Capital Market, SEBI, Stock Exchanges, Insurance, Pension and Financial Inclusion in India Notes for UPSC: IPO, Mutual Funds, IRDAI, PFRDA, NPS, PMJDY and UPI Explained

The financial system is the circulatory system of the economy: it collects the savings of households and gives them to the businesses and the government for investment. Besides the banks, three other pillars are the capital market (shares and bonds, regulated by SEBI), the insurance sector (regulated by IRDAI) and the pension sector (regulated by PFRDA). A fourth theme, financial inclusion, aims to bring every citizen into the formal system. For UPSC, questions come on the regulators, the instruments (IPO, FPO, SIP, ETF, REIT), the stock indices, the schemes (PMJDY, APY, NPS) and the issues like the NPAs and the investor protection. These notes explain all of these in simple language, with tables for the regulators and the instruments.

Why Study This Topic?

Finance questions appear in both the Prelims and the Mains, and with the growth of the retail investors, the new regulations and the digital payments, the topic is full of current affairs. It joins the banking topics in our notes on the Banking System and Financial Inclusion in India and the Monetary Policy and RBI, so revise both together.

Structure of the Indian Financial System

The Financial Stability and Development Council (FSDC, 2010), chaired by the Finance Minister, coordinates the different regulators and monitors the stability of the financial system.

The Capital Market

The capital market has two parts. In the primary market, companies raise fresh capital by issuing the securities for the first time, for example, through an Initial Public Offer (IPO) or a Follow-on Public Offer (FPO). In the secondary market (the stock exchange), the existing securities are bought and sold among the investors. The prices are decided by the demand and the supply.

Stock Exchanges and Indices

• Bombay Stock Exchange (BSE): Established in 1875, it is the oldest stock exchange in Asia. Its index is the Sensex, based on 30 large companies.
• National Stock Exchange (NSE): Set up in 1992 and began operations in 1994 as a fully electronic exchange. Its index is the Nifty 50.
• Depositories: The National Securities Depository Limited (NSDL, 1996) and the Central Depository Services Limited (CDSL) hold the shares in the electronic (demat) form.
• Bull market means rising prices, and bear market means falling prices. Circuit breakers stop the trading when the index moves too much, to prevent panic.

The Securities and Exchange Board of India (SEBI)

SEBI was set up in 1988 as an administrative body and was given the statutory status by the SEBI Act, 1992. Its headquarters are in Mumbai. It has three functions: protective (protecting the interest of the investors and preventing the insider trading and fraud), regulatory (regulating the stock exchanges, the brokers, the mutual funds, the merchant bankers and the credit rating agencies) and developmental (promoting the education of the investors and the growth of the market). Its decisions can be appealed before the Securities Appellate Tribunal (SAT) and then the Supreme Court. SEBI has the power to make regulations, investigate, issue the orders and impose the penalties, so it has the quasi-legislative, quasi-executive and quasi-judicial powers.

Insurance Sector

• The life insurance business was nationalised in 1956 with the formation of the Life Insurance Corporation (LIC), and the general insurance business in 1972 (General Insurance Corporation).
• The Insurance Regulatory and Development Authority of India (IRDAI) was formed in 1999 and made statutory in 2000, when the sector was opened to the private companies. The limit of the foreign direct investment in the sector has been raised in steps over the years, and it is a subject of regular reform.
• The insurance schemes of the government for the poor include the PM Jeevan Jyoti Bima Yojana (life insurance), the PM Suraksha Bima Yojana (accident insurance), the PM Fasal Bima Yojana (crops) and the Ayushman Bharat PM-JAY (health).
• The main issue is the low insurance penetration (premium as a share of GDP) compared to many other countries, and the low coverage of the health insurance.

Pension Sector

Financial Inclusion

Financial inclusion means making the banking, credit, insurance and pension services available to all, especially the poor and the rural people, at an affordable cost. The key initiatives are given below.

• Pradhan Mantri Jan Dhan Yojana (PMJDY, 2014): Zero-balance bank accounts with a RuPay debit card, accident insurance and an overdraft facility; more than 50 crore accounts have been opened.
• JAM Trinity: Jan Dhan accounts, Aadhaar and Mobile numbers used for the Direct Benefit Transfer, to reduce the leakages.
• Unified Payments Interface (UPI, 2016): The instant mobile payment system of the NPCI, which has made India a leader in the digital payments.
• Payments banks and small finance banks: New types of banks (2015 onwards) to reach the unbanked and the small borrowers. The India Post Payments Bank began in 2018.
• MUDRA Yojana (2015): Loans to the small businesses in the three categories of Shishu, Kishor and Tarun.
• Self-Help Groups and the microfinance: Through the NABARD-supported SHG-Bank Linkage Programme.
• Stand-Up India: Loans for the women and the SC/ST entrepreneurs.

Investor Protection and Key Risks

As more households enter the stock market and mutual funds, investor protection has become a major theme. SEBI works against the insider trading, the price manipulation and the misleading advertisements, it runs the investor education programmes, and it has set up the grievance system called SCORES. The Investor Education and Protection Fund (IEPF) looks after the unclaimed dividends. The main risks are the market volatility, the unregulated schemes and the online scams, so a student should remember the three simple principles of safe investing: diversify, know the product and use only the regulated platforms.

The Mains Angle

For the Mains, discuss the importance of a strong financial system for the growth, the savings mobilisation and the risk management, the progress made (the digital payments, the access to bank accounts and the growth of the retail investors), and the challenges (the NPAs, the low insurance and pension coverage, the fraud and mis-selling, the cyber risk, the gap between the account opening and the actual use of the services, and the low financial literacy). Suggest a way forward: stronger regulation and investor protection, financial education, the use of technology with the safeguards, support for the cooperative and the rural credit institutions and the better design of the pension and the health insurance for the unorganised workers.

Previous-Year Style Practice

• Which body regulates the securities market? Answer: SEBI.
• Which is the oldest stock exchange of Asia? Answer: The Bombay Stock Exchange (1875).
• Which scheme offers the guaranteed pension to the unorganised sector? Answer: The Atal Pension Yojana.
• Which year saw the launch of the PMJDY? Answer: 2014.

Frequently Asked Questions (FAQ)

Which body regulates the capital market in India?

The Securities and Exchange Board of India (SEBI).

When did SEBI get the statutory status?

In 1992, through the SEBI Act.

Which is the oldest stock exchange in Asia?

The Bombay Stock Exchange, established in 1875.

How many companies are in the Sensex and the Nifty?

The Sensex has 30 companies, and the Nifty 50 has 50 companies.

What is the difference between the primary and the secondary market?

In the primary market, the securities are issued for the first time, and in the secondary market, they are traded among the investors.

What is an IPO?

An Initial Public Offer, when a company first sells its shares to the public.

What does the IRDAI do?

It regulates and develops the insurance sector.

What is the National Pension System?

A defined-contribution pension scheme, open to all citizens, regulated by the PFRDA.

What is the Atal Pension Yojana?

A scheme that provides the guaranteed pension of Rs. 1,000 to Rs. 5,000 a month to the unorganised sector workers.

What is the PMJDY?

The Pradhan Mantri Jan Dhan Yojana, launched in 2014, for the financial inclusion through the zero-balance accounts.

What is the FSDC?

The Financial Stability and Development Council, which coordinates the financial regulators.

How is this topic asked in UPSC?

As the regulators, the instruments and the schemes in the Prelims, and as the questions on the financial inclusion and the market regulation in the Mains.