Chapter II: Market Participants in the Securities Market (Part 1)
1. Introduction to Market Participants
The securities market is a structured environment designed to facilitate the seamless transfer of resources from those with surplus funds (investors) to entities requiring capital for productive purposes (issuers). This financial intermediation is supported by Market Infrastructure Institutions (MIIs) and specialized market participants.
2. Investors in the Securities Market
Investors represent the backbone of any economy's securities market. They supply surplus capital to companies in exchange for potential financial gains. Investors are broadly classified into two main categories:
Retail Investors
- Definition: Individual investors who buy and sell securities for their personal accounts rather than on behalf of organizations.
- High Net Worth Individuals (HNIs): Under this category, individuals who invest above rupees two lakh in a single transaction are classified as High Net Worth Individuals.
Institutional Investors
- Definition: Specialized organizations and corporate bodies that pool large sums of money to invest.
- Key Entities:
- Domestic Financial Institutions (DFIs)
- Banks and Insurance Companies
- Mutual Funds
- Foreign Portfolio Investors (FPIs): Entities established or incorporated outside India that propose to make investments within India.
3. Issuers of Securities
Issuers are entities that tap the securities market to raise capital for financing expansion, setup costs, modernization, and growth plans.
Who are the Issuers?
- Public and private sector enterprises
- Banks and other financial institutions
- Mutual funds (acting as investment intermediaries that mobilize small savings)
Capital Sourcing Routes
Issuers can raise funds both domestically and internationally. International capital markets are tapped using specialized financial instruments:
| Instrument | Full Form | Description |
|---|---|---|
| GDR | Global Depository Receipt | Instrument to raise capital in international markets. |
| ADR | American Depository Receipt | Depository receipt traded in the United States. |
| FCCB | Foreign Currency Convertible Bond | Debt instrument denominated in foreign currency, convertible into equity. |
| ECB | External Commercial Borrowing | Commercial loans raised from non-resident lenders. |
4. Market Infrastructure Institutions (MIIs)
Intermediaries put together the demands of buyers and the offers of sellers. MIIs provide the foundational physical and electronic infrastructure required for trading, clearing, and settlement.
| Institution | Primary Function | Key Activities |
|---|---|---|
| Stock Exchanges | Provide a trading platform | Facilitate buying and selling of securities |
| Clearing Corporations | Provide clearing, settlement & risk management | Determine obligations, manage counterparty risk, and facilitate settlement |
| Depositories | Provide dematerialisation & book-entry services | Hold securities electronically and enable transfer through book entries |
I. Stock Exchanges
- Primary Function: Provide a robust, secure trading platform where buyers and sellers meet to execute transactions in securities.
II. Clearing Corporations
Clearing corporations perform three primary operations:
- Clearing: Determining the exact obligations of buyers and sellers.
- Settlement: Completing the actual delivery of funds and securities.
- Risk Management: Implementing risk mitigation measures to guarantee the integrity of the settlement process.
III. Depositories
- Primary Objective: To facilitate holding securities in electronic (dematerialised) form and enable transfer of securities by book entry.
- Benefits: Replaces paper-based physical share certificates with paperless trading, ensuring high speed, precision, accuracy, and safety.
5. Market Participants & Clearing Members
To execute and settle trades on Stock Exchanges, investors and brokers must interact with certified clearing and trading members.
Member Classification Matrix
| Member Type | Trading Rights? | Clearing Rights? | Operational Scope |
|---|---|---|---|
| Trading Member / Stock Broker | Yes | No | Buys and sells securities on behalf of clients (individuals and institutions). |
| Self-Clearing Member | Yes | Yes | Clears and settles only those trades executed by themselves. |
| Trading cum Clearing Member (TCM) | Yes | Yes | Clears their own proprietary trades as well as trades executed by other members. |
| Professional Clearing Member (PCM) | No | Yes | Has no trading rights; can only clear trades executed by other associated members. |
| Custodian | No | Yes | Settles trades on behalf of clients of trading members when assigned to them. Safeguards client assets. |
6. Custodian Services
A Custodian is a specialized entity registered with SEBI to carry out custodian services.
- Registration Prerequisite: Must obtain a certificate of registration from SEBI to operate.
- Key Responsibilities:
- Asset Safeguarding: Taking custody of and safeguarding the physical/electronic securities of clients.
- Corporate Actions Tracking: Keeping track of corporate actions (such as dividends, stock splits, or bonus issues) on behalf of clients.
- Trade Settlement: Settling transactions executed through trading brokers, subject to custodian confirmation.
Key Exam Takeaways
- HNI Threshold: Individual investments above Rs. 2 Lakh in a single transaction.
- PCM Limitation: Professional Clearing Members have clearing rights only and cannot execute trades.
- FPI Definition: Foreign Portfolio Investors are incorporated outside India to invest domestically.
- Primary MII Components: Consists of Stock Exchanges, Clearing Corporations, and Depositories.