NISM Series VII SORM – Chapter 2: Market Participants in the Securities Market
This is Chapter 2 of the NISM Series VII Securities Operations and Risk Management (SORM) short notes for PassNISM.in. This chapter covers all key market participants — investors, issuers, intermediaries, regulators, and the regulatory framework — which are high-weightage topics in the NISM SORM certification exam.
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Who Are Investors?
Investors are the backbone of the securities market. They provide surplus capital to companies in exchange for financial returns. In the Indian securities market, investors are broadly classified as:
1. Retail Investors
Individual investors who buy and sell securities for their personal accounts (not for another company or organisation). This category also includes High Net Worth Individuals (HNIs) — those who invest more than ₹2 lakh in a single transaction.
2. Institutional Investors
These include:
- Domestic Financial Institutions (DFIs)
- Banks
- Insurance Companies
- Mutual Funds
- Foreign Portfolio Investors (FPIs): Entities incorporated or established outside India that invest in Indian securities markets
Who Are Issuers?
Issuers are public and private sector companies, banks, and financial institutions that raise capital from the securities market for expansion and growth.
Indian companies can raise resources from international capital markets through:
- GDRs (Global Depository Receipts)
- ADRs (American Depository Receipts)
- FCCBs (Foreign Currency Convertible Bonds)
- ECBs (External Commercial Borrowings)
Market Infrastructure Institutions (MIIs)
These are the backbone institutions that keep the securities market functioning smoothly.
1. Stock Exchanges
Stock exchanges provide a regulated trading platform where buyers and sellers (investors) meet to transact in securities. Major exchanges in India include NSE (National Stock Exchange) and BSE (Bombay Stock Exchange).
2. Clearing Corporation
A clearing corporation performs three main functions:
- Clearing: Determining the obligations of each member after trades are executed
- Settlement: Completing the actual transfer of funds and securities between buyers and sellers
- Risk Management: Ensuring members meet their financial obligations
In India, NSE Clearing Limited (formerly NSCCL) and BSE Clearing Corporation are the key clearing corporations.
3. Depository
A depository is an entity that enables holding and transfer of securities in electronic (dematerialised) form through book entries. Its key objectives are:
- Maintaining electronic ownership/transfer records of securities (paperless trading)
- Ensuring fast, accurate, and safe transferability of securities
India has two depositories: NSDL (National Securities Depository Ltd) and CDSL (Central Depository Services Ltd) — established under the Depositories Act, 1996.
Market Participants – Types and Roles Trading Member (Stock Broker)
A trading member is a member of a stock exchange who can buy and sell securities on behalf of individual clients and institutions. They are also called stock brokers.
Clearing Member
A clearing member helps in the clearing of trades executed on the exchange. There are different types:
| Type | Trading Rights | Clearing Rights | Scope |
|---|---|---|---|
| Professional Clearing Member (PCM) | No | Yes | Can clear trades of all associated members |
| Trading cum Clearing Member (TCM) | Yes | Yes | Can clear own trades + trades of others |
| Self-Clearing Member | Yes | Yes (self only) | Can only clear own trades |
Custodian
Custodians are clearing members (but NOT trading members). Their role involves:
- Settling trades on behalf of institutional clients (such as FPIs and mutual funds)
- Safeguarding the securities of clients
- Tracking and acting on corporate actions on behalf of clients
- Confirming whether a particular trade assigned by a broker will be settled
Custodians must register with SEBI to provide custodial services.
Regulators in the Indian Securities Market
Understanding the regulatory structure is a key component of the NISM VII SORM exam.
| Regulator | Full Form | Sector Regulated |
|---|---|---|
| SEBI | Securities and Exchange Board of India | Securities and Commodities Markets |
| RBI | Reserve Bank of India | Banking Sector |
| IRDAI | Insurance Regulatory and Development Authority of India | Insurance Sector |
| PFRDA | Pension Fund Regulatory and Development Authority | Pension Fund Sector |
| MOF | Ministry of Finance | Financial Policy |
| MCA | Ministry of Corporate Affairs | Corporate Governance |
Role and Functions of SEBI
SEBI was established under the SEBI Act, 1992 with the following core objectives:
- Protecting the interests of investors in securities
- Promoting the development of the securities market
- Regulating the securities market
- Registering and regulating stock brokers, sub-brokers, and other intermediaries
- Promoting and regulating self-regulatory organisations (SROs)
- Prohibiting fraudulent and unfair trade practices in securities markets
- Conducting inspections, inquiries, and audits of stock exchanges, mutual funds, and other market intermediaries
Regulatory Framework – Key Laws for NISM SORM Exam
The NISM Series VII exam tests candidates on the following key legislations:
SEBI Act, 1992
Enacted to give SEBI statutory powers to protect investors, promote market development, and regulate the securities market. Its jurisdiction covers corporates issuing securities and all market intermediaries.
Securities Contracts (Regulation) Act, 1956 – SCRA
Provides direct and indirect control over all aspects of securities trading and stock exchange operations. Gives the Central Government regulatory jurisdiction over: stock exchanges (via recognition and supervision), securities contracts, and the listing of securities.
Depositories Act, 1996
Received Presidential assent on 10 August 1996. It enabled the establishment of multiple depositories in India to ensure competition in depository services. This act facilitated the creation of NSDL and CDSL. Only companies registered under the Companies Act and sponsored by specified institutions can set up a depository.
Companies Act, 2013
Deals with issue, allotment, and transfer of securities. Governs disclosures in public issues, rights and bonus issues, interest and dividend payments, underwriting, and annual report filings.
SEBI (Stock Broker) Regulations, 1992
Lays down rules for the registration of stock brokers, SEBI fees, and the general code of conduct for brokers.
Prevention of Money Laundering Act, 2002 (PMLA)
An act to prevent money laundering and provide for confiscation of property derived from or involved in money laundering.
SEBI (Prohibition of Insider Trading) Regulations, 2015
Insider trading gives insiders an unfair advantage using non-public information, undermining market integrity. These regulations define "Insiders," restrict their communication and trading, mandate disclosure of insider trades, and require listed companies and intermediaries to put systemic provisions in place.
SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003
Enables SEBI to investigate cases of market manipulation and unfair trade practices. Fraud is defined as any act, expression, omission, or concealment intended to induce another person to deal in securities.
SEBI KYC Registration Agency (KRA) Regulations, 2011
Introduced to eliminate duplication of KYC processes across SEBI-registered intermediaries. Provides details about KRA registration, functions, and obligations.
SEBI (Intermediaries) Regulations, 2008
Covers registration of intermediaries, their general obligations (grievance redressal, compliance officer appointment), code of conduct, and disciplinary proceedings.
Quick Revision – Key Points for NISM VII Chapter 2
- HNIs invest more than ₹2 lakh in a single transaction.
- FPIs are entities incorporated outside India that invest in Indian securities.
- A PCM has only clearing rights; a TCM has both trading and clearing rights.
- Custodians are clearing members but NOT trading members.
- SEBI regulates securities and commodities markets; RBI regulates banking.
- Depositories Act (1996) enabled NSDL and CDSL.
- PMLA (2002) prevents money laundering.
- Insider trading regulations (2015) protect market integrity.
- KRA system started for clients opening accounts from 1 January 2012 onwards.
📌 Next Chapter: NISM Series VII SORM – Chapter 3: Introduction to Securities Broking Operations
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Related reads: NISM Series VII Syllabus PDF | NISM SORM Study Material | SEBI Regulations for NISM Exam