Comprehensive Guide to Securities Market Structure and Participants NISM Series XII

This section provides an in-depth exploration of the architectural framework of the Indian securities markets, identifying the essential players and the regulatory bodies that govern financial transactions. This is Part 2 of a three-part series covering Chapter 1 of the NISM Securities Markets Foundation Workbook.

1.3 Securities Markets: Structure and Participants

The securities market is the platform where securities are issued, purchased, and subsequently transferred among investors. It is characterized by two interdependent and inseparable segments that ensure the continuous flow of capital and liquidity.

1.3.1 Market Segmentation: Primary and Secondary

1.3.2 The Building Blocks: Investors and Issuers

Investors Investors are individuals or organizations with surplus funds seeking to earn a return by converting savings into financial assets. They are classified based on the size of investment and strategy sophistication:

• Retail Investors: Individuals who invest money on their personal account.
• Institutional Investors: Organizations (like mutual funds, banks, and insurance companies) that invest large sums using specialized knowledge. They manage risk through formal selection, monitoring, and holding processes.

Issuers Issuers are entities authorized by regulatory authorities to raise money in the securities markets based on their capital needs and ability to pay for funds. Common issuers include:

• Companies: Raise short-term and long-term capital for business operations.
• Governments: Central and State governments issue debt to finance deficits, while local governments/municipalities issue debt for development.
• Financial Institutions and Banks: Seek capital beyond their normal deposit sources.
• Public Sector Companies: Issue securities as part of government disinvestment programs.
• Mutual Funds and Investment Trusts (REITs, InvITs, AIFs): Issue units to mobilize money for specific investment objectives.

1.3.3 Market Intermediaries: The Connecting Links

Intermediaries coordinate between lenders (investors) and borrowers (issuers) to organize the transfer of funds. Under the SEBI (Intermediaries) Regulations, 2008, the following are key players:

A. Investment and Issue Managers

• Asset Management Companies (AMCs): Specialists who pool money from investors to create a portfolio represented by units.
• Portfolio Managers: Act on behalf of individual investors to manage portfolios but are prohibited from pooling money.
• Merchant Bankers (Investment Bankers): Also called lead managers, they manage the entire issue process, from evaluating capital needs to pricing and listing.
• Underwriters: Commit to purchasing the portion of an offer not bought by investors; specialist underwriters in government bonds are known as Primary Dealers.

B. Trading and Execution Services

• Stock Brokers: Registered members of stock exchanges who facilitate transactions for investors.
• Authorized Persons (AP): Agents of brokers registered with exchanges to expand the broker's reach to more investors.
• Trading and Clearing Members: Trading members execute buy/sell orders, while clearing members handle the actual settlement of funds and delivery of securities.

C. Infrastructure and Support Services

• Registrars & Share Transfer Agents (RTAs): Maintain investor records for the issuer, ensuring dividends and interests flow to the correct owners.
• Depository Participants (DPs): Act as agents for depositories, enabling investors to hold and transact securities in dematerialized (electronic) form.
• Custodians: Typically large banks that hold securities and bank accounts for institutional investors, managing delivery and accounting.
• Bankers to an Issue: Collect application forms and money during a new issue and transfer funds to the issuer's account.

D. Protection and Evaluation Agencies

• Trustees: Appointed to supervise asset managers (Mutual Fund Trustees) or protect lender interests (Debenture Trustees).
• Credit Rating Agencies: Rank debt issues using symbols to indicate the issuer's ability to meet interest and principal obligations.
• Investment Advisers: Help investors choose securities based on needs, time horizons, and risk appetite.
• KYC Registration Agencies (KRAs): Maintain a centralized system for Know-Your-Customer information, ensuring a uniform process across SEBI-registered intermediaries.

1.3.4 Regulators of the Securities Markets

The Indian regulatory landscape is shared by multiple authorities to ensure specialized oversight across different financial segments.

• Securities and Exchange Board of India (SEBI): The primary statutory body governing the securities market. It regulates stock exchanges, oversees primary market eligibility (ICDR Regulations), inspects intermediaries, and prohibits insider trading.
• Reserve Bank of India (RBI): Regulates the money market and foreign exchange segments. It acts as the issue manager and regulator for government securities and the banking system.
• Ministry of Corporate Affairs (MCA): Administers the Companies Act, which defines the setting up, functioning, and auditing of companies and their security issuances.
• Ministry of Finance (MoF): Oversees the banking, insurance, and pension sectors through the Department of Financial Services, while the Department of Economic Affairs regulates capital markets.
• IRDAI (Insurance Regulatory and Development Authority of India): Protects policyholders and promotes efficiency in the insurance business.
• PFRDA (Pension Fund Regulatory and Development Authority): Establishes and regulates pension funds, including the National Pension System (NPS).
• IBBI (Insolvency and Bankruptcy Board of India): Oversees insolvency proceedings for entities like insolvency professionals and agencies.
• IFSCA (International Financial Services Centres Authority): A unified regulator for financial products and services in the IFSC (e.g., GIFT City) to promote ease of doing business globally.

Key Takeaways for Part 2

• Market Synergy: The primary market creates assets, while the secondary market provides the liquidity that gives investors confidence to invest.
• Dematerialisation: Since the mid-1990s, the market has transitioned from physical certificates to electronic holdings facilitated by DPs and Depositories.
• Unified KYC: SEBI has mandated a uniform KYC procedure across mutual funds, brokers, and DPs, managed centrally by KRAs.
• Regulatory Specialization: While SEBI is the chief market regulator, the RBI maintains control over systemic liquidity and government debt.

Important Terms

• Dematerialisation: The process of converting physical share certificates into electronic form.
• Lead Manager: A merchant banker responsible for managing the entirety of a public issue.
• Insider Trading: Trading by persons connected with a company who possess material, non-public information.
• Primary Dealer: A specialist intermediary acting as an underwriter in the government bond market.
• Disinvestment: The government process of offering its holding in public sector companies to private investors.

End of Part 2. Part 3 will cover Section 1.4: Role of Securities Markets and Section 1.5: Technological Advancements.