CHAPTER 2:

MARKET PARTICIPANTS IN THE

SECURITIES MARKET

FINGROCER
 2.1 Introduction
• As already discussed in the previous chapter, in every economic system, there are savers (who are
surplus‐generators) and there are spenders (deficit‐generators).
• Securities market provides a platform for savers to place their surplus funds in financial claims or securities at the
disposal of the spenders and in turn get benefits such as interest, dividend, capital appreciation, bonus etc.
• These investors and issuers of financial securities constitute two important elements of the securities markets.
• Another important element of the markets are the intermediaries who act as conduits between the investors and
issuers.
• Regulatory bodies, which regulate the functioning of the securities markets, constitute another significant
element of securities markets. The process of mobilization of resources is carried out under the supervision and
overview of the regulators.
• The regulators develop fair market practices and regulate the conduct of issuers of securities, investors and the
intermediaries. They are also in‐charge of protecting the interests of the investors.
• The regulator ensures a high service standard from the intermediaries and supply of quality securities and
non‐manipulated demand for them in the market. Thus, the four important participants of securities markets are
the investors, the issuers, the intermediaries and regulators. We now discuss these different participants in detail
in the following sections.
 2.2 Investors

• An investor is the backbone of the securities market in any economy as he is the one giving
Surplus resources for funding to companies(for their set‐up or for expansion plans) in
return for financial gains. Investors in securities market can be broadly classified into Retail
Investors and Institutional Investors.
• Retail Investors are those individual investors who buy and sell securities for their personal
account, and not for another company or organization. This category also includes high
networth individuals (HNI) which comprises people who invest above rupees two lakh in a
single transaction.
• Institutional Investors comprises domestic financial institutions (DFIs), banks, insurance
companies, mutual funds and Foreign Portfolio Investors (a FPI is an entity established or
incorporated outside India that proposes to make investments in India).
• SEBI (Foreign Portfolio Investors) Regulations, 2019, specifies the categories of FPI.
 2.3 Issuers
• The public and private sector enterprises, banks and other financial institutions
tap the securities market to finance their capital expansion and growth plans.
Even mutual funds which are an important investment intermediary mobilises the
savings of the small investors. Funds can be raised in the primary market from the
domestic market as well as from international markets.
• Indian companies can also raise resources from international capital markets
through Global Depository Receipts (GDRs)/American Depository Receipts (ADRs),
Foreign Currency Convertible bonds (FCCBs) and External Commercial Borrowings
(ECBs).4
• To learn more about the different international market instruments for raising
capital from overseas market please see Box 2.1.
Box 2. 1: Instruments for raising capital from
overseas markets
• Global Depository Receipts (GDRs) are equity instruments issued abroad by authorized overseas corporate
bodies against the shares/bonds of Indian companies held with nominated domestic custodian banks.
• American Depository Receipts (ADRs) are negotiable instruments, denominated in dollars and issued by the
US Depository Bank.
• Foreign Currency Convertible Bonds (FCCBs) are bonds issued by Indian companies and subscribed to by a
non‐resident in foreign currency. They carry a fixed interest or coupon rate and are convertible into a
certain number of ordinary shares at a predetermined price.
• External Commercial Borrowings (ECBs) are commercial loans (in the form of bank loans, buyers credit,
suppliers credit, securitized instruments, floating rate notes and fixed rate bonds) availed from any
internationally recognized source such as bank, export credit agencies, suppliers of equipment, foreign
collaborators, foreign equity holders and international capital market. Indian companies have preferred this
route to raise funds as the cost of borrowing is low in the international markets.

Latest reforms in the market has allowed foreign companies to raise capital from Indian
markets. They can issue IDR (Indian Depository Receipts). This will be in rupee terms.
Standard Chartered Bank is the first entity to raise capital through issuing IDR.
 Regulations for Issuers:
• To raise resources, issuers have to adhere to different SEBI regulations which have been discussed here
very briefly:
• SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018
• SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018 hereinafter referred to as ICDR
Regulations lays down general conditions for capital market issuances like public and rights issuances;
eligibility requirements; general obligations of the issuer and intermediaries in public and rights
issuances; regulations governing preferential issues, qualified institutional placements and bonus
issues by listed companies; issue of IDRs etc.
• ICDR Regulations also have detailed requirements laid out with respect to disclosure and process
requirements for capital market transactions by listed and unlisted companies.
• While the eligibility and disclosure obligations are applicable to the Issuer, in capital market
transactions, the role of the merchant banker/ lead manager/ book runner is extremely important
since they perform the role of agents in capital market transactions and are registered entities with
SEBI.
SEBI (Listing Obligations and Disclosure
Requirements) Regulations, 2015
• Issuer or the issuing company desirous of listing its securities on a
recognised stock exchange shall execute a listing agreement with such
stock exchange in terms of the SEBI (Listing Obligations and Disclosure
Requirements) Regulations, 2015.
• As per the regulations, the company is required to obtain ‘in‐principle
approval for listing from the exchanges having nationwide trading
terminals where it is listed, before issuing further shares or securities.
Where the company is not listed on any exchange having nationwide
trading terminals, it agrees to obtain such ‘in‐principle’ approval from all
the exchanges in which it is listed before issuing further shares or
securities.
2.4Market Structure and Participants

• Intermediation is the process of enabling the saver or buyer of

securities (through information and facilitation) to buy or sell the
securities and help them acquire all the rights related to the security.
• The intermediaries play a very important role in the securities market;
they put together the demands of the buyers with the offers of the
security sellers. A large variety and number of intermediaries provide
intermediation services in the Indian securities markets.
2.4.1 Market Infrastructure Institutions (Stock
Exchange, Clearing Corporations and
Depositories)
• Stock Exchanges
• The stock Exchanges provide a trading platform where the buyers and sellers(investors) can meet to transact in securities. Earlier
investors and stock brokers met in the trading hall or the “Ring” of the Stock Exchanges to transact in stocks, whereas in the modern
world, on‐ line trading takes through computers connected through VSATs, leased lines and Internet.
• The Securities Contract (Regulation) Act, 1956 (SCRA) defines ‘Stock Exchange’ as (a) any body of individuals, whether incorporated or
not, constituted before corporatisation and demutualisation under sections 4A and 4B, or
• (b) a body corporate incorporated under the Companies Act, 1956 (1 of 1956) whether under a scheme of corporatisation and
demutualisation or otherwise, for the purpose of assisting, regulating or coordinating the business of buying, selling or dealing in
securities.

• Clearing Corporation
• A Clearing Corporation performs three main functions, namely: clearing and settlement of all transactions executed in the stock
market (i.e. completes the process of receiving and delivering shares/funds to the buyers and sellers in the market) and carrying out risk
management. The Clearing Corporation acts as a central counterparty i.e. it provides financial guarantee for all transactions executed
on the Exchange. This process is called novation.
• The clearing agency determines fund/security obligations and arranges for pay‐in of the same.5
• It collects and maintains margins, processes for shortages in funds and securities. For carrying out settlement of trades, the clearing
corporation is helped by the clearing members, clearing banks, custodians and depositories. Thus, these entities are also important
intermediaries of securities market.
 Depository
• There are two Depositories in India, Central Depository Services Limited (CDSL) and National
Securities Depository Limited (NSDL), which were established under the Depositories Act 1996, for
the purpose of facilitating dematerialisation of securities and assisting in trading of securities in the
dematerialised form. The Depository provides its services to clients through its agents called
depository participants (DPs).
• These agents are appointed by the depository with the approval of SEBI. According to SEBI
regulations, amongst others, three categories of entities, i.e. Banks, Financial Institutions, NBFCs
and SEBI registered trading members can become DPs.
• Besides providing custodial facilities and dematerialisation, depositories offer various transactional
services to its clients to effect buying, selling, transfer of shares etc. Through a system of paperless
securities, depositories have facilitated smooth securities market operations for Stock Exchanges,
clearing houses/corporations, stock broking firms, equity issuing companies, share transfer agents
etc.
 2.4.2 Market Participants
• 2.4.2.1 Trading Member /Clearing Member
• An important constituent of the securities market is a trading member/ stock broker who is a
member of the stock exchange.
• A trading member is allowed to buy and sell securities on stock exchanges on behalf of
individuals and institutions. A trading member can be an individual (sole proprietor), a
partnership firm, corporate or a bank who is a member of a Stock Exchange6.
• Sub‐broker is not a member of a Stock Exchange but acts on behalf of a trading member as
an agent for assisting the investors in buying, selling or dealing in securities through such
trading members.
• Clearing Members help in clearing of the trades.
• There are three kinds of clearing member‐
➢Professional Clearing Members (PCM),
➢Trading Cum Clearing Member (TCM) and
➢Self Clearing Member (SCM).
• Professional Clearing Members and Trading cum Clearing Members
• Professional Clearing Members (PCM) has the right only to clear
trades. The PCM does not have any kind of trading rights. These types
of members can clear trades of all members associated with him.
• SEBI registered Custodians and Banks registered by the Exchange are
eligible to become Professional Clearing Members (PCMs).
• Trading cum Clearing member (TCM) has both trading and clearing
rights. He can clear his own trades as well as the trades of others. Any
member of the equity segment of the Exchange is eligible to become
trading cum clearing member of the Derivatives Segment.
• Custodians
• Custodians are also clearing members like PCMs but not trading
members. They settle trades on behalf of the clients of the trading
members, when a particular trade is assigned to them for settlement.
The custodian is required to confirm whether he is going to settle that
trade or not.
• Self‐Clearing Members (SCM)
• As the name implies, self‐clearing members can clear the trades done
by him. The only difference between SCM and TCM is that SCM does
not have the rights to clear the trades of other members; he can only
clear his own trades, whereas TCM can clear the trades of any other
member.
• Any member of the cash segment of the Exchange is eligible to become
Self‐Clearing member of the Derivatives Segment.
• Eligibility Criteria for a Trading Member
• The admission as a trading member on the Stock Exchanges is based
on the various criteria like age, capital adequacy, financial track
record, education, experience and fulfillment of criteria of “fit &
proper person” as laid down in the SEBI (Intermediaries) Regulations,
2008.
• The Exchanges may stipulate additional requirements over and above
the SEBI prescribed rules
 2.4.2.2 Custodian
• A Custodian is an entity that is responsible for safeguarding the securities of its clients.
• Besides safeguarding securities, a custodian also keeps track of corporate actions on behalf of
its clients. It also helps in:
➢Maintaining a client’s securities account
➢Collecting the benefits or rights accruing to the client in respect of securities
➢Keeping the client informed of the actions taken or to be taken by the issuer of securities,
having a bearing on the benefits or rights accruing to the client.
• Custodians are clearing members but not trading members. They settle trades on behalf of
the clients of the trading members, when a particular trade is assigned to them for
settlement. The custodian is required to confirm whether he is going to settle that trade or
not. In case the custodian fails to confirm then the onus of settling the trade falls on the
trading member who has executed the trade.
 2.5 Regulators
• The regulators in the Indian securities market ensures that the market participants behave in a desired manner so
that securities market continue to be a major trusted source of finance for corporates and Government and the
interest of investors are protected. The different regulators who regulate the activities of the different sectors in
the financial market are as given below:
➢ Securities and Exchange Board of India (SEBI) regulates the securities market and the commodity derivatives
market.
➢ Reserve Bank of India (RBI) is the authority to regulate and monitor the banking sector.
➢ Insurance Regulatory and Development Authority of India (IRDAI) regulates the insurance sector.
➢ Pension Fund Regulatory and Development Authority (PFRDA) regulate the pension fund sector.
➢ Ministry of Finance (MOF)
➢ Ministry of Corporate Affairs (MCA)
• We would be discussing about the role of SEBI as it is the regulatory authority for the securities market in India.
• The orders of SEBI under the securities laws are appealable before a Securities Appellate Tribunal (SAT). Most of
the powers under the SCRA are exercisable by the Department of Economic Affairs (DEA) of Ministry of Finance
while a few others by SEBI. The powers of the DEA under the SCRA are also concurrently exercised by SEBI.
• The powers in respect of the contracts for sale and purchase of securities,
gold related securities, money market securities and securities derived from
these securities and ready forward contracts in debt securities are exercised
concurrently by RBI.
• The SEBI Act and the Depositories Act are primarily administered by SEBI. The
rules under the securities laws are framed by Government and regulations by
SEBI.
• All these are administered by SEBI. The powers under the Companies Act
relating to the issue and transfer of securities and non‐payment of dividend
are administered by SEBI in case of listed public companies and public
companies proposing to get their securities listed. The Self Regulatory
Organizations (SROs) ensure compliance with their own rules as well as with
the rules relevant for them under the securities laws.
 2.5.1 Role of Securities Exchange Board of India (SEBI)
• The Securities and Exchange Board of India (SEBI) is the regulatory authority in India established under
Section 3 of SEBI Act, 1992 under an Act of Parliament. SEBI’s primary role is to protect the interest of
the investors in securities and to promote the development of securities market and regulate the
securities market, by measures it thinks fit.
• Role of SEBI:
➢ Protecting the interests of investors in securities.
➢ Promoting the development of the securities market.
➢ Regulating the business in stock exchanges and any other securities markets.
➢ Registering and regulating the working of stock brokers, sub–brokers etc.
➢ Promoting and regulating self‐regulatory organizations
➢ Prohibiting fraudulent and unfair trade practices
➢ Calling for information from, undertaking inspection, conducting inquiries and audits of the stock
exchanges, intermediaries, self‐regulatory organizations, mutual funds and other persons associated with
the securities market
• 2.5.2 Regulatory Framework for Securities Market
• The process of liberalization of the Indian securities market started in
1992. The aim was to liberalize the securities market, ensure protection
of the interests of the investor, to have a regulated market and to
develop the securities market. Various Acts were promulgated and
legislations amended towards this goal.
• The four main Acts governing the securities market are:
1. The SEBI Act, 1992
2. The SC(R)A, 1956
3. Securities Contracts (Regulation) (Stock Exchanges and Clearing
Corporations) Regulations, 2017
4. The Depositories Act, 1996
5. The Companies Act, 2013.
• Apart from the four Acts the following Regulations are also of high
importance in the regulation of Indian Securities Markets:
• SEBI (Stock Brokers) Regulation, 1992
• SEBI (Prevention of Insider Trading) Regulations, 2015
• The Prevention of Money laundering Act, 2002
• SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to
the Securities Market) Regulations 2003
• SEBI (Custodians) Regulation, 1996
• SEBI (Substantial Acquisition of Shares and Takeovers) Regulations,
2011
• SEBI Act, 1992
• The SEBI Act, 1992 was enacted to empower SEBI with statutory powers for
• (a) Protecting the interests of investors in securities,
• (b) Promoting the development of the securities market, and
• (c) Regulating the securities market.
• Its regulatory jurisdiction extends over corporates (who list or propose to list their
securities) in the issuance of capital and transfer of securities, in addition to all
intermediaries and persons associated with securities (more specifically the capital market)
market.
• It can conduct enquiries, audits and inspection of all concerned and adjudicate offences
under the Act. It has powers to register and regulate all market intermediaries and also to
penalise them in case of violations of the provisions of the Act, Rules and Regulations made
thereunder.
• SEBI has full autonomy and authority to regulate and develop an orderly securities market.
• Securities Contracts (Regulation) Act, 1956
• It provides for direct and indirect control of virtually all aspects of securities trading
and the running of Stock Exchanges and aims to preventing undesirable
transactions in securities.
• It gives Central Government the regulatory jurisdiction over‐
• (a) Stock Exchanges through a process of recognition and continued supervision
• (b) Contracts in securities, and
• (c) Listing of securities on Stock Exchanges
• As a condition of recognition, a Stock Exchange complies with conditions
prescribed by Central Government.
• Organized trading activity in securities takes place on a specified recognized stock
Exchange. The Stock Exchanges determine their own listing regulations which have
to conform to the minimum listing criteria set out in the Rules.
➢ Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2017
➢ The Securities Contract (Regulation) (Stock Exchanges and Clearing Corporations) Regulations,
2012 (SECC Regulations) were notified on June 20, 2012.
• These regulations provide for procedural norms on recognition, networth, ownership and
governance for stock exchanges, and clearing corporations. These regulations provides for
modalities for monitoring shareholding limits and compliance with ‘fit and proper’ criteria for all
shareholders.
• SECC Regulations mandates that the compensation policy for key management personnel of stock
exchange/ clearing corporation to be in accordance with the norms specified by SEBI. These
regulations also enlists the mechanism for listing of stock exchanges.
• The SECC Regulations mandate segregation of regulatory departments in stock exchange from
other departments.
• These regulations are required to be read in conjunction with the SCRA 1956, SCRR 1957, and
other applicable laws.
 Depositories Act, 1996
• The Depositories Act enables the setting up of multiple depositories in the country. This was to
ensure that there is competition in the service and more than one depository in operation. The
Depositories Act facilitated the establishment of the two depositories in India viz., NSDL and CDSL.
• Only a company registered under the Companies Act, 2013 or (hitherto Companies Act 1956) and
sponsored by the specified category of institutions can set up a depository in India.
• Before commencing operations, depositories should obtain a certificate of registration and a
certificate of commencement of business from SEBI. A depository established under the
Depositories Act can provide any service connected with recording of allotment of securities or
transfer of ownership of securities in the record of a depository.
• A depository however, cannot directly open accounts and provide services to clients. Any person
willing to avail of the services of the depository can do so by entering into an agreement with the
depository through any of its Depository Participants.
• The rights and obligations of depositories, depository participants, issuers and beneficial owners
are indicated clearly in this Act.
 Companies Act, 2013
• The Companies Act, 2013 deals with issue, allotment and transfer of securities and various aspects relating to
company management. It provides for standard of disclosure in public issues of capital, particularly in the fields
of company management and projects, information about other listed companies under the same management,
and management perception of risk factors. It also regulates underwriting, the use of premium and discounts on
issues, rights and bonus issues, payment of interest and dividends, providing annual reports and other
information.
• Section 24 of the Companies Act 2013, delegates the power to regulate and transfer securities to SEBI. The
provision contained in chapter VI, section 127 and section 24 shall,‐
• (a) In so far as they relate to –
• (i) issue and transfer of securities; and
• (ii) non‐payment of dividend;
• by listed companies or those companies which intend to get their securities listed on any recognised stock
exchange in India, except as provided under this Act, be administered by the Securities and Exchange Board by
making regulations in this behalf.
• (b) in any other case, be administered by the Central Government.
SEBI (Stock Broker) Regulation, 1992
• The SEBI (Stock Brokers) Regulation, 1992 lays down the rules and regulation for registration of Stock Brokers. It also prescribes
the fees applicable to be paid to SEBI on grant of registration certificate from SEBI and the general code of conduct by the stock
broker holding certificate of membership. The schedule II, regulation 7 of the SEBI (Stock Broker) regulation states that the stock
broker shall ‐‐
➢ “Maintain high standards of integrity, promptitude and fairness in the conduct of all his business.
➢ Act with due skill, care and diligence in the conduct of all his business.
➢ Not indulge in manipulative, fraudulent or deceptive transactions or schemes or spread rumors with a view to distorting market
equilibrium or making personal gains.
➢ Not create false market either singly or in concert with others or indulge in any act detrimental to the investors’ interest or
which leads to interference with the fair and smooth functioning of the market”.
• In its duty to the investor, the stock broker, in his dealings with the clients and the general investing public shall faithfully execute
the orders for buying and selling of securities at the best available market price. The broker as per the regulation shall issue
without delay to his client a contract note for all transactions in the form specified by the exchanges.
• This regulation also prescribes the brokers to maintain the different books of accounts, records and documents. These have been
discussed in the chapter 3, under section 3.4.5. Some good practices to be adhered to by trading members/brokers are given in
Annexure 1.
 Prevention of Money Laundering Act, 2002
• The term money‐laundering offense is defined as “whoever acquires,
owns, possess or transfers any proceeds of crime; or knowingly enters
into any transaction which is related to proceeds of crime either directly
or indirectly or conceals or aids in the concealment of the proceeds or
gains of crime within India or outside India...”
• The Prevention of Money‐Laundering Act, 2002 (PMLA), is an act to
prevent money‐ laundering and to provide for confiscation of property
derived from, or involved in, money‐ laundering and for related matters.
• Section 6 of the PMLA confers powers on the Central Government to appoint an Adjudicating Authority to exercise jurisdiction,
powers and authority conferred by or under the Act.
• According to section 9, in the event of an order of confiscation being made by an Adjudicating Authority (AA) in respect of any
property of a person, all the rights and title in such property shall vest absolutely in the Central Government without any
encumbrances.
• Section 11 of the Act makes it clear that the Adjudicating Authority shall have the same powers as are vested in a civil court under
the Code of Civil Procedure while trying a suit, with regard to the following matters:
• a) Discovery and inspection
• b) Enforcing the attendance of any person, including any officer of a banking company or a financial institution or a company and
examining him on oath
• c) Compelling the production of records
• d) Receiving evidence on affidavits
• e) Issuing commissions for examination of witnesses and documents
• f) Any other matter which may be prescribed
• All the persons summoned as mentioned above shall be bound to attend the proceedings in person or through authorized agents and
shall be bound to state the truth and produce such documents as may be required. Further, every proceeding under the section shall
be deemed to be a judicial proceeding within the meaning of sections 193 and 228 of the Indian Penal Code (IPC).
• Section 12 of the Act stipulates that every reporting entity (i.e. a banking company, financial
institution, intermediary or a person carrying on a designated business or profession) shall‐
• (a) Maintain a record of all transactions, including information relating to transactions in such
manner as to enable it to reconstruct individual transactions. The records shall be maintained for a
period of five years from the date of transaction between a client and the reporting entity.
• (b) Furnish to the Director within such time as may be prescribed, information relating to such
transactions, whether attempted or executed, the nature and value of which may be prescribed; 8
• (c ) Maintain record of documents evidencing identity of its clients and beneficial owners as well as
account files and business correspondence relating to its clients. The records shall be maintained
for a period of five years after the business relationship between a client and the reporting entity
has ended or the account has been closed, whichever is later.
• (d) Every information maintained, furnished or verified, save as otherwise provided under any law
for the time being in force, shall be kept confidential. The Central Government may, by notification,
exempt any reporting entity or class of reporting entities from any obligation.
• Section 12 AA of PMLA stipulates enhanced due diligence by reporting entities.
• 1. Every reporting entity shall, prior to the commencement of each specified transaction,—
• (a) verify the identity of the clients undertaking such specified transaction by authentication
under the Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and
Services) Act, 2016 (18 of 2016) in such manner and subject to such conditions, as may be
prescribed, provided that where verification requires authentication of a person who is not
entitled to obtain an Aadhaar number under the provisions of the said Act, verification to
authenticate the identity of the client undertaking such specified transaction shall be carried
out by such other process or mode, as may be prescribed.
• (b) take additional steps to examine the ownership and financial position, including sources of
funds of the client, in such manner as may be prescribed.
• (c) take additional steps as may be prescribed to record the purpose behind conducting the
specified transaction and the intended nature of the relationship between the transaction
parties.
• The information obtained while applying the enhanced due diligence measures shall be
maintained for a period of five years from the date of transaction between a client and the
reporting entity.
• (2) Where the client fails to fulfil the above conditions, the reporting entity shall not
allow the specified transaction to be carried out. Specified transaction means: any
withdrawal or deposit in cash, exceeding such amount;
• any transaction in foreign exchange, exceeding such amount;
• any transaction in any high value imports or remittances;
• such other transaction or class of transactions, in the interest of revenue or where
there is a high risk of money‐laundering or terrorist financing, as may be
prescribed.
• (3) Where any specified transaction or series of specified transactions undertaken
by a client is considered suspicious or likely to involve proceeds of crime, the
reporting entity shall increase the future monitoring of the business relationship
with the client, including greater scrutiny or transactions in such manner as may be
prescribed.
• Sections 16 and 17 lay down the powers of the authorities to carry out summon,
searches and seizures.
• Section 24 makes it clear that when a person is accused of having engaged in
money‐ laundering, the burden of proving that the proceeds of the alleged crime
are untainted shall be on the accused.
• Sections 25 and 26 relate to the establishment of an Appellate Tribunal and the
procedures for filing an appeal to the same.
• Section 42 deals with appeals against any decision or order of the Appellate
Tribunal.
• Section 43 empowers the Central Government to designate one or more Courts of
Session as Special Courts for the trial of the offence of money‐laundering.
• The offence of money laundering is punishable with rigorous imprisonment for a
term which shall not be less than 3 years but which may extend to 7 years and shall
also be liable to fine.
• SEBI Guidelines on Anti‐Money Laundering
• SEBI has laid down guidelines on Anti‐Money Laundering (AML) Standards and Combating the Financing of Terrorism (CFT) /Obligations of
Securities Market Intermediaries under the PMLA 2002 and Rules framed for all the intermediaries registered with SEBI.
• These guidelines have been divided into two parts; the first part is an overview on the background and essential principles that concern
combating Money Laundering (ML) and Terrorist Financing (TF). The second part provides a detailed account of the procedures and
obligations to be followed by all registered intermediaries to ensure compliance with AML/CFT directives. These guidelines are also
applicable for registered intermediaries ’branches and subsidiaries located abroad, especially, in countries which do not or insufficiently
apply the FATF Recommendations, to the extent local laws and regulations permit. When local applicable laws and regulations prohibit
implementation of these requirements, the same shall be brought to the notice of SEBI. The detailed guidelines can be referred to on SEBI
website.9
• SEBI has issued the KYC Registration Agency (KRA) Regulations, 2011 in exercise of the powers conferred under the SEBI Act. Under the said
Regulations, a KYC Registration Agency (KRA) is a company formed and registered under the Companies Act and granted a certificate of
registration under the KRA Regulations.
• The KRA is required to obtain the KYC documents of the client from the intermediary; as prescribed by the SEBI and in terms of the rules,
regulations, guidelines and circulars issued by SEBI or any other authority for Prevention of Money Laundering, from time to time. Every
individual who wishes to invest in securities markets has to be KYC compliant. An individual has to provide personal details such as name,
address, financial status, occupation and other personal information in the prescribed KYC form. Along with the same, individual investors are
required to produce proof of identity and proof of address, as prescribed, in the form. Non‐individual investors are required to produce
documents relating to its constitution/ registration to fulfil the KYC process.
• SEBI (Prohibition of Insider Trading) Regulations, 2015
• Insider Trading is considered as an offence and is hence prohibited as per the SEBI (Prohibition of Insider Trading) Regulations, 2015. These regulations
came into force with effect from May 2015.
• Any dealing/trading done by an insider based on information which is not available in public domain, gives an undue advantage to insiders and affects
market integrity. This is not in line with the principle of fair and equitable markets. Thus, in order to protect integrity of the market, the SEBI (Prohibition
of Insider Trading) Regulations have been put in place. The
• Regulations lay down the definition of ‘Insiders’; restrictions on communication and trading by insiders; disclosures of trading by them; and the systemic
provisions which need to be laid down and followed by listed company as well as intermediaries.
• Regulation 2(g) of the SEBI Insider regulations, defines an ‘insider’ any person who is:
• i) a connected person; or
• ii) in possession of or having access to unpublished price sensitive information;
• Regulation 2(n) defines unpublished price sensitive information as any information, relating to a company or its securities, directly or indirectly, that is
not generally available which upon becoming generally available, is likely to materially affect the price of the securities and shall, ordinarily including but
not restricted to, information relating to the following:
• (i) financial results;
• (ii) dividends;
• (iii) change in capital structure;
• (iv) mergers, de‐mergers, acquisitions, delistings, disposals and expansion of business and such other transactions;
• (v) changes in key managerial personnel; and
• (vi) material events in accordance with the listing agreement.
• SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities
Market) Regulations, 2018
• The SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities
Market) Regulations 2018 enable SEBI to investigate into cases of market manipulation
and fraudulent and unfair trade practices.
• Regulation 2(1) (c) defines fraud as inclusive of any act, expression, omission or
concealment committed to induce another person or his agent to deal in securities.
There may or may not be wrongful gain or avoidance of any loss. However, that is
inconsequential in determining if fraud has been committed.
• Some of the instances cited are as follows:
• a) A knowing misrepresentation of the truth or concealment of material fact in order
that another person may act, to his detriment
• b) A suggestion as to a fact which is not true, by one who does not believe it to be true
• c) An active concealment of a fact by a person having knowledge or belief of the fact
• d) A promise made without any intention of performing it
• e) A representation, whether true or false, made in a reckless and careless manner
• Under Section 3, no person shall buy or sell securities in a fraudulent manner, use any manipulative device or
scheme to defraud or engage in any practice which would operate as a fraud upon any person dealing in listed
securities or perform any act which is in contravention to these regulations.
• Regulation 4(2) describes instances of what would be deemed as a manipulative, fraudulent or an unfair
trade practice and includes the following:
• a) Knowingly indulging in an act which creates a false or misleading appearance of trading in the securities
market.
• b) Dealing in a security not intended to effect transfer of beneficial ownership but only to operate as a device
to inflate, depress or cause fluctuations in the price of the security for wrongful gain or avoidance of loss.
• c) Advancing or agreeing to advance any money to any person thereby inducing any person to subscribe to an
issue of the securities for fraudulently securing the minimum subscription to such issue of securities, by
advancing or agreeing to advance any money to any other person or through any other means.
• d) Paying, offering or agreeing to pay or offer, directly or indirectly to any person any money or money’s
worth for inducing any person for dealing in any securities for artificially inflating, depressing, maintaining or
causing fluctuation in the price of securities through any means including by paying, offering or agreeing to
pay or offer any money or money's worth, directly or indirectly, to any person.
• e) Any act or omission amounting to manipulation of the price of a security including influencing or manipulating the
reference price or bench mark price of any securities".
• f) Knowingly publishing or causing to publish or reporting or causing to report by a person dealing in securities any
information relating to securities, including financial results, financial statements, mergers and acquisitions,
regulatory approvals, which is not true or which he does not believe to be true prior to or in the course of dealing in
securities.
• g) Entering into a transaction in securities without intention to perform it or without intention to change the
ownership of such securities.
• h) Selling, dealing or pledging of stolen, counterfeit or fraudulently issued securities whether in physical or
dematerialized form: Provided that if:
• (i) the person selling, dealing in or pledging stolen, counterfeit or fraudulently issued securities was a holder in due
course; or
• (ii) the stolen, counterfeit or fraudulently issued securities were previously traded on the market through a bonafide
transaction, such selling, dealing or pledging of stolen, counterfeit or fraudulently issued securities shall not be
considered as a manipulative, fraudulent, or unfair trade practice.
• i) Disseminating information or advice through any media, whether physical or digital, which the disseminator knows
to be false or misleading and which is designed or likely to influence the decision of investors dealing in securities.
• J) A market participant entering into transactions on behalf of client without the knowledge of or instructions
from client or misutilizing or diverting the funds or securities of the client held in fiduciary capacity. Circular
transactions in respect of a security entered into between "persons including intermediaries to artificially
provide a false appearance of trading in such security or to inflate, depress or cause fluctuations in the price of
such security.
• k) Fraudulent inducement of any person by a market participant to deal in securities with the objective of
enhancing his brokerage or commission or income.
• l) An intermediary predating or otherwise falsifying records including contract notes, client instructions, balance
of securities statement, client account statements.
• m) Any order in securities placed by a person, while directly or indirectly in possession of information that is not
publically available, regarding a substantial impending transaction in that securities, its underlying securities or
its derivative.
• n) Knowingly Planting false or misleading news or information which may induce sale or purchase of securities
• o) Mis‐selling10 of securities or services relating to securities market.
• p) Illegal mobilization of funds by sponsoring or causing to be sponsored or carrying on or causing to be carried
on any collective investment scheme by any person.
• We here describe the act of front running as an example of unfair trade practices.
Front‐ running can be described as an illegal act on part of a dealer/stock broker in which
the broker places his own/firm’s order ahead of client’s order or when client’s order is
pending. This act of dealer/broker gives him/her an unfair advantage if price of a security
is likely to be affected by client’ order.
• Front running could be in the form of buying/selling ahead of client’s purchase or sale
order. Such act on part of dealer / broker amounts to violation of Section 12A (a), (b) and
(e) of the SEBI Act, 1992 or Regulations 3 (a) to (d) and Regulation 4(q) of the SEBI
(Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market)
Regulations, 2003.
• When SEBI has reasonable grounds to believe that the transaction in securities are being
dealt with in a manner detrimental to the investor or the securities market in violation of
these regulations and when any intermediary has violated the rules and regulations under
the act then it can order to investigate the affairs of such intermediary or persons
associated with the securities market. Based on the report of the investigating officer, SEBI
can initiate action for suspension or cancellation of registration of an intermediary.
 SEBI (Custodian) Regulation, 1996
• The custodians are entities that hold securities or gold or gold‐related instruments on behalf of mainly large
investors, e.g., mutual funds and insurance companies. Custodians maintain and reconcile the records
relating to the assets held and also monitor corporate actions such as dividend payments or rights issues on
behalf of their clients. In short, custodians are mainly into trade settlement, safekeeping, benefit collection,
reporting and accounting. One point of distinction between a depository participant and a custodian is that a
Depository has the right to effect transfer of beneficial ownership while a custodian does not.
• The SEBI (Custodian) Regulation 1996, states that for the purpose of grant of a certificate for activities of a
custodian of securities, the entity should have a net worth of a minimum Rs.50 crores.
• As per Chapter III, every custodian of securities shall enter into an agreement with each client on whose
behalf it is acting as custodian of securities and every such agreement shall provide for the circumstances
under which the custodian of securities will accept or release securities from the custody account, will accept
or release monies from the custody account; time circumstances under which the custodian of securities will
receive rights or entitlements on the securities of the client. Every custodian of securities shall have adequate
internal controls to prevent any manipulation of records and documents including audits for securities and
rights or entitlements arising from the securities held by it on behalf of its client.