Regulation of Security Markets

5.
2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)

Page1 Prof. 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 1990s
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)

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.

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
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.
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.

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.
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
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.
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).
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.
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.
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
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 todays investment skyscraper, youll see the wreckage of
several
peoples investment plans.
Youd 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 thats changing. Theres 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.
Theres another quiet revolution, one thats 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, theres 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, its moving in the right direction.
The sign
Short-term volatility isnt 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.
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.
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.
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 1990s
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,
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
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
ministrys
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.
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
publics
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 firms
stock,
3. It presents the IPO fact file and prospects to the investor community,
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 marketread 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 Banks 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.
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 Mehtas 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.
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 DPS:
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
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
Companys 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 Indias 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 companys:
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)
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 companys 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 companys 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.
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,
(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;
(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 SEBIs 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
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, Governments 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.
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.
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;
(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

(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,
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
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.
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:
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,
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.
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

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
SEBIs
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
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 donts 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.
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;
(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

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
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.

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
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:
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
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.
(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:
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:
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.
(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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Regulation of Security Markets

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5.

2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)

5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)

resources. Three more general objectives of public intervention derive

5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)

intermediaries handling broker-dealer negotiations, asset management and

A third objective of financial market regulation, linked with the general

subordination of various social groups

oversights, anti-discrimination, environmental protection, taxation and labor

5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)

merged with Delhi Stock Exchange.

Saurashtra Kutch Stock Exchange Limited (at Rajkot, 1989), Vadodara

asset classes should be maintained in order to ensure that the investors

empowering the average Indian?

Normally the short-term investment plan estimates the short-term needs of

Risk Management and Insurance Planning: Managing cash flow risks

Informed investor- an asset to corporate India,

league as Satyam, which have been recently declared vanishing companies.

Attracting and retaining the best management and employees

incorporated as a whole new spectrum of legislation that would correspond

securities of a like nature in or of any incorporated company or other body

(i) traded on a recognized stock exchange;

transactions in securities in any State or States or area, that it is necessary so

concerned company. The concerned company or any aggrieved investor may

authority to regulate and develop an orderly securities market. All the

exercised or done by the Board.

investment schemes including mutual funds;

Page33 Prof. Abdul Kadir Khan

13) Custodian of securities,

Any person, through a participant, may enter into an agreement, in such

Option to opt out in respect of any security

d) transfer of beneficial ownership of shares, such securities dealt with by a

then introduced the Insurance Regulatory and Development Authority Act in

Page40 Prof. Abdul Kadir Khan

4. Website dedicated to Investor Education

(b) Five whole-time members;

be offered by insurers in respect of general insurance business not so

multilateral and bilateral official development assistance along with

securities markets (i.e. share, debt and derivatives), External Commercial

matters related to Colombo Plan and Technical Cooperation framed there

5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)

function of the MRTP Commission is to enquire into and take appropriate

provisions were considerably modified. Since 1957, the Reserve Bank of

promote new specialized financing agencies. Accordingly, the Reserve Bank

Central Government may direct

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