3. Stakeholders in Capital Market

Curated By
Vivek Gadodia
System trader and algo specialist

Skill Takeaways

  • Stakeholders – who are they?
  • Role of stakeholders in the capital market
  • Stakeholder mapping, management, analysis
  • Who are investors and traders?

Just as you go to a vegetable market to buy vegetables, companies go to the capital market to raise capital, i.e., funds. A capital market is a market for long-term debt and equity shares where both equity and debt instruments are issued and traded. As you know, capital is the lifeline of any business and the capital market helps raise the funds required to run businesses. Hence, orderly growth of the capital market is essential for the development of the economy at large.

There are many stakeholders in the capital market who influence and are influenced by the functioning of the market. They are like the wheels of a vehicle and are essential for its smooth functioning.

The diagram below shows examples of stakeholders in a capital market are:

 

Brokers

A broker is a member of a recognised stock exchange and is registered with the SEBI. You can deal in securities in stock exchanges through brokers as only they are permitted to do trades on the screen-based trading system of stock exchanges. A broker is entitled to execute trades only in those exchanges where they are a member. Thus, a broker, who is a member of the Bombay Stock Exchange, can trade only on the BSE trading platform and not on other exchanges.

Stock Exchanges

Stock exchanges are the organisations that provide platforms to companies to raise capital through IPOs and trade in their shares and bonds through investors and traders. Along with equities and bonds, various other products are traded on the exchanges, such as Exchange Traded Funds (ETFs), investment funds, single stock futures and options, index futures and options, currency derivatives, commodity derivatives and interest rate derivatives.

BSE and NSE are the major Indian exchanges which provide platforms for corporates to raise money from the capital market and list their shares.

Depositories

Nowadays, trading only shares and bonds in electronic form is allowed, which makes depositories an important stakeholder in the smooth functioning of capital markets. Depositories facilitate the holding of securities in electronic form and also enable securities transactions to be processed by book entry. Presently, there are two depositories in India, viz., Central Depository Services (India) Ltd (CDSL) and National Securities Depository Ltd (NSDL).

Depository Participant

A depository participant is an agent of the depository and offers depository services to investors, including the dematerialisation of physical shares. Financial institutions, banks, custodians and stockbrokers are allowed to act as depository participants.

The depository system, of which depositories and depository participants are the main constituents, has effectively eliminated paper-based certificates that were more prone to losses, forgery, damage and other problems, resulting in bad deliveries.

Companies

A capital market without companies is like a stage without actors. Therefore, the listing of companies in stock exchanges, usually through an initial public offering (IPO), is crucial. Further, to facilitate small and medium-sized companies to get listed on stock exchanges, both BSE and NSE have opened separate platforms for such types of companies.

Government

The government (through its ministries, agencies and departments) plays multiple roles in the capital market – regulator, influencer and participant. The Ministry of Finance, the Securities Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) are the main stakeholders of the capital market.

Securities Exchange Board of India (SEBI) is the regulatory authority established under a special Act of the Parliament to protect the interests of the investors in securities and to promote the development of the capital market. It is also often referred to as the market regulator, as it plays a role in preventing malpractices and ensuring orderly development. The agency is also responsible for managing and monitoring if its rules and regulations are being implemented by all stakeholders.

Reserve Bank of India (RBI) is the regulator of the Indian banking system. It is responsible for the regulation of all banks, including those listed. As a regulator of the Indian banking system, RBI, too, has a stake in ensuring the smooth functioning of the capital market.

Both SEBI and RBI come under the purview of the Ministry of Finance, which is the final authority on various aspects affecting the capital market. Raising funds through disinvesting government stakes in PSUs is one of the ways through which the finance ministry tries to finance the deficit.

Investors and Traders

Investor is the mainstay of the capital market because they put in money to be utilised by corporates as capital. An investor is a person or an institution who commits their funds in the capital market with expectations of good returns. There are various categories of investors, but they all have a common goal - to earn solid returns for their investments.

Did You Know?

Till 1992, foreign investors were not allowed to invest in Indian capital markets, and mutual funds were within the purview of the public sector.

Traders are another category of stakeholders who account for a substantial portion of the stock exchanges’ trading volume. The main difference between traders and investors is that the former has a short-term perspective about the market, varying from a few hours to a few days, while the latter usually follows a buy-and-hold approach to earn dividends and capital appreciation. Traders are an integral part of the markets as their operations bring a speculative element.

Points to Remember:

  • Every stakeholder has a role to play in the functioning of capital markets
  • You need to understand the value of every stakeholder as you proceed in your journey to becoming a successful trader
  • Every trader is an important cog in the wheel – you too can make a difference by putting in efforts to trade smartly
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