Equity Market in India: Shares, IPOs, Stock Exchanges and Foreign Investment for RBI Grade B Finance
Last updated: 2026-11-13 · MockMentor
The equity market is part of the Financial Markets line of the RBI Grade B Finance syllabus: "Primary and Secondary Markets (Forex, Money, Bond, Equity, etc.)". It is also the area that SEBI's circulars change most often, so questions mix static concepts (types of shares, the IPO process, the difference between FPI and FDI) with recent reforms (T+1 settlement, curbs on derivatives trading, SME IPO rules). In the 2023 to 2026 Phase 2 papers, capital markets and SEBI circulars were among the most frequent objective topics. This chapter covers the equity market from the issue of shares to their trading.
In one line: companies raise equity in the primary market through IPOs, FPOs, rights issues and placements, and investors trade shares in the secondary market on BSE and NSE, with SEBI regulating both and settlement now completed on the next trading day.
Basic concepts
- Equity share: a unit of ownership in a company. A shareholder shares in profits through dividends and in the company's growth through a rise in share price, and has voting rights.
- Face value: the nominal value of a share stated in the company's memorandum, such as ₹1, ₹2 or ₹10. The market price can be very different.
- Market capitalisation: the total market value of a company's shares, calculated as share price × number of shares.
- Primary market: the market for new issues, where a company sells shares to investors and receives the money.
- Secondary market: the market where investors trade existing shares among themselves; the company receives no money.
- Free float: the shares available for public trading, excluding those held by promoters and other locked-in holders.
- Promoter: the person or group that controls a company and is named as such in its offer documents.
Why in News?
- SEBI's measures to curb speculative trading in equity index derivatives, introduced from November 2024, included higher contract sizes, one weekly expiry per exchange and upfront collection of option premiums. SEBI's studies showed that about nine in ten individual traders lose money in futures and options.
- India's stock market has been among the largest in the world by market capitalisation, and the number of demat accounts has grown to well over 20 crore, driven by young first-time investors.
- SEBI tightened rules for SME IPOs in 2025, including a minimum operating profit track record and limits on the share of the issue that can be an offer for sale, after concerns about inflated listings.
- Optional same-day (T+0) settlement, introduced in 2024 for a limited set of stocks, has been expanded alongside the standard T+1 cycle.
Why companies use equity
| Equity | Debt |
|---|---|
| No obligation to pay dividends | Interest must be paid |
| No repayment of capital | Principal must be repaid |
| Shareholders are owners with voting rights | Lenders are creditors with no vote |
| Higher cost for the company in the long run, as investors expect more return | Lower cost, and interest is tax-deductible |
| Lower financial risk | Higher financial risk from leverage |
Companies combine the two to reach the right capital structure.
Types of shares and share-based actions
| Type | Meaning |
|---|---|
| Equity shares | Ordinary shares with voting rights and residual claims on profits and assets |
| Preference shares | Fixed dividend paid before equity; priority in repayment on winding up; usually no voting rights |
| Shares with differential voting rights (DVR) | Shares with more or fewer votes than ordinary shares, allowed within limits; superior voting rights for founders of tech firms allowed by SEBI in 2019 |
| Sweat equity | Shares issued at a discount or for non-cash consideration to employees or directors for know-how or value added |
| Bonus shares | Free shares issued to existing shareholders from reserves; the number of shares rises but the company's value does not |
| Rights issue | New shares offered to existing shareholders in proportion to their holdings, usually at a discount |
| Employee Stock Option Plan (ESOP) | The right for employees to buy shares at a set price after a vesting period |
| Stock split | Divides a share into more shares of lower face value; makes shares more affordable |
| Buyback | A company buys back its own shares, which returns cash and can raise earnings per share |
The primary market
Ways of raising equity
| Route | Description |
|---|---|
| Initial Public Offer (IPO) | First sale of shares to the public, after which the company is listed |
| Follow-on Public Offer (FPO) | A further public issue by a listed company |
| Offer for Sale (OFS) | Existing shareholders sell shares; money goes to them, not the company. Also a stock exchange window used by the government for disinvestment |
| Rights issue | Offer to existing shareholders |
| Qualified Institutional Placement (QIP) | Quick issue by a listed company to qualified institutional buyers only |
| Preferential allotment | Shares issued to selected investors at a price set by SEBI's formula |
| Private placement | Issue to a small group of investors without a public offer |
Fresh issue and offer for sale
An IPO may have a fresh issue (new shares, money goes to the company), an offer for sale (existing shareholders sell) or both. Many recent large IPOs have been mainly offers for sale by promoters and private equity investors.
Pricing methods
| Method | Feature |
|---|---|
| Fixed price issue | The issuer sets the price in advance; demand is known only after the issue closes |
| Book building | The issuer sets a price band (the upper end not more than 120% of the lower end); investors bid within it, and the final price is set on the basis of demand |
Investor categories in an IPO
| Category | Who | Typical share of a book-built issue (profitable company) |
|---|---|---|
| Qualified Institutional Buyers (QIBs) | Mutual funds, banks, insurers, FPIs, pension funds | Up to 50% |
| Non-Institutional Investors (NIIs) | Individuals and others bidding above ₹2 lakh | At least 15% |
| Retail Individual Investors (RIIs) | Individuals bidding up to ₹2 lakh | At least 35% |
For companies that do not meet the profitability track record, at least 75% must go to QIBs and no more than 10% to retail investors. Up to 60% of the QIB portion can go to anchor investors, who commit a day before the issue opens and face a lock-in.
Steps in an IPO
- Appointment of merchant bankers (book running lead managers), legal advisers, registrar and others.
- Filing of the Draft Red Herring Prospectus (DRHP) with SEBI for observations.
- In-principle approval from the stock exchanges.
- Filing of the Red Herring Prospectus (RHP) with the Registrar of Companies, with the price band announced.
- Anchor investor allocation a day before the issue opens.
- Bidding, usually for three working days, through ASBA.
- Basis of allotment and refund or unblocking of funds.
- Listing and trading, now within three working days of the issue closing (T+3).
ASBA and UPI
Application Supported by Blocked Amount (ASBA) means the application money stays in the investor's bank account but is blocked until allotment. Only the allotted amount is debited. Retail investors can use a UPI mandate for this. ASBA is mandatory for all public issues.
Green shoe option
A green shoe option lets the issuer allot extra shares, up to 15% of the issue, if demand is strong, and use the proceeds to stabilise the price after listing through a stabilising agent.
SME platforms
BSE SME and NSE Emerge are platforms for small and medium enterprises, with lighter rules but a high minimum application size to keep out small retail investors. After a surge in SME listings and some cases of manipulation, SEBI tightened eligibility and disclosure in 2025.
The secondary market
Stock exchanges
| Exchange | Year | Notes |
|---|---|---|
| BSE (formerly Bombay Stock Exchange) | 1875 | Asia's oldest stock exchange; started as the Native Share and Stock Brokers' Association |
| National Stock Exchange (NSE) | Incorporated 1992; trading from 1994 | First screen-based exchange; largest in India by volume and the world's largest derivatives exchange by number of contracts |
| Metropolitan Stock Exchange of India (MSE) | 2008 | Smaller national exchange |
| India INX and NSE IX | 2017 | International exchanges in GIFT City |
Exchanges were demutualised and corporatised under SEBI's rules after 2005, separating ownership from trading rights.
Indices
| Index | Exchange | Composition | Base |
|---|---|---|---|
| S&P BSE Sensex | BSE | 30 large companies | 1978-79 = 100 |
| Nifty 50 | NSE | 50 large companies | 3 November 1995 = 1,000 |
| Nifty Bank, Bankex | NSE, BSE | Banking stocks | Sectoral |
| India VIX | NSE | Expected volatility from Nifty options | Fear gauge |
Most indices use the free-float market capitalisation method, in which only the shares available for trading are counted.
Trading and settlement
- Trading is screen-based and anonymous, with orders matched by price and time priority.
- Settlement moved from T+3 to T+2 in 2003 and to T+1 in phases between 2022 and January 2023. India was among the first major markets to adopt T+1. An optional T+0 cycle exists for selected stocks.
- Clearing corporations (NSE Clearing, Indian Clearing Corporation) act as central counterparties, guaranteeing settlement.
- Depositories NSDL (1996) and CDSL (1999) hold shares in demat form; depository participants (banks and brokers) open demat accounts.
Safeguards
| Safeguard | Purpose |
|---|---|
| Circuit breakers | Index-based market-wide halts at falls or rises of 10%, 15% and 20% |
| Price bands | Daily limits on how far a stock can move |
| Margins | Upfront margins on trading to limit default risk |
| Surveillance measures | Additional Surveillance Measures and the Graded Surveillance Measure framework for volatile stocks |
| Insider trading rules | SEBI (Prohibition of Insider Trading) Regulations, 2015 |
| Takeover code | SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, requiring an open offer when an acquirer crosses 25% |
Big trades
- Block deal: a single large trade, above a minimum size set by SEBI, carried out in special block deal trading windows.
- Bulk deal: trades in a stock by a single client totalling more than 0.5% of the company's listed shares in a day, which must be disclosed.
Foreign investment in Indian equity
| Basis | Foreign Direct Investment (FDI) | Foreign Portfolio Investment (FPI) |
|---|---|---|
| Threshold | 10% or more of a listed company's post-issue equity | Less than 10% of a listed company |
| Purpose | Long-term control and management | Financial return; no control |
| Stability | More stable | Can move quickly ("hot money") |
| Regulator | Government (DPIIT) and RBI under FEMA | SEBI (registration) and RBI (FEMA limits) |
An FPI that crosses 10% must either sell down within the time allowed or reclassify the investment as FDI. Non-resident Indians invest through the Portfolio Investment Scheme.
Depository receipts
| Instrument | Meaning |
|---|---|
| American Depository Receipt (ADR) | A receipt issued by a US depository bank, representing shares of a foreign company, traded in the United States |
| Global Depository Receipt (GDR) | Similar, but traded in markets outside the United States, such as London or Luxembourg |
| Indian Depository Receipt (IDR) | A receipt issued in India representing shares of a foreign company; Standard Chartered PLC issued the first in 2010 |
The Companies Act and FEMA rules were amended in 2023 and 2024 to allow some Indian companies to list directly on foreign exchanges, starting with the IFSC exchanges in GIFT City.
Investors in the Indian market
- Retail investors: the number of demat accounts has risen sharply since 2020. Systematic Investment Plans (SIPs) in mutual funds bring steady monthly flows.
- Domestic institutional investors (DIIs): mutual funds, insurers and pension funds, whose buying has increasingly offset FPI selling.
- FPIs: large holders of Indian shares; their flows drive short-term movements.
- Promoters: hold large stakes in many listed companies. Listed companies must keep at least 25% public shareholding (with a longer timeline for newly listed large companies).
Role of the equity market in the economy
- Mobilises savings for productive investment.
- Gives companies long-term risk capital without fixed repayment.
- Provides liquidity to investors.
- Values companies and allocates capital through prices.
- Improves governance through disclosure rules and shareholder scrutiny.
- Lets the government disinvest stakes in public sector firms.
- Spreads wealth through employee ownership and retail participation.
Concerns
- Speculation in derivatives: retail losses in futures and options have been very large.
- Valuations: high valuations in mid-cap and small-cap stocks have raised concerns of froth.
- Market manipulation and "finfluencers": misleading advice on social media; SEBI barred registered entities from associating with unregistered influencers in 2024.
- Governance failures: cases involving related-party transactions and promoter misconduct.
- FPI volatility: sudden outflows weaken the rupee.
- Concentration: a few large companies account for much of the market value.
Way forward
- Continue to protect retail investors through suitability rules and investor education.
- Strengthen surveillance and enforcement against manipulation.
- Deepen the participation of long-term domestic investors such as pension funds.
- Improve the quality of IPOs, especially on SME platforms.
- Develop GIFT City as a listing venue for Indian and foreign firms.
Possible exam and interview questions
- Explain the process of an IPO through the book building method. What are the roles of SEBI, merchant bankers and anchor investors? (620 words)
- Distinguish between FDI and FPI. Why does India prefer FDI? (420 words)
- What is ASBA? How has UPI changed the IPO process?
- What are the benefits and risks of the move to T+1 settlement?
- Interview: Should retail investors be restricted from trading in equity derivatives?
Related reading: financial regulators, mutual funds and investment vehicles, and derivatives.
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