Market Participants in the Securities Market: formula sheet

Key formulas

Primary market test

Money goes to the issuer → primary market

IPO, FPO, rights issue, private placement and preferential allotment all raise fresh capital for the issuer.

Secondary market test

Money goes to the selling investor → secondary market

The issuer's capital does not change. The market provides liquidity and price discovery.

Instrument classes

Equity = ownership; Debt = loan; Derivative = value derived from an underlying

Mutual fund units represent a share in a pooled portfolio.

Segment identification

Cash = shares delivered; Derivatives = futures and options; Debt = bonds and G-Secs

Match the product named in the question to its segment.

Trading member

Trading member = admitted by the exchange to trade, registered with SEBI as a broker

Can place orders. Needs a clearing member to settle if it is not a clearing member itself.

Trading-cum-clearing member

TCM = clears own trades + clients' trades + other trading members' trades

Clears and settles its own and its clients' trades with the clearing corporation, and also clears for other trading members.

Self-clearing member

SCM = clears only own trades + clients' trades

Does not clear for other trading members. This is the difference from a TCM.

Professional clearing member

PCM = clears only, does not trade

Clears trades for trading members and custodial clients.

Exchange vs clearing corporation

Exchange = trading platform; Clearing corporation = clearing and settlement, as central counterparty through novation

Through novation, the clearing corporation becomes the buyer to every seller and the seller to every buyer, and so guarantees settlement. Do not mix the two functions in an answer.

Novation

Original contract (Buyer ↔ Seller) → Buyer ↔ CCP and CCP ↔ Seller

The CCP becomes the buyer to every seller and the seller to every buyer. This is the basis of the settlement guarantee.

Central counterparty role

CCP = guarantor of settlement + risk manager + settlement agent

Guarantee covers settlement of trades accepted for clearing; it does not guarantee that a trade will be profitable.

Default waterfall (order of use)

Defaulter's margins and deposits → defaulter's contribution to SGF → other resources of the clearing corporation as per its rules → non-defaulting members' contributions

The defaulter's own resources are used first. Check the exact order in your workbook wording for the option given.

Clearing member types

Self-clearing member | Trading-cum-clearing member | Professional clearing member

Self-clearing clears only its own trades and its clients' trades. Trading-cum-clearing also clears for other trading members. Professional clearing members clear for others and do not trade themselves.

Ownership split

Registered owner = depository; Beneficial owner = investor

The depository holds legal title in the issuer's records. The investor keeps all rights, such as dividends, bonus and voting.

Chain of service

Investor → DP → Depository → Issuer / RTA

The investor has no direct account with the depository. The DP is the agent.

Depositories in India

NSDL and CDSL

Both are SEBI-registered and work under the Depositories Act, 1996. Their core functions are the same.

Dematerialisation and rematerialisation

Demat = paper to electronic; Remat = electronic to paper

Do not reverse the two terms in options.

Transfer mode

Transfer within a depository = book entry

No physical delivery and no transfer deed is needed for the transfer.

Custodian role

Institutional client → trades via broker → trade confirmed to custodian → custodian settles

The broker executes. The custodian settles. This is the flow behind custodial trades.

PCM definition

PCM = clearing member without trading rights

It clears for others and does not trade on its own account.

Clearing bank role

Funds pay-in and pay-out = via clearing bank accounts of members

Securities move through depositories. Funds move through clearing banks.

Custodian vs DP

Custodian = institutional safekeeping and settlement; DP = depository's agent for demat accounts

A custodian usually also holds DP registration, but the roles are distinct.

SEBI's three core objectives

Investor protection + market development + market regulation

Use this to test any option about why SEBI exists.

Regulator match

SEBI = securities market; RBI = banks, money market, G-secs, forex; IRDAI = insurance; PFRDA = pensions

The commonest matching question in MCQs.

Institutional investor list

Mutual funds, banks, insurers, pension funds, financial institutions, FPIs

Individuals and small HUFs are retail, not institutional.

FPI vs FII

FPI = current SEBI-registered category for foreign portfolio investment; FII = older category

FPIs invest for returns, not control. Large strategic stakes are FDI, not FPI.

Self-regulation tier

SEBI → exchanges, depositories, clearing corporations → members

Market infrastructure institutions frame rules for their members, subject to SEBI.

Broker

Stockbroker = SEBI-registered trading member who executes trades for clients

Trades on the exchange only through a registered broker.

Authorised person

Authorised person = appointed by broker + approved by stock exchange

The broker is responsible for the authorised person's acts. Not a SEBI-registered sub-broker.

Sub-broker status

Sub-broker = agent of broker; fresh registration discontinued by SEBI in 2018

Existing ones had to convert to trading member or authorised person.

Registrar to an issue

Registrar to an issue = application processing + allotment finalisation + refunds + credit of securities

Works for the issuer in public issues, with the merchant banker.

Share transfer agent

STA = maintains holder records + processes transfers for the issuer

Mutual fund RTAs do the same for unit holders, including purchases and redemptions.

Matching rule

Function in question → intermediary

Manage issue: merchant banker. Collect money: banker to issue. Hold for institutions: custodian. Open demat: DP.

Quick revision

• Draw the trade chain from order to settlement and place every participant on it.
• The stock exchange provides the trading platform; trading members trade on it for clients or themselves.
• The clearing corporation handles clearing and settlement of trades and manages the related risk.
• Clearing members clear and settle trades through the clearing corporation; a trading member may need a clearing member to settle for it.
• A depository holds securities in electronic form; investors access it through a depository participant.
• A depository participant is the agent of the depository and the investor's point of contact.
• Custodians hold and settle securities for institutional clients such as funds and foreign investors.
• Clearing banks handle the funds side of settlement for clearing members.
• SEBI is the main securities market regulator, set up to protect investors and develop the market.
• Institutional investors include entities such as mutual funds, insurers and foreign portfolio investors.
• Read each question for the role asked: who does it, who guarantees it, or who holds it.
• Skip a question if you are torn between two roles; wrong answers cost 25% of the question's marks.

Common mistakes

• Saying the issuer receives money when shares are traded on the exchange. Fix: In secondary trades, money passes between investors. Only fresh issue proceeds go to the issuer.
• Treating a rights issue as a secondary market activity. Fix: A rights issue creates new shares and raises capital, so it is a primary market activity.
• Treating every trading member as a clearing member. Fix: Remember that a trading member may depend on a clearing member to settle its trades.
• Saying the stock exchange settles trades. Fix: The clearing corporation handles clearing and settlement. The exchange provides the trading platform.
• Saying the stock exchange guarantees the trade. Fix: The exchange matches orders. The clearing corporation guarantees settlement as central counterparty.
• Confusing novation with netting. Fix: Novation replaces the contract with two contracts with the CCP. Netting offsets a member's buy and sell obligations into a net figure.
• Saying the investor opens an account directly with NSDL or CDSL. Fix: Remember the account is opened with a DP. The depository only admits and supervises DPs.
• Treating the depository as the beneficial owner of the securities. Fix: The depository is the registered owner. The investor is the beneficial owner and receives dividends, bonus and other benefits.
• Saying a custodian opens demat accounts for retail investors. Fix: Link retail demat opening to the DP. Link institutional safekeeping and settlement to the custodian.
• Thinking a PCM can trade on its own account. Fix: A PCM has no trading rights. It only clears and settles for others.

Exam tips

• Most questions test one idea: who receives the money. Settle that first.
• Learn the list of primary market routes: IPO, FPO, rights issue and private placement.
• Do not guess when unsure. NISM Series VII has negative marking of 25% of the marks of a question.
• Match each product to its segment by name. Futures and options mean derivatives.
• Read options for words like always or only. Market structure rules usually have exceptions.
• Link each entity to one verb: exchange provides the platform, trading member trades, clearing member settles.
• Learn the four member categories through three yes/no questions: trades, clears, and clears for other trading members.
• Be careful with options using 'only' or 'always'.