The Pillars of Indian Capital Markets: SEBI, Stock Exchanges, Depositories, and the Regulatory Framework
The Indian stock market stands as a cornerstone of the nation's economic architecture, acting as a vital engine for capital formation and a crucial platform for investment. By providing a structured and regulated environment for the trading of securities, stock exchanges empower companies to raise essential capital for growth and innovation, while simultaneously offering investors diverse avenues for wealth creation. This intricate ecosystem is underpinned by a robust legal framework and facilitated by key institutions, primarily stock exchanges and depositories, each playing a distinct yet interconnected role in ensuring the efficient and transparent functioning of the market.
As per the Securities Contracts (Regulation) Act, 1956 under Section 2(j) defines a “stock exchange” means—
(a) any body of individuals, whether incorporated or not, constituted before corporatisation and demutualisation under sections 4A and 4B, or
(b) a body corporate incorporated under the Companies Act, 1956 whether under a scheme of corporatisation and demutualisation or otherwise, for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities;
This broad definition acknowledges the historical evolution of these institutions and their fundamental role in the securities market. Furthermore, the SCRA distinguishes between a stock exchange and a "recognized stock exchange," the latter being conferred this status by the Central Government under Section 4 of the Act upon satisfaction that its organization and rules are conducive to fair trading and the protection of investor interests. This recognition is a prerequisite for a stock exchange to operate lawfully and provide a legitimate platform for securities transactions within India's regulatory ambit.
Historically, India had approx 23 stock exchanges such as the Ahmedabad Stock Exchange, the Madras Stock Exchange and the Delhi Stock Exchange played localized roles in capital mobilization and investment opportunities. However, the dynamics of the Indian financial market have undergone a significant transformation, marked by a natural process of consolidation driven by economic realities and regulatory imperatives.
Factors such as diminishing trading volumes on regional platforms, the increasing complexities and costs associated with regulatory compliance, and the formidable competition posed by the national behemoths, the Bombay Stock Exchange (BSE) and the National Stock Exchange of India (NSE), led to a gradual decline in the operational viability of many regional exchanges.
Consequently, a majority of these exchanges either ceased operations, or became inactive like the Calcutta Stock Exchange(which is listed but inactive and matters pertaining to it are subjudice), or were granted a formal exit by the Securities and Exchange Board of India (SEBI) under its well-defined Exit Policy for De-recognized/Non-operational Stock Exchanges.
As of the year 2025, the Indian stock market is predominantly shaped by a few key players. BSE and NSE stand as the dominant forces in the equity segment, commanding the lion's share of trading activity and market capitalization. These exchanges have evolved into technologically advanced platforms offering a wide array of financial products and services. Complementing their role in the equity market are specialized commodity exchanges such as the Multi Commodity Exchange of India (MCX) and the National Commodity & Derivatives Exchange Limited (NCDEX), which cater to the specific needs of trading in various commodities, including metals, energy, and agricultural produce. Furthermore, NSE has established a wholly-owned subsidiary, NSE IFSC Limited (NSEIX), operating within Gujarat International Finance Tec-City (GIFT City). Incorporated in 2016, NSEIX serves as an international exchange platform, facilitating the management of both inbound and outbound investments, thereby expanding India's reach in the global financial landscape.
Integral to the efficient functioning of stock exchanges trade and the overall securities market is through depositories, established under the sec 3 of Depositories Act, 1996. These entities serve as custodians of securities held in electronic form, providing a secure and efficient mechanism for their storage, transfer, and settlement. In India, two primary depositories operate: the National Securities Depository Limited (NSDL), and the Central Depository Services Limited (CDSL).
The advent of depositories and the process of dematerialization (demat) have revolutionized the way securities are held and traded, effectively eliminating the inherent risks associated with physical share certificates, such as loss, theft, or forgery. By enabling investors to hold their securities in electronic accounts, depositories have significantly enhanced the safety, speed, and convenience of securities transactions.
Facilitating the interface between investors and depositories are Depository Participants (DPs). These intermediaries, which include banks, brokers, and other financial institutions, are registered with the depositories to provide a range of services to investors. DPs play a crucial role in opening and managing demat accounts, executing transfer instructions for securities, and assisting investors with various corporate actions such as dividend payouts and bonus share issuances. They act as the vital link that ensures accessibility and convenience for investors to participate in the dematerialized securities market.
The ownership and governance structures of key market infrastructure institutions like NSE and BSE are critical for maintaining market integrity and investor confidence. BSE, is a limited company(BSE Ltd), holds the unique distinction of being listed on the NSE itself, making it a publicly traded entity with a broader shareholder base including institutional investors, financial institutions, and retail participants. As of today National Stock Exchange of India Ltd itself is not listed on any stock exchange. Its shares are privately held(unlisted) by various domestic and global financial institutions, public and privately-owned entities, and individuals.
Both BSE and NSE have undergone the process of demutualization as per sec 4A and 4B of SCRA, like BSE underwent it under BSE (Corporatization and Demutualization) Scheme, 2005 a significant structural reform that separates ownership from trading rights. This separation ensures that the management of these exchanges is aligned with the broader interests of all stakeholders, rather than being unduly influenced by the interests of trading members. Furthermore, both exchanges have established their own clearing corporations – ICCL (Indian Clearing Corporation Limited) for BSE and NSCCL (NSE Clearing Limited) for NSE – which are responsible for handling the crucial functions of clearing and settlement of trades, thereby mitigating counterparty risks and ensuring the smooth flow of transactions.
The operations of stock exchanges and depositories in India are governed by a comprehensive and evolving legal and regulatory framework, with the Securities and Exchange Board of India serving as the primary regulatory authority.
Several key legislative enactments and regulations form the bedrock of this framework.
The Securities Contracts (Regulation) Act, 1956 ]provides the foundational legal basis for the recognition, operation, and regulation of stock exchanges, defining securities, outlining listing and trading processes, and empowering the Central Government in their oversight. Under Sec 8 of the Act it empowers Central Government to direct rules to be made or to make rules.
The SEBI Act, 1992, established SEBI as the apex regulator, tasked with protecting investor interests, promoting market development, and regulating intermediaries.
The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR), mandate stringent disclosure and corporate governance norms for listed companies to ensure transparency and protect shareholder rights.
The Depositories Act, 1996, provides the legal framework for the establishment and functioning of depositories and depository participants, enabling the dematerialization of securities and ensuring secure electronic holding and transfer. SEBI (Depositories and Participants) Regulations, 2018: These regulations govern the registration and functioning of depositories and depository participants in consonance with parent legislation.
The Foreign Exchange Management Act, 1999 (FEMA), governs foreign investments in Indian stock markets, facilitating cross-border capital flows.
Furthermore, regulations such as the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 and the Takeover Regulations, 2011, address specific aspects of market conduct, prohibiting insider trading and ensuring fair practices during mergers and acquisitions, respectively.
The SEBI (Intermediaries) Regulations, 2008, provide a framework for the registration, regulation, and obligations of various intermediaries in the Indian securities market, such as stockbrokers and clearing members. These regulations also outline the procedures for inspection, disciplinary actions, and the suspension or cancellation of the registration of intermediaries in case of defaults.
Companies Act 2013, under Section 40 of the Act mandates that companies making a public offer must apply to one or more recognized stock exchanges and obtain permission for their securities to be dealt with on those exchanges. This ensures a level of scrutiny and compliance before a company can access public capital through the stock market. Section 26 of the Companies Act, 2013, along with the Companies (Prospectus and Allotment of Securities) Rules, 2014, specifies the information that must be included in a prospectus.
The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, govern various capital-raising activities in the Indian securities market, including public issues, rights issues (₹10 crores and above), preferential issues (₹10 crores and above), bonus share issues by listed entities, Qualified Institutions Placements by listed entities, Indian Depository Receipt issuances, Small and Medium Enterprise IPOs, and listing without a public issue.
The SEBI (Mutual Funds) Regulations, 1996, while primarily aimed at governing the establishment and operation of mutual funds in India and safeguarding the interests of mutual fund investors, have a significant indirect impact on the stock market due to the substantial role mutual funds play as investors.
SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 2003: These are broad regulations used to combat market manipulation, price rigging, and other deceptive practices.
In conclusion, SEBI, stock exchanges and depositories are indispensable pillars of the Indian capital market, playing critical roles in facilitating economic development and providing investment opportunities. Their operations are intricately governed by a robust and evolving legal and regulatory framework designed to ensure market integrity, protect investor interests, and promote orderly growth. The consolidation of exchanges, the widespread adoption of dematerialization, and the proactive role of SEBI in strengthening regulations underscore India's commitment to maintaining a fair, efficient, and transparent securities market, which is fundamental to its continued economic progress and the financial well-being of its investors.
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