School of Distance Education

MODULE V

REGULATORY INSTITUTIONS

Financial institutions, financial markets, financial instruments and

financial services are all regulated by regulators like Ministry of Finance, the
Company Law Board, RBI, SEBI, IRDA, Dept. of Economic Affairs, Department of
Company Affairs etc. The two major Regulatory and Promotional Institutions in
India are Reserve Bank of India (RBI) and Securities Exchange Board of India
(SEBI). Both RBI and SEBI administer, legislate, supervise, monitor, control and
discipline the entire financial system. RBI is the apex of all financial institutions in
India. All financial institutions are under the control of RBI. The financial markets
are under the control of SEBI. Both RBI and SEBI have laid down several policies,
procedures and guidelines. These policies, procedures and guidelines are changed
from time to time so as to set the financial system in the right direction.

V-I. RESERVE BANK OF INDIA

The Reserve Bank of India is the Central Bank of our country. The Reserve
Bank of India is the apex financial institution of the country’s financial system
entrusted with the task of control, supervision, promotion, development and
planning. Reserve Bank of India came into existence on 1 st April, 1935 as per the
Reserve Bank of India act 1935. But the bank was nationalised by the
government after Independence. It became the public sector bank from 1st January,
1949. Thus, Reserve Bank of India was established as per the Act 1935 and
empowerment took place in Banking Regulation Act 1949.

Reserve Bank of India is the queen bee of the Indian financial system which
influences the commercial banks’ management in more than one way. The Reserve
Bank of India influences the management of commercial banks through its various
policies, directions and regulations. Its role in bank management is quite unique.
In fact, the Reserve Bank of India performs the four basic functions of management,
viz., planning, organising, directing and controlling in laying a strong foundation
for the functioning of commercial banks. Reserve Bank of India has 4 local boards
basically in North, South, East and West – Delhi, Chennai, Calcutta, and Mumbai.

Objectives of the Reserve Bank of India

The Preamble to the Reserve Bank of India Act, 1934 spells out the objectives
of the Reserve Bank as: “to regulate the issue of Bank notes and the keeping of
reserves with a view to securing monetary stability in India and generally to operate
the currency and credit system of the country to its advantage.”

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Prior to the establishment of the Reserve Bank, the Indian financial system
was totally inadequate on account of the inherent weakness of the dual control of
currency by the Central Government and of credit by the Imperial Bank of India.
The Hilton-Young Commission, therefore, recommended that the dichotomy of
functions and division of responsibility for control of currency and credit and the
divergent policies in this respect must be ended by setting-up of a central bank – called
the Reserve Bank of India – which would regulate the financial policy and develop
banking facilities throughout the country. Hence, the Bank wasestablished with this
primary object in view.

Another objective of the Reserve Bank has been to remain free from political
influence and be in successful operation for maintaining financial stability and
credit. The fundamental object of the Reserve Bank of India is to discharge purely
central banking functions in the Indian money market, i.e., to act as the note-
issuing authority, bankers’ bank and banker to government, and to promote the
growth of the economy within the framework of the general economic policy of the
Government, consistent with the need of maintenance ofprice stability.

A significant object of the Reserve -Bank of India has also been to assist the
planned process of development of the Indian economy. Besides the traditional
central banking functions, with the launching of the five-year plans in the country,
the Reserve Bank of India has been moving ahead in performing a host of
developmental and promotional functions, which are normally beyond the purview of
a traditional Central Bank.

Functions of the Reserve Bank of India

The Reserve Bank of India performs all the typical functions of a good Central Bank.
In addition, it carries out a variety of developmental and promotional functions which
are tuned to the course of economic planning in the country:

 Issuing currency notes, i.e. to act as a currency authority.

 Serving as banker to the Government.

 Acting as bankers’ bank and supervisor.

 Monetary regulation and management.

 Exchange management and control.

 Collection of data and their publication.

 Miscellaneous developmental and promotional functions and activities.

 Agricultural Finance.

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 Industrial Finance

 Export Finance.

 Institutional promotion.

Important functions of Reserve Bank of India are briefed below

i) Monopoly in Note Issue: - Reserve Bank of India enjoys monopoly of Notes

issue since its establishment. The bank issues the currency notes of all
denominations. Except coins which are issued by the ministry of finance
in the government of India. But these coins are put into circulation only
through the RBI. The Bank (RBI) issue currencies to a minimum reserve
system under which Rs 200\- crores worth of Gold and foreign exchange
reserve should be kept out of these 200 crores, 115 crores values should
be in the form of Gold only. To undertake this functionRBI established
2 department i.e.

a) Issue Department

b) Banking department

Issue department is involved in issue of currencies and manages currencies

circulation.

ii) Banker to the Government: - Reserve Bank of India acts as a banker to the
central and state Government. As a banker it provides all the services like
a commercial bank to these Governments. It accepts deposits of the
Government and allows them to withdrawal of cheques. It makes
payments and collect receipts on behalf of the government. It also
provides temporary advances for maximum period of 3 months to these
governments. It is known as “Ways” and “Means advances”. It is also the
financial advisor to the central and states. It also helps them in
formulation of financial policies.

iii) Bankers bank: - Reserve Bank of India is the apex financial institution acts
as banker to other bank. RBI accepts deposits, maintains cash reserves
and lends loans to all the banks operating under its preview. It is a
banker’s bank in the following grounds: It provides short-term loans to
the banks for 3 months against (security) i.e. eligible securities.

It is known as lenders of last resort in the times of financial emergency.

It also gives loans at concessional rate of Interest for a specific purpose.
It also offers refinance facilities to all the eligible banks.

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iv) Regulatory and Supervisor Function: -The most significant provision of the
Banking regulation act is supervision and regulation of banks. Section 35 of
the act say’s that RBI can inspect any branch of Indian Bank located in or
outside the country. Further, it issued licensing for the banks and can
establish new branches to maintain regional balance in the country. It also
arranges for training colleges to the banks employees and officers.

v) Controller of Credit: - Reserve Bank of India is an important controller of

credit in our credit. The credit created by bank leads to inflation or
depression and disturbs the smooth functioning of the economy. Therefore,
to regulate credit Reserve Bank of India uses qualitative as well as
Quantitative credit control measures.

Role of Reserve Bank of India in Credit Control

The Reserve Bank of India adopts two methods to control credit in modern times
for regulating bank advances. They are as follows

(A) Quantitative or General Credit Control

This method aims to regulate the amount of bank advance.

(a) Bank rate

It is the rate at which central bank discounts the securities of commercial

banks or advance loans to commercial banks. This rate is the minimum and
it affects rate is the rate of discount prevailing in the money market among
other lending institutions. Generally bank rate is higher than the marketrate.
If the bank rate is changed all the other rates normally change at the same
direction. A central bank control credit by manipulating the bank rate. If the
central bank raises the bank rate to control credit, the market discount rate
and other lending rates in the money will go up. The cost of credit goes up and
demand for credit goes down. As a result, the volume of bank loans and
advances is curtailed. Thus raise in bank rate will contract credit.

(b) Open Market Operation:

It refers to buying and selling of Government securities by the central bank in

the open market. This method of credit control becomes very popular afterthe
1st World War. During inflation, the banks will securities and during
depression, it will purchase securities from the public and financial
institutions. The Reserve Bank of India is empowered to buy and sell
government securities from the public and financial institutions. The
Reserve Bank of India is empowered to buy and sell government securities,
treasury bills and other approved securities. The central bank uses the
weapon to overcome seasonal stringency in funds during the slack season.

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When the central bank sells securities, they are purchased by the commercial
banks and private individuals. So money supply is reduced in the economy and
there is contraction in credit.

When the securities are purchased by the central bank, money goes to the
commercial banks and the customers. SO money supply is increased in the
economy and there is more demand for credit.

(c) Variable Reserve Ratio (VRR):

This is a new method of credit control adopted by central bank. Commercial

banks keep cash reserves with the central bank to maintain for the purpose of
liquidity and also to provide the means for credit control. The cash reserveis
also called minimum legal reserve requirement. The percentage of this ratio can
be changed legally by the central bank. The credit creation of commercial banks
depends on the value of cash reserves. If the value of reserve ratio increase and
other things remain constant, the power of credit creation by the commercial bank
is decreased and vice versa. Thus by varying the reserve ratio, the lending
capacity of commercial banks can be affected.

(B) Qualitative or Selective Control Method:

It is also known as qualitative credit control. This method is used to control the
flow of credit to particular sectors of the economy. The direction of creditis
regulated by the central bank. This method is used as a complementary to
quantitative credit control discourages the flow of credit to unproductive sectors
and speculative activities and also to attain price stability. The main instruments
used for this purpose are:

(1) Varying margin requirements for certain bank:

While lending commercial banks accept securities, deduct a certain

margin from the market value of the security. This margin is fixed by the central
bank and adjusts according to the requirements. This method affects the
demand for credit rather than the quantity and cost of credit. This method is
very effective to control supply of credit for speculative dealing in the stock
exchange market. It also helps for checking inflation when the margin is raised.
If the margin is fixed as 30%, the commercial banks canlend up to 70% of
the market value of security. This method has been used by RBI since 1956 with
suitable modifications from time to time as per the demand and supply of
commodities.

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(2) Regulation of consumer's credit:

Apart from trade and industry a great amount of credit is given to the
consumers for purchasing durable goods also. Reserve Bank of India seeks to
control such credit in the following ways:

(a) By regulating the minimum down payments on specific goods.

(b) By fixing the coverage of selective consumers’ durable goods.

(c) By regulating the maximum maturities on all instalment credit and

(d) By fixing exemption costs of instalment purchase of specific goods.

(3) Control through Directives:

Under this system, the central bank can issue directives for the credit control.
There may be a written or oral voluntary agreement between the central bank
and commercial banks in this regard. Sometimes the commercial banks do not
follow these directives of the Reserve Bank of India.

(4) Rationing of credit:

The amount of credit to be granted is fixed by the central bank. Credit is

rationed by limiting the amount available to each commercial bank. The
Reserve Bank of India can also restrict the discounting of bills. Credit can also
be rationed by the fixation of ceiling for loans and advances.

(5) Direct Action:

It is an extreme step taken by the Reserve Bank of India. It involves refusal

by Reserve Bank of India to extend credit facilities, denial of permission to open
new branches etc. Reserve Bank of India also gives wide publicity about the
erring banks to create awareness amongst the public.

(6) Moral suasion:

Reserve Bank of India uses persuasion to influence lending activities of banks.

It sends letters to banks periodically, advising them to follow sound principles of
banking. Discussions are held by the Reserve Bank of India with banks to control
the flow of credit to the desired sectors.

Role of Reserve Bank of India in Money market

RBI is the most important constituent of the money market. The money market
comes within the direct purview of the Reserve Bank of India regulations. The
Reserve Bank of India influences liquidity and interest rates through a number of
operating instruments such as CRR, Open Market Operations, repos, change in

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bank rates etc. The RBI has been taking several measures to develop money
market in India. A committee to review the working of the monetary system under
the chairmanship of Sukhamoy Chakravorty was set up in 1985. It underlined the
need to develop money market instruments. As follow up, the RBIset up a working
group on the money market under the chairmanship of [Link]. The committee
submitted its report in 1987. This committee laid the blueprint for the institution
of a money market. Based on its recommendations, the RBI initiated the following
measures:

1. The DFHI was set up as a money market institution jointly by the RBI, public
sector banks, and financial institutions in 1988 to impart liquidity to moneymarket
instruments and help the development of a secondary market for such
instruments.

2. Money market instruments such as the 182-day T-bill, CD and interbank

participation certificate were introduced in 1988-89. CP was introduced in January
1990.

3. To enable price discovery, the interest rate ceiling on call money was freed in
stages from October 1988. As a first step, operations of the DFHI in the call/notice
money market were freed from the interest rate ceiling in 1988. Interest rate
ceiling on interbank term money, rediscounting of commercial bills and interbank
participation without risk were withdrawn in May 1989. All the money market
interest rates are, by and large, determined by market forces.

In August 1991, the RBI set up a high level committee under the
chairmanship of [Link] (the Narasimham Committee) to examine all
aspects relating to structure, organization, functions and procedures of the
financial system. The committee made several recommendations for the
development of the money market. Based on its recommendations, the RBI
initiated the following measures:

4. The Securities Trading Corporation of India was set up in June 1994, to provide
an active secondary market in government securities.

5. Barriers to entry were gradually eased by (a) setting up the primary dealer
system in 1995 and satellite dealer system in 1999 to inject liquidity in themarket,
(b) enabling market evaluation of associated risks by withdrawing regulatory
restrictions such as bank guarantees in respect of CPs, and (c) increasing the
number of participants by allowing the entry of foreign institutional investors.

6. Several financial innovations in instruments and methods were introduced. T- bills

of varying maturities and RBI repos were introduced. Auctioned T-bills were
introduced leading to market-determined interest rates.

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7. The development of a market for short term funds at market-determined rates

has been fostered by a gradual switch from a cash credit system to a loan based system.

8. Adhoc and on-tap 91-day T-bills were discontinued.

9. Liquidity Adjustment Facility (LAF) was introduced in June 2000.

10. The minimum lock in period for money market instruments was brought
down to 7 days.

11. The RBI started repos both on auction and fixed interest rate basis for liquidity
management.

12. New money market derivatives such as forward rate agreements and interest rate
swaps were introduced in 1999.

13. Money market instruments such as CDs and CPs are freely accessible to non-
bank participants.

14. The payment system infrastructure was strengthened with the introduction of the
negotiated dealing system (NDS) in February 2002, setting up of the Clearing
Corporation of India Ltd. (CCIL) in April 2002, and the implementation of real time
grow settlement system from April 2004.

15. Collateral Borrowing and Lending Obligations was operationalising as a

money market instruments through the CCIL in June 2003.

A basic objective of money market reforms in the recent years has been to
facilitate the introduction of new instruments and their appropriate pricing. The
RBI has endeavoured to develop market segments which exclusively deal in specific
assets and liabilities as well as participants. Accordingly, the call/notice money market
is now a pure inter-bank market. Standing liquidity support to banks from the RBI
and facilities for exceptional liquidity support has been rationalized. The various
segments of the money market have integrated with the introduction and successful
implementation of the LAF. The NDS and CCIL have improved the functioning of money
markets. Thus, RBI has been attempting to develop the Indian money market. RBI is
playing a key role in the development of Indian money market.

V-2. Securities Exchange Board of India (SEBI)

Securities and Exchange Board of India (SEBI) is the nodal agency to regulate
the capital market and other related issues in India. It was establishedin 1988 as
an administrative body and was given statutory recognition in January 1992
under the SEBI Act 1992 which came into force on January 30,

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1992. Before that, the Capital Issues (Control) Act, 1947 was repealed. SEBI hasbeen
constituted on the lines of Securities and Exchange Commission of USA. SEBI is
consisting of the Chairman and 8 Members (one member representing the Reserve
Bank of India, two members from the officials of Central Governmentand five other
public representatives to be appointed by the Central Government from different
fields). Securities and Exchange Board of India has been playing an active role in the
Indian Capital Market to achieve the objectives enshrined in the Securities and
Exchange Board of India Act, 1992.

The major objective of the SEBI may be summarised as follows:

 To provide a degree of protection to the investors and safeguard their rights and
to ensure that there is a steady flow of funds in the market.

 To promote fair dealings by the issuer of securities and ensure a market

where they can raise funds at a relatively low cost.

 To regulate and develop a code of conduct for the financial intermediaries

and to make them competitive and professional.

 To provide for the matters connecting with or incidental to the above.

Section 11 of the SEBI Act deals with the powers and functions of the SEBI
as follows:

 It shall be the duty of Board to protect the interests of the investors in securities
and to promote the development of and to regulate the securities market by
measures as deemed fit.

 To achieve the above, the Board may undertake the following measures :

1. Regulating the business in stock exchanges;

2. Registering and regulating the working of stock brokers, sub-brokers, share

transfer agents, bankers to an issue, merchant bankers, underwriters,
portfolio managers;

3. Registering and regulating the working of the depositories, participants, credit

rating agencies;

4. Registering and regulating the working of venture capital funds and collective
investment schemes, including mutual funds;

5. Prohibiting fraudulent and unfair trade practices relating to securities

markets;

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6. Promoting investors education and training of intermediaries of securities

markets;

7. Prohibiting insider trading in securities;

8. Regulating substantial acquisition of shares and take-over of companies;

and

9. Calling for information from undertaking, inspection, concluding inquiries and

audits of the stock exchanges, mutual funds, other persons associated with the
securities market intermediaries and self-regulatory organisations in the
securities market.

In order to attain these objectives, Securities and Exchange Board of India has issued
Guidelines, Rules and Regulations from time to time. The most important of these
is the “SEBI (Disclosure and Investor Protection) Guidelines, 2000″. The provisions of
these Guidelines, 2000 are aimed to protect the interest of the investors in securities.

The Guidelines, 2000 deals with the following areas:

 Eligibility norms for companies issuing securities,

 Pricing of securities by companies,

 Promoters contribution and lock-in requirements,

 Pre-issue obligations of the merchant bankers,

 Contents of the prospectus/abridged prospectus letter of offer,

 Post issue obligation, of merchant bankers,

 Green shoe option,

 Guidelines on advertisements,

 Guidelines for issue of debt instruments,

 Guidelines for book building process

 Guidelines on public offer through stock exchange on-Iine system,

 Guidelines for issue of capital by financial institutions,

 Guidelines for preferential issues of securities,

 Guidelines for bonus issues,

 Other operational and miscellaneous matters.

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In order to regulate and control and to provide a code of conduct for the merchant
bankers, other participants of capital market, and other matters relating to trading
of securities, SEBI has issued several Rules and Regulations. These are related to
Bankers to the issues, Buy back of securities, Collective Investments Schemes,
Delisting of securities, Depositors, Derivatives, Employee stock options, Foreign
Institutional Investors(FII’s), Insider Trading, Lead Manager, Market Makers,
Merchant Bankers, Mutual Funds, Ombudsman, Portfolio Manager, Registrars and
Share Transfer Agents, Securities Lending Scheme, Sweat Equity, Stock Brokers and
sub-brokers, Takeover Regulations, Transfer of Shares, Underwriters, unfair Trade
Practices, venture capital Funds, Annual Reports, etc.

Role of SEBI in Primary Market

The primary market is under the control of Securities and Exchange Board
of India. Securities and Exchange Board of India has an important role to keep
the primary market healthy and efficient. It has been taking several measures
for the development of primary market in India. In the meantime it is attempting
to protect the interest of investors. It is issuing guidelines in respect of new issues
of securities in the primary market. The role being played by the Securities and
Exchange Board of India in the primary market can be understood from the
following points:

1. The prime objective of establishing Securities and Exchange Board of India was
to protect the interests of investors in securities, promoting the development of,
and regulating the securities markets.

2. The Securities and Exchange Board of India Act came into force on 30th January,
1992. With its establishment, all public issues are governed by the rules and
regulations issued by Securities and Exchange Board of India.

3. Securities and Exchange Board of India was formed to promote fair dealing in
issue of securities and to ensure that the capital markets function efficiently,
transparently and economically in the better interests of both the issuers and
investors.

4. The promoters should be able to raise funds at a relatively low cost. At the same
time, investors must be protected from the unethical practices. Their rights must be
safeguarded so that there is a ready flow of savings into the market. There must be
proper regulation and code of conduct and fair practice by intermediaries to make
them competitive and professional. These are taken care of by Securities and
Exchange Board of India.

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5. Since its formation, Securities and Exchange Board of India has been
instrumental in bringing greater transparency in capital issues. Under the
umbrella of Securities and Exchange Board of India, companies issuing shares
are free to fix the premium provided that adequate disclosure is made in the offer
documents. Securities and Exchange Board of India has become a vigilant
watchdog with the focus towards investor protection.

6. The Securities and Exchange Board of India introduced the concept of anchor
investor on June 18, 2009 to enhance issuer’s ability to sell the issue, generate
more confidence in the minds of retail investors and better price discovery in the
issue process. Anchor investors are qualified institutional buyers that buy a large
chunk of shares a day before an IPO opens. They help arriving at an appropriate
benchmark price for share sales and generate confidence in retail investors. A
retail investor is one who can bid in a book-built issue or applies for securities for
a value of not more than Rs. 1,00,000.

Primary Market Reforms by the SEBI:

The Securities and Exchange Board of India (SEBI) has introduced various
guidelines and regulatory measures for capital issues for healthy and efficient
functioning of capital market in India. The issuing companies are required to make
material disclosure about the risk factors, in their offer documents and also to
get their debt instruments rated. Steps have been taken to ensure that continuous
disclosures are made by firms so as to enable to investors to make a comparison
between promises and performance. The merchant bankers now have greater
degree of accountability in the offer document and the issue process. The due
diligence certificate by the lead manager regarding disclosure made in the offer
document, has been made a part of the offer document itself for better
accountability and transparency on the part of the lead managers.

New reforms by Securities and Exchange Board of India, in the primary

market, include improved disclosure standards. Introduction of prudential norms
and simplifications of issue procedures. Companies are now required to disclose
all material facts and specific risk factors associated with their projects while
making public issues. SEBI has also introduced a code for advertisement for public
issues for ensuring fair and true picture. In order to reduce the cost of issue, the
underwriting of issues has been made optional subject to the conditions that if
the subscription is less than 90% f the amount offered, the entire amount collected
would be refunded to the investors.

The book-building process in the primary market has been introduced with
a view to further strengthen the price fixing process. Indian companies have been
allowed to raise funds from abroad by issue of ADR/GDR/FCCB, etc.

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Role of SEBI in Secondary Market

Since its birth, Securities and Exchange Board of India has been playing an
active role to make the secondary market healthy and efficient. It will issue guidelines
for the proper functioning of the secondary market. It has the power to call
periodical returns from stock exchanges. It has the power to prescribe maintenance of
certain documents by the stock exchanges. It may call upon the exchange or any
member to furnish explanation or information relating to the affairs of the stock
exchange or any members.

Recent Developments in the Secondary Market (Steps taken by SEBI and Govt to
reform the Secondary Market)

In recent years several steps have been taken to reform the secondary market
with a view to improve the efficiency and effectiveness of secondary market. Some
of the developments in this direction are as follows:

1. Regulation of intermediaries: Strict control is being exercised on the

intermediaries in the capital market with a view to improve their functioning. The
intermediaries such as merchant bankers, underwriters, brokers, sub-brokersetc.
must be registered with the Securities and Exchange Board of India. To improve
their financial adequacy, capital adequacy norms have been fixed.

2. Insistence on quality securities: Securities and Exchange Board of India has

announced recently revised norms for companies accessing the capital market so
that only quality securities are listed and traded in stock exchanges. Further,
participation of financial institutions in the capital is essential for entry into the
capital market.

3. Prohibition of insider trading: Now Securities and Exchange Board of India

(Insider Trading) Amendment Regulations, 2002 have been formed giving more
powers to Securities and Exchange Board of India to curb insider trading. An
insider is prevented from dealing in securities of any listed company on the basis
of any unpublished price sensitive information.

4. Transparency of accounting practices: To ensure correct pricing and wider

participation, greater efforts are being taken to achieve transparency in trading
and accounting practices. Brokers are asked to show their prices, brokerage,
service tax etc. separately in the contract notes and their accounts.

5. Strict supervision of stock market operations: The Ministry of Finance and

Securities and Exchange Board of India supervise the operations in stock exchanges
very strictly. The Securities and Exchange Board of India monitors the operations of
stock exchanges very closely in order to ensure that the dealings are conducted in
the best interest of the overall financial environment in the

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country in general and the investors in particular. Strict rules have been framed
with regard to recognition of stock exchanges, membership, management,
maintenance of accounts etc. Again, stock exchanges are inspected by the officers
of the Securities and Exchange Board of India from time to time.

6. Discouragement of manipulations: The Securities and Exchange Board of India

is taking all steps to prevent price manipulations in all stock exchanges. It has given
instructions to all stock exchanges to keep special margins in addition to normal
ones on the scrips which are subject to wide price fluctuations. The Securities and
Exchange Board of India itself insists upon a special margin of 25% or more (in
addition to the regular margin) on purchases of scrips which are subject to sharp
rise in prices. All stock exchanges have been directed to suspend trading in scrip
in case any one of the stock exchanges suspends trading in that scrip for more than
a day due to price manipulation or fluctuation.

7. Prevention of price rigging: Greater powers have been given to Securities and
Exchange Board of India under Securities and Exchange Board of India
(Prohibition of fraudulent and unfair trade practices relating to security markets)
Regulations, 1995 to curb price rigging.

8. Protection of investors’ interests: Stock exchanges are given instructions to take

timely action for the redressal of grievances of investors. For this purpose, the
Securities and Exchange Board of India issues “Investors Guidance Service’to
guide and educate the investors about grievances and remedies available. It also
gives information about various investment avenues, their merits, tax benefits
available etc. Disciplinary Action Committees have been set up in each stock
exchange to take up complaints against companies, brokers etc. The Securities and
Exchange Board of India itself takes up complaints against companies, brokers etc.
Further, each stock exchange is under a legal obligation to create an investor
protection fund.

9. Free pricing of securities: Now any company is free to enter the capital market
to raise the necessary capital at any price that it wants. Recently, the Securities and
Exchange Board of India has permitted companies to issue shares below the face
value of Rs. 10 and liberalised the norms for initial public offerings.

10. Freeing of interest rates: Interest rates on debentures and on PSU bonds were
freed in August 1991 with a view to raising funds from the capital market at
attractive rates depending on the credit rating.

11. Setting up of credit rating agencies: Credit rating agencies have been set upfor
awarding credit rating to the money market instruments, debt instruments, deposits
and equity shares also. Now all debt instruments must be compulsorily credit rated by
a credit rating agency so that the investing public may not be deceived by financially
unsound companies.
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12. Introduction of electronic trading: The OTCEI has started its trading
operations through the electronic media. Similarly, BSE switched over to
electronic trading system in 1995, called BOLT. Again, NSE went over to screen
based trading with a national network.

13. Establishment of OTC / OTCEI / NSE: To overcome delay, price rigging,

manipulation etc., OTC/ OTCEI and NSE have been established. OTC markets are
fully automated exchanges where trading would be carried out through network
of telephone/ computers/ tellers spread throughout the country.

14. Introduction of depository system: To avoid bad delivery, forgery, theft, delay
in settlement and to speed up the transfer of securities, the depository system has
been approved by the Parliament on July 23, 1996.

15. Buy back of shares: Now companies have been permitted to buy back their
own shares.

16. Disinvestment of shares of PSUs: To bring down the Govt. holding and to
push up the privatisation process, the disinvestment programme has been
implemented. A Disinvestment Commission has been established for this
purpose.

17. Stock watch system: The Securities and Exchange Board of India introduced
a new stock watch system to trace out the source of undesirable trading if any in
the market. The stock watch system simply works as a mathematical model which
keeps a constant watch on the market movements.

18. Trading in derivatives: L.C. Gupta Committee which had gone into the question
of introduction of derivative trading, has recommended introducing trading in index
futures to start with and then trading in options. Recently, future funds also have
been permitted to trade in derivatives.

19. Stock lending mechanism: To make the capital market active by putting idle
stocks to work, stock lending scheme has been introduced by the Securities and
Exchange Board of India.

20. International listing: The big event in the history of Indian capital market is the
listing company’s share on an American stock exchange.

21. Rolling settlement: In July 2001, Securities and Exchange Board of India made
rolling settlement on a T + 5 cycles compulsory in 414 stocks and the restof the
stocks should follow it from January 2002. But now T + 2 rolling settlement have
been introduced for all securities.

22. Margin trading: Another development in the secondary market is the

introduction of margin trade.

Indian Financial Management Page 106