Stock Market Intermediaries and Regulators: Exchanges, Depositories, Brokers, Clearing corps, Merchant bankers, SEBI, RBI...

I click just a few keys to buy a stock. Buying and selling stocks happens within a fraction of a second. It seems to be a very simple process but behind the screen, it is one of the most complex structures of organizations working continuously to make our trading flawless. These organizations are called intermediaries of the stock market and their working is regulated by regulatory bodies. Let us discuss the working of each intermediary to understand the functioning of the stock market. Understanding this working may not be useful for trading or investing but it can definitely help you during the time of some mishappening to you. This knowledge will help you keep yourself safe from fraud and find a way out when you are a victim of fraud.

Stock Market Intermediaries

Stock Exchanges

The stock exchanges provide a platform for trading in securities of already-listed companies. The most popular stock exchanges for the Indian equity market are the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). MCX and NCDEX are also very popular stock exchanges for commodity trading. Trading in these exchanges occurs through an electronic trading terminal by an anonymous order matching system. Stock exchanges also appoint clearing and settlement agencies and banks to manage funds and securities.

Depositories

Depositories hold investor's securities in electronic form in simple terms, depositories are similar to banks but hold shares, bonds, debentures, etc. instead of cash. A lot of people have a misconception that brokers hold their shares and so ask questions as to, "what if a specific broker closes its operations? how am I supposed to get my shares? " The answer is simple through any other broker from the depository as it is stored at the depository, brokers are just a medium. 

There two depositories in India CDSL(Central Depository Services Limited) and NSDL(National Securities Depository Limited)

Depository Participant

Depository Participant(DP) is an agent of depository. DP acts as an interface between depositories and investors. DP makes it possible for an investor to interact with depositories for transacting securities in dematerialized form. Investor level accounts of securities are held by DP. 

There are many financial institutions under the head of a depository participant; namely public financial institutions, banks, financial corporations, custodians, stockbrokers, clearing corporations, NBFCs, and registrars, etc. All Depository Participants have to be registered at SEBI and follow SEBI's guidelines for operations.

Trading Members/ Stockbrokers

Stockbrokers are registered members of stock exchanges. All secondary market transactions have to happen through a broker. A stockbroker can be an individual, partnership firm, or a corporate body. A Stockbroker facilitate in the process of buying and selling of securities. Anyone can become a stockbroker subject to the fulfillment of criteria defined by regulators and exchanges.

Custodians

A custodian facilitates holding the funds and securities for large institutional investors like banks, mutual funds, and insurance companies.

Clearing Corporations

A clearing corporation has the responsibility of the collection and disbursement of funds and securities during any trade. Whenever a trade occurs the securities and funds have to be exchanged between buyers and sellers. By taking responsibility for the clearance of the trade a clearing corporation helps protect investor's trust.

Clearing Banks

Clearing banks are an important intermediary between clearing members and clearing corporations. Each clearing member has an account in a clearing bank. The funds of clearing members are held in this account. 

Merchant Banker

The merchant banker helps companies through their issuance process. Whenever a company wants to issue any financial product they hire a merchant banker. The merchant banker understands the need of the company and helps the company in deciding the type of product it should issue, pricing the product, and processing all formalities involved in the issuance of securities. The merchant banker is the only point of contact for the company through the process until the security is listed.

Underwriter

The underwriter is an intermediary who underwrite (give written assurance) to the issuer of securities that it will buy a portion of securities issued if the issuance do not get enough subscription. Such underwriting provides the issuer some comfort during the issuance process.

Underwriting can be hard or soft underwriting. If underwriter provides underwriting before the price band declaration it is called hard underwriting, while after price band declaration it is called soft underwriting.  

Stock Market Regulators

SEBI

SEBI (Securities and Exchange Board of India) is a regulatory body of the government of India. SEBI provides a guideline, monitor, and regulate the Indian securities market to protect investor interest in capital market.

In short, SEBI makes sure no fraudulent activity/malpractice is happening in the securities market. If one is a victim of fraud related to the securities market he should complain about it to SEBI. SEBI has the power to penalize the entity responsible for it and compensate the victim.    

RBI  

RBI (Reserve Bank of India) is also an important regulator of the securities market but compared to the SEBI which was established for the sole purpose of regulating the securities market RBI's scope of work is more outside the securities market and less into the securities market.

RBI regulates the foreign exchange market, bond market, and monetary policies of the Indian government.RBI works as a banker for the Government of India. Issuing currency notes is also a major responsibility of RBI.

I hope you understood various intermediaries and regulators of the stock market along with their responsibilities. If you have any query feel free to comment.

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