Chapter 2

FINANCIAL
REGULATORS RBI,
SEBI, IRDA
 Chapter Objectives

To understand

Role and functions of the RBI

Role and functions of SEBI

Role and functions of IRDA

Reserve Bank of
India (RBI)
 The Reserve Bank of
Indiain 1934 through the
Established by legislation
Reserve Bank of India Act, 1934

It started functioning from April 1, 1935

Its central office is at Mumbai since inception

Though originally privately owned, since

nationalization in 1949, it is fully owned by the
Government of India

The RBI is the central bank of our country

 The Reserve Bank of India
(cont.)

Objectives

Price Stability to secure monetary

stability within the country

Ensuring Adequate Credit to operate

the currency & credit system to the
advantage of the country (i.e. ensuring
adequate credit availability to finance economic
activities for the benefit of the country)
The Reserve Bank of India
(cont.)

Organization

Central Board
Official Directors
Non-official directors

4 Local boards
Offices: 22 regional offices
Training establishments
 The Reserve Bank of India
(cont.)

Subsidiaries

NHB (National Housing Bank)

NABARD (National Bank for Agriculture
& Rural Development)
DICGC (Deposit Insurance & Credit
Guarantee Corporation of India)
BRBNMPL (Bharatiya Reserve Bank
Note Mudran Private Limited)
SBI (State Bank of India)
 Legal Framework
Umbrella acts
The Reserve Bank of India Act, 1934, governs the
Reserve Bank functions
The Banking Regulation Act, 1949, governs the
financial sector
Acts governing Specific Functions
Acts governing Banking Operations
Acts governing Individual Institutions
 RESERVE BANK OF INDIA (RBI)

The RBI is the nerve-centre of the money market

and the main regulator of the banking system.
The Functions/ Roles of the RBI comprise:

1. Note Issuing Authority (Issue Of Currency),

2. Government Banker,
3. Bankers' Bank,
4. Supervisory Authority,
5. Promoter Of The Financial System And
6. Regulator Of Money & Credit (Monetary
Authority).
1. Note Issuing Authority/Issuer of Currency
One basic function of the RBI is to issue currency notes that
are legal tender every where in India without any limit.

Currency management by the RBI involves efforts to

achieve self-sufficiency in the production of currency
notes/coins, with a judicious denomination mix,
improvement in the efficiency of distribution networks,
withdrawal and destruction of notes, technology up
gradation and enhancement in the security features of
currency notes.

The currency notes have 100% backing of eligible assets.

 2. Government Banker
As the Government banker, apart from banking services
relating to receipts/payments on behalf of the Government,

The issue, management and administration of Government

public debt is a major function of the RBI.

The objective of its debt management policy is to raise

resources at the minimum cost, while maintaining
consistency with the monetary policy objectives.

To bridge temporary mismatches in the cashflows, it

provides WAMAs for a period upto 3 months.
 3. Bankers' Bank
As the bankers' bank, the RBI has a special
relationship with banks.

It controls the volume of SLR and CRR and

determines their credit-creation ability.

It is, in effect, the banker of the last resort.

 4. Supervising Authority/ Regulator &
Supervisor
As a regulator and supervisor, the RBI prescribes
the broad parameters within which the banking and
financial system functions.

It regulates and supervises the banking system,

under the provisions of the Banking Regulation Act.

The NBFCs are regulated under the provisions of

Chapter III- B of the RBI Act.
 5. Exchange Control (EC) Authority

The RBI develops and regulates the foreign

exchange market within the framework of the
FEMA.
 6. Regulator of Money & Credit/
Monetary Authority
As the central bank of the country, the RBI formulates
and conducts the monetary policy.

Monetary policy refers to the use of the techniques of

monetary control to achieve the broad objectives of
maintaining price stability and ensuring an adequate
flow of credit to productive sectors so as to assist growth.

The instruments of monetary control used by the RBI

are: OMOs, Bank rate, Refinance, CRR, SLR, LAF and
Repo Rates.
 Instruments of Monetary Control

1. OMOs,
2. Bank rate,
3. Refinance,
4. CRR,
5. SLR,
6. LAF and
7. Repo Rates.
 1. Open Market Operations (OMOs)

The OMOs involve sale and purchase of

Government securities and T-bills.

Through the OMOs, the RBI can affect the reserve

position of banks, yields on Government
securities/T-bills and volume/ cost of credit.

They are poised to emerge as a major tool of

monetary policy in India.
 2. Bank Rate

The bank rate (B/R) The B/R is the standard rate

(i) at which the RBI buys/rediscounts bills of

exchange/other eligible commercial papers and

(ii) that RBI charges on advances on specified

collaterals to banks.

The B/R technique regulates the cost/availability of

finance to banks/FIs.
 3. Cash Reserve Ratio (CRR)

The CRR refers to the cash which banks have to

maintain with the RBI as a percentage of their
demand and time liabilities to ensure safety and
liquidity of bank deposits.

As an instrument of policy, the CRR has been used

by the RBI very actively.
 4. Statutory Liquidity Ratio (SLR)

The SLR enables the RBI to impose a secondary and

supplementary reserve requirement.

Strictly speaking, SLR is not a technique of

monetary control; it only distributes bank resources
in favor of the Government/ public sector.
 5. Liquidity Adjustment Facility (LAF)
The LAF has emerged as one of the most important
instruments of monetary policy in recent years.

The LAF operates through repo auctions for

absorption of liquidity and reverse repo auctions for
injection of liquidity on a daily basis, thereby
creating a corridor for the call rates and other short-
term interest rates.

The funds under LAF are expected to be used by

banks for their day to day mismatches in liquidity.
 6. Repos
A repo/reverse repo/ready forward/ repurchase
(buy-back) is a transaction in which two parties
agree to sell and repurchase the same security.

The seller sells specified securities, with an

agreement to repurchase the same at a mutually
decided future date and price.

Likewise, the buyer purchases the security with an

agreement to resell the same to the seller, on an
agreed date and at a predetermined price.
 6. Repos (cont.)

The same transaction is 'repo' from the viewpoint of the

seller and 'reverse repo' from the angle of the
buyer.

Repo is also known as ready forward as it is a means of

funding by selling a security held on a spot basis and
repurchasing the same on a forward basis.

The terms of the contract are in terms of a repo rate,

representing the money market borrowing/lending
rate. It is generally lower than the B/R. Repos have a
maturity of 1-14 days. They are very safe transactions.
 Types of Repos

Two types of repos are currently in operation in

India:

1. Bank Repos and

2.RBI Repos
 6.1 Inter-Bank Repos
The inter-bank repos are permitted under regulated
conditions.

Banks can undertake repo deeds in all Government

securities and T-bills of all maturities, through the
SGL Account maintained by the RBI.

Repos are also allowed to develop a secondary

market in PSU bonds, FI bonds, corporate bonds
and private debt securities if held in demat form and
if deals are done through stock exchange(s).
 6.1 Inter-Bank Repos (cont.)

However, non-bank participants can deal only in

reverse repos, that is, they can only lend money
to the eligible participants.

Such entities holding SGL accounts, can enter into

reverse repos with banks, in all Government
securities.
 6.2 RBI Repos
The RBI undertakes repos/reverse repo operations
with banks/PDs to absorb/inject liquidity under the
LAF.

It uses the daily fixed rate repo auction system.

It participates actively in the call market, with LAF

repos conducted throughout the year to modulate the
surplus liquidity in the market.

It also conducts reverse repo operations under the

LAF to prevent sudden spurts in the call rates.
 6.2 RBI Repos (cont.)

The repo rate has emerged as the signalling

rate, together with the B/R.

The repo rate serves the purpose of a floor

signalling rate, together with the B/R.

The repo rate serves the purpose of a floor rate and

the B/R serves as a cap for the money market to
operate within an interest rate corridor.
 Role of the RBI
Monetary authority of the country
Regulator and supervisor of the financial
system
Banker to the government
Manager of exchange control
Issuer of currency
Developmental role
Banker to the banks
 Achievements of RBI
Introduced reforms in the monetary policy
Strengthened the framework of the banking
structure
Introduced of primary dealers in the government
securities market to impart liquidity
Converted the call money market into pure inter-
bank money market

Developed the government securities market by

introducing auctions, market-related interest rates,
negotiated dealing system, real-time gross
settlement system and setting up of Clearing
 Achievements of RBI (cont.)

Developed and stabilized Foreign Exchange

markets
Introduced reforms in payments and
settlement system
Emphasis on technology as a tool to reform
markets
Emerged successfully as an autonomous
Central Bank of the country.
Securities & Exchange
Board of India
(SEBI)
 Legislation Governing the
Capital Market

SEBI Act 1992

Companies Act, 1956
Securities Contracts (Regulation) Act
1956
Depositories Act, 1996
 SEBI
Came into existence in April 1988 and
set up with statutory powers on Feb. 21,
1992

Objectives
Investor protection
Promotion and development of the capital
market
containing risk
broad-basing
maintaining market integrity
promoting long-term investment
 SEBI (cont.)

Powers and functions

Exercises powers under Section 11 (1),
Section 11 and Section 11 B of the SEBI
Act 1992.
Issues Regulations, Guidelines and
Schemes
 Regulation of Securities
Market
Registers and regulates all market
intermediaries

Conducts inquiries, audits and inspection of

all intermediaries

Promotes & regulates self-regulatory

organizations

Prohibits fraudulent and unfair trade

practices
 Supervision of Securities
Market
Inspection of Stock Exchanges
Inspection of Brokers/Sub Brokers
Inspection of Depositories
System Audit
Surveillance
Investigations
Prosecutions
Inspection of Mutual Funds
Self Regulatory Organizations
(SROs)
Make regulations more effective and
responsive

SEBI has framed the SEBI (Self Regulatory

Organizations) Regulations, 2000, which lay
down the obligations of SROs
 Investor Protection
Measures
Redressal of investor grievances
Supervision of the allotment process
Enlightening investors through
advertisements
Regulations for collective investment
schemes
An automated complaints handling system
Investor education
 Achievements of SEBI
Reforms in the primary and secondary
markets

Introduction of computerized trading,

depositories, dematerialization, circuit filters,
margins, stock watch, central listing authority,
demutualization and corporatization of stock
exchanges

Streamlined and simplified procedures

Stringent action against companies and

Achievements of SEBI (cont.)

Encouraged development of Corporate

governance standards

Trying to bring down three kinds of risk

structural, systematic and operational

Criticized on account of scams, ambiguous

guidelines, failure to penalize fraudulent
companies and absence of the necessary
machinery to achieve its objectives
 Functions of the Board
(A) Regulatory

1. regulating the business in stock exchanges and any other

securities markets;

2. registering and regulating 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 managers, investment
advisors and such other intermediaries who may be
associated with securities markets in any manner;

3. registering and regulating the working of collective

investment schemes including mutual funds;
 Functions of the Board (cont.)

(A) Regulatory (cont.)

4. regulating self-regulatory organizations;

5. prohibiting fraudulent and unfair trade practices

relating to securities markets;

6. prohibiting insider trading in securities;

7. regulating substantial acquisition of shares and

takeover of companies;
 Functions of the Board (cont.)

(A) Regulatory (cont.)

8. calling for formation from undertaking

inspection, conducting inquiries and audits of the
stock exchanges and intermediaries and self-
regulatory organizations in the securities market;

9. levying fees or other charges for carrying out the

purposes of this section.
 Functions of the Board (cont.)

(B) Developmental

1. promoting investors education;

2. promoting self-regulating organizations;

3. training of intermediaries of securities markets;

4. promotion of fair practices and code of conduct for all

SROs;

5. conducting research and publishing information useful

to all market participants.
 SEBI Guidelines to Investors
1. Deal with a registered member of the stock
exchange. If you are dealing with a sub-broker, make
sure that all bills and contracts are made in the name
of a registered broker.

2. Insist that all your deals are done in the trading ring.

3. Give specific orders to buy or sell within the fixed

price limits and/or time periods within which orders
have to be executed.

4. Insist on contract notes to be passed on to you on

the dates, when the orders are executed.
 SEBI Guidelines to Investors (cont.)

5. Make sure that your deal is registered with the stock

exchange in a souda Block Book. In the case of a
dispute, this will help trace the details of the deal
easily.

6. Collect a settlement table from the stock exchange

mentioning the pay-in and pay-out days. Each stock
exchange has its own trading periods which are called
settlements. All transactions done within this period
are settled at the end of it. All payments for shares
bought and their deliveries take place on the pay-in
day. An awareness of pay-in and pay-out days is
useful when a broker tries to make excuses.
 SEBI Guidelines to Investors (cont.)

7. Keep separate records of dealings in specified

shares (Group A) and non-specified share (Group
B). The settlement for each is on different days.

8. Execute periodic settlements of dues and delivery of

shares to avoid accumulation of transactions.

9. Insist on delivery. If the company returns your

papers and shares with objections, contact your
broker immediately.
 SEBI Guidelines to Investors (cont.)

10.Ensure that shares bought are transferred in your

name before the companys book closure date.
This is necessary to make sure that you receive
benefits like dividend, interest and bonus shares.
All companies have a book closure date on which
the list of shareholders in the company is
finalized.
 SEBI Guidelines to Investors (cont.)

11. Complain if the broker does not deliver the

shares bought in your name. Proceed to contact
another broker with the bill/contract given to
you by the earlier broker, and the Exchange
authorities and the latter will purchase the
shares on your behalf. In such an event, the first
broker will have to pay the difference in price.

12. Do not sell shares that are not transferred in

your name after the book closure as these are not
valid in the market.
 SEBI Guidelines to Investors (cont.)

13. Do not sell/deal in shares where any one of the

holders has passed away. In cases where the holder
has died, a succession certificate is necessary. In
case where one of the joint shareholders passes
away, the surviving holder should send the shares
along with the death certificate to the company.
Only after the name of the deceased has been
deleted from the shares, can they be transferred.

14. Do not expect the money for shares to come

immediately. It will take at least a fortnight or a
month from the date of transaction.
SEBI Guidelines to Investors (cont.)

15. Unless you have a special arrangement with the

broker, do not expect the adjustment of
purchases and sales against one another. One
pays first and receives later.

16. Do not take delays or harassment lying down.

You have to complain to the Grievance Cell of
the stock exchange or the Securities and
Exchange Board of India (SEBI) in case of delay
or harassment.
 Limitations of SEBI
1. Limited transparency;
2. Bureaucratic administration;
3. Lack of professionalism;
4. Long and complex procedures;
5. Lack of serious approach to investors needs;
6. Fraudulent activities;
7. Counterproductive regulations;
8. Lack of adequate powers;
9. Weak legislation;
10.Too mechanical procedures;
11. Minimum accountability; and
12. Lack of confidence of all players in the capital
market including investors, especially small.
Insurance Regulatory &
Development Authority
(IRDA)
 IRDA
Constituted on April 19, 2000

IRDA Act enacted in 1999

Objectives of IRDA
Policy holder protection
Healthy growth of the insurance market
 IRDA (cont.)

Constituted the Insurance Advisory

Committee and issued regulations in areas
of:
Registration of insurers
Conduct of insurers
Solvency of reinsurance business
Licensing
Code of conduct of intermediaries
 IRDA (cont.)

The duty of the IRDA is to regulate, promote and

ensure the orderly growth of the insurance and
reinsurance business.

Its powers and functions include:

1. Issue/renewal/ cancellation/suspension of registration
of insurance companies;
2. Protection of policyholder's interests;
3. Specifying the requisite qualifications/practical
training for intermediaries/agents;
 IRDA Powers and Functions
(cont.)

4. Specifying the code of conduct for

surveyors/ loss assessors;
5. Promoting efficiency in the conduct of insurance
business;
6. Promoting/regulating professional organizations;
7. Calling for information, undertaking inspection,
conducting inquiries/ investigations of
insurers/intermediaries/other organizations;
8. Regulating investments of funds/ maintenance
of margin of solvency and so on.
 IRDA (cont.)

The IRDA would be bound by the directions of the

Government on questions of policy.
 IRDA (cont.)

The powers of the Government in relation to the

under mentioned activities/operations of
insurance companies have been delegated to the
IRDA:
(i) Investment of assets,
(ii) Maintenance of assets,
(iii) Limit on expenditure,
(iv) Provision regarding directors,
(v) Acquisition of surrender values by policyholders
and so on.
 IRDA Regulations
To carry out its powers/functions, the IRDA has issued a
number of regulations as ground rules for the conduct
of insurance business.

The major regulations covered here relate to the

following:
1. Rural/Social Sector Obligations;
2. Insurance Advertisements/Disclosures;
3. Licensing Of Insurance Agents;
4. General Insurance - Reinsurance;
5. Appointment Of An Actuary;
6. Registration Of Indian Insurance Companies;
 IRDA Regulations (cont.)

7. Investment norms;
8. Preparation of financial statements and auditor's
report;
9. Third party administratorshealth services;
10. Protection of policyholders interest's;
11. Licensing of corporate/composite corporate
agents;
12. Distribution of surpluses;
13. Life insurancereinsurance;
14. Insurance brokers;
15. Insurance surveyors and loss assessors; and
16. Micro-insurance.
 IRDA (cont.)
Steps taken to protect the interest of policy
holders

1. Notified the regulations in 2002

2. Specified the file and use procedure
3. Constitution of a cell to look into public
grievances
4. Customers consulted for policy decisions
5. Consumer representative on Insurance
companys board
6. Disclosure of Information
THANK YOU