Structure of Financial Markets in India

The Indian financial market is a network of institutions, intermediaries, and platforms that facilitate the flow of funds from savers to borrowers. It is broadly divided into two layers – the primary market, where new securities are issued, and the secondary market, where existing securities are traded.

Both layers operate under a common regulatory umbrella, primarily SEBI (Securities and Exchange Board of India), with complementary oversight from the RBI for money‑market instruments. The market is further segmented into equity, debt, money‑market, and derivatives segments, each serving distinct financing and risk‑management needs.

For the NISM exam, you must be able to map each activity (e.g., IPO, trading, clearing) to its correct layer and segment, and recognise which regulator governs it. Questions often test your ability to pick the right definition among similar‑sounding terms.

• Primary market – creation of new securities.
• Secondary market – trading of existing securities.

The primary market is where companies raise fresh capital by issuing equity shares, debentures, or other securities to the public for the first time. The most common instrument is the Initial Public Offering (IPO), but rights issues, preferential allotments and private placements also belong here.

In India, the issuance process is governed by SEBI (Issue of Capital and Disclosure Requirements) Regulations, which prescribe disclosure, pricing, and underwriting standards. Investment advisers play a crucial role in guiding issuers and retail investors through the subscription process.

Exam relevance: Questions may ask you to identify which regulation applies, the role of a lead manager, or the difference between a fresh issue and a secondary offering.

• IPO – first sale of shares to the public.
• Rights Issue – existing shareholders offered additional shares proportionate to their holding.

The secondary market provides liquidity by allowing investors to buy and sell securities that have already been issued. Trading occurs on recognised stock exchanges such as the BSE and NSE, as well as in the over‑the‑counter (OTC) segment for certain debt instruments.

Key features include real‑time price discovery, settlement cycles (T+2 for equities), and the presence of market makers who ensure continuous quoting. SEBI’s Market Intermediaries Regulations govern brokers, depositories, clearing corporations and other participants.

For the exam, you may be asked to differentiate between exchange‑traded and OTC trading, or to explain the settlement timeline and its impact on cash flow.

• Exchange‑traded – transactions occur on a regulated exchange.
• OTC – bilateral trades outside an exchange, common for government securities.

India’s financial market is divided into four principal segments: Equity, Debt, Money Market, and Derivatives. Each segment caters to different risk‑return profiles and financing needs.

The equity segment includes shares of listed companies and equity‑linked instruments. The debt segment covers bonds, debentures, and government securities. Money‑market instruments are short‑term (maturity ≤ 1 year) such as Treasury bills and commercial paper. Derivatives provide hedging and speculative opportunities through futures and options on equities, indices, currencies and interest rates.

Exam focus: You will often need to match an instrument (e.g., Treasury bill) to its correct segment, and know the typical maturity range or underlying asset for each segment.

• Equity – ownership, longer‑term horizon.
• Debt – fixed‑income, defined maturity.
• Money Market – short‑term, high liquidity.
• Derivatives – contracts whose value derives from underlying assets.

SEBI is the principal regulator for securities markets, overseeing market conduct, disclosures, and investor protection. The RBI regulates money‑market instruments and foreign exchange, while the Ministry of Corporate Affairs (MCA) handles company law aspects of issuances.

Key regulatory documents include the SEBI (Listing Obligations and Disclosure) Regulations, SEBI (Prohibition of Insider Trading) Regulations, and the RBI’s Master Direction on Money Market Operations. Understanding which regulator issues which circular is vital for answering compliance‑related questions.

Exam tip: When a question mentions “listing requirements” or “insider trading”, think SEBI. When it mentions “repo rate” or “liquidity management”, think RBI.

• SEBI – securities market oversight.
• RBI – money‑market and foreign exchange.
• MCA – corporate governance of issuers.

Participants in Indian financial markets include issuers (companies, governments), investors (retail, HNI, institutional), and intermediaries (brokers, depositories, clearing corporations, mutual funds, portfolio managers). Each plays a distinct role in capital formation and liquidity provision.

Retail investors constitute the largest number of participants but hold a smaller share of market value. Institutional investors such as mutual funds, insurance companies and foreign portfolio investors (FPIs) dominate market turnover and influence price discovery.

For the exam, you may be asked to identify which participant type performs a specific function, such as “maintaining demat holdings” (depository) or “providing liquidity” (market makers).

• Issuers – raise capital via primary market.
• Investors – provide demand in secondary market.
• Intermediaries – facilitate trade, settlement, and custody.

Key infrastructure components ensure smooth functioning of the secondary market. The National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) provide trading platforms, while the National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL) hold securities in dematerialised form.

Clearing corporations such as the National Securities Clearing Corporation (NSCCL) guarantee settlement and manage risk through margin requirements. The settlement cycle for equities is T+2, meaning trade date plus two business days.

Exam relevance: You may need to state the settlement cycle, identify the role of a depository, or explain the purpose of a clearing corporation in risk mitigation.

• Trading Platform – exchange (NSE/BSE).
• Depository – NSDL/CDSL for demat.
• Clearing Corporation – NSCCL for settlement guarantee.

Market depth and turnover ratio are common indicators used to assess liquidity. Turnover ratio = (Total value of shares traded in a period) ÷ (Average market capitalisation) × 100. A higher turnover ratio indicates a more liquid market, which is a focus area for SEBI’s market‑development initiatives.

Another useful metric is the price‑to‑earnings (P/E) ratio, which compares a company’s market price with its earnings per share. While not a structural concept, the exam often links P/E to market valuation and investor sentiment.

Remember: The formula for turnover ratio involves market capitalisation, linking back to the previous formula block. Exam questions may present a turnover figure and ask you to interpret market liquidity.

• Turnover Ratio – liquidity indicator.
• P/E Ratio – valuation metric.