Securities markets

A PMS portfolio lives inside the listed securities market. When a client asks why a trade took a day to settle, who actually holds her shares, or what a circuit breaker is, you should be able to answer without looking it up. The exam tests the plumbing: who does what, and in what order.

Primary market: where securities are born

In the primary market, companies and governments raise fresh money by issuing securities. The main routes are:

• Initial public offer (IPO). First sale of shares to the public, followed by listing on an exchange. Price is found through book building within a price band; retail investors apply through ASBA (money is blocked, not debited) or UPI.
• Follow-on public offer (FPO) for a listed company raising more capital, and offer for sale (OFS) where existing holders, often promoters, sell through the exchange window.
• Rights issue to existing shareholders in proportion to holdings, usually at a discount. Bonus issue gives free shares out of reserves and changes nothing in value.
• Private placement, preferential allotment and qualified institutions placement (QIP) for select investors, faster but with lock-ins and pricing rules.

SEBI's issue regulations (ICDR) govern disclosures in the offer document and the timeline; shares now list within three working days of issue closure. Anchor investors are allotted a day before the issue opens to signal demand.

Secondary market and its participants

Once listed, securities trade among investors on exchanges such as NSE and BSE. The issuer receives nothing from these trades; the market provides price discovery and liquidity. The participants you must keep straight:

• SEBI regulates the whole market under the SEBI Act, 1992. RBI regulates banks, the money market and government securities.
• Stock exchanges provide the trading platform and surveillance.
• Clearing corporations (NSE Clearing, ICCL) stand between buyer and seller through novation and guarantee settlement. If one side defaults, the clearing corporation still delivers.
• Depositories (NSDL, CDSL) hold securities in electronic form; investors access them through depository participants (DPs). Dematerialisation replaced paper certificates.
• Stock brokers execute client orders; custodians hold securities and settle trades for institutions, including many PMS clients.
• KYC registration agencies (KRAs), credit rating agencies, registrars and transfer agents, investment advisers, research analysts, mutual funds, AIFs, FPIs and portfolio managers complete the picture, each registered with SEBI.

How a trade moves from order to settlement

Orders are matched on the exchange by price-time priority: the best price wins, and among equal prices the earlier order wins. Limit orders specify a price; market orders take whatever is available. After the trade, the clearing corporation computes obligations and settlement happens on a T+1 rolling basis: the buyer pays and the seller delivers on the next working day. An optional same-day (T+0) cycle exists for a set of stocks, but T+1 remains the standard settlement answer.

Shares must be held in demat form to be traded on an exchange; transfer of physical share certificates of listed companies is no longer permitted, except by transmission or inheritance. On settlement day the clearing corporation collects shares and money from the selling and buying brokers (pay-in) and delivers them to the other side (pay-out), and the broker then credits the client's demat or bank account.

Risk control works through margins collected upfront, daily mark-to-market, and price bands. Individual stocks have daily price limits; the market as a whole has index circuit breakers that halt trading if Nifty 50 or Sensex moves 10%, 15% or 20%, with the halt duration depending on the time of day. Securities transaction tax (STT) is levied on equity trades and is relevant later for tax treatment of gains.

Indices and market-cap classification

An index tracks a basket of securities to represent a market or segment. Nifty 50 and Sensex 30 are the broad benchmarks; sector indices (Bank, IT, Pharma), size indices (Midcap 150, Smallcap 250) and total return indices (TRI, which add back dividends) are all used as PMS benchmarks. Most Indian indices are free-float market-capitalisation weighted: a company's weight depends on the value of shares actually available for trading, excluding promoter and locked-in holdings.

For mutual funds and most PMS strategies, size labels follow the AMFI list updated every six months: the top 100 companies by average full market cap are large caps, 101 to 250 are mid caps, and 251 onwards are small caps. The ranking uses full market cap, not free float, so do not mix the two.

Investor protection

Every intermediary needs SEBI registration and must follow a code of conduct. Complaints go first to the intermediary, then to SEBI's online platform SCORES, and the Online Dispute Resolution (ODR) portal offers conciliation and arbitration. Exchanges run investor protection funds for broker defaults. KYC through a KRA, PAN linkage and nomination in demat accounts are standard hygiene that a PMS client must complete before onboarding.

Knowing the roles matters for a practical reason: in a PMS, the securities sit in the client's own demat account with a depository, trades go through the manager's broker and custodian, and the clearing corporation settles. A client who understands that chain trusts the structure.