Efficiency of NSE in Price Discovery and Its Effect on Corporate Capital Formation

Abstract

Price discovery is a fundamental function of stock exchanges, ensuring that security prices reflect available information, market expectations, and underlying fundamentals. For emerging economies such as India, an efficient price discovery mechanism is crucial because it influences corporate financing behaviour, investor confidence, and overall market stability. This paper evaluates the efficiency of the National Stock Exchange of India (NSE) in facilitating price discovery and examines its consequent impact on corporate capital formation through channels such as Initial Public Offerings (IPOs), Follow-on Public Offers (FPOs), and Qualified Institutional Placements (QIPs).

Drawing upon secondary data sourced from NSE, SEBI, RBI, and economic research institutions up to 2022, the study investigates the interplay between market liquidity, informational transparency, bid–ask spreads, volatility patterns, and trading volume. The analysis further assesses how this efficiency parameters contribute to lowering the cost of capital, enabling firms to raise equity more effectively, and strengthening the primary market ecosystem.

The findings reveal that NSE has consistently demonstrated high efficiency in price discovery due to its electronic limit-order book system, nationwide market access, stringent disclosure norms, and real-time data dissemination. Improved liquidity and narrow bid–ask spreads have reduced transaction costs and minimized price distortions, supporting fair valuation of securities. As a result, corporations increasingly rely on NSE as a preferred platform for raising equity capital. Between 2010 and 2022, the exchange witnessed a substantial rise in IPO and QIP activity, correlating strongly with deeper liquidity, enhanced regulatory oversight, and more accurate market-driven pricing.

The study concludes that NSE’s market microstructure, technological infrastructure, and regulatory standards collectively contribute to efficient price signals, thereby promoting robust capital formation and accelerating India’s financial development trajectory