42591827 Regulation of Security Markets

5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page1 Prof. Abdul Kadir KhanSyllabus:Unit -1An overview of Indian Securities Market:Nature of Savings and InvestmentProfile of Indian InvestorFactors affecting investment decisions of an Indian InvestorUnit -2Need for regulating securities markets in India:Protection to retail InvestorVanishing companies of 1990’sPricing of an IPO and possible economic offencesUnit -3Entities governing the Securities Markets in India:Companies Act, 1956Securities Contracts Regulation ActSEBI ActDepositories ActInsurance ActsSpecial Regulatory requirements of Derivative marketUnit -4Regulatory BodiesDepartment of Company AffairsDepartment of Economic AffairsSEBIForward Market CommissionRBIIRDANeed for Self RegulationReference Books:Company Law – Avtar SinghFinance and Profits – N.J. YasawajFinance Sense – Dr. Prasanna Chandra

5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page2 Prof. Abdul Kadir KhanRegulation:Regulation is "controlling human or societal behavior by rules or restrictions."Regulation can take many forms: legal restrictions promulgated by a governmentauthority, self-regulation by an industry such as through a trade association, socialregulation (e.g. norms), co-regulation and market regulation. One can considerregulation as actions of conduct imposing sanctions (such as a fine). This action ofadministrative law, or implementing regulatory law, may be contrasted with statutory orcase law.Regulation mandated by a state attempts to produce outcomes which might nototherwise occur, produce or prevent outcomes in different places to what mightotherwise occur, or produce or prevent outcomes in different timescales than wouldotherwise occur. In this way, regulations can be seen as implementation artifacts ofpolicy statements. Common examples of regulation include controls on market entries,prices, wages, Development approvals, pollution effects, employment for certain peoplein certain industries, standards of production for certain goods, the military forces andservices. The economics of imposing or removing regulations relating to markets isanalyzed in regulatory economics.

Regulating Financial Markets:The theoretical underpinning for public intervention in economic matters is traditionallybased on the need to correct market imperfections and unfair distribution of the

resources. Three more general objectives of public intervention derive thereby: thepursuit of stability, equity in the distribution of resources and the efficient use of thoseresources.The regulation of the financial system can be viewed as a particularly important case ofpublic control over the economy. The accumulation of capital and the allocation offinancial resources constitute an essential aspect in the process of the economicdevelopment of a nation. The peculiarities of financial intermediation and of theoperators who perform this function justify the existence of a broader system ofcontrols with respect to other forms of economic activity.Various theoretical motivations have been advanced to support the opportunity of aparticularly stringent regulation for banks and other financial intermediaries. Suchmotivations are based on the existence of particular forms of market failure in the creditand financial sectors.

5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page3 Prof. Abdul Kadir Khan

The NEED/ OBJECTIVES for regulating financial market:The definition of the term 'financial market' has traditionally included the banking,financial and insurance segments. The bounds dividing institutions, instruments andmarkets were clear-cut, so that further distinctions were drawn within the differentclasses of intermediaries (with banks specialized in short or medium/long termmaturities, functional/commercial operations, deposits and investments; with financial

intermediaries handling broker-dealer negotiations, asset management and advisoryfunctions, and with insurance companies dealing in life and other insurance policies).

A primary objective of financial market regulation is the pursuit of macroeconomicand microeconomic stability. Safeguarding of the stability of the system translatesinto macro-controls over the financial exchanges, clearing houses and securitiessettlement systems. Measures pertaining to the microstability of the intermediariescan be subdivided into two categories: general rules on the stability of all businessenterprises and entrepreneurial activities, such as the legally required amount ofcapital, borrowing limits and integrity requirements; and more specific rules due tothe special nature of financial intermediation, such as risk based capital ratios, limitsto portfolio investments and the regulation of off-balance activities.

Secondary objective of financial regulation is transparency in the market and inintermediaries and investor protection. This is linked to the more general objectiveof equity in the distribution of the available resources and may be mapped into thesearch for "equity in the distribution of information as a precious good" amongoperators. At the macro level, transparency rules impose equal treatment (forexample, rules regarding takeovers and public offers) and the correct disseminationof information (insider trading, manipulation and, more generally, the rules dealingwith exchanges microstructure and price-discovery mechanisms). At the micro level,such rules aim at non-discrimination in relationships among intermediaries anddifferent customers (conduct of business rules).

A third objective of financial market regulation, linked with the general objective ofefficiency, is the safeguarding and promotion of competition in the financialintermediation sector. This requires rules for control over the structure ofcompetition in the markets and, at the micro level, regulations in the matter ofconcentrations, cartels and abuse of dominant positions. Specific controls overfinancial intermediation are justified by the forms that competition can assume inthat field. They are related to the promotion of competition as well as to limitingpossible destabilizing excesses generated by competition itself


Benefits of Regulation:Regulations, like any other form of coercive action, have costs for some and benefits forothers. Efficient regulations are defined as those where the total benefits to somepeople exceed the total costs to others.Regulations are justified using a variety of reasons and therefore can be classified inseveral broad categories: Market failures - regulation due to inefficiency. Intervention due to a classicaleconomics argument to market failure.o Risk of monopolyo Collective action, or public goodo Inadequate informationo Unseen externalizations Collective desires - regulation about collective desires or considered judgementson the part of a significant segments of society Diverse experiences - regulation with a view of eliminating or enhancingopportunities 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 ofcertain preferences on an aggregate level Irreversibility - regulation that deals with the problem of irreversibility – theproblem in which a certain type of conduct from current generations results inoutcomes from which future generations may not recover from at all. Interest group transfers - regulation that results from efforts by self-interestgroups to redistribute wealth in their favor, which may disguise itself as one ormore 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. Legalsociologists have in particular been interested in exploring the limits of formal and legalregulation in changing patterns of social behavior.


Regulated (Controlled) Market-A regulated market or controlled market is the provision of goods or services that isregulated by a government appointed body. The regulation may cover the terms andconditions of supplying the goods and services and in particular the price allowed to becharged. It is common for a regulated market to control natural monopolies such asaspects of telecommunications, water, gas and electricity supply. Often regulatedmarkets 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 thatprivilege special interests, known as regulatory capture.Financial regulations are a form of regulation or supervision, which subjects financialinstitutions to certain requirements, restrictions and guidelines, aiming to maintain theintegrity of the financial system. This may be handled by either a government or non-government 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 systemInsider Trading:Insider trading is the trading of a corporation's stock or other securities (e.g. bonds orstock options) by individuals with potential access to non-public information about thecompany. In most countries, trading by corporate insiders such as officers, keyemployees, directors, and large shareholders may be legal, if this trading is done in away that does not take advantage of non-public information. However, the term isfrequently used to refer to a practice in which an insider or a related party trades basedon material non-public information obtained during the performance of the insider'sduties at the corporation, or otherwise in breach of a fiduciary or other relationship oftrust and confidence or where the non-public information was misappropriated fromthe company.


Insider Trading :The illegal kind of Insider Trading is the trading in a security (buying or selling astock) based on material information that is not available to the general public. Itis prohibited by the US Securities and Exchange Commission (SEC) and SEBI(India) because it is unfair and would destroy the securities markets by destroyinginvestor confidence.The prevention of insider trading is widely treated as an important function of securitiesregulation. In the United States, which has the most studied financial markets of theworld, regulators appear to devote significant resources to combat insider trading. Thishas led many observers in India to mechanically accept the notion that the prohibitionof 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 paylip service to the idea that insider trading must be prevented, while doing little by wayof enforcement.In order to make sense of insider trading, we must go back to a basic understanding ofmarkets, prices and the role of markets in the economy. The ideal securities market isone which does a good job of allocating capital in the economy. This function is enabledby "market efficiency", the situation where the market price of each security accuratelyreflects the risk and return in its future. The primary function of regulation and policy isto 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 arecompletely different. Manipulation is intrinsically about making market prices moveaway from their fair values; manipulators reduce market efficiency. Insider tradingbrings prices closer to their fair values; insiders enhance market efficiency.Once again, a mechanical adoption of regulation from the US is inappropriate. Given thehigher degree of automation of the Indian markets, it is not difficult to imagine asituation where trades by insiders are disclosed to the market within five minutes of thetrade being matched by the computer. Such a reporting requirement would harness theinformational potential of insider trading, and enhance market efficiency by speeding upthe full impact of the trade upon market prices.Our prime focus here is the widely--held viewpoint that insider trading is a problemwhich should be a priority on SEBI's agenda. This viewpoint is not supported byeconomic reasoning. Insider trading might indeed have negative consequences, butthere is no simple argument which links up higher levels of insider trading to reducedlevels of market efficiency. There are many alternative ways through which SEBI canimprove market efficiency, avenues where the impact of policy interventions is lessambiguous and where the cost of intervention is lower.


Indian Securities Market: An OverviewIndian 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 andbusiness in its loan securities used to be transacted towards the close of the eighteenthcentury.By 1830's business on corporate stocks and shares in Bank and Cotton presses tookplace in Bombay. Though the trading list was broader in 1839, there were only half adozen brokers recognized by banks and merchants during 1840 and 1850.The 1850's witnessed a rapid development of commercial enterprise and brokeragebusiness attracted many men into the field and by 1860 the number of brokersincreased into 60.In 1860-61 the American Civil War broke out and cotton supply from United States ofEurope was stopped; thus, the 'Share Mania' in India begun. The number of brokersincreased 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 Rs2850 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 wouldconveniently assemble and transact business. In 1887, they formally established inBombay, the "Native Share and Stock Brokers' Association" (which is alternativelyknown as “The Stock Exchange "). In 1895, the Stock Exchange acquired a premise in thesame street and it was inaugurated in 1899. Thus, the Stock Exchange at Bombay wasconsolidated.Ahmedabad gained importance next to Bombay with respect to cotton textile industry.

After 1880, many mills originated from Ahmedabad and rapidly forged ahead. As newmills were floated, the need for a Stock Exchange at Ahmedabad was realized and in1894 the brokers formed "The Ahmedabad Share and Stock Brokers' Association".What the cotton textile industry was to Bombay and Ahmedabad, the jute industry wasto Calcutta. Also tea and coal industries were the other major industrial groups inCalcutta. After the Share Mania in 1861-65, in the 1870's there was a sharp boom in juteshares, which was followed by a boom in tea shares in the 1880's and 1890's; and a coalboom between 1904 and 1908. On June 1908, some leading brokers formed "TheCalcutta Stock Exchange Association".In the beginning of the twentieth century, the industrial revolution was on the way inIndia 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 Indianenterprise was reached.Indian cotton and jute textiles, steel, sugar, paper and flour mills and all companiesgenerally enjoyed phenomenal prosperity, due to the First World War.In 1920, the then demure city of Madras had the maiden thrill of a stock exchangefunctioning in its midst, under the name and style of "The Madras Stock Exchange" with100 members. However, when boom faded, the number of members stood reducedfrom 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 arapid increase in the number of textile mills and many plantation companies werefloated. In 1937, a stock exchange was once again organized in Madras - Madras StockExchange Association (Pvt.) Limited. (In 1957 the name was changed to Madras StockExchange Limited).Lahore Stock Exchange was formed in 1934 and it had a brief life. It was merged withthe Punjab Stock Exchange Limited, which was incorporated in 1936.

Indian Stock Exchanges - An Umbrella GrowthThe Second World War broke out in 1939. It gave a sharp boom which was followed by aslump. But, in 1943, the situation changed radically, when India was fully mobilized as asupply 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 allparts 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 andthe Delhi Stocks and Shares Exchange Limited - were floated and later in June 1947,amalgamated into the Delhi Stock Exchange Association Limited.

Post-independence ScenarioMost of the exchanges suffered almost a total eclipse during depression. LahoreExchange was closed during partition of the country and later migrated to Delhi and

merged with Delhi Stock Exchange.Bangalore Stock Exchange Limited was registered in 1957 and recognized in 1963.

5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page9 Prof. Abdul Kadir KhanMost of the other exchanges languished till 1957 when they applied to the CentralGovernment for recognition under the Securities Contracts (Regulation) Act, 1956. OnlyBombay, Calcutta, Madras, Ahmedabad, Delhi, Hyderabad and Indore, the wellestablished exchanges, were recognized under the Act. Some of the members of theother Associations were required to be admitted by the recognized stock exchanges ona concessional basis, but acting on the principle of unitary control, all these pseudostock exchanges were refused recognition by the Government of India and theythereupon ceased to function.Thus, during early sixties there were eight recognized stock exchanges in India(mentioned above). The number virtually remained unchanged, for nearly twodecades.During eighties, however, many stock exchanges were established: Cochin StockExchange (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 (atMangalore, 1985), Magadh Stock Exchange Association (at Patna, 1986), Jaipur StockExchange Limited (1989), Bhubaneswar Stock Exchange Association Limited (1989),

Saurashtra Kutch Stock Exchange Limited (at Rajkot, 1989), Vadodara Stock ExchangeLimited (at Baroda, 1990) and recently established exchanges - Coimbatore and Meerut.Thus, at present, there are totally twenty one recognized stock exchanges in Indiaexcluding the Over the Counter Exchange of India Limited (OTCEI) and the NationalStock Exchange of India Limited (NSEIL).


Nature of Savings and Investment:Saving is income not spent, or deferred consumption. Methods of saving includeputting money aside in a bank or pension plan. Saving also includes reducingexpenditures, such as recurring costs. In terms of personal finance, saving specifies lowriskpreservation of money, as in a deposit account, versus investment, wherein risk ishigher.It is a well-established fact that growth of output of an economy depends on theamount of capital accumulation and the amount of capital accumulation in an economyis ultimately constrained by its rate of saving. As savings increase in the economy, morefunds will be available for investment. Hence, the issue of ways and means to stimulateinvestment and bring about an increase in the level of savings and increased investmenthas assumed importance. Savings depend on the following factors:1. The ability to save: This mainly depends on the income levels of the people and thekind 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 savelikely to be the existence of financial Institutions, interest rates and the range andavailability of financial assets to suit savers with different needs.Investment is the commitment of money or capital to purchase financial instrumentsor other assets in order to gain profitable returns in form of interest, income, orappreciation of the value of the instrument. It is related to saving or deferringconsumption.Investment comes with the risk of the loss of the principal sum. The investment that hasnot been thoroughly analyzed can be highly risky with respect to the investment ownerbecause 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 practical2) Simplicity: An investment should be simple to understand and operate.3) Flexibility: An investment should be flexible so that the investor can benefit fromthe growing opportunities from various asset classes.4) Provision for contingencies: An investment plan must provide for contingenciesthat may crop up during the life-time of the investor. A good investment planmust make a provision for unforeseen or unexpected expenses. (E.g. Medicalurgencies etc.)5) An investment plan should be appealing to the investors.


6) Optimum usage of funds: Proper utilization of funds should be ensured as itgenerates 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’ moneygenerates optimum returns.8) Provide safety to investors: A sound investment plan should ensure adequatesafety to investors’ funds.9) Should be timely controlled: An investment should be timely controlled so thatan investor can shift from one asset class to another.10) An investment should be done with a Long-term view in order to attain optimumreturns 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 relationshipbetween savings and investment in developing countries and India, in particular. It willbe more interesting to test the applicability of theory to the countries like India becauseof the following reasons:1. India is thickly populated country and for ages it believed in savings management2. Two-thirds of the population depends on agricultural sector and this sectorconstantly faces the peril of either drought or floods. Therefore savings became aquestion mark in this sector.3. For decades, the unorganized sector has been dominating the organized sector andpeople engaged in agriculture have been exploited by higher interest rates, hencemoney has been moving from urban to rural sector.4. Political instability for the past one and half decade has been the cause of lowconfidence of the public and investors in the economy as a result of uncertaintyregarding 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 ofclassical view planned of savings being equal to planned investment before and afterliberalization and also a brief on the Indian financial system.


Profile of Indian InvestorAn 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 areprecisely set and fully rational.INDIAN INVESTOR PROFILE = LOW RISK + HIGH RETURNSIs the profile of Indian Investor changing?There seems to be a revolution in the Indian stock markets. From thetumultuous, unpredictable times, the stock market has come a long way. Morepeople are investing in more instruments than ever before; and doing itintelligently. Are reforms, a proactive regulator and a fantastic bull run

empowering the average Indian?Turmoil of the nineties

5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page13 Prof. Abdul Kadir KhanIf you watched the roller coaster of the Indian stock market in the nervous nineties, youwould swear that this was no way to make a living. Your hard-earned money wasprobably safer in nationalized banks, post offices or fixed deposits.Did the average Indian invest in the stock market? Oh, yes. Look carefully, and near theground floor of today’s investment skyscraper, you’ll see the wreckage of severalpeople’s investment plans.You’d watch a bull run with mounting excitement then, counter-intuitively, throw yourmoney in without real knowledge, right at the end. Before you knew it, the marketcollapsed, taking your savings with it.Winds of changeWell, all that’s changing. There’s a new breed of Indian investor – younger, moreinformed, more confident and well paid. The days of going to your broker are gone.Demat is in; and with it a world of possibility. You can have the cake of equity and eat it,with mutual funds.There’s another quiet revolution, one that’s significant in the Indian context. More andmore women are educating themselves and investing online, and are smilinglysuccessful.Financial reformsHave financial reforms helped? You bet they have. The market is open, is mostly freeand fair, there’s honest competition and you can find information on any aspect online.

Investor education is on the rise and resources are available on every self-respectingwebsite.What about SEBI? The board is deadly serious about cleaning up the marketplace and isproactively offering you more avenues, while policing old ones. Even if a little tentativein some steps, such as allowing short-sell, it’s moving in the right direction.The signShort-term volatility isn’t scaring you back to the post-office. This is a sure sign that theinvestor has arrived.“Indian investors are blooming at the right time, in the right place.”

5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page14 Prof. Abdul Kadir KhanFactors affecting investment decisions of anIndian Investor:InvestmentInvestment refers to the accumulation of some kind of asset in hopes to get a futurereturn from it. The fundamentals for all types of investment are the same. The investorsbasically are buying risk from their investment, the more risk they take from theirinvestment, the higher price they can sell for it.Different persons of varied ages also need different type of investment plan to givethem better return. Conservative & old people prefer investing in gradually growingcompanies with low risks like utility and consumer goods. Aggressive investors preferfast and high earning stocks with high investment risks like foreign and technologysectors.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 theinvestors 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 isprepared 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'ssituation from all relevant angles to produce integrated solutions. Financial planners arealso known by the title financial adviser in India, although these two terms aretechnically not synonymous, and their roles have some functional differences.Although there are many types of 'financial planners,' the term is used largely todescribe those who consider the entire financial picture of a client and then provide acomprehensive 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 growththrough 2014.


Factors determining investment decisions / Canons of financial planningof an Indian Investor:1) Personal (financial) Objectives / Decisions:Personal financial planning is broadly defined as a process of determining anindividual'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 meetthose goals.The individual's goals are used as guideposts to map a course of action on 'what needsto be done' to reach those goals.Alongside the data gathering exercise, the purpose of each goal is determined to ensurethat the goal is meaningful in the context of the individual's situation. Through a processof careful analysis, these goals are subjected to a reality check by considering theindividual's current and future resources available to achieve them. In the process, theconstraints and obstacles to these goals are noted. The information will be used later todetermine if there are sufficient resources available to get to these goals, and whatother things need to be considered in the process. If the resources are insufficient orabsent to meet any of the goals, the particular goal will be adjusted to a more realisticlevel or will be replaced with a new goal.Planning often requires consideration of self-constraints in postponing some enjoymenttoday for the sake of the future. To be effective, the plan should consider theindividual's current lifestyle so that the 'pain' in postponing current pleasures isbearable over the term of the plan. In times where current sacrifices are involved, theplan should help ensure that the pursuit of the goal will continue. A plan shouldconsider the importance of each goal and should prioritize each goal. Many financialplans 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 throughsound risk management and insurance techniques

Investment and Planning Issues: Planning, creating and managing capitalaccumulation to generate future capital and cash flows for reinvestment andspending

Retirement Planning: Planning to ensure financial independence at retirementincluding 401Ks, IRAs etc.


Tax Planning: Planning for the reduction of tax liabilities and the freeing-up ofcash flows for other purposes

Estate Planning: Planning for the creation, accumulation, conservation anddistribution of assets

Cash Flow and Liability Management: Maintaining and enhancing personal cashflows 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 InvestorVanishing companies of 1990’sPricing 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 Governmentmeant 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% tofinancial market instruments other than bank deposits. Despite a long history and maturity of Indian stock markets, the penetrationlevel remains very low. The number of retail investors in the financial market has not materiallygrown over the last 10 years. More than 90% of exchange trade is largelyconfined to 10 cities and 100 companies while mutual fund penetration isjust around 4%KEY CHALLENGES: Low depth in equity markets, low retail equity ownership, dominance of top cities in trading volumes,

5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page17 Prof. Abdul Kadir Khan limited capital formation and higher costs per trade Today, India is experiencing rapid economic growth. If we want to share thisprosperity with a cross-section of our society, we must ensure that theownership of equity is spread as widely as possible” Regulatory Authorities should advocate certain macro\market level reformswhich will have a positive cascading effect on the retail investorsThese 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 encouragepeople beyond the top 10 centers to invest directly in equities,• increased indirect investor participation through mutual funds and long termretirement products such as the new pension scheme 2009 and• Targeting high net worth NRIs by facilitating account opening and introducingreforms to simplify profit repatriation.Investor awareness program held under the theme -

“Informed investoran asset to corporate India”,- Ministry of Corporate Affairs

5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page18 Prof. Abdul Kadir KhanVANISHING COMPANIES OF THE NINETIES:As per the Ministry of Corporate Affairs (MCA), Government of India, a company wouldbe 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 itcontinues to be a listed company);3. It is not maintaining its registered office at the address notified with the ROC /SE; and4. None of its Directors are traceable.Ministry of Corporate Affairs has clarified that all the conditions mentioned abovewould 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 asvanishing 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 wereidentified as vanishing companies. However, 117 companies have been traced outleaving the number of vanishing companies to 121. “FIRs have been filed in 112cases under the Indian Penal Code (IPC). SEBI has debarred 100 companies and 378directors under section 11B of the SEBI Act from entering capital market for a periodof five years. Interestingly enough, Satyam is not the only company based in Hyderabad to havesiphoned 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, ataround Rs 47 crore, it is not insignificant. Many ‘vanishing companies’ had raised money from the market during the capitalmarket boom period, and then simply vanished. By the corporate affairs ministry’sown admission, there are at least 115 vanishing companies, which have failed to fileany report on accounts with Sebi for the last two years. PC Gupta, the Union minister for corporate affairs, in a recent interaction withExpress staff, had stated that “we have identified almost 100 odd companies andprosecuted their directors and promoters, and some of them are behind bars”. However, there is another huge scandal from the 1990s, when thousands of crore ofrupees just vanished as thousands of plantation companies disappeared withinvestors’ money. These plantation companies, through glossy, high profileadvertisement campaigns and exaggerated profit projections, managed to attractgullible investors in large numbers. Most of the 7,983 plantation companies listed on the corporate affairs ministrywebsite have closed down while investors try to recover their hard-earned money.

5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page19 Prof. Unfortunately, by the time the government or regulators woke up to this huge fraudin late 1990s, almost all these companies had gone underground with the public’smoney. Meanwhile, the corporate affairs ministry website states that a coordinationand monitoring committee set up by corporate affairs ministry and Sebi for initiatingaction 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 theaction to be taken against companies doing the vanishing act, investors suffersilently. Some action needs to be taken against these firms which will be left untouched byall 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 anentity wants to enter the market, it makes its share available to common investors inform of an auction sale.Each application for an IPO has to be within a cut-off figure, which is eligible forallotment in the retail investors’ category. But in this case, financiers and market playersillegally 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 forthe first time. They are often issued by smaller, younger companies seeking capital toexpand, but can also be done by large privately-owned companies looking tobecome publicly traded.In an IPO the issuer may obtain the assistance of an underwriting firm, which helps itdetermine what type of security to issue (common or preferred), best offering price andtime to bring it to market.An IPO can be a risky investment. For the individual investor it is tough to predict whatthe stock or shares will do on its initial day of trading and in the near future since thereis 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 toadditional 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 invariablylook to issue additional new shares in order at the same time. The money paid by investors for the newly-issued shares goes directly to thecompany (in contrast to a later trade of shares on the exchange, where themoney passes between investors). An IPO, therefore, allows a company to tap a wide pool of stock market investorsto provide it with large volumes of capital for future growth. The company is never required to repay the capital, but instead the newshareholders have a right to future profits distributed by the company and theright to a capital distribution in case of dissolution. The existing shareholders will see their shareholdings diluted as a proportion ofthe company's shares. However, they hope that the capital investment will make their shareholdingsmore valuable in absolute terms. In addition, once a company is listed, it will be able to issue further shares viaa rights issue, thereby again providing itself with capital for expansion withoutincurring 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 keyincentive 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 bankloans, 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 acoterie of institutional investors and the general public to purchase the firm’sstock,3. It presents the IPO fact file and prospects to the investor community,

5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page21 Prof. Abdul Kadir Khan4. It determines the number and price of shares to be offered in the IPO, and5. It works out the aftermarket position, after observing the “quiet period.”When the Securities Exchange Board of India (Sebi) started scanning an entire spectrumof IPOs launched over 2003, 2004 and 2005, it ended digging up more dirt and probablyprevented a larger conspiracy to hijack the market.Here is a lowdown on the IPO scam:What is the scam?It involved manipulation of the primary market—read initial public offers (IPOs)—byfinanciers and market players by using fictitious or benaami demat accounts.While investigating the Yes Bank scam, Sebi found that certain entities had illegallyobtained IPO shares reserved for retail applicants through thousands of benaami demataccounts.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 listingprice.When was the scam detected?

The IPO scam came to light in 2005 when the private 'Yes Bank' launched its initial publicoffering. Roopalben Panchal, a resident of Ahmedabad, had allegedly opened severalfake demat accounts and subsequently raised finances on the shares allotted to herthrough Bharat Overseas Bank branches.The Sebi started a broad investigation into IPO allotments after it detected irregularitiesin the buying of shares of YES Bank’s IPO in 2005.What triggered the Sebi probe?On October 10, 2005 an Income Tax raid on businessman Purushottam Budhwaniaccidentally found he was controlling over 5,000 demat accounts. Sebi finds thissuspicious.On December 15, Sebi declared results of its probe, how a few people cornered a largechunk of YES Bank IPO shares.On January 11 this year, Sebi discovered huge rigging in the IDFC IPO.Roopalben Panchal was found to be controlling nearly 15,000 demat accounts.

5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page22 Prof. Abdul Kadir KhanIt was found that once they obtained these shares, the fictitious investors transferredthem to financiers.The financiers then sold these shares on the first day of listing, reaping huge profitsbetween the IPO price and the listing price. The Sebi report covered 105 IPOs from2003-2005.The Sebi probe covered several IPOs dating back to 2005, 2004 and 2003 to detectmisuse. These included the offerings of Jet Airways, Sasken Communications, SuzlonEnergy, 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 nextfew days.It also detected similar irregularities in the IDFC IPO, in which over 8 per cent of theallotment in the retail segment was cornered by fictitious applicants through multipledemat accounts.Who is Roopalben Panchal?Roopalben Panchal of IndiaBulls Securities is allegedly the mastermind of the scam.Finance Ministry officials are expected to act against her soon.How is this different from Harshad Mehta’s scam?The securities scam involved price manipulation in the secondary market, read stocks.Whereas in this case, the manipulation happened in the primary market—even beforethe shares (IPOs) entered the stocks market.This time, fraudsters targeted the primary market to make a quick buck at the expenseof the gullible small investors.Direct Participants (DPs) used retail applicants’ shares for reaping benefits in the stockmarket.How big is the scam?Apart from the YES Bank fraud, Sebi reportedly has definite data about two IPOs whereretail allotments were rigged, but market observers believe the scam is far bigger. TheYes Bank and IDFC cases are only a tip of an iceberg, say analysts.The Sebi probe has identified more operators and some market intermediaries involvedin the misuse of the initial allotment process in public offerings dating back to ’04-05.

5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page23 Prof. Abdul Kadir KhanThe Income-Tax Department in Ahmedabad has found that two major accused, Panchaland Sugandh Investments, have together made Rs 60.62 crore in 18 months.

ROLE OF DP’S:Suzlon Energy IPO: Rs 1,496.34 cr (September 23-29, 2005)Key operators used 21,692 fictitious accounts to corner 3,23,023 shares which is equalto 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 to0.52 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 percent of the total number of shares allotted to retail investors.Tata Consultancy Services IPO: Rs 4,713.47 crore14,619 'benami' accounts were used to corner 2,61,294 shares representing 2.09 percent of the total shares allotted to retail individual investors.Unit -3Entities governing the Securities Markets in India:Companies Act, 1956Securities Contracts Regulation ActSEBI ActDepositories ActInsurance Acts

5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page24 Prof. Abdul Kadir KhanSpecial Regulatory requirements of Derivative marketThe Indian Companies’ Act of 1956Companies 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 ofcontrolling and regulating every conceivable facet of the corporate sector. TheCompany’s Act 1956 was drafted retaining certain section of the earlier act. It was

incorporated as a whole new spectrum of legislation that would correspond toindependent India’s socialistic ideals and policy.The act consists of 13 parts and 14 schedules.The important provision pertaining to Indian capital market/financial market are givenbelow:-1. PART 3:-It is relevant to capital market. It relates to a company’s:

Issue of capital Issue of prospectus Allotment and other matter relating to the issue of shares and debentures.

Section 55 to 58 deals with this matter. These section stipulates thatmisstatements in prospectus is subject to civil liability in terms of compensation topersons 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 officersof company from evading any regulation and undertaking fraudulent activities. Section63 relates to the criminal liability for miss presentation in the prospectus. Section 68relates to penalty for fraudulently inducing person to invest money; this section alsodeals 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 ofits own shares by a company. Buyback of shares is legal and common practice inUSA. It is done to reward the share holders. The price paid is usually higher thanthe market rate which is given as an incentive to share holders. The companywants to bring down the paid up capital to reduce the dividend servicing theoutflow.2. Insider trading:-


Insiders are those who have an access to the confidential information of thecompany. BY virtue of the position occupied by them in the said company andthereby are in a position to manipulate the share prices to the own advantagewith a view to make windfall profits. The action caused wide fluctuations in theprices 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 ofdirectors of the company, regarding purchase and sale of security by anydirector, statutory auditor, cost auditor, financial accountant, cost accountant,tax and management consultant, advisor, solicitors and others who prove to beeffective in controlling such trading.3. Prospectus:-Prospectus serves as publicity for corporate enterprises to solicit publicsubscription of capital.The companies’ Act 1956 contains elaborated details of these documents. Theprospectus usually contains information relating to the proposed offer about thecompany. Separate prospectus should be drafted depending upon the issue.A regular prospectus contains;a) information about the capital structureb) terms of issuec) company management and project risk perceptiond) promotors contribution, Financial information, etc.The concept of abridged prospectus introduced by the company’s amended act1988, aims at making the public issue of shares of shares an inexpensivepreposition accordingly shares application form shall a company only a documentof brief version of the salient feature of the prospectus.4. Financial disclosure:-The company’s Act 1956 has a number of norms requiring information disclosureabout companies’ information on market which sound capital market structure is

built.The efficiency of market is greatly determined by the free flow of unbiased andreliable market information. Unfortunately, there is no dearth (shortage) ofmarket information but the quality of reliable information for the investors tomake right and timely decisions.5. PART 4:-It relates to the share capital and debentures with regard to type, number,certificate of shares, capital, etc.Section 116 : In this part provides for penalty for impersonation of share holders.

5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page26 Prof. Abdul Kadir KhanSECURITIES CONTRACTS (REGULATION) ACT, 1956The Securities Contracts (Regulation) Act, 1956 [SC(R)A] was enacted to preventundesirable transactions in securities by regulating the business of dealing therein andby 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 beingrecognized 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 beforecorporatization and demutualization under sections 4A and 4B, or(b) a body corporate incorporated under the Companies Act, 1956 (1 of 1956) whetherunder a scheme of corporatization and demutualization or otherwise, for the purpose ofassisting, 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 theinvestors in such schemes,(iv) Security receipts as defined in clause (g) of section 2 of the Securitization andReconstruction 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 fundscheme,

5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page27 Prof. Abdul Kadir Khan(vi) any certificate or instrument issued to an investor by any issuer being a specialpurpose distinct entity which possesses any debt or receivable, including mortgagedebt, assigned to such entity, and acknowledging beneficial interest of such investor insuch 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 besecurities, 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 underlyingsecurities;Section 18A provides that notwithstanding anything contained in any other law for thetime 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 withthe 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 whichprovides for-(a) actual delivery of securities and the payment of a price therefore either on the sameday as the date of the contract or on the next day, the actual period taken for thedispatch of the securities or the remittance of money therefore through the post beingexcluded from the computation of the period aforesaid if the parties to the contract donot reside in the same town or locality;

5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page28 Prof. Abdul Kadir Khan(b) transfer of the securities by the depository from the account of a beneficial owner tothe account of another beneficial owner when such securities are dealt with by adepository.The SC(R)A deals with1.stock exchanges, through a process of recognition and continued supervision,2. contracts & options in securities, and3. 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 becarried out without registration from SEBI. Any Stock Exchange which is desirous ofbeing recognized has to make an application under Section 3 of the Act to SEBI,which is empowered to grant recognition and prescribe conditions. This recognitioncan 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 corporatizationand demutualization of stock exchange. Under section 4A of the Act, SEBI bynotification in the official gazette may specify an appointed date on and from whichdate all recognized stock exchanges have to corporatize and demutualise their stockexchanges. Each of the Recognized stock exchanges which have not already beingcorporatized and demutualised by the appointed date are required to submit ascheme for corporatization and demutualization for SEBI’s approval. After receivingthe scheme SEBI may conduct such enquiry and obtain such information as be maybe required by it and after satisfying that the scheme is in the interest of the tradeand also in the public interest, SEBI may approve the scheme.

SEBI is authorized to call for periodical returns from the recognized Stock Exchangesand make enquiries in relation to their affairs. Every Stock Exchange is obliged tofurnish annual reports to SEBI. Recognized Stock Exchanges are allowed to makebylaws for the regulation and control of contracts but subject to the previousapproval of SEBI and SEBI has the power to amend the said bylaws.

The Central Government and SEBI have the power to supersede the governing bodyof any recognized stock exchange. The Central Government and SEBI also havepower to suspend the business of the recognized stock exchange to meet anyemergency as and when it arises, by notifying in the official gazette.Contracts and Options in Securities

5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page29 Prof. Abdul Kadir KhanOrganized trading activity in securities takes place on a recognized stock exchange. If theCentral 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, itmay, by notification in the Official Gazette, declare provisions of section 13 to apply tosuch State or States or area, and thereupon every contract in such State or States orarea which is entered into after date of the notification otherwise than betweenmembers of a recognized stock exchange or recognized in stock exchanges in such Stateor States or area or through or with such member shall be illegal. The effect of thisprovision clearly is that if a transaction in securities has to be validly entered into, such atransaction has to be either between the members of a recognized stock exchange orthrough a member of a Stock Exchange.Listing of SecuritiesWhere securities are listed on the application of any person in any recognized stockexchange, such person shall comply with the conditions of the listing agreement withthat stock exchange (Section 21). Where a recognized stock exchange acting inpursuance of any power given to it by its bye-laws, refuses to list the securities of anycompany, the company shall be entitled to be furnished with reasons for such refusaland the company may appeal to Securities Appellate Tribunal (SAT) against such refusal.Delisting of SecuritiesA recognized stock exchange may delist the securities of any listed companies on suchgrounds as are prescribed under the Act. Before delisting any company from itsexchange, the recognized stock exchange has to give the concerned company areasonable opportunity of being heard and has to record the reasons for delisting that

concerned company. The concerned company or any aggrieved investor may appeal toSAT against such delisting. (Section 21A)SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992Major part of the liberalization process was the repeal of the Capital Issues (Control)Act, 1947, in May 1992. With this, Government’s control over issues of capital, pricing ofthe issues, fixing of premia and rates of interest on debentures etc. ceased, and theoffice which administered the Act was abolished: the market was allowed to allocateresources to competing uses.However, to ensure effective regulation of the market, SEBI Act, 1992 was enacted toestablish SEBI with statutory powers for:(a) protecting the interests of investors in securities,(b) promoting the development of the securities market, and(c) regulating the securities market.

5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page30 Prof. Abdul Kadir KhanIts regulatory jurisdiction extends over companies listed on Stock Exchanges andcompanies intending to get their securities listed on any recognized stock exchange inthe issuance of securities and transfer of securities, in addition to all intermediaries andpersons associated with securities market. SEBI can specify the matters to be disclosedand the standards of disclosure required for the protection of investors in respect ofissues; can issue directions to all intermediaries and other persons associated with thesecurities market in the interest of investors or of orderly development of the securitiesmarket; and can conduct enquiries, audits and inspection of all concerned andadjudicate offences under the Act. In short, it has been given necessary autonomy and

authority to regulate and develop an orderly securities market. All the intermediariesand persons associated with securities market, viz., brokers and sub-brokers,underwriters, merchant bankers, bankers to the issue, share transfer agents andregistrars to the issue, depositories, Participants, portfolio managers, debenturestrustees, foreign institutional investors, custodians, venture capital funds, mutual funds,collective investments schemes, credit rating agencies, etc., shall be registered with SEBIand shall be governed by the SEBI Regulations pertaining to respective marketintermediary.Constitution of SEBIThe Central Government has constituted a Board by the name of SEBI under Section 3 ofSEBI Act. The head office of SEBI is in Mumbai. SEBI may establish offices at other placesin India.SEBI consists of the following members, namely:-(a) a Chairman;(b) two members from amongst the officials of the Ministry of the Central Governmentdealing with Finance and administration of Companies Act, 1956;(c) one member from amongst the officials of the Reserve Bank of India;(d) five other members of whom at least three shall be whole time members to be appointed by the Central Government.

5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page31 Prof. Abdul Kadir KhanThe general superintendence, direction and management of the affairs of SEBI vests in aBoard of Members, which exercises all powers and do all acts and things which may beexercised or done by SEBI.The Chairman also has powers of general superintendence and direction of the affairs ofthe 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 theCentral Government and the members referred to in (b) and (c) shall be nominated bythe Central Government and the Reserve Bank respectively.The Chairman and the other members are from amongst the persons of ability, integrityand standing who have shown capacity in dealing with problems relating to securitiesmarket or have special knowledge or experience of law, finance, economics,accountancy, administration or in any other discipline which, in the opinion of theCentral Government, shall be useful to SEBI.Functions of SEBISEBI has been obligated to protect the interests of the investors in securities and topromote and development of, and to regulate the securities market by such measuresas 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 transferagents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchantbankers, underwriters, portfolio managers, investment advisers and such otherintermediaries who may be associated with securities markets in any manner;

5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page32 Prof. Abdul Kadir Khan(c) registering and regulating the working of the depositories, participants, custodiansof securities, foreign institutional investors, credit rating agencies and such otherintermediaries 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 securitiesmarkets;(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 andaudits of the stock exchanges, mutual funds, other persons associated with thesecurities market, intermediaries and self- regulatory organizations in the securitiesmarket;(k) calling for information and record from any bank or any other authority or board orcorporation established or constituted by or under any Central, State or Provincial Actin respect of any transaction in securities which is under investigation or inquiry bythe 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, suchinformation as may be considered necessary by it for the efficient discharge of itsfunctions;(p) performing such other functions as may be prescribed.SEBI may, for the protection of investors,(a) specify, by regulations for

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

Page33 Prof. Abdul Kadir Khan(i) the matters relating to issue of capital, transfer of securities and other mattersincidental 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, oradvertisement soliciting money from the public for the issue of securities,(ii) specify the conditions subject to which the prospectus, such offer document oradvertisement, if not prohibited may be issued. (Section 11A).SEBI may issue directions to any person or class of persons referred to in section 12, orassociated with the securities market or to any company in respect of matters specifiedin section 11A. if it is in the interest of investors, or orderly development of securitiesmarket to prevent the affairs of any intermediary or other persons referred to in section12 being conducted in a manner detrimental to the interests of investors or securitiesmarket to secure the proper management of any such intermediary or person (Section11B).Registration of IntermediariesThe intermediaries and persons associated with securities market shall buy, sell or dealin securities after obtaining a certificate of registration from SEBI, as required by Section12:1) 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 or16) Collective investment schemes,17) Venture capital funds,

5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page34 Prof. Abdul Kadir Khan8) Underwriter,9) Portfolio manager,10) Investment adviser18) Mutual fund, and19) Any other intermediary associated with thesecurities market.THE DEPOSITORIES ACT, 1996The Depositories Act, 1996 was enacted to provide for regulation of depositories insecurities and for matters connected therewith or incidental thereto. It came into forcefrom 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 adepository.(2) "Depository" means a company, formed and registered under the Companies Act,1956 and which has been granted a certificate of registration under sub-section (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 12of the SEBI Act, 1992.(5) "Registered owner" means a depository whose name is entered as such in theregister of the issuer.Agreement between depository and participantA depository shall enter into an agreement in the specified format with one or moreparticipants as its agent.Services of depository

Any person, through a participant, may enter into an agreement, in such form as may bespecified by the bye-laws, with any depository for availing its services.Surrender of certificate of security

5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page35 Prof. Abdul Kadir KhanAny person who has entered into an agreement with a depository shall surrender thecertificate of security, for which he seeks to avail the services of a depository, to theissuer in such manner as may be specified by the regulations. The issuer, on receipt ofcertificate of security, shall cancel the certificate of security and substitute in its recordsthe name of the depositoryas 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 depositoryEvery depository shall, on receipt of intimation from a participant, register the transferof security in the name of the transferee. If a beneficial owner or a transferee of anysecurity seeks to have custody of such security, the depository shall inform the issueraccordingly.Options to receive security certificate or hold securities with depositoryEvery person subscribing to securities offered by an issuer shall have the option eitherto receive the security certificates or hold securities with a depository. Where a personopts to hold a security with a depository, the issuer shall intimate such depository thedetails of allotment of the security, and on receipt of such information the depositoryshall enter in its records the name of the allottee as the beneficial owner of that

security.Securities in depositories to be in fungible formAll securities held by a depository shall be dematerialized and shall be in a fungibleform.Rights of depositories and beneficial ownerA depository shall be deemed to be the registered owner for the purposes of effectingtransfer of ownership of security on behalf of a beneficial owner. The depository as aregistered owner shall not have any voting rights or any other rights in respect ofsecurities held by it. The beneficial owner shall be entitled to all the rights and benefitsand be subjected to all the liabilities in respect of his securities held by a depository.


Pledge or hypothecation of securities held in a depositoryA beneficial owner may with the previous approval of the depository create a pledge orhypothecation in respect of a security owned by him through a depository. Everybeneficial owner shall give intimation of such pledge or hypothecation to the depositoryand such depository shall thereupon make entries in its records accordingly. Any entryin the records of a depository under Section 12 (2) shall be evidence of a pledge orhypothecation.Furnishing of information and records by depository and issuerEvery depository shall furnish to the issuer information about the transfer of securitiesin the name of beneficial owners at such intervals and in such manner as may bespecified by the bye-laws. Every issuer shall make available to the depository copies ofthe relevant records in respect of securities held by such depository.

Option to opt out in respect of any securityIf a beneficial owner seeks to opt out of a depository in respect of any security he shallinform the depository accordingly. The depository shall on receipt of intimation makeappropriate entries in its records and shall inform the issuer. Every issuer shall, withinthirty days of the receipt of intimation from the depository and on fulfillment of suchconditions and on payment of such fees as may be specified by the regulations, issue thecertificate of securities to the beneficial owner or the transferee, as the case may be.Depository to indemnify loss in certain casesAny loss caused to the beneficial owner due to the negligence of the depository or theparticipant, the depository shall indemnify such beneficial owner. Where the loss due tothe negligence of the participant is indemnified by the depository, the depository shallhave the right to recover the same from such participant.Securities not liable to stamp dutyAs per Section 8-A of Indian Stamp Act, 1899:

5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page37 Prof. Abdul Kadir Khana) an issuer, by the issue of securities to one or more depositories shall, in respect ofsuch issue, be chargeable with duty on the total amount of security issued by it and suchsecurities need not be stamped;b) where an issuer issues certificate of security under sub-section (3) of Section 14 ofthe Depositories Act, 1996, on such certificate duty shall be payable as is payable on theissue of duplicate certificate under the Indian Stamp Act, 1899;c) transfer of registered ownership of securities from a person to a depository or from adepository 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 depositoryshall 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 fundincluding units of the Unit Trust of India, dealt with by a depository shall not be liable toduty under Article 62 of Schedule I of the Indian Stamp Act, 1899;

INSURANCE ACTS IN INDIAThe insurance sector went through a full circle of phases from being unregulated tocompletely regulated and then currently being partly deregulated. It is governed by anumber of acts.The Insurance Act of 1938 was the first legislation governing all forms of insurance toprovide strict state control over insurance business.Life insurance in India was completely nationalized on January 19, 1956, through the LifeInsurance Corporation Act. All 245 insurance companies operating then in the countrywere merged into one entity, the Life Insurance Corporation of India.The General Insurance Business Act of 1972 was enacted to nationalize the about 100general insurance companies then and subsequently merging them into four companies.All the companies were amalgamated into National Insurance, New India Assurance,

5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page38 Prof. Abdul Kadir KhanOriental Insurance and United India Insurance, which were headquartered in each of thefour 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 theIndian insurance companies.In 2006, the Actuaries Act was passed by parliament to give the profession statutorystatus on par with Chartered Accountants, Notaries, Cost & Works Accountants,Advocates, Architects & Company Secretaries.Unit -4Regulatory BodiesDepartment of Company AffairsDepartment of Economic AffairsSEBIForward Market CommissionRBIIRDANeed for Self RegulationSEBISecurities & Exchange Board of India (SEBI) is the regulator for the securities market inIndia. It was formed officially by the Government of India in 1992 with SEBI Act 1992being passed by the Indian Parliament. Chaired by C B Bhave.

5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page39 Prof. Abdul Kadir KhanPREAMBLEThe Preamble of the Securities and Exchange Board of India describes the basicfunctions of the Securities and Exchange Board of India as –“…..to protect the interests of investors in securities and to promote thedevelopment of, and to regulate the securities market and for matters connectedtherewith 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, quasi-judicial and quasiexecutive.It drafts regulations in its legislative capacity, it conducts investigation andenforcement action in its executive function and it passes rulings and orders in itsjudicial capacity. Though this makes it very powerful, there is an appeals process tocreate accountability. There is a Securities Appellate Tribunal which is a three-membertribunal and is presently headed by a former Chief Justice of a High court - Mr. JusticeNK Sodhi. A second appeal lies directly to the Supreme Court.SEBI has enjoyed success as a regulator by pushing systemic reforms aggressively andsuccessively (e.g. the quick movement towards making the markets electronic andpaperless rolling settlement on T+2 basis). SEBI has been active in setting up theregulations as required under law.SEBI has also been instrumental in taking quick and effective steps in light of the globalmeltdown and the Satyam fiasco. It had increased the extent and quantity of disclosuresto be made by Indian corporate promoters. More recently, in light of the globalmeltdown, it liberalized the takeover code to facilitate investments by removingregulatory strictures.Securities Market Awareness Campaign (SMAC) by SEBI:The Securities and Exchange Board of India (SEBI) has been mandated to protect theinterests of investors in securities and to promote the development and to regulate the

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

Page40 Prof. Abdul Kadir Khansecurities market so as to establish a dynamic and efficient Securities Marketcontributing to Indian Economy.SEBI strongly believes that investors are the backbone of the securities market. They notonly determine the level of activity in the securities market but also the level of activityin the economy.However, many investors may not possess adequate expertise/knowledge to takeinformed investment decisions. Some of them may not be aware of the complete riskreturnprofile of the different investment options. Some investors may not be fullyaware of the precautions they should take while dealing with market intermediaries anddealing in different securities. They may not be familiar with the market mechanism andthe practices as well as their rights and obligations.In this backdrop, SEBI launched a comprehensive education campaign aimed at creatingawareness among investors about securities market, which has been christened –“Securities Market Awareness Campaign” (SMAC). The motto of the campaign is – ‘AnEducated Investor is a Protected Investor.’ The campaign was launched at the nationallevel by the then Prime Minister, Shri Atal Bihari Vajpayee, on January 17, 2003.Thenational launch was closely followed by launches in 12 states.The structural foundation of the campaign is based on workshops that are beingconducted all across the country with the continued and active participation of marketparticipants, market intermediaries, Investors Associations etc., to spread SEBI’smessage of “Invest With Knowledge”.The Multi-Pronged approach by SMAC:1. Workshops2. Advertisements3. Educative Material

4. Website dedicated to Investor Education5. All India Radio6. Cautionary Message on Television1. WorkshopsThe workshops are aimed at reaching out to the common investors and are being heldprimarily in small and medium towns and cities all over the country. At theseworkshops, the aim is to acclimatize the investors with the functioning of the securitiesmarket, the basic fundamentals of investment and risk management and their rights and5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page41 Prof. Abdul Kadir Khanresponsibilities. 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/townsacross the country.2. AdvertisementsSEBI has prepared simple “dos and don’ts” for investors relating to various aspects ofthe securities market. While these simple messages have been put on the investorwebsite and have been printed in the form of leaflets to be distributed across thecountry, it was felt that these messages could be spread across the investor base by wayof advertisements in newspapers, especially in the regional newspapers.Till date, over 700 advertisements relating to various aspects of Securities Market haveappeared in 48 different newspapers/ magazines, covering approximately 111 cities and9 regional languages, apart from English and Hindi.3. Educative MaterialSEBI has prepared a standardized reading material and presentation material for theworkshops. In addition, reference guides on topics concerning investors have also been

prepared.The reference guides/booklets have been translated into Hindi and the workshopmaterial has been translated into 10 major regional languages. You can read thematerial translated into regional languages on-line or download it in the language ofyour choice.4. Website dedicated to Investor EducationWith a view to make information relevant to the investor available at one place, thisdedicated 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 toyour specified email address and you will be issued a complaint registration numberinstantaneously.5. All India RadioWith regard to educating investors through the medium of radio, SEBI Officials regularlyparticipate in programmes aired by All India Radio6. Cautionary Message on TelevisionWith a view to use the electronic media to reach out to a larger number of investors, ashort cautionary message, in the form of a 40 seconds filmlet, has been prepared andthe same is being aired on television.

5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page42 Prof. Abdul Kadir KhanIRDA (Insurance Regulatory and Development Authority)Insurance Regulatory and Development Authority (IRDA) was setup under section 4 ofIRDA 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. Theyare 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 growthof 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 assigningof policy, nomination by policy holders, insurable interest, settlement ofinsurance claim, surrender value of policy and other terms and conditions ofcontracts of insurance;(c) Specifying requisite qualifications, code of conduct and practical training forintermediary 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 theinsurance 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 andinvestigations including audit of the insurers, intermediaries, insuranceintermediaries and other organizations connected with the insurance business;

5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page43 Prof. Abdul Kadir Khan(i) Control and regulation of the rates, advantages, terms and conditions that may

be offered by insurers in respect of general insurance business not so controlledand regulated by the Tariff Advisory Committee under section 64U of theInsurance Act, 1938 (4 of 1938);(j) Specifying the form and manner in which books of account shall be maintainedand statement of accounts shall be rendered by insurers and other insuranceintermediaries;(k) Regulating investment of funds by insurance companies;(l) Regulating maintenance of margin of solvency;(m) Adjudication of disputes between insurers and intermediaries or insuranceintermediaries.(n) Supervising the functioning of the Tariff Advisory Committee;(o) Specifying the percentage of premium income of the insurer to financeschemes for promoting andregulating professional organizations referred to in clause (f);(p) Specifying the percentage of life insurance business and general insurancebusiness to be undertaken by the insurer in the rural or social sector.(q) Exercising such other powers as may be prescribedDepartment of Economic Affairs (DEA)Department of Economic Affairs (DEA) is the nodal agency of the Union Government toformulate and monitor country's economic policies and programmes having a bearingon domestic and international aspects of economic management. Department ofEconomic 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 macrolevel that is connected with the Capital Market inclusive of Stock Exchange

It manages both the internal and external aspects of the economic policiesand programmes of the country

The department prepares the Union Budget on a yearly basis exclusive of theRailway Budget system

It also lifts up external resources of the country's economy with the help of

multilateral and bilateral official development assistance along with

5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page44 Prof. Abdul Kadir Khancommercial 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'seconomy with the help of market borrowings, taxation, gathering of smallsavings, and ordinance of money supply system

It plays a cardinal role in manufacturing bank notes and coins available invaried denominations

It also makes available the postal stationery, postal stamps, and many more

The department of economic affairs takes substantial interest in cadremanagement, career planning and training of the Indian Economic Service(IES)

It is highly responsible for the disbursement of loans as well debt servicing ofthe loansUnits working under the Department of Economic Affairs are:

Administrative DivisionAll administrative and establishment matters, including protocol, andimplementation of Official Language Policy fall within the domain of this Division.

Bilateral Cooperation DivisionBC Division deals with Bilateral Development Assistance from all G-8 countries.One of the main functions of the Division is to extend concessional Lines ofCredit to other developing countries. It also monitors the progress ofimplementation of Externally Aided Projects and administers all short termforeign training programmes.

Budget DivisionApart from preparation of Union Budget and other allied issues like marketborrowings, accounting and auditing procedures and financial relationship withthe State Governments. This Division also deals with mobilization of smallsavings through the National Savings Institute (NSI).

Capital Market DivisionIt is primarily responsible for policy issues related to development of the

securities markets (i.e. share, debt and derivatives), External CommercialBorrowing and administration of Foreign Exchange Management Act (FEMA),1999. It also looks after the administrative matters of the Specified Undertakingof Unit Trust of India (SUUTI), the Securities and Exchange Board of India (SEBI),Securities Appellate Tribunal (SAT) and Pensions Funds Regulation andDevelopment Authority (PFRDA).

Economic Division

5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page45 Prof. Abdul Kadir KhanIt tenders economic advice to the Government on important policy issuesrelating to macro management of the economy.

Finance DivisionThe Finance Division is responsible for tendering of financial advice on allmatters involving government expenditure of the Department of EconomicAffairs and the Department of Financial Services. The Division is also responsiblefor preparation of the Budget and administering the Detailed Demands forGrants in respect of these Departments. Coordination, compilation and printingof the Detailed Demands for Grants and the Outcome Budget of the Ministry ofFinance is also handled by this Division.

Multilateral Relations DivisionWith a view to provide focused and outcome oriented engagement withmultilateral organizations and Trade Related issues, Multilateral RelationsDivision has been created recently by merging Sections from Foreign TradeDivision and Fund Bank Division specifically dealing with related issues. The MRDivision comprises five sections namely, MR-I Section has been assigned the jobof 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 Sectionadvises 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 ofand consequent to implementation of Foreign Trade Policy.

Infrastructure DivisionSectoral responsibilities of infrastructure, including Railways,Telecommunications, Roads, Ports, Shipping, Civil Aaviation, Power, Coal, Non-Conventional Energy Resources and Inland Water Transport (IWT) are handledhere.

Aid, Accounts and Audit DivisionThis Division is responsible for disbursement of loans and grants frommultilateral/ bilateral donor agencies, debt servicing of loans to multilateral/bilateral donors, accounting of external assistance, export promotion audit andsupply of management information to credit Divisions.

Multilateral Institutions DivisionMatters 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 GuaranteeAgency (MIGA) are the concern of this Division.

5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page46 Prof. Abdul Kadir KhanDepartment of Company Affairs (DCA)The Department of Company Affairs, mainly administers the Companies Act, 1956 andthe Monopolies and Restrictive Trade Practices Act, 1969. Besides it also administers

The Chartered Accountants Act, 1949, The Cost and Works Accountants Act, 1959 andThe Company Secretaries Act, 1980.The Department has a three tier organizational set-up; namely, the Secretariat at NewDelhi, the Offices of Regional Directors at Mumbai, Calcutta, Chennai and Kanpur andthose of the Registrars of Companies in States and Union Territories and OfficialLiquidators attached to each of the High Courts functioning in the country. Theorganization at the Headquarters also includes two Directors of Inspection andInvestigation with a complement of staff, a Director of Research and Statistics and otherOfficials providing expertise on legal, accounting, economic and statistical matters.The four Regional Directors who are in charge of the respective Regions comprising anumber of States and Union Territories supervise the working of the Offices of theRegistrars of Companies and the Official Liquidators working in their regions. Certainpowers of the Central Government under the Act have been delegated to the RegionalDirectors to be exercised by them in their respective regions. They have also beendeclared as Heads of the Department and have accordingly been entrusted withappropriate administrative and financial powers. An Inspection Unit is attached to theoffice of every Regional Director for carrying out inspection of the book of accounts ofcompanies under section 209A of the Act.Registrars of Companies appointed under Section 609 of the Companies Act, coveringthe various States and Union Territories, are vested with the primary duty of registeringcompanies in the respective States and the Union Territories and ensuring that such

companies comply with the statutory requirements under the Act. Their offices functionas registry of records relating to the companies registered with them.The Official Liquidators are officers appointed by the Central Government under Section448 of the Companies Act and are attached to the various High Courts. The OfficialLiquidators are under the administrative charge of the respective Regional Directorswho supervise their functioning on behalf of the Central Government. In the conduct ofthe winding up of the companies, however, Official Liquidators act under the directionsof the High Courts.

Company Law Board5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page47 Prof. Abdul Kadir KhanThe Central Government constituted an independent Company Law Board videNotification Sl.No. 364 dated the 31st May, 1991. The Board is a quasi-judicial bodywhich exercises some of the judicial and quasi-judicial powers which were earlier beingexercised by the High Court or the Central Government. The Board is not subject to thecontrol of the Central Government and has the powers to regulate its own procedureand act in its own discretion. The Board has its Headquarter at Delhi and four RegionalBenches located at Delhi, Mumbai, Calcutta and Chennai.The Monopolies and Restrictive Trade Practices CommissionAn important organ of the Department of Company Affairs is the Monopolies andRestrictive Trade Practices Commission (MRTP Commission) a quasi-judicial body. TheMRTP Commission established under Section 5 of the Monopolies and Restrictive TradePractices 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 inrespect of unfair trade practices and restrictive trade practices. In regard tomonopolistic trade practices the Commission is empowered to inquire into suchpractices(i) Upon a reference made to it by the Central Government or(ii) Upon its own knowledge or information and submit its findings to CentralGovernment for further action.Director General of Investigation and RegistrationThe Director General of Investigation and Registration, who functions in terms ofSection 8 of the MRTP Act, makes investigations for the purpose of the Act, formaintaining a register of agreements subject to registration under the Act and also forperforming 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 andcommenced business on April 1, 1935 with a share capital of Rs. 5 crores on the basis ofthe recommendations of the Hilton Young Commission. It is the central bank of ourcountry. The share capital was divided into shares of Rs. 100 each fully paid which wasentirely owned by private shareholders in the beginning. The Government held sharesof nominal value of Rs. 2,20,000. Reserve Bank of India was nationalized in the year1949.The Central Board of Directors is the main committee of the central bank and has notmore 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

localBoards with the headquarters at Mumbai, Kolkata, Chennai and New Delhi

10 nominated Directors by the Government to give representation to importantelements in the economic life of the countryFunctions of Reserve Bank of IndiaThe Reserve Bank of India Act of 1934 entrust all the important functions of a centralbank the Reserve Bank of India. They are divided into 2 categories namely, monetaryand 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 issuebank notes of all denominations. The distribution of one rupee notes and coins andsmall coins all over the country is undertaken by the Reserve Bank as agent of theGovernment. The Reserve Bank has a separate Issue Department which is entrustedwith the issue of currency notes. The assets and liabilities of the Issue Department arekept separate from those of the Banking Department. Originally, the assets of the IssueDepartment were to consist of not less than two-fifths of gold coin, gold bullion orsterling 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 ofIndia 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 requiredto 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 minimumreserve system.Banker to Government:The second important function of the Reserve Bank of India is to act as Governmentbanker, agent and adviser. The Reserve Bank is agent of Central Government and of allState Governments in India excepting that of Jammu and Kashmir. The Reserve Bank hasthe obligation to transact Government business, via. to keep the cash balances asdeposits free of interest, to receive and to make payments on behalf of the Governmentand to carry out their exchange remittances and other banking operations. The Reserve

5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page49 Prof. Abdul Kadir KhanBank of India helps the Government - both the Union and the States to float new loansand to manage public debt. The Bank makes ways and means advances to theGovernments for 90 days. It makes loans and advances to the States and localauthorities. It acts as adviser to the Government on all monetary and banking matters.Bankers' Bank and Lender of the Last ResortThe Reserve Bank of India acts as the bankers' bank. According to the provisions of theBanking Companies Act of 1949, every scheduled bank was required to maintain withthe Reserve Bank a cash balance equivalent to 5% of its demand liabilites and 2 per centof 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 cashreserves equal to 3 per cent of their aggregate deposit liabilities. The minimum cashrequirements can be changed by the Reserve Bank of India.The scheduled banks can borrow from the Reserve Bank of India on the basis of eligiblesecurities or get financial accommodation in times of need or stringency byrediscounting bills of exchange. Since commercial banks can always expect the ReserveBank of India to come to their help in times of banking crisis the Reserve Bank becomesnot 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 thevolume of credit created by banks in India. It can do so through changing the Bank rateor 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 notto lend to particular groups or persons on the basis of certain types of securities. Since1956, 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 moneymarket. Every bank has to get a license from the Reserve Bank of India to do bankingbusiness within India, the license can be cancelled by the Reserve Bank of certainstipulated conditions are not fulfilled. Every bank will have to get the permission of theReserve Bank before it can open a new branch. Each scheduled bank must send aweekly return to the Reserve Bank showing, in detail, its assets and liabilities. Thispower 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 anycommercial bank.As supreme banking authority in the country, the Reserve Bank of India, therefore, hasthe following powers:(a) It holds the cash reserves of all the scheduled banks.

5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page50 Prof. Abdul Kadir Khan(b) It controls the credit operations of banks through quantitative and qualitativecontrols.(c) It controls the banking system through the system of licensing, inspection andcalling for information.(d) It acts as the lender of the last resort by providing rediscount facilities to scheduledbanks.Custodian of Foreign Reserves:The Reserve Bank of India has the responsibility to maintain the official rate ofexchange. According to the Reserve Bank of India Act of 1934, the Bank was required tobuy and sell at fixed rates any amount of sterling in lots of not less than Rs. 10,000. AfterIndia became a member of the International Monetary Fund in 1946, the Reserve Bankhas the responsibility of maintaining fixed exchange rates with all other membercountries of the I.M.F.Besides maintaining the rate of exchange of the rupee, the Reserve Bank has to act asthe custodian of India's reserve of international currencies. The vast sterling balanceswere acquired and managed by the Bank. Further, the RBI has the responsibility ofadministering the exchange controls of the country.Non-Monetary FunctionsSupervisory functions:

In addition to its traditional central banking functions, the Reserve bank has certain nonmonetaryfunctions of the nature of supervision of banks and promotion of soundbanking in India. The Reserve Bank Act, 1934, and the Banking Regulation Act, 1949have given the RBI wide powers of supervision and control over commercial and cooperativebanks, relating to licensing and establishments, branch expansion, liquidity oftheir assets, management and methods of working, amalgamation, reconstruction, andliquidation. The RBI is authorized to carry out periodical inspections of the banks and tocall for returns and necessary information from them. The nationalization of 14 majorIndian scheduled banks in July 1969 has imposed new responsibilities on the RBI fordirecting the growth of banking and credit policies towards more rapid development ofthe economy and realization of certain desired social objectives. The supervisoryfunctions of the RBI have helped a great deal in improving the standard of banking inIndia to develop on sound lines and to improve the methods of their operation.Promotional functions:

5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page51 Prof. Abdul Kadir KhanWith economic growth assuming a new urgency since Independence, the range of theReserve Bank's functions has steadily widened. The Bank now performs a variety ofdevelopmental and promotional functions, which, at one time, were regarded asoutside the normal scope of central banking. The Reserve Bank was asked to promotebanking habit, extend banking facilities to rural and semi-urban areas, and establish and

promote new specialized financing agencies. Accordingly, the Reserve Bank has helpedin the setting up of the IFCI and the SFC; it set up the Deposit Insurance Corporation in1962, the Unit Trust of India in 1964, the Industrial Development Bank of India also in1964, the Agricultural Refinance Corporation of India in 1963 and the IndustrialReconstruction Corporation of India in 1972. These institutions were set up directly orindirectly by the Reserve Bank to promote saving habit and to mobilize savings, and toprovide industrial finance as well as agricultural finance. As far back as 1935, theReserve Bank of India set up the Agricultural Credit Department to provide agriculturalcredit. 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, toeliminate moneylenders from the villages and to route its short term credit toagriculture. The RBI has set up the Agricultural Refinance and Development Corporationto provide long-term finance to farmers.Forward Market Commission (FMC)Forward Markets Commission is a regulatory body for commodity futures/ forwardtrade in India. This was set up under the Forward Contracts (Regulation) Act of 1952. Itis responsible for regulating and promoting futures/ forward trade in commodities. TheForward Markets Commission's Head Quarter is located at Mumbai and Regional Officeat Kolkata.The commission can have a minimum of 2 and a maximum of 4 members appointed bythe 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 directThe members can hold their office for a maximum period of 3 years from the date ofappointment and a member relinquishing his office on the expiry of his term shall beeligible for re-appointment.Functions of the Commission:The functions of the Commission are:

5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page52 Prof. Abdul Kadir Khanb. To advise the Central Government in respect of the recognition of or thewithdrawal of recognition from any association or in respect of any other matterarising out of the administration of this Act.c. To keep forward markets under observation and to take such action in relation tothem as it may consider necessary, in exercise of the powers assigned to it by orunder this Act.d. To collect and whenever the Commission thinks it necessary publish informationregarding the trading conditions in respect of goods to which any of the provisionsof this Act is made applicable, including information regarding supply, demand andprices, and to submit to the Central Government periodical reports on theoperation of this Act and on the working of forward markets relating to suchgoods.e. To make recommendations generally with a view to improving the organizationand working of forward markets.f. To undertake the inspection of the accounts and other documents of anyrecognized association or registered association or any member of suchassociation whenever it considers it necessary.g. To perform such other duties and exercise such other powers as may be assignedto 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 acivil court under the Code of Civil Procedure, 1908, while trying a suit in respect of thefollowing matters, namely:(a) Summoning and enforcing the attendance of any person and examining him on oath;(b) Requiring the discovery and production of any document;(c) Receiving evidence on affidavits;(d) Requisitioning any public record or copy thereof from any office;(e) Any other matters which may be prescribed.5.2-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page53 Prof. Abdul Kadir Khan(2) The Commission shall have the power to require any person to furnish informationon any matters which may be useful for, or relevant to any matter under theconsideration of the Commission and any person so required shall be deemed to belegally bound to furnish such information within the meaning of Sec. 176 of the IndianPenal code, 1860.================================X================================

Documents

42591827 Regulation of Security Markets