Financial services

comprises various functions and services that are provided by

financial institutions in a financial system.

includes asset management companies and liability management

companies.

helps not only in raising the required funds but also in ensuring
efficient distribution.

are provided by S.E, specialized and general financial institutions,

banks and insurance companies.

are regulated by SEBI, RBI, Dept. of Banking and Insurance, and

Govt. of India.

help in deployment of funds raised , assist in decision making in

regard to financial mix etc.

Contributes towards the growth and development through

mobilization of savings and channelizing them into productive
investments.

Constituents of financial services

Financial services market constituents who render services.

Four major constituents

1. Market players: host of institutions and agencies, like banks,

fin.Inst, MFds, MB, stock brokers, consultants, underwriters, etc.

2. Financial instruments: imp part of the financial services. Equity,

debt, hybrid and exotic instruments.

3. Specialized institutions: includes acceptance houses, discount

houses, factors, depositories, credit rating agencies, VC Inst.

4. Regulatory bodies: Fin mkt is regulated by a host of institutions

and agencies, like, Dept. of Banking & Insurance of the Govt., RBI,
SEBI, BIFR.

1
Example of financial services

1. Leasing, credit cards, factoring, portfolio management, technical

and economic consultancy, credit information.

2. Underwriting, discounting and rediscounting of bills,

3. Acceptances, brokerage and stockholding

4. Depository, housing finance and book building,

5. Hire purchase and installment credit

6. Deposit insurance

7. Financial and performance guarantees

8. E-commerce and securitization of debts

9. Loan syndicating and credit rating

Growth of financial services in India

Discussed under the various stages

1. Merchant Banking Era (1960 onwards)

fin.services like MB, Insurance, Leasing services began to grow.

2. Investment Companies Era: (1970 onwards)

includes establishment of variety of investment institutions and

banks. Like, UTI, MFds, LIC, Nationalization of major commercial
banks.

3.Modern Services Era: (1980 onwards)

launch of a variety of financial products and services like OTCEI,

MF, Factoring, VC, and credit rating.

4.Depository Era: (1990 onwards)

depositories were set up, promoting paperless trading through

dematerialization of securities. Book Building, NSE and computerization
of BSE.
2
5.Legislative Era: (1995 onwards)

FERA replaced by FEMA, Amendments in Co. Act 1956,

Regulatory framework

Broad classification of the regulatory framework relating to

financial service sector in India is as:

1. Institutional regulations: also known as structural regulations

which call for a clear demarcation of activities of Financial
institutions. It is to promote healthy competition among players.
Apex agencies like SEBI to regulate the MB, Stock Broking Co.
and RBI another structural entity prescribing the activities of
commercial banking.

2. Prudential regulations: related to internal management of financial

institutions and other financial services org, regarding capital
adequacy, liquidity and solvency etc. Aims at preventing the entry
of firms without adequate resources. (ex. Minimum net worth
requirement for various financial service firms is fixed by the SEBI
and RBI`s regulations relating to the NBFC`s)

3. Investors regulations: the role of SEBI is highlighted with periodic

guidelines on investor protection.

4. Legislative Regulations: brought out by Govt. for all round

development of financial services industry. They are, Banking
Regulation Act, Securities Contract Regulation Act, meant for
evolving rules, guidelines and regulations that govern the micro
aspect and operational issues.

5. Self-regulations: this is addition to the above regulations that are

self imposed regulations such as, Foreign Exchange Dealers
association, and Merchant Bankers association in addition to SEBI
regulation that governs their members.

3
 The framework of regulations currently operating in India is
elaborated

banking and financial services

insurance services

investment services

Merchant Banking and Financial Services

4
Reserve Bank of India
Reserve Bank of India

Seal of RBI The RBI headquarters in Mumbai

Headquarter
Mumbai, Maharashtra
s
185600N 725010E / 18.93337N
Coordinates 72.836201ECoordinates: 185600N725010E / 18.9333
7N 72.836201E
Established 1 April 1935
Governor Duvvuri Subbarao
Central bank
India
of
Currency Indian Rupee
ISO
INR
4217Code
US$300.21 billion (2010
Reserves
[Key_rates:-
8.50%

bank_rate=6.00%
repo_rate=8.25
Base deposit
rate reverse_repo_rete=7.25

SLR =24%
CRR =6%

Website rbi.org.in

5
The Reserve Bank of India (RBI, Hindi: ) is the central
banking institution of India and controls the monetary policy of
the rupee as well as US$300.21 billion (2010) of currency reserves. The
institution was established on 1 April 1935 during the British Raj in
accordance with the provisions of the Reserve Bank of India Act, 1934.
The share capital was divided into shares of Rs. 100 each fully paid
which was entirely owned by private shareholders in the
beginning. Reserve Bank of India plays an important part in the
development strategy of the government. It is a member bank of
the Asian Clearing Union. Reserve Bank of India was nationalised in the
year 1949. The general superintendence and direction of the Bank is
entrusted to Central Board of Directors of 20 members, the Governor
and four Deputy Governors, one Government official from the Ministry of
Finance, ten nominated Directors by the Government to give
representation to important elements in the economic life of the country,
and four nominated Directors by the Central Government to represent
the four local Boards with the headquarters at Mumbai, Kolkata, Chennai
and New Delhi. Local Boards consist of five members each Central
Government appointed for a term of four years to represent territorial
and economic interests and the interests of co-operative and indigenous
banks
History
19351950

The old RBI Building in Mumbai

The central bank was founded in 1935 to respond to economic troubles
after the first world war. The Reserve Bank of India was set up on the
recommendations of the Hilton-Young Commission. The commission
submitted its report in the year 1926, though the bank was not set up for
another nine years. The Preamble of the Reserve Bank of India
6
describes the basic functions of the Reserve Bank as to regulate the
issue of bank notes, to keep reserves with a view to securing monetary
stability in India and generally to operate the currency and credit system
in the best interests of the country. The Central Office of the Reserve
Bank was initially established in Kolkata, Bengal, but was permanently
moved to Mumbai in 1937. The Reserve Bank continued to act as the
central bank for Myanmar till Japanese occupation of Burma and later up
to April 1947, though Burma seceded from the Indian Union in 1937.
After partition, the Reserve Bank served as the central bank
for Pakistan until June 1948 when the State Bank of
Pakistan commenced operations. Though originally set up as a
shareholders bank, the RBI has been fully owned by the government of
India since its nationalization in 1949.
19501960
Between 1950 and 1960, the Indian government developed a centrally
planned economic policy and focused on the agricultural sector. The
administration nationalized commercial banksand established, based on
the Banking Companies Act, 1949 (later called Banking Regulation Act)
a central bank regulation as part of the RBI. Furthermore, the central
bank was ordered to support the economic plan with loans.
As per Saying on mr. Rishi Kumar k
19601969
As a result of bank crashes, the reserve bank was requested to establish
and monitor a deposit insurance system. It should restore the trust in the
national bank system and was initialized on 7 December 1961. The
Indian government founded funds to promote the economy and used the
slogan Developing Banking. The Government of India restructured the
national bank market and nationalized a lot of institutes. As a result, the
RBI had to play the central part of control and support of this public
banking sector.
19691985
Between 1969 and 1980, the Indian government nationalized 6 more
commercial banks, following 14 major commercial banks being
nationalized in 1969(As mentioned in RBI website). The regulation of the
economy and especially the financial sector was reinforced by the
Government of India in the 1970s and 1980s.The central bank became

7
the central player and increased its policies for a lot of tasks like
interests, reserve ratio and visible deposits. The measures aimed at
better economic development and had a huge effect on the company
policy of the institutes. The banks lent money in selected sectors, like
agri-business and small trade companies.
The branch was forced to establish two new offices in the country for
every newly established office in a town[ The oil crises in 1973 resulted
in increasing inflation, and the RBI restricted monetary policy to reduce
the effects.
19851991
A lot of committees analysed the Indian economy between 1985 and
1991. Their results had an effect on the RBI. The Board for Industrial
and Financial Reconstruction, the Indira Gandhi Institute of Development
Research and the Security & Exchange Board of India investigated the
national economy as a whole, and the security and exchange board
proposed better methods for more effective markets and the protection
of investor interests. The Indian financial market was a leading example
for so-called "financial repression" (Mackinnon and Shaw). The Discount
and Finance House of India began its operations on the monetary
market in April 1988; the National Housing Bank, founded in July 1988,
was forced to invest in the property market and a new financial law
improved the versatility of direct deposit by more security measures and
liberalisation.\
19912000
The national economy came down in July 1991 and the Indian rupee
was devalued. The currency lost 18% relative to the US dollar, and
the Narsimahmam Committee advised restructuring the financial sector
by a temporal reduced reserve ratio as well as the statutory liquidity
ratio. New guidelines were published in 1993 to establish a private
banking sector. This turning point should reinforce the market and was
often called neo-libera l. The central bank deregulated bank interests
and some sectors of the financial market like the trust and property
markets.This first phase was a success and the central government
forced a diversity liberalisation to diversify owner structures in 1998.
The National Stock Exchange of India took the trade on in June 1994
and the RBI allowed nationalized banks in July to interact with the capital

8
market to reinforce their capital base. The central bank founded a
subsidiary companythe Bharatiya Reserve Bank Note Mudran
Limitedin February 1995 to produce banknotes.
Since 2000
The Foreign Exchange Management Act from 1999 came into force in
June 2000. It should improve the foreign exchange market, international
investments in India and transactions. The RBI promoted the
development of the financial market in the last years, allowed online
banking in 2001 and established a new payment system in 2004 - 2005
(National Electronic Fund Transfer). The Security Printing & Minting
Corporation of India Ltd., a merger of nine institutions, was founded in
2006 and produces banknotes and coins.[
The national economy's growth rate came down to 5.8% in the last
quarter of 2008 - 2009 and the central bank promotes the economic
development.
Structure
Central Board of Directors
The Central Board of Directors is the main committee of the central
bank. The Government of India appoints the directors for a four-year
term. The Board consists of a governor, four deputy governors, four
directors to represent the regional boards, and ten other directors from
various fields.
Governors
The central bank till now was governed by 21 governors. The 22nd,
Current Governor of Reserve Bank of India is Dr Subbarao
Supportive bodies
The Reserve Bank of India has four regional representations: North in
New Delhi, South in Chennai, East in Kolkata and West in Mumbai. The
representations are formed by five members, appointed for four years by
the central government and serve - beside the advice of the Central
Board of Directors - as a forum for regional banks and to deal with
delegated tasks from the central board. The institution has 22 regional
offices.
The Board of Financial Supervision (BFS), formed in November 1994,
serves as a CCBD committee to control the financial institutions. It has
9
four members, appointed for two years, and takes measures to strength
the role of statutory auditors in the financial sector, external monitoring
and internal controlling systems.
The Tarapore committee was set up by the Reserve Bank of India under
the chairmanship of former RBI deputy governor S S Tarapore to "lay
the road map" to capital account convertibility. The five-member
committee recommended a three-year time frame for complete
convertibility by 1999-2000.
On 1 July 2006, in an attempt to enhance the quality of customer service
and strengthen the grievance redressal mechanism, the Reserve Bank
of India constituted a new department Customer Service Department
(CSD).
Offices and branches
The Reserve Bank of India has 4 regional offices,15 branches and 5
sub-offices. It has 22 branch offices at most state capitals and at a few
major cities in India. Few of them are located
inAhmedabad, Bangalore, Bhopal, Bhubaneswar, Chandigarh, Chennai,
Delhi, Guwahati, Hyderabad, Jaipur, Jammu, Kanpur, Kolkata, Lucknow,
Mumbai, Nagpur, Patna, and Thiruvananthapuram. Besides it has sub-
offices
at Agartala, Dehradun, Gangtok, Kochi, Panaji, Raipur, Ranchi, Shimla a
nd Srinagar.
The bank has also two training colleges for its officers, viz. Reserve
Bank Staff College at Chennai and College of Agricultural Banking
at Pune. There are also four Zonal Training
Centres at Belapur,Chennai, Kolkata and New Delhi.
Main functions

10
Reserve Bank of India regional office, Delhi entrance with
the Yakshini sculpture depicting "Prosperity through agriculture".[25]

The RBI Regional Office in Delhi.

The regional offices of GPO (in white) and RBI (in sandstone)
at Dalhousie Square, Kolkata.
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

11
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.
Monetary authority
The Reserve Bank of India is the main monetary authority of the country
and beside that the central bank acts as the bank of the national and
state governments. It formulates, implements and monitors the monetary
policy as well as it has to ensure an adequate flow of credit to productive
sectors. Objectives are maintaining price stability and ensuring adequate
flow of credit to productive sectors. The national economy depends on
the public sector and the central bank promotes an expansive monetary
policy to push the private sector since the financial market reforms of the
1990s.
The institution is also the regulator and supervisor of the financial
system and prescribes broad parameters of banking operations within
which the country's banking and financial system functions. Objectives
are to maintain public confidence in the system, protect depositors'
interest and provide cost-effective banking services to the public.
The Banking Ombudsman Scheme has been formulated by the Reserve
Bank of India (RBI) for effective addressing of complaints by bank
customers. The RBI controls the monetary supply, monitors economic
indicators like the gross domestic product and has to decide the design
of the rupee banknotes as well as coins.
Manager of exchange control
The central bank manages to reach the goals of the Foreign Exchange
Management Act, 1999. Objective: to facilitate external trade and
payment and promote orderly development and maintenance of foreign
exchange market in India.
Issuer of currency
The bank issues and exchanges or destroys currency and coins not fit
for circulation. The objectives are giving the public adequate supply of
currency of good quality and to provide loans to commercial banks to
maintain or improve the GDP. The basic objectives of RBI are to issue
bank notes, to maintain the currency and credit system of the country to

12
utilize it in its best advantage, and to maintain the reserves. RBI
maintains the economic structure of the country so that it can achieve
the objective of price stability as well as economic development,
because both objectives are diverse in themselves.
Minimum Reserve System - Principle of Currency Note Issue
RBI can issue currency notes as much as the country requires, provided
it has to make a security deposit of Rs. 200 crores, out of which Rs. 115
crores must be in gold and Rs. 85 crores must be FOREX Reserves.
This principle of currency notes issue is known as the 'Minimum Reserve
System'.
Developmental role
The central bank has to perform a wide range of promotional functions to
support national objectives and industries. The RBI faces a lot of inter-
sectoral and local inflation-related problems. Some of this problems are
results of the dominant part of the public sector.
Related functions
The RBI is also a banker to the government and performs merchant
banking function for the central and the state governments. It also acts
as their banker. The National Housing Bank (NHB) was established in
1988 to promote private real estate acquisition. The institution maintains
banking accounts of all scheduled banks, too.
There is now an international consensus about the need to focus the
tasks of a central bank upon central banking. RBI is far out of touch with
such a principle, owing to the sprawling mandate described above.
Policy rates and Reserve ratios

Policy rates, Reserve ratios, lending, and deposit rates as of 14

September, 2011

Bank Rate 6.0%

Repo Rate 8.25%

13
 Reverse Repo Rate 7.25%

Cash Reserve Ratio (CRR) 6.0%

Statutory Liquidity Ratio (SLR) 24.0%

Base Rate 9.50%10.75%

Reserve Bank Rate 4%

Deposit Rate 8.50%9.50%

Bank Rate: RBI lends to the commercial banks through its discount
window to help the banks meet depositors demands and reserve
requirements. The interest rate the RBI charges the banks for this
purpose is called bank rate. If the RBI wants to increase the liquidity and
money supply in the market, it will decrease the bank rate and if it wants
to reduce the liquidity and money supply in the system, it will increase
the bank rate. As of 5 May, 2011 the bank rate was 6%.
Cash Reserve Ratio (CRR): Every commercial bank has to keep certain
minimum cash reserves with RBI. RBI can vary this rate between 3%
and 15%. RBI uses this tool to increase or decrease the reserve
requirement depending on whether it wants to affect a decrease or an
increase in the money supply. An increase in Cash Reserve Ratio (CRR)
will make it mandatory on the part of the banks to hold a large proportion
of their deposits in the form of deposits with the RBI. This will reduce the
size of their deposits and they will lend less. This will in turn decrease
the money supply. The current rate is 6%.
Statutory Liquidity Ratio (SLR): Apart from the CRR, banks are required
to maintain liquid assets in the form of gold, cash and approved
securities. Higher liquidity ratio forces commercial banks to maintain a
larger proportion of their resources in liquid form and thus reduces their
capacity to grant loans and advances, thus it is an anti-inflationary

14
impact. A higher liquidity ratio diverts the bank funds from loans and
advances to investment in government and approved securities.
In well-developed economies, central banks use open market
operations--buying and selling of eligible securities by central bank in the
money market--to influence the volume of cash reserves with
commercial banks and thus influence the volume of loans and advances
they can make to the commercial and industrial sectors. In the open
money market, government securities are traded at market related rates
of interest. The RBI is resorting more to open market operations in the
more recent years.
Generally RBI uses three kinds of selective credit controls:

1. Minimum margins for lending against specific securities.

2. Ceiling on the amounts of credit for certain purposes.
3. Discriminatory rate of interest charged on certain types of
advances.
Direct credit controls in India are of three types:

1. Part of the interest rate structure i.e. on small savings and

provident funds, are administratively set.
2. Banks are mandatorily required to keep 24% of their deposits in
the form of government securities.
3. Banks are required to lend to the priority sectors to the extent of
40% of their advances.

Establishment

The Reserve Bank of India was established on April 1, 1935 in

accordance with the provisions of the Reserve Bank of India Act, 1934.

The Central Office of the Reserve Bank was initially established in

Calcutta but was permanently moved to Mumbai in 1937. The Central
Office is where the Governor sits and where policies are formulated.

Though originally privately owned, since nationalisation in 1949, the

Reserve Bank is fully owned by the Government of India.

Preamble

15
The Preamble of the Reserve Bank of India describes the basic
functions of the Reserve Bank as:

"...to regulate the issue of Bank Notes and keeping of reserves with
a view to securing monetary stability in India and generally to
operate the currency and credit system of the country to its
advantage."

Central Board

The Reserve Bank's affairs are governed by a central board of directors.

The board is appointed by the Government of India in keeping with the
Reserve Bank of India Act.

Appointed/nominated for a period of four years

Constitution:
o Official Directors
Full-time : Governor and not more than four Deputy
Governors
o Non-Official Directors
Nominated by Government: ten Directors from various
fields and one government Official
Others: four Directors - one each from four local boards

Functions : General superintendence and direction of the Bank's affairs

Local Boards

One each for the four regions of the country in Mumbai, Calcutta,
Chennai and New Delhi
Membership:
consist of five members each
appointed by the Central Government
for a term of four years

Functions : To advise the Central Board on local matters and to

represent territorial and economic interests of local cooperative and
indigenous banks; to perform such other functions as delegated by
Central Board from time to time.

Financial Supervision

The Reserve Bank of India performs this function under the guidance of
the Board for Financial Supervision (BFS). The Board was constituted in

16
November 1994 as a committee of the Central Board of Directors of the
Reserve Bank of India.

Objective

Primary objective of BFS is to undertake consolidated supervision of the

financial sector comprising commercial banks, financial institutions and
non-banking finance companies.

Constitution

The Board is constituted by co-opting four Directors from the Central

Board as members for a term of two years and is chaired by the
Governor. The Deputy Governors of the Reserve Bank are ex-officio
members. One Deputy Governor, usually, the Deputy Governor in
charge of banking regulation and supervision, is nominated as the Vice-
Chairman of the Board.

BFS meetings

The Board is required to meet normally once every month. It considers

inspection reports and other supervisory issues placed before it by the
supervisory departments.

BFS through the Audit Sub-Committee also aims at upgrading the

quality of the statutory audit and internal audit functions in banks and
financial institutions. The audit sub-committee includes Deputy Governor
as the chairman and two Directors of the Central Board as members.

The BFS oversees the functioning of Department of Banking Supervision

(DBS), Department of Non-Banking Supervision (DNBS) and Financial
Institutions Division (FID) and gives directions on the regulatory and
supervisory issues.

Functions

Some of the initiatives taken by BFS include:

i. restructuring of the system of bank inspections

ii. introduction of off-site surveillance,
iii. strengthening of the role of statutory auditors and
iv. strengthening of the internal defences of supervised institutions.

17
The Audit Sub-committee of BFS has reviewed the current system of
concurrent audit, norms of empanelment and appointment of statutory
auditors, the quality and coverage of statutory audit reports, and the
important issue of greater transparency and disclosure in the published
accounts of supervised institutions.

Current Focus

supervision of financial institutions

consolidated accounting
legal issues in bank frauds
divergence in assessments of non-performing assets and
supervisory rating model for banks.

Legal Framework

Umbrella Acts

Reserve Bank of India Act, 1934: governs the Reserve Bank

functions
Banking Regulation Act, 1949: governs the financial sector

Acts governing specific functions

Public Debt Act, 1944/Government Securities Act (Proposed):

Governs government debt market
Securities Contract (Regulation) Act, 1956: Regulates government
securities market
Indian Coinage Act, 1906:Governs currency and coins
Foreign Exchange Regulation Act, 1973/Foreign Exchange
Management Act, 1999: Governs trade and foreign exchange
market
"Payment and Settlement Systems Act, 2007: Provides for
regulation and supervision of payment systems in India"

Acts governing Banking Operations

Companies Act, 1956:Governs banks as companies

Banking Companies (Acquisition and Transfer of Undertakings)
Act, 1970/1980: Relates to nationalisation of banks
Bankers' Books Evidence Act
Banking Secrecy Act
Negotiable Instruments Act, 1881

18
Acts governing Individual Institutions

State Bank of India Act, 1954

The Industrial Development Bank (Transfer of Undertaking and
Repeal) Act, 2003
The Industrial Finance Corporation (Transfer of Undertaking and
Repeal) Act, 1993
National Bank for Agriculture and Rural Development Act
National Housing Bank Act
Deposit Insurance and Credit Guarantee Corporation Act

Main Functions

Monetary Authority:

Formulates, implements and monitors the monetary policy.

Objective: maintaining price stability and ensuring adequate flow of
credit to productive sectors.

Regulator and supervisor of the financial system:

Prescribes broad parameters of banking operations within which

the country's banking and financial system functions.
Objective: maintain public confidence in the system, protect
depositors' interest and provide cost-effective banking services to
the public.

Manager of Foreign Exchange

Manages the Foreign Exchange Management Act, 1999.

Objective: to facilitate external trade and payment and promote
orderly development and maintenance of foreign exchange market
in India.

Issuer of currency:

Issues and exchanges or destroys currency and coins not fit for
circulation.
Objective: to give the public adequate quantity of supplies of
currency notes and coins and in good quality.

Developmental role

19
 Performs a wide range of promotional functions to support national
objectives.

Related Functions

Banker to the Government: performs merchant banking function

for the central and the state governments; also acts as their
banker.
Banker to banks: maintains banking accounts of all scheduled
banks.

Offices

Has 22 regional offices, most of them in state capitals.

20
Securities and Exchange Board of India Act, 1992

Securities and Exchange Board of India

SEBI Bhavan, Mumbai headquarters

Agency overview

Formed 12 April 1992

Jurisdiction Government of India

Headquarters Mumbai, Maharashtra

Employees 525 (2009)[1]

Agency executive Upendr Kumar Sinha, Chairman

21
The Securities and Exchange Board of India Act, 1992 (the SEBI Act)
was amended in the years 1995, 1999 and 2002 to meet the
requirements of changing needs of the securities market and responding
to the development in the securities market.
Based on the Report of Joint Parliamentary Committee (JPC) dated
December 2, 2002 , the SEBI Act was amended to address certain
shortcomings in its provisions. The mission of SEBI is to make India as
one of the best securities market of the world and SEBI as one of the
most respected regulator in the world. SEBI also endeavors to achieve
the standards of IOSCO/FSAP.
In this background, the internal group constituted by SEBI consisting of
its senior officers had proposed certain amendments to the SEBI Act.
The SEBI Board had constituted an Expert Group under the
Chairmanship of Mr Justice M. H .Kania (Former Chief Justice of India)
to consider the proposals. The report of the Expert Group is placed for
eliciting public comments on the recommendations. It may be noted that
the Report does not necessarily reflect the views of SEBI on the various
proposals and recommendations. SEBI would consider the comments
received from various sources before taking any final view on the
recommendations.

How SEBI came into picture

The World Bank and the International Monetary Fund (IMF) have
introduced a benchmark i.e., Financial Services Assessment
Programme (FSAP) to strengthen the monitoring of financial systems in
the context of the IMFs bilateral surveillance and the World
Banks financial sector development work. The FSAP is designed to help
countries enhance their resilience to crisis and cross-border contagion,
and to foster growth by promoting financial system soundness and
financial sector diversity. The mission of SEBI is to make India as one of
the best securities market of the world and SEBI as one of the most
respected regulator in the world. SEBI endeavors to achieve the
standards of IOSCO/FSAP. Amendments will be required to be made in
the Securities Laws especially the SEBI Act, which will facilitate India
and SEBI to achieve above objective.
Why do we need a regulatory body for Investor protection in India?

22
 India is an ` informationally ' weak market

Boosting capital market demands restoring the confidence of lay

investors who have been beaten down by repeated scams

Progressively softening interest rates and an under performing

economy have eroded investment options, and require enhanced
investing skills.

In 1988 the Securities and Exchange Board of India (SEBI) was

established by the Government of India through an executive
resolution, and was subsequently upgraded as a fully autonomous
body (a statutory Board) in the year 1992 with the passing of the
Securities and Exchange Board of India Act (SEBI Act) on 30th
January 1992.

In 1988 the Securities and Exchange Board of India (SEBI) was

established by the Government of India through an executive
resolution, and was subsequently upgraded as a fully autonomous
body (a statutory Board) in the year 1992 with the passing of the
Securities and Exchange Board of India Act (SEBI Act) on 30th
January 1992.

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

Constitution of the Group

It is in this background, the SEBI Board had decided to constitute an
Expert Group to identify the deficiencies / inconsistencies in the existing
provisions of the SEBI Act and also to suggest new provisions that can
be incorporated in the SEBI Act to make it more effective and investor

23
friendly, taking into account recommendations of the JPC as also
recommendations of other expert groups constituted by SEBI from time
to time in this regard.
The SEBI Board in its meeting held on August 5, 2004 constituted the
Expert Group with the following members:

1. Mr. Justice M. H. Kania, ( Former Chief Justice of India) Chairman

2. Mr. Justice A. N. Mody ( Retd.)
3. Mr. Justice S. M. Jhunjhunwala (Retd.)
4. Ms. P. M. Umerji, Principal Secretary (Retd.) (Legislation),Govt. of
Maharashtra
5. Shri. Jitesh Khosla*, Joint Secretary, Representative of the
Department of Company Affairs(Govt. of India)
6. Shri. Prashant Saran , Chief General Manager, Representative of
the Reserve Bank of India
7. Ms Parimala Rao, Principal, Govt. Law College, Mumbai
8. Shri. PGR Prasad, Managing Director,SBI Funds Management
Pvt. Ltd., Representative of the Association of Mutual Funds of
India(AMFI)
9. Shri. N. K. Jain**, Secretary and Chief Executive Officer, the
Institute of Company Secretaries of India (ICSI), Representative of
ICSI
10. Shri. Sushil Jiwrajka, Chairman,Western Regional Council ,
Federation of Indian Chambers and Commerce of Industry(FICCI)
Representative of FICCI
11. Shri. K.R. Chandratre, Practicing Company Secretary & Ex-
President Institute of Company Secretaries of India
12. Anil Singhvi, Director, Gujarat Ambuja Cements Ltd.
13. Shri. Pratip Kar, Executive Director , SEBI
14. Shri. R. S. Loona, (Member Secretary), sebi
Mission of SEBI

Securities & Exchange Board of India (SEBI) formed under the

SEBI Act, 1992 with the prime objective of

Protecting the interests of investors in securities,

Promoting the development of, and

24
 Regulating, the securities market and for matters connected
therewith or incidental thereto.

Focus being the greater investor protection, SEBI has become

a vigilant watchdog

The Propose and Aims Of SEBI

1. Regulating the business in stock markets and other securities

markets.

2. Registering and regulating the working of stock brokers and other

intermediaries associated with securities market.

3. Registering and regulating the working of collective investment

schemes including mutual funds.

4. Promoting and regulating the self-regulating organizations

Deliberation and Examination by the Expert Group

A paper containing few suggestions to amend the SEBI Act was
prepared as a base material for discussion and deliberation by the
Group. The said paper was sent to the representatives of all
stakeholders and market participants inviting their comments thereon
and further suggestions regarding amendments in the SEBI Act.
The names of the stakeholders from whom the comments were sought
are given in the annexure A hereto. The Group received detailed
comments to the proposals from certain stakeholders whose names are
given in the annexure B hereto. The Group deliberated on the
proposals made regarding amendments to SEBI Act in the light of
comments thereon received from the stakeholders in its various
meetings held on October 27, 2004, December 20, 2004, February 4,
2005, March 10, 2005, April 11, 2005, May 3, 2005, June 14, 2005 and
on June 15, 2005 . After deliberating on the said proposals and
comments of stakeholders, the Group seeks to make recommendations
in respect of the following proposals:- I Proposed Amendments for
incorporating new provisions in the SEBI Act. II Proposed Amendments

25
for changes in the existing provisions III Consequential and related
amendments in other Acts.
'''PART ONE'''

Proposed Amendments for incorporating new provisions in the

SEBI Act
1.1 Investor Protection Fund
SEBI has been created inter alia for the purpose of protecting the
interests of investors in securities. The investor education is more
relevant in the context of complexities involved in various options and
instruments of investments available in the securities market. Retail
investors are not in a position to identify and /or appreciate the risk
factors associated with certain scrips or schemes. With the result they
are not able to make informed investment decisions. Since development
of securities market largely depends upon proper education of investors,
SEBI is committed to spread awareness amongst them.
The Joint Parliamentary Report (JPC) on securities scam of 2001 had
recommended that in order to enable SEBI to undertake investor
education and awareness campaign effectively, the investor education
and protection fund established under section 205C of the Companies
Act and investor education resources of RBI should be shifted to SEBI
and a joint campaign for investor education and awareness under the
leadership of SEBI must be undertaken.
The Group noted that majority of the stakeholders have agreed for the
setting up of a separate investor protection fund under the SEBI Act. It is
also suggested by the stakeholders that the said fund should be utilized
exclusively for the purpose of investor education, conducting awareness
programme and for protecting the interest of investors.
The Group also noted that the proposed Investor Protection Fund is for
the purpose of achieving the objective of Investor Education and
awareness.
In terms of section 55A of the Companies Act, SEBI is required to
administer the provisions of sections specified in section 55A in respect
of issue of capital, transfer of securities and non payment of dividend in

26
case of listed companies and the companies which intend to get their
securities listed on the stock exchange. Further, SEBI is required to
protect the interest of investors and enforce redressal of grievances of
investors by listed companies.
In the light of the above provisions, the Group also discussed the
proposition regarding payment of compensation to investors for the
purpose of investor protection. In this regard, the Group also deliberated
on the suggestion for setting up of a Fund on the lines of Fair Fund
established under the Sarbanes Oxley Act, 2002 of United States which
is used for compensating the investors out of the penalties received.
Another view was expressed during deliberations that the investors in
the equity market invest in risk capital and no assured return or
compensation for non fulfilment of every expectation may be provided in
the statute. However, compensation in respect of fraud or
misrepresentations or misstatements by companies or intermediaries
may be considered. Further the Group noted that the Pension Fund
Regulatory and Development Authority, Ordinance, 2004 which
mandated the Pension Fund Regulatory and Development Authority
(PFRDA) to protect the interest of subscribers to the schemes of pension
funds has permitted PFRDA to set up the Subscriber Education and
Protection Fund. The said Ordinance also specifies the monies which
should be credited to the said Subscriber Education and Protection
Fund. The said Ordinance also provides that all sums realised by way of
penalties by PFRDA under the Ordinance shall be credited to the
Subscriber Education and Protection Fund.
The Group felt that to achieve the objective of investor protection by
investor education and investor awareness, a separate fund under the
SEBI Act on the lines of Subscriber Education and Protection Fund
under PFRDA Ordinance 2004 to be administered by SEBI may be set
up and administered by SEBI for investor education and awareness.
Further, the compensation to small investors in respect of fraud or
misrepresentations or misstatements by companies or intermediaries
may be considered as a matter of investor protection out of the said
Investor Protection Fund. In this regard it is felt desirable that SEBI may
specify guidelines and parameters for administration of the Investor
Protection Fund the for the purpose of Investor Education and
Awareness and payment of compensation to small investors. In this

27
regard, the guidelines issued by SEBI in respect of Investor Protection
Fund of stock exchanges may be adopted with necessary changes.
As regards the monies to be credited to the said Investor Protection
Fund, the Group took into consideration the representation of the
National Stock Exchange that the big stock exchanges are utilising the
monies for the purpose suitably. The Group also noted that the monies
lying with the IPF of small stock exchanges are not being utilised to the
full satisfaction. It is considered that the monies lying unutilized for
substantial period in the Investor Protection Fund of the stock
exchanges should be transferred to the proposed Investor Protection
Fund.
The unclaimed dividend and interest lying with the mutual fund and
Collective Investment Schemes or venture capital funds and the
unclaimed monies or securities of the clients lying with the
intermediaries for a period of 7 years should be used in a purposeful
manner.
Further, all sums realised by way of penalties imposed by the
Adjudicating Officer under Chapter VIA of the SEBI Act, should be
credited to the proposed Investor Protection Fund.
Recommendation
The Group recommends that a separate Investor Protection Fund under
the SEBI Act, on the lines of Subscriber Education and Protection Fund
under PFRDA Ordinance 2004 may be established for the purpose of
investor education and awareness and for compensation to the small
investors in respect of fraud or misrepresentations or misstatements by
companies or intermediaries.
The said fund be administered by SEBI to protect the investors and take
measures for investor education and awareness and for compensation
to the small investors in accordance with the established guidelines or
parameters specified by SEBI on the lines of the guidelines in respect of
stock exchanges.
There shall be credited to the said fund the following amounts, namely
a)unclaimed dividend or interest under any mutual fund or Collective
Investment Scheme (CIS) or venture capital fund scheme for more than
7 years; b) any unclaimed money or securities of a client lying with an
intermediary in securities market for more than 7 years; c) monies lying

28
unutilised in the Investor Protection Funds of the stock exchanges; d) all
sums realised by way of monetary penalty under Chapter VIA of SEBI
Act.
1.2 Nomination Facility
The concept of nomination has been recognized under section 109 of
the Companies Act, 1956, Section 45ZA of the Banking Regulation Act,
1949 and Section 39A of the UTI Act, 1963 (since repealed). Under the
aforesaid provisions, nominee of a shareholder or debenture holder,
depositor or unit holder is entitled to the rights in securities or money
held by the deceased to the exclusion of all other persons,
notwithstanding anything contained in any other law for the time being in
force including the testamentary laws. However, SEBI Act does not
contain any such provision of nomination facility for the unit holders of
mutual funds and collective investment schemes.
The Group noted that SEBI (Mutual Funds) Regulations, 1996 provide
for nomination facility to the unit holders. The Group felt that the
provision for nomination facility is investor friendly but such provision
should exist in the parent Act and not in the Regulations.
However, the Group is not in favour of giving any overriding effect as
provided under section 109 of the Companies Act, 1956 wherein the
nominees rights can defeat the claim of a legal heir.
Recommendation
In view of the above, the Group recommends for a suitable amendment
in the SEBI Act for the incorporation of a provision to provide nomination
facility to the unit holders of Mutual Funds and Collective Investment
Schemes.
1.3 Advance Ruling
The Group was informed that SEBI receives a number of requests from
various market participants for advance guidance on the interpretation of
the provisions of SEBI Act and Regulations. As SEBI Act does not
contain specific provisions like section 245B to section 245N of the
Income Tax Act, 1961 authorising SEBI to give advance ruling, SEBI has
evolved a system of giving interpretive letters/no action letters under the
provisions of SEBI (Informal Guidance) Scheme, 2003. However, the
guidance given under the scheme does not equate with the advance
ruling under the Income Tax Act as it is not binding on SEBI Board.

29
The advance ruling system for the securities market would have the
advantage of a market participant being able to obtain a binding ruling
on the applicability of a particular provision of Securities Laws to a
proposed transaction, before actually undertaking such transaction.
The Group felt that the system of advance ruling is certainly better than
that of informal guidance given under the said scheme as the advance
ruling given by SEBI would be binding on its Board. The binding effect
provides, not only more comfort for the market participants, it also
provides better legal status to the whole mechanism.
However, in view of the smooth and satisfactory functioning of the
Informal Guidance Scheme in vogue, the Group felt that SEBI should
analyse the option very carefully as the move of shifting from the
scheme to advance ruling would require setting up of a separate
department and infrastructure on the lines of Income Tax Act.
Recommendations
The Group recommends that as legally the advance ruling is preferable
the adoption of the same may be considered and the Informal Guidance
Scheme may also continue.
1.4 Self Regulatory Organisation (SRO)
The Group noted that section 11(2) (d) of the SEBI Act provides for
promoting and regulating SRO. SEBI Act, however does not have
specific provision for empowering SRO to make bye-laws having
statutory force for admission of members. Further, SEBI Act does not
have provisions relating to supersession of governing boards of SROs
by SEBI or restricting the voting right of members of SROs,
notwithstanding anything contained in the Companies Act, 1956.
Proposed amendments seek to confer such powers on SEBI.
The Group noted that SEBI has already framed regulations, namely,
SEBI (Self Regulatory Organisations) Regulations, 2004 under section
30 read with section 11(2)(d) of the SEBI Act for regulating the SROs,
which require inter alia SROs to seek recognition from SEBI. The
Regulations also empower the SROs to make rules and bye laws with
the approval of SEBI. Regulation 23 of the Regulation governing SROs,
provides for the power of SEBI to withdraw the recognition. In view of the
said power, the Group felt that SEBI is already having the requisite
power to require the SROs to regulate their activities in accordance with

30
the Regulations. Consequently, there may not be any need for the
amendment of the SEBI Act.
Recommendation
The Group recommends that there is no necessity of amending the SEBI
Act as proposed. The Regulations framed by SEBI should suffice to
address the concern of SEBI, as a regulator of SROs.
1.5 Rectification of errors in orders
The Group noted that there is no provision in the SEBI Act, which
empowers SEBI to rectify the clerical or typographical errors apparent in
its own orders. A view was also expressed that SEBI does not have
powers to review its own orders even in cases when orders are passed
ex parte.
The Group observed that Review of orders appears to give substantive
powers which are usually not available with Authorities having original
jurisdiction. However, the Group felt that enabling SEBI to rectify clerical
or typographical errors apparent on the face of its order on the lines of
section 26 (2) of the Recovery of Debts Due to Banks and Financial
Institutions Act, 1993 is desirabl ans fds
Recommendation
An amendment should be made in the SEBI Act to enable SEBI to rectify
clerical or typographical errors apparent on the face of its order, on the
lines of section 26 (2) of the Recovery of Debts Due to Banks and
Financial Institutions Act, 1993.

1.6 Retrospective effect

The Group noted that the existing provisions of SEBI Act do not
empower SEBI to frame the regulations with retrospective effect even for
the limited purpose of giving relief to the market participants.
The Group felt that SEBI may be empowered to make regulations with
retrospective effect in respect of matters relating to charging of fees or
procedural matters on the lines of the Income Tax Act for the limited
purpose of giving relief and not for imposing new liabilities and
obligations. According to the Group such a benevolent provision may

31
remove undue hardship to market participants in certain cases and
hence should be viewed with favour.
Recommendation
The Group recommends that the SEBI Act may be amended on the lines
of section 295(4) of the Income Tax Act, 1961 to empower SEBI to make
regulations with retrospective effect in respect of matters relating to
charging of fees or procedural matters for the limited purpose of giving
relief and benefit and not for imposing new liabilities and obligations.
1.7 Overriding Effect
The Group discussed the suggestion to amend SEBI Act in order to
provide overriding effect to SEBI Act over other laws in the matter of
securities. In order to assess the need for such an amendment, the
Group tried to identify those substantive provisions of the SEBI Act that
deserve to be given an overriding effect. After due consideration, the
Group felt that SEBI Act does not contain any such substantive
provisions which deserve to be given an overriding effect. It also noted
that where ever the substantive provisions deserved to be given an
overriding effect, the SEBI Act has already done by non obstante clause.
Recommendation
The Group recommends that SEBI Act may not be amended for giving
an overriding effect to the SEBI Act over other laws.
1.8 Power to issue circulars
The Group examined the proposal to amend the provisions of SEBI Act
for giving statutory power to SEBI to issue circulars and guidelines.
The Group noted that SEBI has been issuing circulars and guidelines
under section 11 of the SEBI Act. The Group felt that there is no legal
infirmity in issuing circulars or guidelines under the existing provisions of
section 11 which is the source of inherent powers of SEBI.
Recommendation
The Group recommends that SEBI Act may not be amended for
inserting a specific provision for the issuance of circular and guidelines
as SEBI has inherent powers to do so under Section 11 of the SEBI Act.

32
1.9 Transaction / Issue of securities to be treated void in certain
circumstances
The Group was informed that in cases of fraudulent issue of securities,
excess dematerialisation of securities etc. SEBI should be empowered
to declare such transactions as void. For this purpose suitable provisions
in the SEBI Act on the lines of section 9(3) & section 14 of the SCRA
may be made to provide that such transaction, if they are in violation of
any specified regulation, shall be void.
The Group felt that such power should be performed by an independent
body, preferably by the civil courts. Administrative bodies may not be
conferred with such jurisdiction.
Recommendation
SEBI Act should not be amended as proposed. Such power should
preferably be left to be exercised by a civil court.
1.10 Winding up of intermediaries
The Group was informed that one of the principles of Securities
Regulations as specified by IOSCO/FSAP is that there should be
procedures for dealing with the failure of a market intermediary in order
to minimize damage and loss to investors and to contain systemic risk.
The Group noted that there is no specific power conferred upon SEBI
under SEBI Act for taking steps for winding up of an intermediary in case
such intermediary goes bankrupt or the continuance of such
intermediary is considered to be detrimental to the interest of investors
or clients of such intermediary.
The Group noted that Reserve Bank of India (RBI) has power to file
winding up petitions against a Non Banking Finance Company under
section 45 MC of RBI Act. The Group felt that SEBI should have similar
power to file winding up petition under SEBI Act.
The Group further observed that in case of winding up of such
intermediary company, the claim of the clients of such intermediary
should have priority over other claims or debts i.e. even over secured
creditors and sovereigns authorities such as Income Tax. The Group in
this regard noted that under Section 43A of Banking Regulation Act,
1949 there is a provision for the preferential payment to depositors in
priority to all other debts from out of assets of the Banking Company.
The Group felt that similar provisions should also be made in respect of

33
claims of clients of intermediary companies while empowering SEBI to
file a winding up petition against an intermediary in case such
intermediary goes bankrupt or the continuance of such intermediary is
considered to be detrimental to the interest of investors or clients of such
intermediary.
Recommendation
The Group recommends that suitable provision in the SEBI Act may be
made to enable SEBI to file winding up petition in respect of the
intermediary companies on the lines of section 45MC of the Reserve
Bank of India Act and section 43A of Banking Regulation Act.
1.11 Non attachment of assets of clients with intermediaries
The Group noted that one of the IOSCO principles for securities market
regulations is that the regulatory system should enable the pool of
investors funds to be distinguished and segregated from the assets of
other entities. Further, the investors should be protected from
misleading, manipulative or fraudulent practices, including insider
trading, front running or trading ahead of customers and the misuse of
client assets.
It was brought to the notice of the Group that by the Securities Laws
(Amendment) Bill, 2003, a section 27B was proposed to be inserted in
the Securities Contracts (Regulation) Act, to provide that an investor
may entrust his money or securities to any intermediary who shall hold
such money or securities in trust and shall deal with them as directed by
the investors. Such monies and securities shall not be part of the assets
of the intermediaries and no authority shall attach or seize such assets
of investors. However, in the Securities Laws (Amendment) Act, 2005
this provision was omitted.
The Group observed that the money or securities entrusted by an
investor to an intermediary should be held by such intermediary in trust
of such investors. Such money or securities of investors should not form
part of asset of intermediary and no authority shall attach or seize such
assets of investors which are in custody or possession of such
intermediary.
Recommendation
The Group recommends that there should be a specific provision in the
SEBI Act to the effect that the monies or securities of the clients should

34
be held in the form of a trust by intermediaries and no authority shall
attach or seize such assets of investors which are in possession of the
intermediary. For this purpose the provisions as proposed in the
Securities Laws (Amendment) Bill, 2003 may be made.

SEBI during 1996-96 took several steps to promote and regulate

The self regulatory organizations The measures taken by SEBI

are discussed below.

Association of Merchant Bankers of India (AMBI)

AMBI was granted recognition to set up professional standards

for providing efficient services and establish standard practices in
merchant banking and financial services. It was promoted for
healthy business practice and to exercise overall supervision over
its members in the matters of compliance with statutory rules and
regulations pertaining to merchant banking and other activities.
AMBI in consultation with SEBI is working towards improving
disclosures standards in the offer document as well as meeting the
statutory requirement in a systematic manner.

Association of Mutual Funds of India (AMFI)

The Association of Mutual Funds of India (AMFI) has been set up.
SEBI undertakes regular consultations with members of AMFI on various
issues affecting mutual funds. In February 1997, SEBI held a meeting
with trustees of all mutual funds to discuss with them their
responsibilities for prudential oversight of mutual funds in the light of
SEBI (Mutual Funds) Regulations, 1996.

Registrars Association of India (RAIN)

The Registrars Association of India (RAIN) a self regulatory

organization for registrars to an issue and share transfer agents has
been set up.

35
 5 Prohibiting fraudulent and unfair trade practices relating to
securities market

6 Promoting investors education and training of intermediaries of

securities market

7 Prohibiting insider trading in securities.

8 Regulating substantial acquisition of shares and takeover of

companies

9 Performing such functions and exercising powers under the

provisions of the Capital Issues (Control ) Act,1947 and Securities
Control Act, 1956.

Capital Issues (Control) Act,1947

The main objective of this act were:-

To promote the expansion of private corporate sector, and growth

of particular corporate enterprises having sound capital structure

To distribute the Capital Structure in such a manner that there is

no overcrowding in a particular period

Powers Of SEBI

To regulate all the issue activities and the merchant banking

To oversea the working of stock exchange in India

To act as a regulatory authority in regards to new issue activities of

companies

To oversea the operations of the Mutual Funds

To file complaints in parts and to notify its regulations without prior

approval of the government.

To regulate issue of capital and transfer of securities

36
 To impose monetary penalties on various intermediaries and other
participants for specified range of violation

To issue directions and to call for documents from all financial

intermediaries.

37
Insurance Regulatory and Development Authority

The Insurance Regulatory and Development Authority (IRDA) is a

national agency of the Government of India, based in Hyderabad. It was
formed by an act of Indian Parliament known as IRDA Act 1999, which
was amended in 2002 to incorporate some emerging requirements.
Mission of IRDA as stated in the act is "to protect the interests of the
policyholders, to regulate, promote and ensure orderly growth of the
insurance industry and for matters connected therewith or incidental
thereto."
In 2010, the Government of India ruled that the Unit Linked Insurance
Plans (ULIPs) will be governed by IRDA, and not the market
regulator Securities and Exchange Board of India.

38
Our Mission

To protect the interests of the policyholders, to regulate, promote and

ensure orderly growth of the insurance industry and for matters
connected therewith or incidental thereto.

Expectations
The law of India has following expectations from IRDA...

1. To protect the interest of and secure fair treatment to

policyholders.
2. To bring about speedy and orderly growth of the insurance
industry (including annuity and superannuation payments), for the
benefit of the common man, and to provide long term funds for
accelerating growth of the economy.
3. To set, promote, monitor and enforce high standards of integrity,
financial soundness, fair dealing and competence of those it
regulates.
4. To ensure that insurance customers receive precise, clear and
correct information about products and services and make them
aware of their responsibilities and duties in this regard.
5. To ensure speedy settlement of genuine claims, to prevent
insurance frauds and other malpractices and put in place effective
grievance redressal machinery.
6. To promote fairness, transparency and orderly conduct in financial
markets dealing with insurance and build a reliable management
information system to enforce high standards of financial
soundness amongst market players.
7. To take action where such standards are inadequate or
ineffectively enforced.
8. To bring about optimum amount of self-regulation in day to day
working of the industry consistent with the requirements of
prudential regulation.
Duties, Powers and Functions of IRDA
Section 14 of IRDA Act, 1999 laysdown the duties,powers and functions
of IRDA
39
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. Without prejudice to the generality of the provisions contained in
sub-section (1), the powers and functions of the Authority shall
include,
1. issue to the applicant a certificate of registration, renew,
modify, withdraw, suspend or cancel such registration;
2. 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;
3. specifying requisite qualifications, code of conduct and
practical training for intermediary or insurance
intermediaries and agents;
4. specifying the code of conduct for surveyors and loss
assessors;
5. promoting efficiency in the conduct of insurance business;
6. promoting and regulating professional organisations
connected with the insurance and re-insurance business;
7. levying fees and other charges for carrying out the purposes
of this Act;
8. calling for information from, undertaking inspection of,
conducting enquiries and investigations including audit of
the insurers, intermediaries, insurance intermediaries and
other organisations connected with the insurance business;
9. 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);
10. 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;

40
 11. regulating investment of funds by insurance
companies;
12. regulating maintenance of margin of solvency;
13. adjudication of disputes between insurers and
intermediaries or insurance intermediaries;
14. supervising the functioning of the Tariff Advisory
Committee;
15. specifying the percentage of premium income of the
insurer to finance schemes for promoting and regulating
professional organisations referred to in clause (f);
16. specifying the percentage of life insurance business
and general insurance business to be undertaken by the
insurer in the rural or social sector; and
17. exercising such other powers as may be prescribed
from time to time,
Advisory committee
IRDA consists of a Chairman and some permanent as well as part time
members. The regulations, however, are enacted under the guidance of
a statutory advisory committee. The advisory committee consists of
following individuals and ex-officio authorities:

Chairman: Hari Narayana is the current Chairman of IRDA.

Full-time Members: Currently, they are Mr K K Srinivasan (Nonlife
Member), Sri G Prabhakara (Life Member), Dr R Kannan(Member,
Actuary) and Sri R.K. Nair (Member, F & I). There is provision for a
panel of other members and part time members. IRDA formed a high
powered Insurance Law Reforms Committee known as KPN
Committee with important insurance advisors like Mr N
Govardhan and Dr K C Mishra as its members. There were also a few
non-advisory committee members like Mr Liaquat Khan and Mr T
Viswanathan etc.
Full force and utility of various institutions like Advisory Committee and
self-regulatory organizations are not yet realized as the regulator seems
to be in a long learning mode. Due to over delegations, Individual
incumbents decide the pace and extent of utilization of prudential and
statutory bodies. Research is limited to opinion seeking through legacy
channels. Market waits for revision of insurance act and establishment

41
meaningfully functioning regulatory organs devoid of excess delegation
and subjective localization of development agencies.
IRDA Journal is available as soft copy in its website.[2] Unlike other
Indian administrative Regulatory Agencies IRDA is perceived as a silent
regulator with activities confined to its local existence.
Chairman selection process
Government of India has circulated to broadbase IRDA chairman
selection process. It is felt in the market that placing of retired civil
servants as IRDA Chairman has served the purpose of administrative
fiefdom of the regulator. Mostly, the regulator has become passive to
market realities and most of the original public policy intentions have
been systematically replaced by personal preferences. There seems to
be no oversight of public policy erosions. Taking advantage of the
completion of term of current incumbent, there seem to be an attempt to
correct the future course but people do not perceive any outcome to
result as the market does not seem to throw up candidates of the stature
of Howard Davies for Indian market. But a right leadership is the solution
to the requirement of this booming market.

Mission Statement Of IRDA

To protect the interest of and secure fare treatment to policy holders.

To bring about speedy and orderly growth of the insurance industry
(Including annuity and superannuation payments), for the benefit of the
common man, and to provide long term funds for accelerating growth of
the economy.
To set, promote, monitor and enforce high standard of integrity,
financial soundness, fair dealing and competence of those it regulates.
To ensure that insurance customers receive precise, clear and correct
information about products and services and make them aware of their
responsibilities and duties in this regard.
To ensure speedy settlement of genuine claims, to prevent insurance
frauds and other malpractices and put in place affective grievance
redressed machinery.
To promote fairness, transparency and orderly conduct in financial
42
market dealing with insurance and build a reliable management
information system to enforce high standards of financial soundness
amongst market players.

Functions of Ombudsman

Brief note on the functioning of the offices of the Insurance

Ombudsman
The institution of Insurance Ombudsman was created by a Government
of India Notification dated 11th November, 1998 with the purpose of
quick disposal of the grievances of the insured customers and to
mitigate their problems involved in redressal of those grievances. This
institution is of great importance and relevance for the protection of
interests of policy holders and also in building their confidence in the
system. The institution has helped to generate and sustain the faith and
confidence amongst the consumers and insurers.

Appointment of Insurance Ombudsman

The governing body of insurance council issues orders of appointment of

the insurance Ombudsman on the recommendations of the committee
comprising of Chairman, IRDA, Chairman, LIC, Chairman, GIC and a
representative of the Central Government. Insurance council comprises
of members of the Life Insurance council and general insurance council
formed under Section 40 C of the Insurance Act, 1938. The governing
body of insurance council consists of representatives of insurance
companies.

Eligibility

Ombudsman are drawn from Insurance Industry, Civil Services and

Judicial Services.

Terms of office

An insurance Ombudsman is appointed for a term of three years or till

the incumbent attains the age of sixty five years, whichever is earlier.
Re-appointment is not permitted.

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Territorial jurisdiction of Ombudsman

He governing body has appointed twelve Ombudsman across the

country allotting them different geographical areas as their areas of
jurisdiction. The Ombudsman may hold sitting at various places within
their area of jurisdiction in order to expedite disposal of complaints. The
offices of the twelve insurance Ombudsmans are located at (1) Bhopal,
(2) Bhubaneswar, (3) Cochin, (4) Guwahati, (5) Chandigarh, (6) New
Delhi, (7) Chennai, (8) Kolkata, (9) Ahmedabad, (10) Lucknow, (11)
Mumbai, (12) Hyderabad. The areas of jurisdiction of each Ombudsman
has been mentioned in the list of Ombudsman.

Office Management

The Ombudsman has a secretarial staff provided to him by the

insurance council to assist him in discharging his duties. The total
expenses on Ombudsman and his staff are incurred by the insurance
companies who are members of the insurance council in such proportion
as may be decided by the governing body.

Removal from office

An Ombudsman may be removed from service for gross misconduct

committed by him during his term of office. The governing body may
appoint such person as it thinks fit to conduct enquiry in relation to
misconduct of the Ombudsman. All enquiries on misconduct will be sent
to Insurance Regulatory and Development Authority which may take a
decision as to the proposed action to be taken against the Ombudsman.
On recommendations of the IRDA, the Governing Body may terminate
his services, in case he is found guilty.

Power of Ombudsman

Insurance Ombudsman has two types of functions to perform (1)

conciliation, (2) Award making. The insurance Ombudsman is
empowered to receive and consider complaints in respect of personal
lines of insurance from any person who has any grievance against an
insurer. The complaint may relate to any grievance against the insurer
i.e. (a) any partial or total repudiation of claims by the insurance
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companies, (b) dispute with regard to premium paid or payable in terms
of the policy, (c) dispute on the legal construction of the policy wordings
in case such dispute relates to claims; (d) delay in settlement of claims
and (e) non-issuance of any insurance document to customers after
receipt of premium.

Ombudsman's powers are restricted to insurance contracts of value not

exceeding Rs. 20 lakhs. The insurance companies are required to
honour the awards passed by an Insurance Ombudsman within three
months.

Manner of lodging complaint

The complaint by an aggrieved person has to be in writing, and

addressed to the insurance Ombudsman of the jurisdiction under which
the office of the insurer falls. The complaint can also be lodged through
the legal heirs of the insured. Before lodging a complaint:

i) the complainant should have made a representation to the insurer

named in the complaint and the insurer either should have rejected the
complaint or the complainant have not received any reply within a period
of one month after the concerned insurer has received his complaint or
he is not satisfied with the reply of the insurer.
ii) The complaint is not made later than one year after the insurer had
replied.
iii) The same complaint on the subject should not be pending with before
any court, consumer forum or arbitrator.

Recommendations of the Ombudsman

When a complaint is settled through the mediation of the Ombudsman,

he shall make the recommendations which he thinks fair in the
circumstances of the case. Such a recommendation shall be made not
later than one month and copies of the same sent to complainant and
the insurance company concerned. If the complainant accepts
recommendations, he will send a communication in writing within 15
days of the date of receipt accepting the settlement.

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Award

The ombudsman shall pass an award within a period of three months

from the receipt of the complaint. The awards are binding upon the
insurance companies.

If the policy holder is not satisfied with the award of the Ombudsman he
can approach other venues like Consumer Forums and Courts of law for
redressal of his grievances.

As per the policy-holder's protection regulations, every insurer shall

inform the policy holder along with the policy document in respect of the
insurance Ombudsman in whose jurisdiction his office falls for the
purpose of grievances redressal arising if any subsequently.

Steady increase in number of complaints received by various

Ombudsman shows that the policy-holders are reposing their confidence
in the institution of Insurance Ombudsman.

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Addresses of Offices of IRDA

Head Office :

Insurance Regulatory and Development Authority

3rd Floor, Parisrama Bhavan, Basheer Bagh HYDERABAD 500 004

Andhra Pradesh (INDIA )

Ph: (040) 23381100

Fax: (040) 6682 3334

Delhi Office:

Insurance Regulatory and Development Authority

Delhi Office Gate No. 3

Jeevan Tara Building, First Floor

Sansad Marg, New Delhi-110001

Ph: (011) 2374 7648

Fax: (011) 2374 3397

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