Unitedworld School of law

“INFRASTRUCTURAL FINANCIAL MARKETS”

PROJECT ON

“LEGAL AND REGULATORY FRAMEWORK OF

FINANCIAL MARKETS”

For Internal Evaluation Submitted to

Prof. NITESH NANAVATI

Prepared by-
Prerna Bhansali
ROLL No. –
1007AL0058
 TABLE OF CONTENTS

1. Introduction to SEBI
2. Objectives of SEBI
3. Powers and functions of SEBI
4. Securities Appellate Tribunal
5. RBI
6. Impact of various policies on financial markets
a. Credit policy
b. Fed policy
c. Inflation index
d. CPI
e. WPI
7. Stock Exchange
INTRODUCTION TO SEBI

The Securities and Exchange Board of India is known as SEBI. In India, the Securities and
Exchange Board of India (Sebi) is in charge of overseeing the securities market. It was
established in 1922 as part of the SEBI Act. It is recognised to be a government regulatory
organisation in India.

SEBI is responsible for keeping track of all participants in the Indian capital markets. It
makes an effort to protect the interests of mutual fund investors. Investments in mutual funds
include Equity Mutual Funds, Debt Mutual Funds, Income Funds, and many others. Also, by
applying various laws and regulations, it aims to improve the capital markets.

Visit the government of India's official website for additional information about SEBI. The
government's goal is to ensure that the capital (money) invested by the people is safe. This
builds a framework of trust and respect for the stock exchange and capital market over time.

OBJECTIVES OF SEBI

SEBI has following objectives-

1. Protection to the investors

SEBI's main goal is to safeguard investors' interests in the stock market and to create a
healthy environment for them.

2. Prevention of malpractices
SEBI was established for this reason. Preventing malpractice is one of the key goals.

3. Fair and proper functioning

SEBI is in charge of ensuring the smooth operation of capital markets and keeps a careful eye
on the actions of financial intermediaries such as brokers, sub-brokers, and others.

POWERS AND FUNCTIONS OF SEBI

Powers of SEBI:

• Inspect the books of accounts of recognised stock exchanges and demand periodic returns.

• Inspect the books of financial intermediaries.

• Make it mandatory for some businesses to be listed on one or more stock markets.

• To take care of broker registration.

SEBI primarily has three functions-

 1. Protective Function
2. Regulatory Function
3. Development Function

Protective Functions
As the name suggests, these functions are performed by SEBI to protect the interest of
investors and other financial participants.

It includes-

 Checking price rigging.

 Prevent insider trading.
 Promote fair practices.
 Create awareness among investors.
 Prohibit fraudulent and unfair trade practices.

Regulatory Functions
These functions are basically performed to keep a check on the functioning of the business in
the financial markets.

These functions include-

 Designing guidelines and code of conduct for the proper functioning of financial
intermediaries and corporate.
 Regulation of takeover of companies
 Conducting inquiries and audit of exchanges
 Registration of brokers, sub-brokers, merchant bankers etc.
 Levying of fees
 Performing and exercising powers
 Register and regulate credit rating agency

Development Functions
SEBI performs certain development functions also that include but they are not limited to-

 Imparting training to intermediaries

 Promotion of fair trading and reduction of malpractices
 Carry out research work
 Encouraging self-regulating organizations
  Buy-sell mutual funds directly from AMC through a broker

SECURITIES APPELLATE TRIBUNAL

The Central Government may create an Appellate Tribunal known as the Securities Appellate
Tribunal by notification to exercise the jurisdiction, powers, and authority conferred on it
under the SEBI Act, 1992 or any other law in force at the time. A Tribunal has been
established by the Central Government in Mumbai.

The SECURITIES APPELLATE TRIBUNAL is a statutory body formed under Section 15K
of the Securities and Exchange Board of India Act, 1992 to hear and decide appeals against
orders made by the S&E Board of India or an adjudicating officer under the Act.

Composition of SAT
SAT consists of
 A Presiding Officer &
 Two other members

Appointment
 Presiding Officer
The Presiding officer of SAT shall be appointed by the Central Government in consultation
with the Chief Justice of India or his nominee.
 Members
The two members of SAT shall be appointed by the Central Government.

Qualifications
Presiding Officer-
 A sitting or retired Supreme Court judge, a sitting or retired Chief Justice of the High
Court, or a sitting or retired Judge of a High Court who has served as a Judge in a
High Court for at least 7 years.

Members-
 He is a person of ability, honesty, and standing;
 He has demonstrated competence in dealing with securities market problems, and he
has qualifications and expertise in corporate law, securities legislation, finance,
economics, or accounting.

Tenure
 Presiding Officer
Earlier of the two
– 5 years at a time or re appointment or
– 68 years
  Members
Earlier of the two
– 5 years at a time or re appointment or
– 62 years
Powers of SAT
The SAT must have the same powers as a civil court under the Code of Civil Procedure 1908
while trying an action, for the purpose of carrying out their functions under this Act, in
respect of the following matters:
 Requiring the discovery and production of documents.
 Receiving evidence on affidavits.
 Summoning and demanding the appearance of any individual and questioning him
under oath.
 Appointing commissions to examine witnesses or documents.
 Reconsidering its choices.
 Dismissing an application due to default or making an ex-party decision.
 Any other thing that may be ordered.
 Setting aside any order or dismissal of any applicable for default or any order passed
by it ex-party.
Appeal to SAT
 Any person aggrieved may prefer an appeal to a SAT having jurisdiction in the issue,
by an order made by SEBI under this act, or by an order made by an adjudicating
officer under this act.

Time limit
 Every appeal must be filed within 45 days of receiving a copy of the order issued by
SEBI or the adjudicating officer, and must be accompanied by the prescribed form
and fees.
 The SAT may hear an appeal after the 45-day period has expired if it is satisfied that
there was sufficient cause for not filing it within that time. The appeal must be made
in three copies, with additional copies for each additional appeal.
 The authorised person must sign the appeal. Upon receipt of the appeal, the SAT may,
after hearing the parties to the appeal, issue any order it deems appropriate, affirming,
amending, or setting aside the order appealed against, and such appeal shall be
resolved within 6 months.

How to appear before SAT

A Chartered Accountant, Company Secretary, Cost Accountant, or Legal Practitioner may
appear before the SAT in person or through an authorised person.
Appeal against the order of SAT
Any person who is dissatisfied with the SAT's decision or order can file an appeal with the
Supreme Court. Only a point of law can be raised in an appeal. Within 60 days of receiving a
copy of the SAT's decision or order, the appeal must be filed. If the supreme court determines
that the applicant was prohibited from filing an appeal within the first 60 days by sufficient
cause, it may provide an additional 60-day time for filing an appeal.

Civil court not to have Jurisdiction

No civil court shall have jurisdiction to hear any suit or process relating to any subject that an
Adjudicating Officer appointed under this act or a SAT created by this act is entitled to
decide.
Any court or other authority may not issue an injunction in relation to any action done or to
be taken in the exercise of any power conferred by or under this act.

RBI (RESERVE BANK OF INDIA)

The Reserve Bank of India (RBI) is India's central bank and regulatory authority, reporting
to the Government of India's Ministry of Finance. It is in charge of the Indian rupee's issue
and supply, as well as the banking system's supervision. It also oversees the country's primary
payment networks and aims to further the country's economic growth.
It also had complete control of India's monetary policy until the Monetary Policy Committee
was constituted in 2016. In compliance with the Reserve Bank of India Act, 1934, it began
operations on April 1, 1935. The initial share capital was divided into 100 fully paid shares.
The RBI was nationalised on January 1, 1949, following India's independence on August 15,
1947.
The governor, four deputy governors, two finance ministry representatives, 10 government-
nominated directors, and four directors who represent local boards for Mumbai, Kolkata,
Chennai, and Delhi make up the RBI's 21-member central board of directors. Each of these
local boards is made up of five people who represent regional and local interests.
The Asian Clearing Union has accepted it as a member bank. The bank is also a leading
member of the Alliance for Financial Inclusion, which promotes financial inclusion policies
(AFI). The bank is frequently referred to as 'Mint Street.'
Policy Rates and Reserve Ratio
Quantitative Instruments
The quantitative instruments are also known as the RBI's general tools (Reserve Bank of
India). These instruments are linked to the quantity and volume of money, as the name
implies. These devices are used to regulate the total amount of money and volume of bank
credit in the economy. These are indirect devices that are used to alter the amount of credit in
the economy.
Bank Rate: -

The bank rate is the lowest rate at which the central bank loans money to commercial banks
and rediscounts first-class bills of exchange and securities. When the RBI detects a rise in
inflation, it raises bank interest rates, causing commercial banks to borrow less money and
keeping inflation under control. Commercial banks are also increasing their lending rates to
the general public and businesses, causing consumers to borrow less money and, in turn,
helping to limit inflation. When the RBI lowers bank rates, however, commercial banks will
be able to borrow more cheaply and easily. This enables commercial banks to lend money to
borrowers at a cheaper interest rate, so encouraging borrowers and businesspeople.

Legal Reserve Ratio

Commercial banks are required to hold a specific amount of reserve assets in reserve cash.
Some of these cash reserves are cash equivalents of their total assets. The RBI holds a fixed
level of cash reserves to maintain liquidity and control credit in the economy. SLR (Statutory
Liquidity Ratio) and CRR (Current Reserve Ratio) are two reserve ratios (Cash Reserve
Ratio). obligation that the bank must keep on hand at all times with the RBI. The CRR in
India is regulated to be between 3 and 15%. SLR refers to the requirement for a particular
percentage of reserves to be held in gold and foreign securities. SLR is restricted to 25-40%
in India by law. Any changes in the SLR and CRR cause commercial banks' positions to
shift.

Open Market Operations

Open market operations are the sale and acquisition of securities by the RBI in the money
market on a long/short term basis. This is a popular monetary policy tool used by the RBI. To
impact the interest rate's term and structure, as well as to stabilise the market for government
securities, and so on, The RBI employs OMO, which is also utilised to eliminate money
shortages in the money market. When the Reserve Bank of India offers securities in the
money market, private and commercial banks, as well as individuals, buy them. Money is
moved from commercial banks to the RBI, resulting in a drop in the existing money supply.
On the contrary, When RBI acquires assets from commercial banks, the selling banks are
paid the amount they had previously invested in RBI. Underdeveloped securities markets,
excess reserves held by commercial banks, commercial bank debts, and other variables all
have an impact on OMO.

Repo Rate

A repo rate is a rate at which commercial banks can borrow money by selling their assets to
the Reserve Bank of India (RBI) in order to maintain liquidity. In the event of a cash crisis or
owing to statutory requirements, commercial banks sell their securities. It is one of the RBI's
primary tools for keeping inflation under control.

Reverse Repo Rate

When there is excess liquidity in the market, the RBI borrows money from commercial
banks. Commercial banks benefit in this instance because they receive interest on their RBI
assets. When the country's inflation rises, the RBI raises the reverse repo rate, which
encourages banks to park more funds with the central bank, allowing it to earn larger rates on
excess funds.

Qualitative Method

Selective instruments of the RBI's monetary policy are also known as qualitative instruments.
These instruments are used to distinguish between different types of credit, such as favouring
export over import or essential credit supply over non-essential credit supply. Both borrowers
and lenders are affected by this strategy.
The RBI employs the following selective credit control tools:

Rationing of credit

The Reserve Bank of India sets a credit limit for commercial banks. The quantity of credit
accessible to any commercial bank is limited. The higher credit limit might be set for certain
objectives, and banks must adhere to it. This reduces the bank's credit exposure to
unfavourable industries. This device also regulates bill rediscounting.

Regulation of consumer credit

Consumer credit supply is regulated by the instalment of sale and hire purchase of consumer
goods under this instrument. Features like as instalment amount, down payment, loan period,
and so on are all pre-determined, which aids in the control of credit and inflation in the
country.

Change in marginal requirement

The term "margin" refers to the percentage of a loan that is not offered or financed by the
bank. A change in the loan size can be caused by a change in the marginal. This device is
used to boost credit supply for necessary sectors while discouraging it for non-essential ones.
This can be accomplished by raising the marginal of unneeded sectors while lowering the
marginal of other sectors in need. If the RBI believes that additional credit should be
available to the agricultural sector, the margin will be reduced, and 80-90 percent of the loan
will be available.

Moral suasion

Moral suasion refers to the RBI's recommendations to commercial banks that aid in the
restraint of credit during inflationary periods. The Reserve Bank of India (RBI) exerts
pressure on the Indian banking system without taking any concrete steps to ensure
compliance with the rules. Through monetary policy, commercial banks get informed of the
expectations of RBI. Under moral suasion, the RBI can offer orders, recommendations, and
suggestions to commercial banks to reduce loan supply for speculative purposes.

Impact of various policies on financial markets

1. Credit policy

 The Reserve Bank of India has a credit policy that aims to achieve higher
economic growth while maintaining price stability; higher economic growth
entails producing more goods and services in various sectors of an economy;
monetary policy is also known as RBI's credit policy or money management
policy.

 It is essentially the central bank's opinion on how much money should be

available in the economy and how interest rates should change in the banking
sector.
  It refers to the central bank's use of credit policy instruments to regulate the
availability, cost, and use of money and credit in order to promote economic
growth, price stability, optimal levels of output and employment, balance of
payments equilibrium, stable currency, or any other goal of the government's
economic policy.

 The credit policy attempts to increase the amount of money available for
agricultural and industrial activity. The role of other commercial banks is
critical when credit policy is enacted.

 The flow of credit from commercial banks to various sectors of the economy
is determined by the actual cost of credit and the availability of cash in the
economy. The goals of monetary policy are comparable to our country's five-
year plans.

 In a word, it's a strategy for ensuring the monetary system's growth and
stability.

2. Fed policy

 The Fed Funds Rate is the interest rate at which the top US banks borrow
overnight money from common reserves. All American banks are required to
park a portion of their deposits with the Federal Reserve in cash, as a statutory
requirement.

 Actually, fed fund rate gives the direction in which US interest rates should be
heading at any given point of time. If the Fed is increasing the interest rates,
lending rates for companies and retail borrowers will go up and vice versa. In
India, hike in repo rate may not impact the countries outside India. On the
other hand, US interest rates matter a lot to global capital flows. Some of the
world’s richest institutions and investors have their base in USA. They
constantly compare Fed rates with interest rates across the world to make their
allocation decisions.

 In the globalised world, markets are connected. An increase in Fed rates will
be negative in general for the US stock market and if it leads to another round
of sell-offs, it will also have ripple effects on the Indian market.

 Any changes in the Fed Fund Rates impact the domestic borrowing market to
a large extent. For instance, if the Fed rates go up, it will make the RBI
hesitant in cutting rates at that time. The reason is that if RBI cut rates it will
lead to heavy pull-out of foreign investors from the Indian bond market.

 Rupee Vs Dollar: If the Fed rates are hiked, the value of the dollar would go
up, thus weakening Indian rupee in comparison. This might hurt India’s forex
reserves and imports. However, the weaker rupee is good for India’s exports
but low global demand and stiff competition would not leave much room for
 Indian exporters to capitalise the situation. DBS said that India’s financing
requirements will keep the rupee vulnerable to rising US rates this year.

 Bond market pressure: Due to the higher Fed rates, US’ 10-year bond yields
are expected to go up, which will also put pressure on India’s 10-year
government bond yields.

 RBI repo rate: With higher Fed rates weakening the Rupee, India’s imports
bill is likely to go up putting pressure on the RBI to either increase repo rates
or at least refrain from cutting rates in the upcoming monetary policy
meetings.

3. Inflation index

An index is just a collection of facts that serves as a reference point in the future.
From the stock market to inflation, the index concept is used in all aspects of life.
Wage levels, business earnings as a percentage of GDP, and nearly anything else that
can be quantified are all indexed. This allows us to compare where we are today with
where we have been previously.

An inflation index is a monetary indicator that is used to calculate the rate of inflation
in a given economy. There are various methods for measuring inflation, resulting in
multiple inflation indices, with economists and investors favouring one technique
over another, sometimes strongly.

Inflation Indices

In India, Consumer Price Index (CPI) and Wholesale Price Index (WPI) are two
major indices for measuring inflation. In United States, CPI and PPI (Producer Price
Index) are two major indices. The Wholesale Price Index (WPI) was main index for
measurement of inflation in India till April 2014 when RBI adopted new Consumer
Price Index (CPI) (combined) as the key measure of inflation.

Wholesale Price Index

Wholesale Price Index (WPI) is computed by the Office of the Economic Adviser in Ministry
of commerce & Industry, Government of India. It was earlier released on weekly basis for
Primary Articles and Fuel Group. However, since 2012, this practice has been discontinued.
Currently, WPI is released monthly.

Salient notes on WPI are as follows:

Base Year

Current WPI Base year is 2004-05=100. Its worth note that the base year for CPI is 2012
currently. This is one reason for increasing difference between CPI and WPI in recent times.

Items
There is total 676 items in WPI and inflation is computed taking 5482 Price quotations. These
items are divided into three broad categories viz. (1) Primary Articles (2) Fuel & power and
(3) Manufactured Products. WPI does not take into consideration the retail prices or prices of
the services.

Consumer Price Index

Consumer Price Indices (CPI) released at national level are:

• CPI for Industrial Workers (IW)

• CPI for Agricultural Labourers (AL)/ Rural Labourers (RL)

• CPI (Rural/Urban/Combined).

While the first two are compiled and released by the Labour Bureau in the Ministry of Labour
and Employment, the third by the Central Statistics Office (CSO) in the Ministry of Statistics
and Programme Implementation. In India, RBI uses CPI (combined) released by CSO for
inflation purpose. Important notes on this index are as follows

Base Year

Base year for CPI (Rural, Urban, Combined) is 2012=100.

Number of items

The number of items in CPI basket include 448 in rural and 460 in urban. Thus, it makes it
clear that CPI basket is broader than WPI basket. The items in CPI are divided into 6 main
groups.

4. CPI and WPI

Primary use of WPI is to have inflationary trend in the economy as a whole. However, CPI is
used for adjusting income and expenditure streams for changes in the cost of living.

• WPI is based on wholesale prices for primary articles, administered prices for fuel items
and ex-factory prices for manufactured products. On the other hand, CPI is based on retail
prices, which include all distribution costs and taxes.

• Prices for WPI are collected on voluntary basis while price data for CPI are collected by
investigators by visiting markets.

• CPI covers only consumer goods and consumer services while WPI covers all goods
including intermediate goods transacted in the economy.

• WPI weights primarily based on national accounts and enterprise survey data and CPI
weights are derived from consumer expenditure survey data
Stock Exchange

Sensex and Nifty are the two most important stock market Indices in India. They are the
benchmark indices meaning, the important ones, and a standard point of reference for the
entire stock market of India. Before we proceed, it’s important to understand what stock
market indices are.

What is Stock Market Index/Indices?

The right guide to understanding a stock market index is to first know what a stock exchange
is. The stock exchange is a place where all the tradable securities like shares, bonds,
derivatives, commodities are listed.
To be able to trade (buy and sell) these securities, they need to be listed on the stock
exchanges first and the Securities and Exchange Board of India (Sebi), our market regulator,
oversees such activities.
We have two major stock exchanges in India:
I. Bombay Stock Exchange (BSE)
II. National Stock Exchange (NSE)
Other than these two we have few other exchanges like Calcutta Stock Exchange, Among
these are the Metropolitan Stock Exchange and the National Commodity and Derivatives
Exchange Ltd. In the country, Sebi recognises nine stock exchanges.
In India, a stock market index is a measure of the country's stock exchange. Hundreds of
thousands of firms are listed on both markets, but indications are simply a reflection of a few
of the best performers.
This is done to reduce the amount of clutter and to show the market's genuine situation. The
logic behind maintaining only the cream in the indices is that bigger and better enterprises
lead the economy and the country's financial health. We'll go into the various processes for
selecting companies to be included in the various indices later.

Bibliography

Securities and Exchange Board of India - Wikipedia

SEBI - Objectives, Functions, Purpose and Structure (byjus.com)
Securities and Exchange Board of India (SEBI) - Powers and Functions of SEBI (groww.in)
Home|Securities Appellate Tribunal,Mumbai|Government Of India (sat.gov.in)
Reserve Bank of India (rbi.org.in)
Governments' Influence on Markets (investopedia.com)
What is a Credit Policy, and How Do I Make A Good One? (levelset.com)
Federal Reserve Board - Home
Inflation Index: What Is It? (thebalance.com)
Stock exchange - Wikipedia