Capital Markets: Structure, Participants and Instruments
Scope of the domain
This domain tests how the Indian securities market is organised: who issues and invests, which intermediaries sit between them, how instruments are classified, and where regulatory jurisdiction lies. The exam expects you to distinguish primary from secondary markets and capital from money markets, and to place each participant in the chain.
Core structure
- Primary market raises new capital through IPOs, FPOs, rights issues, preferential allotments and debt issuance. Secondary market transfers existing securities on recognised exchanges.
- Money market handles short-term instruments (up to one year), such as Treasury bills, commercial paper and certificates of deposit; capital market handles long-term equity and debt.
- Instruments include equity shares, preference shares, debentures, bonds, ETFs, REITs/InvITs and derivatives. Derivatives derive value from an underlying and are traded on recognised exchanges under SCRA.
- Participants: issuers, investors (retail, institutional, FPIs), stock brokers, merchant bankers, underwriters, registrars, custodians, depository participants, clearing corporations, depositories, exchanges and SEBI. RBI regulates money market and forex; SEBI regulates securities markets.
Worked example
A company issues 10-year non-convertible debentures to institutions. This is a capital-market, primary-market debt instrument. The merchant banker manages the issue; the registrar handles allotment; the depository credits demat balances; the clearing corporation settles the exchange trades if listed. If the same company issued 91-day commercial paper, it would be a money-market instrument, typically regulated in the money market by RBI.
Traps
Do not call a stock exchange the counterparty to every trade - novation makes the clearing corporation the counterparty. Do not classify commercial paper as a capital-market instrument. Do not confuse a depository with a depository participant.