REGULATION OF SECURITIES MARKETS ASSIGNMENT
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SEBI AND RBI 2
INDEX PARTICULARS NO. I.
Secu Securi riti ties es and and Exc Excha hang nge e Boar Board d of of Ind India ia 1. 2. 3. 4. 5.
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Introduction and Objectives SEBI Administration Functions of Board Investors Know-how Conclusion
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Reserve Bank of of India 1. 2. 3. 4. 5.
Introduction 23 Objectives of the Reserve Bank of India 24 Organization and Management of Reserve Bank of India 25 Functions of Reserve Bank of India 27 Conclusion 33
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SECURITIES AND EXCHANGE BOARD OF INDIA
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INTRODUCTION In 1988 the Securities and Exchange Board of India (SEBI) was established by the Government of India through an executive resolution, and was subsequently upgraded as a fully autonomous body (a statutory Board) in the year 1992 with the passing of the Securities and Exchange Board of India Act (SEBI Act) on 30th January 1992. In place of Government Control, a statutory and autonomous regulatory board with defined responsibilities, to cover both development & regulation of the market, and independent powers have been set up. Paradoxically this is a positive outcome of the Securities Scam of 1990-91. The BASIC OBJECTIVES of the Board were identified as: •
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to protect the interests of investors in securities; to promote the development of Securities Market; to regulate the securities market and for matters connected therewith or incidental thereto.
Since its inception SEBI has been working targetting the securities and is attending to the fulfillment of its objectives with commendable zeal and dexterity. The improvements in the securities markets like capitalization requirements, margining, establishment of clearing corporations etc. reduced the risk of credit and also reduced the market. SEBI has introduced the comprehensive regulatory measures, prescribed registration norms, the eligibility criteria, the code of obligations and the code of conduct for different intermediaries like, bankers to issue, merchant bankers, brokers and sub-brokers, registrars, portfolio managers, credit rating agencies, underwriters and others. It has framed byelaws, risk identification and risk management systems for Clearing houses of stock exchanges, surveillance system etc. which has made dealing in securities both safe and transparent to the end investor. Another significant event is the approval of trading in stock 5
indices (like S&P CNX Nifty & Sensex) in 2000. A market Index is a convenient and effective product because of the following reasons: •
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It acts as a barometer for market behavior; It is used to benchmark portfolio performance; It is used in derivative instruments like index futures and index options; It can be used for passive fund management as in case of Index Funds.
Two broad approaches of SEBI is to integrate the securities market at the national level, and also to diversify the trading products, so that there is an increase in number of traders including banks, financial institutions, insurance companies, mutual funds, primary dealers etc. to transact through the Exchanges. In this context the introduction of derivatives trading through Indian Stock Exchanges permitted by SEBI in 2000 AD is a real landmark. SEBI appointed the L. C. Gupta Committee in 1998 to recommend the regulatory framework for derivatives trading and suggest bye-laws for Regulation and Control of Trading and Settlement of Derivatives Contracts. The Board of SEBI in its meeting held on May 11, 1998 accepted the recommendations of the committee and approved the phased introduction of derivatives trading in India beginning with Stock Index Futures. The Board also approved the "Suggestive Bye-laws" as recommended by the Dr LC Gupta Committee for Regulation and Control of Trading and Settlement of Derivatives Contracts. SEBI then appointed the J. R. Verma Committee to recommend Risk Containment Measures (RCM) in the Indian Stock Index Futures Market. The report was submitted in november 1998. However the Securities Contracts (Regulation) Act, 1956 (SCRA) required amendment to include "derivatives" in the definition of securities to enable SEBI to introduce trading in derivatives. The necessary amendment was then carried out by the Government in 1999. The Securities Laws (Amendment) 6
Bill, 1999 was introduced. In December 1999 the new framework was approved. Derivatives have been accorded the status of `Securities'. The ban imposed on trading in derivatives in 1969 under a notification issued by the Central Government was revoked. Thereafter SEBI formulated the necessary regulations/bye-laws and intimated the Stock Exchanges in the year 2000. The derivative trading started in India at NSE in 2000 and BSE started trading in the year 2001.
SEBI ADMINISTRATION The Securities and Exchange Board of India Act, 1992 is having retrospective effect and is deemed to have come into force on January 30, 1992. Relatively a brief act containing 35 sections, the SEBI Act governs all the Stock Exchanges and the Securities Transactions in India. A Board by the name of the Securities and Exchange Board of India (SEBI) was constituted under the SEBI Act to administer its provisions. It consists of one Chairman and five members. One each from the department of Finance and Law of the Central Government, one from the Reserve Bank of India and two other persons and having its head office in Bombay and regional offices in Delhi, Calcutta and Madras. The Central Government reserves the right to terminate the services of the Chairman or any member of the Board. The Board decides questions in the meeting by majority vote with the Chairman having a second or casting vote. Section 11 of the SEBI Act provides that to protect the interest of investors in securities and to promote the development of and to regulate the securities market by such measures, it is the duty of the Board. It has given power to the Board to regulate the business in Stock Exchanges, register and regulate the working of stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio 7
managers, investment advisers, etc., also to register and regulate the working of collective investment schemes including mutual funds, to prohibit fraudulent and unfair trade practices and insider trading, to regulate take-overs, to conduct enquiries and audits of the stock exchanges, etc. All the stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deed, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and such other intermediary who may be associated with the Securities Markets are to register with the Board under the provisions of the th e Act, under Section 12 of the Sebi Act. The Board has the power to suspend or cancel such registration. The Board is bound by the directions vested by the Central Government from time to time on questions of policy and the Central Government reserves the right to supersede the Board. The Board is also obliged to submit a report to the Central Government each year, giving true and full account of its activities, policies and programmes. Any one of the aggrieved by the Board's decision is entitled to appeal to the Central Government.
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FUNCTIONS OF THE BOARD The Board is responsible for the securing the interests of investors in securities and to facilitate the growth of and to monitor the securities market in an appropriate manner. To monitor and control the performance of stock exchange and derivative markets. Listing and monitoring the functioning of stock brokers, sub brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and others associated with securities markets by any means. Monitoring and Controlling the functioning of venture capital funds and mutual funds. Forbid unjust and dishonest trade practices in the security markets and forbid insider trading in the security market. Undertake periodic audits of stock exchanges, mutual funds, individuals and self regulatory organizations associated with the security market.
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INVESTORS KNOWHOW PUBLIC ISSUE Any company or a listed company making a public issue or a rights issue of value of more than Rs 50 lakhs is required to file a draft offer document with SEBI for its observations. The company can proceed further only after getting observations from SEBI. The company has to open its issue within three months from the date of SEBI's observation letter.
Through public issues, SEBI has laid down eligibility norms for entities accessing the primary market. The entry norms are only for companies making a public issue (IPO (IPO or FPO FPO)) and not for listed company making a rights issue. issue. The entry norms are as follows Entry Norm I (EN I): The company shall meet the following requirements •
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Net Tangible Assets of at least Rs. 3 crores for 3 full years. Distributable profits in atleast three years. Net worth of at least Rs. 1 crore in three years. If change in name, atleast 50% revenue for preceding 1 year should be from the new activity. The issue size does not exceed 5 times the pre- issue net worth.
SEBI has provided two other alternative routes to company not satisfying any of the above conditions to provide sufficient flexibility and also to ensure that genuine companies do not suffer on account of rigidity of the parameters, for accessing the primary Market. They are as under Entry Norm II (EN II) •
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Issue shall be through book building route, with at least 50% to be mandatory allotted to the Qualified Institutional Buyers (QIBs). The minimum post-issue face value capital shall be Rs. 10 crore or there shall be a compulsory market-making for at least 2 years.
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Entry Norm III (EN III) •
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The "project" is appraised and participated to the extent of 15% by FIs/Scheduled Commercial Banks of which at least 10% comes from the appraiser(s). The minimum post-issue face value capital shall be Rs. 10 crore or there shall be a compulsory market-making for at least 2 years. Note :- The company should also satisfy the criteria of having at least 1000 prospective allotees.
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Private Sector Banks Public sector banks An infrastructure company whose project has been appraised by a PFI or IDFC or IL&FS or a bank which was earlier a PFI and not less than 5% of the project cost is financed by any of these institutions. Rights issue by a listed company
SECONDARY MARKET Section 3 of SEBI Act protects the interests of the investors in securities and also promotes the development of, and regulates, the securities market and related matters.
The following are the financial products/instruments which the secondary market deals with •
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Equity Shares Rights Issue/ Rights Shares Bonus Shares Preferred Stock/ Preference shares Cumulative Preference Shares Cumulative Convertible Preference Shares Participating Preference Share Bond Zero Coupon Bond Convertible Bond Debentures Commercial Paper 11
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Coupons Treasury Bills
MUTUAL FUNDS To protect the interest of the investors, SEBI formulates policies and regulates the mutual funds. It notified regulations in 1993 (fully revised in 1996) and issues guidelines from time to time. MF either promoted by public or by private sector entities including one promoted by foreign entities are governed by these Regulations.
SEBI approved Asset Management Company (AMC) manages the funds by making investments in various types of securities. Custodian, registered with SEBI, holds the securities of various schemes of the fund in its custody. The general power of superintendence and direction over AMC is vested with the trustees. According to SEBI Regulations, two thirds of the directors of trustee company or board of trustees must be independent . They should not be associated with the sponsors. 50% of the directors of AMC must be independent. All mutual funds are required to be registered with SEBI before they launch any scheme. Increase of load more than the level mentioned in the offer document is applicable only to prospective investments by the MFs. For original investments, the offer documents has to be amended to make investors aware of loads at the time of investments. TAKEOVER •
Imposing of curbs on off-market deals. 1. Upto a threshold threshold level level of 5 per cent, cent, off-market off-market deals deals to be allowed. 2. Between Between 5 per cent and and 15 per cent, cent, all deals deals to be made only through the stock market. Otherwise, open offer will be attracted. 12
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3. Exception Exception : the "preferentia "preferentiall allotment" allotment" route with with approval from shareholders. Reducing the time limit for completion of the open offer from 4 months at present to 3 months. Putting restrictions on the sale of shares by the acquirer during the open offer period. Independant comment to be ginven by the board of directors to the shareholders of a target company regarding its future plans. Merchant banker to stop dealing in the shares of the target company, following his appointment as manager to the offer. Also to disclose its shareholding in the offer document.
FOREIGN INSTITUTIONAL INVESTOR
One who propose to invest their proprietary funds or on behalf of "broad based" funds or of foreign corporates and individuals and belong to any of the undergiven categories can be registered for FII. •
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Pension Funds Mutual Funds Investment Trust Insurance or reinsurance companies Endowment Funds University Funds Foundations or Charitable Trusts or Charitable Societies who propose to invest on their own behalf, and Asset Management Companies Nominee Companies Institutional Portfolio Managers Trustees Power of Attorney Holders Bank
An application for registration has to be made in Form A, the format of which is provided in the SEBI(FII) Regulations, 1995 and submitted with under mentioned documents in duplicate addressed to SEBI as well as to Reserve Bank of India (RBI) and 13
sent to the following address within 10 to 12 days of receipt of application. Supporting documents required are: •
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Application in Form A duly signed by the authorised signatory of the applicant. Certified copy of the relevant clauses or articles of the Memorandum and Articles of Association or the agreement authorizing the applicant to invest on behalf of its clients Audited financial statements and annual reports for the last one year , provided that the period covered shall not be less than twelve months. A declaration by the applicant with registration number and other particulars in support of its registration or regulation by a Securities Commission or Self Regulatory Organisation or any other appropriate regulatory authority with whom the applicant is registered in its home country. A declaration by the applicant that it has entered into a custodian agreement with a domestic custodian together with particulatrs of the domestic custodian. A signed declaration statement that appears at the end of the Form. Declaration regarding fit & proper entity.
The eligibility criteria for applicant seeking FII registration As per Regulation 6 of SEBI (FII) Regulations,1995, Foreign Institutional Investors are required to fulfill the following conditions to qualify for grant of registration: •
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Applicant should have track record, professional competence, financial soundness, experience, general reputation of fairness and integrity; The applicant should be regulated by an appropriate foreign regulatory authority in the same capacity/category where registration is sought from SEBI. Registration with authorities, which are responsible for incorporation, is not adequate to qualify as Foreign Institutional Investor. 14
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The applicant is required to have the permission under the provisions of the Foreign Exchange Management Act, 1999 from the Reserve Bank of India. Applicant must be legally permitted to invest in securities outside the country or its in-corporation / establishment. The applicant must be a "fit and proper" person. The applicant has to appoint a local custodian and enter into an agreement with the custodian. Besides it also has to appoint a designated bank to route its transactions. Payment of registration fee of US $ 5,000.00
DEPOSITORIES DEPOSITORIES AND CUSTODIANS There are two Depositories and approximately 390 Depository Participants (DP) are registered with SEBI at present. The two Depositories are: •
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National Securities Depository Limited Central Depository Services (I) Limited
The benefits of availing Depository Services are as follows: •
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A safe, convenient way to hold securities; Instant transfer of securities; Stamp duty is not required on transfer of securities; Elimination of risks associated with physical certificates such as bad delivery , fake securities, Delays, thefts etc.; Reduction in paperwork involved in transfer of securities; Reduction in the cost of transaction, No odd lot problem, even one share can be sold; Facility of nomination; Change in address recorded with DP gets registered with all companies in which investor holds securities electronically eliminating the need to correspond with each of them separately; Transmission of securities is done by DP eliminating correspondence with companies; Credited automatically into demat account of shares, arising out-of bonus or split or consolidation or merger etc.
Opening of an account with any of the depository Participant of any depository is required to avail the services. 15
Opening of an account
The investor has to approach a Depository Participant and fill up an account opening form with the support proof of identity and address. Proof of Identity : Photograph and Signature of investor must be authenticated by investor's bank or by an existing demat account holder. Alternatively, one can submit a copy of a valid Passport, Voters Id Card, Driving License or PAN card with photograph. Proof of Address : A copy of ration card or passport or voter ID or PAN card or driving license or bank passbook as proof of address. The investor has to sign an agreement with DP in a depository prescribed standard format, which holds a detail of investor's and DPs rights and duties. DP provides investor with a copy of the agreement and schedule of charges for future reference. The DP opens the account for the investor in the system and give an account number, which is also called BO ID (Beneficiary owner Identification number). Kindly note that there is no balance of securities required in the account and more than one account in the same name can be opened either with the same DP or with other irrespective of the brokers account. DERIVATIVES Derivatives trading takes place under the Securities and Exchange Board of India Act, 1992 and the framework including suggestive bye-law and its Clearing Corporation/House has been laid down by Dr. L.C. Gupta Committee, constituted by SEBI.
Some of the eligibility conditions laid down by SEBI for Derivative Exchange/Segment and its Clearing Corporation/House are as follows: 16
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The Derivatives Exchange/Segment shall have on-line surveillance capability to monitor positions, prices, and volumes on a real time basis so as to deter market manipulation. The Derivatives Exchange/ Segment should have arrangements for dissemination of information about trades, quantities and quotes on a real time basis through atleast two information vending networks, which are easily accessible to investors across the country. The Derivatives Exchange/Segment should have arbitration and investor grievances redressal mechanism operative from all the four areas / regions of the country. The Derivatives Exchange/Segment should have satisfactory system of monitoring investor complaints and preventing irregularities in trading. The Derivative Segment of the Exchange would have a separate Investor Protection Fund. The Clearing Corporation/House shall perform full novation, i.e., the Clearing Corporation/House shall interpose itself between both legs of every trade, becoming the legal counterparty to both or alternatively should provide an unconditional guarantee for settlement of all trades. The Clearing Corporation/House shall have the capacity to monitor the overall position of Members across both derivatives market and the underlying securities market for those Members who are participating in both. The level of initial margin on Index Futures Contracts shall be related to the risk of loss on the position. The concept of value-at-risk shall be used in calculating required level of initial margins. The initial margins should be large enough to cover the one-day loss that can be encountered on the position on 99% of the days. The Clearing Corporation/House shall establish facilities for electronic funds transfer (EFT) for swift movement of margin payments. In the event of a Member defaulting in meeting its liabilities, the Clearing Corporation/House shall transfer client positions and assets to another solvent Member or close-out all open positions. The Clearing Corporation/House should have capabilities to segregate initial margins deposited by Clearing 17
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Members for trades on their own account and on account of his client. The Clearing Corporation/House shall hold the clients' margin money in trust for the client purposes only and should not allow its diversion for any other purpose. The Clearing Corporation/House shall have a separate Trade Guarantee Fund for the trades executed on Derivative Exchange / Segment.
Presently, SEBI has permitted Derivative Trading on the Derivative Segment of BSE and the F&O Segment of NSE. The rights of investors in the Derivative Market are well protected by SEBI. The measures specified by SEBI are as follows: •
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Investor's money has to be kept separate at all levels and is permitted to be used only against the liability of the Investor and is not available to the trading member or clearing member or even any other investor. The Trading Member is required to provide every investor with a risk disclosure document which will disclose the risks associated with the derivatives trading so that investors can take a conscious decision to trade in derivatives. Investor would get the contract note duly time stamped for receipt of the order and execution of the order. The order will be executed with the identity of the client and without client ID order will not be accepted by the system. The investor could also demand the trade confirmation slip with his ID in support of the contract note. This will protect him from the risk of price favour, if any, extended by the Member. In the derivative markets all money paid by the Investor towards margins on all open positions is kept in trust with the Clearing House/ Clearing corporation and in the event of default of the Trading or Clearing Member the amounts paid by the client towards margins are segregated and not utilised towards the default of the member. However, in the event of a default of a member, losses suffered by the Investor, if any, on settled / closed out position are compensated from the Investor Protection Fund, as per 18
the rules, bye-laws and regulations of the derivative segment of the exchanges COLLECTIVE INVESTMENT SCHEMES At the time of commencement of CIS Regulations i.e. (October 15, 1999), entities operating a collective investment scheme are deemed to be an existing collective investment scheme.
SEBI does not ensure the refund of money invested in defaulting entities registered before October 15, 1999. By any means the under mentioned do not constitute a CIS where any scheme or arrangement •
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Made or offered by a co-operative society or a society being a society registered or deemed to be registered under any law relating to co-operative societies for the time being in force in any State Being under which deposits are accepted by non-banking financial companies e.g. a contract of insurance to which the Insurance Act, applies. Providing for any Scheme, Pension Scheme or the Insurance Scheme framed under the Employees Provident Fund and Miscellaneous Provisions Act, 1952. Under which deposits are accepted under section 58A of the Companies Act, 1956 (1 of 1956). Under which deposits are accepted by a company declared as a mutual benefit society under section 620A of the Companies Act, 1956 (1 of 1956). Falling within the meaning of Chit business as defined in clause (d) of section 2of the Chit Fund Act, 1982 (40 of 1982). Under which contributions made are in the nature of subscription to a mutual fund.
Registered with SEBI under the SEBI (Collective Investment Schemes) Regulations, 1999 and incorporated under the provisions of the Companies Act, 1956 whose object is to organise, operate and manage a Collective Investment Scheme forms a Collective Investment Management Company. These companies can raise funds from the public by launching schemes which has to be credit rated and appraised by 19
appraising agencies. It also has to be approved by the Trustee and contain disclosures according to the Regulations to enable investors to make informed decision. The offer document to the public is issued after 21 days of filing document to SEBI and in return no modifications are suggested by SEBI. The CIS cannot do such. SEBI is not responsible either for the financial soundness of any scheme for which the offer document has been filed or for the correctness of the statements made or opinions expressed in the offer document. CIMC has to ensure the disclosures. BUY BACK OF SECURITIES A company buy back its shares in any one of the undermentioned manners even without shareholders' resolution to the extent of 10% of paid up equity capital and reserves. For 25% buy back, it has to get approved by Shareholders Resolution as specified in Section 77 A of Companies Act, 1956. •
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From the existing shareholders on a proportionate basis through the tender offer; From open market through: Book building process Stock exchange, From odd lot holders. o o
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The listed companies requires intimation to the stock exchange of general meetings and resolutions passed thereof. The informations can be obtained from the stock exchanges. SEBI issues a press release and the offer document is put on the SEBI website when buyback offer document or public announcement is filed.
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CONCLUSION SEBI, if not 100%, than for sure it has been near to 100% success as far as the protections of the investors are concerned. As we have seen that via different guidelines it had made it sure that no stone remains unturned in the path of the mission of protecting the investors. But at present the two greatest challenges are the scams relating to mutual fund and the disgorgement of money. As regards to the mutual fund problem, according to a current issue in a newspaper it had become clear that, the Capital market regulator SEBI is concerned about the kind of service mutual funds are providing to their investors and wants the industry to focus on the hassle-free redemptions and also conduct an investor survey, in their own interest. Furthermore Mr.C.B. Bhave while pointing towards the mutual fund institutions commented that, “Take up investor survey to find out what they feel about your products, why do they like certain products……….”, “Focus on what the client wants, as this will be in your interest,” he added. He also assured that SEBI would be having an advisory committee for the MF institutions. The SEBI Chairman also suggested setting up of a depository that will maintain database of all mutual fund investors across the country, much in line with the depositories for the equity market. SEBI is also planning to hold a workshop for the trustees to get their feedback and to know their requirements. The regulator has also decided to set up a mutual fund advisory committee to address the issues faced by the industry. In India, the position is not so well and hence the picture is not clear as to how the disgorged money is to be treated. Generally, the payments received by way of penalties are deposited in Consolidated Fund of India. In its first ever disgorgement order on 21st November, 2006, in Karvey case, SEBI directed NSDL, CDSL and eight depository participants (DPs) to return Rs115.81 crore in six months. The DPs include i nclude Karvey, HDFC Bank, Khandwala Securities, IDBI Bank, Jhavei Securities, ING Vysya Bank, PR Stock Broking and Pratik Stock Vision. On the issue of disgorgement, in the order passed in the Karvey case, SEBI said, “It is well established worldwide that 21
the power to disgorge is an equitable remedy and is not a penal or even a quasi- penal action. Thus it differs from actions like forfeiture and impounding of assets or money. Unlike damages, it is a method of forcing a defendant to give up the amount by which he or she was unjustly enriched. The point of importance here is that the order was passed with the need felt to restore confidence about the market process in the minds of investors who were deprived of their entitlement to shares under the IPO as a result of illegal cornering of shares by some financiers. The Wadhwa Committee report of December 2007 recommended making good deprived investors in money terms, which, it seems, went well with the SEBI, as understood from its order of disgorgement.
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RESERVE BANK OF INDIA
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INTRODUCTION The central bank of the country is the Reserve Bank of India (RBI). It was established in April 1935 with a share capital of Rs. 5 crores on the basis of the recommendations of the Hilton Young Commission. The share capital was divided into shares of Rs. 100 each fully paid which was entirely owned by private shareholders in the beginning. The Government held shares of nominal value of Rs. 2,20,000. Reserve Bank of India was nationalised in the year 1949. The general superintendence and direction of the Bank is entrusted to Central Board of Directors of 20 members, the Governor and four Deputy Governors, one Government official from the Ministry of Finance, ten nominated Directors by the Government to give representation to important elements in the economic life of the country, and four nominated Directors by the Central Government to represent the four local Boards with the headquarters at Mumbai, Kolkata, Chennai and New Delhi. Local Boards consist of five members each Central Government appointed for a term of four years to represent territorial and economic interests and the interests of cooperative and indigenous banks. The Reserve Bank of India Act, 1934 was commenced on April 1, 1935. The Act, 1934 (II of 1934) provides the statutory basis of the functioning of the Bank. The Bank was constituted for the need of following: •
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To regulate the issue of banknotes To maintain reserves with a view to securing monetary stability and To operate the credit and currency system of the country to its advantage.
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OBJECTIVES OF THE RESERVE BANK OF INDIA The Preamble to the Reserve Bank of India Act, 1934 spells out the objectives of the Reserve Bank as: “to regulate the issue of Bank notes and the keeping of reserves with a view to securing mone moneta tarry stab stabil ilit ity y in Indi India a and and gene genera rall lly y to oper operat ate e the the currency and credit system of the country to its advantage.” Prio Priorr to the the esta establi blishm shmen entt of the the Reser Reserve ve Bank, Bank, the the Indi Indian an fina financ ncia iall syst system em was was tota totall lly y inad inadeq equa uate te on acco accoun untt of the the inhe inhere rent nt weak weakne ness ss of the the dual dual cont contro roll of curr curren ency cy by the the Central Government and of credit by the Imperial Bank of India. The The Hilton-Y Hilton-Youn oung g Commiss Commission ion,, theref therefore ore,, recomme recommended nded that that the the dicho dichoto tomy my of funct function ions s and divi divisio sion n of respo responsi nsibil bilit ity y for for control control of currency currency and credit and the divergent policies in this respect must be ended by setting-up of a central bank – called the Reserve Bank of India – which would regulate the financial policy and develop banking facilities throughout the country. Hence, the Bank was established with this primary object in view. Another objective of the Reserve Bank has been to remain free from from poli politi tica call infl influe uenc nce e and and be in succ succes essf sful ul oper operat atio ion n for for maint maintain aining ing finan financia ciall stabi stabilit lity y and and cred credit it.. The The funda fundame menta ntall obje object ct of the the Rese Reserv rve e Bank Bank of Indi India a is to disc discha harg rge e pure purely ly central banking functions in the Indian money market, i.e., to act as the note- issuing authority, authority, bankers’ bankers’ bank and banker to government, and to promote the growth of the economy within the framework of the general economic policy of the Government, consistent with the need of maintenance of price stability. A significant object of the Reserve -Bank of India has also been to assist the planned process of development of the Indian economy economy.. Besides Besides the traditi traditiona onall central central banking banking functio functions, ns, with the launching of the five-year plans in the country, the Reserve Bank of India has been moving ahead in performing a host of developmental and promotional functions, which are normally beyond the purview of a traditional Central Bank.
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ORGANIZATION AND MANAGEMENT OF RESERVE BANK OF INDIA CENTRAL BOARD OF DIRECTORS: The The orga organiz nizat ation ion and manag managem ement ent of RBI RBI is vest vested ed on the the Central Board of Directors. It is responsible for the management of RBI.Central Board of Directors consist of 20 members. It is constituted as follows: •
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One Governor: it is the highest authority of RBI. He is appointed by the Government of India for a term of 5 years. He can be re-appointed for another term. Four Deputy Governors: Four deputy Governors are nominated by Central Govt. for a term of 5 years Fifteen Directors: Other fifteen members of the Central Board are appointed by the Central Government. Out of these , four directors, one each from the four local Boards are nominated by the Government separately by the Central Government.
Ten directors nominated by the Central Government are among the experts of commerce, industries, finance, economics and cooperation. The finance secretary of the Government of India is also nominated as Govt. officer in the board. Ten directors are nominated for a period of 4 years. The Governor Governor acts as the Chief Executive officer and Chairman of the the Cent Centra rall Boar Board d of Dire Direct ctor ors. s. In his his abse absenc nce e a depu deputy ty Governor nominated by the Governor, acts as the Chairman of the Centra Centrall Board. Board. The deputy deputy govern governors ors and govern government ment’s ’s officer nominee are not entitled to vote at the meetings of the Board. The Governor and four deputy Governors are full time officers of the Bank. LOCAL BOARDS: Besides the central board, there are local boards for four regional areas of the country with their head-quarters at Mumbai, Kolkata, Chennai, and New Delhi. Local Boards consist of five members each, appointed by the central Government for a term of 4 years to represent territorial and economic interests and the interests of co-operatives and indigenous banks. The function of the local boards is to advise the central 26
board on general and specific issues referred to them and to perform duties which the central board delegates.
OFFICES OF RBI: The Head office of the bank is situated in Mumbai and the offi office ces s of loca locall boar boards ds are situ situat ated ed in Delh Delhi, i, Kolka olkata ta and and Chennai. In order to maintain the smooth working of banking system, RBI has opened local offices or branches in Ahmedab Ahmedabad, ad, Bangal Bangalore ore,, Bhopal Bhopal,, Bhubane Bhubaneshwa shwar, r, Chandig Chandigarh arh,, Guwahati, Hyderabad, Jaipur, Jammu, Kanpur, Nagpur, Patna, Thiruvananthpuram, Kochi, Lucknow and Byculla (Mumbai). The RBI can open its offices with the permission permission of the Government Government of India. In places where there are no offices of the bank, it is represented by the state Bank of India and its associate banks as the agents of RBI. ADMINISTRATIVE DEPARTMENT OF RBI :
In order to maintain smooth functioning, RBI has established different administrative departments which are the part of its internal organization. These are as follows: Department of currency management. Department of banking supervision. Rural planning and credit department. Department of banking operations and development. Exchange control department. Secretary’s department Industrial and export credit department Department of administration and personnel management Department of Government and Bank accounts. Department of non-Banking supervision. Internal debt management cell. Inspection department. Department of information and technology. Other department: Besides these above departments RBI has other departments such as premises department, press relation department, personnel policy department etc. • • • • • • • • • • • • •
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FUNCTIONS OF RESERVE BANK OF INDIA The Reserve Bank of India Act of 1934 entrust all the important functions of a central bank the Reserve Bank of India. BANK OF ISSUE
Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to issue bank notes of all denominations. The distribution of one rupee notes and coins and small coins all over the country is undertaken by the Reserve Bank as agent of the Government. The Reserve Bank has a separate Issue Department which is entrusted with the issue of currency notes. The assets and liabilities of the Issue Department are kept separate from those of the Banking Department. Originally, the assets of the Issue Department were to consist of not less than two-fifths of gold coin, gold bullion or sterling securities provided the amount of gold was not less than Rs. 40 crores in value. The remaining three-fifths of the assets might be held in rupee coins, Government of India rupee securities, eligible bills of exchange and promissory notes payable in India. Due to the exigencies of the Second World War and the post-was period, these provisions were considerably modified. Since 1957, the Reserve Bank of India is required to maintain gold and foreign exchange reserves of Ra. 200 crores, of which at least Rs. 115 crores should be in gold. The system as it exists today is known as the minimum reserve system. BANKER TO GOVERNMENT
The second important function of the Reserve Bank of India is to act as Government banker, agent and adviser. The Reserve Bank is agent of Central Government and of all State Governments in India excepting that of Jammu and Kashmir. The Reserve Bank has the obligation to transact Government business, via. to keep the cash balances as deposits free of 28
interest, to receive and to make payments on behalf of the Government and to carry out their exchange remittances and other banking operations. The Reserve Bank of India helps the Government - both the Union and the States to float new loans and to manage public debt. The Bank makes ways and means advances to the Governments for 90 days. It makes loans and advances to the States and local authorities. It acts as adviser to the Government on all monetary and banking matters. BANKERS' BANK AND LENDER OF THE LAST RESORT
The Reserve Bank of India acts as the bankers' bank. According to the provisions of the Banking Banki ng Companies Act of 1949, every scheduled bank was required to maintain with the Reserve Bank a cash balance equivalent to 5% of its demand liabilites and 2 per cent of its time liabilities in India. By an amendment of 1962, the distinction between demand and time liabilities was abolished and banks have been asked to keep cash reserves equal to 3 per cent of their aggregate deposit liabilities. The minimum cash requirements can be changed by the Reserve Bank of India. The scheduled banks can borrow from the Reserve Bank of India on the basis of eligible securities or get financial accommodation in times of need or stringency by rediscounting bills of exchange. Since commercial banks can always expect the Reserve Bank of India to come to their help in times of banking crisis the Reserve Bank becomes not only the banker's bank but also the lender of the last resort. CONTROLLER OF CREDIT
The Reserve Bank of India is the controller of credit i.e. it has the power to influence the volume of credit created by banks in India. It can do so through changing the Bank rate or through open market operations. According to the Banking Regulation Act of 1949, the Reserve Bank of India can ask any particular 29
bank or the whole banking system not to lend to particular groups or persons on the basis of certain types of securities. Since 1956, selective controls of credit are increasingly being used by the Reserve Bank. The Reserve Bank of India is armed with many more powers to control the Indian money market. Every bank has to get a licence from the Reserve Bank of India to do banking business within India, the licence can be cancelled by the Reserve Bank of certain stipulated conditions are not fulfilled. Every bank will have to get the permission of the Reserve Bank before it can open a new branch. Each scheduled bank must send a weekly return to the Reserve Bank showing, in detail, its assets and liabilities. This power of the Bank to call for information is also intended to give it effective control of the credit system. The Reserve Bank has also the power to inspect the accounts of any commercial bank. As supreme banking authority in the country, the Reserve Bank of India, therefore, has the following powers: (a) It holds the cash reserves of all the scheduled banks. (b) It controls the credit operations of banks through quantitative and qualitative controls. (c) It controls the banking system through the system of licensing, inspection and calling for information. (d) It acts as the lender of the last resort by providing rediscount facilities to scheduled banks. CUSTODIAN OF FOREIGN RESERVES
The Reserve Bank of India has the responsibility to maintain the official rate of exchange. According to the Reserve Bank of India Act of 1934, the Bank was required to buy and sell at fixed rates any amount of sterling in lots of not less than Rs. 30
10,000. The rate of exchange fixed was Re. 1 = sh. 6d. Since 1935 the Bank was able to maintain the exchange rate fixed at lsh.6d. though there were periods of extreme pressure in favour of or against the rupee. After India became a member of the International Monetary Fund in 1946, the Reserve Bank has the responsibility of maintaining fixed exchange rates with all other member countries of the I.M.F. Besides maintaining the rate of exchange of the rupee, the Reserve Bank has to act as the custodian of India's reserve of international currencies. The vast sterling balances were acquired and managed by the Bank. Further, the RBI has the responsibility of administering the exchange controls of the country. SUPERVISORY FUNCTIONS
In addition to its traditional central banking functions, the Reserve bank has certain non-monetary functions of the nature of supervision of banks and promotion of sound banking in India. The Reserve Bank Act, 1934, and the Banking Regulation Act, 1949 have given the RBI wide powers of o f supervision and control over commercial and co-operative banks, relating to licensing and establishments, branch expansion, liquidity of their assets, management and methods of working, amalgamation, reconstruction, and liquidation. The RBI is authorised to carry out periodical inspections of the banks and to call for returns and necessary information from them. The nationalisation of 14 major Indian scheduled banks in July 1969 has imposed new responsibilities on the RBI for directing the growth of banking and credit policies towards more rapid development of the economy and realisation of certain desired social objectives. The supervisory functions of the RBI have helped a great deal in improving the standard of banking in India to develop on sound lines and to improve the methods of 31
their operation. PROMOTIONAL FUNCTIONS
With economic growth assuming a new urgency since Independence, the range of the Reserve Bank's functions has steadily widened. The Bank now performs a varietyof developmental and promotional functions, which, at one time, were regarded as outside the normal scope of central banking. The Reserve Bank was asked to promote banking habit, extend banking facilities to rural and semi-urban areas, and establish and promote new specialised financing agencies. Accordingly, the Reserve Bank has helped in the setting up of the IFCI and the SFC; it set up the Deposit Insurance Corporation in 1962, the Unit Trust of India in 1964, the Industrial Development Bank of India also in 1964, the Agricultural Refinance Corporation of India in 1963 and the Industrial Reconstruction Corporation of India in 1972. These institutions were set up directly or indirectly by the Reserve Bank to promote saving habit and to mobilise savings, and to provide industrial finance as well as agricultural finance. As far back as 1935, the Reserve Bank of India set up the Agricultural Credit Department to provide agricultural credit. But only since 1951 the Bank's role in this field has become extremely important. The Bank has developed the co-operative credit movement to encourage saving, to eliminate moneylenders from the villages and to route its short term credit to agriculture. The RBI has set up the Agricultural Refinance and Development Corporation to provide long-term finance to farmers. CLASSIFICATION CLASSIFICATION OF RBIS FUNCTIONS
The monetary functions also known as the central banking functions of the RBI are related to control and regulation of money and credit, i.e., issue of currency, control of bank credit, control of foreign exchange operations, banker to the Government and to the money market. Monetary functions of 32
the RBI are significant as they control and regulate the volume of money of money and credit in the country. Equally important, however, are the non-monetary functions of the RBI in the context of India's economic backwardness. The supervisory function of the RBI may be regarded as a nonmonetary function (though many consider this a monetary function). The promotion of sound banking in India is an important goal of the RBI, the RBI has been given wide and drastic powers, under the Banking Regulation Act of 1949 these powers relate to licencing of banks, branch expansion, liquidity of their assets, management and methods of working, inspection, amalgamation, reconstruction and liquidation. Under the RBI's supervision and inspection, the working of banks has greatly improved. Commercial banks have developed into financially and operationally sound and viable units. The RBI's powers of supervision have now been extended to non-banking financial intermediaries. Since independence, particularly after its nationalisation 1949, the RBI has followed the promotional functions vigorously and has been responsible for strong financial support to industrial and agricultural development in the country.
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CONCLUSION RBI is the apex banking institution in India. RBI is an autonomous body promoted by the government of India and is head headqu quar arte tere red d at Mumb Mumbai ai.. The The RBI RBI play plays s a key key role role in the the management of the treasury foreign exchange movements and is also also the the prim primar ary y regu regula lato torr for for bank bankin ing g and and nonnon-ba bank nkin ing g financial institutions. The RBI operates a number of government mints that produce currency and coins.
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THANK YOU
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