6

INSTITUTIONS AND
INTERMEDIARIES
LEARNING OUTCOMES

After going through the chapter student shall be able to understand:

❑ Depository
❑ Stock and Commodity Exchanges – Indian and Global
❑ Intermediaries
❑ Institutional Investors
❑ FPIs
❑ Custodians
❑ Clearing Houses

1. DEPOSITORY
Depository in simple terms means a place where securities are kept safely. Actually, depository is
an organization which keeps securities in electronic form and helps in the transfer of ownership of
securities. As per section 2(e) of the Depositories Act, 1996, ‘Depository means a company formed
and registered under the Companies Act, 2013 and which has been granted a certificate of
registration under Securities and Exchange Board of India Act, 1992.’
In the depository system, transactions in securities are done entirely on paperless or electronic
basis. This is quite similar to the banking system where one opens an account with a bank. Similarly,
in case of depository system, an investor willing to invest in the securities market opens an account
(which is called a ‘Demat Account’) with a depository. Whenever securities are allotted to a particular
investor, his account will be credited. In the same way, whenever any securities are sold by that

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particular investor, his demat account will be debited by the amount of shares sold by him. A
depository also acts a securities bank where dematerialized securities in electronic are kept in safe
custody.
1.1 Benefits of a Depository System
To the Investors
i) It eliminates bad deliveries of securities.
ii) The settlement cycle has become quicker. It is now T + 2.
iii) Immediate transfer and registration of securities are possible now.
iv) It eliminates the risks present in physical certificate for e.g. forgery, delays, mutilation, theft
and damage of share certificates.
v) Electronic transfer of securities enables the investor to get dividend, bonus shares and right
shares quickly.
vi) Transaction costs are lower as transfer of securities in electronic form is exempt from stamp
duty.
vii) Further, as trading in depository system is paperless; no share certificate and share transfer
deed is required.
viii) Lastly, rate of interest on loan against the pledged demat shares are lower in comparison to
physical shares.
To the Company
i) The depository system helps a company to maintain and update its shareholding pattern
periodically. The company has knowledge of the beneficial ownership and their holdings at
all times.
ii) The cost of issue of securities also gets lowered because of dematerialisation of securities.
iii) Another advantage of depository system is that large number of transactions can be settled
promptly.
(iv) Distribution of dividends and issuance of rights shares and bonus shares will be quicker as
the ownership can be easily identified.
v) The transfer process under depository system is quick and without any defects. Therefore,
complaints against the company by investors have been drastically reduced in this respect.
To the Capital Market
i) The capital market is more transparent, as trading, clearing and settlement are automatic and
always inter linked with the depository.

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ii) Use of latest technology in the depository system has made the capital market activities more
efficient.
iii) That has made the investors to have more confidence in the capital market.
iv) Use of depository system has attracted foreign institutional investors in large numbers.
v) Use of electronic system has made the Indian Capital Market more flourishing. For instance,
we can take the example of mutual funds which have increased substantially in th e last few
years.
1.2 The Process of Depository System
Four parties are involved in a depository system i.e. the customer, the depository participant (DP),
the depository, and the share registrar and transfer agent. The process of the depository system
and the involvement of the four parties as mentioned above are discussed as below:
(a) Account Opening: An investor who wishes to avail the depository services has to apply for
opening an account with a depository through a Depository Participant (DP). A depository
participant can either be a custodian, a bank, a broker, or an individual. After opening an
account, the investor is allotted a client account number. The holder of a demat account is
called a ‘beneficial owner’. He has the option of opening more than one demat account either
with the same DPs or multiple DPs.
(b) Dematerialization: In order to convert physical shares into electronic one, an investor has to
make an application to the depository in a Dematerialization Request Form (DRF). DP
forwards the form within seven days to the issuer company or its Registrar and Share Transfer
Agent (RTA). The company or its RTA, then, verifies the validity of the security certificates
and the fact the person making an application is actually a registered memb er. After
verification, the issuer company or its RTA, on being satisfied, authorizes an electronic credit
of security in favour of the investor. Thereafter, the depository also credit the demat account
of the investor.
(c) Rematerialisation: An investor having a demat account can apply for withdrawal of balance
in his account in a Rematerialisation Request Form (RRF). On receipt of the RRF, if the DP
is satisfied that there is sufficient balance, will block the balance of the investor to the extent
of the rematerialisation quantity and electronically forwards the request to the depository. The
depository will then block the balance of the investor to the extent of the rematerialisation
quantity and forward the accepted rematerialisation application to the issuer or its Registrar
and Share Transfer Agent (RTA). The RTA will confirm that RRF has been accepted. Then,
the RTA will dispatch the physical share certificates within 30 days.
(d) Distributing Dividend: A company or its RTA generally informs the depository of various
dates such as book closures, redemption or maturity of security etc. This enables the
depository to electronically provide to the company a list of the holding of the investors on

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the day of distribution of dividend. The company will, then, distribute dividend on the basis of
the list provided.
(e) Closing an Account: If an investor wants to close his account, he shall make an application
in the prescribed format to the DP. The DP may close his account if no balances are there in
the investor’s demat account. If any balances exist, then account may be closed either by
rematerialisation or transferring his securities to other account either with the same
depository participant or with a different depository participant.

2. STOCK AND COMMODITY EXCHANGES – INDIAN AND

GLOBAL
The stock exchanges are meant to facilitate mobilization of resources by companies. However, the
regulation of stock exchanges is necessary to protect the interests of investors and safeguarding
the role of stock exchanges with regard to the development of the ca pital market.
Stock exchanges are basically regulated by SEBI. The recognition given to a stock exchange to
function in the capital market is given by SEBI. The Securities Contracts (Regulation) Act 1956 along
with the Securities Contracts (Regulation) Rules 1957 has been the main laws to regulate the
securities market in India. As per the Securities Contracts Regulations Act, 1956 a stock exchange
is defined as "an association, organization or body of individuals whether incorporated or not,
established for the purpose of assisting, regulating and controlling business in buying, selling and
dealing in securities”.
2.1 Growth of Stock Exchanges
The history of Stock Exchanges in India goes back to the eighteenth century, when securities of the
East India Company were transacted. There were 50-60 brokers led by the legendary Premchand
Roychand. They formed the backbone of share floatation by East India Company and a few
commercial banks. Corporate shares made their entry in the 1830s and assumed significance with
the enactment of the Companies Act in the 1850s. The Bombay Stock Exchange, the oldest stock
exchange in India was established in 1875 under the name, Share and Stockbrokers Associati on.
The stock exchanges are tightly regulated as self-regulatory organizations (SROs) under the Act. In
addition to ordinary regulatory powers over the stock exchanges, the Central Government and/or
SEBI may nominate up to three members to the board of each stock exchange [Section 4(2) (iii) of
the SC (R) Act, 1956 and Section 10 of SC(R) Rules, 1957]. The government and/or the agency
have the authority to make, approve and amend the byelaws of the stock exchanges [Section 4(1)(a)
&8 of the SC(R) Act, 1956]. In return, the stock exchanges have been granted a strong disciplinary
authority (as well as obligations) over their member stockbrokers.
2.1.1 Leading Stock Exchanges in India
The two leading stock exchanges in India are Bombay Stock Exchange (BSE) and National Stock
Exchange (NSE). A brief about them has been discussed as below:

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(a) Bombay Stock Exchange Limited: It is the oldest stock exchange in Asia and was
established as "The Native Share & Stock Brokers Association" in 1875. The Securities
Contract (Regulation) Act, 1956 gives permanent recognition to Bombay Stock Exchange in
1956. BSE became the first stock exchange in India to obtain such permission from the
Government under the Act.
The Exchange's pivotal and pre-eminent role in the development of the Indian capital market
is widely recognized and its index, SENSEX, is tracked worldwide. Earlier, an Association of
Persons (AOP), the Exchange is now a demutualized and corporatized entity incorporated
under the provisions of the Companies Act, 1956, pursuant to the BSE (Corporatization and
Demutualization) Scheme, 2005 notified by the Securities and Exchange Board of India
(SEBI).
The Exchange has a nation-wide coverage. The BSE’s systems and processes are designed
in such a way that it safeguards the integrity of the market and ensure transparency in its
operations.
Therefore, the traders can freely trade in equity, debt and derivative instruments as they are
pretty much sure of the BSE’s transparent and efficient operations. The BSE's On Line
Trading System (BOLT) is a proprietary system of the Exchange and is BS 7799 -2-2002
certified. Similarly, the surveillance and clearing & settlement functions of the Exchange are
ISO 9001:2000 certified.
(b) National Stock Exchange: NSE was incorporated in 1992. It was recognized as a stock
exchange by SEBI in April 1993 and commenced operations in 1994 with the launch of the
wholesale debt market, followed shortly after the launch of the cash market segment.
NSE also has strategic investments in complementary businesses, including mutual fund
registry services, back-end exchange support services for its platforms, depository services,
e-corporate governance and commodity, power and receivables exchanges.
The National Stock Exchange of India Ltd. (NSE) is the leading stock excha nge in India and
the second largest in the world by number of trades in equity shares from January to June
2018, according to World Federation of Exchanges (WFE) report.
NSE launched electronic screen-based trading in 1994, derivatives trading (in the form of
index futures) and internet trading in 2000, which were each the first of its kind in India.
NSE has a fully-integrated business model comprising our exchange listings, trading
services, clearing and settlement services, indices, market data feeds, technology solutions
and financial education offerings. NSE also oversees compliance by trading and clearing
members and listed companies with the rules and regulations of the exchange.
NSE is a pioneer in technology and ensures the reliability and perform ance of its systems
through a culture of innovation and investment in technology. NSE believes that the scale
and breadth of its products and services, sustained leadership positions across multiple asset

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classes in India and globally enable it to be highly reactive to market demands and changes
and deliver innovation in both trading and non-trading businesses to provide high-quality data
and services to market participants and clients. [Source: NSE Website]
2.1.2 Stock Exchanges Abroad
With the increasing globalization and liberalization, the prices of securities on Indian stock
exchanges are influenced by stock exchanges abroad. Under this heading we have tried to give a
brief introduction of the major stock exchanges abroad.
(a) New York Stock Exchange (NYSE):The New York Stock Exchange was established
more than 200 years ago in 1792. NYSE is the world’s foremost securities marketplace.
Each day on the NYSE trading floor an auction takes place. Open bid and offers are made by
investors which are efficiently managed by exchange members who act on behalf of institutions and
individual investors. Prices are determined through the forces of demand and supply. Buy and sell
orders given by investors for the listed securities are given an assigned location where a NYSE
member from employed broker acts as an auctioneer in an open outcry market . However, from
January 24, 2007 onwards NYSE stocks are also being traded electronically.
(b) Nasdaq: Nasdaq is known for its growth, liquidity, depth of market and the world’s most
powerful, forward-looking technologies. This makes NASDAQ the leading choice of some of the well-
known companies in the world. NASDAQ was born in 1971. Since then, it has outformed the other
market to become the fastest growing stock exchange in USA. In Nasdaq, trading takes place in
electronic trading platform having the highest level of efficiency.
As Nasdaq is one of the world’s most popular stock exchanges, the companies in order to get listed
on it must satisfy the most strict earnings, capitalization and corporate governance norms.
In contrast to NYSE, the Nasdaq is a fully electronic trading platform for securities . So, it has no
individual specialist broker through which the transactions go through. Nasdaq’s market structure is
such that it allows large number of participants to undergo trading in stocks though a highly
sophisticated computer network. Together, these participants help ensure transparency and liquidity
for a company’s stock while maintaining an orderly market and functioning u nder tight regulatory
controls.
(c) London Stock Exchange: The history of the formation of London stock exchange can be
traced back to 1760 when 150 brokers fired from royal Exchange for misbehavior formed a club at
Jonathan’s Coffee House to buy and sell shares. In 1773, members voted to change the name to
Stock Exchange and 2000 shareholders voted it to become a public limited company and thus
London Stock Exchange was formed. Dealing in shares is conducted via an off-market trading facility
operated by Cazenove and Co.

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London Stock Exchange provides a range of services for companies and investors:
(i) Company Services -It provides a number of markets which allow companies large and small
to raise capital, and a range of services to increase the profile of the companies.
(ii) Trading Services -It gives market users access to a well-developed trading environment with
a proven record of stability and flexibility.
(iii) Information Services - It provides high quality real-time price information to market users
worldwide, as well as historical and reference data.
Supporting these activities, the exchange regulates the markets to give protection to investors and
companies and to maintain its reputation for high standards and integrity. In addition, in partnership
with others, it helps to track the performance of the markets through various indices.
2.2 Characteristics of Stock Exchanges in India
Stock exchange is an association of individual members called brokers. It is formed with the aim to
regulate and facilitate the buying and selling of securities by retail investors and institutions.
Corporate membership of stock exchanges was introduced lately.
A stock exchange is typically governed by a board, consisting of directors. Some Members of the
Board are nominated by the Government. Government nominees include representatives of the
Ministry of Finance, as well as some public representatives, who are expected to safeguard the
interest of investors in the functioning of the exchanges. The board is headed by a President, who
is an elected member, usually nominated by the government, from among the elected members.
The Executive Director, who is appointed by the stock exchange with government approval, is the
operational chief of the stock exchange. His duty is to ensure that the day -to-day operations of the
stock exchange are carried out in accordance with the rules and regulations governing its
functioning.
Securities and Exchanges Board of India (SEBI) has been set up in Mumbai by the Government to
oversee the orderly development of stock exchanges in the country.Every company which wishes to
raise capital from the public is required to get its securities listed in atleast one stock excha nge.
Thus, all ordinary shares, preference shares and debentures of publicly held companies are listed
in one or more stock exchanges.
2.3 Functions of Stock Exchanges
The Stock Exchange is a market place where investors buy and sell securities. Functions of the
stock exchanges can be summarized as follows:
(a) Liquidity and Marketability of Securities: The basic function of the stock market is the
creation of a continuous market for securities, enabling them to be liquidated, where investors can
convert their securities into cash at any time at the prevailing market price. It also provides investors
the opportunity to change their portfolio as and when they want to change, i.e. they can at any time
sell one security and purchase another, thus giving them marketability.

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(b) Fair Price Determination: The stock market is almost a perfectly competitive market. The
reason is that there are large number of buyers and sellers, near perfect information and active
bidding from both the buyer’s and the seller’s side. The reasons as mentioned above ensures that
fair price is determined by the forces of demand and supply.
(c) Source for Long term Funds: Corporates, Government and public bodies raise funds from
the equity market. These securities are negotiable and transferable. They are traded and change
hands from one investor to the other without affecting the long-term availability of funds to the issuing
companies.
(d) Helps in Capital Formation: Savings and investments of the people are closely interrelated.
The savings of the community are mobilized and channeled by stock exchanges for investment into
those sectors and units which are favoured by the community at large, on the basis of such criteria
as good return, appreciation of capital, and so on. It is the preference of investors for individual units
as well as industry groups, which is reflected in the share price that decides the mode of investment.
Stock exchanges render this service by arranging for the preliminary distribution of new issues of
capital, offered through prospectus, as also offers for sale of existing securities, in an orderly and
systematic manner. They themselves administer the same, by ensuring that the various requisites
of listing (such as offering at least the prescribed minimum percentage of capital to the public,
keeping the subscription list open for a minimum number of days, enlisting prescribed centres for
receiving of applications, allotting shares against application received are complied with.
Stock exchanges also provide a forum for trading in rights shares of companies already listed,
thereby enabling a new class of investors to take up a part of the rights in t he place of existing
shareholders who renounce their rights for monetary considerations.
(e) Reflects the General State of Economy: The way stock markets perform is indicative of the
manner of economic health of a country i.e. whether the economy is undergoing boom or depression.
It indicates the general state of the economy to all those concerned, who can take suitable steps in
time. The Government takes suitable monetary and fiscal steps depending upon the state of the
economy.
2.4 Indian Commodity Exchanges
Presently four national commodity exchanges are operational; National Multi-Commodity Exchange
of India (NMCE), Indian Commodity Exchange (ICEX), National Commodity and Derivatives
Exchange (NCDEX) and Multi Commodity Exchange (MCX).
(a) National Commodity & Derivatives Exchange Limited (NCDEX): NCDEX is a
professionally managed online multi commodity exchange.It is promoted by ICICI Bank Limited
(ICICI Bank), Life Insurance Corporation of India (LIC), National Bank for Agriculture and Rur al
Development (NABARD) and National Stock Exchange of India Limited (NSE), Punjab National Bank
(PNB), CRISIL Limited (formerly the Credit Rating Information Services of India Limited), Indian
Farmers Fertiliser Cooperative Limited (IFFCO), Canara Bank and Goldman Sachs by subscribing

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to the equity shares of the Exchange. NCDEX is the only commodity exchange in the country
promoted by national level institutions.
NCDEX is a public limited company incorporated on April 23, 2003 under the Companies Act, 195 6.
It commenced its operations on December 15, 2003.
It is a national level, technology driven demutualized on-line commodity exchange with an
independent Board of Directors and professionals not having any vested interest in commodity
markets. It is committed to provide a world-class commodity exchange platform for market
participants to trade in a wide spectrum of commodity derivatives driven by best global practices,
professionalism and transparency.
Initially, it was regulated by Forward Market Commission in respect of futures trading in commodities.
However, FMC is merged with SEBI in 2015. Now, SEBI is also the regulator of commodity
exchanges. Further, NCDEX is also required to comply various laws like the Companies Act, Stamp
Act, Contract Act, SEBI Act and various other legislations, which generally hamperit’s working.
(b) Multi Commodity Exchange (MCX): MCX is an independent and demutualized multi
commodity exchange. The government has given it permanent recognition for facilitating online
trading, clearing and settlement operations for commodities futures market across the country.
Because of the opportunities galore offered by the MCX to a large cross section of participants
including producers/ processors, traders, corporate, regional trading centre, importers, exporters,
co-operatives and industry associations amongst others, it offers trading in more than 30 commodity
futures contracts. The headquarter of MCX is in Mumbai. Further, it is led by an expert management
team with good knowledge of the commodities futures market.
Being a nation-wide commodity exchange having state-of-the-art infrastructure, offering multiple
commodities for trading with wide reach and penetration, MCX is well placed to tap the vast potential
posed by the commodities market.
The key shareholders of MCX are Financial Technologies (I) Ltd. (now, 63 Moons Technologies
Limited), State Bank of India and its' associates, National Bank for Agriculture and Rural
Development (NABARD), National Stock Exchange of India Ltd. (NSE), Fid Fund (Mauritius) Ltd. -
an affiliate of Fidelity International, Corporation Bank, Union Bank of India, Canara Bank, Bank of
India, Bank of Baroda, HDFC Bank and SBI Life Insurance Co. Ltd.
(c) Indian Commodity Exchange (ICEX): It is a screen based on-line derivatives exchange for
commodities. It has robust assaying and warehousing facilities in order to facilitate deliveries. It has
Reliance Exchange Next Ltd. as anchor investor and has MMTC Ltd., India Bulls Financial Services
Ltd., Indian Potash Ltd., KRIBHCO and IDFC among others, as its partners.
The head office is located in Mumbai and has regional offices spread across the country which
covers agri belt, with a vision to encourage participation of farmers, traders and actual users to
hedge their positions against the wide price fluctuations.

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It provides the widest range of benchmark future products available on any exchange, covering all
major commodities. It offers future trading in Agriculture Commodities, Bullions, Base Metals and
Energy.
(d) National Multi-Commodity Exchange of India (NMCE): It is the first demutualized
Electronic Multi-Commodity Exchange of India and has been granted the National status on a
permanent basis by the Government of India. NMCE has been operational from 26th November
2002.
It is promoted by commodity-relevant public institutions, viz., Central Warehousing Corporation
(CWC), National Agricultural Cooperative Marketing Federation of India (NAFED), Gujarat Agro-
Industries Corporation Limited (GAICL), Gujarat State Agricultural Marketing Board (GSAMB),
National Institute of Agricultural Marketing (NIAM), and Neptune Overseas Limited (NOL) and
Punjab National Bank (PNB).
There are many positive features of NMCE. It is a zero debt company and has been regularly
following prudent accounting and auditing practices. The delivery mechanism is very good which
makes it the most suitable participants in the physical commodity market.
To attract speculative volume, the exchange does not compromise on delivery mechanism. The main
motive is public interest rather than commercial considerations. It has transparent rule based
procedures which has almost eliminated any conflict of interest.
2.5 International Commodity Exchanges
Major international commodity exchanges of the world are briefly discussed as below:
• Chicago Mercantile Exchange (CME): It is a financial and commodity derivatives trading
platform which has its headquarter in Chicago. It was established in 1898 as the Chicago
Butter and Egg Board. Presently, Chicago offers contract of all kinds which includes
agriculture, credit, equity index, interest rates and other futures/options investments.
• Chicago Board of Trade (CBOT): It is formed in 1848 and being considered among oldest
future/options trading exchanges in the world. The exchange offers more than 50 different
futures and option contracts for investors which scattered over a number of asset classes.
• New York Mercantile Exchange (NYMEX): The NYMEX is the world’s largest physical
commodity futures exchange, which offers a wide variety of products. Commodity Exchange
Inc. (COMEX) which acts as a division of the NYMEX also offers exposure to various metals
contracts.
• London Metal Exchange (LME): LME was established in 1877. However, it has its roots
in 1571, when the Royal Exchange in London was founded, trading only copper at that time.
It is a major exchange which offers exposure to futures and options of a various varieties of
base metals and other commodity products. Some of the metals which have been traded
include aluminum, copper, tin, nickel, zinc, and lead..

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• Intercontinental Exchange Inc. (ICE):The Intercontinental Exchange is an American

company which operates futures and over-the-counter contracts through internet. In the
beginning, the company was operating energy contracts but has increased its scope by
offering exposure to a number of commodities including cocoa, cotton, sugar, iron ore, natural
gas and crude products.

3. INTERMEDIARIES IN THE CAPITAL MARKET

The following market intermediaries are involved in the Capital Market:
• Merchant Bankers
• Registrars to an issue and Share Transfer Agents
• Underwriters
• Bankers to issue
• Debenture Trustees
• Portfolio managers
• Stock brokers and sub-broker
We will discuss them one by one in the following paragraphs :
3.1 Merchant Bankers
SEBI (Merchant Banker) Regulations, 1992, define ‘merchant banker’ as any person who is engaged
in the business of issue management, either by making arrangements regarding selling, buying, or
subscribing, or acting as a manager, consultant, or advisor, or rendering corporate-advisory services
in relation to such issue management.
In case of both the public issues and right issues, it is mandatory to appoint a Merchant Banker. The
task of Merchant Banker is basically that of a facilitator or coordinator. It coordinates the process of
issue management by helping the underwriters, registrars and bankers, in pricing and ma rketing the
issue and complying with the SEBI guidelines.
Merchant Bankers are prohibited from carrying on certain activities such as acceptance of deposits,
leasing and bill discounting. They are not allowed to borrow any money from the market. They are
also debarred from engaging in the acquisition and sale of securities on a commercial basis.
3.2 Registrars to an issue and Share Transfer Agents
‘Registrar to an Issue’ means a person who is involved with the following activities:
(a) Collecting applications on behalf of the investors and keep a proper record of monies received
and paid.

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(b) Helping the company which has issued shares in determining the basis of allotment of the
securities in consultation with the stock exchange.
(c) Finalizing the list of person entitled to allotment of securities.
(d) Processing and dispatch of allotment letters, share certificates and refund orders.
‘Share Transfer Agent’ means a person who on behalf of the issuer company maintains the records
of holders of securities issued by such company.
The Registrars to an Issue and Share Transfer Agents are important intermediaries in the primary
market. They help in mobilizing new capital and ensure that proper records of the details of the
investors are maintained, so that the decisions regarding basis for allotment and the number of
securities to be allotted can be smoothly implemented .
3.3 Underwriters
An underwriter is a person who engages in the business of underwriting the public issue of securities
of a particular company . An underwriting is an arrangement in which a SEBI registered underwriter
gives an undertaking to the issuing company that in case the company’s public issue is not fully
subscribed, the underwriter will purchase the unsubscribed portion of the public issue.
Underwriting is compulsory for a public issue. It is necessary for a public company which invites
public subscription for its securities to ensure that 90% of its public issue is fully subscribed
otherwise the whole issued amount has to be refunded. The company cannot fully rely on
advertisements to ensure full subscription. In case of any under subscription, it has to be made good
by the underwriters. And, the underwriting agreement has to be made in advance of the opening of
the public issue.
3.4 Bankers to an issue
Banker to an Issue means a scheduled bank doing any one of the following tasks:
(i) Acceptance of application money;
(ii) Acceptance of allotment or call money;
(iii) Refund of application money;
(iv) Payment of dividend or interest warrants.
Therefore, as the name indicates, bankers to the issue carries out the important task of ensuring
that the funds are collected and transferred to the Escrow accounts. The banks do a great favour to
the companies in mobilization of capital.
3.5 Debenture Trustee
A debenture trust deed is a document created by the company where debenture trustees are
appointed to protect the interest of the debenture holders. To act as debenture trustee, the entity

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should either be a scheduled bank carrying on commercial activity, a public financial institution, an
insurance company, or a body corporate. The entity should be registered with SEBI to act as a
debenture trustee. The contract deed entered into with a debenture trustee must specify the interest
rate and date of interest and principal repayments.
Duties of the Debenture Trustee include:
(a) Call for periodical reports from the body corporate, i.e., issuer of debentures.
(b) Take possession of trust property in accordance with the provisions of the trust deed.
(c) Enforce security in the interest of the debenture holders.
(d) Ensure on a continuous basis that the property charged to the debenture is available and
adequate at all times to discharge the interest and principal amount payable in respect of the
debentures and that such property is free from any other encumbrances except those which
are specifically agreed with the debenture trustee.
(e) Exercise due diligence to ensure compliance by the body corporate with the provisions of the
Companies Act, the listing agreement of the stock exchange or the trust deed.
(f) To take appropriate measures for protecting the interest of the debenture holders as soon as
any breach of the trust deed or law comes to his notice.
(g) To ascertain that the debentures have been converted or redeemed in accordance with the
provisions and conditions under which they are offered to the debenture holders.
(h) Inform the Board immediately of any breach of trust deed or provision of any law.
(i) Appoint a nominee director on the board of the body corporate when required .
(Source: SEBI FAQ’s - Debenture Trustee)
3.6 Portfolio Managers
As per SEBI, a portfolio manager is a body corporate who, pursuant to a contract or arrangement
with a client, advises or directs or undertakes on behalf of the client (whether as a discretionary
portfolio manager or otherwise), the management or administration of a portfolio of s ecurities or the
funds of the client.
Simply stated, a portfolio manager is a person who is responsible for investing a fund's assets,
monitoring investment strategy and doing day-to-day trading. A portfolio manager manages mutual
funds and other investment funds, such as hedge or venture funds. He may be an experienced
investor, a broker, a fund manager, or a trader with good knowledge of industry and a having a track
record of producing good results.
The portfolio manager provides to the client the Disclosure Document at least two days prior to
entering into an agreement with the client. The Disclosure Document contains the quantum and
manner of payment of fees payable by the client for each activity, portfolio risks, complete

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disclosures in respect of transactions with related parties, the performance of the portfolio manager
and the audited financial statements of the portfolio manager for the immediately preceding three
years. Please note that the disclosure document is neither approved nor disapproved by SEBI nor
does SEBI certify the accuracy or adequacy of the contents of the Documents .
(Source: SEBI FAQ’s - Portfolio Managers)
3.7 Stock brokers and Sub-Broker
Stock broker is a person who buys and sells stocks and other securities for its clients through a
stock exchange. Stock brokers should be registered with SEBI and are governed by SEBI Act and
Securities Contract Regulation Act. Stock brokers may also call themselves investment consultants
and financial consultants. A stockbroker should have good knowledge about the securities market.
Further, he should be good with numbers, have excellent interpersonal skills and should be attentive
enough not to oversee any important details.
On the other hand, a sub broker is a person who is not a trading Member of a Stock Exchange but
who acts on behalf of a trading member as an agent. His task is to help investors in dealing in
securities through such trading members(brokers). The leading stock brokers in India are listed as
below:
• India Infoline
• ICICI Direct
• Share Khan
• India Bulls
• Geojit Securities
• HDFC
• Reliance Money
• Religare
• Angel Broking
New Margin Rules for brokers and its implications
The new margin rules have come into effect from 1 September, 2020 after SEBI's refusal to extend
the deadline to implement the new rules on margin pledge any further. SEBI's new margin rules aim
at bringing transparency and preventing brokerages from misusing clients' securities. These norms
came out earlier in February 2020 and were initially scheduled to come into effect from June 1, 2020.
The date was then extended to August 1, 2020 and thereafter to September 1 2020. While the
brokers and other participants requested more time to make their systems ready, SEBI's refused to
extend by saying there was enough time to do the changes.

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Here are the changes:

• The stock will continue to remain in investor's demat account and can be directly pledged to
the clearing corporation. As the securities remain in investors’ own demat account, they will
enjoy all corporate benefits on their shares.
Under the old system, cash margins were taken care of by the broker. Investors either had to
transfer their shares to the brokers’ account or give power of attorney (POA) to the broker.
Some brokers went on to misuse the POA assigned to them.
• It is mandatory for brokers to collect margins from investors upfront for any purchase of sale
of shares. Failing to do so will attract a penalty.
• No Power of Attorney (POA) to be assigned to brokers. The investors used to give authority
to the brokers by way of POA to execute transaction on their behalf. The POA cannot be used
for pledging anymore.
• Investors who want to avail margin now have to create margin pledge separately.
• Earlier collecting upfront margin wasn’t mandatory, but under the new system, investors will
have to pay at least 30% margin upfront to avail a margin loan.
• Shares bought today cannot be sold tomorrow. Currently, investor can use intraday realized
profits for taking new positions on the same trading day. According to the new norms, you
will be able to use it only after T+2 days in case of equity/stocks once you receive the deliv ery
of shares in your account.
• Till now, clients needed to meet margin requirements in their account once at the end of the
day. But, the new margin rules of SEBI will require them to fulfill their margin obligations at
the beginning of the deal. (Source : Livemint)

4. INSTITUTIONAL INVESTORS
An institutional investor is a large organization that has large cash reserves by which it invests in
securities and other investment assets. Institutional investors include endowment funds, hedge
funds, insurance companies, pension funds, mutual funds, etc. An institutional investor is basically
a non-bank organization that trades in large quantities to qualify for preferential treatment. They are
considered as specialized investors and supply capital to organization that required funds or are in
dire straits. Moreover, they exert good influence in the management of the corporations exercising
voting rights.
So, basically, an institutional investor is an organization that invests on behalf of the investors.
Institutional investors have the required resources to do detailed research on various investment
avenues, and because of their extensive knowledge, they generally have an edge over retail
investors. Various institutional investors are briefly discussed as below:

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(i) Commercial Banks: They play an important role in taking deposits from the public and giving
loans to various sectors of the economy. A sound banking system ensures that mobilized savings
are effectively deployed to needy sectors of the economy. When banks provide loan in the form of
working capital, they are providing loan for funding the current assets. The working capital loan
should be of short term in nature and it is given in the form of a limit.
Banks provide long term loan for asset purchase as well as margin money for working capital
purpose. In the case of asset purchase, a bank would provide a long- term loan which would be
repaid either from the cash flow generated from the business or from refinancing or disinvestment.
In such a case, the security is generally created on the asset which is purchased out of the term
loan. Besides, some other collateral is also taken as security in the form of term loan. In the case of
term loan for working capital purpose, generally, other assets are taken as security. This asset can
be immovable properties the borrower happens to have.
(ii) Insurance Companies: Insurance is basically the process of safeguarding the interest of
people from loss and uncertainty. Insurance companies do a lot of service to the economy of the
nation by protecting companies from contingencies and compensate them from any loss. They
collect premiums for providing these services. The role and responsibilities of insurance companies
have been outlined as below:
a) The insurance companies provide safety and security against a particular event.
b) They generate financial resources by collecting premiums and utilizing the premium amount
for fruitful investment purposes.
c) Life insurance encourages savings through payment of regular premium amount.
d) The insurance companies promote economic growth by making accumulated capital into
productive investment purposes. They help to reduce loss, bringfinancial stability by providing
compensation at the time of any uncertain event and promote trade and commerce activities
resulting into economic growth and development.
e) And, last but not the least, insurance help in shifting of risk from the insured to the insurer.
(iii) Mutual Funds: Mutual Fund is a trust that pools together the savings of investors by making
investments in the capital market thereby making the investor to be a part owner of the assets of the
mutual fund. The fund is managed by a professional money manager who invests the money
collected from different investors in various stocks, bonds or other securities according to specific
investment objectives as established by the fund. If the value of the mutual fund investments goes
up, the return on them increases and vice versa. The net income earned on the funds, along with
capital appreciation of the investment, is shared amongst the unit holders in proportion to the units
owned by them. Mutual Fund is therefore an indirect vehicle for the investor investing in capital
markets. In return for administering the fund and managing its investment portfolio, the fund manager
charges fees based on the value of the fund’s assets.

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(iv) Pension Funds: A pension fund is a fund from which pensions are paid which are
accumulated from contributions from employers and employees.Pension systems throughout the
world have been under close scrutiny over the last couple of decades. Numerous reforms have been
carried out to tackle the sustainability and adequacy of pension arrangements in the face of the
rising global demographic challenge.
In India, now Pension funds are regulated by Pension Fund Regulatory and Development Authority
(PFRDA). Moreover, the funds contributed by the Subscribers are invested by the Pension Fund
Regulatory and Development Authority (PFRDA) registered Pension Fund Managers (PFM’s) as per
the investment guidelines provided by PFRDA. The investment guidelines are framed in a very
professional manner in such a way that there is negligible effect on the subscribers contributions
even if the market is not doing well by a prudent mix of investment vehicles like Government
securities, corporate bonds and equities.
(v) Endowment Funds: An endowment fund is an investment vehicle where periodic withdrawal
from the money invested into the fund is possible. The money put into the endowment funds, is often
used by universities, nonprofit organizations, churches and hospitals, and is generally used for
specific requirement or to give a boost to the company's operating process.
An endowment fund is a financial asset, basically held by a non-profit organization, which contains
the capital investments and related earnings used by the non-profit organization to fund the overall
objective of the organization. Further, endowment funds are organized by stringent contractual
obligations and rules to be followed by the non-profit organization. The main aim of the fund is to
further the goal of the long-term financial health of the non-profit organization and its beneficiaries.
(vi) Hedge Funds: A hedge fund can be explained as a package of funds that takes both short
and long positions, buys and sells equities, initiates arbitrage, and trades bonds, currencies,
convertible securities, commodities and derivative products to give returns at minimum possible risk.
The hedge fund tries to minimize risks to investor's capital against market volatility by employing
various hedging strategies as outlined above. Hedge fund investors typically include High Networth
Individuals (HNIs), endowments and pension funds, insurance companies, and banks. These funds
work either as private investment partnerships or offshore investment companies.

5. FOREIGN PORTFOLIO INVESTORS (FPIS)

Who are FPIs?
FPIs are basically registered foreign funds, which put their money in the stock markets in India. They
invest through various methods in the capital market that is either in the debt segment or in the
equity segment. Therefore, a FPI is an investor or investment fund that is registered in a country
outside of the one in which it is currently investing. Institutional investors include hedge funds,
insurance companies, pension funds and mutual funds. If we try to explain it in the Indian context, it
refers to foreign companies investing in the financial markets of India. The Institutional investors

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based internationally must register with the Securities and Exchange Board of India (SEBI) to
participate in the market.
Categorization of FPIs
Before making its investment in India, the FPI shall obtain a certificate of registration from a
designated depository participant on behalf of the SEBI. They can be divided into following
categories:
(a) Category I foreign portfolio investor" which shall include –

(i) Government and Government related investors such as central banks, sovereign wealth
funds, international or multilateral organizations or agencies including entities controlled or
at least 75% directly or indirectly owned by such Government and Government related
investor(s);
(ii) Pension funds and university funds;

(iii) Appropriately regulated entities such as insurance or reinsurance entities, banks, asset
management companies, investment managers, investment advisors, portfolio managers,
broker dealers and swap dealers;
(iv) Entities from the Financial Action Task Force member countries or from any country
specified by the Central Government by an order or by way of an agreement or treaty with
other sovereign Governments, which are –
I. appropriately regulated funds;

II. unregulated funds whose investment manager is appropriately regulated and

registered as a Category I foreign portfolio investor:
Provided that the investment manager undertakes the responsibility of all the acts of
commission or omission of such unregulated fund;
III. university related endowments of such universities that have been in existence for
more than five years;
(v) An entity (A) whose investment manager is from the Financial Action Task Force member
country and such an investment manager is registered as a Category I foreign portfolio
investor; or (B) which is at least seventy-five per cent owned, directly or indirectly by another
entity, eligible under sub-clause (ii), (iii) and (iv) of clause (a) of this regulation and such an
eligible entity is from a Financial Action Task Force member country:
Provided that such an investment manager or eligible entity undertakes the responsibility
of all the acts of commission or omission of the applicants seeking registration under this
sub-clause.

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(b) "Category II foreign portfolio investor" shall include all the investors not eligible under
Category I foreign portfolio investors such as –
(i) appropriately regulated funds not eligible as Category-I foreign portfolio investor;
(ii) endowments and foundations;
(iii) charitable organisations;
(iv) corporate bodies;
(v) family offices;
(vi) Individuals;
(vii) appropriately regulated entities investing on behalf of their client, as per conditions
specified by the Board from time to time;
(viii) Unregulated funds in the form of limited partnership and trusts;
Explanation: An applicant incorporated or established in an International Financial Services
Centre shall be deemed to be appropriately regulated.
An interesting fact about FPIs
Foreign Portfolio Investors have made good money in the last few years. However, the problem for
the Indian markets is that if interest rates in the US rise, they may sell stocks they held in the Indian
Stock Market to make higher yields in the US. The reason for this action is that they may earn higher
return in the US than what they may earn by investing in the Indian Stock market. This may lead to
high sell off in the Indian Capital market. So, interest rate hike by US Fed can influence the Indian
Stock Market hugely.
Investment restrictions on FPIs
As per the SEBI (Foreign Portfolio Investors) Regulations, 2019, a foreign portfolio investor shall
invest only in the following securities, namely-
(i) shares, debentures and warrants issued by a body corporate; listed or to be listed on a
recognized stock exchange in India;
(ii) units of schemes launched by mutual funds under Chapter V, VI-A and VI-B of the Securities
and Exchange Board of India (Mutual Fund) Regulations, 1996;
(iii) units of schemes floated by a Collective Investment Scheme in accordance with the Securities
and Exchange Board of India (Collective Investment Schemes) Regulations, 1999;
(iv) derivatives traded on a recognized stock exchange;
(v) units of real estate investment trusts, infrastructure investment trusts and units of Category
III Alternative Investment Funds registered with the Board;

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(vi) Indian Depository Receipts;

(vii) any debt securities or other instruments as permitted by the Reserve Bank of India for foreign
portfolio investors to invest in from time to time; and
(viii) such other instruments as specified by the Board from time to time.
Recent Trends
Foreign portfolio investors (FPIs) remained net sellers in Indian markets in July 2020 so far on
account of both domestic and global factors, including rising number of coronavirus cases and
increasing tension between the US and China.
According to the depositories data, overseas investors invested ` 2,336 crore in equities but pulled
out ` 2,422 crore from the debt segment, leading to net outflows of ` 86 crore from Indian markets
between July 1-24. In the previous month i.e. June 2020 FPIs were net buyers to the tune of
` 24,053 crore. (Source : Livemint)
About 70% of the foreign portfolio investor (FPI) inflows into Indian equities in the month of October,
2020 have gone into two sectors — banking and technology, according to NSDL data. These
investors have pumped ` 16,945 crore into local stocks in October. Out of this, they have invested
nearly ` 9,500 crore in banking stocks. Better-than-expected September quarter earnings,
improvement in asset quality, and lower valuations because of the recent share underperforma nce
FPIs' purchases in shares of private banks in October 2020.
FPIs put ` 3,327 crore into technology shares in October as the companies are cash-rich and their
earnings have been resilient even when the disruptions on account of Covid-19 dragged down other
sectors.
FPIs have also increased their stakes in automobiles, consumer discretions, capital goods,
consumer durables and construction companies. Data show these investors have pulled out ` 871
cr from oil & gas companies, ` 847 crore from metals and a total of ` 350 crore from telecom and
insurance sectors. (Source : Economic Times)

6. CUSTODIANS
The custodians play a critical role in the secondary market. SEBI (Custodian) Regulation, 1996 was
framed for the proper conduct of their business. According to SEBI regulations, custodial services
in relation to securities of a client or gold/gold related instrument held by a mutual fund or title deeds
of real estate assets held by a real estate mutual fund mean safekeeping of such securities or
gold/gold related instruments or title deeds of real estate assets and providing related services.
The related services provided by them are as follows:
• Maintaining accounts of the securities of a client.
• Collecting the benefits /rights accruing to the client in respect of securities.

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• Keeping the client informed of the actions taken by issuer of securities.

• Maintaining and reconciling records of the services as referred above.
Further, every custodian should appoint a compliance officer to monitor the compliance of SEBI Act
and its various rules, regulations and guidelines and also for redressal of investor grievances. The
compliance officer should immediately report any non-compliance observed by him to the SEBI.
SEBI can also ask for information from the custodian in regard to his activities. Such information has
to be given within a reasonable period as laid down by SEBI. Further, SEBI is also empowered to
conduct inspection/investigation including audit of books of account, records etc. of custodians to
ensure that they are being properly maintained. SEBI’s task is also to ascertain that compliance of
provisions of SEBI Act and its regulations have been duly complied with. Moreover, his job is also
to investigate into complaints received from the investors or clients.

7. CLEARING HOUSES
Clearing house is an exchange-associated body charged with the function of ensuring
(guaranteeing) the financial integrity of each trade. Orders are cleared by means of the clearing
house acting as the buyer to all sellers and the seller to all buyers. Clearing houses provide a range
of services related to the guarantee of contracts, clearance and settlement of trades, and
management of risk for their members and associated exchanges.
7.1 Role of Clearing Houses
• It ensures adherence to the system and procedures for smooth trading.
• It minimises credit risks by being a counter party to all trades.
• It involves daily accounting of all gains or losses.
• It ensures delivery of payment for assets on the maturity dates for all outstanding contracts.
• It monitors the maintenance of speculation margins.
7.2 Working of Clearing Houses
The clearinghouse acts as the medium of transaction between the buyer and the seller. Every
contract between a buyer and a seller is substituted by two contracts so that clearing house becomes
the buyer to every seller and the seller to every buyer. In a transaction where P sells futures to R, R
is replaced by the clearinghouse and the risk taken by P becomes insignificant. Similarly, the credit
risk of R is taken over by the clearing house; thus, the credit risk is now assumed by the clearing
house rather than by individuals. The credit risk of the clearing house is then minimised by employing
some deposits as collaterals by both, buyers and sellers. These deposits, known as margins, are
levied on each transaction depending upon the volatility of the instrument and adjusted everyday for
price movements. Margins, which normally are in form of cash or T-bills, can be categorised into the
following types: -

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• Initial Margins on Securities: It is paid by purchasers and short sellers, generally function as
a security for loan, and is similar to a down payment required for the purchase of a security.
• Initial Margins on Derivatives: It refers to funds paid as guarantee to ensure that the party to
the transaction will perform its obligation under the contract. Initial margin on derivatives is
designed to cover future changes that may occur in the value.
• Maintenance Margins: It refers to the value over and above the initial margin, which must be
maintained in a margin account at all times after the initial margin requirement, if any, is
satisfied.
• Variation Margin: It refers to funds that are required to be deposited in, or paid out of, a margin
account that reflects changes in the value of the relevant instrument.
7.3 Trading Procedure of Clearing Houses
Clients have to open an account with a member of the exchange. When they want to trade in futures,
they instruct members to execute orders in their account. The trade details are reported to the
clearing house. If a member of the exchange is also a member of clearing house, then he directly
deposits the margins with the clearing house. If he is not a member then he should route all
transactions through a clearing member for maintaining margins.

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