Are you looking to invest in the financial market or want to become an intermediary? But feeling that it is an overwhelming and complex task? Don’t worry! GenZCFO is here to rescue you. We are a team of trusted guides ensuring every step you take is in the right direction.

But before you enter into the realm of it, you must know that you cannot invest directly or become intermediaries. You will need the help of several SEBI intermediaries which are considered to be the backbone of India’s financial system. No matter if you are a seasoned investor or just a beginner, understanding who intermediaries are, what are their different types, how they operate, what role SEBI plays in regulating them, and how these intermediaries can get registered is very important.

This article is an attempt to explain the intricacies of SEBI intermediaries and give you certain insights on the topic so that you can make informed decisions with confidence.

Interested to gain more insights! Read further to know more!

SEBI AND ITS ROLE IN REGULATION OF INTERMEDIARIES

In general parlance, an intermediary refers to a person or organization that acts as a link between people and tries to connect them. It is basically about trying to bring about an agreement between two people or organizations. You can also refer to them as third parties who assist the individuals to deal or execute a deal that would otherwise be too difficult for those parties to close. This implies that intermediaries facilitate transactions between parties by providing necessary services, expertise, or access to markets.

Securities and Exchange Board of India (SEBI) is the key market regulator that oversees the functioning of various intermediaries in both the primary and secondary markets by bringing regulations for respective intermediaries. You can understand it as that SEBI is the key regulatory body that has been established to protect your i.e. investors' interest. Intermediaries which are individuals or companies, act as a main link between the investors and SEBI and the stock exchanges.

SEBI Act, 1992 is the primary law that deals with the functions and powers of SEBI. It is one of the functions of SEBI to regulate the business in stock exchanges and other securities markets. There are certain intermediaries in the stock market such as stock brokers, portfolio managers, investment advisors, merchant bankers etc. These intermediaries have been explained in later part of the article.

As a key regulator in the secondary market, SEBI also plays an important role in protecting investor’s interest, promoting and regulating the securities market and enforcing the regulations to prevent unfair practices. 

You must also note that it is the duty of the SEBI to register and regulate the working of stock brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisors and such other intermediaries who may be associated with the securities market in any manner.

Besides having respective regulations for intermediaries, SEBI has also introduced SEBI (Intermediaries) Regulations, 2008 for regulating the activities of intermediaries in financial markets like Asset management companies, foreign portfolio investors, clearing member of a clearing corporation or clearing house, trading members of a derivative segment etc.

SEBI has the power to appoint inspecting authorities who will be responsible for undertaking the inspection of the books of accounts, records, and documents of an intermediary for any purpose. If any default on the part of intermediary is found then, SEBI can take actions such as suspension of certificate of registration, cancellation of registration, warning the intermediary etc.

OBJECTIVES OF INTERMEDIARIES

It is important for you to understand that intermediaries are service providers and they form an integral part of any financial system of the country. They serve as a vital link between investor, issuer and the regulator. Considering their such an important role in the economy, it becomes highly crucial to understand the objectives of intermediaries which are explained as follows:

·       They will assist you in smoothening the process of investment.

·       They will establish a link between you and the users of the funds.

·       They provide important infrastructure for the robust growth and development of primary and secondary markets.

·   Intermediaries offer their services to the Corporations and Governments and will act as their representatives. This is because Corporations and Governments are often hesitant to offer their securities directly to the investors. Hence, they take the help of intermediaries. So, you will have to keep an eye on intermediaries for investment if you want to invest.

·       It is important for you to note that if you want to trade in share/secondary market, then you will have to transact in the market through the help of share brokers.

·   They will help you in selecting attractive investments by providing investment consultancy, market analysis and credit rating of investment instruments.

TYPES OF INTERMEDIARIES

There are several types of intermediaries in the market. These intermediaries have been explained below:

·       Alternative Investment Funds

Alternative Investment Funds are privately pooled funds which mostly invest in the infrastructure projects, debt equity market, hedge funds, venture capitals etc and are mostly accessible to the high-net-worth individuals or ultra-high net worth individuals. For example, Darjeeling Capital Trust, HDFC Capital Affordable Real Estate Fund-2 etc. The regulation dealing with Alternative Investment Funds is SEBI (Alternative Investment Funds) Regulations, 2012.

·       Market Infrastructure Institutions

Stock exchanges, depositories, and clearing corporations are collectively referred to as ‘Market Infrastructure Institutions’. Stock exchange refers to a trading platform where the buyers and sellers of shares meet each other to transact in securities. Though there are several stock exchanges, most prominent among them are National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).

A clearing corporation can be understood by the means of its functions that it performs. The three basic functions are clearing and settlement of all transactions executed in the stock market and carrying out of risk management activities. For example, Indian Clearing Corporation Limited, NSE Clearing Limited etc.

On the other hand, depository means an entity which facilitates the holding of securities in electronic form and enables the transfer of securities by book entry. This entity basically provides the facility of maintenance of ownership or transfer records of securities in an electronic book entry form. There are majorly two depositories in India i.e. Central Depository Services Limited (CDSL) and National Securities Depository Limited (NSDL).

·       Depository Participant

It refers to the agent of depository through which it establishes a link with investors and provides its depository services. It is basically an intermediary between the depository and the investors that facilitates transfer and settlement of securities. Depository participants are responsible for providing dematerialization and rematerialization services to the investors. For example, IDBI Bank Limited, Fincare Small Finance Bank Limited etc. The regulations dealing with depository participants and depositories are SEBI (Depositories and Participants) Regulations, 2018.

·       Custodians

These are the entities including large banks that hold the securities and manage the bank accounts on behalf of the institutional investors. They provide custodial services to the client. They also perform ancillary function such as assist in managing the transactions related to delivery of securities and funds after a trading transaction is successful through the broker, maintaining the accounts of securities and funds etc. For example, Axis Bank Limited, ICICI Bank Limited etc. The regulations dealing with the custodians is SEBI (Custodian) Regulations, 1996.

·       Infrastructure Investment Trusts

Infrastructure Investment Trusts is a collective investment scheme which is similar to mutual fund. It enables the direct investment of money from individual and institutional investors in infrastructure or cash-generating projects to earn a small portion of income as return. The main purpose of Infrastructure Investment Trusts is to expedite the investment in a country’s infrastructure sector to achieve overall economic growth. Additionally, it also aims to provide investors with a steady income stream. For example, POWERGRID Infrastructure Investment Trust, National Highways Infra Trust etc. The regulation dealing with Infrastructure Investment Trusts is SEBI (Infrastructure Investment Trusts) Regulations, 2014.

·       KYC (Know Your Client) Registration Agency

KYC Registration Agency is a specialized entity registered with SEBI that is responsible for storing the basic information about the investors centrally. With the help of these agencies, time and resources are saved because now customers will not have to provide information again. It is also pertinent to note that in order to bring uniformity in the KYC requirements for securities market, SEBI has initiated the uniform usage of KYC by all the SEBI registered intermediaries. For example, CDSL Ventures Limited (CVL), NSDL Database Management Limited (NDML) etc. The regulations dealing with the KYC (Know Your Client) Registration Agency is SEBI [KYC (Know Your Client) Registration Agency] Regulations, 2011.

·       Credit Rating Agencies

It refers to a body corporate that is engaged in the business of rating the securities that are either listed or proposed to be listed on the recognized stock exchange of the SEBI. For example, CRISIL Ratings Limited, ICRA Limited etc. The regulation dealing with credit rating agency is SEBI (Credit Rating Agencies) Regulations, 1999.

·       Stock Brokers

These are the members of stock exchange who act as the agents for you and helps in buying and selling shares on your behalf in the securities market. It is very important that all the secondary market transactions have to be conducted through registered brokers. It can also be said that stock broker is any person who have trading rights in any recognized stock exchange and includes a trading member. For example, Axis Securities Limited, ICICI Bank Limited etc. The regulation dealing with stock brokers is SEBI (Stock Brokers) Regulations, 1992.

·       Debenture Trustees

It refers to a trustee appointed in relation of any issue of debentures of a body corporate. For example, Canara Bank, Central Bank of India etc. The regulation dealing with debenture trustees is the SEBI (Debenture Trustees) Regulations, 1993.

·       Registrars to an Issue and Share Transfer Agents

Registrar to an Issue means any person who is appointed by a body corporate or any person or group of persons to carry the following activities:

o   Collects the application for investor in respect of an issue.

o   Keeps a proper record of applications and monies received from investors.

o   Assists the body corporates in various tasks such as determination of basis of allotment, finalizes the list of persons entitled to allotment of securities etc.

On the other hand, share transfer agents refers to those persons who on behalf of any body corporate are responsible for maintaining the records of holders of securities issued by such body corporate. It also refers to the department or division of a body corporate that performs the activities of share transfer agents if at any time the total number of holders of securities issued exceed 1 lakh. For example, Universal Capital Securities Private Limited, BGSE Financials Limited etc. The regulation dealing with registrar to an issue and share transfer agents are SEBI (Registrars to an Issue and Share Transfer Agents) Regulations, 1993.

·       Merchant Banker

It refers to any person who is engaged in the business of issue management either by making arrangements for buying/selling or subscribing to the securities. It can also refer to a person who is acting as a manager, consultant advisor or anyone who is rendering corporate advisory services in regards to issue management. Therefore, merchant bankers manage public issues and provides underwriting services to the investors. For example, Deutsche Bank, SMC Capitals Limited etc. The regulation governing merchant bankers is SEBI (Merchant Bankers) Regulations, 1992.

·       Mutual Funds

These are the entities that pool funds from the investors and then invest them in diversified portfolios. They offer various schemes and investment options for the investors. For example, Bajaj Finserv Limited, Canara Robeco MF etc. The regulation governing mutual funds is SEBI (Mutual Funds) Regulations, 1996.

·       ESG Rating Providers

ESG expands to Environmental, Social and Governance. ESG rating providers assists the investors in evaluating how well their investments are measuring in terms of sustainability. These rating providers are third party agencies which are mainly responsible for providing unbiased ratings to companies, funds, or securities based on the ESG parameters. Ratings are given in numerical scores, percentages, or letter grades. This helps in evaluating the entity’s exposure to ESG risks and their ability to manage those risks. Generally, ESG rating provider considers factors such as transparency, disclosure etc. For example, CARE ESG Ratings Limited, CRISIL ESG Ratings & Analytics Limited. As of now, ESG rating providers are regulated under SEBI (Credit Rating Agencies) Regulations, 1999. These regulations prescribe certain guidelines for registration of ESG rating providers, their general obligations, manner of inspection and code of conduct applicable to them.

·       Real Estate Investment Trust

These are the companies that own, manage or finance properties and are responsible for distributing most of their income to the investors. This income can be received from rents or mortgage payment. REITs permits the individuals to invest in large scale income producing real estate. For example, Mindspace Business Parks REIT, Nexus Select Trust etc. The regulations dealing with Real Estate Investment Trust is SEBI (Real Estate Investment Trusts) Regulations, 2014.

·       SM REITs

SM REIT expands to Small and Medium Real Estate Investment Trust. These are new investment options for the investors introduced by SEBI recently. These allow Indian investors to invest in both commercial and residential properties. These are similar to traditional REITs which own real estate properties, collect rental income and distribute to investors as dividends. However, as compared to these traditional REITs, SM REITs may have lower numbers and values of properties. For example, Property Share Investment Trust. The regulations dealing with SM REITs is SEBI (Real Estate Investment Trusts) Regulations, 2014 as amended by SEBI (Real Estate Investment Trusts) (Amendment) Regulations, 2024.

·       Vault Managers

Vault managers provide vaulting services to the investors. These are the persons who are responsible for storing gold to create electronic gold receipts (EGRs). Their major responsibilities include accepting deposits, storing and keeping gold safe, handling grievances, checking deposited gold against gold standards, coordinating with depositors to create and transfer EGRs etc. Vault managers have to register themselves with SEBI and obtain a certificate of registration. For example, Brink’s India Private Limited, Sequels Logistics Private Limited etc. The regulations dealing with vault managers is SEBI (Vault Managers) Regulations, 2021.

·       Venture Capital Funds

These are the funds which are established as a company or trust and are responsible for raising money through donations, loans, issue of securities or units etc. They invest in startups and early growth stage companies and provides them with growth capital and guidance. Their main focus is on high growth potential investments. For example, Aditya Birla Private Equity Trust, Aditya Birla Real Estate Fund etc. The regulation dealing with venture capital funds is SEBI (Venture Capital Funds) Regulations, 1996.

·       Bankers to an Issue

It refers to any scheduled bank or such other banking company as is specified by SEBI from time to time to carry the following activities:

o   Accepting application and application monies.

o   Accepting allotment or call monies.

o   Refunding application monies.

o   Payment of dividend or interest warrants.

For example, AU Small Finance Bank Limited, Bandhan Bank Limited etc. The regulation dealing with bankers to an issue is SEBI (Bankers to an Issue) Regulations, 1994.

·       Investment Advisor

It refers to any person who is engaged in the business of providing investment advice to the investors which can be either person or a group of persons for a consideration. Here, investment advice means any advice relating to investing in, purchasing, selling or otherwise in securities or investment products. It also contains advice on the investment portfolio containing securities or investment products whether written or oral or through any medium of communication. But all of this advice is rendered for the benefit of investors and which further helps them in financial planning. These investment advisors conduct risk assessments and create investment plans so that portfolio of investors is rebalanced. It is mandatory for a person to get registered with SEBI if they want to become an investment advisor and render investment advice. For example, Kotak Alternate Asset Managers Limited, HDFC Securities Limited etc. The regulations dealing with investment advisor is SEBI (Investment Advisors) Regulations, 2013.

·       Foreign Venture Capital Investors

Foreign Venture Capital Investor refers to an investor who is incorporated and established outside India, is registered under the regulations and proposes to make the investment in accordance with the regulations. These investors intend to invest in the venture capital funds or undertakings in India. These investors can invest in a variety of sectors such as IT, biotechnology, bio-fuels, seed research and development etc. For example, Alpha Asia Holdings II Pte Limited, Agility Fanar General Trading FZE etc. The regulations dealing with foreign venture capital investor is SEBI (Foreign Venture Capital Investors) Regulations, 2000.

·       Self-Certified Syndicate Banks

A self-certified syndicate bank is a bank that is responsible for offering the applications supported by blocked amount (ASBA) process for applying to public issues. In simple terms, a bank which is recognized by SEBI and capable of providing ASBA services to its customers. This process allows the retail investors to apply for IPO using a bank account to block application money until allotments are made. These banks also provide guarantee to the issuer company for the blocked money. For example, Bank of Baroda, Axis Bank Limited etc.

·       Research Analysts

It refers to any person who is responsible for preparation or publication of the content of the research report, making anyone buy/sell/hold the recommendations or give a price target or offer an opinion concerning the public offer with respect to the securities that are listed or to be listed in a stock exchange. The basic job of research analyst is to study the companies and industries, analyze their raw data am make forecast recommendations about whether to buy, hold or sell securities. But research analysts should avoid conflict of interest to maintain the integrity of their analysis. Also, a person who aspires to become research analyst should get themselves registered with SEBI. For example, Axis Securities Limited, Onepaper Research Analysts Private Limited etc. The regulations dealing with research analyst is SEBI (Research Analysts) Regulations, 2014.

·       Portfolio Managers

Portfolio refers to a bucket of different securities. Therefore, portfolio manager refers to a body corporate which pursuant to a contract signed with the investor, is responsible for advising, directing or undertaking on behalf of the investor the management or administration of a portfolio of securities or goods or funds of the investor. In simple words, anyone who is responsible for managing the investment portfolios for clients, offering customized investment solutions and monitoring market trends and adjusting portfoilio according to it is a portfolio manager. For example, Motilal Oswal Capital Limited, Kotak Securities Limited etc. The regulations dealing with portfolio managers is SEBI (Portfolio Managers) Regulations, 2020.

·       Foreign Portfolio Investor

It refers to any person who is registered under Chapter II of SEBI (Foreign Portfolio Investors) Regulations, 2019 and shall be deemed to be an intermediary under the provisions of SEBI Act, 1992. For example, American Century Global Small Cap Fund, R.S. Holdings Limited etc. The regulations dealing with Foreign Portfolio investors is SEBI (Foreign Portfolio Investors) Regulations, 2019.

PROCESS OF REGISTRATION OF INTERMEDIARIES

It is pertinent to understand that not everyone can become an intermediary. If anyone wants to become an intermediary then they are required to apply to the SEBI for the grant of certificate to act as an intermediary. If all the conditions are fulfilled and the applicant is found eligible, then SEBI will grant a certificate.

It has been specifically provided in SEBI Act for registration of intermediaries. It has been stated that no one can buy, sell or deal in securities except under the conditions given in the certificate of registration which is obtained from the SEBI in accordance with the relevant regulations.

But how can intermediary get themselves registered. Let us understand in this detail.

·       Application for Grant of Registration

First of all, an application for the grant of a certificate to act as an intermediary has to be made to SEBI. However, if a person wants to become stock broker, sub broker, clearing member, or depository participant, then it has to first of submit the application to their principal members such as Stock exchange, clearing corporation/house, depository respectively. These principal members will check the application and examine the eligibility of the applicant in terms of the respective regulations. After everything is found correct, the application will be forwarded and submitted to SEBI with application fees as early as possible but not later than 30 days from the receipt of the complete application.

·       Verification of Application

After SEBI has received application, it will verify them. If required, they can ask from the application for additional information or clarification. It can also conduct physical verification of documents, office space, infrastructure, technological support etc. that a intermediary is required to have to perform its functions.

·       Consideration of Application

SEBI will consider the application on certain parameters such as whether the applicant has been refused the certificate by SEBI in past and on what grounds, whether the applicant, its directors/partners or trustees are involved in any pending litigation which is related to securities market and will have an adverse bearing on the business of the applicant, whether the applicant fulfills the eligibility criteria, whether the grant of certificate is in the interest of investors and development of securities market.

·       Rejection of Application

If SEBI thinks that application for registration has to be rejected, then SEBI has to record the reasons in writing for such refusal. Some of the reasons which can be cited by SEBI for refusal of application