Cash Markets: Equity and Debt Depository

Cash Market, also known as the spot market, refers to the marketplace where financial instruments like equities (stocks) and debt instruments (bonds) are traded for immediate delivery and settlement. Unlike derivative markets, where the underlying asset is exchanged at a future date, cash markets involve the actual exchange of securities at prevailing market prices. A well-functioning cash market plays a crucial role in maintaining liquidity, facilitating price discovery, and ensuring smooth capital flow in an economy.

Equity Market in the Cash Segment

Equity market in the cash segment involves the trading of company shares that represent ownership in a firm. Investors buy and sell shares at current market prices, and the settlement occurs within a short timeframe (T+1 or T+2 days).

Features of Equity Cash Market

• Ownership Transfer: When investors purchase shares, they gain ownership rights, including voting rights and a share in profits through dividends.
• Price Discovery: The equity cash market reflects real-time prices based on demand and supply, investor sentiment, and market conditions.
• Liquidity: Stock exchanges provide a continuous market, ensuring high liquidity for widely traded securities.
• Transparency: Regulated by bodies like the Securities and Exchange Board of India (SEBI), equity markets ensure transparent and fair trading practices.

Trading Mechanism

The equity cash market operates through stock exchanges like the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). Investors trade through brokers, and transactions are settled electronically via depositories. The process involves the following steps:

1. Order Placement: Buyers and sellers place orders through registered brokers.
2. Matching Orders: The stock exchange’s trading system matches buy and sell orders based on price and quantity.
3. Settlement: Once the transaction is executed, settlement occurs in T+1 or T+2 days. The buyer receives the shares, and the seller receives the payment.

Debt Market in the Cash Segment:

Debt market in the cash segment involves the trading of fixed-income securities like government bonds, corporate bonds, debentures, and treasury bills. Unlike equities, debt instruments represent a loan made by the investor to the issuer (government or corporation) in exchange for periodic interest payments and principal repayment at maturity.

Types of Debt Instruments:

1. Government Securities (G-Secs): Bonds issued by the central or state government, considered risk-free.
2. Corporate Bonds: Bonds issued by companies to raise long-term capital.
3. Treasury Bills (T-Bills): Short-term instruments with maturities of up to one year, issued by the government.
4. Debentures: Unsecured bonds issued by companies, offering a fixed rate of interest.

Trading Mechanism

Debt instruments are traded on exchanges or over-the-counter (OTC) markets. Major platforms for debt trading in India are:

• NSE Debt Market (NDM)
• BSE Debt Market
• Over-the-Counter Exchange of India (OTCEI)

Like equities, debt transactions are settled electronically via depositories.

Role of Depositories in Cash Markets

Depository is a financial institution that holds securities in electronic form, enabling investors to trade securities without the need for physical certificates. In India, there are two major depositories:

1. National Securities Depository Limited (NSDL)
2. Central Depository Services Limited (CDSL)

Depositories play a pivotal role in ensuring smooth, secure, and efficient functioning of the cash markets.

Functions of Depositories

• Dematerialization of Securities

Depositories convert physical certificates into electronic form, ensuring faster and more secure transactions. Dematerialization reduces the risks associated with holding physical certificates, such as loss, theft, or forgery.

• Facilitating Trading and Settlement

Once a trade is executed on the stock exchange, the depository ensures the transfer of securities from the seller’s account to the buyer’s account. This electronic settlement is quick and efficient, reducing settlement risks.

• Pledging and Hypothecation of Securities

Investors can pledge their demat holdings as collateral for loans. Depositories facilitate this process by maintaining records of pledged securities.

• Corporate Actions

Depositories handle corporate actions such as dividend payments, bonus issues, stock splits, and rights issues on behalf of companies, ensuring timely benefits to investors.

• Electronic Voting

Depositories provide an electronic voting platform for shareholders, enabling them to participate in company decision-making processes without attending physical meetings.

Process of Opening a Demat Account

To trade in the cash market, investors need a demat account with a depository participant (DP), typically a bank or brokerage firm. The steps involved are:

1. Choose a DP and fill out an account opening form.
2. Submit required documents (identity proof, address proof, PAN card).
3. Sign an agreement with the DP, outlining rights and obligations.
4. Once the account is opened, the investor receives a unique Beneficiary Owner Identification (BO ID).

Regulation of Cash Markets

The cash market is regulated by SEBI, which ensures transparency, investor protection, and fair trading practices. Key regulatory frameworks are:

• SEBI Act, 1992: Governs the overall functioning of the securities market.
• Depositories Act, 1996: Regulates the functioning of depositories and dematerialization of securities.
• Securities Contracts (Regulation) Act, 1956: Regulates stock exchanges and trading practices.