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p By: Deepika Sehgal [R230207024]

B.A. LL.B. (Hons.) VIIIth Sem.
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India has grown to become a trillion dollar economy characterized by liberalized foreign
investment and trade policy. Of the growth, the dominant role is played by the private sector
which is spurred by deregulation. The country¶s GDP is growing at an average rate of 8.5%
every year and is counted as one of the best amongst the emerging economies. Notwithstanding
the global slowdown and turbulent financial conditions, the Indian economy smoothly sailed
through the testing times, thanks to a strong and vibrant financial and banking sector in India. A
lot of credit goes to the efficient regulatory supervision and measures undertaken by the Reserve
Bank of India (RBI), the Indian central bank cum banking regulator and the Securities and
Exchange Board of India (SEBI), the Indian securities market regulator. As per the recent Global
Competitiveness Report 2010-2011 published by the World Economic Forum, India ranks 17
(out of 139 countries) in the vital field of ³Financial Market Development´.

From 1991, trade liberalization in India has been accompanied by a process of gradual
liberalization of capital flows management regulations. Foreign Direct Investment (FDI) by non-
resident in resident entities through transfer or issue of securities to persons resident outside
India is a capital account transaction and Government of India and RBI regulate the same under
the Foreign Exchange Management Act, 1999 (FEMA) and various regulations framed under the
Act. RBI is given primary authority to regulate capital flows through FEMA. Notably, Section 6
of FEMA authorizes the RBI to manage foreign exchange transactions and capital flows in
consultation with the Ministry of Finance. SEBI(Foreign Institutional Investors) Regulations,
1995 (FII Regulations) have facilitated the regulation of portfolio investments and strengthened
India¶s opening to world markets. Supplementing RBI and SEBI, the other institutional bodies
regulating capital flows include the Forward Markets Commission (FMC), the Insurance
Regulatory and Development Authority (IRDA) and the Pension Fund Regulatory and
Development Authority (PFRDA), which seems to have lost jurisdiction over any foreign direct
investment in the country owing to the ongoing discussions for the enactment of the revised
PFRDA Bill. The functions of rest of the above-mentioned organizations are explained as under.

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The RBI monitors the ceilings on FII/NRI/PIO investments in Indian companies on a daily
basis. For effective monitoring of foreign investment ceiling limits, the Reserve Bank has fixed
cut-off points that are two percentage points lower than the actual ceilings. The cut-off point, for
instance, is fixed at 8 per cent for companies in which NRIs/ PIOs can invest up to 10 per cent of
the company's paid up capital. The cut-off limit for companies with 24 per cent ceiling is 22 per
cent and for companies with 30 per cent ceiling, is 28 per cent and so on. Similarly, the cut-off
limit for public sector banks (including State Bank of India) is 18 per cent.

Once the aggregate net purchases of equity shares of the company by FIIs/NRIs/PIOs reach
the cut-off point, which is 2% below the overall limit, the Reserve Bank cautions all designated
bank branches so as not to purchase any more equity shares of the respective company on behalf
of FIIs/NRIs/PIOs without prior approval of the Reserve Bank. The link offices are then required
to intimate the Reserve Bank about the total number and value of equity shares/convertible
debentures of the company they propose to buy on behalf of FIIs/NRIs/PIOs. On receipt of such
proposals, the Reserve Bank gives clearances on a first-come-first served basis till such
investments in companies reach 10 / 24 / 30 / 40/ 49 per cent limit or the sectoral caps/statutory
ceilings as applicable. On reaching the aggregate ceiling limit, the Reserve Bank advises all
designated bank branches to stop purchases on behalf of their FIIs/NRIs/PIOs clients. The
Reserve Bank also informs the general public about the `caution¶ and the `stop purchase¶ in these
companies through a press release.

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In 1996-97, several changes were made to the SEBI (Foreign Institutional Investors)
Regulations, 1995 to diversify the foreign institutional investor base and to further facilitate
inflow of foreign portfolio investment. The changes aimed at facilitating investment in debt
securities through the FII route. The changes are as follows:

‡ the eligible categories of FIIs have been expanded to include university funds,
endowments, foundations, charitable trusts and charitable societies which have a track record of
5 years and which are registered with a statutory authority in their country of incorporation or
establishment

‡ each FII or sub-account of an FII has been permitted to invest upto 10% of the equity of
any one company, subject to the overall limit of 24% on investments by all FIIs, NRIs and OCBs

‡ the 24% limit may be raised to 30% in the case of individual companies who have
obtained shareholder approval for the same

‡ FIIs have been permitted to invest in unlisted securities

‡ FIIs have been allowed to invest their proprietary funds

‡ FIIs who obtain specific approval from SEBI have been permitted to invest 100% of their
portfolios in debt securities. Such investment may be in listed or to be listed corporate debt
securities or in dated government securities, and is treated to be part of the overall limit on
external commercial borrowing.

The impact of these changes was felt as several endowment funds, proprietary funds and
100% debt funds of FIIs obtained registration. In order to simplify the FII registration process,
SEBI and RBI set up a co-ordination committee. At the end of 1996-97 there were no
applications for FII registration pending with SEBI and RBI.

Foreign investment in Indian securities has also been made possible through the purchase of
Global Depository Receipts, Foreign Currency Convertible Bonds and Foreign Currency Bonds
issued by Indian issuers which are listed, traded and settled overseas. Foreign investors, whether
registered as FII or not, may also invest in Indian securities outside the FII route. Such
investment requires case by case approval from the Foreign Investment Promotion Board (FIPB)
and the RBI, or only by the RBI depending the size of investment and the industry in which this
investment is to be made.

Foreign financial services institutions have also been allowed to set up joint ventures in stock
broking, asset management companies, merchant banking and other financial services firms
along with Indian partners. The foreign participation in financial services requires the approval
of FIPB. In 1996-97, the FIPB announced guidelines for foreign investment in the non-banking
financial services sector.

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Forward Markets Commission (FMC) headquartered at Mumbai, is a regulatory authority

which is overseen by the Ministry of Consumer Affairs, Food and Public Distribution, Govt. of
India. It was set up in 1953 under the Forward Contracts (Regulation) Act, 1952. The functions
of the FMC are as follows:

(a) To advise the Central Government in respect of the recognition or the withdrawal of
recognition from any association or in respect of any other matter arising out of the
administration of the Forward Contracts (Regulation) Act 1952.

(b) To keep forward markets under observation and to take such action in relation to them, as
it may consider necessary, in exercise of the powers assigned to it by or under the Act.

(c) To collect and whenever the Commission thinks it necessary, to publish information
regarding the trading conditions in respect of goods to which any of the provisions of the act is
made applicable, including information regarding supply, demand and prices, and to submit to
the Central Government, periodical reports on the working of forward markets relating to such
goods;

(d) To make recommendations generally with a view to improving the organization and
working of forward markets;

(e) To undertake the inspection of the accounts and other documents of any recognized
association or registered association or any member of such association whenever it considerers
it necessary.

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Insurance Regulatory and Development Authority is the administrative agency for Indian
insurance industry, and was formed by the Government of India for the supervision and
development of the insurance sector in India. The Insurance Regulatory and Development
Authority was established by the IRDA Act which was enacted by the Indian Parliament in 1999.

The mission of IRDA is to protect the interests of the policyholders, to regulate, promote and
ensure orderly growth of the insurance industry and for matters connected therewith or incidental
thereto.
 The creation of IRDA has brought revolutionary changes in the Insurance sector. In last 10
years of its establishment the insurance sector has seen tremendous growth. When IRDA came
into being; only players in the insurance industry were Life Insurance Corporation of India (LIC)
and General Insurance Corporation of India (GIC), however in last decade 23 new players have
emerged in the field of insurance. The IRDA also successfully deals with any discrepancy in the
insurance sector.