Chapter-VI. Regulation of Financial Intermediaries in India

Transcription

1 Chapter-VI Regulation of Financial Intermediaries in India

2 Chapter VI Regulation of Financial Intermediaries in India 168 Introduction; Financial market in India is one of the oldest in the world and is considered to be the fastest growing and best among all the markets of the emerging economies. Financial markets are the centers or arrangements facilitating buying and selling of financial claims, assets, services and securities. Banking and non-banking financial institutions, dealers, borrowers and lenders, investors and savers, and agents are the participants on demand and supply side in these markets. Financial market may be a specific place or location, e.g., stock exchange, or it may be just an over-the-phone market. In the financial markets there are regulatory institutions those framing rules and regulations for operations and for the smooth functioning of financial markets. These regulators include Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), Ministry of Finance. Efficiency and effectiveness of financial market depends upon the functioning functioning of these market regulators. This chapter will focus on Regulation of Financial Intermediaries in India and attempt to study the perception of Indian investor s perception towards the functioning of financial market regulators towards the functioning of financial market regulators in India. India is having multiple regulatory network system, separate regulator for various financial instruments. RBI, SEBI, Registrar of Companies, Ministry of Company Affairs( former DCA), Company Law Board, Stock Exchanges functions as separate regulator for various financial instruments like equity,

3 169 shares, debentures, fixed deposits, mutual funds, etc. The Joint Parliament Committee on Ketan Parekh has discussed at length the system, the functioning of regulators in India. It has passed various observations on the functioning of regulatoiy network in India. The JPC1 report explains: The Regulatory framework has to be fashioned to cater for the changing economic scenario of the country. With liberalization, the role of the government as a direct player is being progressively reduced. Earlier, the Government had considerable control over a large part of economic activity and acted as policy-maker, regulator and service provider in several sectors. Efforts to separate these functions have been going on since 1991 and will have to continue. Whatever the functions of the Government with regard to the economy as a whole, the functions of the Government as a policy maker have changed and will change as the economy shifts towards more and more market-orientation. In the light of this development, the relationship between Government and the regulators has been changing, with a conscious effort at distancing Government from day-to-day regulation, augmenting the autonomy of Regulators and endowing them with statutory powers. At the same time, Regulators have been found wanting and they do not instill confidence in the investor. While it is for the executive and the Regulators to reconcile the growing autonomy of the Regulators with the imperatives of effective regulation to meet the requirements of a healthy Capital Market, the responsibility of the Ministry of Finance to Parliament for the financial health of the economy, including Capital Markets, 1UTI-I redeems 5% more ofsus 99 for Rs 300 cr\ The Economic Times, 15 Dec 2003

4 170 must inform the institutions, mechanisms and procedures put in place to this end. The liberalized economy is statutorily regulated by the Reserve Bank of India (RBI), the Securities Exchange Board of India (SEBI), the Department of Company Affairs (DCA) and others. These Regulators are represented, along with senior officers of the Ministry of Finance, in the High Level Coordinator Committee for Capital Markets (HLCC), Chaired by Governor, RBI. Although important achievements took place in the Indian securities market took place during this period, repeated misconduct in the stock market have led to an image of disarray, lack of transparency and fraud dominating the financial sector. Consequent collapses in the stock market have resulted in such a loss of confidence in the minds of investors, domestic and foreign, that there has been low- level stagnation in our stock markets ever since the crash of March- April 2001 observes JPC. Rules. Regulations & Regulators: The Government has framed rules under the SCRA, the SEBI Act and the Depositories Act. The SEBI has framed regulations under these acts for registration and regulation of the market intermediaries and for prevention of unfair trade practices. Under these Acts, the Government and the SEBI issue notifications, guidelines and circulars, which the market participants comply with. The SROs like the stock exchanges have also laid down their rules and regulations for the market participants to follow. The regulator has to ensure that the market participants abide by and adhere to the rules and regulations prescribed to them. This in turn would ensure that the securities market continues to be a major source of finance for corporate and government and also protect the interest of investors.

5 171 The responsibility for regulating the securities market is shared by the Department of Economic Affairs (DEA), Department of Company Affairs (DCA), Reserve Bank of India (RBI) and SEBI. The activities of all these agencies are coordinated by a High Level Committee on Capital Markets. The orders of SEBI under the securities laws are appealable before the Securities Appellate Tribunal (SAT). Most of the powers under the SCRA are exercisable by DEA, while a few others by SEBI. The powers of DEA under SCRA are also con-currently exercised by SEBI. The regulation of the contracts for sale and purchase of securities, gold related securities, money market securities and securities derived from these securities and ready forward contracts in debt securities are exercised concurrently with the RBI. The SEBI Act and the Depositories Act are mostly administered by SEBI. The rules under the securities laws are framed by government and regulations by the SEBI. All rules are administered by SEBI. The powers under the Companies Act relating to issue and transfer of securities and non-payment of dividend are administered by SEBI in case of listed public companies and public companies proposing to get their securities listed. The SROs ensure compliance with their own rules as well as with the rules relevant for them under the securities laws. Various legislations governing the securities market are: (a) the SEBI Act, 1992 which establishes SEBI to protect investors and develop and regulate securities market; (b) the Companies Act, 1956, which sets out the code of conduct for the corporate sector in relation to issue, allotment and transfer of securities and disclosures to be made in public issues;

6 172 (c) the Securities Contracts (Regulation) Act, 1956, which provides for regulation of transactions in securities through control over stock exchanges; and (d) The Depositories Act, 1996 which provides for electronic maintenance and transfer of ownership of demat securities; (e) NBFC Guidelines, Regulations of RBI; (f) Guidelines and Regulations of Collective Investment Scheme from SEBI; (g) Guidelines and Regulations from SEBI on Mutual Fund; (h) Guidelines and Regulations from Stock Exchanges on Investor Protection Fund; (i) Guidelines and Regulations from Stock Exchanges on Arbitration; (j) Guidelines and Regulations of SEBI on Debenture Trustees; (k) Demutualisation of Stock Exchanges Guidelines, A brief about these legislations is given below: The Securities and Exchange Board of India; The Capital Market Regulator; Stock Exchanges in India were continued to be regulated directly by the Government of India under powers conferred in terms of the Securities Contract (Regulations) Act 1956 up to the late Eighties. In the year 1988 the Government of India constituted the Securities and Exchange Board of India (Popularly referred as 'SEBI') with Head office at Mumbai through an executive resolution to act as the independent regulator of Stock exchanges, the primary market, Mutual Funds etc. The Capital Issues (Control) Act of 1947 was abolished in May The abolition of CCI (Controller of Capital Issues) and allowing free pricing of issues prompted many companies to raise funds from the equity market at a premium. The ground was cleared for the incoming of a market

7 173 regulatoiy authority replacing direct government control. SEBI was made into a statutory corporate body in the year 1992 with the passing of the Securities and Exchange Board of India Act in 30th January The objects clause of the Act explained the scope and purpose of the Act in the following words: An Act to provide for the establishment of a Board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto. Subsequently on 13th September 1994, the Government of India through a Gazette Notification delegated the Powers conferred to it under the Securities Contracts (Regulation) Act 1956 to SEBI. The Government in the year 1996 also passed the Depositories Act 1996, which came into retrospective operation from 20 September Organizational Structure of SEBI; 1. The Board i.e. SEBI shall consist of the following members, namely a. a Chairman; b. two members from amongst the officials of the Ministries of the Central Government dealing with Finance and Law; c. one member from amongst the officials of the Reserve Bank of India constituted under section 3 of the Reserve Bank of India Act, 1934; d. two other members, to be appointed by the Central Government. 2. The general superintendence, direction and management of the affairs of the Board shall vest in a Board of members, which may exercise all powers and do all acts and things which may be exercised or done by the Board. 3. Save as otherwise determined by regulations, the Chairman shall also have powers of general superintendence and direction of the affairs of the Board

8 174 and may also exercise all powers and do all acts and things which may be exercised or done by the Board. 4. The Chairman and members referred to in clauses (a) and (d) of sub-section (1) shall be appointed by the Central Government and the members referred to in clauses (b) and (c) of that sub-section shall be nominated by the Central Government and the Reserve Bank of India respectively. 5. The Chairman and the other members referred to in clauses (a) and (d) of sub-section (1) shall be from amongst the persons of ability, integrity and standing who have shown capacity in dealing with problems relating to securities market or have special knowledge or experience of law, finance, economics, accountancy, administration or in any other discipline which, in the opinion of the Central Government, shall be useful to the Board. Powers and Functions of The Board fsebds These are detailed in the second chapter of the Act under Section 11(1). The section points out that it shall be duty of the Board to protect the interests of the investors in securities and to promote and development of, and to regulate the securities market by such measures as it thinks fit. In brief the statutory objectives of the SEBI enshrined in the SEBI Act are fourfold- 1. Protection of investors interests in securities 2. Promotion of the development of the securities market 3. Regulation of the securities market and 4. Matters connected therewith and incidental thereto. By way of amplification of the above core objectives, the Act enumerates as under the different powers & functions of SEBI in greater details as under:-

9 175 a. regulating the business in stock exchanges and any other securities markets; b. 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 advisers and such other intermediaries who may be associated with securities markets in any manner. (ba). Registering and regulating the working of the depositories, participants, custodians of securities, foreign institutional investors, credit rating agencies and such other intermediaries as the Board may, by notification, specify in this behalf c. registering and regulating the working of venture capital funds and collective investment schemes including mutual funds; d. promoting and regulating self-regulatory organisations; e. prohibiting fraudulent and unfair trade practices relating to securities markets; promoting investors' education and training of intermediaries of securities markets; g. prohibiting insider trading in securities; h. regulating substantial acquisition of shares and take-over of companies; i. calling for information from, undertaking inspection, conducting inquiries and audits of the stock exchanges, mutual funds and other persons associated with the securities market and intermediaries and self- regulatory organisations in the securities market; j. performing such functions and exercising such powers under the provisions of Securities Contracts (Regulation) Act, 1956, as may be delegated to it by the Central Government;

10 176 k. levying fees or other charges for carrying out the purpose of this section; L conducting research for the above purposes; (la) calling from or furnishing to any such agencies, as may be specified by the Board, such information as may be considered necessary by it for the efficient discharge of its functions; m. Performing such other functions as may be prescribed. For the due exercise of its responsibilities under the Act, the Board is vested with the same powers as are vested in a civil court, in respect of the following matters, namely:- L the discovery and production of books of account and other documents, at such place and such time as may be specified by the Board; ii. iii. summoning and enforcing the attendance of persons and examining them on oath; Inspection of any books, registers and other documents of any person referred to in section 12, at any place. Matters to be Disclosed by the Companies to the Board [Section 11(A)1 The Board may, for the protection of investors, specify, by regulations,- a. The matters relating to issue of capital, transfer of securities and other matters incidental thereto; and b. The manner in which such matters, shall be disclosed by the companies.

11 177 Power to Issue Directions fsection 11(B)!: SEBI is empowered to issue Directions to the following intermediaries with regards to matters connection with Section 12: stock-broker, sub- broker, share transfer agent, banker to an issue, trustee of trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser and such other intermediary who may be associated with securities market Depository, depository participant, custodian of securities, foreign institutional investor, credit rating agency or any other intermediary associated with the securities market 9 sponsers of venture capital funds, or collective investment schemes including mutual funds and to any Company with regards to matters to be disclosed by the Companies as specified in Section 11(A) Registration of Intermediaries connected with Securities market: Different intermediaries mentioned above can commence functioning in their respective activities only after registration with SEBI and complying with requirements as stated under specific regulations intended for each. (1) No stock-broker, sub- broker, share transfer agent, banker to an issue, trustee of trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser and such other intermediary who may be associated with securities market shall buy, sell or deal in securities except under, and in accordance with, the conditions of a certificate of registration obtained from the Board in accordance with the regulations made under this Act.

12 178 (IA) No depository, participant, custodian of securities, foreign institutional investor, credit rating agency or any other intermediary associated with the securities market as the Board may by notification in this behalf specify, shall buy or sell or deal in securities except under and in accordance with the conditions of a certificate of registration obtained from the Board in accordance with the regulations made under this Act. (IB) No person shall sponsor or cause to be sponsored or carry on or cause to be carried on any venture capital funds or collective investment schemes including mutual funds, unless he obtains a certificate of registration from the Board in accordance with the regulations. SEBI has issued detailed Rules and Regulations to be adhered to by each of the intermediaries above specified Establishment of Securities Appellate Tribunals The Central Government shall by notification, establish one or more Appellate Tribunals to be known as the Securities Appellate Tribunal to function as Appellate Authority and hear appeals Civil Court not to have jurisdiction (Section 15Y) No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which an adjudicating officer appointed under this Act or a Securities Appellate Tribunal constituted under this Act is empowered by or under this Act to determine and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any power

13 179 conferred by or under this Act. However appeals against the decision of Securities Appellate Tribunal can be preferred before a High Court. SEBI since its inception has carried out its functions effectively and brought about immense changes in the environment of the investment market to the benefit of the common investor. SEBI - Performance Objectives SEBI was established by the Government of India with the objectives towards protecting the interest of the investors in securities; to promote the development of, and regulate the securities market and matters connected therewith or incidental to. SEBI has drawn a comprehensive Strategic Action Plan in order to realize this vision. The Plan envisages achievement of strategic aims laid down for: a. corporates, b. markets and c. regulatory regime SEBI has drawn its Vision to become the "Most Dynamic and Respected Regulator-Globally. Towards this end it has drawn a comprehensive Strategic Action Plan in order to realize this vision. The Strategic Action Plan has identified four key spheres and has set strategic aims for each of them as under:

14 180 Table 6Ai The Strategic Action Plan Sphere of Responsibility INVESTORS (CONSUMERS) FIRMS (CORPORATE) FINANCIAL MARKETS (EXCHANGES, INTERMEDIARIES) REGULATORY REGIME Strategic Aim Identified Investors are enabled to make informed choices and decisions and achieve fair deals in their financial dealings Regulated firms and their senior management understand and meet their regulatory obligations Consumers and other participants have confidence that markets are efficient, orderly and clean An appropriate, proportionate and effective regulatory regime is established in which all the stakeholders' have confidence Progress & Performance: Transparent, vibrant and efficient secondary market is necessary to provide avenue for deployment of savings and also to prop up the primary market, to mobilize savings for investments needed for economic growth. SEBI has been endeavouring to ensure this. 1. Automated On-line Screen Based Trading System; The trading system has become on-line, fully automated, screen-based. Open outcry is now outmoded and discarded. Manual trading has yielded place to terminal trading. It has brought about efficiency and transparency. It has cut down the cost, time and risk involved. A large number of participants, irrespective of their location, now trade with one another simultaneously, improving the

15 181 depth and liquidity of the market. The system provides perfect audit trail. Given the size and complexity of the country, that we could click the system and stabilise it so successfully is, by no means, a mean achievement. 2. Demateriaiization of Securities: A cent percent dematerialization-trading dream, too, has virtually materialized. Today, the investing public has been saved from the botheration of safe keeping, bad delivery, delayed delivery, share duplicity, bogus documents and also from irritating headaches of intimation of change of address, watching the receipt of bonus or rights shares etc. While the convenience is conveniently enjoyed, even the modest cost involved is mostly disliked, as is the human nature. Still, this issue is being addressed by SEBI to explore the possibility of further cost or tariff reduction. 3. Rolling Settlement; Gone are the days when the seller had to wait for weeks for settlement. Rolling settlement on T+5 basis, initially made compulsory for 200 actively traded scrips on BSE and NSE, was extended to cover all the scrips in December Within a little over two years we moved to T+3 and then to T+2 by April The transition has been so smooth and successful that it has received word wide acclamation. We should now look forward to a day when the settlement would be on T+l basis or even Real Time Basis. 4. Elimination of Counterparty Risk & Investor Protection: Following introduction of T+2 rolling settlement, the risk containment measures were rationalized. Based on classification of the scrips depending on liquidity and volatility, VaR based margins have been made applicable to these scrips. 5. Unique client ID for all investors. In the absence of any single identity code for investors in India such as the social security numbers as available elsewhere, the code could be the passport number, ration card, driving

16 182 licence or pan card with a provision available on stock exchange for mapping it to do one-to-one correspondence. SEBI is in discussion with NSDL to work out a system of providing unique number to all investors. 6. G-Sec Trading in Stock Exchanges; In order to make the market more efficient and provide more investment opportunities to the investors, trading in government securities on stock exchanges was permitted. Probably, ours is the first country to have screen-based, automated, anonymous trading on G-Sec. 7. Establishment Central Listing Authority; With a view to harmonizing the listing requirements across the various stock exchanges and centralizing the listing powers in one single authority, an independent body viz. Central Listing Authority has been conceived and is to come into being. 8. Demutualization of Stock Exchanges; In order to eliminate conflict of interest situation and ensure alignment of investors interest with the Exchanges, the process of demutualization and corporatization of stock exchange has already been initiated. Almost all the stock exchanges have submitted their plans. These are under process. 9. Trading in Derivatives Products; The introduction of the derivatives in the market and the gradual enlargement of the basket of products has further enhanced the liquidity, efficacy of the market and also provided hedging opportunities. The Risk management system which includes VAR based margining, on line monitoring of margin and automatic disablement features has stood the test of stress. We can derive immense satisfaction from the success of our derivatives market. IQ.Corporate Accountaabilitv & Corporate Governance: The corporate governance standard is a crucial factor for ensuring investors confidence. While the Company Law would take care of the basic requirement of the

17 183 form of corporate governance structure, SEBI is concerned with the corporate governance practices on on-going basis. SEBI constituted a new committee on corporate governance under the Chairmanship of Narayana Murthy to look into existing corporate governance practices and suggest improvement wherever necessary. Based on this report, revised corporate governance standards have been finalized. Disclosures on corporate governance standard observation would form part of the listing agreement requirement. Simultaneously, SEBI encouraged the credit rating agencies- ICRA and CRISIL, to evolve a suitable corporate governance index as a measure of wealth creation by the corporates. Some of the companies have been rated against this index. I understand that this institute, too, has developed a measuring model. It is our belief that the economic compulsions would increasingly induce the companies to go for the corporate governance rating. Corporate governance is essentially ethics-based. No amount of legislation or regulation will serve the purpose fully, unless there is an attitudinal change in the management of the corporate. 11. Enforcement of Code of Conduct for Market Intermediaries: In the dynamic conditions of the market, the regulation cannot remain static. As a measure of regulatory dynamism, various regulatory guidelines concerning intermediaries, listed entities, and trade practices have been reviewed and suitably modified. Such a view would be a continual process. Code of Conduct for various intermediaries have also been finalized and would be in their hands shortly. 12. Public Issues - Disclosure & Investor Protection Norms: Over the years, SEBI has taken several initiatives to improve the operational efficiency and transparency in equity market and to provide investors with the security issues of high quality and to enable entities to raise resources in cost

18 184 effective manner. The disclosures prescribed for new issues in India are comparable, in terms of contents and stringency, to those obtaining in most of the advanced markets. Entry norms and track record criteria have also been attuned to ensure the quality of new issues and to protect the investors. The continual disclosure requirements for listed companies are also at par with any international standards. These relate to publication of annual audited results and quarterly results in prescribed format and time frame, consolidated results, segmental reporting, cash flow, auditors qualifications and their impact quantification, and disclosures of certain transactions. To enable electronic filing of information, Electronic Data Information Filing System has been set up in association with National Informatics Center. 13.Vigilance Enforcement & Curbs on Market Manipulation: The basket of products has been enlarged; regulations have been revamped; risk management system has been streamlined; code of conduct for various intermediaries and players has been put in place. While these can be reviewed and modified from time to time as the circumstances demand, the major area of concern for the regulator and the investors should be the possibility of price manipulation and malpractices. Normally, once bitten, one is twice shy. The Indian investors have been bitten twice. Therefore, to pre-empt any further biting, the intensity of shyness must necessarily be high. As a regulator, we keep a constant watch to spot any unusual movement or activities for possible preemptive action. Interestingly, it is observed that authorized trading terminals, in some places, give birth to unauthorized dabbers. Possible action is being taken in this regard. 14Jnvestor Awareness Programmes: Invariably, while manipulators play, the retail investors fall a prey. Often, there is a fatal attraction to hypes and greed. On its part, SEBI has started conducting Investor Awareness

19 185 Programmes at various places across the country in collaboration with different agencies. But it is for the retail investors to be diligent enough not to be led by some invisible hands via garden path to prickly desert. Contracts and Options in Securities: If the Central Government is satisfied regarding the nature or the volume of transactions in securities in any state/states or area that it is necessary to do so, it may, by notification in the Official gazette, declare provisions of section 13 i.e contracts in notified areas illegal in certain circumstances' to apply to such State/States or area and thereupon every contract in such State or States or area which is entered into after the date of the notification otherwise than between members of a recognized stock exchange or recognized stock exchanges in such State/States/area or through or with such member would be illegal. Provided that any contract entered into between members of two or more recognized stock exchanges in such State or States or area would be subject to such terms and conditions as may be stipulated by the respective stock exchanges with prior approval of SEBI and require prior permission from the respective stock exchanges with prior approval of SEBI. As per section 13 A of SCRA (1956), a stock exchange can establish additional trading floor with prior approval of the SEBI in accordance with the terms and conditions stipulated by SEBI. Listing Of Securities; When securities are listed on the application of any person in any recognized stock exchange, such persons should comply with the conditions of the listing agreement with that stock exchange. The act also provides conditions of listing, delisting of securities, right of appeal against refusal of stock exchanges to list securities of public companies, right of appeal to SAT against

20 186 refusal of stock exchange to list securities of public companies, procedures and powers of SAT, Right to legal representation. PENALTIES AND PROCEDURES: The act also provides various cases when a person is liable for penalties such as when there is failure to: a) Furnish information, return, etc. b) Enter into agreements with clients c) Redress investor's grievances d) Segregate securities or moneys of client or clients e) Comply with provision of listing and delisting conditions etc. DEPOSITORIES ACT, 1996: The Depositories Act, 1996 provides for the establishment of depositories for securities to ensure transferability of securities with speed, accuracy and security. The act provides the rights and obligations of depositories, participants, issuers and beneficial owners. 1) A depository is required to enter into an agreement with one or more participants as its agents. 2) Any person through a participant can enter into an agreement as specified by byelaws with any depository for availing its services. 3) Any person who enters into an agreement with depository should surrender the certificate of security for which he requires the services of a depository to the issuer in such a manner as may be specified by the regulations. 4) After the issuer receives the certificate of security, he should cancel the certificate of security and substitute in its records the name of the depository as a registered owner in respect of that security and inform the depository accordingly. After receiving the information, the depository should enter the name of the person who has entered into agreement, as the beneficial owner in its records.

21 187 5) After receiving intimation from the participant, every depository should register the transfer of security in the name of the transferee. If a beneficial owner or a transferee of a security seeks to have custody of such security the depository should inform the issuer accordingly. 6) The persons which subscribes to securities offered by the issuer would have the option either to receive the security certificates or hold securities with a depository. 7) Even if a person decides to hold a security with a depository, the issuer would intimate such depository the details of allotment of the security and after receiving such information the depository should enter in its records the name of the allottee as the beneficial owner of the security. 8) All securities held by a depository should be dematerialized and be in a fungible form. The depositories should be deemed to be the registered owner for the purpose of effecting transfer of ownership of security on behalf of a beneficial owner. Further, the depository as a registered owner should not have any voting rights or other rights in the securities held by it. The Beneficial owner should be entitled to all the rights and benefits and be subjected to all the liabilities in respect of his securities held by a depository. 9) The depository is required to maintain a register and an index of beneficial owners. 10) Beneficial owners, with the prior approval of the depository create a pledge or hypothecation of securities owned by him through a depository. Further, the BO is required to intimate the depository regarding the pledge and accordingly the depositories make entries in its records.

22 188 11) The depositories are required to furnish information about the transfer of securities in the name of beneficial owners at such intervals and in such manner as may be specified by the bye-laws. 12) If the Beneficial Owner opts out of a depository in respect of any security then it has to be informed to the depository. COMPANIES ACT, 1956; It deals with issue, allotment and transfer of securities and various aspects relating to company management. It provides for standards of disclosure in the public issues, particularly in the fields of company management and projects, information about other listed companies under the same management, and management perception of risk factors. It also regulates underwriting, the use of premium and discounts on issues, rights and bonus issues, payment of interest and dividends, supply of annual report and other information. RESERVE BANK OF INDIA (RBI): Reserve Bank of India (RBI) has regulatory involvement in the capital market, but this has been limited to debt management through primary dealers, foreign exchange control and liquidity support to market participants. It is RBI and not SEBI that regulates primary dealers in the Government securities market. RBI instituted the primary dealership of Government securities in March Securities transactions that involve foreign exchange transactions need the permission of RBI. STOCK EXCHANGES: SEBI issued directives that require that half the members of the governing boards of the stock exchanges should be non broker public representatives and include a SEBI nominee. To avoid conflicts of interest, stock brokers are a minority in the committees of stock exchanges set up to handle matters of

23 189 discipline, default and investor-broker disputes. The exchanges are required to appoint a professional, non member executive director who is accountable to SEBI for the implementation of its directives on the regulation of stock exchanges. SEBI has introduced a mechanism to redress investor grievances against brokers. Further, all issues are regulated through a series of disclosure norms as prescribed by SEBI and respective stock exchanges through their listing agreement. After a security is issued to the public and subsequently listed on a stock exchange, the issuing company is required under the listing agreement to continue to disclose in a timely manner to the exchange, to the holders of the listed securities and to the public any information necessary to enable the holders of the listed securities to appraise its position and to avoid the establishment of a false market in such listed securities. The powers and functions of regulatory authorities for the securities market seem to be diverse in nature. SEBI is the primary body responsible for regulation of the securities market, deriving its powers of registration and enforcement from the SEBI Act. There was an existing regulatory framework for the securities market provided by the Securities Contract Regulation (SCR) Act and the Companies Act, administered by the Ministry of Finance and the Department of Company Affairs (DCA) under the Ministry of Law, respectively. SEBI has been delegated most of the functions and powers under the SCR Act and shares the rest with the Ministry of Finance. It has also been delegated certain powers under the Companies Act. RBI also has regulatory involvement in the capital markets regarding foreign exchange control, liquidity support to market participants and debt management through primary dealers. It is RBI and not SEBI that regulates primary dealers in the Government securities market. However, securities transactions that involve a foreign exchange transaction need the permission of

24 190 RBI. So far, fragmentation of the regulatory authorities has not been a major obstacle to effective regulation of the securities market. Rather, lack of enforcement capacity by SEBI has been a more significant cause of poor regulation. But since the Indian stock markets are rapidly being integrated, the authorities may follow the global trend of consolidation of regulatory authorities or better coordination among them. After introduction of SEBI Act, participants in the Indian capital market are required to register with SEBI to carry out their businesses. These include: stock brokers, sub brokers, share transfer agents, bankers to an issue, trustees of a trust deed, registrars to an issue, merchant bankers, underwriters, portfolio managers, and investment advisers. Stockbrokers are not allowed to buy, sell, or deal in securities, unless they hold a certificate granted by SEBI. Each stockbroker is subject to capital adequacy requirements consisting of two components: basic minimum capital and additional or optional capital relating to volume of business. The basic minimum capital requirement varies from one exchange to another. The additional or optional capital and the basic minimum capital combined have to be maintained at 8 percent or more of the gross outstanding business in the exchange (the gross outstanding business means the cumulative amount of sales and purchases by a stock broker in all securities at any point during the settlement period). Sales and purchases on behalf of customers may not be netted but may be included to those of the broker. Most stockbrokers in India are still relatively small. They cannot afford to directly cover every retail investor in a geographically vast country and in such a complex society. Thus, they are permitted to transact with sub brokers as the latter play an indispensable role in intermediating between investors and the

25 191 stock market. An applicant for a sub broker certificate must be affiliated with a stockbroker of a recognized stock exchange. There are two major issues which need to be addressed concerning sub brokers in the Indian capital market; majority of sub brokers are not registered with SEBI; and the function of the sub broker is not clearly defined. No sub broker is permitted to buy, sell, or deal in securities, without a certificate granted by SEBI. SEBI enforced the following measures in March 1997 to regulate unregistered sub brokers : [a] Initiation of criminal actions on complaints received against unregistered sub-brokers in suitable cases; [b] Prohibition of stockbrokers in dealing with unregistered sub brokers. In spite of these actions, the problem is still at large. There is a need to address the basic issue of clarifying the role of the sub brokers and to educate the investors about their role. SEBI Act of 1992 has introduced self-regulatory organizations [SROs] for regulating various participants in the securities market. But they are not yet operational. A clear regulatory framework has yet to be set up, and relevant market participants are not ready to regulate themselves for professional purposes. The only market related SROs in India whose regulatory frameworks have been well established and which is actually functioning are the recognized stock exchanges. For knowing investor s perception regarding financial market regulator a survey was conducted in Varanasi region. The analysis of data and information are as follows:

26 192 RESEARCH METHPQLOGY Type of Research Type of Data Method of Data Collection Data Collection Technique Universe of the Study Sample Unit Sampling Technique Sample Size Statistical Tools to be used Analysis of Data: Descriptive Research - Primary Data - Survey - Questionnaire - Investing Community based in Varanasi District - an Investor - Convenient Sampling Percentage analysis, Charts, Graphs, Tables, etc. 1. You currently have investments in= [ JMutual Funds [ ]Bank Deposits/Accounts [ ]Company Deposits [ ]Shares [ ]Life Insurance [ ]Medical/ Accident/General Insurance [ ]Any Other (specify) Option s Mutual Funds Bank Deposits/ Accounts Table 6.2; Percentage Investment Company Deposits Share s Life Insurance Medical/ Accident /General Insurance Any Other %age

27 193 % share in investment avenues % share in investment avenues Avenues As most of the investors are futuristic they want to make their family secure. That is why 70% of the investors are investing in Life Insurance. Now investors are so much rational that they are moving from shares to mutual funds. 62% of the investors are investing in Mutual Funds but only 35% are investing in shares. 57% are having Bank Deposits/ Accounts and only 32% are having Medical/Accident/General Insurance. Today only few rely on company deposits. 7% of the investors are also investing in some other avenues which are: a. NSC b. PPF c. Post Office d. Gold 2. Listed Companies shares which you own are listed on - [ ]NSE [ ]BSE [ lother Exchange (specify) Table 6.3: Investor Preference of Stock Exchange Options NSE BSE Other Exchange %age

28 194 Stock Exchanges Trade in S.E. Stock Exchanges used Out of the sample of 100 investors all of them are not investing in mutual funds and/or shares due to which all of them were not eligible to attempt this question. 45% of the investors invest in the companies which are listed in NSE (National Stock Exchange) and 47% invest in the companies listed in BSE (Bombay Stock Exchange). None of the investors invest in the companies which are listed in stock exchanges other than NSE and BSE. 3. What are the objectives of your investment decision? [ (Safety [ ]Liquidity [ ]High Return [ (Capital Appreciation [ (Tax Saving [ (Security [ (All the above [ (Any Other (specify)

29 195 Table 6.4: Objectives of Your Investment Decision Options Safety Liquidity High Capital Tax Security All Any Return Appreciation Saving the Other above %age Objectives of Investment Decision %age too mow om o mo ik to C O C M C M i-i SSB d %age of investors Safety High Return q Capital Appreciation o ni Tax Saving Security All the above Any Other o Liquidity 22% of the investors utilize their idle savings through investment for safety, 13% for liquidity, 28% for high return, 14% for capital appreciation, 21% for tax saving and 21% for security. But 41% of the investors say that they invest for all the objectives viz. safety, liquidity, high return, capital appreciation, tax saving and security. 4. Do you think SEBI (Securities and Exchange Board of India) effectively prohibits fraudulent and unfair trade practices? [ JYes [ ]No [ ]Can t Say

30 196 Table 6.5: SEBI Role in Prohibition of Fraudulent and Unfair Trade Practices Options Yes No Can t Say %age As many of the investors are investing in M Fs & shares they need to know about SEBI. 47% of the respondents say in its favour but 31% say against it and 22% are unable to give the response. 5. Does SEBI prohibit insider trading in securities? [ ]Yes [ INo [ ]Can t Say

31 197 Table 6.6: SEBI Role in Insider Trading Options Yes No Can t Say %age % of the investors say that SEBI prohibits insider trading in securities. Only 11% of the investors say that SEBI does not prohibit it. Majority of the respondents i.e. 48% are unaware about insider trading in securities and the role of SEBI in its prohibition. 6. Do you think SEBI promotes investors education? [ ]Yes [ JNo [ JCan t Say Table 6.7: SEBI Role in Promoting Investors Education Options Yes No Can t Say %age

32 198 Out of 100 respondents 51% say that SEBI promotes investors education which reveals that 51% are aware about its functions but 27% say that SEBI does not promote investors education and 22% are unable to give the response. 7. Does the RBI (Reserve Bank of India) sets the CRR (Cash Reserve Ratio) according to the prevailing market scenario? [ ]Yes [ ]No [ JCan t Say Table 6.8: RBI s role in CRR Options Yes No Can t Say %age Can t Say 24% Yes No Can t Say In the first question it was found that 57% of the investors are having Bank Deposits/ Accounts which account for more than 50% of the total respondents. In addition to these 57% some other respondents are also in favour of RBI. 64%

33 199 of the total respondents say that RBI sets the CRR according to the prevailing market scenario. Only 12% are against it and 24% didn t know about it. 8. Does the IRDA (Insurance Regulatory and Development Authority) effectively protect the interest of the insurance policy holders in the settlement of claims? [ ] Yes [ ] No [] Can t Say Table 6.9: IRDA role in settlement of claims Options Yes No Can t Say %age Can t Say 24% Yes No Can t Say In the first question it was found that 70% of the total respondents are having Life Insurance policies & 32% are having Medical/Accident/General Insurance policies. All the insurance policies together capture a major portion of the total investment in various avenues. 64% of the investors say that IRDA effectively protect the interest of the insurance policy holders in the settlement of claims.

34 200 Only 12% of the respondents are against it. And 24% of the respondents were unable to give the response. 9. Do you think there is weak Corporate Governance in India? [ ]Yes [ ]No []Can tsay Table 6.10: Corporate Governance in India Options Yes No Can t Say %age Can t Say 17% Yes No a Can t Say In India Corporate Governance is doing well but not up to the mark. It needs to become more effective due to which 45% of the respondents say that there is weak Corporate Governance in India. 38% of the respondents say that the Corporate Governance in India is not weak. And 17% said that they don t know much about the Corporate Governance so they can t respond to it.

35 In case of any problem who do you think is the appropriate authority to complain to? [ JRBI [ ]SEBI [ ]Ministry of Company Affairs [ ]Any Other (specify) Table 6.11: Authority to Complain Options RBI SEBI Ministry of Company Affairs Any Other %age Different Authorities 70% of the respondents rely upon SEBI. They think that in case of any problem related to shares they can approach SEBI to find the solution their problem. 46% of the respondents say that as far as CRR is concerned or there is any problem related to banks then we can go to RBI. 54% of the respondents are in favour of MCA. They say that apart from shares and banks if there is any other problem then we can approach MCA. And 4% say that some other authorities are also there to whom the complaints can be filed. They are :

36 202 Ombudsman > Investor Forum 11. Do you think the authority is receptive to the common man s complaints? [ JYes [ ]No [ ]Can t Say Can t Say 23% 28% 49% of the respondents say that the above authority is receptive to the common man s complaints. 28% say that the respective authority can be complained to but they are not receptive to the common man s complaints. And 23% of the respondents are not sure about it. They say that when such a case will arise then they will think over it.

37 Have you ever approached SEBI for any type of grievance? [ ]Yes [ ]No Minority of the respondents i.e. 27% have approached SEBI for their grievance. Majority of them i.e. 73% have never approached SEBI. 13. If yes, what was the type of grievance? [ JRefund Order/Allotment Advice [ ]Non-receipt of Dividend [ ]Non-receipt of Share Certificates after Transfer [ jcollective Investment Schemes [ ]Any Other (specify)

38 204 Table 6.12: Type of Grievance Options Refund Non-receipt Non-receipt of Collective Any Order/ of Dividend Share Certificates Investment Other Allotment after Transfer Schemes No. of investors Types of Grievance No. of investors R Order/ Non... Non... C I Any Other Allotment Dividend Transfer Schemes Grievances Out of 27 respondents 16 of them have approached SEBI for Refund Order/ Allotment, 9 of them for Non-receipt of Dividend, 6 of them for Non-receipt of Share Certificates after Transfer and 2 of them for Collective Investment Schemes. 2 of them have also approached SEBI for some other reasons which are : Delisting of a company from NSE/BSE. AAA company disappearing from the market (Mutual Funds).

39 Did SEBI listen to your plea and provided you a fair judgment? [ ]Yes [ ]No [ jwaiting for it Waiting for it, 6, Out of 27 investors who approached SEBI for their grievances only 14 investors have got a fair judgement. SEBI did not listen to the plea of 7 of them so they did not get a fair judgement. And 6 of them which account for 22% of 27 are waiting for the judgement of SEBI. Their plea is in process and they are waiting for the action to be taken by SEBI.

40 Have your confidence shaken in the Indian Capital Market after the Satyam scam? [ ]Yes [ ]No Options After the Satyam scam the confidence of 49% of the investors have shaken from the Indian Capital Market but the confidence of 51% of the investors have not shaken from the Indian Capital Market. As more than 50% of the investors rely on the Indian Capital Market even after the Satyam scam this shows that just because of one company the whole system cannot be blamed.

41 Do you think India need a strong and single financial market regulator? [ ]Yes [ ]No ( ]Can t Say Can t Say 15% Yes No Can t Say 67% of the respondents say that India need a strong and single financial market regulator. 18% say that there is no such requirement of a strong and single financial market regulator and 15% can t say anything about it. As 67% are in favour of this question we can say that India really needs a strong and single financial market regulator. This reveals that the current financial market regulators are not working effectively. 17. What do you think is the best solution to protect investors rights? [ ]Brokers and securities intermediaries should be more honest [ ]Wrongdoers should be severely and swiftly punished [ increase regulation