A 2 - Roles and Functions of Various Participants in Financial Market

roles and functions of various participants in financial market.
1. Banks:
Banks participate in the capital market and money market. Within the capital market, banks take active
part in bond markets. Banks may invest in equity and mutual funds as a part of their fund management.
Banks take active trading interest in the bond market and have certain exposures to the equity market also.
Banks also participate in the market as clearing houses.
2. Primary Dealers (PDs):

PDs deal in government securities both in primary and secondary markets. Their basic responsibility is to
provide two-way quotes and act as market makers for government securities and strengthen the
government securities market.
3. Financial Institutions (FIs):

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FIs provide/lend long term funds for industry and agriculture. FIs raise their resources through long-term
bonds from financial system and borrowings from international financial institutions like International
Finance Corporation (IFC), Asian Development Bank (ADB) International Development Association (IDA),
International Bank for Reconstruction and Development (IBRD), etc.
4. Stock Exchanges:
A Stock exchange is duly approved by the Regulators to provide sale and purchase of securities by “open
cry” or “on-line” on behalf of investors through brokers. The stock exchanges provide clearing house
facilities for netting of payments and securities delivery. Such clearing houses guarantee all payments and
deliveries. Securities traded in stock exchanges include equities, debt, and derivatives.
Currently, in India, only dematerialized securities are allowed to be traded on the stock exchanges.
Settlement in securities account is made by depositories through participants’ accounts. It is essential that
stock exchanges are corporatised and de-mutualised so that there can be greater transparency in the trades
and better governance in markets.
5. Brokers:
Only brokers approved by Capital Market Regulator can operate on stock exchange. Brokers perform the
job of intermediating between buyers and seller of securities. They help build up order book, price
discovery, and are responsible for a contract being honoured. For their services brokers earn a fee known as
brokerage.
6. Investment Bankers (Merchant Bankers):

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These are agencies/organisations regulated and licensed by SEBI, the Capital Markets Regulator. They
arrange raising of funds through equity and debt route and assist companies in completing various for-
malities like filing of the prescribed document and other compliances with the Regulator and Regulators.
They advise the issuing company on book building, pricing of issue, arranging registrars, bankers to the
issue and other support services. They can underwrite the issue and also function as issue managers. They
may also buy and sell on their account.
As per regulatory stipulations, such own account business should be separately booked and confined to
scrip’s where insider information is not available to the investment/merchant banker.
Investment/Merchant banking can be an exclusive business. A bank can also undertake these activities.
7. Foreign Institutional Investors (FIIs):

FIIs are foreign based funds authorized by Capital Market Regulator to invest in countries’ equity and debt
market through stock exchanges. They are allowed to repatriate sale proceeds of their holdings, provided
sales have been made through an authorized stock exchange and taxes have been paid. FIIs enjoy de-facto
capital account convertibility.
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FII operations provide depth to equity and debt markets and result in increased turnover. In India, these
activities have brought in technological advancements and foreign funds in equity and debt market.
8. Custodians:
Custodians are organizations which are allowed to hold securities on behalf of customers and carry out
operations on their behalf. They handle both funds and securities of Qualified Institutional Borrowers
(QIBs) including FIIs.
Custodians are supervised by the Capital Market Regulator. In view of their position and as they handle the
payment and settlements, banks are able to play the role of custodians effectively. Thus most banks perform
the role of custodians.
9. Depositories:
Depositories hold securities in demat (electronic) form, maintain accounts of depository participants who,
in turn, maintain accounts of their customers. On instructions of stock exchange clearing house, supported
by documentation, a depository transfers securities from buyers to sellers’ accounts in electronic form.
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Depositories are important for ensuring efficiency in the market. They facilitate lending against securities
and ensure avoidance of settlement risk or bad delivery.

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roles and functions of various participants in financial market.

2. Primary Dealers (PDs):

3. Financial Institutions (FIs):

6. Investment Bankers (Merchant Bankers):

7. Foreign Institutional Investors (FIIs):

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