Market Structure and Participants

The Indian securities market is broadly divided into the primary market where new securities are issued and the secondary market where those securities are subsequently traded among investors. Both markets are linked through a common infrastructure of stock exchanges, clearing houses, depositories and settlement systems that are overseen by SEBI.

Within this structure, the primary market facilitates capital formation for issuers, while the secondary market provides liquidity, price discovery and an avenue for investors to realise gains or losses. The seamless flow of securities from issuance to trading is what enables efficient capital allocation across the economy.

For the NISM exam, remember that many questions test the distinction between issuance activities (e.g., IPO, FPO) and trading activities (e.g., intraday, delivery‑based). Confusing the two is a common trap, especially when the question mentions “listing” or “allocation”.

• Primary market – capital raising, underwriting, issue price determination.
• Secondary market – continuous price discovery, order matching, settlement.

The primary market is characterised by the issuance of fresh equity or debt instruments directly from the issuer to investors. Activities include Initial Public Offerings (IPOs), Follow‑on Public Offerings (FPOs), rights issues, and private placements. SEBI’s Issue and Listing Regulations govern these processes, ensuring transparency, fair pricing and adequate disclosure.

In contrast, the secondary market provides a platform for buying and selling already‑issued securities. Trading occurs on recognised stock exchanges such as NSE and BSE, or on over‑the‑counter (OTC) platforms for certain debt instruments. The secondary market is regulated primarily by the SEBI (Stock Exchanges) Regulations, which focus on market integrity, investor protection and fair access.

Exam‑wise, remember that the primary market deals with “issuance” and “allocation”, while the secondary market deals with “trading”, “order types”, “settlement cycles” and “price formation”.

The primary market ecosystem includes the issuer, who decides to raise funds; the lead manager (often a merchant banker) who structures the issue, conducts due diligence and manages the book‑building process; and the underwriters who guarantee a minimum amount of capital by purchasing unsold shares.

Investors in the primary market are classified as qualified institutional buyers (QIBs), retail investors, and non‑institutional investors (NIIs). Allocation rules, especially for IPOs, are prescribed by SEBI to ensure fair distribution among these categories.

For the exam, be ready to identify the role of each participant in a typical IPO flowchart, and to answer questions on who bears the underwriting risk, who conducts due‑diligence, and which entity maintains the issue ledger.

In the secondary market, the central players are stock exchanges (e.g., NSE, BSE), brokers/stock‑broking firms that act as intermediaries, and the clearing corporation (e.g., NSE Clearing Ltd.) that guarantees settlement. The depository (NSDL or CDSL) holds securities in electronic form, enabling dematerialisation and smooth transfer of ownership.

Other participants include market makers who provide liquidity by quoting buy and sell prices, institutional investors such as mutual funds and insurance companies, and retail investors who trade via online platforms. Each participant must be SEBI‑registered and adhere to KYC and AML norms.

Exam questions often ask you to match a participant with its primary responsibility – for example, “who ensures that the buyer receives securities on the settlement day?” – the answer is the clearing corporation in coordination with the depository.

India’s two dominant equity exchanges are the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). NSE leads in electronic trading volume, while BSE has a larger number of listed companies. Both operate a fully automated order‑matching engine that follows the price‑time priority rule.

Besides equity exchanges, there are commodity exchanges (MCX, NCDEX) and debt platforms (e.g., NSE’s Debt Market). Each exchange is required to obtain a licence from SEBI and must adhere to the SEBI (Stock Exchanges) Regulations, which dictate surveillance, circuit‑breaker mechanisms and disclosure standards.

For exam preparation, remember the market‑share percentages: NSE ~55 % of equity turnover, BSE ~35 %, MCX ~5 % and NCDEX ~5 % (rounded). These figures often appear in comparative questions on market dominance.

Market depth refers to the ability of the market to absorb large orders without causing a significant price change. It is measured by the volume of buy and sell orders at various price levels in the order book. Higher depth indicates better liquidity and lower transaction costs for participants.

Liquidity is closely linked to market depth but also considers the ease of converting securities to cash quickly. High‑frequency traders, market makers and institutional investors contribute to liquidity by continuously posting limit orders. SEBI monitors liquidity metrics to detect manipulation such as quote stuffing.

Exam‑wise, you may be asked to calculate the turnover of a security or to identify which participant improves market depth. Remember that a higher turnover generally signals better liquidity, but the presence of large block trades can temporarily reduce depth.

SEBI is the apex regulator for both primary and secondary markets. Its key responsibilities include approving prospectuses, monitoring insider trading, enforcing market‑wide surveillance, and ensuring that intermediaries maintain adequate net‑worth and compliance systems.

The Securities and Exchange Board of India (Depositories) Regulations govern NSDL and CDSL, while the SEBI (Stock Exchanges) Regulations lay down the operational framework for exchanges. Additionally, the SEBI (Mutual Funds) Regulations impact how mutual funds interact with both market layers.

In the exam, you may encounter scenario‑based questions that ask which regulator issues a particular circular or which rule applies to a specific activity (e.g., “who monitors the price‑band mechanism?” – answer: SEBI via exchange‑level surveillance).