Role of Intermediaries in Capital Markets

Introduction:

While buying and selling stocks looks to be a simple process, fraud and misconduct should be prevented by a government body. Imagine hearing about a terrific initial public offering in the newspaper and investing in it only to discover it was a fraud!

According to the relevant authority, such situations must not occur. In order to improve securities investments, you must also reassure investors by offering an environment built on dense and controlled processes.

As a result, the Securities and Exchange Board of India (SEBI) was established in 1992 with two distinct goals:

1. Investors’ interests must be protected.

2. Regulate and promote India’s securities market.

SEBI created mechanisms with several stages through the introduction of brokers to fulfill both goals. In India’s stock market, there are four major brokers:

1. Investing in stocks

2. Participant or Depository

3. Bank

4. The Clearing House Corporation

Let’s take a brief look at the process of purchasing and selling stocks before we dive into the details of these intermediaries:

Process for Buying or Selling Stocks

• Place a buy/sell order for stocks through a broker. This is something that can be done both online and offline. Each broker must be registered with some exchanges. A broker cannot place a market order directly.
• The market allows you to buy at the price you want. If you try to buy a stock for Rs 50 but the current market price is Rs 60, your trade will be canceled. Only if your pricing expectations match those of a seller, as established by the market, can your trade be consummated.
• At the end of the trading day, you must send money or shares to your broker (for buying transactions) (for selling transactions). The broker, in turn, ensures that you receive your shares or money.

The first question most new investors ask themselves is why do they need to go to a broker. Why aren’t we able to negotiate with the seller directly? Isn’t this a more efficient method?

While a one-to-one transaction may shorten transaction time in half, it comes with a number of disadvantages.

An intermediary acts as a buffer between two parties in each transaction.

A real estate agent, for example, acts as trusted counsel to both the buyer and the seller when a home is sold.

The broker assures a smooth trading transaction, despite the fact that each of them promises due diligence on their own.

Due to the massive quantity of activity conducted on stock exchanges, SEBI devised a mechanism including capital market intermediaries and assigned specific tasks to each of them.

Stock Brokerage

Only registered stockbrokers are allowed to trade on the stock exchange, according to the SEBI. As a result, all stock exchanges provide stockbroker licenses.

This occurs once a legal person meets certain eligibility requirements.

The market required an organized platform on which to trade in order for stock transactions to run properly. As a result, stock exchanges were established.

There are many stock exchanges in India, like the

• The National Stock Exchange (NSE)
• The Bombay Stock Exchange (BSE)
• Calcutta Stock Exchange (CSE)
• The Metropolitan Stock Exchange (MSE)
• India International Stock Exchange (India INX), etc.

A stock may or may not be listed on all stock exchanges. As a result, investors should keep in mind that they can only buy and sell equities that are publicly traded.

An individual cannot place a direct order on a stock exchange. It would be hard to monitor and oversee the quality of the activities if SEBI approved it.

Because all investors must trade through a stockbroker, and all stockbrokers must be registered with the stock exchanges, the stock markets are easier to regulate.

Typically, a stockbroker offers a wide range of services, including:

• An online or offline interface for trading
• A facility through which investors can call them and place a buy-or-sell order.
• Safe investors/traders regularly keep informed of any changes in trade or billing cycles, and delivery or payment times.
• ensuring its customers’ financial stability and authenticity Issuing contract notes for all transactions, etc.

Depository and Depositor Participants

You become a partner in the company for the amount you invest when you acquire a share.

However, how is your civilization being put to the test? Isn’t it true that you’ll need some documentation to back this up? A share certificate serves as verification.

Companies used to distribute share certificates to all shareholders, certifying their right to be co-owners of the business.

Companies and shareholders, on the other hand, found it difficult to issue and maintain tangible share certificates as equity investments grew.

In the 1990s, this is how share certificates were transformed to an electronic or dematerialized format.

This was similar to having a savings account. Isn’t it true that when you put physical currency bills into your bank account, your bank statement only shows one entry?

Share certificates, on the other hand, were real currencies that were changed into account postings.

The shares, however, could not be held in a savings account and needed to be kept in a separate electronic area. As a result, Demat accounts were created.

While Demat accounts should be widely accessible to investors, SEBI assured that their monitoring and control should not be difficult.

Therefore, the concept of the depositary was introduced.

A custodian is a company that keeps records of all securities in electronic form. SEBI directed all companies to become members of a custodian and to keep electronic records of all stocks and debt securities they issued.

Furthermore, all custodians have custodian participants who provide private individuals with Demat accounts in which to hold their securities.

There are two depots in India:

1. NSDL (National Securities Depository Limited)
2. CDSL (Central Depository Services (India) Limited)

Both are regulated by SEBI and have no differences. After the introduction of dematerialization in 1996, the purchase or sale of securities in demat form became mandatory, so that a demat account was necessary for anyone who wanted to invest in the capital market.

Depositaries and depositary participants have the function of ensuring that the supervisory authority is always aware of the complete list of shareholders in a company and that it defines its function as an intermediary in the capital market.

Bank

A bank is required whenever money is present and regulation is required. When an investor buys stocks, they must pay a commission to the broker. Furthermore, while selling, you must receive monies from the broker, which is why a bank is one of the most important financial intermediaries in the capital market because it allows SEBI to transfer money in a controlled environment.

Corporation for the Clearing House

A clearing house, often known as a clearing business, is not a new concept in the financial world. For years, clearing houses have been used by banks to process check payments. A clearing house ensures that the check is genuine and that the funds are transferred to the designated recipient in the financial system. A clearing company is in charge of ensuring that transactions are completed successfully in the capital markets.

Let’s say two investors agree to a trade: Investor ‘A’ wants 100 shares of ABC Ltd. at Rs. 50 per share and investor ‘B’ is willing to buy 100 shares of ABC Ltd. to sell at Rs. 0.50 per share.

This trade is made possible by the clearing company informing both investors about the other’s offer. It acts as a buyer for every seller and a seller for every buyer, ensuring that the transaction is completed. She also makes sure that the shares and money are delivered on schedule to the correct owners. In truth, clearing companies have funds on hand to ensure that operations are not disrupted in the event of a default.

A clearing house performs a variety of functions, including, but not limited to:

• Providing clearing and settlement functions.
• Ensuring transparency.
• Improving market efficiency.
• Reducing (or eliminating the need for) post-settlement arbitration, etc.

There are three clearing companies in India:

1. The National Security Clearing Corporation, Ltd., or NSCCL.
2. The Indian Clearing Corporation or ICCL.
3. The Multi Commodity Exchange Clearing Corporation Ltd. or MCXCCL.

Conclusion

Transactions in the capital market proceed through three stages: negotiation, clearing, and settlement. By incorporating the intermediaries stated above, SEBI has devised protocols to ensure that the chance of fraud or deception is minimized at every stage, increasing transparency and reducing risk.

The role of intermediaries in the capital market is specified to give investors a sense of confidence and to promote the stock market in India, despite the fact that the process flow is not overly complicated.