Financial Regulation

 Financial regulation is a form of regulation or

supervision, which subjects financial
institutions to certain requirements,
restrictions and guidelines, aiming to maintain
the stability and integrity of the financial
system. This may be handled by either a
government or non-government organization.
Financial regulation has also influenced the
structure of banking sectors by increasing the
variety of financial products available
 The objectives of financial regulators are usually:
 market confidence – to maintain confidence in the

financial system
 financial stability – contributing to the protection and

enhancement of stability of the financial system

 consumer protection – securing the appropriate

degree of protection for consumers.

 Acts empower organizations, government or non-government, to monitor activities and enforce actions.
There are various setups and combinations in place for the financial regulatory structure around the globe.

 Supervision of stock exchanges

 Exchange acts ensure that trading on the exchanges is conducted in a proper manner. Most prominent the
pricing process, execution and settlement of trades, direct and efficient trade monitoring.

 Supervision of listed companies

 Financial regulators ensure that listed companies and market participants comply with various regulations
under the trading acts. The trading acts demands that listed companies publish regular financial reports, ad
hoc notifications or directors' dealings. Whereas market participants are required to publish major
shareholder notifications. The objective of monitoring compliance by listed companies with their disclosure
requirements is to ensure that investors have access to essential and adequate information for making an
informed assessment of listed companies and their securities.

 Supervision of investment management

 Asset management supervision or investment acts ensures the frictionless operation of those vehicles

 Supervision of banks and financial services providers

 Banking acts lay down rules for banks which they have to observe when they are being established and when
they are carrying on their business. These rules are designed to prevent unwelcome developments that might
disrupt the smooth functioning of the banking system. Thus ensuring a strong and efficient banking system
Regulatory Bodies
RBI as an apex monetary institution:
 Established in April, 1935 in Calcutta, the Reserve Bank of India (RBI) later moved to Mumbai in 1937.
After its nationalization in 1949, RBI is presently owned by the Govt. of India. It has 19 regional offices,
majorly in state capitals, and 9 sub-offices. It is the issuer of the Indian Rupee. RBI regulates the banking
and financial system of the country by issuing broad guidelines and instructions.

Role of RBI
 Control money supply

 Monitor key indicators like GDP and inflation

 Maintain people’s confidence in the banking and financial system

 Formulate monetary policies such as inflation control, bank credit and interest rate control
Case Study 1
 The variable Reserve ratio is an important method of Credit
control adopted by RBI of India.Cash Reserve Ratio(CRR) and
Statutory Liquidity Ratio(SLR) are the two reserve requirements
of the RBI.These are techniques of monetary control that help
achieve several macro economic objectives. Open Market
operations are another important instrument of Credit Control.
--In this backdrop the following issues can be kept in mind-
 How does RBI Exercise CRR and SLR to increase or decrease

money supply
 How does the RBI employ Open Market Operations to

inject/absorb liquidity into the market?

 Cash Reserve Ratio (CRR) RBI meaning, CRR rate: The Cash Reserve Ratio in India is decided
by RBI’s Monetary Policy Committee in the periodic Monetary and Credit Policy. The
Reserve Bank of India takes stock of the CRR in every monetary policy review, which, at
present, is conducted every six weeks. CRR is one of the major weapons in the RBI’s arsenal
that allows it to maintain a desired level of inflation, control the money supply, and also
liquidity in the economy. The lower the CRR, the higher liquidity with the banks, which in
turn goes into investment and lending and vice-versa. Higher CRR can also negatively
impact the economy as lesser availability of loanable funds, in turn, slows down
investment. It thereby reduces the supply of money in the economy.

 What is CRR or Cash Reserve Ratio?

 The Reserve Bank of India or RBI mandates that banks store a proportion of their deposits
in the form of cash so that the same can be given to the bank’s customers if the need
arises. The percentage of cash required to be kept in reserves, vis-a-vis a bank’s total
deposits, is called the Cash Reserve Ratio. The cash reserve is either stored in the bank’s
vault or is sent to the RBI. Banks do not get any interest on the money that is with the RBI
under the CRR requirements
 Statutory Liquidity Ratio or SLR is the minimum percentage of deposits that a commercial bank has to maintain
in the form of liquid cash, gold or other securities. It is basically the reserve requirement that banks are
expected to keep before offering credit to customers. The SLR is fixed by the RBI and is a form of control over
the credit growth in India.

----Why is the SLR fixed?

 To check the expansion of bank credit.

 To ensure the solvency of commercial banks.

 To compel banks to invest in government securities like bonds.

 To fuel growth and demand; this is done by decreasing the SLR so that there is more liquidity with the

commercial banks.
 If a bank fails to maintain the prescribed SLR, it is liable to pay a penalty to the Reserve Bank of India. The

defaulter bank has to pay a penalty of 3% above the bank rate on the deficient amount for that particular day.
 SLR plays a very important role in fixing the minimum rate at which a bank can lend money to its customers.

This minimum amount is called the base rate. This helps in building transparency between the Reserve Bank of
India and other public dealing banks.
 The Reserve Bank of India is the body which sets the SLR. The Reserve Bank of India increases the SLR at the

time of inflation to control bank credit. At the time of recession, RBI decreases the SLR to increase bank credit.
 Open market operations (OMO) refers to a central bank
buying or selling short-term Treasuries in the open market
in order to influence the money supply, thus influencing
short term interest rates.
 Buying securities adds money to the system, making loans
easier to obtain and interest rates decline.
 Selling securities from the central bank's balance sheet
removes money from the system, making loans more
expensive and increasing rates.
 These open market operations are the method the Fed
uses to manipulate interest rates
 Understanding Open Market Operations
 Its open market operations are the tools it uses to

reach that target rate by buying and selling securities

in the open market. The central bank is able to
increase the money supply and lower the market
interest rate by purchasing securities using newly
created money. Similarly, the central bank can sell
securities from its balance sheet and take money out
of circulation, putting a positive pressure on interest
rates.
SEBI as a regulatory body for the securities market:
 Securities Exchange Board of India (SEBI) was established in 1988 but got legal status in
1992 to regulate the functions of securities market to keep a check on malpractices and
protect the investors. Headquartered in Mumbai, SEBI has its regional offices in New Delhi,
Kolkata, Chennai and Ahmedabad.
Role of SEBI
 Protect the interests of investors through proper education and guidance

 Regulate and control the business on stock exchanges and other security markets

 Stop fraud in capital market

 Audit the performance of stock market

 Insurance Regulatory and Development Authority of India
(IRDAI)

 IRDAI is an autonomous apex statutory body for regulating

and developing the insurance industry in India. It was
established in 1999 through an act passed by the Indian
Parliament. Headquartered in Hyderabad, Telangana, IRDA
regulates and promotes insurance business in India.
Pension Fund Regulatory and Development Authority
(PFRDA)
 Established in October 2003 by the Government of

India, PFRDA develops and regulates the pension

sector in India. The National Pension System (NPS) was
launched in January 2004 with an aim to provide
retirement income to all the citizens. The objective of
NPS is to set up pension reforms and inculcate the
habit of saving for retirement amongst the citizens.
Global Crises and its impact on India
 It is widely believed that India’s stringent regulation and prudent policies enabled it to survive the
crisis in reasonably good shape. Indian solution has been to treat the lesson from the crisis as
going even more slowly on financial sector liberalisation that it had in the past. However, to serve
the growing finance needs of the economy, the approach should be to ‘allow and regulate’ and
undertake appropriate reform with much greater speed.

 The Indian economy is more connected to the global financial system today than it was a decade
ago. The exposure to FIIs has increased; these tend to be volatile, making the economy more
vulnerable to any external shocks. With interest rates beginning to rise in advanced countries, India
may experience outflows of foreign capital. On a related note, since FIIs have been driving the stock
market performance, there is concern that the market’s buoyancy is not backed by the real
economy.

 Further, in the years leading to the crisis, non-performing assets (NPAs) of banks in India were on
the decline, putting banks in a strong position to deal with the adverse effects of the crisis. During
2005-2008, annual gross NPAs amounted to Rs. 500 billion, on average; the figure now is a
whopping Rs. 7,903 billion.

 Finally, at the time of the crisis, the slowdown in advanced countries led to a fall in export demand
in India and other emerging economies. The developed world is now getting back to a steady
growth trajectory. However, this may not imply an increase in trade given the present sentiment of
protectionism.
Case Study 2
 Re purchase Agreement refers to a transaction in which 2
parties agree to sell and re-purchase the same security.It is
significant to note that a transaction is called a Repo when
it is viewed from the perspective of the seller of
securities(i.e the party raising money).The Reverse Repo is
described from the point of view of Supplier of funds.
 In this Backdrop,you are suggested to discuss the following.
 How does RBI exercise Repo and Reverse Repo rates as

instrments for making liquidity adjustments in the

financial system??
 A liquidity adjustment facility (LAF) is a tool used in monetary policy, primarily by the Reserve
Bank of India (RBI), that allows banks to borrow money through repurchase agreements (repos)
or for banks to make loans to the RBI through reverse repo agreements. This arrangement
manages liquidity pressures and assures basic stability in the financial markets.

 Basics of a Liquidity Adjustment Facility

• Liquidity adjustment facilities are used to aid banks in resolving any short-term
cash shortages during periods of economic instability or from any other form of stress caused
by forces beyond their control. Various banks use eligible securities as collateral through a repo
agreement and use the funds to alleviate their short-term requirements, thus remaining stable.

 Liquidity Adjustment Facility and the Economy

• The RBI can use the liquidity adjustment facility to manage high levels of inflation. It does so by
increasing the repo rate, which raises the cost of servicing debt. This, in turn, reduces
investment and money supply in India’s economy.
 Conversely, if the RBI is trying to stimulate the economy after a period of slow economic growth,
it can lower the repo rate to encourage businesses to borrow, thus increasing the money supply.
For example, analysts expect that RBI is likely to cut the repo rate by 25 basis points in April
2019 due to weak economic activity, benign inflation, and slower global growth. However,
analysts expect repo rates to resume rising in 2020 as growth accelerates and inflation picks
up.
 What is RBI Monetary Policy 2020?
 It is the policy formulated by the Reserve Bank of India in 2020 related to money matters of
the country. The policy also takes into account the distribution of credit among users as well
as the rate of interest on borrowing and lending. Since India is a developing country, the
monetary policy is significant in the promotion of economic growth. The monetary policy in
India is formulated by the Reserve Bank of India and relates to the monetary matters of the
country. The policy involves measures taken to control inflation, regulate supply of money
and cost of credit in the economy. The various instruments of monetary policy include
variation in bank rates, other interest rates, supply of currency, etc.

 On 22nd May 2020, RBI has cut the Repo Rate by 40 bps to 4.00% from 4.40% earlier and
reverse repo rate by 40 bps to 3.35%. Cash Reverse Ratio (CRR) stands at 3%. RBI, on 17th
April 2020, has cut the Reverse Repo Rate by 25 bps to 3.75%. This has been done to mitigate
the impact of Covid-19. RBI has also announced that the banks, NBFCs and housing finance
companies are permitted to allow their customers a 3 month moratorium in repayment of
EMIs. This means that the borrower may not pay any EMI for 3 months subject to bank’s
approval. This delay in EMIs will not have any negative impact on credit score.
Objectives of Recent Monetary Policy of RBI
 The main objectives of the recent monetary policy of RBI are as follows:

1. Controlling imports and exports: Monetary policy helps industries to get a loan at a reduced interest rate, which
means they can substitute imports by export-oriented units and, in turn, increase exports.
2. Promotion of savings and investments: A monetary policy can impact the savings and investment of the people. A
higher rate of interest will result in greater investments and savings, thereby maintaining a healthy cash flow
within the economy.
3. Managing business cycles: There are two main stages of a business cycle – boom and depression. The monetary
policy is one of the most efficient financial tools that can help to control the boom and depression period of
business cycles by managing credit distribution and supply of money in the economy.
4. Employment generation: A monetary policy can lead to reduced interest rates, which means small and medium
enterprises (SMEs) can easily secure a loan for business expansion. This means more employment generation.
5. Development of infrastructure: The monetary policy by RBI allows concessional funding for the development of
infrastructure within the country.
6. Developing and managing the banking sector: The central bank is responsible for managing the entire banking
industry. RBI also instructs other banks using the monetary policy to establish rural branches for agricultural
development wherever required. Additionally, the government has also set up cooperative and regional rural
banks to help farmers receive the financial aid they require in no time.
Finance is like Oil to the Engine of the Indian Economy
As finance is the grease and the oil that keeps the engine of any economy running, the BFSI sector assumes importance in this context. While the

post independence era witnessed many large private banks that were either family or community run as well as some government owned banks,
the nationalization of the banking sector in 1969 and the early 1970s meant that the government was the prime mover as far as banking and
finance was concerned.
The situation of government ownership of banks continued well into the 1990s when the first wave of liberalization ensured that banks were now

allowed to be privately owned. While multinational banks were always privately owned, most Indian banks were government owned or owned in a
quasi governmental manner.
Even after liberalization, the RBI or the Reserve Bank of India proceeded cautiously as far as private ownership of the BFSI sector was concerned.

However, this did not deter many firms such as the NBFCs or the Non Banking Financial Companies from operating and indeed, flouting the rules
thereby leading to periodic bouts of crises.

Becoming World Class in their Practices and Dealing with Crises

Now, the BFSI sector in India is in a position where it can compete with its peers abroad and elsewhere mainly due to the pioneering efforts of the
first wave of post liberalization banks such as HDFC and ICICI. No wonder that the Indian BFSI sector has become a dream job destination for
millions of graduates in the technical and managerial institutes.
Having said that, at present, the BFSI sector in India is in crisis due to its profligate lending practices during the boom years of the first decade of

the 21st century. Indeed, concomitant with the growth of the Indian Economy and the blistering pace of capacity addition as well as booming
industries, the banks and financial institutions threw caution to the winds and engaged in indiscriminate lending without doing their due diligence.
For instance, during the heydays of growth between 2000 and 2008, banks, and financial institutions in India lent to just about anybody and the

GFC or the Global Financial Crisis of 2008 resulted in such debts turning bad.
However, it is to the credit of the then ruling dispensation that the 2008 crisis and the global bust did not have major impacts on the Indian BFSI

sector due to adequate oversight and regulation by the government in tandem with the RBI.
Having said that, some experts believe that what they did was to merely “kick the can down the road” without solving the problem and this in turn

led to the ballooning of the NPAs or the Non Performing Assets to such an extent that at the moment, absent massive recapitalization, the Indian
BFSI sector would be in major trouble soon.
PESTLE ANALYSIS
 Political
 In India, like in most developing countries, politics is inseparable from business and hence,  the Indian
BFSI Sector is indeed impacted heavily by the policies and the regulations that are passed by the ruling
dispensations at the center. Moreover, given the high incidence of governmental and public sector
ownership of the so-called State Run Banks, political interference is natural and a major input into the
decision making process at the banks. While experts have repeatedly called for lesser political
interference in the running of the banks, most people agree that it is routine for lenders in the public
sector and even the private sector to pay heed to requests from politicians as far as lending and other
aspects are concerned. Moreover, the political masters appoint the chairpersons of the banks and
financial institutions and this gives them a major say I the day to business practices at these entities.

 Economic
 Economic forces determine the workings of the BFSI sector and it is but natural that the economic

environment plays a major role in the fortunes of the sector. Whether it is liberalization or the GFC or
the Demonetization measure, banks and financial institutions are heavily impacted by the macro and
the micro economic forces. Indeed, both of them are important unlike in the West where the macro is
often the main driver of performance of banks. The reason for this is that the Indian Economy has not
yet matured to an extent where micro trends are insignificant. For instance, small changes in
consumer loans and personal finance segments is enough to cause major impacts on the workings
and business practices of the firms in the BFSI sector. Having said that, the steady development and
integration of the Indian Economy into the broader global economy has resulted in the macro gaining
traction as the moving force of the BFSI sector.
 Social
 The changing socio-cultural profiles and the demographic shifts underway among the Indian consumers does
impact the Indian BFSI sector to a great extent. For instance, with the increase in the population of the youth, banks
and financial institutions are offering ever more lucrative investment options to this segment. In addition, Indians
are now more risk prone as far as their investment patterns are concerned. This can be seen in the rising numbers
of people taking personal, housing, consumer, and other loans to fund their extravagant lifestyles. Moreover, with
the rise in consumerism, there has been a concomitant increase in the numbers of Indians holding credit cards and
debit cards that are also in tune with the Indian Government’s Digital India push for payment avenues. Indeed,
taken together, what the changing sociocultural dynamics indicates is that the BFSI sector in India is at a stage
where it is mimicking the consumer lending practices that are usually associated with the West.

Technological
 It would be an understatement to say that there is a paradox at the heart of the Indian BFSI sector as far as impacts
of technological advances are concerned. For instance, while banking is as old as the Indian Republic, it was only
recently that the Indian BFSI sector took to technology in a big way. Once having done so, it ensured that its tech
offerings were as good as those of the advanced countries with the added advantage of the Indian IT (Information
Technology) industry being at the forefront of the adoption of technology in banking and finance. Having said that,
the paradox here is that while a certain percentage (some of would say miniscule) transacts online and the mobile
channels with advanced tech, the majority of Indians are simply in the tech wilderness as far as their ability to
leverage technology is concerned. Indeed, this is the reason why Demonetization and the concomitant push
towards Digital Banking failed to take off as most Indians are not used to using tech enabled banking and payment
channels.
 Legal
 Given the fact that the Indian Legal System is cumbersome and long winding, it is
natural for banks and financial institutions in India to take the consumers for granted
including trying out unconventional and often, legally dubious methods of loan
recovery as well as selling of financial products. Indeed, while there are many cases
of fraud that are registered annually, the resolution, or the settlement of such cases
is lackluster to say the least. In addition, with the country having weak laws as far as
cybercrime is concerned, the thousands of Indians who fall prey to phishing, cyber
fraud, and online scams keeps growing without any meaningful solution to their
woes. Thus, it can be said that there is an urgent need to rectify the situation.

 Environmental
 This aspect does not have much of an impact on the Indian BFSI sector since Green
Lending and CSR or Corporate Social Responsibility business practices are yet to take
off among the banks and financial institutions. Indeed, it is only recently that the
banks and financial institutions started a separate department for these aspects and
hence, the sector has a long way to go before it catches up in this regard.
SWOT Analysis
 Strengths
 The main strength of the Indian BFSI sector lies in its ability to deliver volumes since India being a large and diverse country, offers
the benefits of a humungous customer base. In addition, the Indian BFSI sector also relies on high net worth individuals who are a
sizable segment of the population considering the number of Millionaires and Billionaires in the country. Apart from this, the Indian
BFSI sector is also heavily driven by corporates who use it for their domestic and international operations.

 Weaknesses
 Having said that, the most notable weakness of the Indian BFSI sector is its informal and unstructured lending and banking
processes. Indeed, despite attempts by the RBI and the Finance Ministry, they have been unable to rein in the dubious practices
followed by the banks and NBFCs. For instance, the recent scandals involving well connected businesspersons and the allegations
of misconduct that has been levelled indicates that crony capitalism is very much the case as far as the Indian BFSI sector is
concerned. This in turn, raises serious questions about its ability to mature into a world class sector which does not bode well for
the country’s aspiration to be a global player and a key pillar of the global economy.

 Opportunities
 On the other hand, there are humungous opportunities for the Indian BFSI Sector since the majority of the population is unbanked
and especially in the rural areas where banks and formal financial sector firms do not have a presence. Indeed, banking for the
unbanked offers an unprecedented opportunity for the Indian BFSI sector as can be seen from the success of emerging banks such
as Bandhan Bank. Further, there are many options for the latest generation payments banks and other institutions that are cropping
up to take advantage of the mobile and Smartphone penetration to leverage their existing banking channels.

 Threats
 However, there are dark clouds on the horizon for the Indian BFSI sector especially in terms of the rising bad loans and the NPAs
(Non Performing Assets) which can bring down the banking sector if they are not managed in a structured manner. Indeed, it can
be said that the Indian BFSI sector is facing an existential crisis as far as the problem of NPAs are concerned. added to this,
someday or the other, the sector has to grow beyond its dubious and wink and nudge informal and personal collusion crony
capitalist practices if it has to well and truly emerge as a global player.
The Reserve Bank of India and Demonetization
 No discussion on the Indian BFSI sector is complete without examining the role of the RBI, the
country’s mandated regulator. Starting in its pre independence and post independences periods of
regulating the Indian BFSI sector to the privatization wave where it was tasked with maintaining
monetary policy and its preeminent role in safeguarding the Indian Economy from external shocks
such as the GFC of 2008, the RBI has indeed done a stellar job of stewarding the Indian BFSI sector.

 Having said that, its neutrality and independence have been questioned in recent years especially
with the Demonetization measure, and this has worrying trends for the future of the Indian BFSI
sector.

 Indeed, Demonetization could be counted as the most radical measure as far as the Indian
Economy in the post independence era is concerned.

 Though there were other notable moves such as nationalization and liberalization as well as
devaluation of the Indian Rupee, Demonetization beats the other bold moves hollow with its
singular thrust of being disruptive in nature.

 It would not be an understatement to say that with this measure, the BFSI sector received such a
jolt and a shock that the after effects would continue to be felt for years to come.
Securities and exchange board of
India(SEBI)
 The SEBI was established in 1998 as an
administrative body and was given statutory
recognition under the SEBI ACT 1992.
 The Act empowers SEBI to regulate activities

connected with
1.Mareketing Securities and investment of stock
exchanges
2.Portfolio management
3. Stock brokers
4.merchant banking
Certain initiatives of the SEBI
 Establishment of Integrated Surveillance
department in SEBI
The Integrated Surveillance department is responsible
for market surveillance of all segments of Securities
market.
 Supervision of Investors Protection
 Inspection of Market intermediaries
 Inspection of stock exchanges
 Investigation for Investors protection
 Regulatory action for investors protection
 Redressal of Investor Grievances
Supervision of Investors Protection

 Investors are the pillar of the financial and securities market. They
determine the level of activity in the market.
 They put the money in funds, stocks, etc. to help grow the market and
thus, the economy.
 It thus very important to protect the interests of the investors. investor
protection involves various measures established to protect the interests of
investors from malpractices.
 Securities and Exchange Board of India (SEBI) is responsible for regulations
of the Mutual Funds and safeguard the interests of the investors.
 Investor protection measures by SEBI are in place to safeguard the investors
from the malpractices in shares, the stock market, Mutual Fund, etc.
 The Role of SEBI in Investor Protection SEBI has given out various methods
and measures to ensure the investor protection from time to time. It has
published various directives, driven many investor awareness programmes,
set up investor protection Fund (IPF) to compensate the investors.
 We will look into the investor protection measures by SEBI in detail
Investor Protection Measures by SEBI Investor protection legislation is implemented
under the Section 11(2) of the SEBI Act. The measures are as follows:
 Stock Exchange and other securities market business regulation. Registering and

regulating the intermediaries of the business like brokers, transfer agents, bankers,
trustees, registrars, portfolio managers, investment consultants, merchant bankers, etc.
 Recording and monitoring the work of custodians, depositors, participants, foreign

investors, credit rating agencies, etc.

 Registering investment schemes like Mutual fund & venture capital funds, and

regulating their functioning.

 Promotion and controlling of self-regulatory companies.
 Keeping a check on frauds and unfair trading methods related to the securities market.
 Observing and regulating major transactions and take-over of the companies.
 Carry out investor awareness and education programme.
 Train the intermediaries of the business.
 Inspecting and auditing the security exchanges (SEs) and intermediaries.
 SEBI Inspections have different stages:
1.Inspection of market intermediaries including
stock brokers/sub brokers and other market
intermediaries
2.inspection of stock exchanges
Inspection of Market intermediaries

 The Market Intermediaries Regulation and Supervision Department is

responsible for the registration, supervision, compliance monitoring
and inspections of all market intermediaries in respect of all segments
of the markets viz. equity, equity derivatives, currency derivatives,
debt and debt related derivatives and commodity derivative.
 The Department also handles the work related to registration,
supervision, compliance monitoring, inspections, investor grievances
and policy related issues as well as fees of various intermediaries.
 The Department also handles the work related to action against the
intermediaries for regulatory violations. Recently, MIRSD has started to
monitor intermediaries based on risk based supervision.
 The new supervisory approach is based upon overall risk assessment
of the intermediary rather than on individual factors such as turnover,
complaints, penalties, etc. MIRSD handles the following intermediaries 
 According to SEBI(2018-19)annual report,the
total number of inspections-including those
of stock and sub brokers were 36.
 In addition SEBI also directed that the stock

exchanges shall inspect all active members

every year.
Inspection Of Stock Exchanges
 Inspections are made to review-the market operations,
organizational structures and administrative control-the stock
excahges.The objectives are-
1.To provide a fair ,equitable,transperent and growing market to investors
2.To ensure that the organization, system and practices are in accordance with the SEBI
act .
3.To ensure that it has implemented the directions, guidelines and instructions issued
by SEBI/Government of India from time to time
4.To Ensure that it has compiled with the conditions if any imposed on it at the time of
the renewal/grant of its recognition under the SEBI Act.
Investigation Of Investors Protection
The SEBI is required to regulate
1. Price manipulation
2. Creation of artificial markets
3. Insider trading

4. Capital issue related irregularities

5. Takeover related violations
6. Manipulation of financial results

7. Non compliance of disclosure requirements

8. Any other misconduct in the securities
market
 As far as the process of investigation is concerned
an analysis of market data is done which includes;
1. Transaction statements
2. Static data like bank records and financial results
3. Order and trade log
4. Events concerning major financial developments
5. Call detail records
Regulatory Action for Investor
protection
 The SEBI can take action in the form of-
1) Issuing warning letters
2) Initiating inquiry proceedings
3) Levy of penalties
4) Issuing directions under SEBI Act
5) Initiating prosecution and referring the
matter to other regulatory agencies
 https://timesofindia.indiatimes.com/busines
s/india-business/how-sebi-cracked-karvys-
misuse-of-clients-funds/articleshow/722318
45.cms
Issue of Capital and Disclosure
Regulation
 In terms of the New ICDR Regulations, an issuer is
also required to make available on its website the
audited standalone financial statements of each of
its material subsidiaries (a subsidiary is considered
material if it contributes 10% or more to the
turnover or net-worth or profits before tax in the
annual consolidated financial statements of the
respective year of the issuer) for the past three full
financial years, or a link to such financial
information.
Prohibition of Insider Trading
Regulation
 It is important to have certain rules and regulations governing the
securities market, in order to ensure that no person gets profited from
trading on some ‘insider’ or on information that is not yet published for
the public. According to Section 11 of the SEBI Act, 2011, the 
SEBI (Insider Trading) Regulations, 1992 were introduced to curb the peril
of insider trading in India. The motive behind is to provide a fair playing
field and accessibility to information regarding the market to all the
participants.
 Many countries have applied strict rules regarding insider trading. This is
to ensure that the information is shared with all the participants of the
market and not one person alone gets the benefits from the information.
Such rules and regulations are generally enforced to ensure liquidity and
efficiency in the market. Also, to ensure that the growth of the market
happens in a steady and fast manner.
Prohibition of Insider Trading
Regulation
 It is important to have certain rules and regulations governing the
securities market, in order to ensure that no person gets profited from
trading on some ‘insider’ or on information that is not yet published for
the public. According to Section 11 of the SEBI Act, 2011, the 
SEBI (Insider Trading) Regulations, 1992 were introduced to curb the peril
of insider trading in India. The motive behind is to provide a fair playing
field and accessibility to information regarding the market to all the
participants.
 Many countries have applied strict rules regarding insider trading. This is
to ensure that the information is shared with all the participants of the
market and not one person alone gets the benefits from the information.
Such rules and regulations are generally enforced to ensure liquidity and
efficiency in the market. Also, to ensure that the growth of the market
happens in a steady and fast manner.
TISCO Case (1992)
 The profit before tax of Tata Iron and Steel Company (TISCO) for the first half of financial year
1992-93 felt steeply to Rs. 50.22 crore in comparison to profit of Rs.278.16 crore for the
financial year 1991-92 and Rs.238.13 crore for the financial year 1990-91. Before the
announcement of the half yearly financial results there was intense activity in the activity of
volume of TISCO shares traded between October 22, 1992 and October 29, 1992. Exhibit 3.3
shows the trading volume of TISCO shares.
 The price of the share registered a sharp fall of 36.6 % from Rs.335 on October 27, 1992 to
Rs.245 on November 6, 1992. It may, however be noted that SENSEX4 registered a decline of
8.3% during the same period from 2986.7 points on October 27, 1992 to 2756 points on
November 6, 1992. The sharp fall in prices of TISCO shares and active trading indicated that
insiders who had knowledge of poor results of the company had manipulated the market to
make large short sales. Bombay Stock Exchange (BSE) authorities initiated investigation. Small
investors were hit badly. BSE authorities claimed that it would not be possible for the
exchange to initiate action even if it was proved that insider trading took place in the absence
of any law against it. Due to the absence of insider trading regulations in India it was not
possible to investigate the case. It may be noted that SEBI insider trading regulations were
issued on November 19, 1992.
SEBI Substantial Aquition and
takeover Regulations
Foreign Exchange Management Act

 The Foreign Exchange Management Act, 1999 (FEMA)

is an Act of the Parliament of India "to consolidate and
amend the law relating to foreign exchange with the
objective of facilitating external trade and payments
and for promoting the orderly development and
maintenance of foreign exchange market in India".
 It enabled a new foreign exchange management

regime consistent with the emerging framework of the

World Trade Organization (WTO).
 It also paved the way for the introduction of the

Prevention of Money Laundering Act, 2002, which

came into effect from 1 July 2005.
 FERA, 1973 – To regulate and conserve foreign
exchange and properly utilise it for economic
development of the country.
 FEMA, 1999 – To facilitate external trade and
payments and to promote orderly developments
and maintenance of forex market in India.
 The important change is that emphasise is no more
on conservation.
REGULATION AND MANAGEMENT OF
FOREIGN EXCHANGE
Dealing in foreign exchange, etc.—Rules or regulations made thereunder, or with the
general or special permission of the Reserve Bank, no person shall—
 (a) deal in or transfer any foreign exchange or foreign security to any person not being

an authorised person;
 (b) make any payment to or for the credit of any person resident outside India in any

manner;
 (c) receive otherwise through an authorised person, any payment by order or on behalf

of any person resident outside India in any manner. Explanation.—For the purpose of
this clause, where any person in, or resident in, India receives any payment by order or
on behalf of any person resident outside India through any other person (including an
authorised person) without a corresponding inward remittance from any place outside
India, then, such person shall be deemed to have received such payment otherwise
than through an authorised person;
 (d) enter into any financial transaction in India as consideration for or in association

with acquisition or creation or transfer of a right to acquire, any asset outside India by
any person. Explanation.—For the purpose of this clause, “financial transaction” means
making any payment to, or for the credit of any person, or receiving any payment for,
by order or on behalf of any person, or drawing, issuing or negotiating any bill of
exchange or promissory note, or transferring any security or acknowledging any debt.
 Holding of foreign exchange, etc.—Save as otherwise
provided in this Act, no person resident in India shall
acquire, hold, own, possess or transfer any foreign
exchange, foreign security or any immovable
property situated outside India.
 Current account transactions.—Any person may sell
or draw foreign exchange to or from an authorised
person if such sale or witdrawal is a current account
transaction: Provided that the Central Government
may, in public interest and in consultation with the
Reserve Bank, impose such reasonable restrictions for
current account transactions as may be prescribed.
 Capital account transactions.—(1) Subject to the provisions
of sub-section (2), any person may sell or draw foreign
exchange to or from an authorised person for a capital
account transaction. (2) The Reserve Bank may, in
consultation with the Central Government, specify— 1 [(a)
any class or classes of capital account transactions which
are permissible;] (b) the limit up to which foreign exchange
shall be admissible for such transactions: 2 [(c) any
conditions which may be placed on such transactions;] 3
[Provided that the Reserve Bank shall not impose any
restriction on the witdrawal of foreign exchange for
payments due on account of amortization of loans or not
depreciation of direct investments in the ordinary course of
business.
 Explain the meaning of the term “Current
Account Transaction” and the right of a
citizen to obtain Foreign Exchange under the
Foreign Exchange Management Act,1999
 The term “current account transaction” is defined in Section 2(j) of 
 FEMA- 1999.
 •
 It means a transaction other than a capital account transaction and includes:
 •
 (i) payments due in connection with foreign trade in the ordinary course of business.
 •
 (ii) payments due as interest on loans and as net income from investments.
 •
 (iii) remittances for living expenses of parents, spouse and children residing abroad and
 •
 (iv) expenses in connection with foreign travel education and medical care of parents, spouse and
children.
 •
 According to Section 5 of FEMA, 1999 any citizen may sell or draw foreign exchange to or from an
authorised person if such sale or drawl is a current account transaction. Provided that the Central
Government may in public interest and in consultation with the Reserve Bank, impose such reasonable
restrictions for current account transactions as may be prescribed.
 •
 Further, any person may sell or draw foreign exchange to or from an authorised person for a capital
account transaction subject to the provisions of section 6(2)which deals with
 Acquisition and Transfer of Immovable Property in India by person resident outside India
Mr. G., an Indian national desires to obtain Foreign Exchange on current account transactions for
the following purposes:
(i) Payment of commission on exports made towards equity investment in wholly owned subsidiary
abroad of an Indian Company.
(ii) Remittance of hiring charges of transponder.
(iii) Remittance for use of trade mark in India.
Advise G whether he can obtain Foreign Exchange and, if so, under what conditions?
• Answer
• Under Section 5 of FEMA, 1999, certain rules have been framed for witdrawal of foreign
exchange on current account. According to the said rules, witdrawal of foreign exchange for
certain transactions is prohibited. In respect of certain transactions witdrawal of foreign
exchange is permissible with the prior approval of Central Government. In respect of some of
the transaction, prior permission of RBI is sufficient for witdrawal of foreign exchange.
(i) In respect of item No.1 i.e. Payment of Commission on exports made towards equity investment
in wholly owned subsidiary abroad of an Indian company is prohibited.
(ii) Drawal of foreign exchange for remittance of hiring charges of transponder, can be made with
the prior approval of the Central Government.
How will you determine whether a particular business unit like a factory or office is a ‘person resident in India’
under FEMA, 1999?
(ii) ‘Printex Computer’ is a Singapore based company having several business units all over the world. It has a unit
for manufacturing computer printers with its Headquarters in Pune. It has a Branch in Dubai which is
controlled by the H.Q in Pune. What would be the residential status under FEMA, 1999 of printer units in
Pune and that of Dubai branch?
• Person resident in India
• Section 2 of FEMA,1999 defines the term “person resident in India”. All business units in India will be
“resident in India” even though these units are owned or controlled by a person resident outside India.
• Similarly all business units outside India will be ‘resident in India’ provided the business units are either
owned or controlled by a person resident in India. It is necessary to determine the residential status of the
person who owns or controls the business unit.
(ii) Printex Computer being a Singapore based company would be person resident outside India. Printex unit in
Pune, being a branch of a company would be a ‘person’.
• Person resident in India includes an office, branch or agency in India owned or controlled by a person resident
outside India. Printex unit in Pune is owned or controlled by a person resident outside India, and hence it,
would be a ‘person resident in India.’
• However, Dubai Branch though not owned is controlled by Print unit in Pune which is a person resident in
India. Hence prima facie, it may be possible to hold a view that the Dubai Branch is a person resident in India.