ROLE OF INTERMEDIARIES IN CAPITAL MARKET: BY VAIBHAV SRIVASTAVA
1.
INTRODUCTION
Intermediaries are the middlemen
between any two parties that are partaking in a transaction. Intermediaries act
as the bridge between them and help in exchanging necessary information towards
fulfilling the objective of a common goal. Intermediaries are basically a link
between issues and investors, in the capital market system.
The role of intermediaries is to
provide services to investors or issues or both. The intermediaries should be
registered with SEBI. The person who
acts as an intermediary is basically an expert of various fields related to
Capital Market. The intermediaries charge professional fees, in terms of
certain percentage or equity of the
share.
For e.g. A B
(Issuer)
(Investor)
C
(Intermediaries)
In case of
Issue, whole delegation of work &
responsibility such as approval, filing etc., is done by an intermediary known
as ‘Merchant Banker’. On the other
hand, in case of Unsubscribe Shares, the
appointment of ‘Underwriter’ is done,
which acts as an intermediary only.
2.
INTERMEDIARIES & THEIR ROLES
a. Merchant Banker
The
‘Merchant Banker’[1] should
be a body corporate[2]
other than NBFC. They are engaged in the business of issue management. The
merchant bankers do the arrangement regarding buying, selling & subscribing
of securities. They also act as the advisor, manager & consultant. They
also provide corporate advisory service. The merchant banker has the net worth
of five crore rupees.
Merchant
bankers are registered in 4 categories. For each category, there are different
eligibility criteria, which have been set keeping in view the different
activities which Merchant Bankers are authorised[3] to do.
The main
role & responsibility of Merchant
Baker are as follows:
● To manage public or private issues.
● They can also act as an underwriter.[4]
● Primary & Satellite dealership
of government securities.
● Corporate advisory services.
● Involved in stock broking services.
● International financial services.
b. Registrar & Transfer Agent[5]
● Registrar to an issue, are the primary intermediaries. The main role
of these intermediaries is the collection of application forms, maintaining the
proper records for application form as well as application money.
● Share transfer agents are the secondary intermediaries. The main role of
transfer agents is to transfer & transmission, redemption of security &
maintain the record of security holders
Apart from
the above two, the regulation also includes to ‘assist the body corporate. This
can be done by determination of the basis of allotment. Secondly, finalize the
list of allotments. Lastly, dispatch the letter of allotment.
c. Underwriter[6]
Underwriters
are the people who subscribed to the unsubscribed portion of a public issue.
Who by an agreement[7]
agreed to subscribe in case of under subscription. Underwriters shall be
appointed on the basis of regulation & conditions[8] imposed by
SEBI.[9] The
appointment of underwriters is compulsory for ‘Public Issues’. Generally underwriters are banks, stick bankers,
financial institutions etc. The main role is to, maintain the proper books of
accounts & records[10]
etc, appointment of compliance officer[11], power to
call for information[12]
d. Banker to an issue[13]
Schedule
Commercial bank( the bank whose name is mentioned in 2nd schedule of RBI Act,
1934 & they are generally nationalised banks). The main role/functions are:
● Collection of applicant forms &
application money.
● Collection of call money.
● Refund of application money.
● Payment of dividend & interest.
e. Debenture Trustee[14]
Debenture
trustees are the trustees of a ‘Trust
Deed’, which are appointed for securing any debenture issue. Generally
banks, financial institutions, insurance corporations, body corporate act as a
debenture trustee. The function of debenture trustees are as follows:
● They call for a periodical report
from the company.
● Authorized to take possession of
trust property.
● Enforce Security in the interest of
the debenture holder.
● Protect the interest of ‘debenture holders.’
● Ensure redemption & conversion
of debenture.
● Ensure timely payment of interest.
f. Stock Broker[15]
Stock
brokers are the numbers of stock exchanges. They are the trading members of the
market, who are allowed to trade in securities. Buying & Selling of
securities can be done by themselves or on the behalf of investors.
Sub-brokers
are the agents of Stock brokers, acting
on the behalf of stock brokers. However, they are not listed as the number with
the stock exchange. The roles are as follows:
● They help the buyer & seller to
enter into transactions.
● Trade on their own behalf of his
client, with his own account.
● They can act as a principal (by on
their own behalf) as well as agent (deal on behalf of investors).
● In case of activity as an agent
obtain consent from his client.
g. Portfolio Manager
Portfolio
manager[16] is
any person who by agreement with his client manages the fund of the client. The
important role of the manager is in deciding the best investment plan as per
the client's income, age & ability to take risk. Secondly, design
customized investment solutions for the client according to the financial need.
There are two types of portfolio manager:
● Discretionary portfolio managers are
those managers who can exercise any level of discretion. They manage funds by
applying owned strategies.
● Non-discretionary portfolio managers are
those, who act as per the direction or advice given by the client.
h. Custodian[17]
of Securities
They keep
the custody of the securities & provide incidental services such as
maintaining the accounts of securities & collection of benefits etc. The
main role is to protect the asset of the client, open a custody account &
deposit in the name of each client & conduct registration of securities.
i. Investment Advisors[18]
The
investment advisors[19] are
those who provide investment advice for consideration or includes a person who
holds himself as an investment advisor. They guide about financial dealing
& investment. However, the investor advisor shall do the risk portfolio for
the client to assess their risk.
j. Research Analysts[20]
They are responsible for preparation
or publication[21] of
the content of the research report. Secondly, provide research reports &
make buy/sell/hold recommendations or give price targets. They study companies
and industries, analyse raw data & forecast or recommend about the buy,
hold or sell securities.
3. CONCLUSION
The regulatory authorities in Indian
capital markets have been instrumental in the development of Indian capital
markets. Initially, the capital markets in India were grossly non regulated
with means of intermediaries. As the people attracted towards the capital
market were less in number, the need to regulate these markets was not also
felt seriously. But, by the time the rapid growths in the market make it
necessary to bridge this gap via help of intermediaries.
[1] Securities and Exchange Board of
India (Merchant Bankers) Rules, 1992 &
Securities and Exchange Board of India (Merchant Bankers) Regulations,
1992.
[2] Defined under clause (f) of Section
45-1 of the Reserve Bank of India Act, 1934, (2 of 1934)
[3] Rule
4 & Regulation 3, Condition for Registration of Merchant Bankers
[4] Regulation 22 of Securities and
Exchange Board of India (Merchant Bankers) Regulations, 1992.
[5] Registered & Regulated under
SEBI (Registrar to an Issue and Share Transfer Agent) Rules and Regulations,
1993.
[6] SEBI (Underwriters) Rules and
Regulations, 1993
[7] Clause (b) of Rule 4
[8] Rule
4 of SEBI (Underwriters) Rules and Regulations, 1993
[9] Rule 3(1) of SEBI (Underwriters)
Rules and Regulations, 1993
[10] Regulations 16
[11] Regulation 17A
[12] Regulation 18
[13] SEBI (Bankers to an Issue) Rules
and Regulations, 1994
[14] SEBI (Debenture Trustees) Rules and
Regulations, 1993
[15] SEBI (Stock Brokers and
Sub-Brokers) Regulations, 1992
[16] Category
I and II merchant bankers are also authorized to undertake the activities of
portfolio managers.
[17] A custodian holds securities and
other assets in electronic or physical form
[18] SEBI (Investment Advisers)
Regulations, 2013
[19] Section 11 of the SEBI Act of 1992
and 2002
[20] SEBI
(Research Analyst) Regulations, 2004
[21] Regulation 2(h) of SEBI (Research
Analyst) Regulations, 2004
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