3.1 Indian Securities Markets Overview

The Indian Securities Market Ecosystem

The Indian securities market is one of the most technologically advanced in the world, having moved to a T+1 settlement cycle ahead of the US and Europe. For the NISM Series XXV-B exam, you must be clear on who regulates what, where securities trade and are held, and how a trade moves from order to settlement.

Regulators

India's financial markets are overseen by multiple regulators, each with a defined mandate:

• SEBI (Securities and Exchange Board of India): The statutory regulator for the securities market — established under the SEBI Act, 1992. SEBI regulates stock exchanges, brokers, merchant bankers, mutual funds, portfolio managers, depositories, credit rating agencies, and the issuance of securities. Its threefold mandate is investor protection, market development, and regulation of the securities market.
• RBI (Reserve Bank of India): Regulates the money market, government securities (G-Secs) market, and the payment and settlement systems. RBI is also the debt manager for the Government of India, conducting G-Sec and Treasury Bill auctions. While SEBI regulates the securities side, RBI oversees monetary policy and interest rates, which directly affect debt securities pricing.
• Ministry of Finance: Sets taxation policy affecting securities, including the Securities Transaction Tax (STT) and capital gains tax rates.

Exam tip: A frequent NISM question tests the regulator split. SEBI = securities (equity, corporate bonds, mutual funds, derivatives on exchanges). RBI = money market, G-Secs, repo, and the rupee. Where both have an interest (e.g., interest-rate derivatives), SEBI regulates exchange-traded derivatives and RBI regulates OTC interest-rate products.

Stock Exchanges

Two exchanges dominate Indian equity trading:

• BSE (Bombay Stock Exchange): Asia's oldest stock exchange, established in 1875. Its benchmark index is the Sensex (30 stocks).
• NSE (National Stock Exchange of India): Established in 1992, it introduced electronic screen-based trading to India. Its benchmark index is the Nifty 50 (50 stocks). NSE is the larger exchange by equity derivatives volume.

A third recognised exchange, MSE (Metropolitan Stock Exchange), operates but holds a small market share.

Depositories

Indian securities are held in dematerialised (demat) form. There are two depositories registered with SEBI:

• NSDL (National Securities Depository Limited): Promoted primarily by NSE and other institutions.
• CDSL (Central Depository Services Limited): Promoted primarily by BSE and other institutions.

Each investor holds a demat account with a Depository Participant (DP), through which securities are credited and debited. A demat account is to securities what a bank account is to cash.

Key Market Participants

Primary Market vs Secondary Market

Primary Market (New Issues)

The primary market is where an issuer raises capital directly from investors by issuing new securities. Key routes include:

• IPO (Initial Public Offering): The first sale of equity by an unlisted company to the public.
• FPO (Further Public Offering): A listed company issuing additional shares.
• Book-Building: The most common IPO pricing mechanism in India. The issuer/merchant banker announces a price band; institutional and retail investors bid within the band. The final issue price is discovered from the aggregated bids.
• Rights Issue: Existing shareholders are offered new shares in proportion to their holdings (discussed in Section 3.2).

Secondary Market (Trading)

The secondary market is where existing securities change hands among investors. The issuer receives no new money here; it provides liquidity. In India, secondary equity trading happens almost entirely on NSE and BSE, with the clearing corporation guaranteeing settlement.

Key distinction: Primary market = capital formation (issuer gets funds). Secondary market = liquidity/price discovery (investors trade among themselves).

Trade Flow: Order to Settlement (T+1)

A typical equity trade in India flows through four stages:

1. Order placement: The investor places a market or limit order through a broker, routed to the exchange's trading engine.
2. Matching: The exchange's order-matching engine matches buy and sell orders on price-time priority, generating a trade confirmation.
3. Clearing: The clearing corporation (NCL for NSE, ICCL for BSE) novates the trade — it becomes the buyer to every seller and seller to every buyer — and computes funds and securities obligations.
4. Settlement (T+1): On the next business day (T+1), securities move from the seller's demat to the buyer's demat via the depositories, and funds move the other way through the clearing bank. India completed its full migration to T+1 settlement on 27 January 2023, making it the first major market globally to do so.

Exam point: The T+1 transition shortened the earlier T+2 cycle. It reduces counterparty risk, frees investor funds faster, and tightens margin requirements — but does not apply to mutual fund units (settled differently).