducted in a manner detrimental to investors or the market, to issue directions to any person associated with the securities market or to any intermediary. Section 11C empowers it to appoint an investigating authority where transactions are being dealt with in a manner detrimental to investors or the market or where a violation of the Act, rules or regulations is suspected. Section 12 makes it unlawful for the specified intermediaries to buy, sell or deal in securities except under a certificate of registration granted by the Board, so control of entry is itself the principal regulatory lever. Section 15Y bars the jurisdiction of civil courts over any matter an adjudicating officer or the Securities Appellate Tribunal is empowered to determine and bars the grant of an injunction in respect of action taken under the Act, while section 15T provides an appeal to that Tribunal and section 15Z a further appeal to the Supreme Court on a question of law within sixty days.

5. Why is investor protection described as the precondition of market development rather than a constraint on it? Because a securities market with a retail base depends on the willingness of ordinary investors to buy instruments whose value they cannot verify from people they do not know. That willingness rests on a belief that the market is not systematically rigged against them: that price sensitive information is not traded on before it is published, that a takeover will not extinguish their holding on terms settled privately, and that fraud will be detected and punished. If that belief fails, participation withdraws and the primary market loses the buyers on which it depends. The Indian participation figures, over 21.6 crore demat accounts and 5.9 crore mutual fund investors, are therefore themselves evidence of the regulatory framework working, and the prohibitions on insider trading and unfair practices in section 11(2)(e) and (g) are as much development measures as protective ones.

6. Why is the shallowness of India's corporate bond market a concern? Because it means that debt which could be held by a wide range of investors is instead held by banks. When a company raises long term funds by issuing bonds, the risk is spread among many holders, each of whom has chosen it and can price and sell it. When it borrows from a bank instead, the risk is concentrated on the bank's balance sheet, and the bank has funded that long term asset with short term deposits, which is the maturity mismatch that makes banking systems fragile. A deeper bond market would also lengthen the maturity of available finance, price credit risk transparently through ratings and yields, and give insurers and pension funds, whose own liabilities are long dated, assets that match them. The absence of one is therefore a structural weakness rather than merely a missing market.