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Abdul Kadir Khan Syllabus: Unit -1 An overview of Indian Securities Market: Nature of Savings and Investment Profile of Indian Investor Factors affecting investment decisions of an Indian Investor Unit -2 Need for regulating securities markets in India: Protection to retail Investor Vanishing companies of 1990’s Pricing of an IPO and possible economic offences Unit -3 Entities governing the Securities Markets in India: Companies Act, 1956 Securities Contracts Regulation Act SEBI Act Depositories Act Insurance Acts Special Regulatory requirements of Derivative market Unit -4 Regulatory Bodies Department of Company Affairs Department of Economic Affairs SEBI Forward Market Commission RBI IRDA Need for Self Regulation Reference Books: Company Law – Avtar Singh Finance and Profits – N.J. Yasawaj Finance Sense – Dr. Prasanna Chandra
5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page2 Prof. Abdul Kadir Khan Regulation: Regulation is "controlling human or societal behavior by rules or restrictions." Regulation can take many forms: legal restrictions promulgated by a government authority, self-regulation by an industry such as through a trade association, social regulation (e.g. norms), co-regulation and market regulation. One can consider regulation as actions of conduct imposing sanctions (such as a fine). This action of administrative law, or implementing regulatory law, may be contrasted with statutory or case law. Regulation mandated by a state attempts to produce outcomes which might not otherwise occur, produce or prevent outcomes in different places to what might otherwise occur, or produce or prevent outcomes in different timescales than would otherwise occur. In this way, regulations can be seen as implementation artifacts of policy statements. Common examples of regulation include controls on market entries, prices, wages, Development approvals, pollution effects, employment for certain people in certain industries, standards of production for certain goods, the military forces and services. The economics of imposing or removing regulations relating to markets is analyzed in regulatory economics. Regulating Financial Markets: The theoretical underpinning for public intervention in economic matters is traditionally based on the need to correct market imperfections and unfair distribution of the
resources. Three more general objectives of public intervention derive thereby: the pursuit of stability, equity in the distribution of resources and the efficient use of those resources. The regulation of the financial system can be viewed as a particularly important case of public control over the economy. The accumulation of capital and the allocation of financial resources constitute an essential aspect in the process of the economic development of a nation. The peculiarities of financial intermediation and of the operators who perform this function justify the existence of a broader system of controls with respect to other forms of economic activity. Various theoretical motivations have been advanced to support the opportunity of a particularly stringent regulation for banks and other financial intermediaries. Such motivations are based on the existence of particular forms of market failure in the credit and financial sectors.
5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page3 Prof. Abdul Kadir Khan The NEED/ OBJECTIVES for regulating financial market: The definition of the term 'financial market' has traditionally included the banking, financial and insurance segments. The bounds dividing institutions, instruments and markets were clear-cut, so that further distinctions were drawn within the different classes of intermediaries (with banks specialized in short or medium/long term maturities, functional/commercial operations, deposits and investments; with financial
intermediaries handling broker-dealer negotiations, asset management and advisory functions, and with insurance companies dealing in life and other insurance policies). A primary objective of financial market regulation is the pursuit of macroeconomic and microeconomic stability. Safeguarding of the stability of the system translates into macro-controls over the financial exchanges, clearing houses and securities settlement systems. Measures pertaining to the microstability of the intermediaries can be subdivided into two categories: general rules on the stability of all business enterprises and entrepreneurial activities, such as the legally required amount of capital, borrowing limits and integrity requirements; and more specific rules due to the special nature of financial intermediation, such as risk based capital ratios, limits to portfolio investments and the regulation of off-balance activities. Secondary objective of financial regulation is transparency in the market and in intermediaries and investor protection. This is linked to the more general objective of equity in the distribution of the available resources and may be mapped into the search for "equity in the distribution of information as a precious good" among operators. At the macro level, transparency rules impose equal treatment (for example, rules regarding takeovers and public offers) and the correct dissemination of information (insider trading, manipulation and, more generally, the rules dealing with exchanges microstructure and price-discovery mechanisms). At the micro level, such rules aim at non-discrimination in relationships among intermediaries and different customers (conduct of business rules).
A third objective of financial market regulation, linked with the general objective of efficiency, is the safeguarding and promotion of competition in the financial intermediation sector. This requires rules for control over the structure of competition in the markets and, at the micro level, regulations in the matter of concentrations, cartels and abuse of dominant positions. Specific controls over financial intermediation are justified by the forms that competition can assume in that field. They are related to the promotion of competition as well as to limiting possible destabilizing excesses generated by competition itself 5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page4 Prof. Abdul Kadir Khan Benefits of Regulation: Regulations, like any other form of coercive action, have costs for some and benefits for others. Efficient regulations are defined as those where the total benefits to some people exceed the total costs to others. Regulations are justified using a variety of reasons and therefore can be classified in several broad categories: Market failures - regulation due to inefficiency. Intervention due to a classical economics argument to market failure. o Risk of monopoly o Collective action, or public good o Inadequate information o Unseen externalizations Collective desires - regulation about collective desires or considered judgements on the part of a significant segments of society Diverse experiences - regulation with a view of eliminating or enhancing opportunities for the formation of diverse preferences and beliefs Social subordination - regulation aimed to increase or reduce social
subordination of various social groups Endogenous preferences - regulation's purpose is to affect the development of certain preferences on an aggregate level Irreversibility - regulation that deals with the problem of irreversibility – the problem in which a certain type of conduct from current generations results in outcomes from which future generations may not recover from at all. Interest group transfers - regulation that results from efforts by selfinterest groups to redistribute wealth in their favor, which may disguise itself as one or more of the justifications above. The study of formal (legal and/or official) and informal (extra-legal and/or unofficial) regulation constitutes one of the central concerns of the Sociology of law. Legal sociologists have in particular been interested in exploring the limits of formal and legal regulation in changing patterns of social behavior. 5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page5 Prof. Abdul Kadir Khan Regulated (Controlled) MarketA regulated market or controlled market is the provision of goods or services that is regulated by a government appointed body. The regulation may cover the terms and conditions of supplying the goods and services and in particular the price allowed to be charged. It is common for a regulated market to control natural monopolies such as aspects of telecommunications, water, gas and electricity supply. Often regulated markets are established during the privatization of government controlled utility assets. A variety of forms of regulations exist in a regulated market. These include controls,
oversights, anti-discrimination, environmental protection, taxation and labor laws. In a regulated market, the government regulatory agency may legislate regulations that privilege special interests, known as regulatory capture. Financial regulations are a form of regulation or supervision, which subjects financial institutions to certain requirements, restrictions and guidelines, aiming to maintain the integrity of the financial system. This may be handled by either a government or nongovernment organization. AIMS of Regulation: The specific aims of financial regulators are usually: To enforce applicable laws To prosecute cases of market misconduct, such as insider trading To license providers of financial services To protect clients, and investigate complaints To maintain confidence in the financial system Insider Trading: Insider trading is the trading of a corporation's stock or other securities (e.g. bonds or stock options) by individuals with potential access to non-public information about the company. In most countries, trading by corporate insiders such as officers, key employees, directors, and large shareholders may be legal, if this trading is done in a way that does not take advantage of non-public information. However, the term is frequently used to refer to a practice in which an insider or a related party trades based on material non-public information obtained during the performance of the insider's duties at the corporation, or otherwise in breach of a fiduciary or other relationship of trust and confidence or where the non-public information was misappropriated from the company.
5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page6 Prof. Abdul Kadir Khan Insider Trading : The illegal kind of Insider Trading is the trading in a security (buying or selling a stock) based on material information that is not available to the general public. It is prohibited by the US Securities and Exchange Commission (SEC) and SEBI (India) because it is unfair and would destroy the securities markets by destroying investor confidence. The prevention of insider trading is widely treated as an important function of securities regulation. In the United States, which has the most studied financial markets of the world, regulators appear to devote significant resources to combat insider trading. This has led many observers in India to mechanically accept the notion that the prohibition of insider trading is an important function of SEBI. In most countries other than the US, government actions against insider trading are much more limited. Many countries pay lip service to the idea that insider trading must be prevented, while doing little by way of enforcement. In order to make sense of insider trading, we must go back to a basic understanding of markets, prices and the role of markets in the economy. The ideal securities market is one which does a good job of allocating capital in the economy. This function is enabled by "market efficiency", the situation where the market price of each security accurately reflects the risk and return in its future. The primary function of regulation and policy is to foster market efficiency; hence we must evaluate the impact of insider trading upon
market efficiency. Insider trading is often equated with market manipulation, yet the two phenomena are completely different. Manipulation is intrinsically about making market prices move away from their fair values; manipulators reduce market efficiency. Insider trading brings prices closer to their fair values; insiders enhance market efficiency. Once again, a mechanical adoption of regulation from the US is inappropriate. Given the higher degree of automation of the Indian markets, it is not difficult to imagine a situation where trades by insiders are disclosed to the market within five minutes of the trade being matched by the computer. Such a reporting requirement would harness the informational potential of insider trading, and enhance market efficiency by speeding up the full impact of the trade upon market prices. Our prime focus here is the widely--held viewpoint that insider trading is a problem which should be a priority on SEBI's agenda. This viewpoint is not supported by economic reasoning. Insider trading might indeed have negative consequences, but there is no simple argument which links up higher levels of insider trading to reduced levels of market efficiency. There are many alternative ways through which SEBI can improve market efficiency, avenues where the impact of policy interventions is less ambiguous and where the cost of intervention is lower. 5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page7 Prof. Abdul Kadir Khan Indian Securities Market: An Overview Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200
years ago. The East India Company was the dominant institution in those days and business in its loan securities used to be transacted towards the close of the eighteenth century. By 1830's business on corporate stocks and shares in Bank and Cotton presses took place in Bombay. Though the trading list was broader in 1839, there were only half a dozen brokers recognized by banks and merchants during 1840 and 1850. The 1850's witnessed a rapid development of commercial enterprise and brokerage business attracted many men into the field and by 1860 the number of brokers increased into 60. In 1860-61 the American Civil War broke out and cotton supply from United States of Europe was stopped; thus, the 'Share Mania' in India begun. The number of brokers increased to about 200 to 250. However, at the end of the American Civil War, in 1865, a disastrous slump began (for example, Bank of Bombay Share which had touched Rs 2850 could only be sold at Rs. 87). At the end of the American Civil War, the brokers who thrived out of Civil War in 1874, found a place in a street (now appropriately called as Dalal Street) where they would conveniently assemble and transact business. In 1887, they formally established in Bombay, the "Native Share and Stock Brokers' Association" (which is alternatively known as “The Stock Exchange "). In 1895, the Stock Exchange acquired a premise in the same street and it was inaugurated in 1899. Thus, the Stock Exchange at Bombay was consolidated. Ahmedabad gained importance next to Bombay with respect to cotton textile industry.
After 1880, many mills originated from Ahmedabad and rapidly forged ahead. As new mills were floated, the need for a Stock Exchange at Ahmedabad was realized and in 1894 the brokers formed "The Ahmedabad Share and Stock Brokers' Association". What the cotton textile industry was to Bombay and Ahmedabad, the jute industry was to Calcutta. Also tea and coal industries were the other major industrial groups in Calcutta. After the Share Mania in 1861-65, in the 1870's there was a sharp boom in jute shares, which was followed by a boom in tea shares in the 1880's and 1890's; and a coal boom between 1904 and 1908. On June 1908, some leading brokers formed "The Calcutta Stock Exchange Association". In the beginning of the twentieth century, the industrial revolution was on the way in India with the Swadeshi Movement; and with the inauguration of the Tata Iron and Steel 5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page8 Prof. Abdul Kadir Khan Company Limited in 1907, an important stage in industrial advancement under Indian enterprise was reached. Indian cotton and jute textiles, steel, sugar, paper and flour mills and all companies generally enjoyed phenomenal prosperity, due to the First World War. In 1920, the then demure city of Madras had the maiden thrill of a stock exchange functioning in its midst, under the name and style of "The Madras Stock Exchange" with 100 members. However, when boom faded, the number of members stood reduced from 100 to 3, by 1923, and so it went out of existence.
In 1935, the stock market activity improved, especially in South India where there was a rapid increase in the number of textile mills and many plantation companies were floated. In 1937, a stock exchange was once again organized in Madras Madras Stock Exchange Association (Pvt.) Limited. (In 1957 the name was changed to Madras Stock Exchange Limited). Lahore Stock Exchange was formed in 1934 and it had a brief life. It was merged with the Punjab Stock Exchange Limited, which was incorporated in 1936. Indian Stock Exchanges - An Umbrella Growth The Second World War broke out in 1939. It gave a sharp boom which was followed by a slump. But, in 1943, the situation changed radically, when India was fully mobilized as a supply base. On account of the restrictive controls on cotton, bullion, seeds and other commodities, those dealing in them found in the stock market as the only outlet for their activities. Many new associations were constituted for the purpose and Stock Exchanges in all parts of the country were floated. The Uttar Pradesh Stock Exchange Limited (1940), Nagpur Stock Exchange Limited (1940) and Hyderabad Stock Exchange Limited (1944) were incorporated. In Delhi two stock exchanges - Delhi Stock and Share Brokers' Association Limited and the Delhi Stocks and Shares Exchange Limited - were floated and later in June 1947, amalgamated into the Delhi Stock Exchange Association Limited. Post-independence Scenario Most of the exchanges suffered almost a total eclipse during depression. Lahore Exchange was closed during partition of the country and later migrated to Delhi and
merged with Delhi Stock Exchange. Bangalore Stock Exchange Limited was registered in 1957 and recognized in 1963. 5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page9 Prof. Abdul Kadir Khan Most of the other exchanges languished till 1957 when they applied to the Central Government for recognition under the Securities Contracts (Regulation) Act, 1956. Only Bombay, Calcutta, Madras, Ahmedabad, Delhi, Hyderabad and Indore, the well established exchanges, were recognized under the Act. Some of the members of the other Associations were required to be admitted by the recognized stock exchanges on a concessional basis, but acting on the principle of unitary control, all these pseudo stock exchanges were refused recognition by the Government of India and they thereupon ceased to function. Thus, during early sixties there were eight recognized stock exchanges in India (mentioned above). The number virtually remained unchanged, for nearly two decades. During eighties, however, many stock exchanges were established: Cochin Stock Exchange (1980), Uttar Pradesh Stock Exchange Association Limited (at Kanpur, 1982), and Pune Stock Exchange Limited (1982), Ludhiana Stock Exchange Association Limited (1983), Gauhati Stock Exchange Limited (1984), Kanara Stock Exchange Limited (at Mangalore, 1985), Magadh Stock Exchange Association (at Patna, 1986), Jaipur Stock Exchange Limited (1989), Bhubaneswar Stock Exchange Association Limited (1989),
Saurashtra Kutch Stock Exchange Limited (at Rajkot, 1989), Vadodara Stock Exchange Limited (at Baroda, 1990) and recently established exchanges - Coimbatore and Meerut. Thus, at present, there are totally twenty one recognized stock exchanges in India excluding the Over the Counter Exchange of India Limited (OTCEI) and the National Stock Exchange of India Limited (NSEIL). 5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page10 Prof. Abdul Kadir Khan Nature of Savings and Investment: Saving is income not spent, or deferred consumption. Methods of saving include putting money aside in a bank or pension plan. Saving also includes reducing expenditures, such as recurring costs. In terms of personal finance, saving specifies lowrisk preservation of money, as in a deposit account, versus investment, wherein risk is higher. It is a well-established fact that growth of output of an economy depends on the amount of capital accumulation and the amount of capital accumulation in an economy is ultimately constrained by its rate of saving. As savings increase in the economy, more funds will be available for investment. Hence, the issue of ways and means to stimulate investment and bring about an increase in the level of savings and increased investment has assumed importance. Savings depend on the following factors: 1. The ability to save: This mainly depends on the income levels of the people and the kind of tax benefits that the government provides. 2. Willingness to Save: This is the most subjective factor and this depends on motive,
love for family, provision for rainy days etc. and moreover the willingness to save likely to be the existence of financial Institutions, interest rates and the range and availability of financial assets to suit savers with different needs. Investment is the commitment of money or capital to purchase financial instruments or other assets in order to gain profitable returns in form of interest, income, or appreciation of the value of the instrument. It is related to saving or deferring consumption. Investment comes with the risk of the loss of the principal sum. The investment that has not been thoroughly analyzed can be highly risky with respect to the investment owner because the possibility of losing money is not within the owner's control. The features of an Investment are: 1) Realistic: An investment must be realistic in nature i.e., it must be practical 2) Simplicity: An investment should be simple to understand and operate. 3) Flexibility: An investment should be flexible so that the investor can benefit from the growing opportunities from various asset classes. 4) Provision for contingencies: An investment plan must provide for contingencies that may crop up during the life-time of the investor. A good investment plan must make a provision for unforeseen or unexpected expenses. (E.g. Medical urgencies etc.) 5) An investment plan should be appealing to the investors. 5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page11 Prof. Abdul Kadir Khan 6) Optimum usage of funds: Proper utilization of funds should be ensured as it generates maximum returns on investment. 7) Balance between Safe and Risky investment classes: A balance between all the
asset classes should be maintained in order to ensure that the investors’ money generates optimum returns. 8) Provide safety to investors: A sound investment plan should ensure adequate safety to investors’ funds. 9) Should be timely controlled: An investment should be timely controlled so that an investor can shift from one asset class to another. 10) An investment should be done with a Long-term view in order to attain optimum returns from investments. Nature of Saving and Investment in India: There is a lot of literature focusing on the relationship between savings and investment. To our knowledge only a few studies made an attempt to assess the relationship between savings and investment in developing countries and India, in particular. It will be more interesting to test the applicability of theory to the countries like India because of the following reasons: 1. India is thickly populated country and for ages it believed in savings management 2. Two-thirds of the population depends on agricultural sector and this sector constantly faces the peril of either drought or floods. Therefore savings became a question mark in this sector. 3. For decades, the unorganized sector has been dominating the organized sector and people engaged in agriculture have been exploited by higher interest rates, hence money has been moving from urban to rural sector. 4. Political instability for the past one and half decade has been the cause of low confidence of the public and investors in the economy as a result of uncertainty regarding economic policies. In this section we present theory related to the relationship between Savings,
Investment and growth of the economy and intuitive discussion for the failure of classical view planned of savings being equal to planned investment before and after liberalization and also a brief on the Indian financial system. 5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page12 Prof. Abdul Kadir Khan Profile of Indian Investor An investor profile or style defines an individual's preferences in investment decisions, for example: Short term trading (active management) or long term holding (buy and hold) Risk averse or risk tolerant / seeker All classes of assets or just one (stocks for example) Value stock, growth stocks, quality stocks, defensive or cyclical stocks... Big cap or small cap stocks, Use of derivatives Home turf or international diversification Hands on, or via investment funds and so on. Factors determining the investor profile: The investor style / profile is determined by – Objective personal or social traits such as age, gender, income, wealth, family, tax situation... Subjective attitudes, linked to the temper (emotions) and the beliefs (cognition) of the investor. Generally, the investor's financial return / risk objectives, assuming they are precisely set and fully rational. INDIAN INVESTOR PROFILE = LOW RISK + HIGH RETURNS Is the profile of Indian Investor changing? There seems to be a revolution in the Indian stock markets. From the tumultuous, unpredictable times, the stock market has come a long way. More people are investing in more instruments than ever before; and doing it intelligently. Are reforms, a proactive regulator and a fantastic bull run
empowering the average Indian? Turmoil of the nineties 5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page13 Prof. Abdul Kadir Khan If you watched the roller coaster of the Indian stock market in the nervous nineties, you would swear that this was no way to make a living. Your hard-earned money was probably safer in nationalized banks, post offices or fixed deposits. Did the average Indian invest in the stock market? Oh, yes. Look carefully, and near the ground floor of today’s investment skyscraper, you’ll see the wreckage of several people’s investment plans. You’d watch a bull run with mounting excitement then, counter-intuitively, throw your money in without real knowledge, right at the end. Before you knew it, the market collapsed, taking your savings with it. Winds of change Well, all that’s changing. There’s a new breed of Indian investor – younger, more informed, more confident and well paid. The days of going to your broker are gone. Demat is in; and with it a world of possibility. You can have the cake of equity and eat it, with mutual funds. There’s another quiet revolution, one that’s significant in the Indian context. More and more women are educating themselves and investing online, and are smilingly successful. Financial reforms Have financial reforms helped? You bet they have. The market is open, is mostly free and fair, there’s honest competition and you can find information on any aspect online.
Investor education is on the rise and resources are available on every selfrespecting website. What about SEBI? The board is deadly serious about cleaning up the marketplace and is proactively offering you more avenues, while policing old ones. Even if a little tentative in some steps, such as allowing short-sell, it’s moving in the right direction. The sign Short-term volatility isn’t scaring you back to the post-office. This is a sure sign that the investor has arrived. “Indian investors are blooming at the right time, in the right place.” 5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page14 Prof. Abdul Kadir Khan Factors affecting investment decisions of an Indian Investor: Investment Investment refers to the accumulation of some kind of asset in hopes to get a future return from it. The fundamentals for all types of investment are the same. The investors basically are buying risk from their investment, the more risk they take from their investment, the higher price they can sell for it. Different persons of varied ages also need different type of investment plan to give them better return. Conservative & old people prefer investing in gradually growing companies with low risks like utility and consumer goods. Aggressive investors prefer fast and high earning stocks with high investment risks like foreign and technology sectors. An investment plan can be short-term, medium-term or long-term. 1) A short term investment plan is prepared for a maximum period of one year.
Normally the short-term investment plan estimates the short-term needs of the investors and determines the sources for financing these needs. 2) Medium-term investment plan is prepared for a period of one to five years. 3) Long-term investment planning is done for a period of more than five years. It is prepared keeping in mind the long-term financial objectives of an individual. Financial Planning: Financial planning is usually a multi-step process, and involves considering the client's situation from all relevant angles to produce integrated solutions. Financial planners are also known by the title financial adviser in India, although these two terms are technically not synonymous, and their roles have some functional differences. Although there are many types of 'financial planners,' the term is used largely to describe those who consider the entire financial picture of a client and then provide a comprehensive solution. To differentiate from the other types of financial planners, some planners may be called 'comprehensive' or 'holistic' financial planners. Other financial planners may specialize in one or more areas, such as insurance planning (risk management) and retirement planning. Financial planning is a growing industry with projected faster than average job growth through 2014. 5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page15 Prof. Abdul Kadir Khan Factors determining investment decisions / Canons of financial planning of an Indian Investor: 1) Personal (financial) Objectives / Decisions: Personal financial planning is broadly defined as a process of determining an individual's financial goals, purposes in life and life's priorities, and after considering his
resources, risk profile and current lifestyle, to detail a balanced and realistic plan to meet those goals. The individual's goals are used as guideposts to map a course of action on 'what needs to be done' to reach those goals. Alongside the data gathering exercise, the purpose of each goal is determined to ensure that the goal is meaningful in the context of the individual's situation. Through a process of careful analysis, these goals are subjected to a reality check by considering the individual's current and future resources available to achieve them. In the process, the constraints and obstacles to these goals are noted. The information will be used later to determine if there are sufficient resources available to get to these goals, and what other things need to be considered in the process. If the resources are insufficient or absent to meet any of the goals, the particular goal will be adjusted to a more realistic level or will be replaced with a new goal. Planning often requires consideration of self-constraints in postponing some enjoyment today for the sake of the future. To be effective, the plan should consider the individual's current lifestyle so that the 'pain' in postponing current pleasures is bearable over the term of the plan. In times where current sacrifices are involved, the plan should help ensure that the pursuit of the goal will continue. A plan should consider the importance of each goal and should prioritize each goal. Many financial plans fail because these practical points were not sufficiently considered. 2) Scope of Financial Planning for an Indian Investor: Investment decisions of an Indian investor cover all areas of his / her financial needs. The scope of planning usually includes the following:
Risk Management and Insurance Planning: Managing cash flow risks through sound risk management and insurance techniques Investment and Planning Issues: Planning, creating and managing capital accumulation to generate future capital and cash flows for reinvestment and spending Retirement Planning: Planning to ensure financial independence at retirement including 401Ks, IRAs etc. 5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page16 Prof. Abdul Kadir Khan Tax Planning: Planning for the reduction of tax liabilities and the freeingup of cash flows for other purposes Estate Planning: Planning for the creation, accumulation, conservation and distribution of assets Cash Flow and Liability Management: Maintaining and enhancing personal cash flows through debt and lifestyle management Education Planning for kids and the family members Unit -2 Need for regulating securities markets in India: Protection to retail Investor Vanishing companies of 1990’s Pricing of an IPO and possible economic offences PROTECTION TO RETAIL INVESTORS: Higher retail investor participation is required for Gross Domestic Product (GDP) growth. There is a need to spread the ownership of equity. The investors should benefit from the various initiatives of the Government meant for investors’ education and protection A well informed investor is a well protected investor. The nature of Indian markets is unique with a large retail investor population
that saves money worth over $ 300 billion but allocates less than 5% to financial market instruments other than bank deposits. Despite a long history and maturity of Indian stock markets, the penetration level remains very low. The number of retail investors in the financial market has not materially grown over the last 10 years. More than 90% of exchange trade is largely confined to 10 cities and 100 companies while mutual fund penetration is just around 4% KEY CHALLENGES: Low depth in equity markets, low retail equity ownership, dominance of top cities in trading volumes, 5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page17 Prof. Abdul Kadir Khan limited capital formation and higher costs per trade Today, India is experiencing rapid economic growth. If we want to share this prosperity with a cross-section of our society, we must ensure that the ownership of equity is spread as widely as possible” Regulatory Authorities should advocate certain macro\market level reforms which will have a positive cascading effect on the retail investors These Reforms include: • Increased financial literacy for multiple asset class including equity, • higher retail portion in the IPOs, • simplified documentation such as readable simple DRHP, KYC forms etc, • simplifying the procedures and cost of opening demat accounts to encourage people beyond the top 10 centers to invest directly in equities, • increased indirect investor participation through mutual funds and long term retirement products such as the new pension scheme 2009 and • Targeting high net worth NRIs by facilitating account opening and introducing reforms to simplify profit repatriation. Investor awareness program held under the theme -
“Informed investor- an asset to corporate India”, - Ministry of Corporate Affairs 5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page18 Prof. Abdul Kadir Khan VANISHING COMPANIES OF THE NINETIES: As per the Ministry of Corporate Affairs (MCA), Government of India, a company would be deemed to be a vanishing company, if it is found to have: 1. Failed to file returns with Registrar of Companies (ROC) for a period of 2 years; 2. Failed to file returns with Stock Exchange (SE) for a period of 2 years (if it continues to be a listed company); 3. It is not maintaining its registered office at the address notified with the ROC / SE; and 4. None of its Directors are traceable. Ministry of Corporate Affairs has clarified that all the conditions mentioned above would have to be satisfied before a listed company is declared as a vanishing company. Further, the conditions mentioned at (1), (3) & (4) would suffice to declare a company as vanishing if such company has been de-listed from the SE. Out of the companies that went public during 1992-2001, a total of 238 firms were identified as vanishing companies. However, 117 companies have been traced out leaving the number of vanishing companies to 121. “FIRs have been filed in 112 cases under the Indian Penal Code (IPC). SEBI has debarred 100 companies and 378 directors under section 11B of the SEBI Act from entering capital market for a period of five years. Interestingly enough, Satyam is not the only company based in Hyderabad to have siphoned off investors’ money. There are at least 12 firms, though not in the same
league as Satyam, which have been recently declared ‘vanishing companies’. Although the magnitude of fraud by these companies from Hyderabad is paltry, at around Rs 47 crore, it is not insignificant. Many ‘vanishing companies’ had raised money from the market during the capital market boom period, and then simply vanished. By the corporate affairs ministry’s own admission, there are at least 115 vanishing companies, which have failed to file any report on accounts with Sebi for the last two years. PC Gupta, the Union minister for corporate affairs, in a recent interaction with Express staff, had stated that “we have identified almost 100 odd companies and prosecuted their directors and promoters, and some of them are behind bars”. However, there is another huge scandal from the 1990s, when thousands of crore of rupees just vanished as thousands of plantation companies disappeared with investors’ money. These plantation companies, through glossy, high profile advertisement campaigns and exaggerated profit projections, managed to attract gullible investors in large numbers. Most of the 7,983 plantation companies listed on the corporate affairs ministry website have closed down while investors try to recover their hard-earned money. 5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page19 Prof. Unfortunately, by the time the government or regulators woke up to this huge fraud in late 1990s, almost all these companies had gone underground with the public’s money. Meanwhile, the corporate affairs ministry website states that a coordination and monitoring committee set up by corporate affairs ministry and Sebi for initiating action against vanishing companies held its 20th and last meeting back on April 23,
2007, almost two years ago. While the various organs of government debate the action to be taken against companies doing the vanishing act, investors suffer silently. Some action needs to be taken against these firms which will be left untouched by all the investigations into Satyam. PRICING of an IPO and possible economic offences: WHAT IS AN IPO? An IPO is the first sale of an entity's common shares to public investors. When an entity wants to enter the market, it makes its share available to common investors in form of an auction sale. Each application for an IPO has to be within a cut-off figure, which is eligible for allotment in the retail investors’ category. But in this case, financiers and market players illegally cornered these retail investors' shares. An Initial Public Offering (IPO) referred to simply as an "offering" or "flotation," is when a company (called the issuer) issues common stock or shares to the public for the first time. They are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately-owned companies looking to become publicly traded. In an IPO the issuer may obtain the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), best offering price and time to bring it to market. An IPO can be a risky investment. For the individual investor it is tough to predict what the stock or shares will do on its initial day of trading and in the near future since there is often little historical data with which to analyze the company. Also, most IPOs are of
companies going through a transitory growth period, and they are therefore subject to additional uncertainty regarding their future value. REASONS FOR LISTING: 5.2-REGULATION OF SECURITIES MARKETS TY-BFM When a company lists its shares on a public exchange, it will almost invariably look to issue additional new shares in order at the same time. The money paid by investors for the newly-issued shares goes directly to the company (in contrast to a later trade of shares on the exchange, where the money passes between investors). An IPO, therefore, allows a company to tap a wide pool of stock market investors to provide it with large volumes of capital for future growth. The company is never required to repay the capital, but instead the new shareholders have a right to future profits distributed by the company and the right to a capital distribution in case of dissolution. The existing shareholders will see their shareholdings diluted as a proportion of the company's shares. However, they hope that the capital investment will make their shareholdings more valuable in absolute terms. In addition, once a company is listed, it will be able to issue further shares via a rights issue, thereby again providing itself with capital for expansion without incurring any debt. This regular ability to raise large amounts of capital from the general market, rather than having to seek and negotiate with individual investors, is a key incentive for many companies seeking to list. There are several benefits to being a public company, namely: Bolstering and diversifying equity base Enabling cheaper access to capital Exposure and prestige
Attracting and retaining the best management and employees Facilitating acquisitions Creating multiple financing opportunities: equity, convertible debt, cheaper bank loans, etc. STEP BY STEP PROCESS: The process for conducting an IPO generally involves a firm taking the following steps: 1. It registers with the Securities and Exchange Commission (SEC), 2. It seeks the help of one or more investment banks as “underwriters” to pursue a coterie of institutional investors and the general public to purchase the firm’s stock, 3. It presents the IPO fact file and prospects to the investor community, 5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page21 Prof. Abdul Kadir Khan 4. It determines the number and price of shares to be offered in the IPO, and 5. It works out the aftermarket position, after observing the “quiet period.” When the Securities Exchange Board of India (Sebi) started scanning an entire spectrum of IPOs launched over 2003, 2004 and 2005, it ended digging up more dirt and probably prevented a larger conspiracy to hijack the market. Here is a lowdown on the IPO scam: What is the scam? It involved manipulation of the primary market—read initial public offers (IPOs)—by financiers and market players by using fictitious or benaami demat accounts. While investigating the Yes Bank scam, Sebi found that certain entities had illegally obtained IPO shares reserved for retail applicants through thousands of benaami demat accounts. They then transferred the shares to financiers, who sold on the first day of listing, making windfall gains from the price difference between the IPO price and the listing price. When was the scam detected?
The IPO scam came to light in 2005 when the private 'Yes Bank' launched its initial public offering. Roopalben Panchal, a resident of Ahmedabad, had allegedly opened several fake demat accounts and subsequently raised finances on the shares allotted to her through Bharat Overseas Bank branches. The Sebi started a broad investigation into IPO allotments after it detected irregularities in the buying of shares of YES Bank’s IPO in 2005. What triggered the Sebi probe? On October 10, 2005 an Income Tax raid on businessman Purushottam Budhwani accidentally found he was controlling over 5,000 demat accounts. Sebi finds this suspicious. On December 15, Sebi declared results of its probe, how a few people cornered a large chunk of YES Bank IPO shares. On January 11 this year, Sebi discovered huge rigging in the IDFC IPO. Roopalben Panchal was found to be controlling nearly 15,000 demat accounts. 5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page22 Prof. Abdul Kadir Khan It was found that once they obtained these shares, the fictitious investors transferred them to financiers. The financiers then sold these shares on the first day of listing, reaping huge profits between the IPO price and the listing price. The Sebi report covered 105 IPOs from 2003-2005. The Sebi probe covered several IPOs dating back to 2005, 2004 and 2003 to detect misuse. These included the offerings of Jet Airways, Sasken Communications, Suzlon Energy, Punj Lloyds, JP Hydro Power, NTPC, PVR Cinema, Shringar Cinema and others. A
lot more dubious accounts across several IPOs are expected to tumble out in the next few days. It also detected similar irregularities in the IDFC IPO, in which over 8 per cent of the allotment in the retail segment was cornered by fictitious applicants through multiple demat accounts. Who is Roopalben Panchal? Roopalben Panchal of IndiaBulls Securities is allegedly the mastermind of the scam. Finance Ministry officials are expected to act against her soon. How is this different from Harshad Mehta’s scam? The securities scam involved price manipulation in the secondary market, read stocks. Whereas in this case, the manipulation happened in the primary market— even before the shares (IPOs) entered the stocks market. This time, fraudsters targeted the primary market to make a quick buck at the expense of the gullible small investors. Direct Participants (DPs) used retail applicants’ shares for reaping benefits in the stock market. How big is the scam? Apart from the YES Bank fraud, Sebi reportedly has definite data about two IPOs where retail allotments were rigged, but market observers believe the scam is far bigger. The Yes Bank and IDFC cases are only a tip of an iceberg, say analysts. The Sebi probe has identified more operators and some market intermediaries involved in the misuse of the initial allotment process in public offerings dating back to ’04-05. 5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page23 Prof. Abdul Kadir Khan The Income-Tax Department in Ahmedabad has found that two major accused, Panchal and Sugandh Investments, have together made Rs 60.62 crore in 18 months.
ROLE OF DP’S: Suzlon Energy IPO: Rs 1,496.34 cr (September 23-29, 2005) Key operators used 21,692 fictitious accounts to corner 3,23,023 shares which is equal to 3.74 per cent of the total number of shares allotted to retail individual investors. Jet Airways IPO: Rs 1899.3 crore (Feb 18-24, 2005) Key operators used 1,186 fake accounts for cornering 20,901 shares which is equal to 0.52 per cent of the total number of shares allotted to retail investors. National Thermal Power Corporation IPO Rs 5,368.14 crore (Oct 7-14, 2004). 12,853 afferent accounts were used for cornering 27,50,730 shares representing 1.3 per cent of the total number of shares allotted to retail investors. Tata Consultancy Services IPO: Rs 4,713.47 crore 14,619 'benami' accounts were used to corner 2,61,294 shares representing 2.09 per cent of the total shares allotted to retail individual investors. Unit -3 Entities governing the Securities Markets in India: Companies Act, 1956 Securities Contracts Regulation Act SEBI Act Depositories Act Insurance Acts 5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page24 Prof. Abdul Kadir Khan Special Regulatory requirements of Derivative market The Indian Companies’ Act of 1956 Companies act 1956, is one of the most important LAW in Indian corporate legislature. It has a far reaching effect on the Indian industry. It was enacted with the objective of controlling and regulating every conceivable facet of the corporate sector. The Company’s Act 1956 was drafted retaining certain section of the earlier act. It was
incorporated as a whole new spectrum of legislation that would correspond to independent India’s socialistic ideals and policy. The act consists of 13 parts and 14 schedules. The important provision pertaining to Indian capital market/financial market are given below:1. PART 3:It is relevant to capital market. It relates to a company’s: Issue of capital Issue of prospectus Allotment and other matter relating to the issue of shares and debentures. Section 55 to 58 deals with this matter. These section stipulates that misstatements in prospectus is subject to civil liability in terms of compensation to persons aggrieved, who subscribe to the issue in good faith and has sustained a loss. There are sufficient numbers of provisions to enable the unscrupulous or officers of company from evading any regulation and undertaking fraudulent activities. Section 63 relates to the criminal liability for miss presentation in the prospectus. Section 68 relates to penalty for fraudulently inducing person to invest money; this section also deals with speculation in shares and debentures in secondary market. 1. Buy-Back of Shares:Section 77 of the companies’ Act 1956 (amended) provides for the purchases of its own shares by a company. Buyback of shares is legal and common practice in USA. It is done to reward the share holders. The price paid is usually higher than the market rate which is given as an incentive to share holders. The company wants to bring down the paid up capital to reduce the dividend servicing the outflow. 2. Insider trading:5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page25 Prof. Abdul Kadir Khan
Insiders are those who have an access to the confidential information of the company. BY virtue of the position occupied by them in the said company and thereby are in a position to manipulate the share prices to the own advantage with a view to make windfall profits. The action caused wide fluctuations in the prices of the securities and undermining the trust of investors in capital market. The provision of the act, section 307 and 308 require full disclosures by board of directors of the company, regarding purchase and sale of security by any director, statutory auditor, cost auditor, financial accountant, cost accountant, tax and management consultant, advisor, solicitors and others who prove to be effective in controlling such trading. 3. Prospectus:Prospectus serves as publicity for corporate enterprises to solicit public subscription of capital. The companies’ Act 1956 contains elaborated details of these documents. The prospectus usually contains information relating to the proposed offer about the company. Separate prospectus should be drafted depending upon the issue. A regular prospectus contains; a) information about the capital structure b) terms of issue c) company management and project risk perception d) promotors contribution, Financial information, etc. The concept of abridged prospectus introduced by the company’s amended act 1988, aims at making the public issue of shares of shares an inexpensive preposition accordingly shares application form shall a company only a document of brief version of the salient feature of the prospectus. 4. Financial disclosure:The company’s Act 1956 has a number of norms requiring information disclosure about companies’ information on market which sound capital market structure is
built. The efficiency of market is greatly determined by the free flow of unbiased and reliable market information. Unfortunately, there is no dearth (shortage) of market information but the quality of reliable information for the investors to make right and timely decisions. 5. PART 4:It relates to the share capital and debentures with regard to type, number, certificate of shares, capital, etc. Section 116 : In this part provides for penalty for impersonation of share holders. 5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page26 Prof. Abdul Kadir Khan SECURITIES CONTRACTS (REGULATION) ACT, 1956 The Securities Contracts (Regulation) Act, 1956 [SC(R)A] was enacted to prevent undesirable transactions in securities by regulating the business of dealing therein and by providing for certain other matters connected therewith. This is the principal Act, which governs the trading of securities in India. The definitions of some of the important terms are given below: ‘Recognized Stock Exchange’ means a stock exchange, which is for the time being recognized by the Central Government under Section 4 of the SC(R)A. ‘Stock Exchange’ means: (a) any body of individuals, whether incorporated or not, constituted before corporatization and demutualization under sections 4A and 4B, or (b) a body corporate incorporated under the Companies Act, 1956 (1 of 1956) whether under a scheme of corporatization and demutualization or otherwise, for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities. As per Section 2(h), the term "securities" include: (i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable
securities of a like nature in or of any incorporated company or other body corporate, (ii) derivative, (iii) units or any other instrument issued by any collective investment scheme to the investors in such schemes, (iv) Security receipts as defined in clause (g) of section 2 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (SARFAESI) (v) units or any other such instrument issued to the investors under any mutual fund scheme, 5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page27 Prof. Abdul Kadir Khan (vi) any certificate or instrument issued to an investor by any issuer being a special purpose distinct entity which possesses any debt or receivable, including mortgage debt, assigned to such entity, and acknowledging beneficial interest of such investor in such debt or receivable, including mortgage debt, as the case maybe. (vii) government securities, (viii) such other instruments as may be declared by the Central Government to be securities, and (ix) rights or interests in securities. As per section 2(aa), “Derivative” includes: A. a security derived from a debt instrument, share, loan whether secured or unsecured, risk instrument or contract for differences or any other form of security; B. a contract which derives its value from the prices, or index of prices, of underlying securities; Section 18A provides that notwithstanding anything contained in any other law for the time being in force, contracts in derivative shall be legal and valid if such contracts are-
(i) traded on a recognized stock exchange; (ii) settled on the clearing house of the recognized stock exchange, in accordance with the rules and bye-laws of such stock exchanges. In accordance with the rules and bye-laws of such stock exchange. "Spot delivery contract" has been defined in Section 2(i) to mean a contract which provides for(a) actual delivery of securities and the payment of a price therefore either on the same day as the date of the contract or on the next day, the actual period taken for the dispatch of the securities or the remittance of money therefore through the post being excluded from the computation of the period aforesaid if the parties to the contract do not reside in the same town or locality; 5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page28 Prof. Abdul Kadir Khan (b) transfer of the securities by the depository from the account of a beneficial owner to the account of another beneficial owner when such securities are dealt with by a depository. The SC(R)A deals with1. stock exchanges, through a process of recognition and continued supervision, 2. contracts & options in securities, and 3. listing of securities on stock exchanges. Recognition of stock exchanges By virtue of the provisions of the Act, the business of dealing in securities cannot be carried out without registration from SEBI. Any Stock Exchange which is desirous of being recognized has to make an application under Section 3 of the Act to SEBI, which is empowered to grant recognition and prescribe conditions. This recognition can be withdrawn in the interest of the trade or public.
Section 4A of the Act was added in the year 2004 for the purpose of corporatization and demutualization of stock exchange. Under section 4A of the Act, SEBI by notification in the official gazette may specify an appointed date on and from which date all recognized stock exchanges have to corporatize and demutualise their stock exchanges. Each of the Recognized stock exchanges which have not already being corporatized and demutualised by the appointed date are required to submit a scheme for corporatization and demutualization for SEBI’s approval. After receiving the scheme SEBI may conduct such enquiry and obtain such information as be may be required by it and after satisfying that the scheme is in the interest of the trade and also in the public interest, SEBI may approve the scheme. SEBI is authorized to call for periodical returns from the recognized Stock Exchanges and make enquiries in relation to their affairs. Every Stock Exchange is obliged to furnish annual reports to SEBI. Recognized Stock Exchanges are allowed to make bylaws for the regulation and control of contracts but subject to the previous approval of SEBI and SEBI has the power to amend the said bylaws. The Central Government and SEBI have the power to supersede the governing body of any recognized stock exchange. The Central Government and SEBI also have power to suspend the business of the recognized stock exchange to meet any emergency as and when it arises, by notifying in the official gazette. Contracts and Options in Securities 5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page29 Prof. Abdul Kadir Khan Organized trading activity in securities takes place on a recognized stock exchange. If the Central Government is satisfied, having regard to the nature or the volume of
transactions in securities in any State or States or area, that it is necessary so to do, it may, by notification in the Official Gazette, declare provisions of section 13 to apply to such State or States or area, and thereupon every contract in such State or States or area which is entered into after date of the notification otherwise than between members of a recognized stock exchange or recognized in stock exchanges in such State or States or area or through or with such member shall be illegal. The effect of this provision clearly is that if a transaction in securities has to be validly entered into, such a transaction has to be either between the members of a recognized stock exchange or through a member of a Stock Exchange. Listing of Securities Where securities are listed on the application of any person in any recognized stock exchange, such person shall comply with the conditions of the listing agreement with that stock exchange (Section 21). Where a recognized stock exchange acting in pursuance of any power given to it by its bye-laws, refuses to list the securities of any company, the company shall be entitled to be furnished with reasons for such refusal and the company may appeal to Securities Appellate Tribunal (SAT) against such refusal. Delisting of Securities A recognized stock exchange may delist the securities of any listed companies on such grounds as are prescribed under the Act. Before delisting any company from its exchange, the recognized stock exchange has to give the concerned company a reasonable opportunity of being heard and has to record the reasons for delisting that
concerned company. The concerned company or any aggrieved investor may appeal to SAT against such delisting. (Section 21A) SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 Major part of the liberalization process was the repeal of the Capital Issues (Control) Act, 1947, in May 1992. With this, Government’s control over issues of capital, pricing of the issues, fixing of premia and rates of interest on debentures etc. ceased, and the office which administered the Act was abolished: the market was allowed to allocate resources to competing uses. However, to ensure effective regulation of the market, SEBI Act, 1992 was enacted to establish SEBI with statutory powers for: (a) protecting the interests of investors in securities, (b) promoting the development of the securities market, and (c) regulating the securities market. 5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page30 Prof. Abdul Kadir Khan Its regulatory jurisdiction extends over companies listed on Stock Exchanges and companies intending to get their securities listed on any recognized stock exchange in the issuance of securities and transfer of securities, in addition to all intermediaries and persons associated with securities market. SEBI can specify the matters to be disclosed and the standards of disclosure required for the protection of investors in respect of issues; can issue directions to all intermediaries and other persons associated with the securities market in the interest of investors or of orderly development of the securities market; and can conduct enquiries, audits and inspection of all concerned and adjudicate offences under the Act. In short, it has been given necessary autonomy and
authority to regulate and develop an orderly securities market. All the intermediaries and persons associated with securities market, viz., brokers and sub-brokers, underwriters, merchant bankers, bankers to the issue, share transfer agents and registrars to the issue, depositories, Participants, portfolio managers, debentures trustees, foreign institutional investors, custodians, venture capital funds, mutual funds, collective investments schemes, credit rating agencies, etc., shall be registered with SEBI and shall be governed by the SEBI Regulations pertaining to respective market intermediary. Constitution of SEBI The Central Government has constituted a Board by the name of SEBI under Section 3 of SEBI Act. The head office of SEBI is in Mumbai. SEBI may establish offices at other places in India. SEBI consists of the following members, namely:(a) a Chairman; (b) two members from amongst the officials of the Ministry of the Central Government dealing with Finance and administration of Companies Act, 1956; (c) one member from amongst the officials of the Reserve Bank of India; (d) five other members of whom at least three shall be whole time members to be appointed by the Central Government. 5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page31 Prof. Abdul Kadir Khan The general superintendence, direction and management of the affairs of SEBI vests in a Board of Members, which exercises all powers and do all acts and things which may be exercised or done by SEBI. The Chairman also has powers of general superintendence and direction of the affairs of the Board and may also exercise all powers and do all acts and things which may be
exercised or done by the Board. The Chairman and members referred to in (a) and (d) above shall be appointed by the Central Government and the members referred to in (b) and (c) shall be nominated by the Central Government and the Reserve Bank respectively. The Chairman and the other members are from amongst the persons of ability, integrity and standing who have shown capacity in dealing with problems relating to securities market or have special knowledge or experience of law, finance, economics, accountancy, administration or in any other discipline which, in the opinion of the Central Government, shall be useful to SEBI. Functions of SEBI SEBI has been obligated to protect the interests of the investors in securities and to promote and development of, and to regulate the securities market by such measures as it thinks fit. The measures referred to therein may provide for:(a) regulating the business in stock exchanges and any other securities markets; (b) registering and regulating the working of stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and such other intermediaries who may be associated with securities markets in any manner; 5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page32 Prof. Abdul Kadir Khan (c) registering and regulating the working of the depositories, participants, custodians of securities, foreign institutional investors, credit rating agencies and such other intermediaries as SEBI may, by notification, specify in this behalf; (d) registering and regulating the working of venture capital funds and collective
investment schemes including mutual funds; (e) promoting and regulating self-regulatory organizations; (f) prohibiting fraudulent and unfair trade practices relating to securities markets; (g) promoting investors' education and training of intermediaries of securities markets; (h) prohibiting insider trading in securities; (i) regulating substantial acquisition of shares and take-over of companies; (j) calling for information from, undertaking inspection, conducting inquiries and audits of the stock exchanges, mutual funds, other persons associated with the securities market, intermediaries and self- regulatory organizations in the securities market; (k) calling for information and record from any bank or any other authority or board or corporation established or constituted by or under any Central, State or Provincial Act in respect of any transaction in securities which is under investigation or inquiry by the Board; (l) performing such functions and exercising according to Securities Contracts (Regulation) Act, 1956, as may be delegated to it by the Central Government; (m) levying fees or other charges for carrying out the purpose of this section; (n) conducting research for the above purposes; (o) calling from or furnishing to any such agencies, as may be specified by SEBI, such information as may be considered necessary by it for the efficient discharge of its functions; (p) performing such other functions as may be prescribed. SEBI may, for the protection of investors, (a) specify, by regulations for 5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)
Page33 Prof. Abdul Kadir Khan (i) the matters relating to issue of capital, transfer of securities and other matters incidental thereto; and (ii) the manner in which such matters, shall be disclosed by the companies and (b) by general or special orders : (i) prohibit any company from issuing of prospectus, any offer document, or advertisement soliciting money from the public for the issue of securities, (ii) specify the conditions subject to which the prospectus, such offer document or advertisement, if not prohibited may be issued. (Section 11A). SEBI may issue directions to any person or class of persons referred to in section 12, or associated with the securities market or to any company in respect of matters specified in section 11A. if it is in the interest of investors, or orderly development of securities market to prevent the affairs of any intermediary or other persons referred to in section 12 being conducted in a manner detrimental to the interests of investors or securities market to secure the proper management of any such intermediary or person (Section 11B). Registration of Intermediaries The intermediaries and persons associated with securities market shall buy, sell or deal in securities after obtaining a certificate of registration from SEBI, as required by Section 12: 1) Stock-broker, 2) Sub- broker, 3) Share transfer agent, 4) Banker to an issue, 5) Trustee of trust deed, 6) Registrar to an issue, 7) Merchant banker, 11) Depository, 12) Participant
13) Custodian of securities, 14) Foreign institutional investor, 15) Credit rating agency or 16) Collective investment schemes, 17) Venture capital funds, 5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page34 Prof. Abdul Kadir Khan 8) Underwriter, 9) Portfolio manager, 10) Investment adviser 18) Mutual fund, and 19) Any other intermediary associated with the securities market. THE DEPOSITORIES ACT, 1996 The Depositories Act, 1996 was enacted to provide for regulation of depositories in securities and for matters connected therewith or incidental thereto. It came into force from 20th September, 1995. The terms used in the Act are defined as under: (1) "Beneficial owner" means a person whose name is recorded as such with a depository. (2) "Depository" means a company, formed and registered under the Companies Act, 1956 and which has been granted a certificate of registration under subsection (1A) of section 12 of the SEBI Act, 1992. (3) "Issuer" means any person making an issue of securities. (4) "Participant" means a person registered as such under sub-section (1A) of section 12 of the SEBI Act, 1992. (5) "Registered owner" means a depository whose name is entered as such in the register of the issuer. Agreement between depository and participant A depository shall enter into an agreement in the specified format with one or more participants as its agent. Services of depository
Any person, through a participant, may enter into an agreement, in such form as may be specified by the bye-laws, with any depository for availing its services. Surrender of certificate of security 5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page35 Prof. Abdul Kadir Khan Any person who has entered into an agreement with a depository shall surrender the certificate of security, for which he seeks to avail the services of a depository, to the issuer in such manner as may be specified by the regulations. The issuer, on receipt of certificate of security, shall cancel the certificate of security and substitute in its records the name of the depository as a registered owner in respect of that security and inform the depository accordingly. A depository shall, on receipt of information enter the name of the person in its records, as the beneficial owner. Registration of transfer of securities with depository Every depository shall, on receipt of intimation from a participant, register the transfer of security in the name of the transferee. If a beneficial owner or a transferee of any security seeks to have custody of such security, the depository shall inform the issuer accordingly. Options to receive security certificate or hold securities with depository Every person subscribing to securities offered by an issuer shall have the option either to receive the security certificates or hold securities with a depository. Where a person opts to hold a security with a depository, the issuer shall intimate such depository the details of allotment of the security, and on receipt of such information the depository shall enter in its records the name of the allottee as the beneficial owner of that
security. Securities in depositories to be in fungible form All securities held by a depository shall be dematerialized and shall be in a fungible form. Rights of depositories and beneficial owner A depository shall be deemed to be the registered owner for the purposes of effecting transfer of ownership of security on behalf of a beneficial owner. The depository as a registered owner shall not have any voting rights or any other rights in respect of securities held by it. The beneficial owner shall be entitled to all the rights and benefits and be subjected to all the liabilities in respect of his securities held by a depository. 5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page36 Prof. Abdul Kadir Khan Pledge or hypothecation of securities held in a depository A beneficial owner may with the previous approval of the depository create a pledge or hypothecation in respect of a security owned by him through a depository. Every beneficial owner shall give intimation of such pledge or hypothecation to the depository and such depository shall thereupon make entries in its records accordingly. Any entry in the records of a depository under Section 12 (2) shall be evidence of a pledge or hypothecation. Furnishing of information and records by depository and issuer Every depository shall furnish to the issuer information about the transfer of securities in the name of beneficial owners at such intervals and in such manner as may be specified by the bye-laws. Every issuer shall make available to the depository copies of the relevant records in respect of securities held by such depository.
Option to opt out in respect of any security If a beneficial owner seeks to opt out of a depository in respect of any security he shall inform the depository accordingly. The depository shall on receipt of intimation make appropriate entries in its records and shall inform the issuer. Every issuer shall, within thirty days of the receipt of intimation from the depository and on fulfillment of such conditions and on payment of such fees as may be specified by the regulations, issue the certificate of securities to the beneficial owner or the transferee, as the case may be. Depository to indemnify loss in certain cases Any loss caused to the beneficial owner due to the negligence of the depository or the participant, the depository shall indemnify such beneficial owner. Where the loss due to the negligence of the participant is indemnified by the depository, the depository shall have the right to recover the same from such participant. Securities not liable to stamp duty As per Section 8-A of Indian Stamp Act, 1899: 5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page37 Prof. Abdul Kadir Khan a) an issuer, by the issue of securities to one or more depositories shall, in respect of such issue, be chargeable with duty on the total amount of security issued by it and such securities need not be stamped; b) where an issuer issues certificate of security under sub-section (3) of Section 14 of the Depositories Act, 1996, on such certificate duty shall be payable as is payable on the issue of duplicate certificate under the Indian Stamp Act, 1899; c) transfer of registered ownership of securities from a person to a depository or from a depository to a beneficial owner shall not be liable to any stamp duty;
d) transfer of beneficial ownership of shares, such securities dealt with by a depository shall not be liable to duty under Article 62 of Schedule I of the Indian Stamp Act, 1899; e) transfer of beneficial ownership of units, such units being units of mutual fund including units of the Unit Trust of India, dealt with by a depository shall not be liable to duty under Article 62 of Schedule I of the Indian Stamp Act, 1899; INSURANCE ACTS IN INDIA The insurance sector went through a full circle of phases from being unregulated to completely regulated and then currently being partly deregulated. It is governed by a number of acts. The Insurance Act of 1938 was the first legislation governing all forms of insurance to provide strict state control over insurance business. Life insurance in India was completely nationalized on January 19, 1956, through the Life Insurance Corporation Act. All 245 insurance companies operating then in the country were merged into one entity, the Life Insurance Corporation of India. The General Insurance Business Act of 1972 was enacted to nationalize the about 100 general insurance companies then and subsequently merging them into four companies. All the companies were amalgamated into National Insurance, New India Assurance, 5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page38 Prof. Abdul Kadir Khan Oriental Insurance and United India Insurance, which were headquartered in each of the four metropolitan cities. Until 1999, there were not any private insurance companies in India. The government
then introduced the Insurance Regulatory and Development Authority Act in 1999, thereby de-regulating the insurance sector and allowing private companies. Furthermore, foreign investment was also allowed and capped at 26% holding in the Indian insurance companies. In 2006, the Actuaries Act was passed by parliament to give the profession statutory status on par with Chartered Accountants, Notaries, Cost & Works Accountants, Advocates, Architects & Company Secretaries. Unit -4 Regulatory Bodies Department of Company Affairs Department of Economic Affairs SEBI Forward Market Commission RBI IRDA Need for Self Regulation SEBI Securities & Exchange Board of India (SEBI) is the regulator for the securities market in India. It was formed officially by the Government of India in 1992 with SEBI Act 1992 being passed by the Indian Parliament. Chaired by C B Bhave. 5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page39 Prof. Abdul Kadir Khan PREAMBLE The Preamble of the Securities and Exchange Board of India describes the basic functions of the Securities and Exchange Board of India as – “…..to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto” Functions and Responsibilities:
SEBI has to be responsive to the needs of three groups, which constitute the market: the issuers of securities the investors the market intermediaries. SEBI has three functions rolled into one body quasi-legislative, quasijudicial and quasiexecutive. It drafts regulations in its legislative capacity, it conducts investigation and enforcement action in its executive function and it passes rulings and orders in its judicial capacity. Though this makes it very powerful, there is an appeals process to create accountability. There is a Securities Appellate Tribunal which is a three-member tribunal and is presently headed by a former Chief Justice of a High court Mr. Justice NK Sodhi. A second appeal lies directly to the Supreme Court. SEBI has enjoyed success as a regulator by pushing systemic reforms aggressively and successively (e.g. the quick movement towards making the markets electronic and paperless rolling settlement on T+2 basis). SEBI has been active in setting up the regulations as required under law. SEBI has also been instrumental in taking quick and effective steps in light of the global meltdown and the Satyam fiasco. It had increased the extent and quantity of disclosures to be made by Indian corporate promoters. More recently, in light of the global meltdown, it liberalized the takeover code to facilitate investments by removing regulatory strictures. Securities Market Awareness Campaign (SMAC) by SEBI: The Securities and Exchange Board of India (SEBI) has been mandated to protect the interests of investors in securities and to promote the development and to regulate the 5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)
Page40 Prof. Abdul Kadir Khan securities market so as to establish a dynamic and efficient Securities Market contributing to Indian Economy. SEBI strongly believes that investors are the backbone of the securities market. They not only determine the level of activity in the securities market but also the level of activity in the economy. However, many investors may not possess adequate expertise/knowledge to take informed investment decisions. Some of them may not be aware of the complete riskreturn profile of the different investment options. Some investors may not be fully aware of the precautions they should take while dealing with market intermediaries and dealing in different securities. They may not be familiar with the market mechanism and the practices as well as their rights and obligations. In this backdrop, SEBI launched a comprehensive education campaign aimed at creating awareness among investors about securities market, which has been christened – “Securities Market Awareness Campaign” (SMAC). The motto of the campaign is – ‘An Educated Investor is a Protected Investor.’ The campaign was launched at the national level by the then Prime Minister, Shri Atal Bihari Vajpayee, on January 17, 2003.The national launch was closely followed by launches in 12 states. The structural foundation of the campaign is based on workshops that are being conducted all across the country with the continued and active participation of market participants, market intermediaries, Investors Associations etc., to spread SEBI’s message of “Invest With Knowledge”. The Multi-Pronged approach by SMAC: 1. Workshops 2. Advertisements 3. Educative Material
4. Website dedicated to Investor Education 5. All India Radio 6. Cautionary Message on Television 1. Workshops The workshops are aimed at reaching out to the common investors and are being held primarily in small and medium towns and cities all over the country. At these workshops, the aim is to acclimatize the investors with the functioning of the securities market, the basic fundamentals of investment and risk management and their rights and 5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page41 Prof. Abdul Kadir Khan responsibilities. You can attend the workshops in your city/town. The message is simple, and lectures and discussions are conducted in your local/regional language, Till date, more than 2188 workshops have been conducted in around 500 cities/towns across the country. 2. Advertisements SEBI has prepared simple “dos and don’ts” for investors relating to various aspects of the securities market. While these simple messages have been put on the investor website and have been printed in the form of leaflets to be distributed across the country, it was felt that these messages could be spread across the investor base by way of advertisements in newspapers, especially in the regional newspapers. Till date, over 700 advertisements relating to various aspects of Securities Market have appeared in 48 different newspapers/ magazines, covering approximately 111 cities and 9 regional languages, apart from English and Hindi. 3. Educative Material SEBI has prepared a standardized reading material and presentation material for the workshops. In addition, reference guides on topics concerning investors have also been
prepared. The reference guides/booklets have been translated into Hindi and the workshop material has been translated into 10 major regional languages. You can read the material translated into regional languages on-line or download it in the language of your choice. 4. Website dedicated to Investor Education With a view to make information relevant to the investor available at one place, this dedicated investor website (http://investor.sebi.gov.in) has been operationalized. A simple and effective internet based response to investor complaints has been set up. On filing of your complaint electronically, an acknowledgement mail would be sent to your specified email address and you will be issued a complaint registration number instantaneously. 5. All India Radio With regard to educating investors through the medium of radio, SEBI Officials regularly participate in programmes aired by All India Radio 6. Cautionary Message on Television With a view to use the electronic media to reach out to a larger number of investors, a short cautionary message, in the form of a 40 seconds filmlet, has been prepared and the same is being aired on television. 5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page42 Prof. Abdul Kadir Khan IRDA (Insurance Regulatory and Development Authority) Insurance Regulatory and Development Authority (IRDA) was setup under section 4 of IRDA Act 1999, (IRDA, which was constituted by an act of parliament). The Authority is a ten member team consisting of (a) One Chairman;
(b) Five whole-time members; (c) Four part-time members, (All appointed by the Government of India) Section 14 of IRDA Act, 1999 lays down the duties, powers and functions of IRDA. They are as follows: (1) Subject to the provisions of this Act and any other law for the time being in force, the Authority shall have the duty to regulate, promote and ensure orderly growth of the insurance business and re-insurance business. (2) The powers and functions of the Authority shall include :(a) Issue to the applicant a certificate of registration, renew, modify, withdraw, suspend or cancel such registration; (b) Protection of the interests of the policy holders in matters concerning assigning of policy, nomination by policy holders, insurable interest, settlement of insurance claim, surrender value of policy and other terms and conditions of contracts of insurance; (c) Specifying requisite qualifications, code of conduct and practical training for intermediary or insurance intermediaries and agents; (d) Specifying the code of conduct for surveyors and loss assessors; (e) Promoting efficiency in the conduct of insurance business; (f) Promoting and regulating professional organizations connected with the insurance and re-insurance business; (g) Levying fees and other charges for carrying out the purposes of this Act; (h) Calling for information, undertaking inspection, conducting enquiries and investigations including audit of the insurers, intermediaries, insurance intermediaries and other organizations connected with the insurance business; 5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page43 Prof. Abdul Kadir Khan (i) Control and regulation of the rates, advantages, terms and conditions that may
be offered by insurers in respect of general insurance business not so controlled and regulated by the Tariff Advisory Committee under section 64U of the Insurance Act, 1938 (4 of 1938); (j) Specifying the form and manner in which books of account shall be maintained and statement of accounts shall be rendered by insurers and other insurance intermediaries; (k) Regulating investment of funds by insurance companies; (l) Regulating maintenance of margin of solvency; (m) Adjudication of disputes between insurers and intermediaries or insurance intermediaries. (n) Supervising the functioning of the Tariff Advisory Committee; (o) Specifying the percentage of premium income of the insurer to finance schemes for promoting and regulating professional organizations referred to in clause (f); (p) Specifying the percentage of life insurance business and general insurance business to be undertaken by the insurer in the rural or social sector. (q) Exercising such other powers as may be prescribed Department of Economic Affairs (DEA) Department of Economic Affairs (DEA) is the nodal agency of the Union Government to formulate and monitor country's economic policies and programmes having a bearing on domestic and international aspects of economic management. Department of Economic Affairs works under the Right to Information (RTI) Act. Main Functions of the Department of Economic Affairs are: It formulates as well as monitors the economic life of the country at macro level that is connected with the Capital Market inclusive of Stock Exchange It manages both the internal and external aspects of the economic policies and programmes of the country The department prepares the Union Budget on a yearly basis exclusive of the Railway Budget system It also lifts up external resources of the country's economy with the help of
multilateral and bilateral official development assistance along with 5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page44 Prof. Abdul Kadir Khan commercial borrowings from overseas countries, foreign direct investments, preserving foreign exchange resources, and balance of payment The department contributes in raising the internal resources of the country's economy with the help of market borrowings, taxation, gathering of small savings, and ordinance of money supply system It plays a cardinal role in manufacturing bank notes and coins available in varied denominations It also makes available the postal stationery, postal stamps, and many more The department of economic affairs takes substantial interest in cadre management, career planning and training of the Indian Economic Service (IES) It is highly responsible for the disbursement of loans as well debt servicing of the loans Units working under the Department of Economic Affairs are: Administrative Division All administrative and establishment matters, including protocol, and implementation of Official Language Policy fall within the domain of this Division. Bilateral Cooperation Division BC Division deals with Bilateral Development Assistance from all G-8 countries. One of the main functions of the Division is to extend concessional Lines of Credit to other developing countries. It also monitors the progress of implementation of Externally Aided Projects and administers all short term foreign training programmes. Budget Division Apart from preparation of Union Budget and other allied issues like market borrowings, accounting and auditing procedures and financial relationship with the State Governments. This Division also deals with mobilization of small savings through the National Savings Institute (NSI). Capital Market Division It is primarily responsible for policy issues related to development of the
securities markets (i.e. share, debt and derivatives), External Commercial Borrowing and administration of Foreign Exchange Management Act (FEMA), 1999. It also looks after the administrative matters of the Specified Undertaking of Unit Trust of India (SUUTI), the Securities and Exchange Board of India (SEBI), Securities Appellate Tribunal (SAT) and Pensions Funds Regulation and Development Authority (PFRDA). Economic Division 5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page45 Prof. Abdul Kadir Khan It tenders economic advice to the Government on important policy issues relating to macro management of the economy. Finance Division The Finance Division is responsible for tendering of financial advice on all matters involving government expenditure of the Department of Economic Affairs and the Department of Financial Services. The Division is also responsible for preparation of the Budget and administering the Detailed Demands for Grants in respect of these Departments. Coordination, compilation and printing of the Detailed Demands for Grants and the Outcome Budget of the Ministry of Finance is also handled by this Division. Multilateral Relations Division With a view to provide focused and outcome oriented engagement with multilateral organizations and Trade Related issues, Multilateral Relations Division has been created recently by merging Sections from Foreign Trade Division and Fund Bank Division specifically dealing with related issues. The MR Division comprises five sections namely, MR-I Section has been assigned the job of rendering advice and dealing all matters related to G-20, G-24, G-8, ASEM, OECD and EC, MR-II Section deals with UN related matters, MR-III Section advises on WTO and SAARC related matters. MR-IV Section is responsible for all
matters related to Colombo Plan and Technical Cooperation framed there under. MR-V Section renders advice to Ministry of Commerce on issues arising out of and consequent to implementation of Foreign Trade Policy. Infrastructure Division Sectoral responsibilities of infrastructure, including Railways, Telecommunications, Roads, Ports, Shipping, Civil Aaviation, Power, Coal, NonConventional Energy Resources and Inland Water Transport (IWT) are handled here. Aid, Accounts and Audit Division This Division is responsible for disbursement of loans and grants from multilateral/ bilateral donor agencies, debt servicing of loans to multilateral/ bilateral donors, accounting of external assistance, export promotion audit and supply of management information to credit Divisions. Multilateral Institutions Division Matters relating to International Monetary Fund (IMF), Asian Development Bank (ADB), International Bank for Reconstruction and Development (IBRD), International Development Association (IDA), International Finance Corporation (IFC), Global Environment Facility (GEF) and Multilateral Investment Guarantee Agency (MIGA) are the concern of this Division.
5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page46 Prof. Abdul Kadir Khan Department of Company Affairs (DCA) The Department of Company Affairs, mainly administers the Companies Act, 1956 and the Monopolies and Restrictive Trade Practices Act, 1969. Besides it also administers
The Chartered Accountants Act, 1949, The Cost and Works Accountants Act, 1959 and The Company Secretaries Act, 1980. The Department has a three tier organizational set-up; namely, the Secretariat at New Delhi, the Offices of Regional Directors at Mumbai, Calcutta, Chennai and Kanpur and those of the Registrars of Companies in States and Union Territories and Official Liquidators attached to each of the High Courts functioning in the country. The organization at the Headquarters also includes two Directors of Inspection and Investigation with a complement of staff, a Director of Research and Statistics and other Officials providing expertise on legal, accounting, economic and statistical matters. The four Regional Directors who are in charge of the respective Regions comprising a number of States and Union Territories supervise the working of the Offices of the Registrars of Companies and the Official Liquidators working in their regions. Certain powers of the Central Government under the Act have been delegated to the Regional Directors to be exercised by them in their respective regions. They have also been declared as Heads of the Department and have accordingly been entrusted with appropriate administrative and financial powers. An Inspection Unit is attached to the office of every Regional Director for carrying out inspection of the book of accounts of companies under section 209A of the Act. Registrars of Companies appointed under Section 609 of the Companies Act, covering the various States and Union Territories, are vested with the primary duty of registering companies in the respective States and the Union Territories and ensuring that such
companies comply with the statutory requirements under the Act. Their offices function as registry of records relating to the companies registered with them. The Official Liquidators are officers appointed by the Central Government under Section 448 of the Companies Act and are attached to the various High Courts. The Official Liquidators are under the administrative charge of the respective Regional Directors who supervise their functioning on behalf of the Central Government. In the conduct of the winding up of the companies, however, Official Liquidators act under the directions of the High Courts. Company Law Board 5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page47 Prof. Abdul Kadir Khan The Central Government constituted an independent Company Law Board vide Notification Sl.No. 364 dated the 31st May, 1991. The Board is a quasijudicial body which exercises some of the judicial and quasi-judicial powers which were earlier being exercised by the High Court or the Central Government. The Board is not subject to the control of the Central Government and has the powers to regulate its own procedure and act in its own discretion. The Board has its Headquarter at Delhi and four Regional Benches located at Delhi, Mumbai, Calcutta and Chennai. The Monopolies and Restrictive Trade Practices Commission An important organ of the Department of Company Affairs is the Monopolies and Restrictive Trade Practices Commission (MRTP Commission) a quasijudicial body. The MRTP Commission established under Section 5 of the Monopolies and Restrictive Trade Practices Act, 1969, discharges functions as per the provisions of the Act. The main
function of the MRTP Commission is to enquire into and take appropriate action in respect of unfair trade practices and restrictive trade practices. In regard to monopolistic trade practices the Commission is empowered to inquire into such practices (i) Upon a reference made to it by the Central Government or (ii) Upon its own knowledge or information and submit its findings to Central Government for further action. Director General of Investigation and Registration The Director General of Investigation and Registration, who functions in terms of Section 8 of the MRTP Act, makes investigations for the purpose of the Act, for maintaining a register of agreements subject to registration under the Act and also for performing such other functions as are assigned to him under the Act. Reserve Bank of India (RBI) Reserve Bank of India (RBI) established under The Reserve Bank of India Act, 1934 and commenced business on April 1, 1935 with a share capital of Rs. 5 crores on the basis of the recommendations of the Hilton Young Commission. It is the central bank of our country. The share capital was divided into shares of Rs. 100 each fully paid which was entirely owned by private shareholders in the beginning. The Government held shares of nominal value of Rs. 2,20,000. Reserve Bank of India was nationalized in the year 1949. The Central Board of Directors is the main committee of the central bank and has not more than 20 members. The government appoints the directors for a four year term. The membership is as follows: 5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page48 Prof. Abdul Kadir Khan
1 Governor 4 Deputy Governors 1 Government official from the Ministry of Finance 4 nominated Directors by the Central Government to represent the four local Boards with the headquarters at Mumbai, Kolkata, Chennai and New Delhi 10 nominated Directors by the Government to give representation to important elements in the economic life of the country Functions of Reserve Bank of India The Reserve Bank of India Act of 1934 entrust all the important functions of a central bank the Reserve Bank of India. They are divided into 2 categories namely, monetary and non-monetary policies. Monetary Policies: Bank of Issue: Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to issue bank notes of all denominations. The distribution of one rupee notes and coins and small coins all over the country is undertaken by the Reserve Bank as agent of the Government. The Reserve Bank has a separate Issue Department which is entrusted with the issue of currency notes. The assets and liabilities of the Issue Department are kept separate from those of the Banking Department. Originally, the assets of the Issue Department were to consist of not less than two-fifths of gold coin, gold bullion or sterling securities provided the amount of gold was not less than Rs. 40 crores in value. The remaining three-fifths of the assets might be held in rupee coins, Government of India rupee securities, eligible bills of exchange and promissory notes payable in India. Due to the exigencies of the Second World War and the post-was period, these
provisions were considerably modified. Since 1957, the Reserve Bank of India is required to maintain gold and foreign exchange reserves of Rs. 200 crores, of which at least Rs. 115 crores should be in gold. The system as it exists today is known as the minimum reserve system. Banker to Government: The second important function of the Reserve Bank of India is to act as Government banker, agent and adviser. The Reserve Bank is agent of Central Government and of all State Governments in India excepting that of Jammu and Kashmir. The Reserve Bank has the obligation to transact Government business, via. to keep the cash balances as deposits free of interest, to receive and to make payments on behalf of the Government and to carry out their exchange remittances and other banking operations. The Reserve 5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page49 Prof. Abdul Kadir Khan Bank of India helps the Government - both the Union and the States to float new loans and to manage public debt. The Bank makes ways and means advances to the Governments for 90 days. It makes loans and advances to the States and local authorities. It acts as adviser to the Government on all monetary and banking matters. Bankers' Bank and Lender of the Last Resort The Reserve Bank of India acts as the bankers' bank. According to the provisions of the Banking Companies Act of 1949, every scheduled bank was required to maintain with the Reserve Bank a cash balance equivalent to 5% of its demand liabilites and 2 per cent of its time liabilities in India. By an amendment of 1962, the distinction between
demand and time liabilities was abolished and banks have been asked to keep cash reserves equal to 3 per cent of their aggregate deposit liabilities. The minimum cash requirements can be changed by the Reserve Bank of India. The scheduled banks can borrow from the Reserve Bank of India on the basis of eligible securities or get financial accommodation in times of need or stringency by rediscounting bills of exchange. Since commercial banks can always expect the Reserve Bank of India to come to their help in times of banking crisis the Reserve Bank becomes not only the banker's bank but also the lender of the last resort. Controller of Credit: The Reserve Bank of India is the controller of credit i.e. it has the power to influence the volume of credit created by banks in India. It can do so through changing the Bank rate or through open market operations. According to the Banking Regulation Act of 1949, the Reserve Bank of India can ask any particular bank or the whole banking system not to lend to particular groups or persons on the basis of certain types of securities. Since 1956, selective controls of credit are increasingly being used by the Reserve Bank. The Reserve Bank of India is armed with many more powers to control the Indian money market. Every bank has to get a license from the Reserve Bank of India to do banking business within India, the license can be cancelled by the Reserve Bank of certain stipulated conditions are not fulfilled. Every bank will have to get the permission of the Reserve Bank before it can open a new branch. Each scheduled bank must send a weekly return to the Reserve Bank showing, in detail, its assets and liabilities. This power of the Bank to call for information is also intended to give it effective control of
the credit system. The Reserve Bank has also the power to inspect the accounts of any commercial bank. As supreme banking authority in the country, the Reserve Bank of India, therefore, has the following powers: (a) It holds the cash reserves of all the scheduled banks. 5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page50 Prof. Abdul Kadir Khan (b) It controls the credit operations of banks through quantitative and qualitative controls. (c) It controls the banking system through the system of licensing, inspection and calling for information. (d) It acts as the lender of the last resort by providing rediscount facilities to scheduled banks. Custodian of Foreign Reserves: The Reserve Bank of India has the responsibility to maintain the official rate of exchange. According to the Reserve Bank of India Act of 1934, the Bank was required to buy and sell at fixed rates any amount of sterling in lots of not less than Rs. 10,000. After India became a member of the International Monetary Fund in 1946, the Reserve Bank has the responsibility of maintaining fixed exchange rates with all other member countries of the I.M.F. Besides maintaining the rate of exchange of the rupee, the Reserve Bank has to act as the custodian of India's reserve of international currencies. The vast sterling balances were acquired and managed by the Bank. Further, the RBI has the responsibility of administering the exchange controls of the country. Non-Monetary Functions Supervisory functions:
In addition to its traditional central banking functions, the Reserve bank has certain nonmonetary functions of the nature of supervision of banks and promotion of sound banking in India. The Reserve Bank Act, 1934, and the Banking Regulation Act, 1949 have given the RBI wide powers of supervision and control over commercial and cooperative banks, relating to licensing and establishments, branch expansion, liquidity of their assets, management and methods of working, amalgamation, reconstruction, and liquidation. The RBI is authorized to carry out periodical inspections of the banks and to call for returns and necessary information from them. The nationalization of 14 major Indian scheduled banks in July 1969 has imposed new responsibilities on the RBI for directing the growth of banking and credit policies towards more rapid development of the economy and realization of certain desired social objectives. The supervisory functions of the RBI have helped a great deal in improving the standard of banking in India to develop on sound lines and to improve the methods of their operation. Promotional functions: 5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page51 Prof. Abdul Kadir Khan With economic growth assuming a new urgency since Independence, the range of the Reserve Bank's functions has steadily widened. The Bank now performs a variety of developmental and promotional functions, which, at one time, were regarded as outside the normal scope of central banking. The Reserve Bank was asked to promote banking habit, extend banking facilities to rural and semi-urban areas, and establish and
promote new specialized financing agencies. Accordingly, the Reserve Bank has helped in the setting up of the IFCI and the SFC; it set up the Deposit Insurance Corporation in 1962, the Unit Trust of India in 1964, the Industrial Development Bank of India also in 1964, the Agricultural Refinance Corporation of India in 1963 and the Industrial Reconstruction Corporation of India in 1972. These institutions were set up directly or indirectly by the Reserve Bank to promote saving habit and to mobilize savings, and to provide industrial finance as well as agricultural finance. As far back as 1935, the Reserve Bank of India set up the Agricultural Credit Department to provide agricultural credit. But only since 1951 the Bank's role in this field has become extremely important. The Bank has developed the co-operative credit movement to encourage saving, to eliminate moneylenders from the villages and to route its short term credit to agriculture. The RBI has set up the Agricultural Refinance and Development Corporation to provide long-term finance to farmers. Forward Market Commission (FMC) Forward Markets Commission is a regulatory body for commodity futures/ forward trade in India. This was set up under the Forward Contracts (Regulation) Act of 1952. It is responsible for regulating and promoting futures/ forward trade in commodities. The Forward Markets Commission's Head Quarter is located at Mumbai and Regional Office at Kolkata. The commission can have a minimum of 2 and a maximum of 4 members appointed by the Central government. The membership is as follows: 1 nominated by the Central Government to be the Chairman The other member or members shall be either whole-time or part- time as the
Central Government may direct The members can hold their office for a maximum period of 3 years from the date of appointment and a member relinquishing his office on the expiry of his term shall be eligible for re-appointment. Functions of the Commission: The functions of the Commission are: 5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page52 Prof. Abdul Kadir Khan b. To advise the Central Government in respect of the recognition of or the withdrawal of recognition from any association or in respect of any other matter arising out of the administration of this Act. c. To keep forward markets under observation and to take such action in relation to them as it may consider necessary, in exercise of the powers assigned to it by or under this Act. d. To collect and whenever the Commission thinks it necessary publish information regarding the trading conditions in respect of goods to which any of the provisions of this Act is made applicable, including information regarding supply, demand and prices, and to submit to the Central Government periodical reports on the operation of this Act and on the working of forward markets relating to such goods. e. To make recommendations generally with a view to improving the organization and working of forward markets. f. To undertake the inspection of the accounts and other documents of any recognized association or registered association or any member of such association whenever it considers it necessary. g. To perform such other duties and exercise such other powers as may be assigned to the Commission by or under this Act, or as may be prescribed. Powers of the Commission:
(1) The Commission shall, in the performance of its functions, have all the powers of a civil court under the Code of Civil Procedure, 1908, while trying a suit in respect of the following matters, namely: (a) Summoning and enforcing the attendance of any person and examining him on oath; (b) Requiring the discovery and production of any document; (c) Receiving evidence on affidavits; (d) Requisitioning any public record or copy thereof from any office; (e) Any other matters which may be prescribed. 5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5) Page53 Prof. Abdul Kadir Khan (2) The Commission shall have the power to require any person to furnish information on any matters which may be useful for, or relevant to any matter under the consideration of the Commission and any person so required shall be deemed to be legally bound to furnish such information within the meaning of Sec. 176 of the Indian Penal code, 1860. ================================X===================== ===========
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