NISM Series IX Merchant Banking: Chapter 1 – Introduction to Capital Markets (Short Notes)

NISM Series IX Merchant Banking: Chapter 1 – Introduction to Capital Markets (Short Notes)

If you are preparing for the NISM Series IX Merchant Banking Certification Examination, this is your first and most important chapter. Understanding how capital markets work is the foundation of everything a merchant banker does — from managing IPOs to advising on mergers and acquisitions.

These short notes are designed to help you pass the NISM exam quickly. They cover all key concepts, definitions, and facts from Chapter 1 of the official NISM workbook, with added depth to ensure complete clarity.

Also Read: How to Register for NISM Series IX Merchant Banking Exam | NISM Series IX Free Mock Test What is a Capital Market?

A capital market is a financial marketplace that brings together issuers (those who need funds) and investors (those who have surplus funds). Capital markets help issuers raise long-term capital for productive activities, while offering investors the opportunity to earn higher returns compared to traditional savings like bank deposits.

Capital markets are broadly divided into two segments:

1. Primary Market (New Issue Market)

The primary market is where new securities are issued for the first time. Companies, governments, and other entities raise fresh capital here. When a company launches an IPO (Initial Public Offer), it happens in the primary market. This is the first point of contact between the issuer and the investor.

2. Secondary Market

The secondary market provides liquidity to existing securities. Once securities are issued in the primary market, investors can buy and sell them in the secondary market. Importantly, the issuing company is not involved in secondary market transactions — it is only between investors.

Secondary markets operate through two mechanisms:

• Over-the-Counter (OTC) Market – Deals are made directly between two parties outside of a formal exchange.
• Exchange Traded Market – Deals happen on organised stock exchanges like NSE and BSE with full transparency and regulation.

3. Money Market

The money market is a market for short-term financial assets that are close substitutes for money. These are typically instruments with maturities of less than one year, like treasury bills, commercial paper, and certificates of deposit.

Products in the Indian Securities Market Equity Market Products

Equity Shares: Equity shares represent a form of fractional ownership in a company. Shareholders collectively own the company and bear both the risks and rewards of ownership. They have voting rights and receive dividends when declared.

Preference Shares: Preference shares have a superior right over equity shares in receiving dividends and getting their capital returned. However, preference shareholders typically do not have voting rights in normal circumstances.

Convertibles: These are instruments that can be converted into equity shares. They may be issued as fully convertible debentures (FCDs) or partly convertible debentures (PCDs). Conversion can be mandatory or at the option of the investor.

Warrants: A warrant gives an investor the right (but not the obligation) to buy equity shares at a specified price after a specified time period. Think of warrants as long-dated call options issued directly by the company.

Mutual Funds: Mutual funds pool money from multiple investors who share similar investment objectives. The pooled money is invested in a diversified portfolio of securities managed by professional fund managers.

Exchange Traded Funds (ETFs): An ETF is a fund that tracks an index and can be traded in real time on a stock exchange, just like individual stocks. Gold ETFs and Nifty ETFs are popular examples in India.

Derivative Market Products

A derivative is a financial instrument whose value is derived from an underlying asset — which could be equity, forex, commodity, or any other asset.

Index/Stock Futures: A futures contract is an agreement between two parties to buy or sell an asset at a predetermined price on a future date. Both parties are obligated to fulfil the contract.

Index/Stock Options: Options give the buyer the right but not the obligation to buy (Call Option) or sell (Put Option) an underlying asset at a specified price on or before a future date.

Currency Derivatives: Currency futures trading in India was introduced in August 2008 on NSE for the USD-INR pair. Currently, currency futures are traded on four INR pairs: USDINR, EURINR, GBPINR, JPYINR — and on three cross-currency pairs: EURUSD, GBPUSD, USDJPY.

Commodity Derivatives: These are derivatives on physical commodities like gold, silver, crude oil, and agricultural products. They are traded on regulated commodity exchanges.

Interest Rate Futures: Trading is based on a notional 10-year coupon-bearing Government of India (GOI) security. These are settled by physical delivery through depositories NSDL and CDSL and the Public Debt Office of RBI — unlike other derivatives which are cash settled.

Debt Market Products

Government Securities (G-Secs): Also called gilt-edged securities, G-Secs are issued by central and state governments and semi-government bodies. Major investors include banks, insurance companies, provident funds, FPIs, and state governments. G-Secs come in two forms:

• Treasury Bills (short-term)
• Government Dated Securities (long-term)

Corporate Bond Market: Corporate bonds are issued by private companies to fund expansion, modernisation, restructuring, or mergers and acquisitions. The corporate bond/debt market is where these instruments are issued and traded.

Participants in the Indian Securities Market

The securities market has three broad categories of participants:

1. Issuers

An issuer is any company or entity making an offer of securities to the public. They need capital and use the capital market to raise it.

2. Investors

Investors are individuals and institutions that invest money in securities. They are classified into three types:

• Retail Investors – Individual investors applying for smaller amounts
• Institutional Investors – Large entities like mutual funds, insurance companies, FPIs
• Non-Institutional Investors (NIIs) – HNIs and corporates who are not classified as QIBs

3. Intermediaries

Under the SEBI Act, 1992, the following are recognised as intermediaries in the Indian securities market:

• Stock Brokers: They execute trades on behalf of clients on stock exchanges. They provide investment advice and recommendations.
• Custodians: They provide custodial services, including safekeeping of securities.
• Depositories: Entities like NSDL and CDSL that hold securities in dematerialised (electronic) form. They allow investors to hold and transfer securities without physical certificates.
• Depository Participants (DPs): Agents of the depository who interact directly with investors. DPs must be registered with SEBI.
• Merchant Bankers: Entities engaged in issue management — arranging for selling, buying, or subscribing to securities. They act as managers, consultants, or advisers in public issues.
• Registrars and Transfer Agents (RTAs): They collect applications from investors, maintain records, and process allotment and refunds on behalf of the issuing company.

Regulators in the Indian Securities Market

India has a multi-regulator framework to oversee different segments of the financial market:

• SEBI (Securities and Exchange Board of India): The primary regulator for the securities market in India — covering stock exchanges, brokers, merchant bankers, mutual funds, and more.
• RBI (Reserve Bank of India): Regulates the money market, which deals with bonds and deposits. RBI also oversees forex markets and banking sector liquidity.
• MCA (Ministry of Corporate Affairs): Regulates the corporate sector through the Registrar of Companies. Administers the Companies Act, 2013.
• IRDAI (Insurance Regulatory and Development Authority of India): The watchdog for the insurance sector. Its mission is to protect policyholders and promote the orderly growth of the insurance industry.
• PFRDA (Pension Fund Regulatory and Development Authority): Regulates the pension sector in India and oversees the National Pension System (NPS).
• FEMA, 1999 (Foreign Exchange Management Act): Governs foreign investment into India. It came into force in 2000 and specifies conditions for foreign investment, including FDI, FPI, and FVCI routes.

Role of Investment Banker in Private Equity

Investment bankers (merchant bankers) play a critical role in private equity transactions. They act as intermediaries between companies seeking growth capital and investors (private equity funds) willing to invest.

Key functions of a merchant banker in private equity include:

• Growth Plan Formulation – Helping the company define its growth strategy
• Transaction Structuring – Designing the deal in the most tax-efficient and investor-friendly manner
• Arriving at Pre-Money Valuation – Determining the company's value before investment
• Offer Literature and Data Room Assistance – Preparing the Information Memorandum and data room for investor due diligence
• Leading the Transaction – Managing the entire deal process from mandate to closure

Key Terms for NISM Series IX Exam – Chapter 1

Frequently Asked Questions – NISM Series IX Chapter 1 What is the difference between Primary Market and Secondary Market?

The primary market is where new securities are issued for the first time and companies raise fresh capital. The secondary market is where previously issued securities are traded between investors. The issuing company is not involved in secondary market transactions.

What is a Merchant Banker as per SEBI?

A merchant banker is any entity engaged in the business of issue management — either by making arrangements for selling, buying, or subscribing to securities, or by acting as manager, consultant, or adviser in relation to such issue management.

Who regulates the Indian securities market?

SEBI (Securities and Exchange Board of India) is the primary regulator. The money market is regulated by RBI, the insurance sector by IRDAI, corporate affairs by MCA, and the pension sector by PFRDA.

What are the two types of Government Securities?

Government securities (G-Secs) are of two types: Treasury Bills (T-Bills), which are short-term instruments, and Government Dated Securities, which are long-term bonds.

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Next Chapter: Chapter 2 – Introduction to Merchant Banking