Indian Financial System Regulatory Bodie PDF

IRJMSH Vol 7 Issue 2 [Year 2016] ISSN 2277 – 9809 (0nline) 2348–9359 (Print)
INDIAN FINANCIAL SYSTEM: REGULATORY BODIES AND THEIR FUNCTIONS
Dr. Babita Jaiswal

Asst. Professor Govt. Girls Degree College Gurgaon Haryana
babitajaiswal09@gmail.com
Abstract:
Fuelled by recent growth rates among large countries, India has begun its journey of an economic
transformation since the liberalization process began in the early 1990’s. In the last few years, supported
by a growth rate of over 7% where in the world economy was in doldrums, soaring stock market,
significant foreign portfolio inflows which has surpassed inflows to any other country of developing
economies and a swiftly changing financial, the Indian financial system has been witnessing an exciting
era of transformation. The banking sector has seen major changes with deregulation of interest rates and
the emergence of strong domestic private players as well as foreign banks. Granting of licenses to new
players and introduction of payment banks with emphasis on technology driven banking is changing the
course of financial system and paving new paths. But at the same time, there is evidence of credit
constraints for India’s corporate and SME segment that rely heavily on trade credit. In this paper we
would try to understand basics of Indian Financial System.
In the worlds of Van Horne, “financial system allocates savings efficiently in an economy to ultimate
users either for investment in real assets or for consumption”.
According to Prasanna Chandra, “financial system consists of a variety of institutions, markets and
instruments related in a systematic manner and provide the principal means by which savings are
transformed into investments”.
The Indian Economy -- A Brief History
The second most populated country in the world (1.11 billion), India currently has the fourth largest
economy in PPP terms, and is closing in at the heels of the third largest economy, Japan. At independence
from the British in 1947, India inherited one of the world’s poorest economies (the manufacturing sector
accounted for only one tenth of the national product), but also one with arguably the best formal financial
markets in the developing world, with four functioning stock exchanges. After independence, a decades-
long turn towards socialism put in place a regime and culture of licensing, protection and widespread red-
tape breeding corruption. In 1990-91 India faced a severe balance of payments crisis ushering in an era of
reforms comprising deregulation, liberalization of the external sector and partial privatization of some of
the state sector enterprises. Along with deregulation, globalization has played a key role in transforming
the Indian economy in the past dozen years. In just over a decade since liberalization, the share of foreign
trade in India’s GDP had increased by over 50%. While imports increased steadily and continued to
exceed exports, the rise in the latter has been almost proportional as well.
Functions of Financial System
The financial system of a country performs certain valuable functions for the economic growth of that
country. The main functions of a financial system may be briefly discussed as below:
1. Saving function: Basic and primary function of a financial system is to mobilize savings and
channelize them into productive purposes. It is through financial system the savings are transformed into
investments.
2. Liquidity function: Another important function of a financial system is to provide money and
monetary assets for the production of goods and services
3. Payment function: The financial system offers a very convenient mode of payment for goods and
services. These may include facilitating payments in hard currency or through other channels. Also
technology is playing important role in this.
4. Risk function: The financial markets provide protection against life, health and income risks
5. Information function: A financial system makes available price-related information, Financial
markets disseminate information for enabling participants to develop an informed opinion about
investment, disinvestment, reinvestment or holding a particular asset.
International Research Journal of Management Sociology & Humanity ( IRJMSH ) Page 161
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6. Transfer function: A financial system provides a mechanism for the transfer of the resources across
geographic boundaries.
Structure of Indian Financial System

Financial structure refers to shape, components and their order in the financial system. The Indian
financial system can be broadly classified into formal (organised) financial system and the informal
(unorganised) financial system. The formal financial system comprises of Ministry of Finance, RBI,
SEBI and other regulatory bodies.
The informal financial system consists of individual money lenders, groups of persons operating as funds
or associations, partnership firms consisting of local brokers, pawn brokers, and non-banking financial
intermediaries such as finance, investment and chit fund companies. The formal financial system
comprises financial institutions, financial markets, financial instruments and financial services. These
constituents or components of Indian financial system may be briefly discussed as below:
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I. Financial Institutions
Financial institutions are the business organizations that act as mobilises of savings and as purveyors of
credit or finance. This means financial institutions mobilise the savings of savers and give credit or
finance to the investors. They also provide various financial services to the community. They deal in
financial assets such as deposits, loans, securities and so on.
1. Regulatory and Promotional Institutions:

Primary function of such institutions is to provide rules, regulations and guidelines. They
provide a premises under which Financial institutions, financial markets, financial
instruments and financial services are regulated by regulators like Ministry of Finance, the
Company Law Board, RBI, SEBI, IRDA, Dept. of Economic Affairs, Department of
Company Affairs etc. The two major Regulatory and Promotional Institutions in India are
Reserve Bank of India (RBI) and Securities Exchange Board of India (SEBI).
2. Banking Institutions:
Banking institutions are one who mobilize the savings of the people. They provide a
mechanism for the smooth exchange of goods and services. They extend credit while lending
money. They not only supply credit but also create credit. There are three basic categories of
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banking institutions. They are commercial banks, co-operative banks and developmental
banks.
3. Non-banking Institutions:
The non-banking financial institutions also mobilize financial resources directly or indirectly
from the people. They lend the financial resources mobilized. They lend funds but do not
create credit. Non-banking financial institutions can be categorized as investment companies,
housing companies, leasing companies, hire purchase companies, specialized financial
institutions (EXIM Bank etc.) investment institutions, state level institutions etc. Financial
institutions are financial intermediaries. They intermediate between savers and investors.
II. Financial Markets:

Financial markets are another part or component of financial system. Efficient financial markets are
essential for speedy economic development. It facilitates the flow of savings into investment. Financial
markets bridge one set of financial intermediaries with another set of players. Financial markets are the
backbone of the economy. This is because they provide monetary support for the growth of the economy.
They deal in financial securities (or financial instruments) and financial services.
Financial markets exist wherever financial transactions take place. Financial transactions include issue of
equity stock by a company, purchase of bonds in the secondary market, deposit of money in a bank
account, transfer of funds from a current account to a savings account etc. The participants in the financial
markets are corporations, financial institutions, individuals and the government.
The main functions of financial markets are outlined as below:
1. To facilitate creation and allocation of credit and liquidity.
2. To serve as intermediaries for mobilisation of savings.
3. To help in the process of balanced economic growth.
4. To provide financial convenience.
5. To provide information and facilitate transactions at low cost.
6. To cater to the various credits needs of the business organisations.
Classification of Financial Markets: There are mainly five ways of classifying financial markets.
1. Classification on the basis of the type of financial claim:

On this basis, financial markets may be classified into debt market and equity market.
Debt market: This is the financial market for fixed claims like debt instruments.
Equity market: This is the financial market for residual claims, i.e., equity instruments.
2. Classification on the basis of maturity of claims: On this basis, financial markets may be
classified into money market and capital market.
Money market: A market where short term funds are borrowed and lend is called money
market. It deals in short term monetary assets with a maturity period of one year or less. The
main participants in this market are banks, financial institutions and government. In short, money
market is a place where the demand for and supply of short term funds are met.
Capital market: Capital market is the market for long term funds. This market deals in the long
term claims, securities and stocks with a maturity period of more than one year. It is the market
from where productive capital is raised and made available for industrial purposes.
3. Classification on the basis of seasoning of claim:
On this basis, financial markets are classified into primary market and secondary market.
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Primary market: Primary markets are those markets which deal in the new securities.
Therefore, they are also known as new issue markets. These are markets where securities are
issued for the first time.
Secondary market: Secondary markets are those markets which deal in existing securities.
Existing securities are those securities that have already been issued and are already outstanding.
Secondary market consists of stock exchanges.
4. Classification on the basis of structure or arrangements:

On this basis, financial markets can be classified into organised markets and unorganized
markets.
Organised markets: These are financial markets in which financial transactions take place
within the well established exchanges or in the systematic and orderly structure.
Unorganised markets: These are financial markets in which financial transactions take place
outside the well established exchange or without systematic and orderly structure or
arrangements.
5. Classification on the basis of timing of delivery:

On this basis, financial markets may be classified into cash/spot market and forward / future
market.
Cash / Spot market: This is the market where the buying and selling of commodities happens or
stocks are sold for cash and delivered immediately after the purchase or sale of commodities or
securities.
Forward/Future market: This is the market where participants buy and sell
stocks/commodities, contracts and the delivery of commodities or securities occurs at a pre-
determined time in future.
6. Other types of financial market:

Apart from the above, there are some other types of financial markets. They are foreign exchange
market and derivatives market.
Foreign exchange market: Foreign exchange market is simply defined as a market in which one
country’s currency is traded for another country’s currency. It is a market for the purchase and
sale of foreign currencies.
Derivatives market: The derivatives are most modern financial instruments in hedging risk. It is
a market in which derivatives are traded. In short, it is a market for derivatives. The important
types of derivatives are forwards, futures, options, swaps, etc.
III. Financial Instruments (Securities)

Financial instruments are the financial assets, securities and claims. They may be viewed as
financial assets and financial liabilities. Financial assets represent claims for the payment of a
sum of money sometime in the future (repayment of principal) and/or a periodic payment in the
form of interest or dividend. Financial liabilities are the counterparts of financial assets. They
represent promise to pay some portion of prospective income and wealth to others.
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The financial instruments may be capital market instruments or money market instruments or
hybrid instruments.
The financial instruments that are used for raising capital through the capital market are known as
capital market instruments
The financial instruments that are used for raising and supplying money in a short period not
exceeding one year through money market are called money market instruments
Hybrid instruments are those instruments which have both the features of equity and debenture.
Examples are convertible debentures, warrants etc.
Financial instruments may also be classified as cash instruments and derivative instruments.
Cash instruments are financial instruments whose value is determined directly by markets.
Derivative instruments are financial instruments which derive their value from some other
financial instrument or variable.
Financial instruments can also be classified into primary instruments and secondary instruments.
Primary instruments are instruments that are directly issued by the ultimate investors to the
ultimate savers. Secondary instruments are issued by the financial intermediaries to the ultimate
savers.
Characteristics of Financial Instruments

The important characteristics of financial instruments may be outlined as below:
a. Liquidity: Financial instruments provide liquidity. These can be easily and quickly
converted into cash.
b. Marketing: Financial instruments facilitate easy trading on the market. They have a
ready market.
c. Collateral value: Financial instruments can be pledged for getting loans.
d. Transferability: Financial instruments can be easily transferred from person to person.
e. Maturity period: The maturity period of financial instruments may be short term,
medium term or long term.
f. Transaction cost: Financial instruments involve buying and selling cost. The buying
and selling costs are called transaction costs. These are lower.
g. Risk: Financial instruments carry risk. This is because there is uncertainty with regard to
payment of principal or interest or dividend as the case may be.
h. Future trading: Financial instruments facilitate future trading so as to cover risks due to
price fluctuations, interest rate fluctuations etc.
IV. Financial Services

The development of a sophisticated and matured financial system in the country, especially after
the early nineties, led to the emergence of a new sector. This new sector is known as financial
services sector. Its objective is to intermediate and facilitate financial transactions of individuals
and institutional investors. Important financial services include lease financing, hire purchase,
instalment payment systems, merchant banking, factoring, forfaiting etc.
Financial institutions, financial markets, financial instruments and financial services are all
regulated by regulators like Ministry of Finance, the Company Law Board, RBI, SEBI, IRDA,
Dept. of Economic Affairs, Department of Company Affairs etc. The two major Regulatory and
Promotional Institutions in India are Reserve Bank of India (RBI) and Securities Exchange Board
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of India (SEBI). Both RBI and SEBI administer, legislate, supervise, monitor, control and
discipline the entire financial system. Let’s have a look on the functions, objectives and initiatives
taken by these two apex bodies in respect with managing Indian financial systems.
RESERVE BANK OF INDIA

The Reserve Bank of India is the apex financial institution of the country’s financial system
entrusted with the task of control, supervision, promotion, development and planning. It came
into existence on 1st April, 1935 as per the Reserve Bank of India act 1935. But the bank was
nationalized by the government after Independence.
The Reserve Bank of India influences the management of commercial banks through its various
policies, directions and regulations. Its role in bank management is quite unique. In fact, the
Reserve Bank of India performs the four basic functions of management, viz., planning,
organising, directing and controlling in laying a strong foundation for the functioning of
commercial banks.
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
monetary stability in India and generally to operate the currency and credit system of the country
to its advantage.”
Another objective of the Reserve Bank has been to remain free from political influence and be in
successful operation for maintaining financial stability and credit.
The fundamental object of the Reserve Bank of India is to discharge purely central banking
functions in the Indian money market, i.e., to act as the note- issuing authority, 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. Besides the traditional central banking functions, 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.
Functions of the Reserve Bank of India

The Reserve Bank of India performs all the typical functions of a good Central Bank. In addition,
it carries out a variety of developmental and promotional functions which are tuned to the course
of economic planning in the country:
 Issuing currency notes, i.e. to act as a currency authority.
 Serving as banker to the Government.
 Acting as bankers’ bank and supervisor.
 Monetary regulation and management.
 Exchange management and control.
 Collection of data and their publication.
 Miscellaneous developmental and promotional functions and activities.
 Agricultural Finance.
 Industrial Finance
 Export Finance.
 Institutional promotion.
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Important functions of Reserve Bank of India are briefed below
i) Monopoly in Note Issue: -

Reserve Bank of India enjoys monopoly of Notes issue since its establishment. The bank
issues the currency notes of all denominations. Except coins which are issued by the
ministry of finance in the government of India. But these coins are put into circulation
only through the RBI. To undertake this function RBI established 2 department i.e.
a) Issue Department
b) Banking department Issue department is involved in issue of currencies and
manages currencies circulation.
ii) Banker to the Government: -
Reserve Bank of India acts as a banker to the central and state Government. As a banker
it provides all the services like a commercial bank to these Governments. It accepts
deposits of the Government and allows them to withdrawal of cheques. It makes
payments and collect receipts on behalf of the government. It also provides temporary
advances for maximum period of 3 months to these governments. It is known as “Ways”
and “Means advances”. It is also the financial advisor to the central and states. It also
helps them in formulation of financial policies.
iii) Bankers bank: -

Reserve Bank of India is the apex financial institution acts as banker to other bank. RBI
accepts deposits, maintains cash reserves and lends loans to all the banks operating under
its preview. It is a banker’s bank in the following grounds: It provides short-term loans to
the banks for 3 months against (security) i.e. eligible securities. It is known as lenders of
last resort in the times of financial emergency. It also gives loans at concessional rate
of Interest for a specific purpose. It also offers refinance facilities to all the eligible
banks.
iv) Regulatory and Supervisor Function: -

The most significant provision of the Banking regulation act is supervision and regulation
of banks. Section 35 of the act say’s that RBI can inspect any branch of Indian Bank
located in or outside the country. Further, it issued licensing for the banks and can
establish new branches to maintain regional balance in the country. It also arranges for
training colleges to the banks employees and officers.
v) Controller of Credit: -
Reserve Bank of India is an important controller of credit in our credit. The credit created
by bank leads to inflation or depression and disturbs the smooth functioning of the
economy. Therefore, to regulate credit Reserve Bank of India uses qualitative as well as
Quantitative credit control measures.
Securities Exchange Board of India (SEBI)

Securities and Exchange Board of India (SEBI) is the nodal agency to regulate the capital market and
other related issues in India. It was established in 1988 as an administrative body and was given statutory
recognition in January 1992 under the SEBI Act 1992 which came into force on January 30,1992. Before
that, the Capital Issues (Control) Act, 1947 was repealed. SEBI has been constituted on the lines of
Securities and Exchange Commission of USA. SEBI is consisting of the Chairman and 8 Members (one
member representing the Reserve Bank of India, two members from the officials of Central Government
and five other public representatives to be appointed by the Central Government from different fields).
Securities and Exchange Board of India has been playing an active role in the Indian Capital Market to
achieve the objectives enshrined in the Securities and Exchange Board of India Act, 1992.
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The major objective of the SEBI may be summarised as follows:

 To provide a degree of protection to the investors and safeguard their rights and to ensure that
there is a steady flow of funds in the market.
 To promote fair dealings by the issuer of securities and ensure a market where they can raise
funds at a relatively low cost.
 To regulate and develop a code of conduct for the financial intermediaries and to make them
competitive and professional.
 To provide for the matters connecting with or incidental to the above. Section 11 of the SEBI
Act deals with the powers and functions of the SEBI as follows:
 It shall be the duty of Board to protect the interests of the investors in securities and to promote
the development of and to regulate the securities market by measures as deemed fit.
 To achieve the above, the Board may undertake the following measures :
1. Regulating the business in stock exchanges;
2. Registering and regulating the working of stock brokers, sub-brokers, share transfer
agents, bankers to an issue, merchant bankers, underwriters, portfolio managers;
3. Registering and regulating the working of the depositories, participants, credit rating
agencies;
4. Registering and regulating the working of venture capital funds and collective
investment schemes, including mutual funds;
5. Prohibiting fraudulent and unfair trade practices relating to securities markets;
6. Promoting investors education and training of intermediaries of securities markets;
7. Prohibiting insider trading in securities;
8. Regulating substantial acquisition of shares and take-over of companies; and
9. Calling for information from undertaking, inspection, concluding inquiries and audits
of the stock exchanges, mutual funds, other persons associated with the securities market
intermediaries and self-regulatory organisations in the securities market.
Insurance Regulatory and Development Authority of India

IRDA is the primary agency which regulates, guides and formulates policies for Insurance products.
Insurance Regulatory and Development Authority of India (IRDAI) is an autonomous apex statutory
body which regulates and develops the insurance industry in India. It was constituted by a Parliament of
India act called Insurance Regulatory and Development Authority Act, 1999[2][3] and duly passed by the
Government of India.[4]
Mission Statement
1 To protect the interest of and secure fair treatment to policyholders
2 To bring about speedy and orderly growth of the insurance industry (including annuity and
superannuation payments), for the benefit of the common man, and to provide long term
funds for accelerating growth of the economy
3 To set, promote, monitor and enforce high standards of integrity, financial soundness, fair
dealing and competence of those it regulates
4 To ensure speedy settlement of genuine claims, to prevent insurance frauds and other
malpractices and put in place effective grievance redressal machinery
5 To promote fairness, transparency and orderly conduct in financial markets dealing with
insurance and build a reliable management information system to enforce high standards of
financial soundness amongst market players
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6 To take action where such standards are inadequate or ineffectively enforced
7 To bring about optimum amount of self-regulation in day-to-day working of the

industry consistent with the requirements of prudential regulation
Section 14 of IRDAI Act, 1999 lays down the duties, powers and functions of IRDAI..
Subject to the provisions of this Act and any other law for the time being in force, the Authority shall
have the duty to regulate, promote and ensure orderly growth of the insurance business and re-insurance
business.
1. Without prejudice to the generality of the provisions contained in sub-section (1), the powers and
functions of the Authority shall include,
 issue to the applicant a certificate of registration, renew, modify, withdraw, suspend or

cancel such registration;
 protection of the interests of the policy holders in matters concerning assigning of policy,
nomination by policy holders, insurable interest, settlement of insurance claim, surrender
value of policy and other terms and conditions of contracts of insurance;
 specifying requisite qualifications, code of conduct and practical training for intermediary
or insurance intermediaries and agents
 specifying the code of conduct for surveyors and loss assessors;
 promoting efficiency in the conduct of insurance business;
 promoting and regulating professional organisations connected with the insurance and re-
insurance business;
 levying fees and other charges for carrying out the purposes of this Act;
 calling for information from, undertaking inspection of, conducting enquiries and
investigations including audit of the insurers, intermediaries, insurance intermediaries
and other organisations connected with the insurance business;
 control and regulation of the rates, advantages, terms and conditions that may be offered
by insurers in respect of general insurance business not so controlled and regulated by the
Tariff Advisory Committee under section 64U of the Insurance Act, 1938 (4 of 1938);
 specifying the form and manner in which books of account shall be maintained and
statement of accounts shall be rendered by insurers and other insurance intermediaries;
 regulating investment of funds by insurance companies;
 regulating maintenance of margin of solvency;
 adjudication of disputes between insurers and intermediaries or insurance intermediaries;
 supervising the functioning of the Tariff Advisory Committee;
 specifying the percentage of premium income of the insurer to finance schemes for
promoting and regulating professional organisations referred to in clause (f);
 specifying the percentage of life insurance business and general insurance business to be
undertaken by the insurer in the rural or social sector; and
Reforms in Financial Sector:

India embarked on substantial economic liberalization in 1991. In the field of finance, the major themes
were the scaling back of capital controls and the fostering of a domestic financial system.
From 1991 to 2002, progress was made in four areas, reflecting the shortcomings that were then evident.
First, capital controls were reduced substantially to give Indian firms access to foreign capital and to build
nongovernment mechanisms for financing the current account deficit. Second, a new definedcontribution
pension system, the New Pension System, was set up so that the young population could achieve
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significant pension wealth in advance of demographic transition. Third, a new insurance regulator, the
Insurance Regulation and Development Agency, was set up, and the public sector monopolies in the field
of insurance were broken to increase access to insurance. Fourth and most important, there was a
significant burst of activity in building the equity market because of the importance of equity as a
mechanism for financing firms and the recognition of infirmities of the equity market. This involved
establishing a new regulator, the Securities and Exchanges Board of India, and new infrastructure
institutions, the National Stock Exchange and the National Securities Depository.
While all these moves were in the right direction, they were inadequate. A large number of problems with
the financial system remain unresolved. In cross-country rankings of the capability of financial systems,
India is typically found in the bottom quartile of countries.
The consensus on desired reforms was constructed through reports from four expert committees on:
High-Powered Expert Committee on Making Mumbai an International Financial Center; Percy
Mistry; 2007 :
The report outlined the prerequisites for making Mumbai an international financial center. According to
the report, the quality and reputation of the regulatory regime is a key determinant of the market share of
an INDIAN FINANCIAL CODE, in addition to the capabilities of the financial firms. It recommended
increasing financial market integration, creating a bond-currency-derivatives nexus, and ensuring capital
account convertibility and competition.
The Committee on Financial Sector Reforms; RaghuramRajan; 2008
The committee was tasked with proposing the next phase of reforms for the Indian financial sector. The
report focuses on how to increase financial inclusion by allowing players more freedom and strengthening
the financial and regulatory infrastructure. It recommended leveling the playing field, broadening access
to finance, and creating liquid and efficient markets.
Committee on Investor Awareness and Protection; DhirendraSwarup; 2010
The report outlines the need for regulation of the market for retail financial products in India and
educating the consumers. The report points to the inadequate regulatory framework governing the sellers
of financial products that induces problems like misselling, the chief cause of which is rooted in the
incentive structure that induces agents to favor their own interest rather than that of the customer. The
report proposes a reconfiguration of incentive structure to minimize information asymmetry between
consumer and seller.
Working Group on Foreign Investment in India; U. K. Sinha; 2010
The working group’s primary focus was on rationalizing the instruments and arrangements through which
India regulates capital flows. The regulatory regime governing foreign investments in India is
characterized by a system of overlapping, sometimes contradictory and sometimes nonexistent, rules for
different categories of players. This has created problems of regulatory arbitrage, lack of transparency,
and onerous transaction costs. The working group proposed reforms for rationalization of capital account
regulation. It recommended the unification of the existing multiple portfolio investor classes into a single
qualified foreign investment framework, and the promulgation of know-your-customer requirements that
meet the standards of best practices of the Organization for Economic Cooperation and Development.
Some parts of these reports were readily implementable, and have been gradually put into practice in the
following years. However, the bulk of the work program envisaged by these four expert committees is
incompatible with the present laws. More and deeper change was needed.
The Financial Sector Legislative Reforms Commission

In the case of financial law, the Ministry of Finance chose to adapt an existing institution of Law
Commissions, which are nonpartisan bodies that propose modifications of laws, to the task of writing
laws for finance.
A former judge of the Supreme Court, Justice B. N. Srikrishna, was chosen to lead the project, which ran
for two years, involved 146 persons, and had a dedicated 35-person technical team. A multidisciplinary
approach was taken, drawing together skills in economics, finance, public administration, and law. The
commission weighed the infirmities of the Indian financial system, the recommendations of expert
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committees, and the international experience, and designed a new legal foundation for Indian finance. The
Indian Financial Code is the commission’s product. It is a single, internally consistent law of 450 sections
that is expected to replace the bulk of existing Indian financial law.
Financial Regulatory Governance

Constructing effective financial law requires an understanding of market failures in finance that will
shape appropriate interventions by the government and good public administration practices, which
impact the working of government agencies. An essential feature of sound public administration is laws
that embed effective accountability mechanisms. The pressure of accountability will impel the leaders of
an agency to reshape their organization in ways that deliver performance.
The four committee reports identified numerous shortcomings in the present arrangements, most of which
can be identified as improperly drafted regulations. The feedback loops are also absent in India’s
government agencies. A lack of performance does not generate feedback loops that force the leadership to
reinvent the agency.
Separation of Powers
The INDIAN FINANCIAL CODE takes one step toward separation of powers by requiring that the
judicial responsibilities be held separate from the legislative and executive functions in the internal
working of the regulator.
Independence
To achieve regulatory independence, numerous modifications are required in financial laws. These
include: sound structure for the appointment process for senior regulatory staff, fixed contractual terms
for them, removing the power for the administration to give directions to financial agencies, and
transparency of board meetings where nominees of the Ministry of Finance are present
Accountability
The key insight of the INDIAN FINANCIAL CODE is the idea that the failures of financial agencies in
India stem from the lack of accountability for the leadership. There are four components of accountability
in the INDIAN FINANCIAL CODE: clarity of purpose, a well-structured regulation-making process, the
rule of law, and reporting mechanisms.
Clarity of Purpose: Agencies’ objectives should be defined clearly to ensure that these bodies do
not have unfettered discretion over how to exercise their power and to hold specific actors
accountable for failures.
Regulation-Making Process: The regulation-making process of the INDIAN FINANCIAL
CODE has checks and balances to help avoid suboptimal outcomes. Under the INDIAN
FINANCIAL CODE, the regulator is obliged to analyze the costs and benefits of a proposed
regulation. The costs to society of implementing the regulation must be compared to costs of the
market failures that motivate the regulation before a decision can be made.
The Rule of Law: When a financial agency is not bound by the rule of law, it wields power
without accountability. Upholding the rule of law introduces checks and balances that induce
greater accountability. In India, there are weaknesses of regulatory governance that lead to
violations of the rule of law. The INDIAN FINANCIAL CODE addresses these issues in a
comprehensive manner.
Reporting;Once the objectives of a regulatory agency are defined, reporting mechanisms are
envisioned under the INDIAN FINANCIAL CODE to determine the extent to which the agency
has achieved its objectives. Under the INDIAN FINANCIAL CODE, each agency would submit
such a progress report to the government. As an example, for a supervisory process, the agency
would be obliged to release data about investigations conducted, orders issued, orders appealed,
and the orders that struck down. Transparency would be required with a functional classification
of the expenditure of the agency across its objectives.
Conclusion
Even though a lot has been done in the Indian financial sector after liberalization still we are lacking
many things to be at par with global financial system. A second round of reform will be required so as to
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provide much needed shot in arm for the Indian financial system. A lot of steps have already been
initiated by different regulatory bodies to make Indian system more resilient and robust but final results
are yet to be seen. A sustainable system will be attained only when the market is mature enough to
understand and incorporate global practices with local flavor.
References:
http://finance.wharton.upenn.edu
http://universityofcalicut.info
http://www1.worldbank.org/finance
Gordon E. & Natarajan K.: Financial Markets & Services, Himalaya Publishing House.
Machiraju.R.H: Indian Financial System, Vikas Publishing House.
Khan M.Y: Indian Financial System, Tata Mcgraw Hill.
Bhole L.M: Financial Institutions and Markets, Tata Mcgraw Hill.
https://www.irdai.gov.in/ADMINCMS/
https://www.irdai.gov.in/ADMINCMS/cms/NormalData_Layout.aspx?page=PageNo101&mid=1.2Ref:
IRDA/GEN/03/2007
http://carnegieendowment.org/files
www.irjmsh.com

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IRJMSH Vol 7 Issue 2 [Year 2016] ISSN 2277 – 9809 (0nline) 2348–9359 (Print)

INDIAN FINANCIAL SYSTEM: REGULATORY BODIES AND THEIR FUNCTIONS

Dr. Babita Jaiswal

Structure of Indian Financial System

1. Regulatory and Promotional Institutions:

II. Financial Markets:

1. Classification on the basis of the type of financial claim:

4. Classification on the basis of structure or arrangements:

5. Classification on the basis of timing of delivery:

6. Other types of financial market:

III. Financial Instruments (Securities)

Characteristics of Financial Instruments

IV. Financial Services

RESERVE BANK OF INDIA

Objectives of the Reserve Bank of India

Functions of the Reserve Bank of India

Important functions of Reserve Bank of India are briefed below

i) Monopoly in Note Issue: -

iii) Bankers bank: -

iv) Regulatory and Supervisor Function: -

Securities Exchange Board of India (SEBI)

The major objective of the SEBI may be summarised as follows:

Insurance Regulatory and Development Authority of India

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

6 To take action where such standards are inadequate or ineffectively enforced

7 To bring about optimum amount of self-regulation in day-to-day working of the

 issue to the applicant a certificate of registration, renew, modify, withdraw, suspend or

Reforms in Financial Sector:

The Financial Sector Legislative Reforms Commission

Financial Regulatory Governance

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