Paper IPaper I · Economy
Capital Markets and SEBI
Primary versus secondary markets, IPO and FPO, the BSE (1875) and NSE, Sensex and Nifty, equity, bonds and debentures, mutual funds and the demat-depository system (NSDL, CDSL), SEBI (statutory 1992) and its functions, FII and FPI flows, derivatives, and the security and investor-protection angle for CAPF Paper I
CAPF wiki•9 min read•20 sections
At a glance
PaperPaper ISubjectEconomySyllabusIndian Polity and Economy: economic development in IndiaImportanceMedium
Capital MarketsSEBIBseNseSensexNiftyIpoShares
The capital market is where long-term funds are raised and traded: companies issue shares and bonds, and investors buy and sell them. CAPF tests the clean static facts: the difference between the primary and secondary market, the meaning of an IPO, the BSE (Asia's oldest stock exchange, 1875) and the NSE, the Sensex and Nifty benchmark indices, the role of SEBI (the statutory markets regulator since 1992), the demat-depository system (NSDL and CDSL), and the FII or FPI route through which foreign portfolio money enters. These are recognition facts that pair naturally with the banking note. The standard references are the SEBI website, NCERT business-studies and macroeconomics material, and Ramesh Singh's "Indian Economy".
- Money market: short-term funds (up to one year). Instruments include Treasury Bills, Commercial Paper, Certificates of Deposit, and Call Money. Regulated by the RBI.
- Capital market: long-term funds (over one year), in equity and debt. Regulated by SEBI.
- Primary market: where securities are issued for the first time and the company raises fresh capital.
- IPO (Initial Public Offering): a company's first sale of shares to the public.
- FPO (Follow-on Public Offer): a further public issue by an already-listed company.
- Rights issue: shares offered first to existing shareholders.
- Private placement: a direct issue to a small set of investors.
- Secondary market: where already-issued securities are traded among investors, on a stock exchange. No fresh capital reaches the company here; it provides liquidity and price discovery.
| Instrument |
Nature |
| Equity share |
Ownership in a company; carries voting rights and a residual claim (dividends) |
| Preference share |
Fixed dividend, priority over equity, usually no voting right |
| Debenture / bond |
A debt instrument; the holder is a creditor earning interest |
| Government security (G-sec) |
Sovereign debt issued by the Government, low risk |
| Mutual fund unit |
A pooled investment managed by an Asset Management Company |
| Derivative |
A contract whose value derives from an underlying asset (futures, options) |
- Equity holders are owners; bond and debenture holders are creditors. In a wind-up, creditors are paid before owners.
- Bombay Stock Exchange (BSE): established 1875, Asia's oldest stock exchange; its benchmark index is the Sensex (S&P BSE Sensex), a basket of 30 large companies.
- National Stock Exchange (NSE): established 1992, fully electronic; its benchmark index is the Nifty 50, a basket of 50 large companies.
- A stock index tracks the weighted price of a representative basket and signals overall market direction. A rising index is a bull market; a falling one is a bear market.
- Shares are now held in dematerialised (demat) electronic form, not as paper certificates.
- A depository holds securities in electronic form. India has two: NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Limited).
- A Depository Participant (DP) is the intermediary (usually a broker or bank) through which an investor opens a demat account.
- FPI / FII (Foreign Portfolio / Institutional Investment): foreign money invested in shares and bonds, which can flow in and out quickly ("hot money"). Distinct from FDI (Foreign Direct Investment), which is a lasting stake in a business (see external sector trade and bop).
- Large FPI inflows lift markets and the rupee; sudden outflows can trigger volatility, which is why portfolio flows are watched closely for financial stability.
- The Securities and Exchange Board of India (SEBI) was set up in 1988 and given statutory powers in 1992 under the SEBI Act, 1992. Its headquarters is in Mumbai.
- SEBI's three-fold mandate is to protect investors, develop the securities market, and regulate it.
- Register and regulate market intermediaries (brokers, merchant bankers, mutual funds, registrars, DPs).
- Regulate stock exchanges and their listing rules.
- Prohibit insider trading, fraudulent and unfair trade practices, and market manipulation.
- Regulate substantial acquisitions and takeovers of companies.
- Promote investor education and grievance redress (the SCORES platform).
- Conduct inspections, inquiries and audits, and impose penalties.
SEBI is one of the four main financial-sector regulators, alongside the RBI (banks, money market), IRDAI (insurance), and PFRDA (pensions).
| Item |
Value or definition |
| Capital-market regulator |
SEBI (statutory 1992, SEBI Act 1992) |
| Money-market regulator |
RBI |
| SEBI headquarters |
Mumbai |
| Oldest stock exchange in Asia |
Bombay Stock Exchange (BSE), 1875 |
| BSE benchmark index |
Sensex (30 companies) |
| NSE established |
1992 (electronic) |
| NSE benchmark index |
Nifty 50 (50 companies) |
| Depositories |
NSDL and CDSL |
| First sale of shares to the public |
IPO (Initial Public Offering) |
| Owners of the company |
Equity shareholders |
| Creditors of the company |
Bond and debenture holders |
| Foreign portfolio route |
FPI / FII (versus FDI, a lasting stake) |
| Rising market / falling market |
Bull / Bear |
- Investor protection is SEBI's first mandate; CAPF rewards recognition that SEBI, not the RBI, polices stock-market fraud, insider trading, and ponzi or chit-fund-style scams that prey on small investors.
- Market integrity and financial stability are governance concerns: manipulation, pump-and-dump schemes, and unregulated collective investment schemes can erode public savings and trust.
- Anti-money-laundering reaches the markets too: brokers and DPs follow KYC norms, and suspicious securities transactions are reported to the Financial Intelligence Unit (FIU-IND), linking the capital market to counter-terror-financing (see banking and financial sector reforms).
- Sudden portfolio outflows can destabilise the rupee and reserves, so the FPI route is monitored as part of external-sector and financial-stability management.
All items below are authored practice, not verbatim PYQs.
-
The regulator of the securities market in India is:
a) the RBI b) SEBI c) IRDAI d) PFRDA
Answer: b. SEBI (statutory since 1992) regulates the securities market.
-
The benchmark index of the National Stock Exchange is the:
a) Sensex b) Nifty 50 c) Dow Jones d) Nikkei
Answer: b. The Nifty 50 is the NSE index; the Sensex is the BSE index.
-
A company raises fresh capital by issuing shares to the public for the first time through a/an:
a) FPO b) rights issue c) IPO d) buyback
Answer: c. An IPO (Initial Public Offering) is the first public sale of shares.
-
In a company, the holders of debentures are best described as:
a) owners b) creditors c) regulators d) promoters
Answer: b. Debenture and bond holders are creditors; equity shareholders are owners.
-
Shares are held in electronic form through depositories such as:
a) NSDL and CDSL b) BSE and NSE c) RBI and SEBI d) NABARD and SIDBI
Answer: a. NSDL and CDSL are India's two depositories.
-
The Bombay Stock Exchange, the oldest in Asia, was established in:
a) 1875 b) 1947 c) 1969 d) 1992
Answer: a. The BSE was established in 1875.
- Primary versus secondary market: the primary market issues new securities and the company gets the money; the secondary market trades existing securities among investors.
- Money market versus capital market: money market is short-term (RBI-regulated); capital market is long-term (SEBI-regulated).
- Equity versus debt: equity holders own the company and bear residual risk; bond and debenture holders are creditors with a fixed claim.
- Sensex versus Nifty: Sensex is the BSE index of 30 firms; Nifty 50 is the NSE index of 50 firms.
- FPI versus FDI: FPI is volatile portfolio money in shares and bonds; FDI is a lasting management stake in a business.
- SEBI versus RBI: SEBI regulates the securities market; the RBI regulates banks and the money market.
- "Sensex on the BSE has 30; Nifty 50 on the NSE has 50."
- "Primary brings new money, Secondary brings liquidity."
- "Equity owns, Debt lends."
- "SEBI guards Shareholders" for the investor-protection mandate.
- SEBI is the securities-market regulator, statutory since 1992 under the SEBI Act, 1992; HQ Mumbai.
- BSE (1875, Asia's oldest) tracks the Sensex (30); NSE (1992) tracks the Nifty 50 (50).
- The primary market issues new securities (IPO, FPO); the secondary market trades them.
- Equity holders are owners; bond and debenture holders are creditors.
- Shares are held in demat form via NSDL and CDSL.
- FPI is volatile portfolio money; FDI is a lasting business stake.
- The capital market handles long-term funds; SEBI regulates it (statutory 1992).
- The money market handles short-term funds; the RBI regulates it.
- The primary market issues new securities; the company raises fresh capital there.
- The secondary market trades existing securities and provides liquidity and price discovery.
- An IPO is a company's first public sale of shares.
- Equity shareholders own the company; debenture and bond holders are its creditors.
- The BSE (1875) is Asia's oldest stock exchange; its index is the Sensex (30 firms).
- The NSE (1992) is electronic; its index is the Nifty 50 (50 firms).
- Shares are held in dematerialised form through the depositories NSDL and CDSL.
- A Depository Participant is the intermediary for opening a demat account.
- FPI or FII is volatile foreign portfolio money in shares and bonds.
- FDI is a lasting foreign stake in a business, unlike portfolio flows.
- SEBI protects investors, develops the market, and regulates it.
- SEBI prohibits insider trading and unfair trade practices.
- A bull market rises; a bear market falls.
- Primary market: where new securities are issued and the company raises capital.
- Secondary market: where existing securities are traded among investors.
- IPO: an Initial Public Offering, a company's first public share sale.
- Equity share: a unit of ownership with voting rights and a residual claim.
- Debenture / bond: a debt instrument; the holder is a creditor.
- Sensex: the BSE benchmark index of 30 large companies.
- Nifty 50: the NSE benchmark index of 50 large companies.
- SEBI: the Securities and Exchange Board of India, the markets regulator.
- Demat: holding securities in electronic, dematerialised form.
- Depository: an institution holding securities electronically (NSDL, CDSL).
- FPI / FII: foreign portfolio or institutional investment in shares and bonds.
- Derivative: a contract whose value derives from an underlying asset.
- Insider trading: trading on undisclosed price-sensitive information, prohibited by SEBI.
- Bull / bear market: a rising / falling market.
Index levels (Sensex and Nifty), large IPOs, and the scale of FPI inflows and outflows are reported through the year and are currency-sensitive, so carry the latest figures rather than memorising a stale value. SEBI's tightening of derivatives and futures-and-options rules, its action against market manipulation and unregistered finfluencers, and the entry of new investors through mutual-fund systematic investment plans (SIPs) are recurring current-affairs hooks. Verify the latest before the exam.