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Procedure for Registration of Market Intermediaries with SEBI

Monisha Chaudhary

| Updated: Aug 29, 2019 | Category: SEBI Advisory

In the era of the closed market, there wasn’t any requirement of the intermediary as buyer & seller transact with one another nearby. However, with the expansion of the financial & capital market, the option for direct transaction became completely infeasible. As a result, the concept of Market Intermediaries evolved. Ever since then, market intermediaries act as a bridge between capital seeker & capital provider. Any person operating in the capital market other than investor & issuer is an intermediary. 

Financial intermediaries & financial market acts as a substitute for the financial service in India. The financial market provides lower-cost debt or equity finance to a smaller group while financial intermediaries offer finance with the higher cost covering the expenses of uncovered information & monitoring activities. These intermediaries & markets also provide complementary financial services to its clients. 

Understanding the meaning of “Market Intermediaries”

Market Intermediaries are the link in the supply chain or bodies engaged in transacting the product from the producer to the end consumer. These could be either individuals or firms. Generally, these intermediaries facilitate the sales process.

Intermediaries are defined as per the SEBI Act, 1992 & comprise of the following:

  • Stockbroker and sub-broker
  • Share transfer agents
  • Banker to an issue
  • Trustees
  • Merchant banker
  • Registrar to an issue
  • Underwriters
  • Portfolio management
  • Investment advisors
  • Depositaries & Depositary participants
  • Custodian
  • Credit rating agents
  • Asset management company
  • Clearing members
  • Trading members

The intermediary regulations specifically prohibit following from the definition of intermediary:

  • Foreign institutional investors
  • Foreign venture capital investors
  • Mutual funds
  • Collective investment scheme
  • Venture capital funds

Regulation governing securities market

SEBI has created a comprehensive regulatory framework covering every intermediary. Intermediaries are governed under specific regulations of each category of intermediary: 

  • SEBI (Stock Brokers & Sub- Brokers) Regulations, 1992;
  • SEBI (Depositories and Participants) Regulations, 1996;
  • SEBI (Bankers to an Issue) Regulations, 1994; the SEBI (Merchant Bankers) Regulations, 1992;
  • SEBI (Portfolio Managers) Regulations, 1993;
  • SEBI (Share Transfer Agents) Regulations, 1993;
  • SEBI (Underwriters) Regulations, 1993.

Role of the Market Intermediaries

The most important role of these intermediaries is that they match the demand & supply forces. Following is the list of roles performed by intermediaries: 

The Flow of Funds

Economies that are successful in matching the needs of savings to appropriate investment opportunities can create business opportunities & generation of wealth & progress for an economy.  Further, issuer & investors are diverse and are not from the same market. So, to connect & manage these diverse groups, matured market middlemen is needed. Investors don’t have adequate information, knowledge or expertise and issuer don’t have access to resources to reach individual investors, thus here is the role of an intermediary who plays an essential role in making the market matrix. 

Investment Banker

Intermediaries perform their role as an investment bank. Following are different functions performed in their capacity as an investment banker:

  • Financing services: they help the companies & governments to raise capital by issuing equity shares, debt, private placement, commercial notes, and medium-term notes.
  • Investment services: they make & trade-in markets of equity & fixed income products. 
  • Research: maintenance of large research database on economies, markets, trading, companies, stocks & bonds.
  • Mergers & Acquisitions: they help & advice on the matters of mergers & amalgamation and Acquisition.  

Security Analyst

As a security analyst, an intermediary analysis examines & evaluate individual securities and the particular market for investment. While examining the security an intermediary seeks out for reliable information. Reliable sources of information can be a financial statement, discussions with the company’s executives, clients & suppliers. There are sometimes hurdles in the analysis of the market as unavailability of timely & accurate information.

Com Bubble

The relevance of intermediaries in the security market was bought by the “dot-com bubble” in the US. They claimed that intermediaries can be acknowledged as necessary evils for the capital market.

Problems/conflict of interest

  1. When an intermediary extends the loan/credit facility to its clients, they are tending to invest the client’s funds with the main focus to the recovery of its loan irrespective of the investment objective of the clients.
  2. Sometimes the broker to make his cut & for generating commission is involved in excess trading on a client’s account regardless of the matter that such trading involves unprofitable investments. 
  3. Sometimes an intermediary operates in different capacities such as, as market analyst & investment advisor for the client along with stockbroker taking proprietary trading. 
  4. Discriminatory market practices where intermediary involves in favorable practices of allotment of shares who promise to purchase further securities from the secondary market from the same intermediary. 
  5. Internal conflicts amongst the group of intermediaries having similar group operations. Sometimes the decision in the favor of the group is not beneficial for a subsidiary. Similarly, when intermediaries under common ownership give diverse services that can be profitable for one service but cannot be that productive for another service.

Online Registration Mechanism for Security Market Intermediaries

  • SEBI has created an intermediary portal https://sipportal.sebi.gov.in for all the intermediaries to directly apply online. Applications for registration, processing of the application, grant of final registration, surrender application, suspension application, can be made. 
  • SEBI intermediary portal is also available on the SEBI official website, i.e. www.sebi.gov.in    
  • SEBI intermediary portal is available for following intermediaries:
    • Stockbrokers
    • Sub-brokers
    • Merchant Bankers
    • Underwriters
    • Registrar to an issue 
    • Share transfer agents
    • Debenture trustees
    • Bankers to an issue
    • Credit rating agencies
  • All the applications for intermediary shall be made through intermediary portal except an application in respect of stock-broker and sub-broker is continued to be made through stock exchange & depositaries respectively. 
  • In cases of an application to the stock exchange and depositaries, a hard copy of the application has to be preserved and in case of demand, it also needs to be submitted with SEBI.
Monisha Chaudhary

Experienced Legal and Advisory professional with 5+ years of workings in the field of compliance, statutory governance and licensing, RBI, IRDAI matters etc.

Top Rated CA

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