1.1 – 1.2 Securities Markets & Securities

The securities market channels savings from investors to issuers (businesses, government). It sits within the wider financial market, alongside the money market and currency market. Securities are defined under Section 2(h) of the Securities Contracts (Regulation) Act, 1956 (SCRA) and include shares, bonds, debentures, derivatives, mutual fund units, government securities, EGRs, and ZCZP instruments. Not securities: bank/company/inter-corporate deposits, insurance policies, provident/pension fund investments — these are financial arrangements, not transferable securities.

1.3 Structure & Participants

• Primary market (new issue market) — issuers raise fresh capital. Secondary market (stock exchange) — investors trade among themselves; no new capital to issuer.
• Investors: Retail (individuals) vs Institutional (mutual funds, banks, insurers, pension funds — specialised knowledge, large sums).
• Issuers: companies, central/state/local governments (debt only, no equity), PSUs, banks/FIs, mutual funds, investment trusts (REITs/InvITs/AIFs).
• Intermediaries (all SEBI-registered under SEBI (Intermediaries) Regulations, 2008): AMCs, Portfolio Managers (discretionary/non-discretionary, cannot pool money), Merchant Bankers/Underwriters, Stock Brokers, Authorized Persons (agents of brokers), Clearing/Trading Members, Bankers to an Issue, Registrar & Share Transfer Agents, Depository Participants, Custodians, Trustees, Credit Rating Agencies, Investment Advisers, KYC Registration Agencies (KRAs).
• KYC done once with any SEBI intermediary is valid across all (via KRA inter-operability).

Regulators — who does what

1.4 Role of Securities Markets

Orderly channel for transfer of funds · Generates productive investment · Liquidity (secondary market) · Price discovery (fair price via buyer-seller interaction) · Information signalling · Market for corporate control (takeovers of underperforming firms) · Bull/bear market cycles.

1.5 Technology: Cyber Security & Sandbox

• MIIs (Market Infrastructure Institutions) under CSCRF: Stock Exchanges, Depositories, Clearing Corporations, KRAs, Qualified RTAs.
• 5 Cyber Resiliency Goals: Anticipate → Withstand → Contain → Recover → Evolve (mapped to Governance/Identify/Protect/Detect/Respond/Recover functions).
• Innovation Sandbox — offline testing by FinTechs (even unregulated) in isolation from live market.
• Regulatory Sandbox — live testing by SEBI-regulated entities on a small scale, under supervision (concept coined by UK FCA, 2015).

2.1–2.2 Equity vs Debt & Choice for Issuers

Other asset classes: Hybrid securities, Commodities (gold, silver, agri — via ETFs/derivatives), Derivatives, Mutual funds, Structured products (bond/currency + embedded derivative, for HNIs), Distressed securities (for hedge funds), EGRs (electronic gold), ZCZP (social bonds, no financial return, listed on Social Stock Exchange).

2.3 Equity Capital Features

• Face value typically Re.1 / Rs.2 / Rs.5 / Rs.10. Inside (promoter) vs outside shareholders.
• DVR shares — higher dividend, lower voting rights (lets promoters raise capital without diluting control).
• Preference shares — pre-defined dividend rate, paid before equity but after all other claims; no voting rights; cumulative preference shares carry forward unpaid dividend.

2.4 Debt Instrument Types & Classification

• Zero coupon bond — issued at discount, no periodic coupon. Floating rate bond — reset vs benchmark (e.g. MIBOR). Callable (issuer redeems early) vs Puttable (investor exits early). Amortizing bonds — principal repaid over life (e.g. home loans).
• Money market instruments (≤1 year, zero-coupon, discount-to-par): Repo/reverse repo, Tri-party repo (via CCIL), Certificates of Deposit (banks), Treasury Bills (91/182/364 days, RBI auction), Commercial Paper (up to 364 days; 90-day most common).
• G-Secs — issued by RBI auction; tenor 1–40 years; fixed coupon “dated securities” most common; Sovereign Gold Bonds: 8-year tenor, 2.5% semi-annual coupon, early exit after year 5.
• Corporate bonds priced at a spread (“credit spread”) over G-sec yield. Masala bonds — rupee-denominated, issued abroad by Indian cos (currency risk borne by foreign investor). Green bonds — fund sustainable projects. Bharat Bond ETF — tracks AAA PSU bond index; 5-yr & 11-yr series.

Benefits & Risks of Debt

Benefits: fixed income, fixed tenor. Risks: inflation/purchasing power risk, default/credit risk, reinvestment risk, call risk, liquidity risk.

2.6 Hybrid Instruments

• Convertible debentures — FCD (fully convertible), PCD (partly), OCD (optionally, at holder’s discretion). Lower coupon than pure debt because of upside from conversion.
• Depository Receipts — ADR (listed in USA), GDR (listed outside USA), IDR (foreign co. listed in India, resident investors only). No voting rights, only dividend/capital appreciation.
• FCCBs — foreign-currency debt convertible to equity; min. maturity 5 years; issue expenses capped (4% public / 2% private placement).
• Warrants — right (not obligation) to subscribe to shares later at a fixed price; investor pays 25% upfront.

2.8 Derivatives (intro)

Futures = obligation to transact; Options = right, not obligation (Call = right to buy; Put = right to sell); strike/exercise price; expiry date. Derivatives are leveraged (margin-funded) and generally more liquid than cash markets. Segments: equity, currency (INR pairs & cross-currency, cash-settled), commodity (options on futures, not spot), interest rate (on G-secs, T-bills, MIBOR).

2.9–2.10 Asset Allocation & Diversification

Dividing a portfolio across asset classes (equity/debt/gold/real estate/cash) so a fall in one is cushioned by others. Suitable allocation depends on time horizon and risk appetite (e.g. near-retirement → more debt).

2.12 Equity Investing Terms

Buy-side research (institutional, generalist) vs Sell-side research (broking houses, sector specialists). Fundamental vs Technical analysis; Top-down vs Bottom-up; DCF vs Relative valuation models.

2.13–2.14 Debt Investing

Time value of money: a rupee today > a rupee tomorrow. Bond price = PV of future coupons + redemption value, discounted at market yield. Inverse relationship: as yield rises, bond price falls. Current yield = Coupon ÷ Market price. YTM = the discount rate equating PV of cash flows to current price. If bought below face value → yield > coupon; above face value → yield < coupon.

3.1 Primary Market Basics

Also called the “new issue market”. Regulators: SEBI (equity & corporate bonds, ADR/GDR), RBI (G-secs, via Government Securities Act 2006), governed also by Companies Act 2013 & SEBI (ICDR) Regulations, 2018.

Functions: Tap larger markets, foster competitive pricing, diversify ownership, better disclosures, evaluation by investors, exit for early investors, liquidity, regulatory supervision.

3.3 Intermediaries

Merchant Bankers (incl. Book Running Lead Manager — due diligence, prospectus, marketing), RTAs, Bankers to the Issue, Brokers to the Issue, Depositories/DPs, Debenture Trustees (safeguard debenture holders), Portfolio Managers (discretionary/non-discretionary), Primary Dealers (RBI-licensed underwriters of G-secs).

3.4–3.6 Types of Issues & Investors

• Public issue, Private placement (≤50 persons under Companies Act, 2013), Preferential issue, Rights/Bonus issue.
• Retail Individual Investor: ≤ Rs.2 lakh per issue. Non-Institutional Buyer (NIB): > Rs.2 lakh. QIB = institutional investors.

3.7 Key IPO Eligibility & Numbers (memorize these!)

3.8–3.9 Types & Pricing of Public Issue

• IPO = Fresh Issue (new shares, capital ↑) or Offer for Sale/OFS (existing holders sell, proceeds to them, capital unchanged). FPO = further issue after IPO.
• Fixed Price Issue — price set upfront. Book Built Issue — bidding within a price band; cut-off price = price at which issue is subscribed.
• Book-built allocation (if eligible on standard criteria): ≥35% Retail, ≥15% NII, ≤50% QIB (5% of QIB reserved for MFs). If NOT eligible: ≤10% Retail, ≤15% NII, ≥75% QIB.
• Non-book-built allocation: ≥50% retail, remainder to others.

3.10–3.12 Process, Prospectus & Application

Prospectus (fixed price) vs Red Herring Prospectus/RHP (book-built, price band disclosed, final price after close). Payment via ASBA only (+UPI for retail up to Rs.5 lakh, mandatory from May 2022). Price band announced ≥2 working days before opening. Minimum application value: Rs.10,000–15,000.

3.12.2–3.14 Allotment, Green Shoe, Listing, Rights

• Green Shoe Option (GSO): allot up to 15% extra shares for price stabilisation for 30 days post-listing.
• Rights issue: open 7–30 days; existing shareholders can subscribe or renounce (sell entitlement).

3.15–3.17 Debt Public Issue & Private Placement

• Min. subscription for public debt issue: 75% of base issue size. Shelf prospectus allows multiple tranches. Debenture Redemption Reserve required.
• QIP: listed ≥1 year, special resolution required, ≥10% to mutual funds, 1-year lock-in on sale.
• EBP (electronic bidding platform): compulsory for private debt placement ≥ Rs.50 crore (single or cumulative).

4.1–4.2 Role & Segments

Secondary market functions: liquidity, price discovery, information signalling, indicator of economic activity, market for corporate control. Segments: Equity (via exchanges + clearing corp), Debt (G-secs via NDS-OM/CCIL; corporate bonds mostly OTC), Commodities (spot via state-regulated APMC “mandis”; e-NAM since 2016 for unified national market).

4.3 Structure

3 national exchanges: BSE, NSE, MSEI. Depositories: NSDL & CDSL (investors hold via DPs). Clearing corporations act as central counterparty (novation) — e.g. NSE Clearing, ICCL, MCCIL. Interoperability (since 2019) lets brokers clear/settle at one CC regardless of exchange — except commodity derivatives.

4.5 Trade Execution

Trading hours: 9:15 am–3:30 pm (Mon-Fri). Pre-open session: 15 min before open. Price-time priority for matching. DMA lets institutional clients bypass broker server for speed.

Bulk vs Block Deals & Circuit Breakers

4.6 Clearing & Settlement

Settlement cycle: T+1 (with optional T+0 rolling settlement also introduced). Netting occurs at trading-member level across all securities. Margins = VaR margin + Extreme Loss Margin (ELM, fixed at 3.5%) + Mark-to-Market (MTM) margin. Cross-margining reduces margin when cash & derivative positions offset. Short delivery → auction; funds shortage → penalty + facility withdrawal.

Corporate actions: record date = date determining entitlement; cum-basis (price includes benefit) vs ex-basis (excludes it); exchange adjusts prices to keep position value constant.

4.7 Investor-Level Process

3-in-1 account (trading + bank + demat). SLBM (Securities Lending & Borrowing) enables short-selling with clearing-corp-guaranteed settlement, on exchange platform since 2008.

4.8 Market Information

Market cap = price × shares outstanding → large/blue-chip, mid-cap, small-cap. Listed companies must comply with the Listing Agreement (disclosures, corporate governance, timely intimation of material events).

4.9–4.10 Risk Management & Grievance Redressal

Core Settlement Guarantee Fund (SGF) covers residual counterparty risk. Grievance path: broker → exchange’s Investor Grievance Division (IGD) → Arbitration (award in 30+30 days) → Appellate panel (appeal within 7 days) → High Court. SCORES = SEBI’s online complaint portal (entity must resolve in 21 days). ODR = online mediation/conciliation/arbitration portal. Investor Protection Fund (IPF) compensates for broker default; IPEF uses disgorged amounts (claims allowed up to 7 years).

5.1–5.2 Basics, NAV & Key Terms

A mutual fund pools investor money, managed by an AMC, structured as a trust. Investors = unit holders (proportional participation, no fixed return). MFs cannot borrow except for temporary liquidity needs. SEBI’s 5 broad categories: Equity, Debt, Hybrid, Solution Oriented, Other.

Open-ended — no maturity, buy/sell anytime at NAV. Closed-ended — units issued only at NFO, mandatorily listed. Interval funds — hybrid, transact only in specified windows. Growth option retains gains (NAV rises); IDCW payout/reinvestment distributes or reinvests gains.

Working of a Mutual Fund

AMC manages day-to-day operations; supervised by Trustees (meet ≥6 times/yr) who protect investor interest; Custodian holds money/securities; R&T Agent services investor records; distributors earn trail commission (periodic, % of AUM, no upfront allowed except via SIP inflows under conditions).

5.3.1 Equity Scheme Minimums (memorize!)

ELSS: statutory lock-in 3 years; 80C deduction (max Rs.1.5 lakh) available only under old tax regime. Value fund and Contra fund — a fund house may offer only one of the two.

5.3.2 Debt Scheme Duration/Maturity Bands

Key rule: interest rates ↑ → debt prices ↓ (longer tenor = bigger impact).

5.3.3–5.3.5 Hybrid, Solution-Oriented & Other Schemes

A fund house offers either Aggressive Hybrid or Balanced Fund, not both. Arbitrage Fund — profits from cash-futures price gap, low risk. Multi Asset Allocation — min. 10% each in ≥3 asset classes. Retirement/Children’s Fund — lock-in 5 years (or earlier trigger). Index Fund/ETF — min. 95% tracking the index; ETFs trade real-time on exchange (need demat+broking account); FoF — min. 95% in underlying schemes.

5.4 Closed-Ended Schemes

FMP — portfolio maturity matches scheme tenor; main risk = credit/default risk. IDF — min. tenor 5 yrs, 90% in infra debt, min. investment Rs.1 crore. Real Estate MF — ≥75% in physical assets/related securities (SEBI also states ≥35% floor in physical assets); valued every 90 days by two valuers.

5.5 Active vs Passive

Active — aims to beat benchmark, higher fees. Passive (Index funds/ETFs) — replicates index, lower fees; tracking error = deviation from benchmark.

5.6 Investing Process

PAN mandatory (exception: ≤Rs.50,000/year lumpsum+SIP combined per fund). KYC once, valid everywhere; eKYC via Aadhaar OTP. NFO open 15 days (except ELSS); allotment within 5 business days. Scheme documents: SAI, SID, KIM. Riskometer shown on NFO form/SID/KIM/ads. Redemption: 10 working days; dividend payout: 15 days of declaration.

5.7–5.8 Systematic Transactions & Switches

5.10–5.13 Benefits, Regulation & SIF

Benefits: diversification, professional management, liquidity, flexibility, tax efficiency, accessibility. Costs: fees, limited control, indirect ownership. Regulator: SEBI under SEBI (Mutual Funds) Regulations, 1996; fund = trust structure; AMFI = industry self-regulatory body. SIF (Specialized Investment Fund) — new (Dec 2024) sophisticated MF product; min. investment Rs. 10 lakh.

6.1–6.2 Core Concepts

A derivative’s value is derived from an underlying. Used to manage/transfer risk. Buyer = “long”, Seller = “short”; futures are a zero-sum game (one party’s gain = other’s loss). Since Oct 2019, all stock F&O positions open at expiry settle by physical delivery; index F&O remain cash-settled. OTC derivatives (forwards, swaps) rely on mutual trust; exchange-traded (futures, options) settle via clearing corporation with margins. Arbitrage exploits price gaps beyond transaction cost (law of one price).

6.3 Four Derivative Products

Option terms: strike/exercise price (agreed transaction price), premium (price of the option), in-the-money (exercising is profitable) vs out-of-the-money.

6.4–6.5 Market Structure & Contract Specs

Equity derivatives began: index futures in June 2000; index options & stock F&O in 2001. Only European options traded in India (exercisable only on expiry; CE=Call European, PE=Put European).

6.5.3–6.5.4 Settlement

Daily (MTM) settlement: T+1, based on daily settlement price = weighted avg. price of last 30 min of trading. Final settlement: at expiry, using the underlying’s closing price in the cash market. Clearing members: TM-CM (trades & clears for self+others), PCM (banks/custodians, clearing only), SCM (clears only own trades). Options: premium settled T+1; at expiry, ITM options settle at the in-the-money strike price; also premium margin and assignment margin apply (in addition to initial & exposure margin).

6.6 Risk Management

Base capital + liquid net worth required from members. Initial margin (risk over 2-day horizon) + Exposure margin (% of notional value, collected only on short option positions for options). Real-time position limits monitored; terminal deactivated if breached.

6.7 Applications & 6.8 Market Indicators

• Hedging — protect an existing cash position. Speculation — directional bet without underlying cash position, at lower cost (margin only). Arbitrage — exploit mispricing across markets.
• Open Interest = sum of all outstanding (unsettled) one-sided positions; rising OI = more liquidity/fresh money.
• Put-Call Ratio (PCR) = Puts outstanding ÷ Calls outstanding. PCR > 1 → more puts (often read as bearish sentiment); PCR < 1 → more calls.

Note: A 2023 SEBI study found 9 out of 10 individual F&O traders incurred net losses — a reminder of the leverage risk in derivatives.