From Stockbrokers to Merchant Bankers – Understanding the Intermediaries Involved in the Stock Market

As soon as you dip your feet into the stock market, the first action you take, such as from opening a Demat account, buying a stock, holding it and eventually selling it one day, many corporate bodies are actively involved in the whole process.

Quietly behind the scenes, these entities ensure the smooth processing of transactions as well as compliance with SEBI rules and regulations. These entities are none other than financial intermediaries.

By working together, these interdependent intermediaries create an ecosystem in which stock markets exist and function. Curious to know who they are?

Read on as we explain the various intermediaries involved in the stock market.

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Also Read: Explained: Sensex, Nifty and Their Role in the Indian Stock Market

1. Stockbroker

One of the most crucial intermediaries that exist and that you should know about is the stockbroker.

A stockbroker is a legal entity, registered as a trading member with the stock exchange, such as NSE, BSE, etc., and most importantly, holds a stockbroker’s license. Securities brokers operate under the guidelines prescribed by market regulator SEBI.

Simply put, a stockbroker is your gateway to the stock exchanges. First, you need to open a trading account with a broker that meets your requirements. The trading account allows you to carry out financial transactions on the market. Through your trading account with the broker, you can buy/sell securities.

When you have a trading account with the broker, you can usually interact with the broker in these ways.

Either you can go to the broker’s office and communicate the actions you want to take, or you can phone your broker and place the order for your trade, or you can even do it yourself. For this method, the broker gives you access to the market via a software called “Trading Terminal”, in which you can place the orders yourself.

And remember that the broker charges fees for the services provided, known as “brokerage fees” or simply brokerage.

2. Custodian and Participants in the Custodian

Can you claim that a property belongs to you without producing proof in the form of ownership papers? No right?

Similarly, when you buy a stock, the only way to claim ownership is to produce your stock certificate, which is a document giving you the right to own shares in a company.

Share certificates are provided in digital form, unlike the early days when they were provided in paper form.

The conversion of a share certificate in paper format into a share certificate in digital format is called “Dematerialization” often abbreviated as DEMAT.

Being digital in nature, the share certificate in DEMAT format must be stored digitally in the storage location called “DEMAT account”.

Next comes the custodian, which is a financial intermediary that offers the service of the Demat account. It is in your Demat account that all the shares you have purchased are present in electronic format. It’s like a digital safe for your shares.

Currently, there are two custodians in India. National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited. Both operate under the regulations of market regulator SEBI.

And what about depository participants (DP)? Just like how you cannot casually walk into the office of BSE or NSE to open a trading account, you cannot walk straight into a custodian to open a DEMAT account. This is exactly why DP is needed. A participating custodian helps you open your DEMAT account with a custodian by acting as agent for the custodian. Just like brokers and custodians, DPs are also governed by the regulations put in place by SEBI.

3. Banks

Needless to say, banks have a very simple role in the stock market ecosystem. They help facilitate the transfer of funds from your bank account to your trading account and your Demat account. You can even link multiple bank accounts to your trading through which you can transfer funds and then trade or invest in the stock market.

Whether you want to buy stocks, invest in mutual funds, sell existing investments, make transactions or receive dividend payments, bank accounts act as both an originating terminal and a terminal.

4. Clearing companies

Another essential intermediary in the stock market is the clearinghouse/companies. As a trader or investor, you usually do not interact directly with clearinghouses, which is why many of you may be unaware of this middleman.

The job of clearing houses is to settle your exchanges/transactions. They do this by identifying the buyer and the seller, and then combining the debit and credit process to complete the order settlement in a timely manner, without any defects. They too work under the guidelines of market regulator SEBI.

Currently, there are three clearinghouses/companies in the stock market: NSE Clearing Limited, MCXCCL and ICCL.

NSE Clearing Limited and Indian Clearing Corporation Limited are wholly owned subsidiaries of the National Stock Exchange and the Bombay Stock Exchange, respectively.

While the relatively recent entrant MCXCCL, which became the first Indian clearing house in the commodity derivatives market in 2018, is a wholly owned subsidiary of Multi Commodity Exchange of India Ltd (MCX).

Understanding stock market intermediaries
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In addition to these intermediaries, which for the most part come under the secondary market, financial intermediaries under the primary stock market are no less important. These include a wide range of intermediaries, such as investment bankers, registrars, underwriters, issue bankers, etc.

To find out more about how the stock market works, Click here.

And now. After the secondary market, let’s understand the key intermediaries of the primary stock market.

5. Merchant Banker

The key role of investment bankers is to act diligently when preparing the offering document containing all the required details about the company that is going to be issued on the primary stock market. Also, investment bankers are responsible for ensuring compliance with legal formalities throughout the issuance process as well as the marketing of the issue.

Primarily, issues made by a company in the primary stock market include initial public offering (IPO), supplementary public offering (FPO), rights issue, composite issue, bonus issue or private placement.

6. Registrars at issue

This intermediary is involved in finalizing the attribution basis of a show, in addition to handling the sending of refunds, attribution details, etc.

7. Bankers on issue

These enable the movement of funds in the issuance process and therefore enable and facilitate registrars to finalize the allocation basis by making available to issuance registrars the status funds available.

8. Subscribers

Another key intermediary is the underwriter. The underwriters dictate the overall issuance and distribution of shares on behalf of the company. But their role is usually most vital at the IPO stage. After determining IPO prices for different companies, underwriters tend to self-guarantee the purchase of a specified number of shares,

To cover the risk of estimation deviation, which results in securities that are not fully subscribed by the public, subscribers undertake to subscribe to the specified number of securities offered by the issuing company.

Also read: 3 impulsive steps to avoid when the market is bleeding red

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Dolores W. Simon