Kinds of Transactions

Transaction in the securities context means any activity that results in the transfer of ownership or rights of a financial instrument. The NISM syllabus groups transactions broadly into primary market and secondary market categories, each governed by distinct regulatory provisions and settlement mechanisms.

The primary market deals with the creation of new securities – for example, an Initial Public Offering (IPO) where a company raises fresh capital. In contrast, the secondary market facilitates the buying and selling of already‑issued securities, providing liquidity to investors. Both markets are essential: the primary market supplies capital to issuers, while the secondary market enables price discovery and risk management.

Exam questions often test your ability to match a transaction with its market, its participants, and the applicable settlement cycle (e.g., T+2 for most equity trades). Confusing the two can lead to loss of marks, especially when the question asks for the regulatory authority or the type of charge applicable.

The primary market includes four major transaction types: Initial Public Offering (IPO), Follow‑on Public Offering (FPO), Rights Issue, and Preferential Allotment. An IPO is the first time a company offers its shares to the public, while an FPO is a subsequent issue of fresh shares after the company is already listed.

Rights issues give existing shareholders the right to purchase additional shares at a discounted price, preserving their proportionate ownership. Preferential allotment allows a company to issue shares to a select group of investors—often institutional or strategic partners—without a public offer. All these transactions are subject to SEBI (Issue of Capital and Disclosure) Regulations and require a prospectus or offer document.

For the exam, focus on the purpose of each transaction, the typical participants, and the regulatory filing requirement. A common mistake is to treat a preferential allotment as a private placement; however, it is a distinct primary market activity with its own disclosure norms.

The secondary market is where most trading activity occurs. Core transaction types include Cash Market Trades (standard buy‑sell orders settled in cash), Margin Trading (buying securities using borrowed funds), Short Selling (selling securities not owned with the intention to repurchase later), and Derivative Transactions such as futures and options.

In addition to these, the market accommodates Off‑Market Transactions (direct transfers between parties without exchange involvement) and Block Deals (large volume trades executed in a single transaction, usually above 5 lakh shares or Rs 10 crore). While off‑market deals are settled through the depositories, block deals are reported to the exchange and are subject to a separate price band to prevent market manipulation.

Exam candidates should remember the settlement cycle for cash market trades (T+2) and for derivatives (same‑day or T+1 depending on the contract). The presence of margin or short‑selling also introduces additional charges such as interest on borrowed funds, which are tested in cost‑calculation questions.

Each component of the total transaction cost has a specific purpose. Brokerage is the primary revenue for brokers and varies by brokerage model (flat fee vs. percentage). STT is a tax levied by the government on the value of the trade and differs for equity delivery, intraday, and derivatives.

GST is applied on the brokerage amount at the prevailing rate of 18%. SEBI Charges are a nominal fee that funds the regulator’s surveillance activities. Finally, Transaction Charges are collected by the exchange for maintaining the trading platform and clearing infrastructure.

In the exam, you may be asked to compute the net cost of a trade or to identify which charge is not applicable to a particular transaction (e.g., STT is not levied on off‑market transfers). Remember to convert percentages to decimal form before calculation.

All transactions in Indian securities markets are overseen by SEBI. The regulator mandates a T+2 settlement cycle for equity cash market trades, meaning the buyer must receive securities and the seller must receive funds two business days after the trade date. Derivative contracts settle on a T+1 basis, while intraday trades are settled on a same‑day (cash) basis.

Off‑market and block‑deal transactions, though executed outside the exchange, still require compliance with SEBI’s reporting guidelines. For instance, block deals above the prescribed threshold must be reported to the exchange within 30 minutes of execution, and the price must lie within a +/- 5% band of the prevailing market price.

Exam candidates should memorize the settlement timelines and the specific reporting obligations for each transaction type, as questions often present a scenario and ask for the applicable settlement day or the regulatory filing requirement.