Elements of securities market
What constitutes the Securities markets in India?
There are three important elements constituting a Securities Market:
- Buyers of Capital
- Sellers of Capital
- Intermediaries
Buyers of capital: These are the people who constitute those set of people who are the net spenders in any economy. These are the people who take the capital from the savers and utilize it. Example: Corporate houses, Government etc.
Sellers of capital: This class constitutes the group of people who are net savers. These are the people who are net providers of money to the people who need money. Example: Retail Investors, Big Investors like Rakesh Jhunjhunwala.
Intermediaries: These are the class of people who are the providers of finance to the spenders. They facilitate the movement of money from the savers to the spenders. The market mediators play an important role on the stock exchange market; they put together the demands of the buyers with the offers of the security sellers. A large variety and number of intermediaries provide intermediation services in the Indian securities markets. The banks play an important role as an intermediary in the securities market.
Participants of the Securities market
Investors: An investor is the backbone of the capital market of any economy as he is the one lending his surplus resources for funding the setting up of or expansion of companies, in return for financial gain.
Investors in Stock Markets can broadly be classified into Retail Investors and Institutional Investors.
Retail Investors are individual investors who buy and sell securities for their personal account, and not for another company or organization. This category also includes High Net worth Individuals (HNI) which comprise of people with large personal financial holdings.
Institutional Investors comprise of domestic Financial Institutions, Banks, Insurance Companies, Mutual Funds and Fii’s (Foreign Institutional investor is an entity established or incorporated outside India that proposes to make investments in India).
Clearing Corporation: A Clearing Corporation is a part of an exchange or a separate entity and performs three functions, namely, it clears and settles all transactions, i.e. Completes the process of receiving and delivering shares/funds to the buyers and sellers in the market, it provides financial guarantee for all transactions executed on the exchange and provides risk management functions.
National Securities Clearing Corporation (NSCCL), a 100% subsidiary of NSE, performs the role of a Clearing Corporation for transactions executed on the NSE.
Stock Brokers and Sub-brokers: Stock Broker means a member of a Stock Exchange and Sub-broker means any person not being a member of Stock Exchange who acts on behalf of a Stock broker as an agent or otherwise for assisting the investors in buying, selling or dealing in securities through such stock brokers.
Depository: A bank or company which holds funds or securities deposited by others, and where exchanges of these securities take place.
Depository Participant (DP): The Depository provides its services to investors through its agents called depository participants (dps). These agents are appointed by the depository with the approval of SEBI.
According to SEBI regulations, amongst others, three categories of entities, i.e. Banks, Financial Institutions and SEBI registered trading members can become dps.
Custodian: A Custodian is basically an organisation, which helps register and safeguard the securities of its clients. Besides safeguarding securities, a custodian also keeps track of corporate actions on behalf of its clients.
- Maintaining a client's securities account
- Collecting the benefits or rights accruing to the client in respect of securities
- Keeping the client informed of the actions taken or to be taken by the issue of securities, having a bearing on the benefits or rights accruing to the client.
Merchant Bankers: Merchant bankers means any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities or acting as a manager, consultant, adviser or rendering corporate advisory services in relation to such issue management.
Merchant banks are also called investment banks and are most significant institutions in thefinancial markets. The merchant banking activity in India is governed by SEBI (MerchantBankers) Regulations 1992. Each merchant banker is required to maintain capital adequacy withprescribed net worth.
Foreign Institutional Investors: Foreign Institutional Investors means an institution establishedor incorporated outside India which proposes to make investment in India in securities.Currently, entities eligible to invest under the FII route are as follows:
(i) An institution established or incorporated outside India as a pension fund, mutual fund,investment trust, insurance company or reinsurance company;
(ii) An International or Multilateral Organization or an agency thereof or a ForeignGovernmental Agency, Sovereign Wealth Fund or a Foreign Central Bank;
(iii) An asset management company, investment manager or advisor, bank or institutionalportfolio manager, established or incorporated outside India and proposing to makeinvestments in India on behalf of broad-based funds and its proprietary funds, if any;
(iv) A Trustee of a trust established outside India, and proposing to make investments in Indiaon behalf of broad-based funds and its proprietary funds, if any;
(iv) University fund, endowments, foundations or charitable trusts or charitable societies.
Mutual Funds: A mutual fund is a company that pools money from many investors and investsthe money in stocks, bonds, short-term money-market instruments, other securities or assets,or some combination of these investments. Mutual Funds are essentially investment vehicleswhere people with similar investment objective come together to pool their money and theninvest accordingly. SESI defines mutual funds as 'A fund established in the form of a trust toraise money through the sale of units to the public or a section of the public under one or moreschemes for investing in securities, including money market instruments or gold or gold relatedinstruments or real estate assets'.
Venture Capital Funds: Venture Capital Fund (VCF) is a fund established in the form of a trust ora company or a private equity capital typically for providing funds to company in the nascentstages of growth where there is very high potential for growth. A company or body corporate tocarryon activities as a VCF has to obtain a certificate from SESI and comply with the regulationsprescribed in the SESI(Venture Capital Regulations) 1996. Venture capital is most attractive fornew companies with limited operating history that are too small to raise capital in the publicmarkets and have not reached the point where they are able to secure a bank loan or completea debt offering.
Credit Rating Agency: Credit Rating Agency means a body corporate which is engaged in orproposes to be engaged in the business of rating of securities offered by way of public or rightsissues. They also assign credit ratings for issuers of certain types of debt obligations as well asthe debt instruments themselves. A credit rating for an issuer takes into consideration theissuer's credit worthiness (i.e., its ability to pay back a loan), and affects the interest rateapplied to the particular securitybeing issued. Credit ratings are used by investors, issuers,investment banks, broker-dealers, and governments. They facilitate the movement of riskcapital into the economy because they classify the companies based on their risk parametersand make the investment process much more simplified.
