Financial Market Regulation in India (Guidelines Issued by RBI and SEBI)

Guidelines Issued by Reserve Bank of India for the Regulation of Financial Markets

1) Management oversight, policy/operational guidelines – The management of a Primary Dealer should bear primary responsibility for ensuring maintenance of appropriate standards of conduct and adherence to proper procedures by the entity. Primary Dealers (PD) should frame and implement suitable policy guidelines on securities transactions. Operational procedures and controls in relation to the day-to-day business operations should also be worked out and put in place to ensure that operations in securities are conducted in accordance with sound and acceptable business practices. With the approval of respective Boards, the PDs should clearly lay down the broad objectives to be followed while undertaking transactions in securities on their own account and on behalf of clients, clearly define the authority to put through deals, procedure to be followed while putting through deals, and adhere to prudential exposure limits, policy regarding dealings with brokers, systems for management of various risks, guidelines for valuation of the portfolio and the reporting systems etc. While laying down such policy guidelines, the Primary Dealers should strictly observe Reserve Bank’s instructions on the following:

1) Ready Forward deals

2) Transactions through SGL Account

3) Internal Controls/Risk Management System

4) Dealings through Brokers

5) Accounting Standards

6) Audit, Review and Reporting

Any other instructions issued from time to time The internal policy guidelines on securities transactions framed by the PD, duly certified by its management to the effect that they are in accordance with the RBI guidelines and that they have been put in place, may be perused by the Statutory Auditors and commented upon as to the conformity of the guidelines with the instructions/guidelines issued by RBI.… Read the rest

Financial Market Regulation: Meaning and Objectives

Financial Market Regulation

The nature of securities markets is such that they are inherently susceptible to failures due to the existence of information asymmetries and existence of high transaction costs. It needs to be emphasized that when securities markets come into existence, the interest of the member brokers are taken care of through margin requirements, barriers to entry of membership, listing agreements. However the investors/clients who buy and sell via their brokers are not able to form an organization to safeguard their interests due to the cost of creation of such organizations and free rider problems. The distinctive nature of the market can be observed with reference to the commodity, its quality, the system of transactions and the participants in the market, as follows:

(a) the commodity(the security)has a life to perpetuity.

(b) while the outcome of the contract say the redemption of debt is certain, in the case of the government, it is not always so in the case of a private debt instrument, hence uncertainty comes into focus.

(c) the quality of private debt instrument is unobservable and hence, it is the trust reposed on the trader or the issuer that is the decisive factor, here the problem of information comes into focus.

(d) in any securities market in any transaction or deal there are at least four participants, two clients and two brokers. The brokers negotiate deals with each other on behalf of their clients and thus the problem of transaction cost comes into focus. When there is so much scope for failure and opportunism, there appears to be substantial ground for prescribing an institution that oversees the market at different stages to ensure its reliability, efficiency and it’s very existence.… Read the rest

Summary of important sections of Banking Regulation Act

The Banking Regulation Act was passed as the Banking Companies Act 1949 and came into force wef 16.3.49. Subsequently it was changed to Banking Regulations Act 1949 wef 01.03.66. Summary of some important sections is provided hereunder.(Note:  The section no. is given at the end of each item. For details, kindly refer the bare Act.)

  • Banking means accepting for the purpose of lending or investment of deposits of money from public repayable on demand or otherwise and withdrawable by cheque, drafts order or otherwise (5 (i) (b)).
  • Banking company means any company which transacts the business of banking (5(i)(c)
  • Transact banking business in India (5 (i) (e).
  • Demand liabilities are the liabilities which must be met on demand and time liabilities means liabilities which are not demand liabilities (5(i)(f)
  • Secured loan or advances means a loan or advance made on the security of asset the market value of which is not at any time less than the amount of such loan or advances and unsecured loan or advances means a loan or advance not secured (5(i)(h).
  • Defines business a banking company may be engaged in like borrowing, lockers, letter of credit, traveller cheques, mortgages etc (6(1).
  • States that no company shall engage in any form of business other than those referred in Section 6(1) (6(2).
  • For banking companies carrying on banking business in India to use at least one word bank, banking, banking company in its name (7).
  • Restrictions on business of certain kinds such as trading of goods etc. (8)
  • Prohibits banks from holding any immovable property howsoever acquired except as acquired for its own use for a period exceeding 7 years from acquisition of the property.
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Steps implemented by Companies Act with regard to Corporate Governance

The Ministry of Company Affairs appointed various committees on the subject of corporate governance which lead to the amendment of the companies Act in 2000.  These amendments aimed at increasing transparency and accountabilities of the Board of Directors in the management of the company, thereby ensuring good corporate governance.  The dealt with the following:


As per this subsection inserted by the Companies Act, every profit and loss account and balance sheet of the company shall comply with the accounting standards.  The compliance of Indian Accounting standards was made mandatory and the provisions for setting up of National Committee on accounting standards were incorporated in the Act.


This section was inserted by the Companies Act 1999which provides that the central government shall establish a fund called the Investor Education and protection Fund and amount credited to the fund relate to unpaid dividend, unpaid matured deposits, unpaid matured Debenture, unpaid application money received by the companies for allotment of securities and due for refund and interest accrued on above amounts.


Subsection (2AA)added by the Companies Act, 2000 provides that the Boards report shall also include a Director’s Responsibility statement with respect to the following matters:

  1. Whether accounting standards had been followed in the preparation of annual accounts and reasons for material departures, if any;
  2. Whether appropriate accounting policies have been applied and on consistent basis;
  3. Whether directors had made judgments and estimate that are reasonable prudent so as to give a true and fair view of the state of affair and profit and loss of the company;
  4. Whether the directors had prepared the annual accounts on a going concern basis.
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Corporate Governance and Clause 49 of the Listing Agreement

SEBI revise Clause 49 of the Listing Agreement pertaining to corporate governance vide circular date October 29th, 2004, which superseded all other earlier circulars issued by SEBI on this subject.  All existing listed companies were required to comply with the provisions of the new clause by 31st December 2005.

The major provisions included in the new Clause 49 are:

  • The board will lay down a code of conduct for all board members and senior management of the company to compulsorily follow.
  • The CEO an CFO will certify the financial statements and cash flow statements of the company.
  • If while preparing financial statements, the company follows a treatment that is different from that prescribed in the accounting standards, it must disclose this in the financial statements, and the management should also provide an explanation for doing so in the corporate governance report of the annual report.
  • The company will have to lay down procedures for informing the board members about the risk management and minimization procedures.
  • Where money is raised through public issues etc., the company will have to disclose the uses/ applications of funds according to major categories ( capital expenditure, working capital, marketing costs etc) as part of quarterly disclosure of financial statements.

Further, on an annual basis, the company will prepare a statement of funds utilized for purposes other than those specified in the offer document/ prospectus and place it before the audit committee.

The company will have to publish its criteria for making its payments to non-executive directors in its annual report.… Read the rest

Laws governing merger in India

Various Laws governing merger in India are as follows:

1. Indian Companies Act, 1956

This has provisions specifically dealing with the amalgamation of a company or certain other entities with similar status. The most common form of merger involves as elaborate but time-bound procedure under sections 391 to 396 of the Act.

Powers in respect of these matters were with High Court (usually called Company Court). These powers are being transferred to National Company Law Tribunal (NCLT) by companies (second Amendment) Act, 2002.

The Compromise, arrangement and Amalgamation/reconstruction require approval of NCLT while the sale of shares to Transferee Company does not require approval of NCLT.

Sec 390 This section provides that “The expression ‘arrangement’ includes a reorganization of the share capital of the company by the consolidation of shares of different classes, or by the division of shares into shares of different classes, or by both these methods”

Sec 390(a) As per  this section , for the purpose of sections 391 to 393,’Company’ means any company liable to be wound up under the Act.

Sec 390(b) As per this section, Arrangement can include reorganization of share capital of company by consolidation of shares of different classes or by division of shares of different classes.

Sec 390(c) As per this section, unsecured creditors who have filed suits or obtained decrees shall be deemed to be of the same class as other unsecured creditors. Thus, their separate meeting is not necessary.

Sec 391 This section deals with the meeting of creditors/members and NCLT’s sanction to Scheme.… Read the rest