UNIT 2 : CAPITAL MARKETS

CAPITAL MARKETS

 A market dealing in medium and long-term funds.

 An institutional arrangement for borrowing medium and long-term funds and
Primary
which provides facilities for marketing and trading of securities.
 It constitutes all long-term borrowings from banks and financial institutions,
Market
borrowings from foreign markets and raising of capital by issue various
securities such as shares debentures, bonds, etc.
 The primary market deals with new or fresh issue of securities and is, therefore,
Second
also known as new issue market;
 whereas the secondary market provides a place for purchase and sale of
ary
existing securities and is often termed as stock market or stock exchange. market
 NEED FOR CAPITAL MARKETS

 Mobilize savings: Capital markets provide a platform for individuals and institutions to save their money and invest
it in businesses and other ventures. This helps channel savings into productive uses, boosting economic growth.
 Facilitate investment: Capital markets allow businesses to raise money to finance their operations and growth. This
is essential for businesses to create jobs and expand their operations, boosting economic growth.
 Manage risk: Capital markets allow investors to diversify their risk by investing in various assets. This helps protect
investors from losses if one asset performs poorly.
 Allocate capital efficiently: Capital markets help to allocate capital to its most productive uses. This is because
businesses compete to attract investment, and investors can choose the investments they believe offer the best
returns.
 Support economic growth and development: Capital markets can support economic growth and development by
providing companies with the financing they need to grow and expand and by helping to allocate capital efficiently.
Capital markets play a vital role in boosting the economy
by facilitating the following functions:
 Capital formation:

1. enable the mobilization of savings from households and institutions

2. allocation to productive sectors of the economy.
3. increase the country's capital stock, essential for economic growth and development.
 Efficient allocation of resources:

1. by matching the demand and supply of funds among various borrowers and lenders
2. help reduce information asymmetry and agency costs
3. optimal utilization of resources.
 Corporate governance:

1. improve corporate governance by enhancing the transparency and accountability of companies.

2. provide a mechanism for monitoring and disciplining the management of companies through various tools
such as shareholder activism, proxy voting, corporate disclosures, etc.
 Innovation:

1. foster innovation by providing access to finance for entrepreneurs and start-ups who have new ideas and
technologies to offer.
2. create a competitive environment for businesses, encouraging them to innovate and improve their products and
services.
 Financial inclusion:

1. help promote financial inclusion by expanding the reach and access of financial services to the underbanked and
unbanked segments of society.
2. create awareness and financial literacy among investors, enabling them to make informed investment decisions.
PRIMARY AND SECONDARY MARKET

Primary Market or New Issue Market

 The Primary Market is the type of Capital Market where new securities are issued for the first
time.
 Thus, it is also called the New Issue Market.
 The primary market provides the channel for the sale of new securities. The issuer of securities
sells the securities in the primary market to raise funds for investment .
 In other words, the market wherein resources are mobilized by companies through the issue of
new securities is called the primary market.
Secondary Market or Old Issue Market
 The Secondary Market refers to a market where those types of securities are traded, which
have already been issued and offered to the public in the Primary Market and/or listed on the Stock
Exchange.
 Thus, it is also called the Old Issue Market.
 The secondary market enables securities holders to adjust their holdings in response to changes in
their assessment of risk and return or to buy/sell their securities as per their liquidity needs.
TYPES OF ISSUES IN PRIMARY MARKET

The issue of new securities in the Primary Market occurs through various methods :
1. Public Issue or Public Offering
 Public Issue or Public Offering refers to the process of a company offering its securities (usually stocks
or bonds) for sale to the general public for the first time or subsequently.
 Here, companies raise capital from a broad range of investors.

Follow on public
offering Initial public
offering
Initial Public Offering (IPO)
 Initial Public Offering (IPO) refers to the process when a private or unlisted company sells its shares to the public
for the very first time.
 This process transforms the company from being privately owned to a public company.
 This is why an IPO is also referred to as “going public”.
 It is generally used by new and medium-sized firms that are looking for funds to grow and expand their business.
 After IPO, the company’s shares are traded in an open market.
 Those shares can be further sold by investors through secondary market trading.
Follow on Public Offering (FPO)
 Follow on Public Offering (FPO) refers to the process when a company, that has already issued
shares and is listed on a stock exchange, issues shares again to raise additional fund.

 Public companies have to sell at least 25% of their shares to the public to be traded on a stock exchange.
Usually, it is this requirement that makes companies go for FPOs.
2. Offer For Sale
 Under this method, securities are not issued directly to the public but are offered for sale through
intermediaries like issuing houses or stock brokers.
 In this case, a company sells securities enbloc at an agreed price to brokers who, in turn, resell them
to the investing public.
3. Right issue :
 Rights Issue is an invitation to existing shareholders to purchase additional new shares in the
company.
 This type of issue gives existing shareholders rights to purchase new shares at a discount to the
market price on a stated future date.
 That’s why it is called Rights Issue.
4. Private Placement : When an issuer makes an issue of securities to a limited group of pre-selected
investors, and which is neither a rights issue nor a public issue, it is called a private placement.
 Private placement can be of 2 types:
Private
placement

Preferential
allotment QIPs
 Preferential Allotment :

When a listed issuer issues shares or convertible securities to a select group of persons, it is called a
Preferential Allotment.
 Qualified Institutional Placement (QIP)

When a listed issuer issues shares or convertible securities to a select group of Qualified Institutional
Buyers (QIBs), it is called a Qualified Institutional Placement (QIP).
SECONDARY MARKET OR OLD ISSUE MARKET:
CONCEPTS

The secondary market, also known as the aftermarket, is a financial market where investors buy and sell previously
issued securities, such as stocks, bonds, options, and futures contracts.
It is a market where securities that were previously sold in the primary market are traded among investors rather
than being sold directly by the issuing company.
Secondary market is a place where a majority of stock trading happens. It is of two types:
1. Stock Exchange market, and the
2. Over-The-Counter market.
1. STOCK EXCHANGE MARKET

 It refers to markets for trading of securities through a centralized exchange, usually called Stock
Exchange.
 Stock exchanges are secondary markets of a massive scale that a high percentage of the population
participates in for trading.
 Secondary markets are associated with uncompromising regulations regarding market securities,
making them a place with low counterparty risks.
 Example : National Stock Exchange and Bombay Stock Exchange
 The stock exchange assists trading in secondary market, acting as a guarantor.
2. OVER-THE-COUNTER MARKET

 The over the counter secondary market is a place where the stock exchange is not involved.
 This is a platform where investors trade among themselves with the shares that they own.
 Since there is no regulatory authority or compulsion involved with this manner of trading, the
counterparty risks in over the counter trading are typically high.
 Also, there is no standardization of share prices, since it varies from one owner to another (the buyer
and the seller directly deal with each other regarding all terms and conditions of a trade contract).
EXAMPLES OF SECONDARY MARKET TRANSACTION

1. Stock trading:
 Purchase and sale of stocks of publicly traded companies.
 An investor buys shares of a publicly traded company, such as Apple or Amazon, from another investor on th
stock exchange.
 The shares were previously issued by the company in an initial public offering (IPO) and are now being
traded on the secondary market.
2. Bond trading:
An investor buys a bond issued by a corporation, such as Microsoft or Coca-Cola, from another investor in the
bond market.
The bond was previously issued by the company to raise funds and is now being traded on the secondary
market.
 Mutual fund investment: An investor purchases shares of a mutual fund, such as Fidelity or
Vanguard, from another investor in the secondary market. The mutual fund invests in a diversified
portfolio of securities, such as stocks and bonds, and is now being traded on the secondary market.
 Derivatives Trading : They trades securities that determine its value from its primary asset. The
derivative contract value is regulated by the market price of the primary item — the derivatives
market securities, including futures, options, forward contracts, and swaps
 Commodity market :
 FOREX : It is a financial market where investors trade in currencies. In the entire world, this is the
most liquid financial market.
COMMODITY MARKET

1. A commodity market is a marketplace where investors trade several commodities like spices, energy, precious
metals, crude oil within a country.
2. Commodities are divided into two different categories: hard and soft commodities.
Hard Commodities
Hard commodities consist of natural resources that is mined or extracted. The hard commodities are classified into
two categories:
a. Metals – Gold, Silver, Zinc, Copper, Platinum
b. Energy – Natural gas, Crude oil, gasoline, heating oil
Soft Commodities
Soft commodities refer to those commodities that are grown and cared for rather than extracted or mined. The soft
commodities are classified into two categories:
c. Agriculture – Rice, Corn, Wheat, Cotton, Soybean, Coffee, Salt, Sugar
d. Livestock and meat – Feeder cattle, live cattle, Egg
 There are 4 popular commodity exchanges for trading in India:

1) Indian Commodity Exchange (ICEX)

2) National Multi Commodity Exchange of India (NMCE)
3) Multi Commodity Exchange of India (MCX)
4) National Commodity and Derivative Exchange (NCDEX
PLAYERS IN THE CAPITAL MARKET

 In the primary market, the key players are Corporations, Institutions, Investment Banks, And
Public Accounting Firms.
 Institutions invest capital in corporations that seek to expand and grow their businesses, while
corporations issue debt or equity to institutions in return for their capital investment.
 Investment banks are hired to match institutions and corporations based on their risk profile and
investment style.
 Finally, public accounting firms are responsible for the preparation, review, and auditing of financial
statements, tax work, consulting on accounting systems, M&A, and capital raising.
 Hence, public accounting firms in the primary market not only assist corporations to raise capital but
also help prepare, review, and audit financial statements to ensure a fair representation of their
financial performance.
 While the issuance of new bonds and new shares in exchange for capital occurs in the primary market,
the secondary market is for the sale and trade of previously issued bonds and shares.
 Buyers and sellers engage in transactions on an exchange, while investment banks facilitate this
process by providing equity research coverage. This ability to freely sell and trade securities
significantly increases the market’s liquidity.
WORKING OF PRIMARY MARKET
PARTICIPANTS IN PRIMARY MARKET

2. Institutions (“Buy Side” Fund Managers)-

1. Corporations – Capital Seekers
Fund providers
 A business entity needs capital to grow and  Fund managers, institutional investors, and
run its operations. individual investors are all examples of fund
 When it finds difficulty or prefers not to use provider institutions.
banking financing facilities to finance  These investment managers supply financing to
required projects or expansion, it can use firms that want to expand and operate.
capital market instruments, common  Corporations issue debt or equity to institutions
stocks, and bonds etc. in the form of bonds or shares in exchange for
 The government can resort to bond their capital.
issuance to finance required projects.  Meanwhile, capital and debt or stock exchanges
complete the cycle of the capital markets’ two
primary players.
3. Investment Banks (“Sell Side”)-
Intermediaries 4. Public Accounting Firms – Analysis
 Acting as an intermediary, service
investment banks are hired to facilitate  Depending on their divisions, public accounting
deals between corporations and firms can engage in multiple roles in the
institutions. primary market.
 their role is to connect institutional  These roles include financial reporting, auditing
investors with corporations in accordance financial statements, taxes, consulting on
with their risk and return expectations and accounting systems, M&A advisory, and capital
investment styles. raising.
 involve extensive financial modeling and  As a result, corporations frequently hire public
valuation analysis. accounting firms to provide accounting and
counselling services
WORKING OF SECONDARY MARKETS
SECONDARY MARKET
 Unlike the primary market, where there is an initial issuance of debt or equity in exchange
for capital, the secondary market allows for the sale and trade of issued bonds and shares.
The secondary market allows players to enter2. and exit securities
Investment Bankseasily, making the market
liquid.
1. Buyers and Sellers  While investment banks facilitate the
 In the secondary market, fund issuance of bonds and shares in the
managers or any investors who primary market, they failitate the sales
wish to purchase securities or and trading of issued debts and equities
debts will have to locate a seller. between buyers and sellers in the
secondary market.
 Transactions are facilitated
through a central marketplace,  They offer research and analysis
including a stock exchange or services on single stock and its market
over the counter (OTC). price movement.
 They also provide recommendations for
buyers and sellers to consider their
REGULATION OF THE CAPITAL MARKETS IN INDIA

 The demand for long-term capital comes predominantly from private sector manufacturers,
agriculture, trade, and government agencies.
 The supply side consists of individuals, corporate savings, insurance savings, banks, specialised
financing agencies and the surplus of governments.
 Regulating this affair, therefore, becomes important to ensure transparency and investor confidence
both domestically and internationally.
 The regulators draft legislation, issue circulars, notifications, guidelines and regulations
from time to time to regulate the securities market in India.
 They also have the power of oversight over various market participants. The stock
exchanges also frame their own rules, regulations and byelaws to regulate the securities
market.
REGULATORS OF THE CAPITAL MARKETS

The Companies Act

2013
Securities Contracts (Regulation) Act of
1956 (SCRA)
Securities & Exchange Board of India Act of
1992 (SEBI Act)
The Reserve Bank of India Act of 1934
(RBI Act)
The Depositories Act of
1996
The Banking Regulation Act
of 1949
Prevention of Money Laundering Act of
2002 (PMLA)
 1. THE COMPANIES ACT OF 2013
 It regulates incorporation of a company, lays down responsibilities of a company, directors, dissolution of
a company. The Companies Act is mainly administered by the Union Ministry of Corporate Affairs.
 All the companies listed on a recognised stock exchange must comply with the provisions laid out by
this Act, including corporate governance norms.
 Corporate governance norms include shareholder decision-making processes, auditing standards, etc.
These norms ensure transparency for investors in their operations.
 Deals with issues, allotments, transfers of securities, and various other aspects relating to company
management.
 Contains : standard disclosures about the public offering of capital, mainly concerning projects and
management of the company, information about other listed companies managed by the same
management, and risk factors perceived by the management.
 The Companies Act also regulates underwriting, use of premiums and discounts on issues, rights and
bonus issues, payment of interests and dividends, supply of annual reports, and other information.
2. SECURITIES CONTRACTS (REGULATION) ACT OF 1956
(SCRA)

 This statute virtually controls all aspects of securities trading and the running of stock exchanges, directly or
indirectly.
 The aim of the SCRA is to prevent undesirable transactions in securities.
 The stock exchanges determine their own listing regulations in conformity with the minimum listing criteria set
out in the Securities Contract (Regulation) Rules, 1957.
 The Act gives the Central Government and SEBI regulatory jurisdiction over:

1. stock exchanges through a process of recognition and continued supervision,

2. contracts in securities, and
3. listing of securities on stock exchanges.
 A stock exchange is to be recognised only if the conditions prescribed by the Central Government are fully
adhered to. Organised trading activity in securities takes place on a specified recognized stock exchange.
3. SECURITIES & EXCHANGE BOARD OF INDIA ACT OF 1992 (SEBI ACT)

SEBI is provided with statutory powers for:

1. protecting the interests of investors in the securities market;
2. promoting the development of the securities market;
3. regulating the securities market, such as issue and transfer of securities, insider trading, futures and options
trading, etc. to protect investors’ interests;
4. promote awareness among investors;
5. training of intermediaries about the safety of the market;
6. and all matters connected to the parameters above.
The objectives of SEBI have been laid down in the preamble of the SEBI Act.
4. THE RESERVE BANK OF INDIA ACT OF 1934 (RBI ACT)

 The RBI Act exercises concurrent authority over contracts pertaining to the sale and purchase of securities, gold-
related securities, money market securities and securities derived from the same, and ready-forward contracts in
debt securities.
 The RBI Act gives the RBI the power to regulate and supervise the trading of securities, gold-related securities,
money market securities and securities derived from the same, and ready-forward contracts in debt securities.
 The RBI can impose requirements on the participants in these markets, such as requirements for capital
adequacy, margin requirements, and reporting requirements. The RBI can also take action against market
participants who violate the law.
 The RBI Act also gives the RBI the power to investigate and prosecute violations of the law. The RBI can impose
penalties on market participants who violate the law, such as fines, imprisonment, or both.
5. THE DEPOSITORIES ACT OF 1996

 This statute provides for the dematerialization of shares, eliminating the risks associated with physical
certificates. It allows the electronic transfer of shares from one depository member to another .
 The primary objective of the Depositories Act is:

1. making securities freely transferable

2. dematerialization of the securities in the depository mode; and
3. providing for maintenance of ownership records in a book entry form.
6. THE BANKING REGULATION ACT OF 1949

 This legislation establishes control over banking infrastructure in India.

 The Act also aims at protecting the interests of the depositors through provisions like the opening/closing of
accounts, deposits and withdrawals, among other things.
 The Act was enacted in 1949 in the wake of the banking crisis of the 1930s. The crisis had led to a loss of
confidence in the banking system, and the government felt the need to enact legislation to regulate the banking
industry and protect the interests of depositors.
 The Act also sets out the powers and functions of the Reserve Bank of India (RBI), which is the central bank of
India. The RBI is responsible for regulating the banking system and ensuring the safety and soundness of banks.
 The Banking Regulation Act of 1949 is a vital piece of legislation that plays a key role in regulating the banking
industry in India. The Act helps to ensure the safety and soundness of banks, and it protects the interests of
depositors.
7. PREVENTION OF MONEY LAUNDERING ACT OF 2002
(PMLA)

 It is legislation by parliament to prevent money laundering.

 The Act contains provisions for confiscation of property derived from money laundering.
 Anti-money laundering is a set of procedures, laws, or regulations designed to stop/curb the practice of
generating income through illegitimate activities or criminal activities such as drug trafficking, terrorist
funding or indulging in processes that make the transaction look legitimate.
 Know Your Customer Guidelines (KYC Guidelines) have been introduced in the capital market based on this
Act.
 PMLA requires all market participants, intermediaries and other institutions connected to the capital market
to maintain a record of transactions done through them, monitor and report suspicious transactions to the
Financial Intelligence Unit (FIU), Government of India.
SEBI

 SEBI stands for Securities and Exchange Board of India. It is a statutory regulatory body that was established by
the Government of India in 1992 for protecting the interests of investors investing in securities along with
regulating the securities market. SEBI also regulates how the stock market and mutual funds function.

 Functions of SEBI

SEBI has the following functions

1. Protective Function
2. Regulatory Function
3. Development Function
PURPOSE OF SEBI

Purpose of SEBI
The purpose for which SEBI was setup was to provide an environment that paves the way for mobilzation and
allocation of resources. It provides practices, framework and infrastructure to meet the growing demand.
It meets the needs of the following groups:
1.Issuer : For issuers, SEBI provides a marketplace that can utilized for raising funds.
2. Investors: It provides protection and supply of accurate information that is maintained on a regular basis.
3. Intermediaries: It provides a competitive market for the intermediaries by arranging for proper infrastructure.
Protective Function: The protective function implies the role that SEBI plays in protecting the investor interest and also
that of other financial participants. The protective function includes the following activities.
a. Prohibits insider trading: Insider trading is the act of buying or selling of the securities by the insiders of a company,
which includes the directors, employees and promoters. To prevent such trading SEBI has barred the companies to
purchase their own shares from the secondary market.
b. Check price rigging: Price rigging is the act of causing unnatural fluctuations in the price of securities by either
increasing or decreasing the market price of the stocks that leads to unexpected losses for the investors. SEBI maintains
strict watch in order to prevent such malpractices.
c. Promoting fair practices: SEBI promotes fair trade practice and works towards prohibiting fraudulent activities related
to trading of securities.
d. Financial education provider: SEBI educates the investors by conducting online and offline sessions that provide
information related to market insights and also on money management.
Regulatory Function: Regulatory functions involve establishment of rules and regulations for the financial
intermediaries along with corporates that helps in efficient management of the market.
The following are some of the regulatory functions.
 SEBI has defined the rules and regulations and formed guidelines and code of conduct that should be followed by
the corporates as well as the financial intermediaries.
 Regulating the process of taking over of a company.
 Conducting inquiries and audit of stock exchanges.
 Regulates the working of stock brokers, merchant brokers.
Developmental Function: Developmental function refers to the steps taken by SEBI in order to provide the investors
with a knowledge of the trading and market function. The following activities are included as part of developmental
function.
1. Training of intermediaries who are a part of the security market.
2. Introduction of trading through electronic means or through the internet by the help of registered stock brokers.
3. Introducing reforms and initiatives to enhance liquidity, transparency and efficiency of the market
4. Creating an environment conducive to the growth of capital market
ORGANISATIONAL STRUCTURE OF SEBI

 SEBI has about 20 departments, all of which are supervised by their respective department
heads, which in turn are administered by a hierarchy in general. The regulatory body is
managed by its members, which consist of the following :
1. The chairman is nominated by the Union Government of India
2. Two members from the Union Finance Ministry
3. One member from the Reserve Bank of India
4. The remaining five members are nominated by the Union Government of India
SEBI has its headquarters in Mumbai and has regional offices in New Delhi, Kolkata, Chennai ,
Ahmedabad along with local offices in Jaipur and Bangalore and offices at Guwahati ,
Bhubaneshwar, Patna , Kochi and Chandigarh.
 GLOBALIZATION OF CAPITAL MARKETS
 The Indian capital markets, since the beginning of the process of liberalization in the country in the early nineties have
become increasingly integrated with the global markets.
 resulted in significant gains for the economy by superior allocation of resources and better specialization of labour

FINANCIAL GLOBALIZATION : Various financial institutions including banks and institutional investors have expanded their
activities geographically. These organizations have acted as intermediaries to channelize funds from lenders to borrowers
across national borders.
1. The Indian capital markets, as was the Indian economy at large, was cocooned in a protectionist
environment with myriad controls and restrictions.
-controls on foreign investments in different sectors
-flow of foreign currency
-access to domestic and international markets
-controls on conducting business in a commercial manner
The controls have, over the past decade since the process of liberalization was ushered in, been
considerably eased and markets have become more liberalized.
 GLOBALIZATION OF CAPITAL MARKETS

1. Indian capital markets have off late shown signs of maturing with the gradual adoption of globally accepted
procedures and practices. Several companies have adopted the US Generally Accepted Accounting Practices
(“GAAP”) which ensures greater transparency in financial statements.
2. Corporate Governance is being given impetus by limited companies as part of their efforts in greater disclosures
as well as protecting shareholder value.
3. Advances in information technology, for example computerization, reduced the cost of transfer of funds and
widened the margins.
 Globalization has significantly impacted the landscape of capital markets, which is continually changing. Global
market interconnection has created new opportunities and challenges in adopting capital markets
technology for enterprises and investors.
1. Expanding the scope and range of the capital markets : The recent trends in capital market also enable more people to
access international capital markets ; there are greater options to raise and invest funds. Additionally, it broadens the
range of financial products and services readily available on the market, meeting various demands and preferences.
2. Improving the capital markets' efficiency and liquidity : The financial markets have become more effective and liquid
due to improved information flow and lower transaction costs brought about by globalization. Additionally, recent
trends in capital market make hedging and risk diversification tactics possible, which can lower volatility and boost
profits.
3. Introducing further dangers and difficulties for the capital markets. Additionally, due to globalization, capital markets
are exposed to other sources of unpredictability and volatility, including changes in exchange rates, financial crises,
regulatory inconsistencies, geopolitical conflicts, and challenges in adopting capital markets technology.
These elements may impact the efficiency and stability of the capital markets, necessitating greater coordination and
collaboration between regulators and market players.
RECENT TRENDS IN CAPITAL MARKET

 The expansion of developing markets. Emerging markets are nations with both tremendous potential for growth
and considerable risk. They now command greater attention from investors and issuers due to their increased
prominence in the global economy and recent trends in capital market. Urbanization, technical advancement,
institutional reforms, and demographic changes are a few of the reasons that contribute to their rise.
 The effects of the digital revolution. The use of digital technology to develop new or improve already existing
corporate processes, goods, or services is known as "digital transformation." It significantly influences capital
markets and globalization by allowing new methods of generating and investing money like crowdfunding, peer-
to-peer lending, robo-advisors, cryptocurrencies, and blockchain. It also questions current banking industry
business structures, rules, and conventions.
 Sustainability's Role. The ability to satisfy current demands without compromising the capacity of future
generations to satisfy their wants is known as sustainable finance. Given how it influences financial activity's E
nvironmental, Social, and Governance (ESG) facets, it has emerged as a major problem for capital markets and
globalization. More investors and issuers are including ESG considerations.
 Geopolitics: Geopolitics is the study of how a country’s geography (location, terrain, land
size, climate, soil and raw materials) affect its foreign, economic, military policy and
strategy.
Global commerce, especially supply chains and financial networks, will continue to be
impacted by the world's growing multi-polarity and the ascendance of new actors. This might
alter the present international system and, more broadly, globalization. Resolutions to these
adjustments must be mutually agreeable. A new set of difficulties for policymakers in various
sectors, including taxes, regulation, the supply of services, and market power, is anticipated
to arise due to the progress in the number of major international firms.
 Structural transformation: The epidemic has sparked technical advancement,
automation, and supply-chain reallocation. This shift presents both possibilities and
significant problems. Disruptions to supply and chaotic labor displacement are key
dangers.
SELF REGULATORY ORGANISATIONS

 Self-Regulatory Organization or SRO is an organization that is formed to regulate certain professions or

industries. They are usually non-governmental organizations, established with the aim of creating rules to
promote order among businesses and organizations.
1. set regulatory and investment industry standards
2. regulate the business and financial conduct of member firms and their registered representatives
3. have a mandate to protect investors and the public interest
 An SRO is required to guide the conduct of its members, ensure that they adhere to industry standards, comply
with relevant laws and regulations, and maintain high ethical standards.
 This involves establishing and enforcing guidelines for consumer protection, data security, data privacy, etc.
 Thus, an SRO must also have adequate powers to investigate and take disciplinary action against its members
for non-adherence.
FUNCTIONS OF AN SRO

An SRO is required to partake in the following actions as mandated by the RBI

1.STANDARD-SETTING
 Set a code of conduct for responsible advertisements and market standards
 Develop appropriate baseline governance standards for the FiN-Tech sector
 Specify to its members all the consequences for violation of rules and and ensure its enforcement
 Collect and store data as necessary, in compliance various statutory legislations.
2. OVERSIGHT AND ENFORCEMENT
 Create a structured framework and baseline surveillance standards, to guide oversight and enforcement
functions
 Deploy suitable surveillance mechanisms for effective monitoring of compliance in the Fin-Tech sector
 Ensure stringent confidentiality of surveillance data and restrict data collection to essential and specific
information only
 Implement data collection procedures from member FinTechs that safeguard proprietary information
 Establish clear standards of conduct
 Bar / remove any of the FinTech entities for a limited period of time or for eternity if required
3. DEVELOPMENT
 Promote understanding of statutory and regulatory requirements and promote a culture of compliance
 Facilitate the exchange of expertise and experience and organize training programs for members
 Disseminate sector-specific information through various channels such as periodicals, bulletins, pamphlets,
magazines, etc., to raise awareness about the developments, trends, and best practices in the FinTech sector
 Encourage a culture of research, development and responsible innovation by facilitating studies, surveys, research
papers, think tank discussions, etc
 Extend guidance and support, particularly to smaller entities within the sector, agnostic of membership

4. GRIEVANCE REDRESSAL AND DISPUTE RESOLUTION

 Establish an efficient, fair, and transparent grievance redressal and dispute resolution framework
 Work towards customer education focused on products and services offered by the industry
 Conduct periodic assessment of customer service standards and review of grievance redressal framework
CRITERIA FOR MEMBERSHIP IN AN SRO

 The members of an SRO must primarily be FinTech companies that are currently not regulated by any financial
sector regulator and are domiciled / registered in India.
 However, membership may also be open to Regulated Entities (other than banks).
 The membership is voluntary and while membership fees may vary or be differentiated, based on size, intent,
capability, etc. the RBI states that membership fee structure as set by the SRO must be reasonable, and non-
discriminatory.
 The RBI also stated, that the number of SROs to be recognised would be considered based on the number and
nature of applications received.