Secondary Market Transactions

What this chapter covers

Chapter 14 carries 5 marks out of 100 — 5% of the paper.

Learning Objectives: After studying this chapter, you should know about the secondary market transactions: Stock markets · Participants in the Stock markets · Listing of Securities · Custodians · Registrar and Transfer Agents

Primary and secondary markets

A company issues securities for the first time to different classes of investors in the primary markets. An Initial Public Offer (IPO) or a Further Public Offer (FPO) is an offer of shares to the public at large while a private placement of shares is an offer made to a select group of investors such as financial institutions, mutual funds, group companies and the like.

The proceeds of shares sold in the primary market go to the company and it increases the share capital of the company. The only exception to this is the offer for sale of shares in the primary market where the proceeds go to the person(s) making the offer and not to the company.

Once the shares are issued, they may be traded among investors. This market for trading in securities that have already been issued is called the secondary market for securities. In the secondary market, the securities are purchased from other investors rather than from the issuer. The proceeds of the transaction go to the selling investor and not to the issuing company.

The first sample question tests this — the proceeds go to the seller.

Why a secondary market is needed

Providing a mechanism for price discovery. The investors in a stock would buy and sell the share depending upon their estimation of the value of the stock. The estimation that the investor makes takes into consideration all the information available which will impact the performance of the company. When many investors evaluate a stock, it is possible to arrive at the appropriate price for the stock.

Providing a mechanism for dissemination of information. Determining the price of a stock would depend on the quality and timeliness of the information that the investor has to evaluate. An efficient secondary market will provide the way for periodic, relevant and timely information to reach the investors.

Providing liquidity. Investors who have bought securities may want to exit the investment. A secondary market provides a way for the investor to find buyers at prices that reflect the valuation of the stock and are acceptable to them. The efficiency of a secondary market lies in enabling this in a cost-effective way.

Three functions — price discovery, information, liquidity.

14.1 Stock markets

The organised secondary market for securities is called a stock market. The principal stock exchanges in India are the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).

A stock market will have the following features: It will be regulated by the regulator of capital markets in the country. In India the stock exchanges are regulated by SEBI. It will provide a platform for trading, clearing and settlement of trades.

The third sample question tests this — stock markets are regulated by SEBI.

The two principal features

Trading Platform – The main stock exchanges in India facilitate screen based trading from member offices around the country. The trading system provides for anonymous trades and price-time priority in the prices at which trades are done. This basically means that trades are executed at the best price (lowest if the investor is buying and highest if the investor is selling) at a given point of time. The system also allows options for the investor to structure the trade in terms of the period of validity of the order, the manner in which the order will be filled and the like.

Anonymous trades, price-time priority.

Clearing and Settlement System- The stock exchange provides facilities of a clearing corporation whose function is to identify the net trade obligations of each party and what each party is owed for trades done in terms of securities and funds. The clearing corporation also stands guarantee for the trades done on the exchange.

The second sample question tests this — the clearing corporation stands guarantee.

Advantages of trading in demat form

Quicker settlement · Elimination of threat of loss of certificates · Elimination of bad deliveries through fake certificates, mutilation and the like · Ease of transactions such as transfer, nomination · Lower costs of transactions as stamp duty is not applicable

The exchange as a self-regulator

Stock exchanges enrol and regulate members and institutions who are allowed to participate in the markets. It sets guidelines for the conduct of transactions in securities and the conduct of members through the prescription of bye-laws for membership, capital requirements etc.

Further, SEBI has also laid down the operating procedure to handle cases of outage due to any technical glitch at any stock exchanges and extension of trading hours thereof — SEBI Circular No.: SEBI/HO/MRD-TPD-1/CIR/P/2023/7 dated January 9, 2023.

14.2 Participants in the stock markets

The participants in a stock market process are Investors · Intermediaries · Companies

Investors

Investors come to the stock exchange to buy and sell securities. SEBI's regulations permit Resident investors, Non-resident Indians, Corporate bodies, Trusts, FPIs who are registered with SEBI, among others, to invest in stock markets in India. Overseas corporate bodies are prohibited from investing in Indian securities markets.

Note the prohibition on overseas corporate bodies.

On January 1, 2012, the government decided to allow Qualified Foreign Investors (QFIs) to invest directly in the Indian equities market to boost capital inflows. QFIs can be individuals, groups or associations based abroad who are allowed by the government to invest directly in mutual funds and stocks of Indian companies.

Investors cannot directly trade on the stock market. They have to go through intermediaries called brokers. Brokers are members of the stock exchange. The investors have to open a trading account with the broker. They are required to comply with the "Know your Customer" (KYC) norms. This seeks to establish the identity and bona-fides of the investor.

The fourth sample question tests whether KYC is optional — it is false. KYC is mandatory, established by regulation.

Investors will also need to open a beneficiary account with a Depository Participant (DP) to be able to trade in dematerialised securities. This account will hold the shares which the investor will buy and sell.

Two accounts — a trading account with the broker and a beneficiary account with the DP.

Once the formality of account opening is done, investors can put through their transactions through their broker's terminal. The trades have to be settled, i.e. securities delivered/received and funds paid out/received, according to the settlement schedule (i.e. currently T+1). Investors have to give instructions to the DP to transfer securities from their account to that of the broker who is also a clearing member; or, give standing instructions to receive securities if they have bought shares. Similarly, they have to ensure that funds are available in their bank account.

Eligible QFI transactions

SEBI has issued detailed operational guidelines for qualified DPs for investment in equity shares by QFI vide circular number CIR/ IMD/FII&C/3/2012 on January 13, 2012. The eligible transactions are:

1. Purchase of equity shares in public issues, to be listed on recognised stock exchange(s). 2. Purchase of listed equity shares through SEBI registered stock brokers, on recognized stock exchanges in India. 3. Sale of equity shares which are held in their demat account through SEBI registered stock brokers. 4. Purchase of equity shares against rights issues. 5. Receipt of bonus shares or receipt of shares on stock split/ consolidation. 6. Receipt of equity shares due to amalgamation, demerger or such other corporate actions, subject to the investment limits. 7. Receipt of dividends. 8. Tender equity shares in open offer in compliance with SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. 9. Tender equity shares in delisting offer in compliance with SEBI (Delisting of Equity Shares) Regulations, 2009. 10. Tender equity shares in case of buy-back by listed companies in compliance with SEBI (Buy-back of Securities) Regulations, 2018.

The UPI block facility

To provide protection to the investors from the default of member(s) [i.e. 'trading member' (TM) / 'clearing member' (CM)], SEBI introduced a supplementary process for trading in secondary market based on blocked funds in investor's bank account, instead of transferring them upfront to the trading member, thereby providing enhanced protection of cash collateral.

The facility is provided by integrating Reserve Bank of India (RBI) approved Unified Payments Interface (UPI) mandate service of single-block-and-multiple-debits with the secondary market trading and settlement process and is referred to as 'UPI block facility'.

Single-block-and-multiple-debits.

Under the framework, funds will remain in the account of client but will be blocked in favour of the clearing corporation (CC) till the expiry date of the block mandate or till block is released by the CC, or debit of the block towards obligations arising out of the trading activity of the client, whichever is earlier. Further, settlement for funds and securities will be done by the CC without the need for handling of client funds and securities by the member.

From SEBI Circular No.: SEBI/HO/MRD/MRD-POD-2/P/CIR/2023/99 dated June 23, 2023 on Trading supported by blocked amount in Secondary Market.

Brokers

Intermediaries in the secondary market process include brokers and Depository Participants. Brokers are members of a stock exchange who are alone authorised to put through trades on the stock exchange. Brokers may be individuals or institutions who are registered with SEBI and meet the respective stock exchange's eligibility criteria for becoming a member of the exchange.

The fifth sample question tests this — it is true.

The stock exchange will specify minimum eligibility requirements such as base capital to be collected from the member brokers which are in line with SEBI's regulations on the same. The exposure that a broker can take in the market will be a multiple of the base capital that is deposited with the exchange.

Depository Participants

Depository Participants (DP) are associates of a Depository through whom the investors will hold their beneficiary accounts to enable them to trade in dematerialised shares.

The SEBI (Depositories and Participants) Regulations, 2018 specify the eligibility requirements for a DP. Banks, financial institutions, brokers, custodians, R&T Agents, NBFCs among others are eligible to become DPs. Apart from this, the DPs are required to have minimum net worth as specified by the regulations. This could range from Rs 10 crores for R&T Agents who are DPs to Rs 50 crores for NBFCs.

Rs 10 crore for R&T agents; Rs 50 crore for NBFCs.

The DPs are responsible for executing the investor's directions on delivery and receipt of shares from their beneficiary account to settle the trades done on the secondary markets.

14.3 Listing of securities

Companies list their shares on the stock exchange and they are bought and sold by investors using the mechanism of the stock exchange. A company has to meet certain eligibility requirements to be able to list its shares on a stock exchange. These include:

Minimum continuous public holding of 25 percent of total number of issued shares of every class of security listed. The public shareholding can be 10 percent for those classes of shares where the post issue capital of the company calculated at offer price is more than Rs.4000 crores but less than Rs. 1 lakh crore — under the Securities Contracts (Regulation) (Amendment) Rules, 2021 w.e.f. June 18, 2021.

A minimum average operating profit of Rs. 15 crore, calculated on a restated and consolidated basis, during the preceding 3 years, with operating profit in each of these preceding 3 years.

The memorandum and articles of association of the company must be approved by the stock exchange and contain the relevant provisions required by the SCRA.

The requirements are: Dividends will not be forfeited unless time-barred · A common transfer form will be used · Transfer of shares will not be denied on account of any obligation of the investor to the issuer · The fully paid-up shares will be free of lien · The draft prospectus will be approved by the stock exchange as to its compliance with the Exchange's listing requirements

The listing agreement

The Company signs the listing agreement with the stock exchange which lays down the obligation of the company with regard to its investors. The primary requirements in the agreement are:

The issuer will give the stock exchange due notice of meetings of board of directors where corporate actions such as dividends, bonus, buyback, rights issue and the like is to be considered.

The proceedings of the meeting will also be intimated to the exchange within 15 minutes of the closure of the meeting.

The issuer will ensure flow and dissemination of information by providing the exchange copies of the balance sheet, the profit and loss account, all periodic and special reports, minutes of general body meetings and the like.

The issuer will submit accounts and cash flow statements as required by the accounting standards and disclose all financial transactions with associates.

Any information that has a bearing on the operations of the company and is price-sensitive will be disclosed to the exchange.

The issuer will give effect to transfer of shares where all documents and formalities are in order. If there are minor discrepancies, the transfer will be done after getting the approval of the transferor.

The issuer will undertake to maintain the minimum public shareholding as required by the provisions of the SCRR.

The company will abide with the requirements of corporate governance in terms of: Composition, remuneration, operations and conduct of the board of directors · An audit committee that will oversee the financial aspects of the company · Overseeing the operations of subsidiary unlisted companies · Complete disclosure to the board and the audit committee on all matters that have an implication on the operations and finances of the company

14.4 The LODR Regulations, 2015

The SEBI (LODR) Regulations prescribe different Disclosure Requirements for different types of listed securities. Amendments include:

SEBI had put in place a mechanism to review the audit qualifications contained in the audit reports of the listed entities.

Dividend Distribution Policy shall be disclosed in the Annual Reports and on the websites of top 1000 listed entities.

The title of the regulation is substituted with "Obligations with respect to employees including senior management, key managerial persons (KMP), directors and promoters.

No employees, including key managerial persons or director or promoter of a listed entity shall enter into any agreement for compensation or profit sharing in connection with dealings in the securities of such listed entity, directly or indirectly... unless prior approval for the same has been obtained from the Board of Directors and public shareholders by way of an ordinary resolution.

Based on the report of the Committee on Corporate Governance under the Chairmanship of Mr. Uday Kotak, SEBI has accepted several recommendations such as every listed entity and their material unlisted subsidiaries shall undertake mandated secretarial audit and annex the same with its audit report; at least 1 woman independent director in the top 1000 listed entities by market capitalisation.

**A "material subsidiary" is one whose income or net worth exceeds 10 percent of the consolidated income or net worth respectively, of the listed entity and its subsidiaries in the immediately preceding accounting year.

Amendments pertain to compliances in relation to corporate governance provisions for listed entities which have issued shares with Superior Rights (SRs). SEBI has issued a framework for issuance of DVR.

The consolidated master circular

SEBI on LODR compliance consolidating all operative circulars up to December 30, 2025, effective January 30, 2026. This circular serves as a single reference for listed entities, stock exchanges, depositories, auditors, and other stakeholders, rescinding earlier circulars while preserving past actions, rights, liabilities, and penalties.

Key features include:

Uniform Listing Agreement applicable across equity, non-convertible securities, securitized debt, mutual fund units, and Indian Depository Receipts.

Shareholding disclosures under Regulation 31, including PAN-based consolidation, identification of persons acting in concert, and reporting of pledges and encumbrances.

Mandatory dematerilisation: 100% of promoter shareholding and at least 50% of non-promoter shareholding must be in dematerialised form, with limited exemptions.

100% promoter; at least 50% non-promoter.

Integrated Filing System for financial and governance reporting, streamlining periodic submissions.

Business Responsibility and Sustainability Reporting (BRSR) requirements, including ESG disclosures for top listed entities.

High Value Debt Listed Entities

Threshold increased from Rs. 1,000 crore to Rs. 5,000 crore of outstanding listed non-convertible debt.

Governance alignment: HVDLEs now follow corporate governance norms similar to equity listed entities, including board composition, director appointments, and committee requirements.

Exemptions: Entities falling below the revised threshold are exempt from HVDLE-specific obligations after three consecutive financial years.

Investor service mechanisms

Regulation 39(2): Listed entities must effect credit of securities in dematerialised form for subdivision, split, consolidation, renewal, exchange, or issuance of duplicate securities within 30 days of investor request.

Regulation 40: Transfers, transmissions, and transpositions of securities must be effected only in dematerialised form, with limited exceptions for transfers executed before April 1, 2019.

Regulation 61A(3): Unclaimed amounts in escrow accounts must be transferred to the Investor Education and Protection Fund (IEPF) after seven years, with no interest accrual.

Seven years, no interest.

Regulation 23: Harmonised for HVDLEs, with exemptions for wholly-owned subsidiaries and certain statutory payments.

Applicability

The SEBI (LODR) Regulations are applicable on listed entities which have listed any of the following designated securities on recognised stock exchange(s):

(a) Specified securities listed on main board or SME Exchange or Innovators Growth Platform · (b) Non-convertible securities · (c) Indian depository receipts · (d) Securitised debt instruments · (e) Security receipts · (f) Units issued by mutual funds · Any other securities as may be specified by SEBI.

Common obligations of listed entities

On changing the agent: in case of any change or appointment of new share transfer agent, the listed entity shall enter into tripartite agreement between the existing share transfer agent, the new share transfer agent and the listed entity, informing the exchange within 7 days of entering into Agreement, the agreement being placed at the subsequent Board Meeting.

Note this is a different tripartite agreement from Chapter 11's — that one is depository, issuer and R&T agent; this one is old agent, new agent and listed entity.

Quarterly compliances

SEBI has introduced Integrated Filing for Governance and Financial related periodic filing requirements under LODR — SEBI Circular No.: SEBI/HO/CFD/CFD-PoD-2/CIR/P/2024/185 dated December 31, 2024.

Cybersecurity — the CSCRF

In order to strengthen the cybersecurity measures in Indian securities market, and to ensure adequate cyber resiliency against cybersecurity incidents/ attacks, SEBI has released the Cybersecurity and Cyber Resilience Framework (CSCRF)... This framework shall supersede existing SEBI cybersecurity circulars/ guidelines/ advisories/ letters.

REs shall put in place appropriate systems and procedures to ensure compliance with the provisions of CSCRF and conduct cyber audit.

The CSCRF is standards based and broadly covers the five cyber resiliency goals adopted from Cyber Crisis Management Plan (CCMP) of Indian Computer Emergency Response Team (CERT-In)- Anticipate, Withstand, Contain, Recover, Evolve. These cyber resiliency goals have been linked with the following cybersecurity functions - Governance, Identify, Protect, Detect, Respond, Recover.

Five goals; six functions.

CSCRF has introduced a Cyber Capability Index (CCI). The CCI enables rating the cybersecurity and resilience controls of the REs and submit their CCI scores. The CCI for MIIs and Qualified REs shall help these REs to monitor and assess their progress and cyber resilience on a periodic basis.

Prior intimation of board meetings

Regulation 29(1) requires intimation at least 2 working days in advance (excluding date of meeting and date of intimation) for board meetings considering:

Financial Results (quarterly, half-yearly, annually) · proposal for buyback of securities · proposal for voluntary delisting · fund raising by way of issue of securities... through further public offer, rights issue, American Depository Receipts/Global Depository Receipts/Foreign Currency Convertible Bonds, qualified institutions placement, debt issue, preferential issue or any other method and for determination of issue price · declaration/recommendation of dividend, issue of convertible securities... or the passing over of dividend · the proposal for declaration of bonus securities · any alteration in the form or nature of any of its securities... or in the rights or privileges of the holders · any alteration in the date on which, the interest on debentures or bonds, or the redemption amount... shall be payable.

One exception: the intimation for determination of issue price in a qualified institutions placement (QIP) is not required if such placement is done in accordance with the provisions of SEBI (ICDR).

Regulation 46(3): any change in website content must be updated within 2 working days from the date of such change in content.

After the board meeting

Regulation 52(8): publish the financial results and the specified line items in at least one English national daily newspaper circulating in the whole or substantially the whole of India, within 2 working days of the conclusion of the meeting of the Board of Directors — with simplified newspaper advertisements for financial results using a Quick Response Code (QR code) and a link to the website and exchanges, subject to prior approval from the debenture trustee for existing non-convertible securities and disclosure in offer documents for new issuances.

Annual compliances

Intimation within 24 hours

Regulation 30(6) requires disclosure of material events as soon as reasonably possible and no later than:

30 minutes from the closure of the board meeting in which the decision pertaining to the event or information has been taken; however, if the board meeting closes after normal trading hours of that day but more than 3 hours before the beginning of the normal trading hours of the next trading day, then the listed entity shall disclose the decision... within 3 hours from the closure of the board meeting;

12 hours from the occurrence of the event/information, in case the event/information is emanating from within the listed entity;

24 hours from the occurrence of the event/information, in case the event/information is not emanating from within the listed entity.

30 minutes for a board decision; 12 hours from within; 24 hours from outside.

The chapter's sample questions confirm that the proceeds of trades in the secondary market go to the seller; that the clearing corporation stands guarantee for trades done on the stock exchange; that stock markets are regulated by SEBI; that it is FALSE that KYC norms are optional formalities; and that it is TRUE that brokers are members of a stock exchange authorised to put through trades on it.