Page 312 - DMGT207_MANAGEMENT_OF_FINANCES

Unit 14: Capital Market and Financial Institutions

Derivatives are usually broadly categorized by: Notes
 The relationship between the underlying and the derivative (e.g. forward, option, swap)
 The type of underlying (e.g. equity derivatives, foreign exchange derivatives and credit
derivatives)
 The market in which they trade (e.g., exchange traded or over-the-counter)

Self Assessment

State whether the following statements are true or false:
8. In private placement shares are issued to foreign investors.
9. The preference shares which can be concerted into equity shares are called convertible
preference shares.
10. Sweat equity shares are issued under section 79A of Companies Act, 1956.
11. Derivatives are often leveraged, such that a small movement in the underlying value can
cause a small difference in the value of the derivative.
12. If there are no profits in a company then no dividends will be payable to the equity share
holders.

14.5 Regulatory Framework of Capital Market

In India, the capital market is regulated by the Capital Markets Division of the Department of
Economic Affairs, Ministry of Finance. The division is responsible for formulating the policies
related to the orderly growth and development of the securities markets (i.e. share, debt and
derivatives) as well as protecting the interest of the investors. In particular, it is responsible for
(i) institutional reforms in the securities markets, (ii) building regulatory and market institutions,
(iii) strengthening investor protection mechanism, and (iv) providing efficient legislative
framework for securities markets, such as Securities and Exchange Board of India Act, 1992 (SEBI
Act 1992); Securities Contracts (Regulation) Act, 1956; and the Depositories Act, 1996. The division
administers these legislations and the rules framed thereunder.
The Securities and Exchange Board of India (SEBI) is the regulatory authority established under
the SEBI Act 1992, in order to protect the interests of the investors in securities as well as promote
the development of the capital market. It involves regulating the business in stock exchanges;
supervising the working of stock brokers, share transfer agents, merchant bankers, underwriters,
etc; as well as prohibiting unfair trade practices in the securities market. The following departments
of SEBI take care of the activities in the secondary market:
 Market Intermediaries Registration and Supervision Department (MIRSD): Concerned
with the registration, supervision, compliance monitoring and inspections of all market
intermediaries in respect of all segments of the markets, such as equity, equity derivatives,
debt and debt related derivatives.
 Market Regulation Department (MRD): Concerned with formulation of new policies as
well as supervising the functioning and operations (except relating to derivatives) of
securities exchanges, their subsidiaries, and market institutions such as Clearing and
settlement organizations and Depositories.

 Derivatives and New Products Departments (DNPD): Concerned with supervising trading
at derivatives segments of stock exchanges, introducing new products to be traded and
consequent policy changes.

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