Structure of Securities Market

The securities market in India is a two‑tiered system that facilitates the mobilisation of capital and the liquidity of financial instruments. The first tier, the primary market, deals with the creation of new securities, while the second tier, the secondary market, enables existing securities to change hands among investors.

Both tiers operate under the umbrella of the Organised Market (regulated exchanges) and the Over‑the‑Counter (OTC) Market. The organised market provides a transparent, rule‑based environment, whereas the OTC market is a dealer‑driven network that handles securities not listed on an exchange.

For the NISM exam, you must be able to map a given activity—such as an IPO, a stock trade, or a forward contract—to its correct market segment and understand the regulatory implications of each segment.

• Primary market activities are governed by SEBI’s Issue and Listing Regulations.
• Secondary market trades must comply with the Securities Contracts (Regulation) Act, 1956.

The primary market is where issuers raise fresh capital by offering new securities to investors. Common mechanisms include Initial Public Offerings (IPOs), Follow‑on Public Offerings (FPOs), Rights Issues, and Preferential Allotments.

In an IPO, the issuer appoints a lead manager, prepares a prospectus, and obtains SEBI’s approval before the securities are listed on an exchange. The proceeds belong to the issuer, which can use them for expansion, debt repayment, or other corporate purposes.

Exam focus: remember that the primary market involves the creation of securities, the flow of funds is from investors to the issuer, and the regulatory framework is centred on disclosure and pricing fairness.

The secondary market provides liquidity by allowing investors to buy and sell already‑issued securities. Trades occur on recognised stock exchanges (e.g., NSE, BSE) or through OTC platforms for instruments like derivatives and debt securities.

Settlement in the Indian secondary market follows a T+2 cycle, meaning the trade is finalised two business days after the transaction date. This reduces counter‑party risk and aligns with global best practices.

For NISM, you must know that price discovery, liquidity provision, and investor protection are the core functions of the secondary market, and that SEBI monitors market conduct through surveillance mechanisms.

Organised exchanges are physical or electronic venues where securities are listed and traded under a strict set of rules prescribed by SEBI. Examples include the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). These platforms offer high transparency, real‑time price dissemination, and a central clearing mechanism.

OTC markets, on the other hand, are dealer‑driven networks where trades are negotiated bilaterally. They typically handle instruments that are not listed on an exchange, such as certain corporate bonds, structured products, and forward contracts. While OTC offers flexibility, it generally has lower transparency and higher counter‑party risk.

Exam relevance: questions may ask you to identify whether a particular security (e.g., a listed equity versus a corporate bond) trades on an organised exchange or in the OTC market, and to state the regulatory differences.

The National Stock Exchange (NSE) is the largest equity market in India by turnover, offering a fully electronic trading platform and a wide range of derivatives. The Bombay Stock Exchange (BSE), the oldest exchange, still commands a substantial share of equity listings and retains a strong presence in small‑cap segments.

The Multi Commodity Exchange (MCX) and National Commodity & Derivatives Exchange (NCDEX) handle commodity futures, while the National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL) provide dematerialisation and settlement services.

Understanding each exchange’s niche helps you answer scenario‑based questions that ask where a particular security type (e.g., commodity futures) is likely to be listed.

SEBI (Securities and Exchange Board of India) is the statutory regulator that oversees the entire securities market. Its responsibilities include registration of market intermediaries, framing of listing and trading regulations, and enforcement of market integrity through surveillance and penal actions.

Key regulations relevant to market structure are the Securities Contracts (Regulation) Act, 1956, the SEBI (Issue of Capital and Disclosure) Regulations, 2018, and the SEBI (Prohibition of Insider Trading) Regulations, 2015. These instruments ensure fair pricing, prevent market manipulation, and protect investor interests.

For the exam, remember that SEBI’s power extends to both organised and OTC markets, and that any breach of its regulations can result in fines, suspension, or imprisonment.

Participants in the securities market include investors (retail and institutional), brokers, sub‑brokers, depositories, clearing corporations, and issuers. Brokers act as intermediaries, executing buy‑sell orders on behalf of clients, while depositories (NSDL, CDSL) hold securities in electronic form and facilitate settlement.

Clearing corporations such as NSE Clearing Ltd. guarantee trade settlement and manage margin requirements, thereby reducing systemic risk. Issuers, typically corporations or governments, raise capital through the primary market and may also engage in secondary market activities like buy‑backs.

Exam tip: questions often test the mapping of a function (e.g., order execution, settlement guarantee) to the correct participant.

The bid‑ask spread is a direct indicator of market liquidity. A narrow spread suggests high liquidity and intense competition among market makers, whereas a wide spread signals lower liquidity and higher transaction costs.

In the Indian equity market, the spread for large‑cap stocks on NSE typically ranges between 0.05% and 0.15% of the price, while small‑cap stocks may exhibit spreads of 0.3% or higher. Understanding spread dynamics helps you answer questions on transaction cost estimation.

Remember: the spread is calculated as the difference between the best ask and best bid at a given point in time, not as a percentage unless explicitly asked.

India follows a T+2 settlement cycle for equity trades, meaning that the transfer of securities and funds is completed two business days after the trade date. This cycle is facilitated by the clearing corporation and the depositories, ensuring that both parties fulfill their obligations.

The T+2 framework reduces counter‑party risk, aligns with international standards, and provides a predictable timeline for cash and securities flow. For derivatives, the settlement may be cash‑based but still adheres to a similar time frame.

Exam relevance: a typical question may present a trade date and ask for the settlement date, or probe the impact of a delayed settlement on the buyer’s cash position.