The classic defects of the Indian capital market were too few stock exchanges, opaque floor trading, odd-lot problems, slow paper settlement, vague prospectuses, a grey market, weak investor protection and slow refunds. Most were fixed by SEBI regulation, screen-based trading, demat shares, ASBA/UPI applications and T+1 settlement (2023). Current challenges include heavy retail losses in F&O (about 91% of individual traders lost money in 2024-25 per SEBI), market manipulation, insider trading, SME IPO froth, a shallow bond market, low liquidity in small stocks, limited financial literacy and dependence on foreign investors.
Most textbook lists of the “defects of the Indian capital market” were written in the 1980s and 1990s. Back then, shares were paper certificates, trades took weeks to settle, odd lots were hard to sell and the Harshad Mehta scam of 1992 had just exposed how easily the system could be gamed.
A lot has changed. SEBI got statutory powers in 1992, the National Stock Exchange started screen-based trading in 1994, shares moved to electronic demat form, and India completed the move to T+1 settlement in January 2023, ahead of most major markets. So this guide does two things: it explains the classic defects you will be asked about in exams, shows how each was fixed, and then lists the problems that still exist today.
Classic Defects and How They Were Fixed
| Classic defect | What it meant | Status today |
|---|---|---|
| Too few stock exchanges | Trading concentrated in Bombay; investors elsewhere had poor access | Fixed: nationwide screen-based trading on NSE and BSE since the 1990s |
| Defective exchange operations | Open-outcry floor trading, opaque prices, broker cartels | Fixed: electronic order matching and SEBI oversight |
| Odd-lot problem | Shares in non-standard quantities were hard to sell | Fixed: demat shares can be traded in any quantity, even one share |
| Delay in delivery and settlement | Paper transfers took weeks and certificates got lost or forged | Fixed: dematerialisation and T+1 settlement (2023) |
| Vague prospectuses | Companies hid key risks from IPO investors | Largely fixed: SEBI ICDR disclosure rules and draft offer documents |
| Grey market | Unofficial trading in IPO shares before listing | Still exists informally, though listing now happens just three working days after an IPO closes |
| Weak investor protection | Few remedies against fraud or broker default | Improved: SEBI enforcement, investor protection funds, online complaint system (SCORES) |
| Inefficient banking and postal links | Slow refunds and application money stuck for weeks | Fixed: ASBA and UPI-based IPO applications block money only until allotment |
| Stockinvest not popular | An old scheme for blocking application money | Replaced by ASBA |
10 Challenges the Indian Capital Market Still Faces
1. Heavy Losses in Derivatives Trading
Retail traders have poured into futures and options. SEBI’s own studies found that about 93% of individual F&O traders lost money between 2021-22 and 2023-24, and around 91% did so in 2024-25. That pushed SEBI to tighten rules on contract sizes and weekly expiries from late 2024.
Read more: Types of bonds.
Read more: Derivatives.
2. Market Manipulation
Pump-and-dump schemes run through Telegram groups and social media “finfluencers” still trap small investors. In July 2025 SEBI ordered US trading firm Jane Street to deposit about ₹4,840 crore, alleging it manipulated index levels on expiry days.
3. Insider Trading
Despite the SEBI (Prohibition of Insider Trading) Regulations, 2015, insider trading remains hard to detect and prove, and cases often take years.
4. SME IPO Froth
Some small and medium enterprise IPOs are heavily oversubscribed despite weak fundamentals, and SEBI has had to tighten eligibility and disclosure rules for the SME platform.
5. Shallow Corporate Bond Market
Companies still rely mostly on bank loans. The corporate bond market is small relative to the economy and dominated by top-rated issuers, so smaller firms struggle to raise debt from the market.
6. Low Liquidity in Many Stocks
Trading concentrates in large companies. Thousands of small listed stocks trade thinly, which makes prices easy to move and hard to exit.
7. Limited Financial Literacy
Demat accounts have grown to well over 15 crore, but many new investors follow tips instead of research, which fuels speculation and losses.
8. Dependence on Foreign Investors
Foreign portfolio investors can pull out billions in a few weeks, causing sharp falls and rupee pressure, as happened in late 2024.
9. Corporate Governance Gaps
Promoter-controlled companies sometimes treat minority shareholders unfairly through related-party deals or poor disclosures.
10. Slow Resolution of Disputes
Appeals and enforcement through the Securities Appellate Tribunal and courts can take years, which weakens deterrence.
How to Answer This in an Exam
If the question asks for the defects of the Indian capital market, list the classic defects but add a line on how each has been addressed since the 1990s and finish with two or three current challenges, such as derivatives losses or market manipulation. Examiners reward answers that show the market has evolved, not just a memorised list.
