regulation of security markets

52-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page1 Prof Abdul Kadir KhanSyllabusUnit -1An overview of Indian Securities MarketNature of Savings and InvestmentProfile of Indian InvestorFactors affecting investment decisions of an Indian InvestorUnit -2Need for regulating securities markets in IndiaProtection to retail InvestorVanishing companies of 1990rsquosPricing of an IPO and possible economic offencesUnit -3Entities governing the Securities Markets in IndiaCompanies 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 BooksCompany Law ndash Avtar SinghFinance and Profits ndash NJ YasawajFinance Sense ndash Dr Prasanna Chandra

52-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page2 Prof Abdul Kadir KhanRegulationRegulation is controlling human or societal behavior by rules or restrictionsRegulation can take many forms legal restrictions promulgated by a governmentauthority self-regulation by an industry such as through a trade association socialregulation (eg 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 lawRegulation 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 entriesprices 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 MarketsThe 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 thoseresourcesThe 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 activityVarious 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

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

The NEED OBJECTIVES for regulating financial marketThe definition of the term financial market has traditionally included the bankingfinancial 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 mediumlong termmaturities functionalcommercial 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 levelsuch 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 RegulationRegulations 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 othersRegulations are justified using a variety of reasons and therefore can be classified inseveral broad categories1048696 Market failures - regulation due to inefficiency Intervention due to a classicaleconomics argument to market failureo Risk of monopolyo Collective action or public goodo Inadequate informationo Unseen externalizations1048696 Collective desires - regulation about collective desires or considered judgementson the part of a significant segments of society1048696 Diverse experiences - regulation with a view of eliminating or enhancingopportunities for the formation of diverse preferences and beliefs1048696 Social subordination - regulation aimed to increase or reduce social

subordination of various social groups1048696 Endogenous preferences - regulations purpose is to affect the development ofcertain preferences on an aggregate level1048696 Irreversibility - regulation that deals with the problem of irreversibility ndash theproblem in which a certain type of conduct from current generations results inoutcomes from which future generations may not recover from at all1048696 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 aboveThe study of formal (legal andor official) and informal (extra-legal andor 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 assetsA variety of forms of regulations exist in a regulated market These include controls

oversights anti-discrimination environmental protection taxation and labor lawsIn a regulated market the government regulatory agency may legislate regulations thatprivilege special interests known as regulatory captureFinancial 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 RegulationThe specific aims of financial regulators are usually1048696 To enforce applicable laws1048696 To prosecute cases of market misconduct such as insider trading1048696 To license providers of financial services1048696 To protect clients and investigate complaints1048696 To maintain confidence in the financial systemInsider TradingInsider trading is the trading of a corporations stock or other securities (eg 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 insidersduties 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 confidenceThe 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 USgovernment 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 enforcementIn 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 efficiencyInsider 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 efficiencyOnce 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 pricesOur prime focus here is the widely--held viewpoint that insider trading is a problemwhich should be a priority on SEBIs 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 eighteenthcenturyBy 1830s 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 1850The 1850s witnessed a rapid development of commercial enterprise and brokeragebusiness attracted many men into the field and by 1860 the number of brokersincreased into 60In 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 1865a 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 1874found 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 ldquoThe 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 wasconsolidatedAhmedabad 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 AssociationWhat 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 1870s there was a sharp boom in juteshares which was followed by a boom in tea shares in the 1880s and 1890s and a coalboom between 1904 and 1908 On June 1908 some leading brokers formed TheCalcutta Stock Exchange AssociationIn 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 reachedIndian cotton and jute textiles steel sugar paper and flour mills and all companiesgenerally enjoyed phenomenal prosperity due to the First World WarIn 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 baseOn account of the restrictive controls on cotton bullion seeds and other commoditiesthose dealing in them found in the stock market as the only outlet for their activitiesMany new associations were constituted for the purpose and Stock Exchanges in allparts of the country were floatedThe Uttar Pradesh Stock Exchange Limited (1940) Nagpur Stock Exchange Limited(1940) and Hyderabad Stock Exchange Limited (1944) were incorporatedIn Delhi two stock exchanges - Delhi Stock and Share Brokers Association Limited andthe Delhi Stocks and Shares Exchange Limited - were floated and later in June 1947amalgamated 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 ExchangeBangalore Stock Exchange Limited was registered in 1957 and recognized in 1963

52-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 functionThus during early sixties there were eight recognized stock exchanges in India(mentioned above) The number virtually remained unchanged for nearly twodecadesDuring 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 MeerutThus 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 InvestmentSaving 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 ishigherIt 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 factors1 The ability to save This mainly depends on the income levels of the people and thekind of tax benefits that the government provides2 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 needsInvestment 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 deferringconsumptionInvestment 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 owners controlThe features of an Investment are1) Realistic An investment must be realistic in nature ie it must be practical2) Simplicity An investment should be simple to understand and operate3) Flexibility An investment should be flexible so that the investor can benefit fromthe growing opportunities from various asset classes4) 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 (Eg 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 investment7) Balance between Safe and Risky investment classes A balance between all the

asset classes should be maintained in order to ensure that the investorsrsquo moneygenerates optimum returns8) Provide safety to investors A sound investment plan should ensure adequatesafety to investorsrsquo funds9) Should be timely controlled An investment should be timely controlled so thatan investor can shift from one asset class to another10) An investment should be done with a Long-term view in order to attain optimumreturns from investmentsNature of Saving and Investment in IndiaThere is a lot of literature focusing on the relationship between savings and investmentTo 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 reasons1 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 sector3 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 sector4 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 policiesIn 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 individuals preferences in investment decisionsfor 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 onFactors determining the investor profileThe investor style profile is determined by ndash1048696 Objective personal or social traits such as age gender income wealth familytax situation1048696 Subjective attitudes linked to the temper (emotions) and the beliefs (cognition)of the investor1048696 Generally the investors financial return risk objectives assuming they areprecisely set and fully rationalINDIAN INVESTOR PROFILE = LOW RISK + HIGH RETURNSIs the profile of Indian Investor changingThere 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 IndianTurmoil of the nineties

52-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 depositsDid the average Indian invest in the stock market Oh yes Look carefully and near theground floor of todayrsquos investment skyscraper yoursquoll see the wreckage of severalpeoplersquos investment plansYoursquod 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 itWinds of changeWell all thatrsquos changing Therersquos a new breed of Indian investor ndash younger moreinformed more confident and well paid The days of going to your broker are goneDemat is in and with it a world of possibility You can have the cake of equity and eat itwith mutual fundsTherersquos another quiet revolution one thatrsquos significant in the Indian context More andmore women are educating themselves and investing online and are smilinglysuccessfulFinancial reformsHave financial reforms helped You bet they have The market is open is mostly freeand fair therersquos honest competition and you can find information on any aspect online

Investor education is on the rise and resources are available on every self-respectingwebsiteWhat 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 itrsquos moving in the right directionThe signShort-term volatility isnrsquot scaring you back to the post-office This is a sure sign that theinvestor has arrivedldquoIndian investors are blooming at the right time in the right placerdquo

52-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page14 Prof Abdul Kadir KhanFactors affecting investment decisions of anIndian InvestorInvestmentInvestment 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 itDifferent persons of varied ages also need different type of investment plan to givethem better return Conservative amp 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 technologysectorsAn investment plan can be short-term medium-term or long-term1) 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 needs2) Medium-term investment plan is prepared for a period of one to five years3) 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 individualFinancial PlanningFinancial planning is usually a multi-step process and involves considering the clientssituation 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 differencesAlthough 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 plannerssome planners may be called comprehensive or holistic financial plannersOther financial planners may specialize in one or more areas such as insurance planning(risk management) and retirement planningFinancial planning is a growing industry with projected faster than average job growththrough 2014


Factors determining investment decisions Canons of financial planningof an Indian Investor1) Personal (financial) Objectives DecisionsPersonal financial planning is broadly defined as a process of determining anindividuals financial goals purposes in life and lifes priorities and after considering his

resources risk profile and current lifestyle to detail a balanced and realistic plan to meetthose goalsThe individuals goals are used as guideposts to map a course of action on what needsto be done to reach those goalsAlongside the data gathering exercise the purpose of each goal is determined to ensurethat the goal is meaningful in the context of the individuals situation Through a processof careful analysis these goals are subjected to a reality check by considering theindividuals 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 goalPlanning often requires consideration of self-constraints in postponing some enjoymenttoday for the sake of the future To be effective the plan should consider theindividuals 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 considered2) Scope of Financial Planning for an Indian InvestorInvestment decisions of an Indian investor cover all areas of his her financial needsThe 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

52-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page16 Prof Abdul Kadir Khan 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 IndiaProtection to retail InvestorVanishing companies of 1990rsquosPricing of an IPO and possible economic offences

PROTECTION TO RETAIL INVESTORSHigher retail investor participation is required for Gross Domestic Product (GDP) growth1048696 There is a need to spread the ownership of equity1048696 The investors should benefit from the various initiatives of the Governmentmeant for investorsrsquo education and protection1048696 A well informed investor is a well protected investor1048696 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 deposits1048696 Despite a long history and maturity of Indian stock markets the penetrationlevel remains very low1048696 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 4KEY CHALLENGES1048696 Low depth in equity markets1048696 low retail equity ownership1048696 dominance of top cities in trading volumes

52-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page17 Prof Abdul Kadir Khan1048696 limited capital formation and1048696 higher costs per trade1048696 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 possiblerdquo1048696 Regulatory Authorities should advocate certain macromarket level reformswhich will have a positive cascading effect on the retail investorsThese Reforms includebull Increased financial literacy for multiple asset class including equitybull higher retail portion in the IPOsbull simplified documentation such as readable simple DRHP KYC forms etcbull simplifying the procedures and cost of opening demat accounts to encouragepeople beyond the top 10 centers to invest directly in equitiesbull increased indirect investor participation through mutual funds and long termretirement products such as the new pension scheme 2009 andbull Targeting high net worth NRIs by facilitating account opening and introducingreforms to simplify profit repatriationInvestor awareness program held under the theme -

ldquoInformed investoran asset to corporate Indiardquo- Ministry of Corporate Affairs

52-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page18 Prof Abdul Kadir KhanVANISHING COMPANIES OF THE NINETIESAs per the Ministry of Corporate Affairs (MCA) Government of India a company wouldbe deemed to be a vanishing company if it is found to have1 Failed to file returns with Registrar of Companies (ROC) for a period of 2 years2 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 traceableMinistry of Corporate Affairs has clarified that all the conditions mentioned abovewould have to be satisfied before a listed company is declared as a vanishing companyFurther the conditions mentioned at (1) (3) amp (4) would suffice to declare a company asvanishing if such company has been de-listed from the SE1048696 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 ldquoFIRs 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 years1048696 Interestingly enough Satyam is not the only company based in Hyderabad to havesiphoned off investorsrsquo money There are at least 12 firms though not in the same

league as Satyam which have been recently declared lsquovanishing companiesrsquoAlthough the magnitude of fraud by these companies from Hyderabad is paltry ataround Rs 47 crore it is not insignificant1048696 Many lsquovanishing companiesrsquo had raised money from the market during the capitalmarket boom period and then simply vanished By the corporate affairs ministryrsquosown admission there are at least 115 vanishing companies which have failed to fileany report on accounts with Sebi for the last two years1048696 PC Gupta the Union minister for corporate affairs in a recent interaction withExpress staff had stated that ldquowe have identified almost 100 odd companies andprosecuted their directors and promoters and some of them are behind barsrdquo1048696 However there is another huge scandal from the 1990s when thousands of crore ofrupees just vanished as thousands of plantation companies disappeared withinvestorsrsquo money These plantation companies through glossy high profileadvertisement campaigns and exaggerated profit projections managed to attractgullible investors in large numbers1048696 Most of the 7983 plantation companies listed on the corporate affairs ministrywebsite have closed down while investors try to recover their hard-earned money

52-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 publicrsquosmoney 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 suffersilently1048696 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 offencesWHAT IS AN IPOAn IPO is the first sale of an entitys common shares to public investors When anentity wants to enter the market it makes its share available to common investors inform of an auction saleEach application for an IPO has to be within a cut-off figure which is eligible forallotment in the retail investorsrsquo category But in this case financiers and market playersillegally cornered these retail investors sharesAn Initial Public Offering (IPO) referred to simply as an offering or flotationis 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 tradedIn 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 marketAn 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

52-REGULATION OF SECURITIES MARKETS TY-BFM1048696 When a company lists its shares on a public exchange it will almost invariablylook to issue additional new shares in order at the same time1048696 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)1048696 An IPO therefore allows a company to tap a wide pool of stock market investorsto provide it with large volumes of capital for future growth1048696 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 dissolution1048696 The existing shareholders will see their shareholdings diluted as a proportion ofthe companys shares1048696 However they hope that the capital investment will make their shareholdingsmore valuable in absolute terms1048696 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 debt1048696 This regular ability to raise large amounts of capital from the general marketrather than having to seek and negotiate with individual investors is a keyincentive for many companies seeking to listThere 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 etcSTEP BY STEP PROCESSThe process for conducting an IPO generally involves a firm taking the following steps1 It registers with the Securities and Exchange Commission (SEC)2 It seeks the help of one or more investment banks as ldquounderwritersrdquo to pursue acoterie of institutional investors and the general public to purchase the firmrsquosstock3 It presents the IPO fact file and prospects to the investor community

52-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 ldquoquiet periodrdquoWhen 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 marketHere is a lowdown on the IPO scamWhat is the scamIt involved manipulation of the primary marketmdashread initial public offers (IPOs)mdashbyfinanciers and market players by using fictitious or benaami demat accountsWhile investigating the Yes Bank scam Sebi found that certain entities had illegallyobtained IPO shares reserved for retail applicants through thousands of benaami demataccountsThey then transferred the shares to financiers who sold on the first day of listingmaking windfall gains from the price difference between the IPO price and the listingpriceWhen 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 branchesThe Sebi started a broad investigation into IPO allotments after it detected irregularitiesin the buying of shares of YES Bankrsquos IPO in 2005What triggered the Sebi probeOn October 10 2005 an Income Tax raid on businessman Purushottam Budhwaniaccidentally found he was controlling over 5000 demat accounts Sebi finds thissuspiciousOn December 15 Sebi declared results of its probe how a few people cornered a largechunk of YES Bank IPO sharesOn January 11 this year Sebi discovered huge rigging in the IDFC IPORoopalben Panchal was found to be controlling nearly 15000 demat accounts

52-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 financiersThe 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 from2003-2005The 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 daysIt 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 accountsWho is Roopalben PanchalRoopalben Panchal of IndiaBulls Securities is allegedly the mastermind of the scamFinance Ministry officials are expected to act against her soonHow is this different from Harshad Mehtarsquos scamThe securities scam involved price manipulation in the secondary market read stocksWhereas in this case the manipulation happened in the primary marketmdasheven beforethe shares (IPOs) entered the stocks marketThis time fraudsters targeted the primary market to make a quick buck at the expenseof the gullible small investorsDirect Participants (DPs) used retail applicantsrsquo shares for reaping benefits in the stockmarketHow big is the scamApart 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 analystsThe Sebi probe has identified more operators and some market intermediaries involvedin the misuse of the initial allotment process in public offerings dating back to rsquo04-05

52-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 6062 crore in 18 months

ROLE OF DPrsquoSSuzlon Energy IPO Rs 149634 cr (September 23-29 2005)Key operators used 21692 fictitious accounts to corner 323023 shares which is equalto 374 per cent of the total number of shares allotted to retail individual investorsJet Airways IPO Rs 18993 crore (Feb 18-24 2005)Key operators used 1186 fake accounts for cornering 20901 shares which is equal to052 per cent of the total number of shares allotted to retail investorsNational Thermal Power Corporation IPO Rs 536814 crore (Oct 7-14 2004)12853 afferent accounts were used for cornering 2750730 shares representing 13 percent of the total number of shares allotted to retail investorsTata Consultancy Services IPO Rs 471347 crore14619 benami accounts were used to corner 261294 shares representing 209 percent of the total shares allotted to retail individual investorsUnit -3Entities governing the Securities Markets in IndiaCompanies Act 1956Securities Contracts Regulation ActSEBI ActDepositories ActInsurance Acts

52-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page24 Prof Abdul Kadir KhanSpecial Regulatory requirements of Derivative marketThe Indian Companiesrsquo Act of 1956Companies act 1956 is one of the most important LAW in Indian corporate legislatureIt 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 TheCompanyrsquos 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 Indiarsquos socialistic ideals and policyThe act consists of 13 parts and 14 schedulesThe important provision pertaining to Indian capital marketfinancial market are givenbelow-1 PART 3-It is relevant to capital market It relates to a companyrsquos Issue of capital Issue of prospectus Allotment and other matter relating to the issue of shares and debenturesSection 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 lossThere 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 market1 Buy-Back of Shares-Section 77 of the companiesrsquo 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 theoutflow2 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 marketThe 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 accountanttax and management consultant advisor solicitors and others who prove to beeffective in controlling such trading3 Prospectus-Prospectus serves as publicity for corporate enterprises to solicit publicsubscription of capitalThe companiesrsquo 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 issueA regular prospectus containsa) information about the capital structureb) terms of issuec) company management and project risk perceptiond) promotors contribution Financial information etcThe concept of abridged prospectus introduced by the companyrsquos 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 prospectus4 Financial disclosure-The companyrsquos Act 1956 has a number of norms requiring information disclosureabout companiesrsquo information on market which sound capital market structure is

builtThe 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 decisions5 PART 4-It relates to the share capital and debentures with regard to type numbercertificate of shares capital etcSection 116 In this part provides for penalty for impersonation of share holders

52-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 Actwhich governs the trading of securities in IndiaThe definitions of some of the important terms are given belowlsquoRecognized Stock Exchangersquo means a stock exchange which is for the time beingrecognized by the Central Government under Section 4 of the SC(R)AlsquoStock Exchangersquo 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 securitiesAs 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

52-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 securitiesAs per section 2(aa) ldquoDerivativerdquo includesA a security derived from a debt instrument share loan whether secured or unsecuredrisk instrument or contract for differences or any other form of securityB a contract which derives its value from the prices or index of prices of underlyingsecuritiesSection 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 exchangesIn accordance with the rules and bye-laws of such stock exchangeSpot 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

52-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 adepositoryThe SC(R)A deals with1stock exchanges through a process of recognition and continued supervision2 contracts amp options in securities and3 listing of securities on stock exchangesRecognition 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 SEBIwhich 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 SEBIrsquos 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 gazetteContracts and Options in Securities

52-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 ExchangeListing 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 refusalDelisting 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 Governmentrsquos 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 usesHowever 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

52-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-brokersunderwriters 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 fundscollective investments schemes credit rating agencies etc shall be registered with SEBIand shall be governed by the SEBI Regulations pertaining to respective marketintermediaryConstitution 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 IndiaSEBI 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

52-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 SEBIThe 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 BoardThe 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 respectivelyThe 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 economicsaccountancy administration or in any other discipline which in the opinion of theCentral Government shall be useful to SEBIFunctions 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

52-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 prescribedSEBI may for the protection of investors(a) specify by regulations for

52-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 Section121) Stock-broker2) Sub- broker3) Share transfer agent4) Banker to an issue5) Trustee of trust deed6) Registrar to an issue7) Merchant banker11) Depository12) Participant

13) Custodian of securities14) Foreign institutional investor15) Credit rating agency or16) Collective investment schemes17) Venture capital funds

52-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page34 Prof Abdul Kadir Khan8) Underwriter9) Portfolio manager10) Investment adviser18) Mutual fund and19) Any other intermediary associated with thesecurities marketTHE 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 Act1956 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 issuerAgreement between depository and participantA depository shall enter into an agreement in the specified format with one or moreparticipants as its agentServices 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 servicesSurrender of certificate of security

52-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 accordinglyA depository shall on receipt of information enter the name of the person in its recordsas the beneficial ownerRegistration 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 issueraccordinglyOptions 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

securitySecurities in depositories to be in fungible formAll securities held by a depository shall be dematerialized and shall be in a fungibleformRights 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 orhypothecationFurnishing 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 beDepository 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 participantSecurities not liable to stamp dutyAs per Section 8-A of Indian Stamp Act 1899

52-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 stampedb) 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 1899c) 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 1899e) 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 actsThe Insurance Act of 1938 was the first legislation governing all forms of insurance toprovide strict state control over insurance businessLife 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 IndiaThe General Insurance Business Act of 1972 was enacted to nationalize the about 100general insurance companies then and subsequently merging them into four companiesAll the companies were amalgamated into National Insurance New India Assurance

52-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 citiesUntil 1999 there were not any private insurance companies in India The government

then introduced the Insurance Regulatory and Development Authority Act in 1999thereby de-regulating the insurance sector and allowing private companiesFurthermore foreign investment was also allowed and capped at 26 holding in theIndian insurance companiesIn 2006 the Actuaries Act was passed by parliament to give the profession statutorystatus on par with Chartered Accountants Notaries Cost amp Works AccountantsAdvocates Architects amp Company SecretariesUnit -4Regulatory BodiesDepartment of Company AffairsDepartment of Economic AffairsSEBIForward Market CommissionRBIIRDANeed for Self RegulationSEBISecurities amp 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

52-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 ndashldquohellipto protect the interests of investors in securities and to promote thedevelopment of and to regulate the securities market and for matters connectedtherewith or incidental theretordquoFunctions 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 intermediariesSEBI has three functions rolled into one body quasi-legislative quasi-judicial and quasiexecutiveIt 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 CourtSEBI has enjoyed success as a regulator by pushing systemic reforms aggressively andsuccessively (eg 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 lawSEBI 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 stricturesSecurities Market Awareness Campaign (SMAC) by SEBIThe 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


Page40 Prof Abdul Kadir Khansecurities market so as to establish a dynamic and efficient Securities Marketcontributing to Indian EconomySEBI 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 economyHowever many investors may not possess adequate expertiseknowledge 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 obligationsIn this backdrop SEBI launched a comprehensive education campaign aimed at creatingawareness among investors about securities market which has been christened ndashldquoSecurities Market Awareness Campaignrdquo (SMAC) The motto of the campaign is ndash lsquoAnEducated Investor is a Protected Investorrsquo The campaign was launched at the nationallevel by the then Prime Minister Shri Atal Bihari Vajpayee on January 17 2003Thenational launch was closely followed by launches in 12 statesThe 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 SEBIrsquosmessage of ldquoInvest With KnowledgerdquoThe Multi-Pronged approach by SMAC1 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 and52-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page41 Prof Abdul Kadir Khanresponsibilities You can attend the workshops in your citytown The message is simpleand lectures and discussions are conducted in your localregional languageTill date more than 2188 workshops have been conducted in around 500 citiestownsacross the country2 AdvertisementsSEBI has prepared simple ldquodos and donrsquotsrdquo 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 newspapersTill 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 Hindi3 Educative MaterialSEBI has prepared a standardized reading material and presentation material for theworkshops In addition reference guides on topics concerning investors have also been

preparedThe reference guidesbooklets 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 choice4 Website dedicated to Investor EducationWith a view to make information relevant to the investor available at one place thisdedicated investor website (httpinvestorsebigovin) has been operationalizedA simple and effective internet based response to investor complaints has been set upOn filing of your complaint electronically an acknowledgement mail would be sent toyour specified email address and you will be issued a complaint registration numberinstantaneously5 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

52-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 forcethe 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 withdrawsuspend 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

52-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 countrys economic policies and programmes having a bearingon domestic and international aspects of economic management Department ofEconomic Affairs works under the Right to Information (RTI) ActMain 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 countrys economy with the help of

multilateral and bilateral official development assistance along with

52-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page44 Prof Abdul Kadir Khancommercial borrowings from overseas countries foreign direct investmentspreserving foreign exchange resources and balance of payment The department contributes in raising the internal resources of the countryseconomy 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 countriesOne 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 (ie 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

52-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 ASEMOECD 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 underMR-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 RailwaysTelecommunications 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 multilateralbilateral 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

52-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 1980The 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 mattersThe 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 ActRegistrars 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 themThe 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 Board52-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page47 Prof Abdul Kadir KhanThe Central Government constituted an independent Company Law Board videNotification SlNo 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 ChennaiThe 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 actionDirector 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 ActReserve 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 220000 Reserve Bank of India was nationalized in the year1949The 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 termThe 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 policiesMonetary PoliciesBank of IssueUnder 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 valueThe 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 IndiaDue 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 Rs115 crores should be in gold The system as it exists today is known as the minimumreserve systemBanker to GovernmentThe 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

52-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 mattersBankers 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 IndiaThe 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 bankers bank but also the lender of the last resortController of CreditThe Reserve Bank of India is the controller of credit ie 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 1949the 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 BankThe 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 bankAs 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

52-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 scheduledbanksCustodian of Foreign ReservesThe 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 10000 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 IMFBesides maintaining the rate of exchange of the rupee the Reserve Bank has to act asthe custodian of Indias 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 countryNon-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 operationPromotional functions

52-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 Banks 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 Banks role in this field has become extremely importantThe 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 farmersForward 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 Commissions Head Quarter is located at Mumbai and Regional Officeat KolkataThe 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-appointmentFunctions of the CommissionThe functions of the Commission are

52-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 Actc 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 Actd 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 suchgoodse To make recommendations generally with a view to improving the organizationand working of forward marketsf 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 necessaryg 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 prescribedPowers 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 prescribed52-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================================

52-REGULATION OF SECURITIES MARKETS TY-BFM (Sem-5)Page2 Prof Abdul Kadir KhanRegulationRegulation is controlling human or societal behavior by rules or restrictionsRegulation can take many forms legal restrictions promulgated by a governmentauthority self-regulation by an industry such as through a trade association socialregulation (eg 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 lawRegulation 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 entriesprices 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 MarketsThe theoretical underpinning for public intervention in economic matters is traditionallybased on the need to correct market imperfections and unfair distribution of the















































Unit -2












REASONS FOR LISTING



























































































































Unit -2












REASONS FOR LISTING






















































































REASONS FOR LISTING













































































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 Section121) Stock-broker2) Sub- broker3) Share transfer agent4) Banker to an issue5) Trustee of trust deed6) Registrar to an issue7) Merchant banker11) Depository12) Participant















































Prof Abdul Kadir Khansecurities market so as to establish a dynamic and efficient Securities Marketcontributing to Indian EconomySEBI 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 economyHowever many investors may not possess adequate expertiseknowledge 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 obligationsIn this backdrop SEBI launched a comprehensive education campaign aimed at creatingawareness among investors about securities market which has been christened ndashldquoSecurities Market Awareness Campaignrdquo (SMAC) The motto of the campaign is ndash lsquoAnEducated Investor is a Protected Investorrsquo The campaign was launched at the nationallevel by the then Prime Minister Shri Atal Bihari Vajpayee on January 17 2003Thenational launch was closely followed by launches in 12 statesThe 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 SEBIrsquosmessage of ldquoInvest With KnowledgerdquoThe Multi-Pronged approach by SMAC1 Workshops2 Advertisements3 Educative Material






























regulation of security markets

Documents