Capital Market Structure, SEBI and Market Intermediaries
Paper 5 opens with the architecture of India's capital market before moving into the specific regulations governing an actual securities issue — this chapter is that architecture: the primary and secondary markets, the statutory framework behind dematerialised trading, SEBI's own powers, and the intermediaries who make a transaction actually happen. This is genuinely new content on this hub, with no equivalent in the CA or CMA corpora, since neither of those syllabi examines securities-market structure at this depth.
1. Primary and secondary markets
The primary market is where new securities are created and sold for the first time — an IPO, a rights issue, a preferential allotment — with the proceeds flowing directly to the issuing company. The secondary market is where already-issued securities are subsequently bought and sold between investors, on a recognised stock exchange, with no new capital reaching the issuing company from that specific trade.
This primary/secondary distinction is foundational because different regulations apply to each: the primary market is governed principally by SEBI's ICDR Regulations (covered in the next chapter), while ongoing secondary-market trading and listed-entity obligations are governed principally by the LODR Regulations and exchange-level trading rules.
2. The Securities Contracts (Regulation) Act and the depository system
The Securities Contracts (Regulation) Act, 1956 (SCRA) is the foundational statute regulating stock exchanges and the contracts traded on them, giving the government (and, through delegation, SEBI) the power to recognise and regulate stock exchanges, and to prohibit or regulate contracts in securities outside a recognised exchange.
The depository system, governed by the Depositories Act, 1996, is what makes modern dematerialised (demat) trading possible. A depository (India has two: NSDL and CDSL) holds securities in electronic form on behalf of investors, with a Depository Participant (DP) acting as the investor-facing agent of the depository — much as a bank branch is the customer-facing agent of the banking system.
Dematerialisation converts physical share certificates into electronic holdings, eliminating the risks of loss, theft and forgery that plagued physical-certificate trading, and today virtually all listed-company trading happens in demat form.
3. SEBI Act, 1992 and SEBI's powers
The Securities and Exchange Board of India (SEBI) is the capital market's primary regulator, established under the SEBI Act, 1992, with a three-fold statutory mandate: protecting investors' interests, promoting the development of the securities market, and regulating the securities market.
SEBI's powers span the full regulatory lifecycle. It registers and regulates market intermediaries (stock brokers, merchant bankers, depositories, mutual funds and others), makes regulations governing issues, listing, takeovers and insider trading, conducts inspections and investigations into suspected violations, and exercises quasi-judicial powers — it can pass orders, impose penalties, and even direct disgorgement of ill-gotten gains, with appeals lying to the Securities Appellate Tribunal (SAT) and thereafter to the Supreme Court.
4. Market intermediaries and mutual funds
A single securities transaction typically passes through several distinct, separately regulated intermediaries, each performing a different function.
| Intermediary | Core function |
|---|---|
| Merchant banker | Manages a public issue — due diligence, pricing, drafting the offer document |
| Registrar and Transfer Agent (RTA) | Maintains the register of security holders and processes transfers |
| Stock broker | Executes buy/sell orders on a stock exchange on behalf of clients |
| Depository Participant | The investor-facing agent through which demat accounts are opened and operated |
| Credit rating agency | Assigns an independent creditworthiness rating to a debt instrument |
| Portfolio manager | Manages an individual investor's securities portfolio on a discretionary or non-discretionary basis |
Mutual funds pool money from many investors and invest it in a diversified portfolio of securities, managed by an Asset Management Company (AMC) under the oversight of a trustee and registered with SEBI under the SEBI (Mutual Funds) Regulations, 1996.
A Collective Investment Scheme (CIS) is a broader category — any scheme pooling investor funds for a common enterprise, managed by someone other than the investors, with the investors not having day-to-day control — and any such scheme (mutual funds are specifically exempted, being separately regulated) must itself be registered with SEBI under the SEBI (Collective Investment Schemes) Regulations, 1999.
Worked Examples
Example 1. A company issues new shares to the public for the first time, and the sale proceeds are credited to the company's own account. Is this a primary-market or secondary-market transaction?
A primary-market transaction — it involves the creation and sale of new securities, with proceeds flowing directly to the issuing company, which is the defining feature of the primary market.
Example 2. An investor buys shares of an already-listed company from another investor through a stock exchange, and no funds reach the company itself from this trade. Which market does this transaction belong to?
The secondary market — it involves the re-trading of already-issued securities between investors, with no new capital reaching the issuing company.
Example 3. An investor wants to hold shares electronically rather than as physical certificates. Which two entities does the investor interact with to achieve this, and what is each one's role?
The investor opens a demat account through a Depository Participant (DP), which acts as the investor-facing agent; the DP in turn operates under one of India's two depositories (NSDL or CDSL), which actually holds the securities in electronic form.
Example 4. SEBI conducts an investigation into suspected market manipulation and, after due process, directs the wrongdoer to disgorge ill-gotten gains. What kind of statutory power is SEBI exercising here, and where does an appeal against this order lie?
SEBI is exercising its quasi-judicial power under the SEBI Act, 1992. An appeal against such an order lies first to the Securities Appellate Tribunal (SAT), and thereafter to the Supreme Court.
Example 5. A company wants to manage its public issue, including due diligence and pricing of the offer. Which market intermediary performs this function?
A merchant banker.
Example 6. A scheme pools money from a large number of investors for a common enterprise, is managed by a person other than the investors, and the investors have no day-to-day control over the scheme's management. Is this necessarily a mutual fund?
Not necessarily — this description fits the broader category of a Collective Investment Scheme (CIS). A mutual fund is a specific, separately regulated form of pooled investment (registered under the SEBI Mutual Funds Regulations, 1996, and specifically exempted from CIS regulation), while a scheme with these general features that is not a mutual fund would instead need registration under the SEBI CIS Regulations, 1999.
Example 7. Identify the foundational statute that empowers the government/SEBI to recognise and regulate stock exchanges themselves, as distinct from the statute establishing SEBI as a regulator.
The Securities Contracts (Regulation) Act, 1956 (SCRA) — it is the statute governing the recognition and regulation of stock exchanges and the contracts traded on them, distinct from the SEBI Act, 1992, which establishes SEBI as the regulator and defines its own powers.
Summary
The primary market creates and sells new securities with proceeds flowing to the issuer, while the secondary market re-trades already-issued securities between investors with no new capital reaching the issuer — a distinction that determines which set of SEBI regulations (ICDR for issues, LODR/exchange rules for ongoing trading) applies.
The SCRA, 1956 underlies the regulation of stock exchanges, and the Depositories Act, 1996 (via NSDL and CDSL, accessed through Depository Participants) underlies dematerialised trading, while the SEBI Act, 1992 establishes SEBI with a three-fold mandate (investor protection, market development, market regulation) and powers spanning registration, rule-making, investigation and quasi-judicial adjudication.
A securities transaction typically passes through several distinct intermediaries — merchant bankers, RTAs, stock brokers, depository participants, credit rating agencies and portfolio managers — while mutual funds and the broader category of Collective Investment Schemes provide two related but separately regulated routes for pooled investment.
