Financial systems role of market participants

Financial System
Role of Market Participants

Agenda
In this session, you will learn about:
• Investors
• Issuers
• Regulators
• Custodians
• Broker Dealers
• Depositories
• Clearing Agents
• Lead Managers

Participants of the Capital Market
ONES WITH
DEFICIT FUNDS
CAPITAL MARKET
ONES WITH
SURPLUS FUNDS
BUY SELL
Invest in assets
to gain more
profit
Sell assets
to get
financing
• The participants of capital market are mainly those who have a surplus of funds
and those who have a deficit of funds.
• The persons having surplus money want to invest in capital market in hope of
getting high returns on their investment.
• People with fund deficit try to get financing from the capital market by selling
stocks and bonds.
• These two kinds of activities keep the capital market going.
Demand SideSupply Side

Participants of the Capital Market
Clearing
Agents
Lead
Managers
Issuers
Investors
Regulators
Custodians
Depositories
Broker
Dealers

Issuers
An Issuer is a legal entity that develops, registers and
sells securities for financing its operations.
Develop
securities
Register
securities
Sell
securities
Obligations of
the issue
Reporting financial conditions,
material developments and any other
operational activities
Issuers are responsible for:

Issuers
Issuers can be
Domestic International
Governments
Private
Corporations
Investment
Trusts
Issuers include
These belong to the demand side of the
process. The demand side consists of those in
need of:
• Cash flows (daily operational needs);
• Interim financing (bridge financing);
• Long-term funds for special projects
(capital funds for venture financing).

Investors
A stock investor is an individual or institution who puts money to buy securities,
offering potential profitable returns, as interest, income, or appreciation in value.
GOAL:
CAPITAL
GAINS
Rely on
fundamental
analysis for
investment
decisions

Investors vs Speculators
HOLD
Investors
Buy-and-hold
Passive in nature
Long term strategy
Speculators
Intraday trading
Active in nature
Short term strategy
Many investors believe in the buy and hold strategy where investors buy stock
ownership in a corporation and hold onto those stocks for the very long term,

Regulators
Financial institution responsible for supervision, which subjects issuers to certain
requirements, restrictions and guidelines, aiming to maintain the integrity of the
financial system.
Non-Government
Bodies
Government
Bodies
WHO ARE THE REGYLATORS?

Regulators
Maintain confidence
in the financial
system
Financial stability
Contributing to the
protection and
enhancement of stability
of the financial system.
Reduction of financial
crime
Reducing the possibility
of a financial crime
committed by a
regulated business
Investor protection
Securing the
appropriate degree of
protection for investors.

Functions of Regulators
What do regulators do?
Register listed
securities
Set the rules
and regulations
and ensures
compliance
Dispute
resolution
Listing
requirements for
issuers of
securities
Register stock
exchanges and
dealing
members
Market
surveillance to
prevent insider
abuse
Licenses dealing
members
Facilitate the
secondary
trading of
securities

SEBI – Securities and Exchange Board of India
SEBI is a centrally controlled body that is entrusted
with the task of protecting the interest of investors
in securities and promoting the growth of the
securities market by implementing suitable rules
and norms.
It was officially established by
the Government of India in
1992.
Since then SEBI has regulated
Primary Market, Secondary
Market, Mutual Funds and
Foreign Institutional
Investments.

• Regulating the business in Stock Exchanges and any other security market
• Registering and regulating the working of intermediaries and KEY player
• Registering and regulating the working of collective investment schemes like
mutual funds
• Prohibiting fraudulent activities in the security market
• Prohibiting insiders trading in securities
• Stabilizing Prices
• Promoting investors education
• Inspecting and inquiries on regular
basis
• Regulating substantial acquisition of
shares and take overs
• Levying fees or other charges
• Conducting research
Functions of SEBI

SEC – Securities and Exchange Commission
US Stock
Market Cap
(2012):
$ 18,600
Billion
~ 40% of
the World
Stock
Market
Cap.

SEC is an agency of
the US Federal
Government, that was
created by Section 4
of the Securities
Exchange Act of 1934.
The SEC is in charge of implementing the federal
securities laws, recommending securities rules,
and regulating the securities industry, the
nation's stock and options exchanges, and other
activities and organizations, including the
electronic securities markets in the US.

SEC brings civil enforcement
actions against individuals or
companies alleged to have
committed accounting fraud,
provided false information, or
engaged in insider trading or
other violations of the
securities law.
Quarterly and
semiannual
reports from
public
companies are
crucial and
monitored by
SEC.
The SEC makes
reports available to
the public through the
EDGAR system. The
SEC also offers
publications on
investment-related
topics for public
education.

Insider Trading
ORDINARY INVESTORS
Public
information
Non public
information
INSIDER TRADER
+
Public
information
VS
Investor with insider information could
potentially make far larger profits that a
typical investor could not make. This is
unfair to other investors.
IN THE UNITED STATES AND SEVERAL
OTHER JURISDICTIONS, TRADING
CONDUCTED BY CORPORATE OFFICERS,
KEY EMPLOYEES, DIRECTORS, OR
SIGNIFICANT SHAREHOLDERS MUST BE
REPORTED TO THE REGULATOR OR
PUBLICLY DISCLOSED.

Insider Trading Cases
• On October 16, 2009, defendants Raj Rajaratnam, Rajat Gupta
and Anil Kumar were arrested and indicted for insider trading
and conspiracy.
• The charges stemmed from an investigation by the United
States Attorney's Office into allegations that Rajaratnam
conspired in insider trading of stock for several large
companies.
United States
Attorney's Office
Raj Rajaratnam
16th
Oct,
2009
Rajat Gupta Anil Kumar
VS

THE LOOT:
The total profits in the
scheme were over
$60 million.
The largest hedge
fund insider trading
case in United
States history!!
Rajaratnam allegedly profited from information
received from:
• Robert Moffat, a senior executive of IBM
considered next in line to be CEO
• Kumar, a senior executive of McKinsey who was
later also accused of passing information to
Rajaratnam
• Rajiv Goel, a midlevel Intel Capital executive
• Roomy Khan, previously convicted of wire fraud
for providing inside information from her
employer, Intel, to Rajaratnam
SOURCES OF
INFORMATION

Jan,
2010
In January 2010, Kumar pleaded guilty to
insider trading charges.
Mar,
2011
Kumar was the government’s star witness in
March, 2011.
Jan,
2011
Danielle Chiesi, who worked as an analyst at
New Castle Funds LLC in New York, pled guilty to
conspiracy before the trial admitting she
solicited inside tips from technology industry
executives.

The government used wiretap evidence to
show that Gupta leaked news about
Goldman's finances, including a crucial
investment by prominent investor Warren
Buffett's Berkshire Hathaway Inc, by phone
to Galleon Group hedge fund founder Raj
Rajaratnam.
The government accused Mr Gupta of
tipping off Mr Rajaratnam of Warren Buffet's
decision to invest $5 billion in Goldman Sachs. Mr
Gupta allegedly learned this information on
September 23 in 2008 at a board meeting. His tip
allegedly allowed Mr Rajaratnam to buy the stock
before the news was made public the next day. Mr
Rajaratnam made a profit of $800,000 in just 24
hours.
March
2011
23rd
Sept,
2008

Gupta was found guilty on June 15, 2012 and
was acquitted on two counts of securities fraud
in federal court in New York. He was also
ordered to make $6 million in restitution to
Goldman and pay a $5 million fine. Gupta is
scheduled to be released from prison in March
2016.
After trial, Rajaratnam was found guilty of all
charges and sentenced to 11 years in prison
for profiting from tips he received from
Robert Moffat, Anil Kumar, Rajiv Goel, and
Roomy Khan.
May,
2011
15th
June,
2012
20th
July,
2011
Danielle Chiesi was sentenced to 30 months in
prison with 2 years of supervised release.

VS
SEBI Reliance Petroinvestments (RPIL)
Headed by Mukesh Ambani
THE PENALTY:
SEBI fined Reliance Industries
group entity Reliance
Petroinvestments (RPIL)
Rs. 11 Crores
Violating insider
trading norms in the
shares of erstwhile
IPCL before its merger
with RIL.
THE CHARGE:

46%
RPIL, the promoter,
held a major portion
of IPCL shares
RPIL was inherently
expected to have access to
price sensitive information
The findings of the investigation led
to the allegation that RPIL was in
the possession of unpublished price
sensitive information while trading
in the scrip of IPCL prior to
announcement of declaration of
interim dividend and amalgamation
of IPCL with Reliance Industries
which resulted in violation of
regulation 3 of SEBI.
THE LOOT:
RPIL generated a profit of
about Rs. 3.82 crore
through the trades related
to insider trading between
February and March 2007.

&
Thank
You
For Your
Attention

Market Participants-
Providing the
Infrastructure

Registrars
A Registrar is an institution or
organization that is responsible
for keeping records of
bondholders and shareholders.
What does a Registrar do?
• Tally and analyze the applications
• Execute the procedures decided upon for provisional allotment for
submission to the issuing house
• Send out stock certificates to successful investors upon confirmation of the
clearance of the allotment proposal by SEC
• Verify ownership in the dematerialization process

Custodians
A custodian bank, or simply custodian, is a specialized
financial institution responsible for safeguarding a firm's
or individual's financial assets.
A custodian is not necessarily
engaged in "traditional" commercial
or consumer/retail banking.
Custodian banks are referred to as global custodians if
they safe keep assets for their clients in multiple
jurisdictions around the world, using their own local
branches or other local custodian banks with which
they contract to be in their "global network" in each
market to hold accounts for their respective clients.
GLOBAL
CUSTODIAN

Brokers and Dealers
Clients
Members
licensed to sell
securities
Broker /Dealer
Regulatory Bodies
Structure of the Financial Industry
A
broker/dealer
is the catalyst
for financial
transactions
Buyer
Broker
Stock
Exchange
Broker
Seller

Market Participants – Brokers and Dealers
Broker-dealer can be an individual, a company or other organization that
engages in the business of trading securities for its own account or on behalf
of its customers.
Corporations Individuals
TRADING SECURITIESBROKER/DEALERSCLIENTS
Broker / Agent
Dealer/ Principal
When executing trade orders on behalf
of a customer, the institution is said to
be acting as a Broker or Agent
When executing trade orders from
their own investments, the institution
is said to be acting as a Dealer or
Principal.

Functions of Brokers and Dealers
Functions of a dealer/broker
Renders advisory and
investment
management services to
clients
Performs custodial
roles for clients
Investment adviser in
the government’s
privatization program
Collects and
revalidates dividends
for clients
Provides facility for
margin accounts

Functions of Brokers and Dealers (Contd.)
Functions of a dealer/broker
Act as stockbroker for
public issues (IPO,
Rights issues)
Builds on contacts with
Institutional investors
Advises companies on the type
of securities that may be
offered with the best chance of
market acceptance, amount
and timing of issue
Undertakes
reorganization exercise
for both public and
private sectors
Advises and participates in
offer for subscription, mergers
and acquisition, future
expansion programme etc

Trustee
BOND ISSUER BOND HOLDERSTRUSTEE
Trust Deed
Contractual obligations of
borrowers and lenders
There is a need to set out the contractual obligations of borrowers and
lenders. This is constituted in a document called the “Trust Deed.”
Bond Issue
A Trustee is required when
a bond is to be issued
Trust Deed

Trustee
A Trust Deed contains the following information
Restriction imposed on
the borrower, usually
referred to as the
covenant
Creditors protection
with regards to future
additional borrowing
by borrower
Interest payment
terms – coupon rate
and when payable
Assets to be
pledged as
security
Principal
repayment
terms
Rights of
creditors in case
of default
Bondholders
details who are
many and
dispersed
Hence, a Trustee is appointed to protect and enforce the rights of the bondholders as
contained in the Trust Deed.

Depositories
INVESTORS DEPOSITORIES
Securities
Certificated or un-certificated (dematerialized) form
Easy transfer of ownership through a book entry
rather than the transfer of physical certificates.
A depository is a specialist financial organization holding securities such as shares
either in certificated or un-certificated (dematerialized) form so that ownership can be
easily transferred through a book entry rather than the transfer of physical certificates.

Functions
Just Like a
Bank
Features of Depositories
• Depository holds securities in accounts for its clients.
• A Depository transfers securities between accounts.
• The transfer of funds or securities happens without the actual handling of funds
or securities.
• Both the Banks and the Depository are accountable for the safe keeping of funds
and securities respectively
SECURITIES IN A
CENTRALIZED
LOCATION
Investor A
Investor C
Investor B
Transfer securities
between accounts

Benefit of Depositories
• It allows brokers and financial companies to hold their securities at one
location where they can be available for clearing and settlement.
• Clearing and settlement is usually done electronically making it much faster
and easier than was traditionally the case where physical certificates had to be
exchanged after a trade had been completed.
CENTRAL
LOCATION
CLEARING & SETTLEMENT

More on Depositories
Types
National International
EXAMPLES
MAY BE FOR A SPECIFIC TYPE
OF SECURITY

Central Depositories
Central
Depository
Brokers
Financial Institutions
Clearance
Settlement
Securities Borrowing
& Lending
CLIENTS
FUNCTIONS
• Central depository is a facility for holding securities, which enables
securities transactions to be processed by book entry.
• Physical securities may be immobilized by the Depository or securities
may be dematerialized.
• In addition to safekeeping, a central depository may incorporate
custodian, clearing and settlement functions.
• A Depository is an organization like a Central Bank where the securities
of a shareholder are held in electronic form through the medium of a
Stock broking firm/Depository Participant.
• It is a centralized bank for shares.

NSDL is an Indian Central Securities
Depository established in 1995.
It handles most of the securities and
settles in dematerialized form.
NSDL – National Securities Depository Ltd
Issuer
Exchange
DP DP
Broker
/CM
Investor
Investor
Accounts:
13.1
Million
More than
12,000
companies
dematted

NSDL Promoters and Shareholders
Promoter of NSDL are:
Industrial Development
Bank of India Ltd. (IDBI
bank)
Unit Trust of India
National Stock Exchange
of India Ltd.
PROMOTERS
SHAREHOLDERS
State Bank of India
Oriental Bank of Commerce
Citibank
Standard Chartered Bank
HDFC Bank Limited
The Hong kong and Shanghai
Banking Corporation Limited
Deutsche Bank
Dena Bank
Canara Bank
Union Bank of India

CDSL- Central Depository Services Ltd
• CDSL is the second Indian Central securities depository
• Its main function is the holding securities either in certificated or uncertificated
(dematerialized) form, to enable book entry transfer of securities.
• Promoter of CDSL are:
• Bombay Stock Exchange Limited
• Bank of India,
• Bank of Baroda,
• State Bank of India and
• HDFC Bank
• Share holders of CDSL are :
• Standard Chartered Bank
• Centurion Bank of Punjab Ltd
• Canara Bank
• Union Bank of India
• Bank of Maharashtra
• Jammu and Kashmir Bank Limited
• The Calcutta Stock Exchange Association Limited
• Others

Depository Participant
• A Depository Participant (DP) is an agent of the depository through which it
interfaces with an investor.
• A DP can offer depository services only after it gets proper registration from SEBI.
• A DP is just like a Branch of a Bank.
• In terms of the Depositories Act, 1996, SEBI (Depositories & Participants)
Regulations,1996, only the following entities are eligible to become a Depository
Participant:
• Financial Institutions,
• Banks, including approved foreign bank
• Custodians,
• Stockbrokers,
• A clearing corporation or a clearing house of a stock exchange
• A non-banking finance company,
• A registrar to an issue or share transfer agent

Market Participants – Clearing Agents
• A clearing house is a financial institution that provides clearing and settlement
services for financial and commodities derivatives and securities transactions.
• Transactions undertaken may be executed on a futures exchange or securities
exchange, as well as off-exchange in the over-the-counter (OTC) market.
• The executed trade can be handed over to a clearing house, which then steps
between the two original traders' clearing firms and assumes the legal
counterparty risk for the trade. This process of transferring the trade title to the
clearing house is called Novation.
• In the United States, stock clearing can be done by The Depository Trust &
Clearing Corporation or Fedwire. In Europe, securities clearing is offered by EMCF,
LCH.Clearnet, SIX x-clear and EuroCCP.

Who is a Lead Manager?
Lead managers are
independent financial
institutions appointed by the
company going public to
manage the IPO. They are the
main body responsible for most
of the IPO processing.
In the pre-issue process, the
Lead Manager (LM) takes up
the due diligence of company's
operations/ management/
business plans/ legal etc.
They are also known as Book
Runners , Underwriters,
Merchant Bankers, Investment
Bankers.
Issuer Company can appoint
more then one lead manager to
manage big IPO's i.e. Reliance
Power IPO came in Jan 2008
had 10 Book Running Lead
Managers.

Functions of Lead Manager in an IPO
Drafting and designing of Offer documents, Prospectus, statutory
advertisements and memorandum containing salient features of the
Prospectus.
LMs are responsible to write the Red Herring Prospectus (RHP) and get it
approve by SEBI.
Help company in selling the IPO Shares, finalize the issue price, issue opening &
closing dates, listing date etc.
The post issue activities including management of escrow accounts, coordinate
non-institutional allocation, intimation of allocation and dispatch of refunds to
bidders etc are performed by the LM.
Finalization of trading and dealing of instruments and dispatch of certificates
and demat of delivery of shares, with the various agencies connected

Quiz
1. SEBI can give exception to certain companies from disclosing their financial
statements.
 True
 False
2. Investors come on the demand side of the capital market
 Yes
 No
3. When does Registrar send out stock certificates to successful investors?
 Post Application
 Post Subscribing
 Clearance of the allotment proposal by SEC
 Never

Quiz
4. When executing trade orders on behalf of a customer, the institution is said to be…?
 Registrar
 Broker
 Issuer
 None of the above
5. The institute which is responsible for safeguarding a firm's or individual's financial
assets and is ….
 Broker
 Registrar
 Depository
 Custodian

Quiz
6. A Depository Participant doesn’t need registration from SEBI.
 True
 False
7. Which of the below statement is true.
 Depository is a centralized bank for shares
 Custodian is the institute responsible for dematerialized transfer of shares
 Registrar can act as an investor
 None of the above

Financial systems role of market participants

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Similar to Financial systems role of market participants

Similar to Financial systems role of market participants (20)

More from Learning Imarticus

More from Learning Imarticus (6)

Recently uploaded

Recently uploaded (20)

Financial systems role of market participants