CHAPTER 1: INTRODUCTION TO THE

SECURITIES MARKET
• The financial markets enable efficient transfer and allocation of
financial resources for productive activities in the economy.
• Users of funds include businesses, governments and households who
seek funds to run their activities.
• Households, businesses and governments also act as providers of
surplus funds.
• Intermediaries such as banks, financial institutions, mutual funds and
insurance companies, among others, channelize the available surplus
funds from lenders to the users.
Function of the financial markets
• They provide a way for aggregation of funds from a large number of investors and make
it available for productive economic activity.
• Transfer of funds happens at a cost that makes it attractive for savers to save and lend
and for users to borrow funds.
• The markets must enable the dissemination of relevant information to all the
participants in the market so that the decision on price of funds is made after integrating
all available information.
• It must also allow the participants to review their funding decisions given new
information and to re‐allocate the resources accordingly.
• Financial market regulations and regulators focus on setting up systems and processes in
place to streamline the activities associated with the transfer of funds.
The term “Securities” as defined in the SCRA, 1956
includes the following:
1. Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any
incorporated company or other body corporate;
2. Derivatives;
3. Units or any other instrument issued by any Collective Investment Scheme;
4. Security receipt as defined in the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002;
5. Units or any other such instrument issued to the investors under any mutual fund scheme;
6. Any certificate or instrument, issued to an investor by any issuer being a special purpose distinct entity which possesses any
debt or receivable, including mortgage debt, assigned to such entity, and acknowledging beneficial interest of such investor in
such debt or receivable, including mortgage debt, as the case may be;
7. Government Securities
8. Such other instruments as may be declared by the Central Government to be securities, and
9. Rights or interest in securities.
1.2 Securities Market
• The primary market is used by issuers for raising capital from the investors
by making Initial Public Offers or rights issues or Further Public Offer
(FPO).
• On the other hand the secondary market provides liquidity to these
instruments, through trading and settlement on the stock Exchanges.
• An active secondary market promotes the growth of the primary market
and capital formation, since the investors in the primary market are
assured of a continuous market where they have an option to liquidate
their investments.
• Thus, in the primary market, the issuer has direct contact with the
investor, while in the secondary market, the dealings are between two
investors and the issuer does not come into the picture.
• Primary market is the market that ensures availability of adequate
capital at reasonable rates to finance expansion, diversification or
consolidation of companies.
• A secondary market on the other hand is the market where the buyer
of securities in the primary market can transfer /sell these securities
to another buyer.
• The resources in the primary market can be raised either through the
private placement route or through the public issue route by way of
Initial Public Offer (IPO) or Follow on Public Offer (FPO). It is a public
issue, if anybody and everybody can subscribe for it, whereas, if the
issue is made to select group of people then it is termed as private
placement.
• In cases, where fresh shares are issued to existing shareholders at a
particular price, it is referred as Rights Issue, whereas if such issues
are without involvement of any cost, it is referred as Bonus
issue/stock split
• The secondary market on the other hand operates through two mediums, namely, the
Over‐ The‐Counter (OTC) market and the Exchange Traded Market/Screen Based
Trading System (SBTS).
• OTC markets are the informal type of markets where trades are negotiated. In this type
of market, the securities are traded and settled bilaterally over the counter.
• The other option of trading is through the stock exchange route, where trading and
settlement is done through the Stock Exchanges and the buyers and sellers don’t know
each other.
• The settlements of trades are carried out as per a fixed time schedule. The trades
executed on the exchange are settled through the clearing corporation, who acts as a
counterparty and guarantees settlement.
• In the secondary market, there are the stock exchanges, stock brokers
(who are members of the stock exchanges), the mutual funds/asset
management companies (AMCs), financial institutions, Foreign Portfolio
Investors (FPIs), investment companies, individual investors, depository
participants and banks.
• The Registrars and Transfer Agents, Custodians and Depositories are
capital market intermediaries which provide important infrastructure
services to both the primary and secondary markets. These would be
discussed in detail in the later sections of this workbook.
primary market secondary market

• There are several major players in the primary market. • In the secondary market, there are
• These include the • the stock exchanges,
• merchant bankers,
• stock brokers (who are members of
• mutual funds,
the stock exchanges),
• financial institutions,
• Foreign Portfolio Investors (FPIs), • the mutual funds/asset
• individual investors;
management companies (AMCs),
• the issuers including • financial institutions,
• companies,
• Foreign Portfolio Investors (FPIs),
• bodies corporate, investment companies,
• lawyers,
• bankers to the issue, • individual investors,
• brokers, and • depository participants and banks.
• depository participants. The stock exchanges are involved to the
extent of listing of the securities.
1.3Money Markets
• Money market is a market for financial assets that are close
substitutes for money. Such financial instruments are also known as
cash equivalents.
• It is a market for short term funds and instruments having a maturity
period of one or less than one year.
• Money market provides short term debt financing and investment.
• The money market deals primarily in short‐term debt securities and
investments, such as bankers acceptances, negotiable certificates of
deposit (CDs), repos and treasury bills (T‐bills), commercial papers.
• Government securities are also a part of the money market.
1.4 Products Traded in the Indian Securities
Market
• Investors in the Indian securities market have a wide choice of
product base to choose depending upon a person’s risk appetite and
needs.
• The different types of products available in equity, derivatives and
debt markets are discussed below. Investors in the Indian securities
market have a wide choice of product base to choose depending
upon a person’s risk appetite and needs. The different types of
products available in equity, derivatives and debt markets are
discussed below.
• An Equity Share represents the form of fractional ownership in a business
venture. Equity shareholders collectively own the company. They bear the
risk and enjoy the rewards of ownership.
• Debentures are instruments for raising debt. Debentures in India are
typically secured by tangible assets.
• There are fully convertible, non‐convertible and partly convertible
debentures.
• Fully convertible debentures will be converted into ordinary shares of the
same company underspecified terms and conditions.
• Partly convertible debentures(PCDs) will be partly converted into ordinary
shares of the same company under specified terms and conditions. Thus, it
has features of both debenture as well as equity.
• Non‐Convertible Debentures (NCDs) are pure debt instruments without a
feature of conversion. The NCDs are repayable on maturity.
• Partly convertible debentures have features of convertible and
non‐convertible debentures. Thus, debentures can be pure debt or
quasi‐equity, asthe case may be.
• Warrants entitle an investor to buy equity shares after a specified time period at a given
price.
• A Mutual Funds is an investment vehicle that pools money from numerous investors who
wish to save or make investments having similar investment objective.
• A mutual fund invests in different types of securities in consonance with the investment
objectives.
• A mutual fund company pools money from many investors and invests the money in
stocks, bonds, money‐market instruments, other securities or assets, or some
combination of these investments, depending on the objectives of the fund.
• There are funds which invest in equities, better known as equity MF schemes which are
considered riskier than debt mutual funds.
• One of the main advantages of mutual funds is that they give small investors access to
professionally managed, diversified portfolios of various securities which would be
quite difficult to create with a small amount of capital.
• Exchange Traded Fund is a fund that can invest in either all of the securities or a representative sample of
securities included in an index. Importantly, the ETFs offer a one‐ stop exposure to a diversified basket of
securities that can be traded in real time like an individual stock. ETF units with underlying security of
Gold are also traded on stock Exchanges.
• Indian Depository Receipt (IDR): Foreign companies are not allowed to directly list on the Indian stock
exchanges. However, they are allowed to raise capital in Indian currency through an instrument called
Indian Depository Receipt (IDR).
• IDRs are issued by foreign companies to Indian investors. IDRs are depository receipts which have the
equity shares of the issuing company as the underlying security.
• The underlying shares are held by a foreign custodian and the DRs are held in the Indian depository. IDRs
are listed in the Indian stock exchanges.
• The investor can either hold the IDR, trade in them in the stock exchange or request for redemption into
the underlying shares. Redemption is permitted after 1 year from the date of listing.
• Two way fungibility of IDRs is permitted i.e. the depository receipt can be converted into underlying
shares and the underlying shares can be converted into depository receipt.
• However, the number of shares that can be converted into depository receipt should be within the
headroom available i.e. the number of IDRs issued less number of IDRs outstanding and IDRs already
converted into underlying shares.
1.4.2 Derivative Market and its Products
• Derivative is a product whose value is derived from the value of one or more basic variables, called bases
(underlying asset, index, or reference rate), in a contractual manner.
• Derivative products are in the form of Forwards, Futures, Options and Swaps. A Forward contract is a
promise to deliver an asset on a pre‐ determined date in future at a predetermined price.
• A Future contract is an agreement between two parties to buy or sell an asset at a certain time in the
future at a certain price.
• These are basically exchange traded, standardized contracts.
• Futures contracts are special types of forward contracts in the sense that the former are standardized
exchange traded contracts.
• Options give the buyer (holder) a right but not an obligation to buy or sell an asset in future. Options are
of two types ‐ calls and puts. Calls give the buyer the right, but not the obligation, to buy a given quantity
of the underlying asset, at a given price on or before a given future date. Puts give the buyer the right, but
not the obligation, to sell a given quantity of the underlying asset at a given price on or before a given
date. The two types of exchange derivatives instruments are futures and options. In India, futures and
options are traded on equity stocks, equity indices, currency and commodities. Apart from these indices,
trading on VIX (Volatility Index) was permitted. Volatility indices indicate investor’s perception of market’s
volatility in the near term.1
• Index Futures and Options: Currently in the Indian markets, future and
options contract are available for trading on the blue‐chip indices such as
BSE’s SENSEX and NSE’s NIFTY 50 and sectoral indices of banks, PSU
etc. Index option contracts are available for one week, one month, two
month, three month and three years expiry cycle. Weekly Options are the
exchange traded options based on a Stock or an Index with shorter maturity
of one or more weeks. The three year options contracts are referred to as
long term option contracts. All option contracts expire on the last Thursday
of the expiry month and have maximum of 3 month expiry cycle except long
term option contracts. In case the last Thursday is a trading holiday, the
contracts expires on the previous trading day. A new contract is introduced
on the next trading day following the expiry of the near month contract. On
expiry of a weekly contract the next weekly contract on rolling basis is
introduced.
• Stock Futures and Options: Individual stock futures and options
on specific listed stocks are chosen by the stock Exchange based
on the guidelines and criterion (such as market capitalization,
trading volume) defined by SEBI.
• Currency Derivatives trading was introduced in the Indian financial markets with the launch of
currency futures trading in the USD‐INR pair in 2008.2 Currently in India, currency futures contracts
are traded on four INR pairs i.e., USDINR, EURINR, GBPINR and JPYINR and on three cross currency
pairs i.e., EURUSD, GBPUSD and USDJPY on the recognized stock exchanges. In case of currency
futures the underlying for USD‐INR, EURINR, GBPINR and JPYINR pair would be the rate of Exchange
between USD and INR, Euro and INR, Great Britain Pound and INR and Japanese Yen and INR
respectively. The contract has a maximum of 12 months of trading cycle. The new contract is
introduced following the expiry of the current contract. All contracts expire on the last working day
(excluding Saturdays) of the expiry months. The last day for the trading of the contract shall be two
working days prior to the last business day of the expiry month at 12.30 pm. All these contracts are
cash settled. The settlement price for USDINR and EURINR is the RBI reference rate, whereas for
GBPINR and JPYINR it is the Exchange rate published by RBI in its Press Release captioned RBI
reference Rate for US$ and Euro. In case of currency options, the underlying USDINR has 3 serial
monthly contracts followed by 1 quarterly contracts of the cycle March/June/September/December.
The expiry is two working days prior to the last business day of the expiry month at 12.30 noon. The
final settlement price is the RBI reference rate on the date of the expiry of the contact.
• Interest Rate Futures/Bond Futures An Interest Rate Futures contract is "an
agreement to buy or sell a debt instrument at a specified future date at a
price that is fixed today." The underlying security for Interest Rate Futures is
either Government Bond or T‐Bill. In India, exchange traded Interest Rate
Futures are standardized contracts based on 6 year, 10 year and 13 year
Government of India Security (NBF II) and 91‐day Government of India
Treasury Bill (91DTB). All futures contracts are cash settled. The lot size (i.e.
the minimum amount that can be traded on the Exchange) is 2000 bonds at
the rate of Rs. 100 per bond i.e. with the total face value of Rs.2,00,000.
New contracts can be introduced by the Exchange on any day of a calendar
month. 3 serial months contracts are available for trading on the bond
futures along with spread contracts of Near‐Mid, Near‐ Far and Mid‐Far.
Last trading day is the last Thursday of the expiry month. If the last
Thursday is a holiday, previous trading day will be the last trading day. The
contract is cash settled.
• Commodity Derivatives are derivatives products, the price of which is
derived from the underlying commodities. These raw commodities are
traded on regulated commodities exchanges, in which they are bought
and sold in standardized contracts for a specified future date.
Commodity markets facilitate the trading of commodities such as
gold, silver, metal, energy and agricultural goods.
• Debt Market and its Products Debt market consists of bonds and
debentures, which provide financing through the issuance of bonds,
and enable the subsequent trading thereof. These instruments can be
traded in OTC or Exchange traded markets. In India, the debt market is
broadly divided into two parts: government securities (G‐Sec) market
and the corporate bond market.
• Government Securities Market: The Government needs enormous
amount of money to perform various functions such as maintaining law
and order, justice, national defence, central banking, creation of
physical infrastructure etc. For this, it generates revenue by various
ways including borrowing from banks and other financial
institutions. The government raisesshort term and long term funds by
issuing securities. These securities do not carry default risk as the
government guarantees the payment of interest and the repayment of
principal. They are therefore referred to as gilt edged securities.
Government securities are issued by the central government, state
government and semi government authorities. The major investors in
this market are banks, insurance companies, provident funds, state
governments, FIIs. Government securities are of two types‐‐treasury
bills and government dated securities. .
• Corporate Bond Market: The corporate bond or corporate debt market is a
market where debt securities of corporate such as corporate bonds, T‐bills,
commercial papers and certificate of deposits are issued and traded.
Corporates adopt either the public offering route or the private placement
route for issuing debentures/bonds. Corporate bonds are bonds issued by
firms to meet their needs for expansion, modernization, restructuring
operations, mergers and acquisitions. The investors in this market are banks,
financial institutions, insurance companies, mutual funds, FIIs etc. The
exchanges have a corporate bond reporting platform, which all issuers,
intermediaries and contracting parties have access to for reporting of trades.
Where the transactions are executed through the intermediary, reporting
responsibility shall lie with the intermediary. If executed otherwise, reporting
will be made either through an authorised intermediary or directly by the
contracting parties.
1.4.3 Other Asset Classes
• Real Estate Investment Trusts (REIT) are trusts registered with SEBI that
invest in commercial real estate assets. The REIT will raise funds through an
initial offer and subsequently through follow‐on offers, rights issue and
institutional placements. The value of the assets owned or proposed to be
owned by a REIT coming out with an initial offer will not be less than Rs.
500 crore and the minimum offer size will not be less than Rs.250 crore.
The minimum subscription amount in an initial offer shall be Rs. 2 lakh. The
units will be listed on the stock exchange.
• Infrastructure Investment Trusts (InvIT) are trusts registered with SEBI that
invest in the infrastructure sector. The InvIT shall raise funds from the
public through an initial offer of units. The offershall be for not less than
Rs. 250 crores and the value of the proposed assets of the InvIT shall not
be less than Rs. 500 crores. The minimum subscription size shall be Rs. 10
lakh. The units shall be listed on a stock exchange.
• Sovereign Gold Bond Scheme (SGB) was launched in 2015 to provide an alternative way
for investors to take exposure to gold as an investment. SGBs are government securities
denominated in grams of gold. The bonds are issued in denomination of one gram of gold
and in denominations thereof. The tenor of the bond is 8 years. Each bond investor buys
the bonds in Indian rupees and on redemption are paid the maturity value also in Indian
rupees. The units (grams) of gold bought by the investor and represented by the bonds is
protected. The value of the bond will reflect the price of gold. On maturity the value of the
bond may be higher or lower depending upon the prevailing price of gold. The bonds bear
an interest rate of 2.50% per annum on the initial investment and is paid semi‐annually to
the account of the bond holder. Investors can apply for the bond when the issue of each
tranche is open. The bonds are available for investment by resident individuals, HUFs,
Trusts, Universities, Charitable Trusts and others. The investor can apply for the bonds
when the issue is ongoing online through the website of listed scheduled commercial bank
or physically through the designated banks or post‐ offices and the NSE and BSE. They can
also be bought on the secondary market. The bonds can be held in physical form or in
dematerialized form. The bond is tradable on stock exchanges if held in dematerialized
form.
 1.5 International Financial Services Centres (IFSC)
• Financial Centre’s that cater to customers outside their own jurisdiction are referred to as
international (IFSCs) or offshore Financial Centers (OFCs). All these centres are ‘international’ in the
sense that they deal with the flow of finance and financial products/services across borders. An IFSC
is thus a jurisdiction that provides world class financial services to non‐residents and residents, to
the extent permissible under the current regulations, in a currency other than the domestic currency
(Indian rupee) of the location where the IFSC is located. IFSC at GIFT, Gandhinagar is a deemed
foreign territory dealing in foreign currency. The entitiesin IFSC are recognised as non‐resident entity
under the FEMA regulations of Reserve Bank of India and get benefits which include exemptions
from security transaction tax (STT), commodity transaction tax, dividend distribution tax, capital
gains waiver and no income tax. Stock exchanges operating in the GIFT IFSC permitted to offer
trading in securities in any currency other than the Indian rupee. As per the SEBI (IFSC) guidelines,
2015, the stock exchanges operating in IFSC was permitted dealing in following types of securities
and products in such securities in any currency other than Indian rupee, with a specified trading lot
size on their trading platform subject to prior approval of SEBI, viz.,
• Equity shares of a company incorporated outside India;
• Depository receipt(s);
• Debt securities issued by eligible issuers;
• Currency and interest rate derivatives;
• Index based derivatives;
• And any other securities as may be specified by SEBI.
• Currently NSE and BSE both have exchanges at IFSC and offer various
products for trading viz., Index derivatives, Stock Derivatives,
Currency Derivatives, Commodity Derivatives and Debt Securities.