NISM Certification on Securities Operations and Risk Management –

Workbook

CHAPTER 1: INTRODUCTION TO THE SECURITIES MARKET

LEARNING OBJECTIVES:

After studying this chapter, you should know about:

 Meaning of securities market and its role in the Indian Economy
 The different segments of securities market
 Products traded in Indian securities market
 Concept of International Financial Services Centres (IFSC)

1.1 Introduction
The financial markets enable efficient transfer and allocation of financial resources for
productive activities in the economy. Users of funds include businesses, governments and
households who seek funds to run their activities. Households, businesses and governments
also act as providers of surplus funds. Intermediaries such as banks, financial institutions,
mutual funds and insurance companies, among others, channelize the available surplus
funds from lenders to the users.
The function of the financial markets is to ensure that economic activity is enabled by
providing access of funds to those who need it for consumption or productive activity. They
provide a way for aggregation of funds from a large number of investors and make it
available for productive economic activity. In the absence of financial markets such
aggregation may not be possible. An efficient financial market ensures that the transfer of
funds happens at a cost that makes it attractive for savers to save and lend and for users to
borrow funds. The markets must enable the dissemination of relevant information to all the
participants in the market so that the decision on price of funds is made after integrating all
available information. It must also allow the participants to review their funding decisions
given new information and to re-allocate the resources accordingly. Therefore, providing
liquidity and exit options are an important function of financial markets. Financial market
regulations and regulators focus on setting up systems and processes in place to streamline
the activities associated with the transfer of funds. The financial market comprises of the
money market and the securities markets.
The marketplace where buyers and sellers interact with each other and participate in the
trading of money, bonds, shares and other assets is the financial market. Financial markets
are the centre that facilitate buying and selling of financial instruments, claims or services.
It caters to the credit needs of the individuals, firms and institutions. It deals with the
financial assets of different types such as currency deposits, cheques, bills, bonds etc. it is
defined as a transmission mechanism between investors and the borrowers through which
transfer of funds is facilitated. It consists of individual investors, financial institutions and
other intermediaries who are linked by a formal trading rules and communication network
for trading the various financial assets and credit instruments. Financial markets can be
broadly classified as Capital Market (Securities Market) and Money market.

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In this book however, we are going to focus specifically on securities market. The term
“Securities” as defined in the Securities Contract Regulation Act (SCRA), 1956 includes the
following:
i. Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities
of a like nature in or of any incorporated company or other body corporate;
ii. Derivatives;
iii. Units or any other instrument issued by any Collective Investment Scheme;
iv. Security receipt as defined in the Securitization and Reconstruction of Financial Assets
and Enforcement of Security Interest Act, 2002;
v. Units or any other instrument issued by any pooled investment vehicle;
vi. Units or any other such instrument issued to the investors under any mutual fund
scheme;1
vii. Any certificate or instrument, issued to an investor by any issuer being a special purpose
distinct entity which possesses any debt or receivable, including mortgage debt, assigned to
such entity, and acknowledging beneficial interest of such investor in such debt or
receivable, including mortgage debt, as the case may be;
viii. Government Securities
ix. Such other instruments as may be declared by the Central Government to be securities,
and
x. Rights or interest in securities.
xi. “Electronic Gold Receipt” means an electronic receipt issued on the basis of deposit of
underlying physical gold in accordance with the regulations made by the Securities and
Exchange Board of India under section 31 of the said Act.
xii. Zero Coupon Zero Principal Instruments

Securities market help in transfer of resources from those with idle resources/surplus to
others who have a productive need for them. To state formally, securities markets provide
channels for allocation of savings to investments and thereby decouple these two activities.
As a result, the savers and investors are not constrained by their individual abilities, but by
the economy’s abilities to save and invest respectively, which inevitably enhances savings
and investment in the economy.

1.2 Securities Market

1
"Securities" shall not include any unit linked insurance policy or scrips or any such instrument or unit, by
whatever name called, which provides a combined benefit risk on the life of the persons and investment by
such persons and issued by an insurer referred to in clause (9) of section 2 of the Insurance Act, 1938 (4 of
1938);

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The securities market has two interdependent and inseparable segments, viz., the new
issues (the primary market) and trading in existing issues (secondary) market.
The primary market is used by issuers for raising capital from the investors by making Initial
Public Offers or rights issues or Further Public Offer (FPO) or private placement. On the other
hand, the secondary market provides liquidity to these instruments, through trading and
settlement on the stock Exchanges. An active secondary market promotes the growth of the
primary market and capital formation, since the investors in the primary market are assured
of a continuous market where they have an option to liquidate their investments. Thus, in
the primary market, the issuer has direct contact with the investor, while in the secondary
market, the dealings are between two investors and the issuer does not come into the
picture.
Primary market is the market that ensures availability of adequate capital at reasonable
rates to finance expansion, diversification or consolidation of companies. A secondary
market on the other hand is the market where the buyer of securities in the primary market
can transfer /sell these securities to another buyer.
The resources in the primary market can be raised either through the private placement
route or through the public issue route by way of Initial Public Offer (IPO) or Follow on Public
Offer (FPO). It is a public issue, if anybody and everybody can subscribe for it, whereas, if
the issue is made to select group of people then it is termed as private placement. In cases,
where fresh shares are issued to existing shareholders at a particular price, it is referred as
Rights Issue, whereas if such issues are without involvement of any cost, it is referred as
Bonus issue/stock split.
The secondary market on the other hand operates through two mediums, namely, the Over-
The-Counter (OTC) market and the Exchange Traded Market/Screen Based Trading System
(SBTS).
OTC markets are the informal type of markets where trades are negotiated. In this type of
market, the securities are traded over the counter and settled bilaterally.
The other option of trading is through the stock exchange route, where trading and
settlement is done through the Stock Exchanges and the buyers and sellers don’t know each
other. The settlements of trades are carried out as per a fixed time schedule. The trades
executed on the exchange are settled through the clearing corporation, who acts as a
counterparty and guarantees settlement.
There are several major players in the primary market. These include the merchant bankers,
mutual funds, financial institutions, Foreign Portfolio Investors (FPIs), individual investors;
the issuers including companies, bodies corporate, lawyers, bankers to the issue, brokers,
depositories, self-certified syndicate banks (SCSBs) and depository participants. The stock
exchanges are involved to the extent of providing platform for primary issuance and listing
of the securities.
In the secondary market, there are the stock exchanges, clearing corporations, stock brokers
(who are members of the stock exchanges), the mutual funds/asset management
companies (AMCs), financial institutions, Foreign Portfolio Investors (FPIs), investment
companies, individual investors, depository participants and banks.

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The Registrars and Transfer Agents, Custodians and Depositories are capital market
intermediaries which provide important infrastructure services to both the primary and
secondary markets. These would be discussed in detail in the later sections of this
workbook.
1.3 Money Market
Money Market is a short-term market and handles instrument from 1 day to 1 year. It is
mostly used by Government, Banks and other corporate entities to tide over short-term
requirements of funds. The entities having excess and the entities with shortage of funds
participate in this market. The RBI uses the money market for transmission of its monetary
policy direction by changing various Reserve ratios, conducting Open Market Operations,
increasing or decreasing of policy rates, etc.
Participants in the Indian money market include Central Bank of India (RBI), Public Sector
Banks, Private Sector Banks, Foreign Banks, Co-operative Banks, Financial Institutions,
Insurance Companies, Mutual Funds, Primary Dealers, Bank cum Primary Dealers, Non-
Banking Financial Companies (NBFCs), Corporates, Provident / Pension Funds, Payment
Banks, Small Finance Banks, etc. The money market deals primarily in short-term debt
securities and investments, such as bankers’ acceptances, negotiable certificates of deposit
(CDs), commercial papers, repos, Call/Notice/Term money and treasury bills (T-bills).
Money market is typically divided into two segments: (a) Borrowing and Lending segment
with or without collaterals; (b) Asset Market involving purchase and sale of money market
instruments.
These are explained briefly below:
a) Call Money: The call money market is an avenue for unsecured lending and
borrowing of funds. This market is a purely interbank market in India restricted only
to Scheduled Commercial Banks (SCBs) and the Primary Dealers (PDs). Call money
transactions are dealt/ reported on the Reserve Bank of India’s NDS-CALL
(Negotiated Dealing System – Call) platform, which is managed by CCIL, and are
predominantly overnight (tenor of borrowing may be extended to account for
weekends and holidays).
b) Notice Money: This is an extension of the interbank call market with uncollateralized
lending and borrowing of funds for a period beyond overnight and up to 14 days.
Notice money transactions are dealt / reported on the RBI’s NDS-CALL.
c) Term Money: This is an extension of the interbank call market for uncollateralized
lending and borrowing of funds for a period between 15 days and 1 year. Term
money transactions are dealt / reported on the RBI’s NDS-CALL.
d) Market Repo: Repo, also known as a ready forward contract, refers to borrowing
funds via sale of securities with an agreement to repurchase the same at a future
date with the interest for the borrowings incorporated in the repurchase price.
Reverse repo is the exact opposite transaction which is essentially a collateralized
lending of funds. Each repo/ reverse repo deal thus has two parts (or, two legs). The
repo period (repo tenor) is the time between the two legs. The interest is computed
on the actual amount borrowed by the repo seller which is the consideration amount
in the repo’s first leg. The lender receives the interest in the second leg when the

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security is bought back by the borrower at a higher consideration that includes the
interest. RBI regulates the repo market in India and major participants are Scheduled
Commercial Banks, Primary Dealers, Mutual Funds, NBFCs, Financial Institutions,
Insurance Companies, Corporates, Provident / Pension Funds, Payment Banks, Small
Finance Banks, etc. Repo transactions are allowed on Government Securities as well
as corporate bonds. Repo transactions against G-secs are traded / reported on the
Clearcorp Repo Order Matching System (CROMS) electronic platform of the
Clearcorp Dealing Systems. These are settled by CCIL along with the G-secs.
e) Triparty Repo in Government Securities: "Triparty repo" is a type of repo contract
with a third party intermediary between the borrower and lender known as the
Triparty Agent (TPA). The TPA does the collateral selection, payment and settlement,
custody and management during repo period. Following RBI’s authorization to CCIL
to act as a TPA., The Tri Party Repo Dealing System (TREPS), an anonymous order
matching trading platform, is provided by Clearcorp Dealing Systems (India) Ltd with
CCIL as the Central Counterparty (CCP) for borrowing and lending of funds against
government securities in India with a triparty arrangement. All the repo eligible
entities can trade on TREPS, and the funds borrowed on TREPS are exempted from
RBI’s CRR/SLR computation and the security acquired under the deal is eligible for
SLR by the acquiring Bank. Unlike Repo, TREPS facilitate the trading of Repo and the
seller of the security has a right to substitute the security.
f) Treasury Bills (T-bills): In India, Treasury bills or T-bills are used for short term
borrowing by the Government of India and are considered to be a part of the money
market as they mature within a year from issue. These are basically zero coupon
securities which are issued at a discount and are redeemed at par. Normally RBI
conducts weekly auctions (on Wednesday) for three tenors of T-bills: 91, 182 and
364 days. Treasury bills are traded on NDS-OM platform along with Government
Securities.
g) Cash Management Bills (CMBs): Essentially very short term T-bills, Cash
Management Bills (CMBs) are issued by the Government of India to fund the
temporary mismatches in its cash flow. CMBs have maturities less than 91 days. This
is issued to absorb excess liquidity in the system after auction for usual Treasury Bills
on weekly basis.
h) Commercial Paper (CP): A Commercial Paper (CP) is used by Indian corporates to
raise short-term unsecured funds. CPs are also discounted instruments like T-bills
and are issued for ₹5 lakh and multiples thereof for maturities between 7 days and
one year. CP issuances are governed by RBI regulations. Companies, including Non-
Banking Finance Companies (NBFCs) and All India Financial Institutions (AIFIs), are
eligible to issue CPs subject to the condition that any fund-based facility availed of
from bank(s) and/or financial institutions is classified as a standard asset by all
financing banks/institutions at the time of issue. The minimum credit rating,
assigned by a Credit Rating Agency (CRA), for the issuance of CPs shall be ‘A3’ as per
rating symbol and definition prescribed by SEBI.
i) Certificate of Deposit (CD): Certificate of Deposits is a negotiable, unsecured money
market instrument issued by a bank2 as a Usance Promissory Note against funds

2 CDs can also be issued by the All India Financial Institution which shall be guided by the specific RBI Directions

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deposited at the bank for a maturity period upto one year. CDs are also discounted
instruments like T-bills and are issued for ₹5 lakh and multiples thereof for maturities
between 7 days and one year. All India Financial Institutions can issue CDs for a
period not less than 1 year and not exceeding 3 years from the date of issue.
j) Repo in Corporate Bond/ Corporate Debt Securities: Repo in corporate bonds was
introduced by RBI in 2010 and the eligible securities for Corporate Bond Repo
include:
a. Listed corporate bonds and debentures, (however, participants cannot
borrow against the collateral of their own securities or those of related
entities);
b. CPs and CDs; and
c. Units of Debt ETFs.
d. Any other security of a local authority as may be specified in this behalf by
the Central Government.
k) Exchange Traded Tri-party Repo: Tri-party repo on corporate bonds is available for
trading on the exchanges. The product is similar to Tri-party repo on government
securities except collateral is corporate bond (including commercial paper and
certificate of deposits) instead of G-Secs and Tri-party repo agent is AMC Repo
Clearing Ltd. (ARCL) which is a Limited Purpose Clearing Corporation (LPCC). The Tri-
party repo product of ARCL is currently traded on Exchange Tri-party repo Market
Trading Platform which is part of Debt Segment of the Exchange.
1.4 Products Traded in the Indian Securities Market
Investors in the Indian securities market have a wide choice of product base to choose from
depending upon a person’s risk appetite and needs. The different types of products
available in equity, derivatives and debt markets are discussed below. These products are
traded on various segment of Exchanges and sometimes on OTC / electronic trading also.
In our workbook we will focus mainly on various segment of Stock Exchange and product
traded on the same.
1.4.1 Equity / Cash Markets and its Products
The equity/cash segment of the stock exchange allows trading in shares, government
securities, debentures, warrants, mutual funds and exchange traded funds (ETFs) etc.
An Equity Share normally known as ordinary shares represents the form of fractional
ownership in a business venture. Equity shareholders collectively own the company. They
bear the risk and enjoy the rewards of ownership. Equity shares do not have a maturity date
and have variable returns in the form of dividends and capital gains. Equity shareholders are
entitled to voting rights. In the event of liquidation of company equities will have last
preference. Typically equity securities are riskier as compared to debt securities.
Preference Shares, also commonly known as preferred stock, are a special type of share
where dividends are paid to shareholders prior to the issuance of equity stock dividends.
Preference shareholders hold preferential rights over equity shareholders when it comes to
sharing profits.

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Debentures are instruments for raising debt. Debenture is debt securities which indicate a
loan to the company. Debentures typically have a maturity date and have a predefined
return in the form of interest payments. Debentures in India are typically secured by
tangible assets. There are fully convertible, non-convertible and partly convertible
debentures. Fully convertible debentures will be converted into ordinary shares of the same
company under specified terms and conditions. Partly convertible debentures (PCDs) will be
partly converted into ordinary shares of the same company under specified terms and
conditions. Thus, it has features of both debenture as well as equity. Non-Convertible
Debentures (NCDs) are pure debt instruments without a feature of conversion. The NCDs
are repayable on maturity. Thus, debentures can be pure debt or quasi-equity, as the case
may be.
Government Securities are also known as “sovereign debt” and are generally issued via
auctions and traded in the secondary market. Government bonds issued in local currency
are considered risk free as the Government, being a sovereign entity, can print the currency
to repay its obligation to bond holders. Government Securities are issued by central and
state government. The dated securities issued by state government is known as State
Development Loans (SDL).
Warrants entitle an investor to buy equity shares after a specified time period at a given
price.
A Mutual Funds is an investment vehicle that pools money from numerous investors who
wish to save or make investments having similar investment objective. A mutual fund
invests in different types of securities in consonance with the investment objectives. A
mutual fund company pools money from many investors and invests the money in stocks,
bonds, money‐market instruments, other securities or assets, or some combination of these
investments, depending on the objectives of the fund. There are funds which invest in
equities, better known as equity MF schemes which are considered riskier than debt mutual
funds. Liquid mutual funds invest mainly in short term and very short term money market
instruments. One of the main advantages of mutual funds is that they give small investors
access to professionally managed, diversified portfolios of various securities which would
be quite difficult to create with a small amount of capital. Mutual Fund schemes are either
open ended or close ended. Close ended mutual funds schemes are traded on the equity
segment of the Exchange.
Exchange Traded Fund : An ETF is a marketable security that tracks an index, a commodity,
bonds, or a basket of assets like an index fund. The main difference between ETFs and other
types of index funds is that ETFs don't try to outperform their corresponding index, but
simply replicate the performance of the Index. Unlike regular mutual funds, an ETF trades
like a common stock on a stock exchange. The traded price of an ETF changes throughout
the day like any other stock, as it is bought and sold on the stock exchange. The trading
value of an ETF is based on the net asset value of the underlying stocks that an ETF
represents.
Indian Depository Receipt (IDR): Foreign companies are not allowed to directly list on the
Indian stock exchanges. However, they are allowed to raise capital in Indian currency
through an instrument called Indian Depository Receipt (IDR). An IDR is an instrument
denominated in Indian Rupees in the form of a depository receipt created by a Domestic

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Depository (custodian of securities registered with the Securities and Exchange Board of
India (SEBI)) against the underlying equity shares of issuing company to enable foreign
companies to raise funds from the Indian securities Markets.3 IDRs are issued by foreign
companies to Indian investors. IDRs are depository receipts which have the equity shares of
the issuing company as the underlying security. The underlying shares are held by a foreign
custodian and the DRs are held in the Indian depository. IDRs are listed in the Indian stock
exchanges. The investor can either hold the IDR, trade in them in the stock exchange or
request for conversion/redemption into the underlying shares. Redemption/Conversion is
permitted after 1 year from the date of listing of the IDRs. Two way fungibility of IDRs is
permitted i.e., the depository receipt can be converted into underlying shares and the
underlying shares can be converted into depository receipt. However, the number of shares
that can be converted into depository receipt should be within the headroom available. The
headroom for this purpose shall be the number of IDRs originally issued minus the number
of IDRs outstanding, which is further adjusted for IDRs redeemed into underlying equity
shares.
1.4.2 Derivative Market and its Products

Derivative is a product whose value is derived from the value of an underlying asset or group
of assets—a benchmark. The derivative itself is a contract between two or more parties. The
most common underlying assets for derivatives are stocks, bonds, commodities, currencies,
interest rates, and market indexes. Derivative products are in the form of Forwards,
Futures, Options and Swaps. Derivatives can trade over-the-counter (OTC) or on an
exchange.

With Securities Laws (Second Amendment) Act, 1999, Derivatives has been included in the
definition of Securities. The term Derivative has been defined in Securities Contracts
(Regulations) Act, 1956 as:
a. a security derived from a debt instrument, share, loan, whether secured or unsecured,
risk instrument or contract for differences or any other form of security;
b. a contract which derives its value from the prices, or index of prices, of underlying
securities;
c. commodity derivatives; and
d. such other instruments as may be declared by the Central Government to be derivatives;

Further Section 18A of the act provides that notwithstanding anything contained in any
other law for the time being in force, contracts in derivative shall be legal and valid if such
contracts are:
o Traded on a recognized stock exchange
o Settled on the clearing house of the recognized stock exchange, in accordance with the
rules and bye–laws of such stock exchanges.

3
[Link]
[Link]
indian-depository-receipts-idrs-_24379.html

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o Between such parties and on such term as the Central Government may, by notification
in the Official Gazette specify
Forward contract is a promise to deliver an asset on a pre- determined date in future at a
predetermined price. Forward contracts are non-standardised contracts which are traded
in OTC4.

A Futures contract is an agreement between two parties to buy or sell an asset at a certain
time in the future at a certain price. Future contracts are the Exchange traded
organized/standardized contracts in terms of quantity, quality (in case of commodities),
delivery time and place for settlement on any date in future. The contract expires on a pre-
specified date which is called the expiry date of the contract. Futures contracts are special
types of forward contracts in the sense that the former are standardized exchange traded
contracts.

Options give the buyer (holder) a right but not an obligation to buy or sell an asset at a
predetermined price within or at end of a specified period. Options are of two types - call
and put. Call Option give the buyer the right, but not the obligation, to buy a given quantity
of the underlying asset, at a given price on or before a given future date. Put Option give
the buyer the right, but not the obligation, to sell a given quantity of the underlying asset at
a given price on or before a given date. Options are traded on stock exchanges as well as on
OTC.

A swap is an agreement made between two parties, to exchange cash flows in the future,
according to a prearranged formula. Swaps are, broadly speaking, series of forward
contracts. Swaps help market participants manage risk associated with volatile interest
rates, currency exchange rates and commodity prices etc. Swaps are mainly traded in OTC.

The two types of exchange traded derivatives instruments are futures and options. In India,
futures and options are traded on equity stocks, equity indices, currency, interest rate
instrument and commodities.

[Link] Equity Derivatives:

Equity Derivatives are financial instruments whose value is derived from price movements
of the underlying asset, where that asset is a stock or stock index.

Equity Index Futures and Options: Currently in the Indian markets, future and options
contract are available for trading on the indices such as BSE’s SENSEX, MSEI SX40 and NSE’s
NIFTY 50 and sectoral indices of banks etc.

Index future and option contracts are available with weekly and monthly expiry and options
for some indices up to three year’s expiry cycle with quarterly and half-yearly expiries.
Weekly Options are the exchange traded options based on an Index with shorter maturity

4
In case of derivatives, Over-the-counter generally indicate transaction undertaken other than Stock
Exchanges and including electronic trading platform.

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of one or more weeks. Weekly and monthly equity index futures & options contracts expire
on the different days of expiry week or month. In case the expiry day is a trading holiday;
the contracts expire on the previous trading day. A new contract is introduced on the next
trading day following the expiry of the near month contract. SEBI vide circular dated October
01, 2024, has advised Exchanges to provide derivatives contracts for only one of its
benchmark index with weekly expiry. Monthly index contracts generally have 3-month
expiry cycle except for the long dated options contracts which are available up to 5-year
expiry cycle with quarterly expiries (March, June, Sept & Dec cycle) and half yearly expiries
(Jun, Dec cycle). Generally, all option contracts with expiry of more than 9 months shall be
treated as long dated/long term option contracts. A new contract is introduced on the next
trading day following the expiry of the near month contract. Weekly option contracts expire
on specific day of the week. A new weekly contract is introduced on the next trading day
following the expiry of the respective week ‘s contract. All Index future and option contracts
are cash settled. The Stock Exchanges have the flexibility to set the expiry date/day for index
derivatives. While doing so, the Stock Exchanges shall have to ensure that there is no change
in the contract specifications or the risk management framework and the integrity of the
market is not affected in any manner.
Stock Futures and Options: Individual stock futures and options on specific listed stocks are
chosen by the stock Exchange based on the guidelines and criteria5 (such as market
capitalization, the median quarter sigma order size, trading volume, delivery volume etc.)
defined by SEBI. All stock futures and option contracts are physically settled. The Stock
Exchanges have the flexibility to set the expiry date/day for stock derivatives. While doing
so, the Stock Exchanges shall have to ensure that there is no change in the contract
specifications or the risk management framework and the integrity of the market is not
affected in any manner. A new contract is introduced on the next trading day following the
expiry of the near month contract.
[Link] Currency Derivatives

Currency Derivatives trading was introduced in the Indian financial markets with the launch
of currency futures trading in the USD-INR pair in 2008.6 Currently in India, currency futures
contracts are traded on four INR pairs i.e., USDINR, EURINR, GBPINR and JPYINR and on
three cross currency pairs i.e., EURUSD, GBPUSD and USDJPY on the recognized stock
exchanges. Currency futures and options are traded on separate segment namely “Currency
Derivatives Segment” of the Exchange. In case of currency futures, the underlying for USD-
INR, EURINR, GBPINR and JPYINR pair would be the rate of Exchange between USD and INR,
Euro and INR, Great Britain Pound and INR and Japanese Yen and INR respectively. The
contract has a maximum of 12 months of trading cycle. The new contract is introduced
following the expiry of the current contract. The expiry day/ last day for the trading of the
monthly contract shall be two working days prior to the last business day of the expiry
month at 12.30 pm. All these contracts are cash settled. The final settlement price for

5
[Link]
segment_86373.html
6 Currency futures were launched at the National Stock Exchange of India on August 29, 2008, and subsequently currency

trading at BSE was introduced on October 1, 2008, and MSEI (earlier known as MCX-SX) on October 7, 2008.

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USDINR, EURINR, GBPINR and JPYINR is the FBIL (Financial Benchmarks India Pvt. Ltd.)
reference rate. (FBIL)7 is an independent benchmark administrator for interest rates and
foreign exchange. The final settlement price for cross currency pairs is derived from crossing
respective FCY-INR rates.

In case of currency options, monthly as well as weekly contracts are available. In case of
monthly contracts, 3 serial monthly contracts followed by 3 quarterly contracts of the cycle
March/June/September/December are available for trading. The expiry is two working days
prior to the last business day of the expiry month at 12.30 pm. The final settlement price is
the FBIL reference rate on the date of the expiry of the contact.

There are weekly futures and options are also available in various Exchanges for certain
currency pairs. Generally, such contracts are expired on last day of the week i.e., on Friday
at 12:30 pm. Currently, all Exchange Traded Currency Futures and Option contracts are cash
settled in INR.

[Link] Interest Rate Derivatives

Interest Rate Derivatives trading was introduced with introduction of Interest rate futures
contract. Interest rate option was introduced in 2019.

Interest Rate Futures (IRF) are standardized interest rate derivative contracts traded on a
recognized stock exchange to buy or sell a notional security or any other interest-bearing
instrument or an index of such instruments or interest rates at a specified future date, at a
price determined at the time of the contract. Interest Rate Futures include Money Market
Futures also. Currently Exchange traded interest rate futures are available on single
government of India Securities within maturity basket of 4-8 year, 8-11 year and 11-15
years, 91-day T-Bills and Overnight MIBOR. All these contracts are currently cash settled.
Recently SEBI provided guidelines for introduction of future contracts on Corporate Bond
Indices.

For single bond futures available on GOI securities, the lot size (i.e., the minimum amount
that can be traded on the Exchange) is 2000 bonds at the rate of Rs. 100 per bond i.e., with
the total face value of Rs.2,00,000. Typically, three Serial monthly contracts followed by
three quarterly contracts of the cycle March/June/September/December available for
single bond futures. Last trading day is the last Thursday of the expiry month. If the last
Thursday is a holiday, previous trading day will be the last trading day. The contract is cash
settled. The final settlement price is value weighted average price of the underlying bond
based on the prices during the last two hours of the trading on NDS-OM. If less than 5 trades
are executed in the underlying bond during the last two hours of trading, then FIMMDA/FBIL
price shall be used for final settlement.

7
Financial Benchmark India Pvt. Ltd (FBIL) is an independent benchmark administrator for interest rates and
foreign exchange.

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Interest rate options are currently available on single bond GOI securities. Typically, three
Serial monthly contracts followed by three quarterly contracts of the cycle
March/June/September/December available for single bond options. Last trading day is the
last Thursday of the expiry month. If the last Thursday is a holiday, previous trading day will
be the last trading day. These contracts are cash settled. The final settlement price is value
weighted average price of the underlying bond based on the prices during the last two hours
of the trading on NDS-OM. If less than 5 trades are executed in the underlying bond during
the last two hours of trading, then FIMMDA/FBIL price shall be used for final settlement.

Interest rate futures and Options are traded on Currency Derivatives segment of the
Exchange. Though SEBI allowed physical settlement for interest rate derivatives product,
currently all Interest Rate Derivatives traded on Exchanges are cash settled.

[Link] Commodity Derivatives

Commodities Derivatives are derivatives products, the price of which is derived from the
underlying commodities. Commodity derivatives facilitate the trading of commodities such
as gold, silver, metal, energy and agricultural goods. Commodity derivatives contract can
cash settled or physically settled with actual delivery of commodity. Commodity futures and
options are traded on separate segment namely “Commodity Derivatives Segment” of the
Exchange.

1.4.3 Debt Market and its Products

Debt market mainly consists of government securities, money market instruments, bonds
and debentures, which provide financing through the issuance of bonds, and enable the
subsequent trading thereof. These instruments can be traded in OTC, Electronic Trading
Platform or Exchange traded markets. In India, the debt market is broadly divided into two
parts: government securities (G-Sec) market and the corporate bond market.

Government Securities Market: The Government needs enormous amount of money to

perform various functions such as maintaining law and order, justice, national defense,
central banking, creation of physical infrastructure etc. For this, it generates money by
various ways including borrowing from banks and other financial institutions. A
Government Security (G-Sec) is a tradeable instrument issued by the Central Government
or the State Governments. It acknowledges the Government’s debt obligation. Such
securities are short term (usually called treasury bills, with original maturities of less than
one year) or long term (usually called Government bonds or dated securities with original
maturity of one year or more). In India, the Central Government issues both, treasury bills
and bonds or dated securities while the State Governments issue only bonds or dated
securities, which are called the State Development Loans (SDLs). G-Secs carry practically no
risk of default and, hence, are called risk-free gilt-edged instruments.

The major investors in this market are banks, insurance companies, provident funds, mutual
funds, state governments, FPIs etc.

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In the primary market, Government securities & Treasury Bills are issued through auctions
(yield based or price based auctions) conducted by RBI. The secondary market for G-Secs in
India is very active with diverse groups of market participants. Secondary market trading
mainly takes place through Negotiated Dealing System-Order Matching (NDS-OM) of RBI. G-
Secs are also traded in OTC market, RBI retail direct portal and Stock Exchanges.

Corporate Bond Market: The corporate bond or corporate debt market is a market where
debt securities of corporate (non-government entities, municipal corporation etc.) such as
corporate bonds, debentures etc. are issued and traded. Corporates adopt either the public
offering route or the private placement route for issuing debentures/bonds. Corporate
bonds are bonds issued by firms to meet their needs for expansion, modernization,
restructuring operations, mergers and acquisitions. The investors in this market are banks,
financial institutions, insurance companies, mutual funds, FPIs etc.
In India, corporate bonds are issued mainly on private placement basis (more than 95%) and
only small part of the total issuances are through public offer. With the majority of corporate
debt issuances in India being private placements, SEBI vide its circular of April 21, 2016,
facilitate/mandate private placement issuance through electronic book
mechanism/electronic bidding platform (EBP) for better and transparent price discovery.
SEBI further streamlined the procedure through its revised guidelines in force from April 1,
2018, operational circular dated August 10, 2021, and subsequent guidelines dated October
10, 2022, applicable from January 01, 2023. The EBP guidelines are applicable for debt
securities and non-convertible redeemable preference shares as defined under SEBI
regulations and ‘Commercial paper’ and/or ‘Certificate of Deposits’ defined under RBI
guidelines issued via private placement mechanism.

Corporate Bond secondary market is mainly OTC market, where the trades are negotiated
between the participants on phone or through intermediaries. The exchanges have a
corporate bond reporting platform, in which all regulated entities need to report OTC
corporate bond trades within stipulated time. The Exchanges in early 2020 have launched
Request for Quote (RFQ) Platform for execution and settlement of trades which will allow
market participants to transact in debt securities. The RFQ Platform provides market
participants range of options to seek a quote and to respond to a quote, while keeping an
audit trail of all the interactions i.e. quoted yield, mutually agreed price, deal terms etc. This
has brought pre trade transparency in the transactions of eligible debt securities. RFQ
facilitate participant to negotiate various terms of transaction through screen based system.
Corporate bonds are also traded on Stock Exchanges. The platform allows regulated entities
to transact through brokers or directly while other entities have an option to transact
through brokers.
1.4.4 Other Asset Classes
Real Estate Investment Trusts (REIT) are trusts registered with SEBI that invest in
commercial real estate assets. “REIT” or “Real Estate Investment Trust” means a person that
pools Rs. 50 crores or more for the purpose of issuing units to at least 200 investors so as to
acquire and manage real estate asset(s) or property(ies), that would entitle such
investors to receive the income generated therefrom without giving them the day-to-
day control over the management and operation of such real estate asset(s) or

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property(ies). REIT assets” means real estate assets and any other assets held by the REIT,
on a freehold or leasehold basis, whether directly or through a holding company and/or a
special purpose vehicle. SEBI (Real Estate Investment Trusts) Regulations, 2014, laid down
framework for REITs. The SEBI (Real Estate Investment Trusts) Regulations, 2014 specifies
conditions regarding issuance and allotment of units. Few details are given below:
A REIT shall make an initial offer of its units by way of public issue only. Any subsequent
issue of units by the REIT may be by way of follow-on offer, preferential allotment, qualified
institutional placement, rights issue, bonus issue, offer for sale or any other mechanism and
in the manner as may be specified by SEBI. The value of the assets owned or proposed to
be owned by a REIT coming out with an initial offer will not be less than Rs. 500 crore and
the minimum offer size will not be less than Rs.250 crore. The minimum number of unit
holders other than sponsor(s), its related parties and its associates forming part of public
which shall be not less than two hundred. The maximum subscription from any investor
other than sponsors, its related parties and its associates shall not be more than 25 percent
of total unit capital. The minimum subscription from any investor in initial and follow-on
public offer shall fall in range of Rs. 10 thousand to Rs. 15 thousand rupees. The units will
be listed on the stock exchange. The units of the REIT listed in recognized stock
exchanges shall be traded, cleared and settled in accordance with the bye-laws of
concerned stock exchanges and such conditions as may be specified by the SEBI. Trading lot
for the purpose of trading of units of the REIT shall consist of one unit.
Infrastructure Investment Trusts (InvIT) are trusts registered with SEBI that invest in the
infrastructure sector. SEBI (Infrastructure Investment Trusts) Regulations, 2014, laid down
framework for InvITs. The SEBI (Infrastructure Investment Trusts) Regulations, 2014
specifies conditions regarding issuance and allotment of units. The InvIT can raise funds
through public issue and/or through private placement. The value of InvIT assets shall not
be less than Rs. 500 crore and the offer size shall be of atleast Rs. 250 crores.
If the InvIT raises funds by public issue it shall be by way of initial public offer. No InvIT shall
raise funds through public issue if any subordinate units have been issued and are
outstanding. Any subsequent issue of units after IPO may be by way of follow-on offer,
preferential allotment, qualified institutional placement, rights issue, bonus issue, offer for
sale or any other mechanism and in the manner as may be specified by SEBI. The minimum
subscription amount from any investor in initial and follow-on offer shall fall within the
range of Rs. 10,000 to Rs. 15,000. The maximum subscription from any investor other than
sponsors, its related parties and its associates shall not be more than 25 percent of total
unit capital. The InvIT shall refund money in case the number of subscribers to the initial
offer forming part of public is less than twenty or fails to collect subscription of at least 90%
of the issue size.
In case InvIT raises fund by way private placement, then it shall be do it through placement
memorandum and from institutional investor or body corporate only, whether Indian and
foreign. The minimum investment from any investor should be of rupees one crore.
Notwithstanding the above, if such privately placed InvIT invests or proposes to invest not
less than eighty per cent of the value of the InvIT assets, in completed and revenue
generating assets, the minimum investment from an investor shall be Rs. 25 crore. The
maximum subscription from any investor other than sponsors, its related parties and its

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associates shall not be more than 25 percent of total unit capital. The placement from not
less than five and not more than one thousand investors. It shall be mandatory for units of
all InvITs to be listed on a recognized stock exchange having nationwide trading terminals,
whether publicly issued or privately placed. The units of the InvIT listed in the designated
stock exchanges shall be traded, cleared and settled in accordance with the bye-
laws of designated stock exchanges and such conditions as may be specified by the SEBI.
In case of private placement, trading lot for the purpose of trading of units on the
designated stock exchange shall Rs. 25 lakhs. In case of public issue, trading lot for the
purpose of trading of units on the designated stock exchange shall consist of one unit.
Sovereign Gold Bond Scheme (SGB) was launched in 2015 to provide an alternative way for
investors to take exposure to gold as an investment. SGBs are government securities
denominated in grams of gold. The bonds are issued in denomination of one gram of gold
and in denominations thereof. The tenor of the bond is 8 years. Each bond investor buys the
bonds in Indian rupees and on redemption are paid the maturity value also in Indian rupees.
The units (grams) of gold bought by the investor and represented by the bonds is protected.
The value of the bond will reflect the price of gold. On maturity the value of the bond may
be higher or lower depending upon the prevailing price of gold. The bonds bear an interest
rate (currently 2.50% per annum) on the initial investment and is paid semi-annually to the
account of the bond holder. Investors can apply for the bond when the issue of each tranche
is open. The bonds are available for investment by resident individuals, HUFs, Trusts,
Universities, Charitable Trusts and others. The bonds can be held in physical form or in
dematerialized form. The bond is tradable on stock exchanges if held in dematerialized
form.

1.5 International Financial Services Centres (IFSC)

An International Financial Services Centre (IFSC) caters to customers outside the jurisdiction
of the domestic economy. These centres are ‘international’ in the sense that they deal with
the flow of finance and financial products/services across borders which includes banking,
insurance, asset management, and most importantly, a well-structured and fully developed
capital market for debt, equities, commodities as well as derivatives. The first IFSC in India
has been set up at GIFT City, Gandhinagar, Gujarat. An IFSC is thus a jurisdiction that
provides world class financial services to non-residents and residents, to the extent
permissible under the current regulations, in a currency other than the domestic currency
(Indian rupee) of the location where the IFSC is located.
IFSC at GIFT, Gandhinagar is a deemed foreign territory dealing in foreign currency. The
entities in IFSC are recognized as non-resident entity under the FEMA regulations of Reserve
Bank of India and get benefits which include exemptions from security transaction tax (STT),
commodity transaction tax, dividend distribution tax, capital gains waiver and no income
tax.
As per the SEBI International Financial Services Centres (IFSC) guidelines, 2015, the stock
exchanges operating in IFSC was permitted dealing in following types of securities and
products, with a specified trading lot size on their trading platform subject to prior approval
of SEBI, viz.,
 Equity shares of a company incorporated outside India;

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 Depository receipt(s);
 Debt securities issued by eligible issuers;
 Currency and interest rate derivatives;
 Index based derivatives;
 Commodity derivatives;
 REITs and InvITs by whatever name called in permissible jurisdictions;
 And any other securities as may be specified by SEBI.

Currently NSE and BSE both have exchanges at IFSC and offer various products for trading
viz., Index derivatives, Stock Derivatives, Currency Derivatives, Commodity Derivatives and
Debt Securities.

“Direct Listing of Equity Shares of Companies Incorporated in India on International

Exchanges Scheme” (the Direct Listing Scheme) is specified in Schedule XI of Foreign
Exchange Management (Non-debt Instruments) Rules, 2019. The Scheme provides an
overarching framework for issuing and listing of equity shares of public Indian companies
on international exchanges. Prior to this, Indian companies were not allowed to issue or list
equity shares abroad.

The direct listing of equity shares of Indian companies on the International Exchanges in
GIFT IFSC will be in accordance with IFSCA Act, 2019 and Rules and Regulations notified
thereunder, including the IFSCA (Issuance and Listing of Securities) Regulations, 2021 (ILS
Regulations). The ILS Regulations provide the regulatory framework for initial listing,
disclosure requirements, continuous listing obligations etc. for listing companies on the
International Exchanges in GIFT IFSC.

IFSCA (International Financial Services Centres Authority) has issued operating guideline to
enable the Bullion Exchange, Bullion Clearing Corporation, Bullion Depository, Vault
Manager in as IFSC to operationalize these activities as per IFSCA (Bullion Exchange)
Regulations, 2020.

As per SEBI (International Financial Services Centres) Guide lines, 2015, only the
following persons can deal in securities listed in IFSC:
 A person not resident in India;
 A non-resident Indian;
 A financial institution resident in India who is eligible under FEMA to invest funds
offshore, to the extent of permitted outward investment;
 A person resident in India who is eligible under FEMA, to invest funds offshore, to the
extent allowed under the Liberalized Remittance Scheme of Reserve Bank of India,
subject to a minimum investment as specified by the Board from time to time.

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Sample Questions

1. Which of the following best describes the term “Private Placement”?

(a) Issue made to all investors in the Indian securities market.

(b) Issue made to select group of people.
(c) Issue made to those investors who already hold shares of the company.

2. State which of these statements is true?

(a) Call Option gives the buyer the right but not the obligation to buy the underlying asset.
(b) Call Option gives the buyer the right but not the obligation to sell the underlying asset.
(c) Put Option gives the buyer the right but not the obligation to buy the underlying asset.

3. The fractional ownership in a company is represented by which of the following?

(a) Equity Shares
(b) Debentures
(c) Bonds

4. ___________ Instruments are not allowed to be traded on IFSC?

(a) Equity shares of a company incorporated outside India
(b) Equity shares of an Indian Companies
(c) Currency and interest rate derivatives

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