Capital Market and Securities Laws · Basics of Capital Market

Market Intermediaries and Participants in the Capital Market

Updated 11 October 2026 · Fact-checked

Capital market intermediaries are SEBI-registered entities that connect issuers and investors and keep the market running. Examples are stock brokers, merchant bankers, depositories and participants, registrars, rating agencies and FPIs. To answer an exam question, name the intermediary, state its registration, list its functions, and conclude with its regulatory duty.

Understand Market Intermediaries and Participants

A company needing money and an investor with savings rarely meet directly. Intermediaries sit between them. Each does one job: some help raise money, some help trade, some hold securities, and some give opinions on risk.

In the primary market, the key intermediaries are merchant bankers (lead managers), underwriters, registrars to an issue, bankers to an issue, debenture trustees and credit rating agencies. They help the issuer prepare the offer document, collect applications, allot securities and refund excess money.

In the secondary market, the key intermediaries are stock brokers, depositories and depository participants (DPs). Brokers place your buy and sell orders on the exchange. A depository holds securities in electronic form. A DP is your agent for the depository, like a bank branch for a bank.

Participants are those who use the market, such as retail investors, institutional investors, mutual funds and foreign portfolio investors (FPIs). FPIs are registered with SEBI through designated depository participants and invest in Indian securities within the limits set by the regulations.

In India, SEBI regulates these entities under the SEBI Act, 1992 and specific regulations for each category. Generally, an intermediary must hold a SEBI certificate of registration to act. Depositories are governed by the Depositories Act, 1996 and the SEBI (Depositories and Participants) Regulations, 2018. India has two depositories: NSDL and CDSL.

Key rules to remember

Registration rule: Intermediary acts only with a SEBI certificate of registration; Applies to brokers, merchant bankers, DPs, registrars, rating agencies and similar intermediaries. Mention the governing regulations in your answer.
Merchant banker functions: Due diligence + offer document + marketing + allotment coordination + post-issue compliance; Lead manager must exercise due diligence and file a due diligence certificate with SEBI for the offer document.
Depository structure: Investor (beneficial owner) → Depository Participant → Depository (NSDL or CDSL); The depository is the registered owner of securities in its books; the investor is the beneficial owner.
Registrar to an issue role: Collect applications → finalise allotment basis → issue refunds and credit demat accounts → maintain records; Handles the application and allotment processing. A share transfer agent handles transfers and records for a company after listing.
Credit rating role: Rating = independent opinion on the issuer's ability to pay debt on time; It is an opinion, not a recommendation to buy, sell or hold.
FPI entry route: FPI registers through a designated depository participant (DDP) under SEBI (FPI) Regulations, 2019; FPIs are registered in categories under those regulations. Check the category details in your study material.

How to solve Market Intermediaries and Participants questions

Use this method for any question asking you to explain, list or distinguish intermediaries.

1Read the question and identify the intermediary or the stage of the market (primary or secondary) it is about.
2Define the intermediary in one line, with the governing regulations and the need for SEBI registration.
3List its main functions in a short, numbered or bulleted form. Keep each function to one line.
4Add its key obligations, such as due diligence, record-keeping, code of conduct or reporting to SEBI.
5Where the question asks for a comparison, use the same points for both: role, who appoints it, who regulates it, stage of market.
6Link the role to the investor or issuer so the examiner sees why it matters.
7End with a one-line conclusion on SEBI's oversight and the consequence of non-compliance.

Quickest way: Who, Stage, Job, Duty

When to use it: Use when you have under five minutes for a short note or when you are revising the whole list.

Who: write the full name and regulation of the intermediary.
Stage: say whether it works in the primary market, secondary market or both.
Job: give three to five core functions in bullets.
Duty: add one line on registration, due diligence or code of conduct.
Link: finish with one sentence on investor protection.

Common mistakes in Market Intermediaries and Participants

Treating a registrar to an issue and a share transfer agent as the same thing.
Both keep records of security holders and are often the same firm.
Fix: Say the registrar handles application and allotment for an issue, while the transfer agent handles transfers and holder records. Note that one entity may do both if registered for both.
Saying the depository directly deals with investors.
Students forget the participant layer.
Fix: Show the chain: investor, DP, depository. The investor opens the demat account with a DP, not with NSDL or CDSL.
Describing merchant bankers only as underwriters.
Underwriting is the best-known activity.
Fix: List the full role: managing issues, due diligence, drafting the offer document, marketing and allotment coordination. Underwriting is a separate activity.
Calling a credit rating a recommendation to invest.
Ratings are used in investment decisions, so the two are confused.
Fix: State that it is an independent opinion on credit risk of a specific instrument or issuer, not advice.
Omitting SEBI registration and regulations from the answer.
Students focus only on functions.
Fix: Open each answer with the governing regulations and the registration requirement. This is what earns the legal marks.
Confusing FPIs with domestic institutional investors.
Both are institutional participants.
Fix: Define FPIs as foreign investors registered with SEBI through a designated depository participant under the FPI Regulations, and note they are participants, not service intermediaries.

Worked examples

Example 1

Explain the role of a merchant banker in a public issue of securities.

Show the solution

Provision: A merchant banker is a SEBI-registered intermediary under the SEBI (Merchant Bankers) Regulations, 1992. In a public issue it acts as the lead manager.
Analysis: It appraises the issuer and carries out due diligence, so that disclosures in the offer document are true and adequate.
It prepares the draft offer document, files it with SEBI, and incorporates observations received.
It coordinates other intermediaries such as registrars, bankers to the issue, underwriters and advertising agencies.
It manages marketing, pricing discussions and the timetable, and oversees allotment, refunds and listing steps.
It files a due diligence certificate with SEBI and remains responsible for post-issue compliance, as the regulations require.
Conclusion: The merchant banker is the central coordinator of a public issue and is accountable to SEBI for the quality of disclosures.

Answer: A merchant banker, as lead manager, performs due diligence, prepares the offer document, coordinates other intermediaries, manages marketing and allotment, and is accountable to SEBI for disclosures.

Example 2

Distinguish between a depository and a depository participant, and state their functions.

Show the solution

Provision: A depository is an entity registered with SEBI under the Depositories Act, 1996 that holds securities in electronic form. NSDL and CDSL are the two depositories in India.
A depository participant is an agent of the depository, registered with SEBI under the SEBI (Depositories and Participants) Regulations, 2018. Banks, brokers and other institutions may act as DPs.
Depository functions: hold securities in dematerialised form, record transfers by book entry, and provide the system through which participants operate.
DP functions: open demat accounts for investors, accept demat and remat requests, process transfers and pledges, and provide account statements.
Difference: the depository serves participants, while the DP serves investors. The investor has no direct account with the depository.
Conclusion: The depository is the infrastructure layer and the DP is the service layer, and together they make paperless holding and transfer possible.

Answer: The depository holds securities electronically and runs the system; the DP is its agent that deals with investors by opening demat accounts and processing transfers. Both are SEBI-registered.

Exam tips

Start every answer with the regulations and SEBI registration. Examiners look for the legal basis first.
For 'role of' questions, give five to six crisp functions rather than a long paragraph on one.
Use a simple flow line such as investor → DP → depository when the question is on the depository system.
Be ready for short notes on registrar to an issue, credit rating agency, FPI and merchant banker. Prepare a four-line note on each.
Keep the intermediary roles in this topic as an overview. Section-level details are covered in the dedicated regulation topics.

Practice questions from Basics of Capital Market

Market Intermediaries and Participants in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Market Intermediaries and Participants: frequently asked questions

Which intermediaries are covered in capital market basics?

Expect stock brokers, merchant bankers, underwriters, registrars to an issue, share transfer agents, depositories and DPs, bankers to an issue, debenture trustees, credit rating agencies and FPIs. Know the role and regulator of each.

What is a registrar to an issue?

It is a SEBI-registered intermediary that processes applications in a public issue, finalises the basis of allotment with the issuer and exchange, credits securities and handles refunds. It also keeps records of the applicants.

What do NSDL and CDSL do?

They are the two depositories in India. They hold securities in electronic form and record transfers by book entry. Investors use them through depository participants.

Is an FPI an intermediary?

An FPI is generally treated as a market participant, not a service intermediary. It invests in Indian securities after registering with SEBI through a designated depository participant.