Understanding Equity Market Structure in India

Introduction

The equity market, often called the stock market, serves as the backbone of a country’s financial ecosystem. In India, it represents the vibrant and ever-evolving marketplace where companies raise capital and investors participate in wealth creation. Understanding the equity market structure in India is essential for anyone involved in trading, investing, or policymaking. It provides insight into how the market operates, who its participants are, how securities are traded, and how regulation ensures transparency and fairness.

India’s equity market has come a long way—from physical trading floors in the 1980s to a fully electronic, globally integrated system today. The structure comprises various layers, institutions, and participants, each performing specific roles to ensure the efficient functioning of the capital market.

1. Evolution of the Indian Equity Market

The Indian stock market has a rich history dating back to the 19th century when the Bombay Stock Exchange (BSE) was established in 1875. Initially, trading was informal, conducted under banyan trees in Mumbai by a group of brokers. However, with the liberalization of the Indian economy in 1991, the market witnessed modernization and rapid growth.

The introduction of the National Stock Exchange (NSE) in 1992 brought electronic trading, transparency, and efficiency. The Securities and Exchange Board of India (SEBI), formed in 1988 and granted statutory powers in 1992, became the principal regulator ensuring investor protection and market discipline. Today, India boasts one of the most advanced and liquid equity markets among emerging economies.

2. Structure of the Indian Equity Market

The Indian equity market operates through a two-tier structure:

Primary Market – where companies issue new shares to raise capital.

Secondary Market – where existing shares are traded among investors.

Let’s explore each in detail.

(a) The Primary Market

The primary market facilitates capital formation. Companies issue securities for the first time through Initial Public Offerings (IPOs), Follow-on Public Offers (FPOs), or Rights Issues. Investors purchase shares directly from the issuing company, and the proceeds are used for business expansion, debt repayment, or diversification.

Key participants include:

Issuing companies

Merchant bankers

Underwriters

Registrars

Investors

Regulation of the primary market is handled by SEBI, which ensures full disclosure of financial information, proper valuation, and transparent allotment processes. The IPO process in India involves book-building, anchor investors, and electronic bidding through platforms like ASBA (Application Supported by Blocked Amount).

(b) The Secondary Market

Once shares are listed on exchanges, they become tradable in the secondary market. Here, investors buy and sell shares through brokers on recognized exchanges such as NSE and BSE. The secondary market ensures liquidity and continuous price discovery.

Trades occur electronically through order-matching systems, with prices determined by demand and supply. This digital infrastructure has enhanced speed, accuracy, and transparency.

3. Major Stock Exchanges in India

India’s equity trading primarily occurs on two major exchanges:

(a) Bombay Stock Exchange (BSE)

Founded in 1875, BSE is Asia’s oldest exchange and one of the fastest in the world. Its benchmark index, SENSEX, tracks the performance of 30 top companies representing key sectors of the Indian economy. The BSE provides a wide range of products including equities, mutual funds, derivatives, and debt instruments.

(b) National Stock Exchange (NSE)

Established in 1992, NSE revolutionized Indian trading by introducing a fully automated, screen-based trading system. Its benchmark index, NIFTY 50, reflects the performance of the top 50 companies listed on the exchange. NSE is the largest exchange in India by trading volume and market capitalization.

Other regional exchanges such as Calcutta Stock Exchange (CSE) and Metropolitan Stock Exchange (MSE) exist but play a minor role compared to NSE and BSE.

4. Key Participants in the Indian Equity Market

The structure of the equity market is defined by the roles of various participants who ensure smooth operations.

(a) Investors

Investors are the backbone of the equity market and include:

Retail investors – individuals investing small amounts.

High Net-Worth Individuals (HNIs) – individuals with significant investable wealth.

Institutional investors – such as Mutual Funds, Pension Funds, Insurance Companies, and Foreign Portfolio Investors (FPIs).

(b) Brokers and Sub-brokers

Brokers are SEBI-registered members of exchanges who facilitate trading on behalf of clients. Sub-brokers operate under registered brokers to provide localized access to investors.

(c) Market Makers and Dealers

Market makers ensure liquidity by providing continuous buy and sell quotes. Dealers, on the other hand, trade securities on their own account.

(d) Depositories and Depository Participants (DPs)

India has two main depositories:

NSDL (National Securities Depository Limited)

CDSL (Central Depository Services Limited)

These institutions hold securities in dematerialized (Demat) form and facilitate the electronic transfer of ownership. DPs act as intermediaries between investors and depositories.

(e) Clearing Corporations

Entities like the National Securities Clearing Corporation Limited (NSCCL) and Indian Clearing Corporation Limited (ICCL) manage trade settlement, ensuring that funds and securities are exchanged efficiently and securely.

(f) Regulators

The Securities and Exchange Board of India (SEBI) regulates the equity market, ensuring transparency, investor protection, and compliance. The Reserve Bank of India (RBI) and Ministry of Finance also play supportive regulatory roles.

5. Trading Mechanism and Settlement Process

The Indian equity market uses an order-driven, automated trading system where buyers and sellers place orders through brokers using trading terminals.

Steps in the Trading Process:

Placing the order – The investor instructs the broker to buy or sell shares.

Order matching – The exchange’s electronic system matches buy and sell orders based on price and time priority.

Trade confirmation – Once matched, the trade is confirmed and recorded.

Clearing and settlement – Managed by clearing corporations.

India follows a T+1 settlement cycle (trade plus one business day).

Shares are credited to the buyer’s Demat account, and funds are transferred to the seller’s account.

This efficient system ensures minimal counterparty risk and prompt settlement.

6. Market Segments within the Equity Market

The equity market in India can be divided into various segments:

(a) Cash Market

Here, stocks are bought and sold for immediate delivery. The buyer gains ownership immediately after settlement.

(b) Derivatives Market

This includes trading in Futures and Options (F&O) contracts, where traders speculate on price movements or hedge risk. The derivative market in India has grown exponentially, making NSE one of the largest F&O exchanges globally.

(c) Institutional Trading Platforms (ITPs)

These allow unlisted companies, particularly startups, to raise capital and trade shares among institutional investors before going for a full IPO.

7. Indices and Market Benchmarks

Indices serve as barometers for market performance. The two most tracked indices are:

BSE SENSEX – tracks 30 large, financially sound companies.

NSE NIFTY 50 – represents 50 top companies across sectors.

Other sectoral and thematic indices include:

NIFTY Bank, NIFTY IT, NIFTY FMCG, etc.
These help investors gauge performance in specific industries.

8. Regulatory Framework
(a) Role of SEBI

SEBI’s mission is to protect investors, regulate intermediaries, and promote market development. Its major functions include:

Ensuring fair practices in IPOs and secondary market trading.

Monitoring insider trading and market manipulation.

Registering and supervising intermediaries like brokers, merchant bankers, and portfolio managers.

Implementing investor grievance mechanisms.

(b) Other Regulatory Bodies

RBI regulates capital inflows and outflows.

Ministry of Corporate Affairs (MCA) oversees corporate governance.

Stock Exchanges enforce listing obligations and compliance norms.

9. Technological Advancements and Digitalization

Technology has transformed the Indian equity market, making it more accessible and efficient.

Key innovations include:

Online trading platforms like Zerodha, Groww, and Upstox democratized investing for retail participants.

Algorithmic trading and High-Frequency Trading (HFT) increased liquidity and efficiency.

Mobile-based trading enabled real-time market participation.

Blockchain and AI tools are emerging for risk analysis and settlement processes.

The transition to a T+1 settlement cycle and the potential move toward instant settlement (T+0) further demonstrate India’s leadership in market modernization.

10. Foreign Participation and Global Integration

India’s equity market attracts global investors due to its growth potential, regulatory transparency, and robust infrastructure. Foreign Portfolio Investors (FPIs) play a key role, bringing in capital and global best practices.

FPIs invest in listed equities and debt instruments, regulated by SEBI.

Foreign Direct Investment (FDI), on the other hand, involves long-term investments in companies.

Global indices such as MSCI and FTSE include Indian equities, enhancing international visibility and liquidity.

11. Challenges in the Indian Equity Market

Despite its progress, the Indian equity market faces challenges such as:

Market volatility due to global economic uncertainty.

Low financial literacy among retail investors.

Corporate governance issues in some listed firms.

Regulatory complexity for foreign investors.

High concentration of trading in a few large-cap stocks.

Efforts by SEBI, stock exchanges, and financial institutions aim to address these challenges through education, transparency, and inclusive market policies.

12. Future Outlook of the Indian Equity Market

The future of India’s equity market looks promising. Several trends indicate robust growth potential:

Increased retail participation fueled by digital access and financial awareness.

Integration with global markets through international listings and GIFT City initiatives.

Expansion of derivative and SME platforms enhancing depth and liquidity.

Sustainable and ESG investing gaining traction among institutional investors.

AI-driven analytics reshaping trading strategies and investment decisions.

With India projected to become the world’s third-largest economy, its equity market will play a pivotal role in channeling capital to productive sectors and driving economic growth.

Conclusion

The Indian equity market is a dynamic and well-regulated system that has evolved into a cornerstone of the country’s financial stability and economic expansion. Its structure—comprising the primary and secondary markets, diverse participants, robust exchanges, and stringent regulatory oversight—ensures efficient capital allocation, investor protection, and continuous innovation.

From the traditional trading floors of the Bombay Stock Exchange to the algorithm-driven platforms of the modern era, India’s equity market reflects a journey of progress, resilience, and transformation. As digitalization, globalization, and financial inclusion continue to advance, the market’s structure will further strengthen, making it a global benchmark for transparency and growth in emerging economies.