Capital Market Intermediaries

Capital markets intermediaries and institutions facilitate the smooth issuance, trading, and settlement of securities. These entities connect investors and issuers, provide services, and ensure regulatory compliance. Some major categories of intermediaries include stock brokers, depositories, merchant bankers, underwriters, registrars, credit rating agencies, custodians, etc. Each plays a distinct part in the capital market ecosystem.

Stock Brokers and Sub-Brokers

A stock broker is a SEBI-registered intermediary authorized to buy and sell securities on a stock exchange on behalf of investors. Brokers are trading members of exchanges such as BSE and NSE and execute trades for retail and institutional clients, and sometimes on their own account.

• Role of Stock Brokers: Brokers facilitate secondary market transactions. Investors cannot trade directly on exchanges and must route orders through a registered broker or its online platform. The broker transmits orders to the exchange, executes trades, and ensures clearing and settlement.
• Types of Brokers: Full-service brokers provide research, advisory services, and personalized support, charging higher brokerage. Discount brokers focus mainly on providing electronic trading platforms at lower cost, with limited advisory services.
• Account Opening and Services: Brokers assist investors in opening trading accounts and usually demat accounts through depository participant services. They complete KYC formalities and link bank accounts for seamless fund and securities transfers.
• Regulation of Brokers: Brokers operate under SEBI regulations, which mandate capital adequacy, audits, segregation of client funds and securities, margin compliance, and limits on brokerage charges. Violations such as unauthorized trading or misuse of client assets can result in penalties or cancellation of registration.
• Sub-Brokers / Authorized Persons: Sub-brokers, now termed Authorised Persons, act as agents or franchisees of stock-brokers. They are not trading members of exchanges but acquire and service clients for the broker. Trades are executed through the sponsoring broker’s systems, and Authorised Persons must be registered with SEBI under the broker’s supervision.

Depositories and Depository Participants (DPs)

Depositories hold securities in electronic (demat) form and enable transfer of ownership during trades, similar to banks holding and transferring money. India has two depositories: National Securities Depository Limited (1996) and Central Depository Services Limited (1999). Dematerialization eliminated risks of fake certificates, bad delivery, and delays. Securities bought are credited to demat accounts and debited on sale based on clearing confirmations.
Depository Participants (DPs) are agents of depositories (banks, brokers, financial institutions) that interface with investors. Investors open demat accounts through DPs, linked to PAN and bank accounts. Depositories also handle statements and corporate actions such as dividends, bonus, rights, and splits. Nearly all Indian market settlements now occur in demat form.

Merchant Bankers (Investment Banks)

Merchant bankers, registered with Securities and Exchange Board of India as Category I, manage capital issues and provide corporate finance advisory. They act as Book Running Lead Managers in IPOs/FPOs, prepare offer documents, conduct due diligence, advise on pricing and timing, market issues, and coordinate with regulators and exchanges. They may also underwrite issues, advise on M&A, FDI, overseas listings, and restructuring.

Underwriters

Underwriters guarantee subscription of securities. If public subscription falls short, they take up the unsold portion for a fee. This assurance boosts issuer confidence, especially in weak markets. Banks, brokerages, and financial institutions can act as underwriters if SEBI-registered, for both equity and debt issues.

Registrars and Transfer Agents (RTAs)

Registrars to an Issue process applications, allot shares, handle refunds, credit demat accounts, and coordinate listings for new issues.
Share Transfer Agents maintain shareholder records, reconcile with depositories, and execute corporate actions (dividends, bonus, rights, AGM voting). Major RTAs include KFin Technologies and CAMS, serving companies and mutual funds.

Credit Rating Agencies (CRAs)

CRAs assess creditworthiness of issuers and debt instruments, providing default-risk ratings (AAA to D). SEBI regulates CRAs such as CRISIL, ICRA, CARE Ratings, India Ratings, and Acuité. Ratings are often mandatory for bond/debenture issues and guide investment limits. CRAs conduct ongoing surveillance and revise ratings as conditions change.

Custodians

Custodians safeguard securities of institutional investors (mutual funds, FPIs, insurers), settle trades, collect income, and provide reporting. Mutual fund assets must be held with custodians separate from AMCs. Examples include SBI-SG, HDFC Bank (custody), Citibank, and Deutsche Bank, all SEBI-registered.

Investment Advisers (IAs) and Research Analysts (RAs)

Investment Advisers (SEBI-registered since 2013) provide fee-based advice with fiduciary responsibility and conflict disclosures.
Research Analysts (SEBI-registered since 2014) publish research and recommendations, adhering to disclosure and trading restrictions around recommendations.

Bankers to an Issue

Bankers to an Issue are banks designated to handle application money in public issues. Earlier, they physically collected IPO application funds. With the introduction of ASBA, banks now block funds in investors’ accounts instead of transferring them upfront. Although their role has evolved, bankers to an issue remain responsible for fund handling and reconciliation in public issues.

Primary Dealers

Primary Dealers operate mainly in the government securities market under RBI regulation. They underwrite and participate in government bond auctions and support liquidity in the G-Sec market. While not directly linked to equity markets, they are an essential part of the debt market infrastructure.

Portfolio Managers

Portfolio Managers, registered with Securities and Exchange Board of India, provide Portfolio Management Services (PMS) to high-net-worth individuals. They manage client portfolios on a discretionary or advisory basis, typically for large minimum investments, functioning as personalized investment management distinct from mutual funds.

Alternative Investment Fund (AIF) Managers

AIF Managers manage pooled investment vehicles such as venture capital, private equity, and hedge funds under SEBI’s AIF regulations. Though not intermediaries for public markets, they are important participants in the broader capital market ecosystem.

Stock Exchanges and Clearing Corporations

Stock Exchanges such as the National Stock Exchange and Bombay Stock Exchange provide the trading platform for securities. Clearing Corporations like NSCCL and ICCL handle clearing, settlement, and settlement guarantees. These market infrastructure institutions are regulated by SEBI and are critical to the safe and efficient functioning of capital markets.

Process Example

Consider an IPO process to see multiple intermediaries:

• A company hires a merchant banker (investment bank) to manage the IPO. The merchant banker advises on structuring the offer, files the draft prospectus with SEBI, gets approvals, and markets the issue.
• The merchant banker forms an underwriting syndicate – maybe it itself and a couple of banks as underwriters to ensure full subscription.
• The company appoints a registrar (RTA) to handle application processing.
• Bankers to the issue (several banks) are designated so that when people apply via their bank (ASBA), those banks will block funds.
• When the IPO opens, investors place bids often online (via their broker or bank ASBA). Brokers may assist large clients in bidding.
• After closing, the registrar gets data of all bids from exchanges, finalizes allotment in consultation with merchant banker (especially if it’s book-built, they decide cut-off price).
• The registrar instructs depositories (NSDL/CDSL) to credit allotted shares to investors’ demat accounts, and instructs banks to unblock excess funds / debit final amount for allotted shares.
• Post issue, the stock gets listed on an exchange, and now brokers facilitate trading. Investors will use their demat (with depository via DP) and trading account to trade. Clearing corporation ensures each trade settles, custodians help institutional trades settle.
• Meanwhile, if it’s a debt instrument being issued, a credit rating agency would have rated it before the issue to inform investors of credit risk.

All these moving parts illustrate the ecosystem.

Regulatory Perspective

All intermediaries above require registration/approval from SEBI (except those regulated by other regulators like banks are RBI regulated but also need SEBI nod for certain activities like merchant banking). SEBI has separate regulations for each: SEBI (Stock Brokers) Regulations, SEBI (Depositories) Regulations, SEBI (Merchant Bankers) Regulations, (Registrars & Share Transfer Agents) Regulations, (Underwriters) Regulations, (Credit Rating Agencies) Regulations, (Custodian) Regulations, (Investment Advisers) Regulations, etc.