Financial Regulatory Bodies In India

The financial system in India is regulated by independent regulators in the field of banking, insurance, capital market, commodities market, and pension funds.   However, Government of India plays a significant role in controlling the financial system in India and influences the roles of such regulators at least to some extent.

The following are five major financial regulatory bodies in India:- (We have given links for these bodies.  For more details about these you can click and visit such websites)

(A) Statutory Bodies via parliamentary enactments:

1. Reserve Bank of India :  Reserve Bank of India is the apex monetary Institution of India. It is also called as the central bank of the country. 
   
   
   The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. The Central Office of the Reserve Bank was initially established in Calcutta but was permanently moved to Mumbai in 1937. The Central Office is where the Governor sits and where policies are formulated.   Though originally privately owned, since nationalization in 1949, the Reserve Bank is fully owned by the Government of India. 
   
   
   
   
   It acts as the apex monetary authority of the country. The Central Office is where the Governor sits and is where policies are formulated. Though originally privately owned, since nationalization in 1949, the Reserve Bank is fully owned by the Government of India.    The preamble of the reserve bank of India is as follows:
    "...to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage."   
       
     
    
2. Securities and Exchange Board of India  :  SEBI Act, 1992 : Securities and Exchange Board of India (SEBI) was first established in the year 1988 as a non-statutory body for regulating the securities market. It became an autonomous body in 1992 and more powers were given through an ordinance. Since then it regulates the market through its independent powers.
    
3. Insurance Regulatory and Development Authority : The Insurance Regulatory and Development Authority (IRDA) is a national agency of the Government of India and is  based in Hyderabad (Andhra Pradesh).  It was formed by an Act of Indian Parliament known as IRDA Act 1999, which was amended in 2002 to incorporate some emerging requirements. Mission of IRDA as stated in the act is "to protect the interests of the policyholders, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto."

(B) Part of the Ministries of the Government of India :

       4. Forward Market Commission India (FMC) : Forward Markets Commission (FMC) headquartered at Mumbai, is a regulatory authority which is overseen by the Ministry of Consumer Affairs, Food and Public Distribution, Govt. of India. It is a statutory body set up in 1953 under the Forward Contracts (Regulation) Act, 1952  This Commission allows commodity trading in 22 exchanges in India, out of which three are national level. 

      5.  PFRDA under the Finance Ministry :  Pension Fund Regulatory and Development Aulthority  : PFRDA was established by Government of India on 23rd August, 2003.  The Government has, through an executive order dated 10th October 2003, mandated PFRDA to act as a regulator for the pension sector. The mandate of PFRDA is development and regulation of pension sector in India.

Regulations in India

Indian Capital Markets are regulated and monitored by the Ministry of Finance, The Securities and Exchange Board of India and The Reserve Bank of India.

The Ministry of Finance regulates through the Department of Economic Affairs - Capital Markets Division. The division is responsible for formulating the policies related to the orderly growth and development of the securities markets (i.e. share, debt and derivatives) as well as protecting the interest of the investors. In particular, it is responsible for

• institutional reforms in the securities markets,
• building regulatory and market institutions,
• strengthening investor protection mechanism, and
• providing efficient legislative framework for securities markets.

The Division administers legislations and rules made under the

• Depositories Act, 1996,
• Securities Contracts (Regulation) Act, 1956 and
• Securities and Exchange Board of India Act, 1992.

The Regulators

Securities & Exchange Board of India (SEBI)

The Securities and Exchange Board of India (SEBI) is the regulatory authority established under the SEBI Act 1992 and is the principal regulator for Stock Exchanges in India. SEBI’s primary functions include protecting investor interests, promoting and regulating the Indian securities markets. All financial intermediaries permitted by their respective regulators to participate in the Indian securities markets are governed by SEBI regulations, whether domestic or foreign. Foreign Portfolio Investors are required to register with DDPs in order to participate in the Indian securities markets.

More Information on : www.sebi.gov.in

 

Reserve Bank of India (RBI)

The Reserve Bank of India (RBI) is governed by the Reserve Bank of India Act, 1934. The RBI is responsible for implementing monetary and credit policies, issuing currency notes, being banker to the government, regulator of the banking system, manager of foreign exchange, and regulator of payment & settlement systems while continuously working towards the development of Indian financial markets. The RBI regulates financial markets and systems through different legislations. It regulates the foreign exchange markets through the Foreign Exchange Management Act, 1999.

More Information on : www.rbi.gov.in

 

National Stock Exchange (NSE) – Rules and Regulations

In the role of a securities market participant, NSE is required to set out and implement rules and regulations to govern the securities market. These rules and regulations extend to member registration, securities listing, transaction monitoring, compliance by members to SEBI / RBI regulations, investor protection etc. NSE has a set of Rules and Regulations specifically applicable to each of its trading segments. NSE as an entity regulated by SEBI undergoes regular inspections by them to ensure compliance.

An Overview of Indian Financial System

By: D. Aruna Kumar Assistant Professor (Finance & Accounting Area) Lokamanya Tilak P G College of Management Ibrahimpatnam, Hyderabad-501 506 E-mail: dakumars@yahoo.com

Financial System of any country consists of financial markets, financial intermediation and financial instruments or financial products. This paper discusses the meaning of finance and Indian Financial System and focus on the financial markets, financial intermediaries and financial instruments. The brief review on various money market instruments are also covered in this study.

The term "finance" in our simple understanding it is perceived as equivalent to 'Money'. We read about Money and banking in Economics, about Monetary Theory and Practice and about "Public Finance". But finance exactly is not money, it is the source of providing funds for a particular activity. Thus public finance does not mean the money with the Government, but it refers to sources of raising revenue for the activities and functions of a Government. Here some of the definitions of the word 'finance', both as a source and as an activity i.e. as a noun and a verb. The American Heritage® Dictionary of the English Language, Fourth Edition defines the term as under- 1:"The science of the management of money and other assets."; 2: "The management of money, banking, investments, and credit. "; 3: "finances Monetary resources; funds, especially those of a government or corporate body" 4: "The supplying of funds or capital." Finance as a function (i.e. verb) is defined by the same dictionary as under- 1:"To provide or raise the funds or capital for": financed a new car 2: "To supply funds to": financing a daughter through law school. 3: "To furnish credit to". Another English Dictionary, "WordNet ® 1.6, © 1997Princeton University " defines the term as under- 1:"the commercial activity of providing funds and capital" 2: "the branch of economics that studies the management of money and other assets" 3: "the management of money and credit and banking and investments" The same dictionary also defines the term as a function in similar words as under- 1: "obtain or provide money for;" " Can we finance the addition to our home?" 2:"sell or provide on credit " All definitions listed above refer to finance as a source of funding an activity. In this respect providing or securing finance by itself is a distinct activity or function, which results in Financial Management, Financial Services and Financial Institutions. Finance therefore represents the resources by way funds needed for a particular activity. We thus speak of 'finance' only in relation to a proposed activity. Finance goes with commerce, business, banking etc. Finance is also referred to as "Funds" or "Capital", when referring to the financial needs of a corporate body. When we study finance as a subject for generalising its profile and attributes, we distinguish between 'personal finance" and "corporate finance" i.e. resources needed personally by an individual for his family and individual needs and resources needed by a business organization to carry on its functions intended for the achievement of its corporate goals. INDIAN FINANCIAL SYSTEM  The economic development of a nation is reflected by the progress of the various economic units, broadly classified into corporate sector, government and household sector.  While performing their activities these units will be placed in a surplus/deficit/balanced budgetary situations. There are areas or people with surplus funds and there are those with a deficit.  A financial system or financial sector functions as an intermediary and facilitates the flow of funds from the areas of surplus to the areas of deficit.  A Financial System is a composition of various institutions, markets, regulations and laws, practices, money manager, analysts, transactions and claims and liabilities. Financial System; The word "system", in the term "financial system", implies a set of complex and closely connected or interlined institutions, agents, practices, markets, transactions, claims, and liabilities in the economy.  The financial system is concerned about money, credit and finance-the three terms are intimately related yet are somewhat different from each other. Indian financial system consists of financial market, financial instruments and financial intermediation. These are briefly discussed below; FINANCIAL MARKETS A Financial Market can be defined as the market in which financial assets are created or transferred. As against a real transaction that involves exchange of money for real goods or services, a financial transaction involves creation or transfer of a financial asset. Financial Assets or Financial Instruments represents a claim to the payment of a sum of money sometime in the future and /or periodic payment in the form of interest or dividend. Money Market- The money market ifs a wholesale debt market for low-risk, highly-liquid, short-term instrument.  Funds are available in this market for periods ranging from a single day up to a year.  This market is dominated mostly by government, banks and financial institutions. Capital Market -  The capital market is designed to finance the long-term investments.  The transactions taking place in this market will be for periods over a year. Forex Market - The Forex market deals with the multicurrency requirements, which are met by the exchange of currencies.  Depending on the exchange rate that is applicable, the transfer of funds takes place in this market.  This is one of the most developed and integrated market across the globe. Credit Market- Credit market is a place where banks, FIs and NBFCs purvey short, medium and long-term loans to corporate and individuals. Constituents of a Financial System FINANCIAL INTERMEDIATION Having designed the instrument, the issuer should then ensure that these financial assets reach the ultimate investor in order to garner the requisite amount.  When the borrower of funds approaches the financial market to raise funds, mere issue of securities will not suffice.  Adequate information of the issue, issuer and the security should be passed on to take place.  There should be a proper channel within the financial system to ensure such transfer. To serve this purpose, Financial intermediariescame into existence. Financial intermediation in the organized sector is conducted by a widerange of institutions functioning under the overall surveillance of the Reserve Bank of India. In the initial stages, the role of the intermediary was mostly related to ensure transfer of funds from the lender to the borrower.  This service was offered by banks, FIs, brokers, and dealers.  However, as the financial system widened along with the developments taking place in the financial markets, the scope of its operations also widened. Some of the important intermediaries operating ink the financial markets include; investment bankers, underwriters, stock exchanges, registrars, depositories, custodians, portfolio managers, mutual funds, financial advertisers financial consultants, primary dealers, satellite dealers, self regulatory organizations, etc. Though the markets are different, there may be a few intermediaries offering their services in move than one market e.g. underwriter.  However, the services offered by them vary from one market to another. Intermediary Market Role Stock Exchange Capital Market Secondary Market to securities Investment Bankers Capital Market, Credit Market  Corporate advisory services, Issue of securities Underwriters Capital Market, Money Market Subscribe to unsubscribed portion of securities Registrars, Depositories, Custodians Capital Market Issue securities to the investors on behalf of the company and handle share transfer activity Primary Dealers Satellite Dealers Money Market Market making in government securities Forex Dealers Forex Market Ensure exchange ink currencies FINANCIAL INSTRUMENTS Money Market Instruments The money market can be defined as a market for short-term money and financial assets that are near substitutes for money. The term short-term means generally a period upto one year and near substitutes to money is used to denote any financial asset which can be quickly converted into money with minimum transaction cost. Some of the important money market instruments are briefly discussed below; 1. Call/Notice Money 2. Treasury Bills 3. Term Money 4. Certificate of Deposit 5. Commercial Papers 1. Call /Notice-Money Market Call/Notice money is the money borrowed or lent on demand for a very short period. When money is borrowed or lent for a day, it is known as Call (Overnight) Money. Intervening holidays and/or Sunday are excluded for this purpose. Thus money, borrowed on a day and repaid on the next working day, (irrespective of the number of intervening holidays) is "Call Money". When money is borrowed or lent for more than a day and up to 14 days, it is "Notice Money". No collateral security is required to cover these transactions. 2. Inter-Bank Term Money Inter-bank market for deposits of maturity beyond 14 days is referred to as the term money market. The entry restrictions are the same as those for Call/Notice Money except that, as per existing regulations, the specified entities are not allowed to lend beyond 14 days. 3. Treasury Bills. Treasury Bills are short term (up to one year) borrowing instruments of the union government. It is an IOU of the Government. It is a promise by the Government to pay a stated sum after expiry of the stated period from the date of issue (14/91/182/364 days i.e. less than one year). They are issued at a discount to the face value, and on maturity the face value is paid to the holder. The rate of discount and the corresponding issue price are determined at each auction. 4. Certificate of Deposits Certificates of Deposit (CDs) is a negotiable money market instrument nd issued in dematerialised form or as a Usance Promissory Note, for funds deposited at a bank or other eligible financial institution for a specified time period. Guidelines for issue of CDs are presently governed by various directives issued by the Reserve Bank of India, as amended from time to time. CDs can be issued by (i) scheduled commercial banks excluding Regional Rural Banks (RRBs) and Local Area Banks (LABs); and (ii) select all-India Financial Institutions that have been permitted by RBI to raise short-term resources within the umbrella limit fixed by RBI. Banks have the freedom to issue CDs depending on their requirements. An FI may issue CDs within the overall umbrella limit fixed by RBI, i.e., issue of CD together with other instruments viz., term money, term deposits, commercial papers and intercorporate deposits should not exceed 100 per cent of its net owned funds, as per the latest audited balance sheet. 5. Commercial Paper CP is a note in evidence of the debt obligation of the issuer. On issuing commercial paper the debt obligation is transformed into an instrument. CP is thus an unsecured promissory note privately placed with investors at a discount rate to face value determined by market forces. CP is freely negotiable by endorsement and delivery. A company shall be eligible to issue CP provided - (a) the tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4 crore; (b) the working capital (fund-based) limit of the company from the banking system is not less than Rs.4 crore and (c) the borrowal account of the company is classified as a Standard Asset by the financing bank/s. The minimum maturity period of CP is 7 days. The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by other agencies. (for more details visit www.indianmba.com faculty column) Capital Market Instruments The capital market generally consists of the following long term period i.e., more than one year period, financial instruments; In the equity segment Equity shares, preference shares, convertible preference shares, non-convertible preference shares etc and in the debt segment debentures, zero coupon bonds, deep discount bonds etc. Hybrid Instruments Hybrid instruments have both the features of equity and debenture. This kind of instruments is called as hybrid instruments. Examples are convertible debentures, warrants etc. Conclusion In India money market is regulated by Reserve bank of India (www.rbi.org.in) and Securities Exchange Board of India (SEBI) [www.sebi.gov.in ] regulates capital market. Capital market consists of primary market and secondary market. All Initial Public Offerings comes under the primary market and all secondary market transactions deals in secondary market. Secondary market refers to a market where securities are traded after being initially offered to the public in the primary market and/or listed on the Stock Exchange. Secondary market comprises of equity markets and the debt markets. In the secondary market transactions BSE and NSE plays a great role in exchange of capital market instruments. (visit www.bseindia.com and www.nseindia.com ). (The author acknowledges Prof. R K Mishra, Director, Institute of Public Enterprise, Osmania University, Hyderabad, for his immense help and encouragement through out this study and Dr. S S S Kumar, Assistant Professor, Finance and Accounting Area, Indian Institute of Management, Kozhikode, for his motivation and inspiration) References 1. Bhole L M, "Financial Institutions and markets", Tata McGraw-Hall, New Delhi, 1999. 2. Khan M Y, "Indian Financial System, Tata Mc Graw-Hill, New Delhi, 2001. 3. S. Gurusamy,Financial markets and Institutions,Thomson publications, First Edition,2004. 4. Pandey I M, Financial Management, Vikas Publications, New Delhi, 2000. 5. Mishra R K, An Overview of financial services, financial services, emerging trends, Delta, Hyderabad, 1997. 6. Mishra R K, "Development of financial services in India some perspectives", Financial services in India Delta, Hyderabad, 1998. 7. Mishra R K, "Global financial services Industry and the specialized financial services institutions in India, Utkal University, 1997. 8. www.bseindia.com 9. www.nseindia.com 10. www.rbi.org.in 11. www.sebi.gov.in 12. www.indiainfoline.com

Dear Studetns

As you know that we have started self assessment weekly test. The purpose of this test is to analyz your performance at micro level and corrective measure can be taken.