Securities and Exchange Board OfIndia (SEBI)

SEBI Act, 1992 lays down the constitution of the management of SEBI. The Board of members of SEBI shall consist of a Chairman, two members from amongst the officials of the Ministries of the Central Government dealing with Finance and Law, one member from amongst the officials of the Reserve Bank of India constituted under section 3 of the Reserve Bank of India Act, 1934, two other members to be appointed by the Central Government, who shall be professionals and interalia have experience or special knowledge relating to securities market.

Powers and Functions of SEBI

Section 11 (1) of Act casts upon SEBI the duty to protect (the interests of investors in securities and to promote the development of and to regulate the securities market through appropriate measures, these measures provide for —

• Regulating the business in stock exchanges and any other securities market,
• Registering and regulating the working of stockbrokers. Sub-brokers. Share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and such other intermediaries who may be associated with securities market in any manner,
• Registering and regulating the working of collective investment schemes, including mutual funds,
• Promoting and regulating self-regulatory organisations,
• Prohibiting fraudulent and unfair trade practices in securities market,
• Promoting investor education and training of intermediaries in securities market,
• Prohibiting insider trading in securities,
• Regulating substantial acquisition of shares and take-over of companies,
• Calling far information from, undertaking inspection, conducting enquiries and audits of the stock exchanges and intermediaries and self-regulatory organisations in the securities market,
• Performing such functions and exercising such powers under the provisions of the capital issues (Control) Act, 1947. (Subsequently repealed) and the Securities Contracts (Regulations) Act. 1956, as may be delegated to it by the Central Government,
• Levying fees or other charges for carrying out the purposes of Section 11 of the Act,
• Conducting research for the above purpose,
• Performing such other functions as may be prescribed by the government.    

Infrastructure Leasing and Financial Services Ltd. (IL &Fs)

IL&Fs, set up in 1988, focuses on leasing of equipment and infrastructure development. The company has been provided a mandate for structuring the finances of major projects in the power and transportation sector. The company has identified several infrastructure projects in association with State Governments and Central Government agencies. Since 1994-95 IL & FS made significant progress in commercialisation of infrastructural projects. It was associated with various central and State Government agencies for developing infrastructure projects in roadways, power generation, telecommunications, water supply, water transport system, etc.

In the field of investment, banking, IL & FS undertakes merchant banking activity and has played a major role in structuring the sale of marketable securities to project finance requirements of the corporate clients. IL & FS is actively engaged in the money and gilt-edged markets for trading in government securities, bonds of public sector undertakings, corporate debentures and units.

The Credit Rating Information Services of India Ltd. (CRISIL)

CRISIL, set; up in 1988, is a credit rating agency. It undertakes the rating of fixed deposit programmes, convertible and non-convertible debentures and also credit assessment of companies. It has developed CRISIL CARD service to provide information to Indian companies. The service provides details about a company such as business it is engaged in, shareholding pattern, key management personnel, plant locations, equity share record, analyzed profit and loss accounts and balance sheets for the past four years, accounting practices, key financial rations, raw material consumption, major competitors, major lenders, excerpts from the Directors report and events after the balance sheet date.

During 1992-93, CRISIL had launched banking rating services and had rated proposed debt instruments of three rationalized banks and one private sector bank. CRISIL introduced CRISIL –500 Equity Index during 1995-96.

The services of CRISIL are being appreciated by similar agencies of other countries. During 1991-92, CRISIL provided technical assistance and training to Rating Agency Malaysia Berhad. It has also agreed to give assistance and provide training to the staff of MALLOT the Israel Securities Rating Agency. CRISIL has received similar requests for assistance from Indonesia, Pakistan and Sri Lanka.

Apart from CRISIL, there is another credit rating agency called Investment Information and Credit Rating Agency of India Limited (ICRA). It rates debt instruments of both financial and manufacturing companies.

Stock Holding Corporation of India Ltd. (SHCIL)

SHCIL has been sponsored by seven all-India financial institutions, viz., IDBI, IFCI, ICICI, UTI, LIC, GIC and IRBI. The principal objective of the Corporation is to introduce a book-entry system for the transfer of shares and other type of securities replacing the present system that involves voluminous paper work. The SHCIL is currently handling market operations and providing custodial services to UTI, LIC Mutual Fund, LIC and GIC and its subsidiaries. The Corporation is also the trustee of LIC Mutual Fund and GIC Mutual Fund for holding and dealing in their securities.

The Government of India has directed that SHCIL should cover all public sector banks and all subsidiaries and mutual funds set up by the public financial institutions and public sector banks.

Few reforms/ TRENDS IN capital MARKETS[1]

• SEBI has been established. Other institutions created for better supervision and expansion of the capital markets.
• Complete computerization, dematerialization and demutualization of stock exchanges.
• A major development in the Indian primary market has been the introduction of “screen based book building”, where securities are auctioned through an anonymous screen-based system, and the price at which securities are sold is discovered on the screen.
• Introduction of new instruments in secondary markets like derivatives.
• Household investor has participation increased,
• Gross turnover on NSE and BSE, has increased
• The mutual fund industry has experienced slow growth in recent years,
• The number of registered FIIs has risen
• SEBI is developing a database about market participants and investors, called the MAPIN database, to give a Unique Identification Number (UIN) to individuals and entities participating in the capital market.

Financial Sector Legislative Reforms Commission

Financial Sector Legislative Reforms Commission (FSLRC) was notified up by the Government in March 2011. The FSLRC was chaired by renowned SC Justice, B.N. Srikrishna, and had a broad mandate to review and recast the legal the institutional structure of financial sector in tune with the contemporary requirements.

Need and Context of FSLRC: There are multiple legislative acts, rules and regulations to govern the financial sector. Financial Sector institutions developed over a century and many of laws don’t address the needs of the changing times. Examples are RBI Act (1934), Insurance Act (1938), Securities Contract Regulation Act (1956). Financial regulation in India has often been criticized for piecemeal regulation by sectors and unnecessary complexity. 

In much of developed world, especially the US and UK, both deeply impacted by the global financial crisis of 2008, there has been a major overhaul of financial regulation and clear delineation of roles, responsibilities and accountability of regulators during recent times.

In India, there was felt need for the same, so that dispute of the kind that erupted between SEBI and IRDA over regulation of ULIP could be avoided in future. There was mention of need of financial regulator in then Finance Minster’s Pranab Mukherji speech in 2009.   

Main Recommendations: FSLRC’s report proposes a sweeping reorganization of the country’s financial architecture. FSLRC has given the following proposals:

1    Consolidation of regulation of securities, pensions and insurance into a single, UK Financial Services Authority-style regulator. Securities and Exchange Board of India (SEBI), Pension Fund Regulatory and Development Authority (PFRDA) and Forward Markets Commission (FMC) would be combined to form a new Unified Financial Regulatory Authority (UFRA). The two new primary regulators – RBI and UFRA will have to do cost-benefit analysis of any proposed regulation. They will then assign an external global agency to review its performance after three years. 

2.   FSLRC’s seeks to impose greater accountability on the newly created financial regulators while setting out the ground rules for the government to follow a due process in policy making.

3    Limiting RBI’s mandate to focus largely on monetary policy, though this is not an exclusive function of RBI. Central Government would promulgate ‘rules’ governing inbound capital flows while the RBI would promulgate ‘regulations’ governing outbound flows.

4.   Emphasis on more effective institutional framework such as to be put in place to deal with ‘systemic risk’. Financial Stability and Development Council is to deal with future financial crises. FSLRC would codify in statute the Financial Stability and Development Council. FSDC will be composed of Finance Minister, chairpersons of RBI and UFRA, Resolution Corporation and an administrative law member.

5.   The creation of a financial consumer protection agency;

6.   A clean-up of certain matters related to financial contracts and market infrastructure.

7.   There are some important recommendations of the Financial Sector Legislative Reforms Commission like the enactment of the Indian Financial Code which is considered necessary for better governance and accountability.

8.   Setting up of Financial Sector Appellate Tribunal (FSAT)

The acceptance of FSLRC’s recommendations would create specialized administrative courts to review violations of financial regulations that, while not unfamiliar in an Indian context.

Issues in implementation: Economic policy debates in India have also been characterized by tensions between pressures to reduce budget deficits and promote social welfare.  Perhaps interestingly, the Commission does not require or prohibit any particular policy measure, but recommends that cost-benefit-analysis be required for any initiative promoting financial inclusion and redistribution.

Still, the Commission’s report will not be without controversy.  Perhaps the most significant effect of the FSLRC’s recommendations, if implemented in total, would be to limit the role of the central bank.  The RBI has been both lauded and pilloried for taking a cautious approach to financial liberalization.

The FSLRC would create a separate agency responsible for managing public debt, removing these functions from the RBI.

The FSLRC would also hand control over critical policy matters such as the objectives of monetary policy and the administration of at least inbound capital flows to the political branch of Government, the Central Government. 

Indian economic policy has been characterized by a high-pitched, if largely internal to the system, turf warfare between the Central Government, specifically the Ministry of Finance, and the RBI, over the pace of financial liberalization, while not taking an explicit position on financial liberalization.  The new Indian Financial Code breaks new ground in that it puts the onus on the government to subsidise through cash or cash equivalent or tax breaks any such directed efforts aimed at social inclusion.

Notwithstanding the many merits of these recommendations on their own terms, the Commission’s prescripts would rewrite the rules of engagement in economic policy in favor of the political branch of government and place a long term bet on broad-scale financial development—a contested proposition given the experience of OECD nations with financial deregulation in recent decades—as a means to realizing broader economic and social development.

Government may set up UFA while recommendations relating to unified Financial Sector Appellate Tribunal (FSAT) may be diluted.

SEBI-FMC Merger 2015

The Forward Markets Commission regulated commodities market since 1953, while the Securities and Exchange Board of India was set up in 1988 as a non-statutory body for regulating the securities markets and became an autonomous body in 1992 with full independent powers.

FMC oversaw the commodities market for over 60 years, but it lacked powers which led to wild fluctuations and alleged irregularities remaining untamed in this market segment. Also, the commodities market faced challenges with respect to speculative activities and illegal activities like 'Dabba trading' flourishing in this segment. These weaknesses culminated into the NSEL scam and paved way for merger of FMC with SEBI which is widely regarded as a more efficient regulator.

What does the merger mean?

The Forward Contracts Regulation Act (FCRA) stands repealed, and the regulation of the commodity derivatives market shifts to SEBI under the Securities Contracts Regulation Act (SCRA), 1956. SCRA is a stronger law, and gives more powers to SEBI than FCRA offered to FMC. Market players feel that commodity markets will now be better regulated, with more stringent processes — and will thus evoke greater confidence.

Why is SEBI seen to be better equipped to monitor commodities trading?

The FMC only regulated the exchanges, and had no direct control over brokers. Also, SEBI has a far superior surveillance, risk-monitoring and enforcement mechanism that market participants say will give more confidence to investors, and may help businesses grow. Among other powers, SEBI now also has the power to access call data records.

How can SEBI expand the scope of commodity trading?

While foreign institutional investors are allowed to invest in Indian equities and debt markets, they are currently restricted from participating in commodities trading at exchanges. According to sources, SEBI may allow FII participation in commodities trading going forward, which would provide more depth to the markets, and increase liquidity, investor participation and better price discovery. Brokers also feel SEBI may introduce option contracts (call and put options) in commodities trading, thereby providing better hedging tools to investors. SEBI has said that it will oversee price determination of commodities. Price discovery has been a major issue in commodities trading, and if the regulator addresses that concern, it will be a big confidence-booster for participants.