Financial Regulations in India

Introduction

 Regulation in its broadest sense includes establishing

specific rules of behaviour, or regulatory aspect per
se, monitoring or tracking observance of behaviour;
and supervision or oversight of the compliance with
specific rules in the overall behaviour along with
disincentives and penal provisions for non-compliance

 Regulation is taken to mean the employment of legal

instruments for the implementation of social-
economic policy objectives

 The objectives of regulation are to avoid monopoly

power, foster competition and protect the consumer’s
interest 1
Types of Economic Regulations
 Structural regulation concerns the regulation of the
market structure. Examples are restrictions on
entry or exit, and rules mandating firms not to
supply professional services in the absence of a
recognized qualification.
 Conduct regulation is used to regulate the
behaviour of producers and consumers in the
market. Examples are price controls, the
requirement to provide in all demand, the labelling
of products, rules against advertising and minimum
quality standards
 Social regulation comprises regulation in the area
of the environment, occupational health and safety,
consumer protection and labour etc.
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Acts Related to Financial Sector
Regulations in India
 The Banking Regulation Act, 1949
 The Securities Contracts (Regulation) Act, 1956
 Securities and Exchange Board Act, 1992
 The Depositories Act, 1996
 The Foreign exchange Management Act, 1999
 Insurance Regulatory and Development Authority of India Act 1999
 The Competition Act, 2002
 The Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest (SARFAESI) Act, 2002
 Prevention of Money Laundering Act, 2002
 The Micro, Small and Medium Enterprises Act, 2006
 Payment and Settlement Systems (PSS) Act, 2007
 Issue of Capital and Disclosure Requirements Regulations Act, 2009
 The Companies Act, 2013
 The Pension Fund Regulatory and Development Authority Act, 2013
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Financial Self Regulation
 to enforce honest and prudent behaviour through self-
policing arrangement
 regulatory policies that minimize interference with the
functioning of the market

 Self-regulatory organizations (SROs) responsibilities

could encompass:

 regulation of market transactions

 regulation of market participants
 disputes resolution and enforcement actions
 pre-commitment of resources
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 contd.

  Limitations of financial self-regulation :

 SROs might transform themselves into cartels and jeopardize

competition

 Short-term tensions between the managers and the authorities

responsible for SROs either discourage participation or diminish
long-term confidence in the market

 Scarcity of institutional and human resources

 Lack of reasonably homogenous institutions for a balanced structures
within SROs

 With limited competition in securities markets, self-regulation may

not be enough to ensure safe and efficient markets
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SEBI
 SEBI formed with all functional autonomy under the SEBI Act,
1992

 The central Govt. is empowered to supersede the SEBI in public

interest or if on account of grave emergency

 The SEBI is a body of eight members comprising comprising

the chairman, three full time members, one part time member
and two officials of the ministries of the central government
dealing with finance and law, and one member from the RBI.
 All members, except the RBI member, are appointed by the
government

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Objective of SEBI

 With the prime objective of (SEBI Act , 1992)

 Protecting the interests of investors in securities,
 Promoting the development of, and
 Regulating, the securities market and for matters
connected therewith or incidental thereto
 Self Regulation & regulation by exception
Power , Scope and Functions
 Scope of Operation of SEBI:
1. Depositories and Participants
2. Custodians
3. Debenture trustees and trust deeds
4. FIIs
5. Insider Trading
6. Merchant Bankers
7. Mutual Funds
8. Portfolio Managers & Investment advisers
9. Registrar to issue and share transfer agents
10. Stock brokers and sub brokers
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 contd.

11. Substantial acquisition of shares and takeovers

12. Underwriters &Bankers to issue
13. Venture Capital Funds
14. To Issue guidelines in respect of Primary and
secondary markets
15. Information discloser, operational transparency and
investor protection
 Development of Financial Institutions
 Pricing of issues
 Bonus issues
 Preferential Issues
 Financial Instruments
 Firm allotment and transfer of shares
 Buy-back of shares
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Institutions and Markets Regulated by SEBI

I. Primary Securities Market

II. Secondary Market & Intermediaries
III. Mutual Funds
IV. Investor Protection Measures
V. Regulatory Measures
VI. Others

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Insurance Regulatory Development
Authority (IDRA)
 Insurance Regulatory and Development Authority (IRDA) is a
statutory body set up for protecting the interests of the
policyholders and regulating, promoting and ensuring orderly
growth of the insurance industry in India

 IRDA has been playing a pivotal role in the insurance sector

with a fundamental commitment to discharge its mandate for
orderly growth of insurance sector. As on 31st March 2015
there are 24 life insurers (1 public sector and 23 private
sectors) and 29 non-life insurers (4 public insurers, 2
specialized insurers, 1 reinsurer and 22 private insurers
including 5 standalone health insurers) operating in in India

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Structure of IRDA
 IRDA is a ten member body appointed by
Government of India consisting of the
chairman, five whole time members, and four
part time members
 The Insurance Advisory Committee (IAC)

advices IRDA in framing the regulations for

insurance companies.
 IAC consists of not more than 25 members

excluding the ex-officio members

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Statutory Functions of IRDA
 Issue to the applicant a certificate of registration, renew, modify, withdraw,
suspend or cancel such registration
 Protection of the interests of the policyholders 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
 Specifying the code of conduct for surveyors and loss assessors
 Promoting efficiency in the conduct of insurance business
 Promoting and regulating professional organisations connected with
insurance and reinsurance business
 Levying fees and other charges for carrying out the purposes of the Act
 Specifying the form and manner in which books of accounts shall be
maintained and statements of accounts shall be rendered by insurers and
other insurance intermediaries
 Regulating investment of funds by insurance companies
 Regulating maintenance of margin of solvency
 Adjudication of disputes between insurers and intermediaries or insurance
intermediaries
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Pension Fund and Regulatory
Development Authority (PFRDA)
 Pension Fund Regulatory and Development
Authority has been established in the year
2003.
 The body was set up with an aim to promote,

regulate and develop the pension sector in

the country
 The PFRDA board consists of seven members

including chairman, three whole time

members and three part time members

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Statutory Functions of PFRDA

 Regulation of intermediaries and National Pension System (NPS)

 Registration and regulation of pension schemes and NPS
 Approval of pension schemes, the terms and conditions thereof and laying
down norms for the management of corpus of the pension funds including
investment guidelines under such scheme
 Reporting the exit of the subscription from NPS
 Formulates the regulations in respect of pension funds, National Pension
Trust, Trustee Bank, Central Record Keeping Agency, custodian of securities,
point of presence, redressal of subscriber’s grievances
 Mechanism for redressal of grievances of subscribers
 Providing the professional organizations connected with the pension system
 Educating subscribers and the general public on issues relating to pension,
retirement and related issues and training of intermediaries
 Standardising dissemination of information about performance of pension
funds and performance benchmarks

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 Capital Market
 A market for long term funds
 Aids economic growth through capital formation
by:
Issue of Primary securities
 Issue of Secondary securities
 Secondary Market transactions
 Functions of a Capital Market

- Mobilise savings
- Provide risk capital
- Provide liquidity
- Lower costs
- Disseminate information
- Enable valuation of assets
- Insurance against risk
- Provide operational efficiency
- Develop integration among markets and segments
- Channelise funds to productive sectors
Primary Market

- A market for new issues

- Leads to Capital Formation
- Nature of fund raising:
Domestic :equity and debt issues
External :GDRs, ADRs and ECBs
:FDI, FII and NRI deposits
 FDI and FII
 FDI-in the form of fully owned subsidiary
or a joint venture ,stable, enhances
management quality, transfer of
technology and generation of employment.
 FII- in the form of portfolio investment;
augments the pool of investible funds;
volatile.
 Data for 2003-05 India(in US $ bn)
Total net FDI flows 11
Total portfolio investments 29
Other non-FDI flows 25
 Fund Raising in the Primary Market

- Public issue by prospectus

- Private Placement
- Rights issues
- Preferential issues
Secondary Market
 A market for outstanding securities
 Facilitates liquidity, marketability, and

valuation of securities
 Helps in price discovery
 Creates a wealth effect
Segregation of Indian Secondary
Market
 Secondary Market for Corporates and
Financial Intermediaries
 Secondary Market for Government securities
and PSU bonds
 History of the Indian Capital
Market
Under British rule - not organised and developed

Post independence – Small size and supervised by CCI

In 1950s – Rampant speculation; Government enacted Securities

Contract (Regulations) Act and Companies Act, 1956;Development of
Financial Institutions.

In 1960s – Ban on badla, UTI set up in 1964

In 1970s – Badla resumed; Promulgation of the Dividend Restriction

Ordinance – slump in BSE sensex; FERA issues revive stock markets

In 1980s – Small investor participation; Introduction of PSU bonds;

popularity of convertible debentures.

In 1990s – Capital Issues (Control) Act repealed. Emergence of SEBI;

Free pricing; entry of new players and new trading mechanism;Capital
market scams

In 2017 – The BSE was the first stock exchange to issue an IPO and the
IPO was listed on NSE.
 Capital Market Scams

- The 1991-92 Securities Scam (Harshad Mehta

Scam)
Misuse of public sector banks, mutual funds, bank
receipts, and SGL ledger accounts; a bank
scam, ,repos banned
- The 2001 Ketan Parekh scam
Misuse of pay orders, private sector banks and
cooperative banks; a securities scam; badla banned
Reforms in the Capital Market
The Primary Capital Market
 The Securities and Exchange Board of India (SEBI) was
set up in early 1988 as a non-statutory body under
an administrative arrangement.
 The Capital Issues (Control) Act, 1947 was repealed
in May 1992.
 The infrastructure of the primary capital market has
been fairly diversified over the years.
 The primary capital market has widened and
deepened with public sector banks, financial
institutions, and public sector enterprises in the
infrastructure and power sectors.
 The requirement to issue shares at a par value of Rs.
10 and Rs.100 was withdrawn.
Reforms in the Capital Market
The Primary Capital Market
 Improved disclosure standards, prudential norms, and
simplified issue procedures have been prescribed.
 All investors, including retail investors are allowed to
invest in Indian Depository Receipts (IDRs).
 The minimum investment limit has been reduced from
Rs. 2,00,000 to Rs. 20,000.
 SEBI launched an alternate payment system called
Applications Supported by Blocked Amount (ASBA) for
public and rights issues in August 2008.
 PAN has been mandatory in all public and rights issues
irrespective of the application amount
Reforms in the Capital Market
The Secondary Capital Market
 Three new stock exchanges at the national level were set
up in the 1990s.
 Trading and settlement cycles were uniformly trimmed to
T+1 day.
 The process of dematerialization of securities through
the depository system and their transfer through
electronic book entry is pursued vigorously.
 SEBI has made regulations to prohibit insider trading,
take over and Badla trading.
 FIIs and NRIs were permitted to invest in all stock
exchange.
 Amendment of regulation in order to recognize delisting.
 Money Market

The money market is a market for financial

assets that are close substitutes for money. It
is a market for overnight to short-term funds
and instruments having a maturity period of
one or less than one year
 Characteristics of Money Market
 A collection of markets for several short
term debt instruments
 Wholesale market
 Principal feature is honor
 Need-based market
 Transactions in the money market can be
both secured and unsecured
 Functions of Money Market

To provide a

• balancing mechanism
• focal point for central bank intervention
• reasonable access to short term funds
Benefits of an Efficient Money
Market

 Provides a stable source of funds to banks

 Encourage development of non-bank
entities
 Facilitates government market borrowing
 Makes effective monetary policy actions
 Helps in pricing different floating-interest
products
 Role of the Reserve Bank in the
Money Market
 To ensure liquidity
 To ensure an adequate flow of credit to the
productive sectors of the economy
 To bring about order in the foreign exchange
market
 Money Market Instruments
 Treasury bills
 Commercial Paper
 Call/Notice money market
 Certificates of Deposit
 Commercial Bills
 Collateralised Borrowing and Lending
Obligation
 Features of T-bills

 Short term instruments issued by RBI on

behalf of the government
 Negotiable and highly liquid securities
 Absence of default risk
 Assured yield, low transaction cost
 Security for SLR purposes
 Not issued in scrip form
 Types of T-bills

 On tap bills
 Ad hoc bills
 Auctioned T- bills: 91-day; 182-day;
and 364-day T-BillsCash Management
Bills (CMBs)
Cash Management Bills (CMBs)new
short-term instrument of less than 91 day
maturity
 Sale of T-bills

 Conducted through an auction

 Non-competitive bids also accepted

Types of auctions:
 Multiple price auction
 Uniform price auction
Commercial Paper
 An unsecured short term promissory
note issued at a discount
 Issuers – creditworthy corporates,
primary dealers and all India financial
institutions
 Largest issuers of CPs –Leasing and
Finance companies
 Usually privately placed with investors.
 Attracts stamp duty.
 Underwriting not mandatory
Process for Issuing CP
 A resolution to be passed by the
Board of Directors
 CP issue to be rated
 Select an Issuing and Paying Agent
for verification of documents
 Arrange for dealers for placement of
CP
 Report to the RBI regarding the
issue
Guidelines Relating to CPs
 Corporates, primary dealers and all
India financial institutions eligible to
issue a CP.
 Minimum credit rating P2 of Crisil
 Maturity period of minimum of 7 days

and maximum upto one year from the

date of issue.
 Minimum of Rs 5 lakh and multiples
 To be issued in demat form
 Banks can provide credit enhancement

facility
Commercial Bills
- A short term, negotiable and self liquidating
instrument with low risk.
Types: Demand bill
Usance bill
Clean bill
Documentary bill
Inland bill
Foreign bill
Hundi
Derivative Usance Promissory Note
 Certificates of Deposit
- A short- term tradeable time deposit issued by commercial
banks and financial institutions.
- Issued at a discount to face value.
- Minimum amount Rs 1 lakh and in multiples there of
- Maturity period : 7 days to one year for banks
: 1 to 3 years for FIs.
- No lock-in period
- Transferable by endorsement
- Banks to maintain appropriate reserve requirement on issue of
CDs.
 Issued in demat form
 Key investors-Mutual Funds, insurance companies, corporates
 Cost attractive vis-à-vis time deposits
Call/Notice Money Market
- Banks borrow/lend money for a period
ranging between 1-14 days.
- No collateral security required
- Highly liquid , risky , and volatile market
- Banks trade money to adhere to CRR
requirement
 Factors Influencing Call Rate Volatility

- Liquidity conditions
- Reserve requirement prescriptions
- Structural factors
- Investment policy of non-bank participants.
- Liquidity changes and gaps in the foreign
exchange market
 Measures for Curbing High
Volatility
 Increasing the number of participants
 Through repos
 Freeing of interbank liabilities from
reserve requirements

The share of the call money market in the

total overnight money market transactions
declined from 51% in April 2005 to 20
percent in March 2009.
Collateralized Borrowing and
Lending Obligations (CBLO)
- Launched by CCIL: To provide liquidity to non-bank entities
It is an obligation by the borrower to return the borrowed
money and an authority to the lender to receive money lent,
at a specified future date with an option to transfer the
authority to another person for value received.
Collateral or cash margin with CCIL as cover
-No lock-in period
 Original tenure varies between one day and one year
 NDS members and associate members can access CBLO
 Two types of markets: Normal and Auction

-Trading volumes have grown: Dominant segment accounting

for 80% of the total volume
-Average daily turnover during March 2005 was Rs.9625 crore
which increased to Rs.83,270 crore in March 2013.
 Link between Money Market and
Monetary Policy in India
Objectives of monetary policy
- Price stability
- Growth
Instruments used to influence monetary conditions
- Direct instruments such as reserve requirements,
limits on refinance, administrative interest rates,
Qualitative and Quantitative restrictions on credit
- Indirect instruments such as open market
operation and repos
 Tools for Managing Liquidity in the
Money Market
- Reserve requirements: CRR (4%) & SLR(23%)
- Interest rates : Base rate:10% -10.25%
Bank rate :9%
- Refinance from RBI
- Liquidity Adjustment Facility: operates through repo and
reverse repo auctions; coupled with OMOs and MSS provides
RBI greater flexibility in managing liquidity
Marginal Standing Facility Rate 9%
- Repos: Types: Interbank repos, RBI repos: Borrowing rate
(Reverse Repo) 7% and Lending rate( repo) 8%
- Market stabilization scheme (MSS): deals with enduring
capital inflows without affecting short-term liquidity
management role of LAF.
 Money Market Derivatives
 Interest rate swap
 Forward rate swap
 Interest rate futures