Financial Regulation Policies

FINANCIAL REGULATION POLICIES
CHAPTER 1 - INTRODUCTION
1.1 Financial Market
A financial market is a broad term describing any marketplace where buyers and sellers
participate in the trade of assets such as equities, bonds, currencies and derivatives.
Financial markets are typically defined by having transparent pricing, basic regulations
on trading, costs and fees, and market forces determining the prices of securities that
trade.
The financial markets act as a link between these two different groups. It facilitates this
function by Acting as an intermediary between the borrowers and lenders of money. So,
financial market may be defined as A transmission mechanism between investors (or
lenders) and the borrowers (or users) through which transfer of funds is facilitated.
Functions of financial market:
(a) It provides facilities for interaction between the investors and the borrowers.
(b) It provides pricing information resulting from the interaction between buyers and
sellers in the market when they trade the financial assets.
(c) It provides security to dealings in financial assets.
(d) It ensures liquidity by providing a mechanism for an investor to sell the financial
assets.
(e) It ensures low cost of transactions and information
1.2 Financial Regulation

Financial regulation is the supervision of financial markets and institutions. Financial
regulations necessitate financial institutions to certain requirements, restrictions and
guidelines. The primary purpose of a financial regulation is to maintain the integrity of
the financial system. Financial regulation protects investors, maintain orderly markets
and promote financial stability.
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Financial regulations aim to:
Enforce applicable laws
Prosecute cases of market misconduct
License providers of financial services
Protect clients
Investigate complaints
Maintain confidence in the financial system.
1.3 Financial Regulatory Bodies in India
FINANCIAL
REGULATORY
BODIES
RBI
SEBI
IRDA
FMC
The financial system in India is regulated by independent regulators in the field of

banking, insurance, capital market, and commodities market. However, Government of
India plays a significant role in controlling the financial system in India and influences
the role of such regulators at least to some extent.
The following are four major financial regulatory bodies in India.

(A) Statutory Bodies via parliamentary enactments:
1. Reserve Bank Of India: Reserve Bank Of India is the apex monetary Institution of
India. It is also called as the central bank of the country. The reserve bank of India
was established on April 1, 1935 in accordance with the provisions of the Reserve
Bank of India act, 1934. The central office of the Reserve Bank was initially
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established in Calcutta but was permanently moved to Mumbai in 1937.

The central office is where the Governor sits and where policies are formulated.
Though originally privately owned, since nationalization in 1949, the Reserve
Bank is fully owned by the Government of India. It acts as the apex monetary
authority of the country.
2. Securities and Exchange Board of India: Securities and Exchange Board of India
(SEBI) Act, 1992 was first established in the year 1988 as a non-statutory body
for regulating the securities market. It became an autonomous body in 1992 and
more powers were given through an ordinance. Since then it regulates the market
through its independent powers.
3. Insurance Regulatory and Development Authority: The Insurance Regulatory and
Development Authority (IRDA) is a national agency of the Government of India
and is based in Hyderabad (Andhra Pradesh). It was formed by an Act of Indian
Parliament known as IRDA Act 1999, which was amended in 2002 to incorporate
some emerging requirements. Mission of IRDA as stated in the act is to protect
the interests of the policyholders, to regulate, promote and ensure orderly growth
of the insurance industry and for matters connected therewith or incidental
thereto.
(B) Part of the Ministries of the Government of India:
Forward Market Commission India (FMC): Forward Markets Commission (FMC)

headquartered at Mumbai, is a regulatory authority which is overseen by the
Ministry of Consumer Affairs, Food and Public Distribution, Govt. of India. It is a
statutory body set up in 1953 under the Forward Contract (Regulation) Act, 1952.
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CHAPTER 2 - RESERVE BANK OF INDIA (RBI)

2.1 Introduction
Reserve Bank of India is the apex monetary Institution of India. It is also called as the
central bank of the country. The Reserve Bank of India was established on April 1, 1935
in accordance with the provisions of the Reserve Bank of India Act, 1934. The Central
Office of the Reserve Bank was initially established in Calcutta but was permanently
moved to Mumbai in 1937. The Central Office is where the Governor sits and where
policies are formulated. Though originally privately owned, since nationalization in 1949,
the Reserve Bank is fully owned by the Government of India.
2.2 Functions of RBI

Traditional functions
1. Issue of currency notes: The RBI has the sole right or authority or monopoly of
issuing currency notes except one rupee note and coins of smaller denominations.
These currency notes are legal tender issued by the RBI. Currently it is in
denominations of Rs.2, 5, 10, 20, 50, 100, 500, and 1000. The RBI has powers not
only to issue and withdraw but even to exchange these currency notes for other
denominations. It issues these notes against the security of gold bullion, foreign
securities, rupee coins, exchange bills and promissory notes and government of
India bonds.
2. Banker to other banks: The RBI being an apex monitory institution has obligatory
powers to guide, help and direct other commercial banks in the country. The RBI
can control the volumes of banks reserves and allow other banks to create credit
in that proportion. Every commercial bank has to maintain a part of their reserves
with its parents viz. the RBI. Similarly in need or in urgency these banks
approach the RBI for fund. Thus it is called as the lender of the last resort.
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3. Banker to the Government: The RBI being the apex monitory body has to work as
an agent of the central and state governments. It performs various banking
function such as to accept deposits, taxes and make payments on behalf of the
government. It works as a representative of the government even at the
international level. It maintains government accounts, provides financial advice to
the government. It manages government public debts and maintains foreign
exchange reserves on behalf of the government. It provides overdraft facility to
the government when it faces financial crunch.
4. Exchanges Rate Management: It is an essential function of the RBI. In order to

maintain stability in the external value of rupee, it has to prepare domestic
policies in that direction. Also it needs to prepare and implement the foreign
exchange rate policy which will help in attaining the exchange rate stability. In
order to maintain the exchange rate stability it has to bring demand and supply of
the foreign currency (U.S Dollar) close to each other.
5. Credit Control Function: Commercial banks in the country create credit according
to the demand in the economy. But if this credit creation is unchecked or
unregulated then it leads the economy into inflationary cycles. On the other credit
creation is below the required limit then it harms the growth of the economy. As a
central bank of the nation the RBI has to look for growth with price stability. Thus
it regulates the credit creation capacity of commercial banks by using various
credit control tools.
6. Supervisory Function: The RBI has been endowed with vast powers for
supervising the banking system in the country. It has powers to issue license for
setting up new banks, to open new branches, to decide minimum reserves, to
inspect functioning of commercial banks in India and abroad, and to guide and
direct the commercial banks in India. It can have periodical inspections an audit
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of the commercial banks in India.

Developmental / Promotional Functions
1. Development of the Financial System: The financial system comprises the

financial institutions, financial markets and financial instruments. The sound and
efficient financial system is a precondition of the rapid economic development of
the nation. The RBI has encouraged establishment of main banking and nonbanking institution to cater to the credit requirements of diverse sectors of the
economy.
2. Development of Agriculture: In an agrarian economy like ours, the RBI has to
provide special attention for the credit need of agriculture and allied activities. It
has successfully rendered service in this direction by increasing the flow of credit
to this sector. It has earlier the Agriculture Refinance and Development
Corporation (ARDC) to look after the credit, National Bank for Agriculture and
Rural Development (NABARD) and Regional Rural Banks (RRBs).
3. Provision of Industrial Finance: Rapid industrial growth is the key to faster
economic development. In this regard, the adequate and timely availability of
credit to small, medium and large industry is very significant. In this regard the
RBI has always been instrumental in setting up special financial institutions such
as ICICI Ltd. IDBI, SIDBI and EXIM BANK etc.
4. Provision of Training: The RBI always tried to provide essential training to the
staff of the banking industry. The RBI has set up the bankers training colleges at
several places. National institute of Bank Management that is NIBM, Banker Staff
College that is BSC and College of Agriculture Banking that is CAB are few to
mention.
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5. Collection of Data: Being the apex monetary authority of the country, the RBI
collects process and disseminates statistical data on several topics. It includes
interest rate, inflation, saving and investments etc. This data proves to be quite
useful for researchers and policy makers.
6. Publication of the Reports: The Reserve Bank has its separate publication
division. This division collects and publishes data on several sectors of the
economy. The reports and bulletins are regularly published by the RBI. It includes
RBI weekly reports, RBI Annual Report, Report on Trend and Progress of
Commercial Banks India., etc. This information is made available to the public
also at cheaper rates.
7. Promotion of Banking Habits: As an apex organization, the RBI always tries to
promote the banking habits in the country. It institutionalizes savings and takes
measures for an expansion of the banking network. It has set up many institutions
such as the Deposit Insurance Corporation- 1962, UTI- 194, IDBI- 1964,
NABARD- 1982, NHB- 1988, etc. these organizations develop and promote
banking habits among the people. During economic reforms it has taken many
initiatives for encouraging and promoting banking in India.
8. Promotion of Export through Refinance: The RBI always tries to encourage the
facilities for providing finance for foreign trade especially exports from India. The
Export-Import Bank of India (EXIM Bank India) and the Export Credit Guarantee
Corporation of India (ECGC) are supported by refinancing their lending for
export purpose.
Supervisory Functions of RBI
1. Granting license to banks: The RBI grants license to banks for carrying its
business. License is also given for opening extension counters, new branches,
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even to close down existing branches.

2. Bank Inspection: The RBI grants license to banks working as per the directive and
in a prudent manner without undue risk. In addition to this it can ask for
periodical information from banks on various components of assets and
liabilities.
3. Control over NBFIs: The Non-Bank Financial Institutions are not influenced by
the working of a monitory policy. However RBI has a right to issue
directives to the NBFIs from time to time regarding their functioning. Through
periodic inspection, it can control the NBFIs.
4. Implementation of the Deposit Insurance Scheme: The RBI has set up the
Deposit Insurance Guarantee Corporation in order to protect the deposits of
small depositors. All bank deposits below
Rs. One lakh are insured with this
corporation. The RBI work to implement the Deposit Insurance Scheme in

case of a bank failure.
2.3 Policies of RBI

Policy of RBI
Monetary Policy
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2.4 Monetary Policy

Monetary policy is a regulatory policy by which the central bank or monetary
authority of a country controls the supply of money, availability of bank credit and cost of
money, that is, the rate of Interest. Monetary policy / monetary management are regarded
as an important tool of economic management in India. RBI controls the supply of money
and bank credit.
The Central bank has the duty to see that legitimate Credit requirements are met and at
the same credit is not used for unproductive and speculative purpose. RBI rightly calls its
credit policy as one of controlled expansion.
2.5 Objectives of Monetary Policy

The main objective of monetary policy in India is growth with stability. Monetary
Management
regulates availability, cost and use of money and credit. It also brings
institutional changes in the financial sector of the economy. Following are the main
objectives of monetary policy in India.
1. Growth with Stability: Traditionally, RBIs monetary policy was focused on
controlling inflation through contraction of money supply and credit. This
resulted in poor growth performance. Thus, RBI has now adopted the policy of
Growth with Stability. This means sufficient credit will be available for growing
needs of different sectors of economy and at the same time, inflation will be
controlled with in a certain limit.
2. Regulation, Supervision and Development of Financial Stability: Financial
stability means the ability of the economy to absorb shocks and maintain
confidence in financial system. Threats to financial stability can come from
internal and external shocks. Such shocks can destabilize the countrys financial
system. Thus, greater importance is being given to RBIs role in maintaining
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confidence in financial system through proper regulation and controls, without

sacrificing the objective of growth.
Therefore, RBI is focusing on regulation, supervision and development of
financial system.
3. Promoting Priority Sector: Priority sector includes agriculture, export and small
scale enterprises and weaker section of population. RBI with the help of bank
provides timely and adequately credit at affordable cost of weaker sections and
low income groups. RBI, along with NABARD, is focusing on microfinance
through the promotion of Self Help groups and other institutions.
4. Generation of Employment: Monetary policy helps in employment generation by
influencing the rate of investment and allocation of investment among
various economic activities of different labor Intensities.
5. External Stability: With the growth of imports and exports Indias linkages with
global economy are getting stronger. Earlier, RBI controlled foreign exchange
market by determining exchange rate. Now, RBI has only indirect control over
external stability through the mechanism of Managed Flexibility where it
influences exchange rate by buying and selling foreign currencies in market.
6. Encouraging Savings and Investments: RBI by offering attractive interest rate
encourages savings in the economy. A high rate of saving promotes investment.
Thus the monetary management by influencing rates of interest can influence
saving mobilization in the country.
7. Redistribution of income And Wealth: By control of inflation and deployment of
credit to weaker sectors of society the monetary policy may redistribute
income and wealth favoring to weaker sections.
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8. Regulation of NBFIs: Non-Banking Financial Institutions (NBFIs), like UTI,

IDBI, and IFCI plays an important role in deployment of credit and mobilization
of savings. RBI does not have any direct control on the functioning of such
institutions. However it can indirectly affects the policies and functions of
NBFIs through its monetary policy.
2.6 Instruments of monetary policy

Instruments
of Monetary
Policy
Quantitative
Instruments
Qualitative
Instruments
Quantitative Instruments
Bank Rate Policy
Open Market Operations
Cash Reserve Ratio
Statutory Liquidity Ratio
Repo and Reverse Repo Rates
Qualitative Instruments
Ceiling on Credit
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Margin Requirements
Discriminatory Interest Rate
Directives
Direct Action
Moral Suasion
I. Quantitative Instruments
1. Bank Rate Policy: Bank rate is the rate at which the Central bank lends money to
the commercial banks for their liquidity requirements. Bank rate is also called
discount rate. In other words bank rate is the rate at which the central bank
rediscounts eligible papers (like approved securities, bills of exchange,
commercial papers etc.) held by commercial banks. Bank rate is important
because it is the pace setter to other market rates of interest. Bank rates have
been changed several times by RBI to control inflation and recession. By 2014 the
bank rate has been reduced to 9 % p.a.
2. Open market operations: It refers to buying and selling of government
securities in open market in order to expand or contract the amount of money in
the banking system. This technique is superior to bank rate policy.
Purchases inject money into the banking system while sale of securities do the
opposite. During last two decades the RBI has been undertaking switch
operations. These involve the purchase of one loan against the sale of another or,
vice-versa. This policy aims at preventing unrestricted increase in liquidity.
3. Cash Reserve Ratio (CRR): The Cash Reserve Ratio (CRR) is an effective
instrument of credit control. Under the RBI Act of, l934 every commercial
bank has to keep certain minimum cash reserves with RBI. The RBI is
empowered to vary the CRR between 3% and 15%. A high CRR reduces the cash
for lending and a low CRR increases the cash for lending The CRR has been
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brought down from 15% in 1991 to 7.5% in May 2001. It further reduced to 5.5%
in December 2001. It stood at 5% on January 2009. In January 2010, RBI
increased the CRR from 5% to 5.75%. It further increased in April 2010 to 6%
as inflationary pressure had started building up in the economy.
As of March 2011, CRR is 6%.In 2014 the CRR is 4%.
4. Statutory Liquidity Ratio (SLR): Under SLR, the government has imposed an
obligation on the banks to; maintain a certain ratio to its total deposits with RBI in
the form of liquid assets like cash, gold and other securities. The RBI has power
to fix SLR in the range of 25% and 40% between 1990 and 1992 SLR was as high
as 38.5%. Narasimham Committee did not favor maintenance of high SLR. The
SLR was lowered down to 25% from 10th October 1997. It was further reduced to
24% on November 2008. In 2014 the SLR is 22 %.
5. Repo and Reverse Repo Rates: In determining interest rate trends, the repo and
reverse repo rates are becoming important. Repo means Sale & Repurchase
Agreement. Repo is a swap deal involving the immediate Sale of Securities and
simultaneous purchase of those securities at a future date, at a predetermined
price. Repo rate helps commercial banks to acquire funds from RBI by selling
securities and also agreeing to repurchase at a later date. Reverse repo rate is the
rate that banks get from RBI for parking their short term excess funds with RBI.
Repo and reverse repo operations are used by RBI in its Liquidity Adjustment
Facility. RBI contracts credit by increasing the Repo and Reverse repo rates and
by decreasing them it expands credit. Repo rate was 6.75% in March 2011 and
Reverse repo rate was 5.75% for the same period. On May 2011 RBI announced
Monetary Policy for 2011-12. To reduce inflation it hiked repo rate to, 7.25% and
Reverse repo to 6.25%. In 2014 the repo rate is 8 % and reverse repo is 7 %.
Qualitative Instruments
1. Ceiling on Credit: The Ceiling on level of credit restricts the lending capacity of a
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bank to grant advances against certain controlled securities.
2. Margin Requirements: A loan is sanctioned against Collateral Security.

Margin means that proportion of the value of security against which loan is not
given. Margin against a particular security is reduced or increased in order to
encourage or discourage the flow of credit to a particular sector. It varies from
20% to 80%. For agricultural commodities it is as high as 75%. Higher the margin
lesser will be the loan sanctioned.
3. Discriminatory Interest Rate (DIR): Through DIR, RBI makes credit flow to
certain priority or weaker sectors by charging concessional rates of interest. RBI
issues supplementary instructions regarding granting of additional credit against
sensitive commodities, issue of guarantees, making advances etc.
4. Directives: The RBI issues directives to banks regarding advances. Directives are
regarding the purpose for which loans may or may not be given.
5. Direct Action: It is too severe and is therefore rarely followed. It may involve
refusal by RBI to rediscount bills or cancellation of license, if the bank has
failed to comply with the directives of RBI.
6. Moral Suasion: Under Moral Suasion, RBI issues periodical letters to bank to
exercise control over credit in general or advances against particular
commodities. Periodic discussions are held with authorities of commercial
banks in this respect.
2.7 Monetary Measures
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Repo Rate: Reduce the policy repo rate under the liquidity adjustment facility
(LAF) by 25 basis points from 7.5 per cent to 7.25 per cent with immediate effect.
Reverse Repo Rate: The reverse repo rate under the LAF, determined with a
spread of 100 basis points below the repo rate, stands adjusted to 6.25 per cent
with immediate effect.
Marginal Standing Facility Rate: The Marginal Standing Facility (MSF) rate,
determined with a spread of 100 basis points above the repo rate, stands adjusted
to 8.25 per cent with immediate effect.
Bank Rate: The Bank Rate stands adjusted to 8.25 per cent with immediate effect.
Cash Reserve Ratio: The cash reserve ratio (CRR) of scheduled banks has been
retained at 4.0 per cent of their net demand and time liabilities (NDTL).
2.8
Recent Changes in Monetary Policy
1. Multiple Indicator Approach: Up to late 1990s, RBI used the Monetary targeting
approach to its monetary policy. Monetary targeting refers to a monetary policy
strategy aimed at maintaining price stability by focusing on changes in growth of
money supply. After 1991 reforms this approach became difficult to follow. So RBI
adopted multiple indicator Approach in which it looks at a variety of
economic indicators and monitor their impact on inflation and economic growth.
2. Selective Methods being phased Out: With rapid progress in financial markets, the
selective methods of credit control are being slowly phased out. Quantitative methods
are becoming more important.
3. Reduction in Reserve Requirements: In post-reform period the CRR and SLR

have been progressive lowered. This has been done as a part of financial sector
reforms. As a result, more bank funds have been released for lending. This has led to
the growth of economy.
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4. Deregulation of Administered Interest Rate System: Earlier lending rate of banks was
determined by RBI. Since 1990s this system has changed and lending rates are
determined by commercial banks on the basis of market forces.
5. Delinking Of Monetary Policy From Budget Deficit: In1994 government phased out
the use of adhoc treasury Bills. These bills were used by government to borrow from
RBI to finance fiscal deficit. With phasing out of Bills, RBI would no longer lend to
government to meet fiscal deficit.
6. Liquidity Adjustment Facility (LAF): LAF allows banks to borrow money

through repurchase agreement LAF was introduced by RBI during June, 2000, in
phases. The funds under LAF are used by banks to meet day-to-day mismatches in
liquidity.
7. Provision of Micro Finance: By linking the banking system with Self Help
Groups. RBI has introduced the scheme of micro finance for rural poor. Along with
NABARD, RBI is promoting various other microfinance institutions.
8. External Sector: With globalization large amount of foreign capital is attracted. To

provide stability in financial markets, RBI uses sterilization and LAF to absorb the
excess liquidity then comes in with huge inflow of foreign capital.
9. Expectation as a Channel of Monetary Transmission: Traditionally, there were four

key channels of monetary policy transmission interest rate, credit availability, asset
price and exchange rate channels. Interest rate is the most dominant transmission
channel as any change as any change in monetary policy has immediate effect on it.
In recent years fifth channel, Expectation his been added. Future expectations about
asset prices, general price and income levels influence the four traditional channels.
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2.9 Impact of monetary policy on economy

Economy: An economy consists of the economic systems of a country or other area; the
labour, capital, and land resources; and the manufacturing, production, trade, distribution,
and consumption of goods and services of that area. A given economy is the result of a
process that involves its technological evolution, history and social organisation, as well
as its geography, natural resource endowment, and ecology, as main factors. These factors
give context, content, and set the conditions and parameters in which an economy
functions.
Inflation: In economics, inflation is a rise in the general level of prices of goods and
services in an economy over a period of time. When the general price level rises, each
unit of currency buys fewer goods and services. Consequently, inflation also reflects
erosion in the purchasing power of money .A loss of real value in the internal medium of
exchange and unit of account in the economy. A chief measure of price inflation is
the inflation rate, the annualized percentage change in a general price index (normally
the Consumer Price Index) over time.
Gross Domestic Product (GDP): Gross domestic product (GDP) is the market value of
all officially recognized final goods and services produced within a country in a given
period. GDP per capita is often considered an indicator of a countrys standard of living;
GDP per capita is not a measure of personal income (See Standard of living and GDP).
Under economic theory, GDP per capita exactly equals the gross domestic income (GDI)
per capita (See Gross domestic income).GDP is related to national accounts, a subject
in macroeconomics. GDP is not to be confused with Gross National Product (GNP)
which allocates production based on ownership.
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Interest rate: An interest rate is the rate at which interest is paid by a borrower for the
use of money that they borrow from a lender. Specifically, the interest rate (I/m) is a per
cent of principal (I) paid at some rate (m). For example, a small company borrows capital
from a bank to buy new assets for their business, and in return the lender receives interest
at a predetermined interest rate for deferring the use of funds and instead lending it to the
borrower. Interest rates are normally expressed as a percentage of the principal for a
period of one year.
Money supply: In economics, the money supply or money stock is the total amount
of monetary assets available in an economy at a specific time. There are several ways to
define money, but standard measures usually include currency in circulation
and demand deposits (depositors easily accessed assets on the books of financial
institutions).Money supply data are recorded and published, usually by the government or
the central bank of the country. Public and private sector analysts have long monitored
changes in money supply because of its possible effects on the price level, inflation,
the exchange rate and the business cycle.
Lending Rate: Prime Lending Rate (PLR) is the rate which the lender charges from the
borrower of high credit standing. With effect from April 19, 2001, PLR has been
converted to a bench mark lending rate for banks. There may be distinction between
nominal PLR and real PLR. Real PLR is worked out with reference to the 52 week
average wholesale price index (WPI). Low nominal PLR may not increase demand for
credit. What is relevant are the real PLR and not the nominal PLR. When the inflation
rate falls faster than the interest rate, the real interest rate will be high and the demand for
credit will be low.
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Relation between two variables

Inflation and economy: Inflation affects the economy on three sides. One, it is
directly linked to interest rates. The interest rates prevailing in an economy at any
point of time are nominal interest rates, i.e., real interest rates plus a premium for
expected inflation. Due to inflation, there is a decrease in purchasing power of every
rupee earned on account of interest in the future; therefore the interest rates must
include a premium for expected inflation. In the long run, other things being equal,
interest rates raise one for one with rise in inflation.
Interest rates & investments: Interest rates & the bond prices are inversely related to
each other. When interest rates move up, it causes the bond prices to fall & vice versa.
Say for example, you have a bond, which is yielding 10% now. Suddenly, the interest
rates in the economy move up to 11%. Now your bond is giving fewer yields than the
market return. Obviously it price is going to fall in such a case. Reverse is the case when
interest rates fall, the bond price will move up because it is giving more returns than the
market return. So movements in interest rates have serious implications for individual
investments.
Money supply and the economy: Money supply also affects the economy on three
sides. One, money supply is used to control the inflation in an economy. On the
demand side, whenever money supply in the economy increases, consumer-spending
increases immediately in the economy because of increased money in the system. But
supply cant vary in the short term, so there is a temporary mismatch of demand &
supply in the economy which exerts an upward pressure on inflation. This argument
assumes that demand drives supply, which is generally the case. On the supply side, due
to an increase in demand, supply can only be increased by capacity additions. This causes
the cost of production to rise & that is reflected in inflation.
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Two, money supply also has a direct relationship with the growth of an economy.
Until an economy reaches full employment level, the economy growth is the
difference between money supply growth rate & the inflation, other things being
equal. When an economy reaches full employment level, the growth in money supply is
set off by a growth in inflation, other things being equal. This happens because
cant rise after full employment & therefore inflation increases one for one
output
with the
money supply.
Three, money supply also has a relationship with interest rates. One variable can be used
to control the other. Both cant be controlled simultaneously. If the RBI wants to peg the
interest rate at a certain level, it has to supply whatever money is demanded at that level
of interest rate. If it wants to fix the money supply at a certain level, the demand & supply
of money will determine the interest rates. Usually it is easier for RBI to control the
interest rates through its open market operations (OMO). So, the money supply is
allowed to vary but RBI controls it by playing around with interest rates through its
OMO.
Cash Reserve Ratio (CRR) & statutory liquidity ratio (SLR) and an economy: CRR
is the percentage of its total deposits a bank has to keep with RBI in cash or near cash
assets & SLR is the percentage of its total deposits a bank has to keep in approved
securities. The purpose of CRR & SLR is to keep a bank liquid at any point of time.
When banks have to keep low CRR or SLR, it Increases the money available for credit in
the system. This eases the pressure on interest rates & interest rates move down. Also
when money is available & that too at lower interest rates, it is given on credit to the
industrial sector which pushes the economic growth.
Monetary policy and economy: It refers to a regulatory policy whereby the monetary
authority of a country maintains its control over the money supply for the realization of
general economic objectives. It involves manipulation
of money supply, the level &
structure of interest rates & other conditions affecting the level of credit. The central bank
signals the market about the availability of credit & interest rates through this policy.
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The RBI fixes the bank rate in this policy which forms the basis of the structure of
interest rates & the CRR & SLR, which determines the availability of credit & the level
of money supply in the economy. So it plays a very important role in the development of
an economy.
2.10 Third Quarter Review of Monetary Policy 2013-14

On the basis of an assessment of the current and evolving macroeconomic situation, it has
been decided to:
Increase the policy repo rate under the liquidity adjustment facility (LAF) by 25
basis points from 7.75 per cent to 8.0 per cent.
Keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent
of net demand and time liability (NDTL).
Consequently, the reverse repo rate under the LAF stands adjusted at 7.0 per cent,
and the marginal standing facility (MSF) rate and the Bank Rate at 9.0 per cent.
2.11 Limitations of monetary policy

Huge Budgetary Deficits: RBI makes every possible attempt to control inflation and to
balance money supply in the market. However Central Government's huge
budgetary deficits have made monetary policy ineffective. Huge budgetary deficits
have resulted in excessive monetary growth.
Coverage of Only Commercial Banks: Instruments of monetary policy cover only
commercial banks so inflationary pressures caused by banking finance can be
controlled by RBI, but in India, inflation also results from deficit financing and
scarcity of goods on which RBI may not have any control.
Problem of Management of Banks and Financial Institutions: The monetary
policy can succeed to control inflation and to bring overall development only when the
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management of banks and financial institutions are efficient and dedicated. Many
officials of banks and financial institutions are corrupt and inefficient which leads to
financial scams in this way overall economy is affected.
Unorganized Money Market: Presence of unorganized sector of money market is one of
the main obstacles in effective working of the monetary policy. As RBI has no power
over the unorganized sector of money market, its monetary policy becomes less effective.
Less Accountability: At present time, the goals of monetary policy in India are not set
out in specific terms and there is insufficient freedom in the use of instruments. In such a
setting, accountability tends to be weak as there is lack of clarity in the responsibility of
governments and RBI.
Black Money: There is a growing presence of black money in the economy. Black
money falls beyond the purview of banking control of RBI. It means large proposition of
total money Supply in a country remains outside the purview of RBI's monetary
management.
Increase Volatility: The integration of domestic and foreign exchange markets could
lead to increased volatility in the domestic market as the impact of exogenous factors
could be transmitted to domestic market. The widening of foreign exchange market and
development of rupee foreign exchange swap would reduce risks and volatility.
Lack of Transparency: According to S. S. Tara pore, the monetary policy formulation,
in its present form in India, cannot be continued indefinitely. For a more effective policy,
it would be necessary to have greater transparency in the policy formulation and
transmission process and the RBI would need to be clearly demarcated.
2.12 Evaluation of monetary policy

Short Term Liquidity Management: RBI has developed various methods to maintain
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stability in interest rate and exchange rate like LAF, OMO and MSS. RBI has also
managed its sterilization operations very well.
Financial Stability: With the help of controls, regulation and supervision mechanism,
RBI has been successful in maintaining financial stability. During the period of global
crisis it has also been able to maintain macroeconomic stability.
Financial Inclusion: Along with NABARD, RBI has made a great impact in the growth
of microfinance. RBI has supported Self Help Group Model and promoted other
microfinance institutions.
Adaptability: In India monetary policy is flexible, as it changes with time. RBI has
developed new methods of credit control and shifted from monetary targeting to multiple
indicator approach.
Increase in Growth: To maintain the growth of economy RBI has used its instruments'
effectively. At present India has the second highest rate of GDP growth after China. Thus
monetary policy has played an important role.
Increase in Bank Deposits: The increase in bank deposits over the years indicates trust
and confidence of people in banking sector. Effective supervision of RBI over banks and
financial institutions is largely responsible for trust and confidence of public in banking
sector.
Competition among Banks: The monetary policy of RBI has resulted in healthy
competition among banks in the country. The competition is due to deregulation of
interest rates and other measures taken by RBI. Now-a-days due to professionalism banks
provide better service to customers.
CHAPTER 3 INSURANCE REGULATORY AND

DEVELOPMENT AUTHORITY (IRDA)
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3.1 Introduction
Insurance Regulatory and Development Authority (IRDA) is an autonomous apex
statutory body which regulates and develops the insurance industry in India. It was
constituted by a Parliament of India act called Insurance Regulatory and Development
Authority Act, 1999 and duly passed by the Government of India.
In India, insurance has a deep-rooted history. It finds mention in the writings of Manu
(Manusmrithi), Yagnavalkya (Dharmasastra) and Kautilya (Arthasastra). 1818 saw
the advent of life insurance business in India with the establishment of the Oriental Life
Insurance Company in Calcutta. The Bombay Mutual (1871), Oriental (1874) and Empire
of India (1897) were started in the Bombay Residency.
This era, however, was dominated by foreign insurance offices which did good business
in India. The Indian Life Assurance Companies Act, 1912 was the first statutory measure
to regulate life business. In 1928, the Indian Insurance Companies Act was enacted to
enable the Government to collect statistical information about both life and non-life
business transacted in India by Indian and foreign insurers including provident insurance
societies.
The Insurance Amendment Act of 1950 abolished Principal Agencies. An Ordinance was
issued on 19th January, 1956 nationalizing the Life Insurance sector and Life Insurance
Corporation came into existence in the same year. The LIC absorbed 154 Indian, 16 nonIndian insurers as also 75 provident societies-245 Indian and foreign insurers in all. The
LIC had monopoly till the late 90s when the Insurance sector was reopened to the private
sector. These were the stages before IRDA existed i.e. the journey of Insurance in India
before IRDA came into existence.
They stated that foreign companies are allowed to enter by floating Indian companies,
preferably a joint venture with Indian partners. In 1993, the Government set up a
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committee under the chairmanship of RN Malhotra, former Governor of RBI, to propose

recommendations for reforms in the insurance sector.
3.2Establishment of IRDA
Following the recommendations of the Malhotra Committee report, in 1999, the
Insurance Regulatory and Development Authority (IRDA) was constituted as an
autonomous body to regulate and develop the insurance industry. The IRDA was
incorporated as a statutory body in April, 2000. The key objectives of the IRDA include
promotion of competition so as to enhance customer satisfaction through increased
consumer choice and lower premiums, while ensuring the financial security of the
insurance market.
The IRDA opened up the market in August 2000 with the invitation for application for
registrations. Foreign companies were allowed ownership of up to 26%. The Authority
has the power to frame regulations under Section 114A of the Insurance Act, 1938 and
has from 2000 onwards framed various regulations ranging from registration of
companies for carrying on insurance business to protection of policyholders interests. In
December, 2000, the subsidiaries of the General Insurance Corporation of India were
restructured as independent companies and at the same time GIC was converted into a
national re-insurer. Parliament passed a bill de-linking the four subsidiaries from GIC in
July, 2002. Today there are 24 general insurance companies including the ECGC and
Agriculture Insurance Corporation of India and 23 life insurance companies operating in
the country. The insurance sector is a colossal one and is growing at a speedy rate of 1520%. Together with banking services, insurance services add about 7% to the countrys
GDP. A well-developed and evolved insurance sector is a boon for economic
development as it provides long- term funds for infrastructure development at the same
time strengthening the risk taking ability of the country.
3.3 Mission Statement of IRDA

To protect the interest of and secure fair treatment to policyholders;
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To bring about speedy and orderly growth of the insurance industry (including
annuity and superannuation payments), for the benefit of the common man, and to
provide long term funds for accelerating growth of the economy;
To set, promote, monitor and enforce high standards of integrity, financial soundness,
fair dealing and competence of those it regulates;
To ensure speedy settlement of genuine claims, to prevent insurance frauds and other
malpractices and put in place effective grievance redressal machinery;
To promote fairness, transparency and orderly conduct in financial markets dealing
with insurance and build a reliable management information system to enforce high
standards of financial soundness amongst market players;
To take action where such standards are inadequate or ineffectively enforced;
To bring about optimum amount of self-regulation in day-to-day working of the

industry consistent with the requirements of prudential regulation.
3.4 ROLE OF IRDA

1. To protect the interest of and secure fair treatment to policyholders.
2. To bring about (speedy) and orderly growth of the insurance industry (including
annuity and superannuation payments), for the benefit of the common man, and
to provide long term funds for accelerating growth of the economy.
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3.
To set, promote, monitor and enforce high standards of (integrity), financial

soundness, fair dealing and competence of those it regulates.
4.
To ensure that insurance customers receive precise, clear and correct

(information) about products and services and make them aware of their
responsibilities and duties in this regard.
5. To ensure speedy settlement of genuine (claims), to prevent insurance frauds and

other malpractices and put in place effective grievance redressed machinery.
6. To promote fairness, (transparency) and orderly conduct in financial markets
dealing with insurance and build a reliable management information system to
enforce high standards of financial soundness amongst market players.
7. To take (action) where such standards are inadequate or ineffectively
enforced.8.To bring about optimum amount of (self-regulation)in day to day
working of the industry consistent with the requirements of prudential regulation.
3.5 Duties, Powers and Functions of IRDA
IRDA Section 14 of IRDA
Act, 1999 lays down the duties, powers and functions of
IRDA
(1) Subject to the provisions of this Act and any other law for the time being in force, the
Authority shall have the duty to regulate, promote and ensure orderly growth of the
insurance business and re-insurance business.
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(2) Without prejudice to the generality of the provisions contained in sub-section (1), the
powers and functions of the Authority shall include,
a) Issue to the applicant a certificate of registration, renew, modify, withdraw,
suspend or cancel such registration;
b) protection of the interests of the policy holders in matters concerning assigning of
policy, nomination by policy holders, insurable interest, settlement of insurance
claim, surrender value of policy and other terms and conditions of contracts of
insurance;
c) Specifying requisite qualifications, code of conduct and practical training for
intermediary or insurance intermediaries and agents;
d) Specifying the code of conduct for surveyors and loss assessors;
e) Promoting efficiency in the conduct of insurance business;
f) Promoting and regulating professional organizations connected with the insurance
and re-insurance business;
g) Levying fees and other charges for carrying out the purposes of this Act;
h) calling for information from, undertaking inspection of, conducting enquiries and
investigations including audit of the insurers,
intermediaries, insurance
intermediaries and other organizations connected with the insurance business;

i) control and regulation of the rates, advantages, terms and conditions that may be
offered by insurers in respect of general insurance business not so controlled and
regulated by the Tariff Advisory Committee under section 64U of the Insurance
Act, 1938 (4 of 1938);
j) Specifying the form and manner in which books of account shall be maintained
and statement of accounts shall be rendered by insurers and other insurance
intermediaries;
k) Regulating investment of funds by insurance companies;
l) Regulating maintenance of margin of solvency;
m) Adjudication of disputes between insurers and intermediaries or insurance
intermediaries;
n) Supervising the functioning of the Tariff Advisory Committee;
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o) Specifying the percentage of premium income of the insurer to finance schemes

for promoting and regulating professional organizations referred to in clause (f);
p) Specifying the percentage of life insurance business and general insurance
business to be undertaken by the insurer in the rural or social sector; and
q) Exercising such other powers as may be prescribed.
3.6 Guidelines of IRDA

Guidelines on Standardization in Health Insurance
Re: Guidelines on Standardization in Health Insurance
Health insurance addresses a major area of public concern. Although it is rapidly
growing, access to health insurance still remain slim ited and add to it complaints
especially due to variable interpretations of key policy term s are enormous. In order to
address the expectation of public more effectively, the Authority propose to stipulate the
following in respect of all health insurance policies issued by life and general insurers in
the country.
1. Standard Definition for 46 com m only used term s in health insurance policies:
Standard terms would reduce ambiguity, enable all stakeholders to provide better services
and enable customers to interact more effectively with insurers, TPA s and providers. All
insurers shall adhere to the stipulated definitions, annexed at Annexure I, while defining
these 46 core term s in all health insurance policies.
2. Standard Nomenclature and Procedures for Critical Illnesses:
In view of resolving the differences in the definitions of term son Critical Illnesses
adopted by the different insurers which are creating confusion in the minds of consumers
and the industry especially at the time when insurers and re-insurers have to arrive at a
point where lump sum payment is made, 11 Critical Illness term s have been standardized
to be adopted uniformly across industry, if offered under the product. All products
offering the 11 critical illness coverage shall ensure that definitions of the stated 11 term s
are in line with the stipulated definitions annexed at Annexure II.
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3. Standard Pre-authorization and Claim form:

A common industry wide pre-authorization and claim form will significantly stream line
processes at all stages. This will enhance the ability of providers to obtain a timely prior
authorization. By implementing it in an optical character recognition (OCR) format, the
ability to transfer data from a handwritten paper based form to IT system s has been
enhanced thus reducing the data entry issues for TPA s and insurers. Every company shall
attach set of claim forms along with policy term s and conditions to the policyholder. The
forms are attached at Annexure III.
4. Standard List of Excluded Expenses in Hospitalization Indemnity policies:
Hospitalization indemnity products are the commonest products in the Indian market and
account for most of the health insurance sold in the country. The standard listing of 199
excluded items, an area which has otherwise been fairly variable in its interpretation and
implementation, has been finalized. The same is annexed at Annexure IV. However,
Insurers may include these exclusions, if the product design allows for, or if the insurer
wants to include these as part of hospitalization expenses.
5. Standard File and Use Application Form, Database Sheet and Customer
Information Sheet:
The existing F& U form used by the non-life insurers is designed keeping in view largely
the characteristics of N on Life products other than Health. With this, the essential
information like the sum insured the minim um and maxim um age, term of the product
etc. that gets captured in the F& U form is very minim al. In order to capture the relevant
product design information, the modified File and Use Application form along with the
Database sheet and Customer information sheet as annexed in the Annexure: V, VI and
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VII respectively shall be submitted under File and Use procedure by the insurers. This
circular supersedes all the existing circulars /guidelines on File and Use Procedure for
health insurance products offered by life insurers/non-life insurers/health insurers. All the
insurers shall com ply with the File and Use procedure specified in this circular.
6. Standard agreement between TPA & Insurer and Provider (Hospital) & Insurer:
The insurers enter into agreements with the TPA s for health services under health
insurance contracts and with the Providers (Hospitals) for health care services under
health insurance contracts. The Service Level Agreement shall include the minim um
standard clauses as annexed in Annexure: V III and IX, as applicable. This is issued under
section 14(2) of IRDA Act, 1999 and shall be effective from 1st July 2013 for group
products and 1st October 2013 for other products.
CHAPTER 4 SECURITIES AND EXCHANGE BOARD OF

INDIA (SEBI)
4.1 Introduction
SEBI Act, 1992 (Securities and Exchange Board of India) was first established in the year
1988 as a non-statutory body for regulating the securities market. It became an
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autonomous body in 1992 and more powers were given through an ordinance. Since then
it regulates the market through its independent powers.
4.2 Purpose and Role of SEBI

SEBI was set up with the main purpose of keeping a check on malpractices and protect
the interest of investors. It was set up to meet the needs of three groups.
1. Issuers: For issuers it provides a market place in which they can raise finance fairly
and easily.
2. Investors: For investors it provides protection and supply of accurate and correct
information.
3. Intermediaries: For intermediaries it provides a competitive
4.3 Objectives of SEBI

The overall objectives of SEBI are to protect the interest of investors and to promote the
development of stock exchange and to regulate the activities of stock market. The
objectives of SEBI are:
1. To regulate the activities of stock exchange.
2. To protect the rights of investors and ensuring safety to their investment.
3. To prevent fraudulent and malpractices by having balance between self-regulation of
business and its statutory regulations.
4. To regulate and develop a code of conduct for intermediaries such as brokers,

underwriters, etc.
4.4 Functions of SEBI

The SEBI performs functions to meet its objectives. To meet three objectives SEBI has
Page 32
three important functions.

These are:
i. Protective functions
ii. Developmental functions
iii. Regulatory functions.
1. Protective Functions: These functions are performed by SEBI to protect the

interest of investor and provide safety of investment.
As protective functions SEBI performs following functions:
(i) It Checks Price Rigging: Price rigging refers to manipulating the prices of securities
with the main objective of inflating or depressing the market price of securities. SEBI
prohibits such practice because this can defraud and cheat the investors.
(ii) It Prohibits Insider trading: Insider is any person connected with the company such
as directors, promoters etc. These insiders have sensitive information which affects the
prices of the securities. This information is not available to people at large but the
insiders get this privileged information by working inside the company and if they use
this information to make profit, then it is known as insider trading, e.g., the directors of a
company may know that company will issue Bonus shares to its shareholders at the end
of year and they purchase shares from market to make profit with bonus issue. This is
known as insider trading. SEBI keeps a strict check when insiders are buying securities of
the company and takes strict action on insider trading.
(iii) SEBI prohibits fraudulent and Unfair Trade Practices: SEBI does not allow the
companies to make misleading statements which are likely to induce the sale or purchase
of securities by any other person.
(iv) SEBI undertakes steps to educate investors so that they are able to evaluate the
securities of various companies and select the most profitable securities.
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(v) SEBI promotes fair practices and code of conduct in security market by taking
following steps:
a) SEBI has issued guidelines to protect the interest of debenture-holders wherein
companies cannot change terms in midterm.
b) SEBI is empowered to investigate cases of insider trading and has provisions for
stiff fine and imprisonment.
c) SEBI has stopped the practice of making preferential allotment of shares
unrelated to market prices.
2. Developmental Functions:
These functions are performed by the SEBI to promote and develop activities in stock
exchange and increase the business in stock exchange. Under developmental categories
following functions are performed by SEBI:
(i) SEBI promotes training of intermediaries of the securities market.
(ii) SEBI tries to promote activities of stock exchange by adopting flexible and adoptable
approach in following way:
a) SEBI has permitted internet trading through registered stock brokers.
b) SEBI has made underwriting optional to reduce the cost of issue.
c) Even initial public offer of primary market is permitted through stock exchange.
3. Regulatory Functions: These functions are performed by SEBI to regulate the

business in stock exchange. To regulate the activities of stock exchange following
functions are performed:
i.
SEBI has framed rules and regulations and a code of conduct to regulate the
intermediaries such as merchant bankers, brokers, underwriters, etc.
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ii.
These intermediaries have been brought under the regulatory purview and private
placement has been made more restrictive.
iii.
SEBI registers and regulates the working of stock brokers, sub-brokers, share
transfer agents, trustees, merchant bankers and all those who are associated with
stock exchange in any manner.
iv.
SEBI registers and regulates the working of mutual funds etc.
v.
SEBI regulates takeover of the companies.
vi.
SEBI conducts inquiries and audit of stock exchanges.
4.5 Powers of SEBI

SEBI has been vested with the following powers:
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1. Power to call periodical returns from recognized stock exchange.

2. Power to control and regulate stock exchange.
3. Power to call any information or explanation from recognized stock exchanges or
their members.
4. Power to levy fees or other charges for carrying out the purpose of regulation.
5. Power to grant registration to market intermediaries.
6. Power to direct enquiries to be made in relation to affairs of stock exchanges or
members.
7. Power to grant approval to bye-laws of recognized stock exchanges.
8. Power to make or amend bye-laws of recognized stock exchanges.
9. Power to compel listing of securities by public companies.
10. Power to declare applicability of Section 17 of the Securities Contract
(Regulation) Act is any state or area to grant licenses to dealers in securities.
4.6 Policy and Programmes

With a view to keep the Indian securities market integrated with the worldwide regulatory
regime, incessant developments are essential while in harmony with the objectives
enshrined in the SEBI Act, 1992. A like every year, 2013-14 as well witnessed various
policy reforms initiated by SEBI which are presented in this section.
The developments are categorized under seven major heads viz., Primary Securities
Market, Secondary Securities Market, Mutual Funds, Intermediaries associated with
Securities Market, Foreign Institutional Investors, Other policies and programmes having
a bearing on the working of securities market and Assessment and Prospects.
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Primary Securities Market:

The primary market enables the government as well corporates in raising the capital that
is required to meet their requirements of capital expenditure and/or discharge of other
obligations such as exit opportunities for venture capitalist/PE firms. A well-developed
primary market is fundamental for an economy to prosper. In order to further refine the
primary market design and boost investor confidence, various measures have been
undertaken by SEBI in 2013-14. This section throws light on the policy measures
initiated during the financial year:
Compliance With The Provisions Of Equity Listing Agreement By Listed
Companies - Monitoring by Stock Exchanges
In order to improve the effectiveness of monitoring mechanism of stock exchanges to
ascertain the adequacy and accuracy of disclosures made in compliance with the Listing
Agreement, the stock exchanges have been advised to put in place appropriate framework
to effectively monitor the disclosures. The stock exchanges have also been advised to put
in place an appropriate mechanism for handling complaints related to inadequate and
inaccurate disclosures and non-compliances.
Stock exchanges are further required to submit exception reports to SEBI containing
details of companies not responding to the clarifications sought by them and/or where the
response submitted by the company is not satisfactory. Further, the stock exchanges have
also been advised to disclose the details of promoters / directors / key managerial
personnel of defaulting companies on their websites.
B. IPO Grading made voluntary

Considering the requests received from market participants, viz. Investor Associations
and Association of Investment Bankers of India (AIBI), the recommendation of the
advisory committee of SEBI, and to align with the principles laid down by the Financial
Stability Board (FSB) on reducing the reliance on credit rating agencies, the IPO grading
Page 37
mechanism was made voluntary as against the earlier provision of the same being
mandatory.
C. Introduction of General Information Document
The concept of General Information Document (GID) has been implemented.
GID shall contain information which is of generic nature (like issue and allotment
procedure) and not specific to the issuer, thereby eliminating the repetition of common
information in abridged prospectus. This is expected to bring down the size of the
abridged prospectus and ultimately reduce the cost of printing.
D. Amendments to SEBI (Issue of Capital and Disclosure Requirements)
Regulations, 2009 relating to preferential issue
With a view to enhance transparency, ensure adequate audit trail and apply lock-in for the
shares allotted in preferential issues, the following amendments were carried out to SEBI
(Issue of Capital and Disclosure Requirements) Regulations, 2009:
1. Preferential issue shall be subscribed only through the allottees own bank
account.
Further, the issuing company shall disclose the natural persons who are
the ultimate beneficial owner of allotted shares and/or who ultimately control the
allottee, subject to the condition that if in the ownership chain there is any listed
company, mutual fund, bank or insurance company, no further disclosure will be
necessary.
2. Allotments in preferential issues shall only be made in dematerialized form.
3. Shares allotted in the preferential issue shall not be transferred till trading
approval is granted for such shares by the stock exchanges. Further, the lock-in
period shall commence on the date of such trading approval.
E. Revised illustrative format of Statement of Assets and Liabilities in SEBI (Issue of

Capital and Disclosure Requirements) Regulations, 2009
The illustrative format of Statement of Assets and Liabilities in offer document which is
provided under Regulation - (2)(IX)(B)(9)(f) of Part-A of Schedule VIII of SEBI (Issue
of Capital and Disclosure Requirements) Regulations, 2009 was updated and brought in
Page 38
line with the revised Schedule VI of the Companies Act, 1956 and Schedule III of the
newly enacted Companies Act, 2013.
F. Format for Auditors Certificate required under Clause 24(i) of the Equity Listing
Agreement
Clause 24(i) of the Equity Listing Agreement requires that the company, while filing for
approval of any draft Scheme of amalgamation / merger / reconstruction, etc. with the
stock exchange under clause 24(f) of the equity listing agreement, shall also file an
auditors certificate to the effect that the accounting treatment contained in the scheme is
in compliance with all the accounting standards specified by the Central Government in
section 211(3C) of the Companies Act, 1956. It was observed that there is no uniform
format for auditors certificate as required under clause 24(i) of the equity listing
agreement. Auditors certificate in different formats was being submitted by the
companies with the stock exchanges. In view of the same, a standard format for the same
has been prescribed to ensure standardization.
Secondary Securities Market:

Secondary market witnessed volatility amidst global and domestic factors, but stock
indices, Sensex and Nifty scaled new heights in 2013-14 as robust FII inflows and upbeat
domestic market sentiment helped to overcome concerns over slowing economic growth
and high inflation. Secondary markets, which serve as a barometer of the financial health
of an Indian economy, entail continuous technological advancements accompanied by
review of existing guidelines so as to maintain a competitive edge. Following were the
major policy initiatives taken by SEBI relating to the secondary market during 2013-14:
A. Listing of Specified Securities of Small and Medium Enterprises on the

Institutional Trading Platform in a SME Exchange without making an Initial Public
Offer
In order to facilitate capital raising by small and medium enterprises including start-up
companies which are in their early stages of growth and to provide for easier exit options
for informed investors like angel investors, VCFs and PEs etc., from such companies, it
Page 39
has been decided to permit listing without an IPO and trading of specified securities of
small and medium enterprises (SMEs) including start-up companies on Institutional
Trading Platform (ITP) in SME Exchanges.
B. Allowing Mutual Fund distributors to use Stock Exchange Infrastructure for
Mutual fund distribution
To enable the mutual fund distributors to leverage the stock exchange platform so as to
improve their reach, SEBI, vide circular dated October 04, 2013, allowed mutual fund
distributors to use the infrastructure of recognized stock exchanges to purchase and
redeem mutual fund units directly from mutual fund/assets management companies on
behalf of their clients. However, to address the possible risk of default, the mutual fund
distributors are not allowed to handle pay-in and pay-out of funds as well as units on
behalf of investors.
C. Amendment to Bye-Laws of Recognized Stock Exchanges with Respect to NonCompliance of Certain Listing Conditions and adopting Standard Operating
Procedure for Suspension and Revocation of Trading of Shares of Listed Entities for
such Non Compliances
To streamline the processes and procedures with regard to actions for non-compliance of
certain listing conditions which have so far been considered as grounds for suspension of
trading by the recognized stock exchanges, the stock exchanges have been advised that in
case of non-compliant companies they would resort to several other measures such as
imposition of fines, freezing of shares of the promoter and promoter group, transferring
the trading in the shares of the company to separate category, etc.
Before suspending the shares of the company. In order to maintain consistency and
uniformity of approach in this regard, it has been decided to lay down, in the bye-laws of
the recognized stock exchanges, the following:
a) Uniform fine structure for non-compliance of certain clauses of the listing
agreement
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b) Standard operating procedure (SOP) for suspension and revocation of suspension

of trading in the shares of such listed entities. The salient features of the circular
are as follows:
i.
Imposition of fines (on per day basis) on the company for noncompliance and delay in compliance with continuous listing
conditions such as submission of shareholding pattern, financial
results, corporate governance report etc.
ii.
In case of non-compliance for two consecutive quarters, moving

the shares of non-compliant company to Z Category, where the
trades would settle on Trade for Trade basis.
iii.
In case non-compliance continues, freezing the shares of the

promoter and promoter group. This would be carried out before
suspension of the trading of shares of the company.
iv.
In order to provide exit window for the non-promoters, after 15

days of suspension, trading in the shares of non-compliant entity
will be available on the Trade for Trade basis, on the first
trading day of every week for 6 months.
D. Exchange Traded Cash Settled Interest Rate Futures (IRF) on 10-year

Government of India Security
SEBI vide circular no. SEBI/DNPD/Cir-46/2009 dated August 28, 2009 permitted stock
exchanges to launch physically settled futures on 10-Year Government of India (GOI)
Security. In consultation with RBI, after taking into account feedback from market
participants and stock exchanges, SEBI decided to permit stock exchanges to introduce
cash settled Interest Rate Futures on 10-Year Government of India Security.
E. Introduction of Derivatives on India VIX

SEBI has permitted introduction of derivatives on India VIX to National Stock
Exchange (NSE) in January 2014. India VIX is Indias first volatility Index which is a
key measure of market expectations of near-term volatility. In India, VIX was launched in
April, 2008 by NSE based on the Nifty 50 Index Option prices. NSE launched futures
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contracts on India VIX called NVIX on February 26, 2014. National Securities Clearing
Corporation Limited (NSCCL) has put in place the necessary risk management measures
such as collection of initial margins, exposure margins and calendar spread margins. The
methodology of calculating the VIX index is same as that for Chicago Board Options
Exchange (CBOE) VIX index.
Mutual Funds:
The mutual fund industry has moved within the broader markets slipstream, oscillating
between exuberance and retrenchment with assets under management approaching to `8,
25,240 crore as end March 2014. The previous two years witnessed a slew of regulatory
reforms approaching towards development and growth of the industry. Mutual funds
manifest huge opportunity for growth and further penetration, which can be achieved
over the period of time, ushering various policies and enhancing levels of investor
education to increase presence in rural areas. The description of steps initiated during
2013-14 aiming at re-energizing growth and investor protection is as follows:
A. Circular on Infrastructure Debt Fund
With regard to Infrastructure Debt Funds (IDF), the following provisions were
developed:
a. Increase in the investment universe
i.
Investments of funds received on account of pre-payment of principal or

regular repayments of principal were permitted in bonds of Public
Financial Institutions (PFIs) and Infrastructure Finance Companies (IFCs),
if the AMC is unable to find core assets for investment.
ii.
Limit of scheme investments in sponsor owned assets were increased from

20 percent to 30 percent with some restrictions.
iii.
Clarity in limits on investments in unrated /below investment grade assets

(30percent extendable to 50 percent) and limits of investment in
instruments of a single issuer (30 percent) was provided.
b. Allowed to raise monies through private placement of units to less than fifty
persons.
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c. Increase in the universe of strategic investors to include, Systemically

Important NBFCs registered with RBI and foreign institutional investors
registered with SEBI which are long term investors subject to their existing
investment limits.
d. Extension of the maximum new fund offer period and specified transaction
period to 45 days.
e. Allowed to increase the tenure of the scheme to two years subject to approval
of two-thirds of the unit holders by value of their investment in the scheme.
f. The following categories of FIIs have been designated as long term investors
for the purpose of IDF:
Foreign Central Banks
Governmental Agencies
Sovereign Wealth Funds
International/Multilateral Organizations/ Agencies
Insurance Funds and Pension Funds
Further, it was decided that regulated foreign feeder funds, having at all times, at least 20
percent of their assets under management held by investors belonging to one of more of
the above categories of FIIs, shall also be categorized as FIIs which are long term
investors, for the purpose of IDF.
A. Gold Exchange Traded Fund Scheme (Gold ETFs) and Gold Deposit Scheme
(GDS) of Banks: Gold certificates issued by banks in respect of investments made
by Gold ETFs in Gold Deposit Scheme (GDS) can be held by mutual funds in
dematerialised or physical form.
B. Proprietary Trading Member (PTM) category: The asset management companies
managing schemes of mutual funds have been permitted to take membership of debt
segment of stock exchanges under Proprietary Trading Member (PTM) category.
However, this will be only to undertake trades directly on behalf of such schemes
managed by them.
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D. Conditions laid down for a sponsor to act as a custodian: It has been decided that
the custodian in which the sponsor of a mutual fund or its associates, holding 50 per cent
or more of the voting rights of the share capital of the custodian, shall be allowed to act
as custodian subject to fulfilling the following conditions i.e. (a) the sponsor should have
net worth of at least `20,000 crore at all points of time, (b) 50 per cent or more of the
directors of the custodian shall be those who do not represent the interests of the sponsor
or its associates,(c) neither the custodian nor the asset management company of a mutual
fund shall be a subsidiary of each other, (d) no person shall be a director of both the
custodian and the asset management company of a mutual fund and (e) the custodian and
the asset management company of a mutual fund shall sign an undertaking that they will
act independently of each other in their dealings with the schemes.
Foreign Institutional Investment:
A. SEBI (Foreign Portfolio Investors) Regulations, 2014 were notified on January
07, 2014.
SEBI (Foreign Portfolio Investors) Regulations, 2014 (the Regulations) were framed and
the same were notified on January 7, 2014.
B. Rationalization of debt limits
The framework of FII debt limits was simplified and existing debt limits were merged
into two broad categories: Government securities of USD 25 billion by merging
Government Debt Old of USD 10 billion and Government Debt Long Term of USD
15 billion) and corporate bonds of USD 51 billion (by merging USD 1 billion for QFIs,
USD 25 billion for FIIs and USD 25 billion for FIIs in long term infra bonds).
C. Corporate Debt limit put on tap
Beginning April 1, 2013, FIIs have been permitted to invest in corporate debt without
purchasing debt limits till the overall investment reaches 90 per cent after which the
auction mechanism would be initiated for allocation of the remaining limits.
D. Additional Government Debt limits on tap for Long Term Investors
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With effect from June 12, 2013, the unutilized Government debt limits along with an
additional USD 5 billion limit for Government debt has been made available for
investment on tap for FIIs which are registered with SEBI under the categories of
Sovereign Wealth Funds (SWFs), multilateral agencies, endowment funds, insurance
funds, pension funds and foreign central banks.
E. Security Receipts under Corporate Debt Limits
Beginning July 9, 2013, investments in security receipts issued by Asset Reconstruction
Companies by FIIs are being reckoned against the extant corporate debt limits.
F. Utilisation period for Government Debt limits
In order to ensure that the unutilised government debt limits are put up for auction
without delay, SEBI vide circular dated July 31, 2013, permitted to utilise the debt limits
allocated to them in each monthly auction till the 17th day of the succeeding month. Any
unutilised limit as on the 18th of each month would get auctioned on the 20th of that
month.
G. Government Debt Limits on Tap
FIIs have been permitted to invest in Government Debt without purchasing debt limits till
the overall investment reaches 90 percent after which the auction mechanism shall be
initiated for allocation of the remaining limits, as currently in place for FII investments in
corporate debt.
4.7 Guidelines of SEBI

SEBI has brought out a number of guidelines separately, from time to time, for primary
market, secondary market, mutual funds, merchant bankers, foreign institutional
investors, investor protection etc.
1. Guidelines for Primary Market.
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A. New Company: Anew company is one, which has not completed12 months
commercial production and does not have audited results. And the promoters do
not have a track record. These companies have to issue shares only at par.
B. New Company set-up by Existing Company: When a new company is being set
up by existing companies with a five year track record of consistent profitability
and a contribution of at least 50% in the equity of new company, it can issue its
shares at premium.
C. Private and closely held companies: These having a track record of consistent
profitability for at least three years, shall be permitted to price their issues freely.
The issue price shall be determined only by the issues in consultation with lead
managers ton the issue.
D. Existing Listed companies: It will be allowed to raise fresh capital by freely
pricing expanded capital provided the promoters contribution is 50%on first
Rs.100crores of issue, 40% on next Rs.200 crores, 30% on next Rs.300 crores and
15% on balance issue amount.
2. Guidelines for Secondary Market:
Stock Exchange
1. Board of Directors of stock exchange has to be reconstituted so as to include nonmembers, public representatives, government representative to the extent of 50%
of total number of members.
2. Capital adequacy norms have been laid down for members of various stock
exchanges depending upon their turnover of trade and other factors.
3. Working hours for all stock exchanges have been fixed uniformly.
4. All the recognized stock exchanges will have to inform about the transaction
within 24 hours.
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Brokers
1. Registration of brokers and sub-brokers is made compulsory.
2. Compulsory audit of brokers book and filing of audit report with SEBI have been
made mandatory.
3. In order to ensure that brokers are professionally qualified and financially solvent,
capital adequacy norms for registration of brokers have been evolved.
4. To bring about greater transparency and accountability in the broker-client
relationship, SEBI has made it mandatory for brokers to disclose transaction price
and brokerage separately in the contract notes issued to client.
5. No broker is allowed to underwrite more than 5% of public issue.
3. Foreign Institutional Investors (FII)
1. Foreign institutional investors have been allowed to invest in all securities traded
in primary and secondary markets.
2. There would be no restriction on the volume of investment for the purpose of
entry of FIIs.
3. Holding of single FII will not exceed the ceiling of 5% of equity capital Tax rate
10% on large capital gain, 30% on short term capital gains 20 % on dividend
4. Guidelines to issue of Bonus Shares
1. Issue of bonus shares after any public/rights issue is subject to the condition that
no bonus shall be made which will dilute the value or rights of holders of
debenture, convertible fully or partly.
2. There should be a provision in the Articles of Association of the company for
issue of bonus shares.
3. The bonus is made out of free reserves built out of the genuine profits or share
premiums collected in cash only.
4. No bonus issue can be made within 12 months of any public issue/rights issue.
5. A company which announces bonus issue after the approval of the Board of
Directors must implement the proposals within a period of six months from the
date of such proposal and shall not have the option of changing the decision
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5. Guidelines for Rights Issue

Where composite issues are made by listed companies, they can be issued at different
prices. Gaps between the clearance dates of right issues and public issues should not
exceed 30 days. If right issues of listed companies exceed Rs.50 lakhs, issue should be
managed by an authorized merchant banker.
1. Underwriting of right issues is not mandatory but as per SEBI Rules right issues
can be underwritten.
2. No preferential allotment shall be made along with the right issues.
3. If the company doesnt receive minimum subscription (90% of the issue amount)
within 120 days from the date of opening issue, the entire subscription should be
refunded within 128 days with interest @ 15 % p.a. for delay.
4. Within 45 days of closure of rights issue, a report in the prescribed form along
with compliance report duly signed by the statutory auditor should be forwarded
to SEBI. Companies making rights issues are now permitted to dispatch an
abridged letter of offer, containing disclosures as required in the abridged
prospectus. However, such companies may provide the detailed letter of offer to
any shareholder upon request.
5. Again, companies that have filed a draft offer document with full disclosures can
now come out with further capital issues even before the shares pertaining to the
document are listed on the brochures.
6. All listed companies making rights issue shall issue an advertisement in at least
two All India newspapers about the dispatch of letters of offer, opening date,
closing date etc.
6. Guidelines to Debentures
1. The amount of working capital debenture should not exceed 20% of the gross
current asset
2. The debt equity ratio should not exceed 2:1
3. The rate of interest can be decided by the company
4. Normally debentures above seven years cannot be issued
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5. Debentures issued to public have to be secured and registered

6. credit rating is compulsory for all the debentures except those issued by public
sector companies
7. Guidelines for protection of the Debenture Holders
1. Servicing of Debentures
2. Protection of interest of Debenture Holders
8. Guidelines for underwriters

1. Hold certificate of registration granted by SEBI
2. Certificate is valid for 3 years from the date of issue
3. Total underwriting obligations should not exceed 20 times of his net worth
4. Furnish all statements within 6 months from the end of financial year
5. Books of account to be maintained for a period of 5 years
9. Investor protection
1. New issues
2. Prohibition of unfair trade practices
3. Investor education
10. Book building
1. Usual methods of fixing share price doesnt take into consideration the investors
demands
2. So goes for book building
CHAPTER 5 FORWARD MARKET COMMISSION

(FMC)
5.1 Introduction
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Forward Markets Commission (FMC) headquartered at Mumbai, is a regulatory authority

for Commodity futures market in India. It is a statutory body set up under Forward
Contracts (Regulation) Act 1952.
The Commission functioned under the administrative control of the Ministry of
Consumer Affairs, Food & Public Distribution, Department of Consumer Affairs, and
Government of India.
The objectives of this regulation by the central government were to exclude from forward
dealings operators with insufficient financial resources and inadequate experience, and to
prevent all forms of price manipulation. The commission sought to achieve the first by
recognition for forward trading of selected trader associations and regulation of their
constitution and market practices.
5.2 Functions of FMC

1. To advise the Central Government in respect of the recognition or the withdrawal
of recognition from any association or in respect of any other matter arising out of
the administration of the Forward Contracts (Regulation) Act 1952;
2. To keep forward markets under observation and to take such action in relation to
them, as it may consider necessary, in exercise of the powers assigned to it by or
under the Act;
3. To collect and whenever the Commission thinks it necessary, to publish
information regarding the trading conditions in respect of goods to which any of
the provisions of the Act is made applicable, including information regarding
supply, demand and prices, and to submit to the Central Government, periodical
reports on the working of forward markets relating to such goods;
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4. To make recommendations generally with a view to improving the organization

and working of forward markets;
5. To undertake the inspection of the accounts and other documents of any
recognized association or registered
association or any member of such
association whenever it considers it necessary.
5.3 Powers of FMC

1. The Commission shall, in the performance of its functions, have all the powers of a
civil court. Under the Code of Civil Procedure, 1908 (5 of 1908), while trying a suit in
respect of the
Following matters, namely:
A. Summoning and enforcing the attendance of any person and examining him on
oath.
B. Requiring the discovery and production of any document.
C. Receiving evidence on affidavits.
D. Requisitioning any public record or copy thereof from any office.
E. Any other matters which may be prescribed.
2. The Commission shall have the power to require any person, subject to any privilege
which may be
claimed by that person under any law for the time being in force, to
furnish information on such points or matters as in the opinion of the Commission may
be useful for, or relevant to any matter under the consideration of the Commission and
any person so required shall be deemed to be legally bound to furnish such information
within the meaning of Sec. 176 of the Indian Penal code, 1860 (45 of 1860).
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3. The Commission shall be deemed to be a civil court and when any offence described in
Sections. 175, 178, 179, 180 or Sec. 228 of the Indian Penal Code, 1860 (45 of 1860), is
committed in the view or presence of the Commission, the Commission may, after
recording the facts constituting the offence and the statement of the accused as provided
for in the Code of Criminal Procedure, 1898 (5 of 1898)11[11] forward the case to a
Magistrate having jurisdiction to try the same and the Magistrate to whom any such case
is forwarded shall proceed to hear the complaint against the accused as if the case had
been forwarded to him under Section 482 of the said Code12[12].
4. Any proceeding before the Commission shall be deemed to be a judicial proceeding
within the meaning of Sections.193 and 228 of the Indian Penal Code, 1860.
5.4 Regulatory Measures taken by FMC

Illegal contracts
Following are the scenarios, in which the contracts are termed as illegal contracts,
A. Forward Contracts in the permitted commodities, i.e., commodities notified under
S.15 of the Forward Contracts (Regulation) Act, 1952, which are entered into
other than: (a) between the members of the recognized Association or (b) through
or (c) with any such members.
B. Forward contracts in prohibited commodities, which are described under section
17 of forward contract act.
C. Forward Contracts in the commodities in which such contracts have been
prohibited.
Measures against Illegal forward trading
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A. The role of Forward Markets Commission is to communicate the information

relating to offences under the Act to the police authorities and assist such
authorities in their work such as accompanying the police in conducting searches
for documents etc.
B. The offences under the Act are technical in nature and it is difficult to prove the
charges in accordance with the rules of evidence contained in the Evidence Act.
So, the Forward Markets Commission periodically conducts training programs,
Seminars, Workshops etc. for the benefit of Police Officers/ Prosecutors and also
Judicial Magistrates First Class/Metropolitan Magistrates.
Rules governing illegal forward contracts
A. Owner of a place which is used for performing illegal forward contracts, with the
Knowledge of such owner.
B. A person who, without permission of the Central Government, organizes illegal
forward contract.
C. Any person who will fully misrepresents or induces any person to believe that he
is a member of a recognized association or that forward contract can be performed
through him.
D. Any person who is not a member of a recognized association canvasses,
advertises or touts in any business connected with forward contracts in
contravention of the Forward Contracts (Regulation) Act, 1952.
E. Any person who joins, gathers, or assists in gathering at any place other than the
place of business
specified in the bye-laws of the recognized associations for
making bids or offers or for entering into illegal forward contracts.
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F. Any person who makes publishes or circulates any statement or information,

which is false and which he knows to be false, affecting or tending to affect the
course of business in forward contracts in permitted commodities.
5.5 Initiatives of the commission in 2013- 14
Investor Protection Fund- Investor Protection Fund has been operationalized and
all the Exchanges have transferred a total of Rs79.89 Cr. to this Fund. This has
been a very significant contribution to protection of investors in this market which
would increase their confidence and hence their participation in the market.
Staggered Delivery Mechanism- To limit excessive speculation especially in the

near month contracts and make the threat of delivery in the near month credible,
the Commission approved the introduction of staggered delivery system. Under
this system, the sellers can indicate their delivery intentions on any day during the
last 15 days of the contract which is allocated to the buyers in a random manner.
This system has already yielded good results in terms of reducing the excess
speculation and price volatility in the near month and showing a more mature
trading pattern in the concerned commodity contracts. This has also led to greater
liquidity in the far month contracts.
SMS and E-mail alerts to clients- To reduce the instances of unauthorized trade
and empower the client with information, a system of sending e-mail alerts and
sms to all the clients by close of business everyday regarding trades executed in
their account has been put in place. A penalty of Rs. 500/- per client per trade is
applicable on member for trades executed without SMS alert facility with effect
from 1st April 2013.
Guidelines for Algorithmic Trading- The Commission has also issued guidelines
for Algorithmic (Algo) Trading at National Commodity Exchanges to protect the
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interests of investors in commodity market and to promote the orderly

development and regulation of the commodity futures market.
Base Minimum Capital Requirements-Commission prescribed Base Minimum

Capital requirement for members of National Exchanges. No exposure is given by
Exchanges on base minimum capital. These funds would be used only towards
settlement of claims by the client, arbitration awards against the member, if any.
More disclosures by National Exchanges-To ensure transparency in the trading

practices, the exchanges now display members data, trading activity during life
cycle of a contract, details of percentage of proprietary/client trading including
details of HFT and also trading on their websites.
Formation of Advisory Committee-Government has constituted an Advisory

Committee to deliberate on various issues of concern to the futures trading in
various commodities. The first meeting of the Committee was held in Mumbai in
October2012. The Advisory Committee consists of various stakeholders of the
market who are expected to give useful inputs in policy making and decision
making process of the Commission and Government.
5.6 Limitations and Future of FMC

This section presents limitations, various issues and challenges present in FMC and what
the future of FMC is going to be.
Limitations of FMC
Following are the limitations of FMCs
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A. Option trading prohibited

B. Functions as a Government department with limited autonomy with respect to:
a. Recognition / de-recognition of exchanges
b. Regulation of intermediaries
c. Financial and administrative autonomy.
C. Market expansion has put heavy pressure on the FMCs coping capacity
Issues and Challenges

1. Strengthening of and Autonomy for the Regulator: Currently, the commission is
an arm functioning under the Ministry of Consumer Affairs and it looks after the
working of futures exchanges also. Unlike India's autonomous stock market
regulator, the commodities regulator i.e. Forward Market Commission (FMC), is
controlled by the Consumer Affairs Ministry and needs to seek government
permission for many decisions. As per the latest news, the Forward Market
Commission will be given autonomy through an ordinance to strengthen the legal
and regulatory framework with stiffer punishment for violators and stringent
provisions for preventing misuse of insider information.
According to FMC chairman B C Khatua, strengthening the regulator would
likely enable banks and financial institutions to enter commodities bourses and
deepen trading. The changes would also help the introduction of options trading in
commodities. The strength of the FMC would be raised from the present four
members to nine, including a Chairman and up to three whole-time members.
2. Increasing the breadth and depth of the market: For increasing breadth and depth
of market, there is necessity of participation of farmers/aggregators and other
hedgers as well as participation of banks and mutual funds.
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3. Improving the Governance of Exchanges and Intermediaries: Possible way to

improve this can be stricter enforcement of legal and regulatory provisions and
improvement in competencies and transparency.
Standardisation of contract designs and quality parameters across the

market.
Removal of interstate tariff and non-tariff barriers Market integration.
Capacity Building: FMC, Exchanges, Warehouses, Assayers.
R and D in Commodity market governance and structural issues.
Sensitisation of policy makers/opinion makers with respect to the benefits

of the commodity futures market.
Way Forward
The following are under implementation
1. Amendment of Forward Contracts (Regulation) Act, 1952.
2. A progressive FDI policy for the Commodity Exchanges.
3. Greater and urgent action on governance issues including storage, quality and
delivery related issues.
4. Dissemination of commodity prices (futures and spot) through ticker boards.
5. (Provision of Rs.100million in 2007-08.)
6. A massive awareness campaign among the stake holders including farmers.
7. Programs for capacity building across the value chain. Rs.25 mn budgeted
8. Efforts are on to promote Aggregators for direct participation of the farmers in the
market.
9. Hope to see a well regulated, strong, efficient and transparent commodity futures
market in India in 2 to 3 years time.
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5.7 Guidelines of FMC

Revised Norms for Constitution of the Board of Directors, Committees, Nomination
and Role of Independent Directors, Appointment of Managing Director/Chief
Executives, etc at the Nationwide Multi Commodity Exchanges.
1. BOARD OF DIRECTORS:
The Board shall include:
(a) Shareholder directors;
(b) Independent directors; and,
(c) Managing Director.
The composition of the Board of Directors shall be as under:

1. Not less than 50% (one-half) of the strength of the Board of Directors shall be
Independent Directors of whom:I.
Independent Directors shall be appointed by the Forward Markets

Commission (henceforth called the Commission) u/s 6(2) (b) of FC (R)
Act and
II.
The remaining Independent Directors of the Board shall be appointed by

the Exchange with the prior approval of the Commission.
2. The remaining posts of Directors of the Board, other than those appointed as
Independent Director under clause 1.1 of these Norms, shall comprise of
shareholder directors, this category also includes any full time Executive Director
other than the Managing Director/ Chief Executive. The Shareholder Directors
shall be appointed by the Exchange with the prior approval of the Commission.
3. The Managing Director shall be an ex-officio director of the Board and shall not
be included in either category of independent directors or shareholder directors.
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4. The Chairperson of the Board of Directors of the Exchange shall be an

Independent Director and shall be appointed with the prior approval of the
Commission.
5. No trading member or clearing member or their associates and agents shall be on
the Board.
6. Foreign Institutional Investor/ Foreign Portfolio Investor as defined in Securities
and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014
shall not have any representation on the Board.
7. The persons to be appointed as Directors should satisfy the criteria of fit and
proper person as given in Annexure-I.
2. MANDATORY COMMITTEES:
2.1. In order to ensure effective oversight of the functioning of commodity exchanges,
various committees are to be formed by exchanges. A list of all such mandatory
committees along with their composition and functions is placed under Annexure-II. This
will be the minimum number of Committees to be constituted by the Exchange. However,
the Exchange may constitute more Committees as per their requirement.
2.2. Independent external persons appointed to Committees: The independent external
persons shall be from amongst the persons of integrity, having a sound reputation and not
having any conflict of interest. They shall be specialists in the field of work assigned to
the committee. The commodity exchange shall frame the guidelines for appointment,
tenure, code of conduct, etc., of independent external persons. Extension of the tenure
may be granted at the expiry of the tenure pursuant to a review of the contribution, record
of attendance at meetings, etc.
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2.3. The Agenda for Board/Committee meetings should invariably be served to all
members of the Committee including Independent Directors at least 7 working days in
advance of the date of the Board/Committee meeting. The Agenda should be
accompanied with the underlying detailed notes on each point for discussion in the Board
/Committee meeting. Agenda items of very urgent nature and not involving major policy
issues may be served at shorter notice but not less than 3 working days prior to the
Board /Committee meeting.
2.4. The Exchange shall submit details about the functioning of committees by way of
Quarterly development report to the Commission.
3. INDEPENDENT DIRECTORS:
3.1. The Exchanges are required to forward at least two names (in the specified format at
Annexure-III) for every vacancy of independent director. The Commission may however,
appoint an independent director other than from the names suggested by the Exchange.
Page 3 of 7
3.2. In addition to the criteria laid down in Section 149 (6) of the Companies Act, 2013,
the eligibility conditions for nomination/appointment as independent director on the
Board of Exchange shall be as follows-:
a) The candidate should be a person of integrity who either represents the farmers,
traders, exporters, importers, Investor associations or be an expert on Commodities
Derivatives Markets, Finance, Accounting, Management, Law, academics having
knowledge of commodity economy/derivatives trading.
b) The candidate should have relevant experience / educational qualifications.
c) The persons who are / were holding positions of trust and responsibility in public
organizations or person who are retired from such positions may be preferred over other
candidates.
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d) Persons who are regular traders / speculators in the market will not be eligible to be
considered for such nomination.
3.3. The Tenure and terms & conditions for appointment of Independent Director at the
Board of Directors shall be as follows-:
The term of an Independent Director shall be normally three years. However, the
Commission may approve the appointment of Independent Director for a term of
less than 3 years as deemed fit. The appointment of the Independent Director can
be terminated by the Commission at any point of time before the expiry of his/her
tenure.
The Independent Directors shall have a maximum of 2 terms of 3 years each.
A person shall not act as Independent Director on more than one Commodity
Exchange simultaneously.
The Remuneration payable to Independent Directors shall be as per the provisions

of Section-197 of the Companies Act, 2013.
The Independent directors shall, endeavour to attend all the board of director
meetings and they shall be liable to vacate office if they remain absent for three
consecutive meetings of the Board of Directors or do not attend seventy five per
cent of the total meetings of the Board of Directors in a calendar year.
The Independent Directors shall meet separately, at least once in six months to
exchange views on critical issues.
The Independent Directors shall submit a report to the Commission within a week
of the conclusion of the Board/Committee meeting in case of any difference of
opinion or disagreement they have or had with the decisions taken by the
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Board/Committee or any other matter which they would like bring to the attention
of the Commission.
If any issue arises as to whether an assignment or position of an independent

director is in conflict with his role, the Commissions decision shall be final.
In case of extension of the term of the independent director or appointment of a

new independent director, the Exchange shall apply to the Commission two
months before the expiry of the term. In addition to the other requirements
prescribed herein, the application for extension of term of the independent
director shall be accompanied with, his/her attendance details on meetings of
various mandatory committees and on the Board of Directors of the Exchange.
The independent director shall not be subject to retirement by rotation.
The existing independent director shall continue holding the post, till a new
independent director is appointed in his place.
4. SHAREHOLDER DIRECTORS:
4.1 The names of persons to be appointed as shareholder directors shall first be approved
by the Board of Directors of the Exchange, followed by shareholders approval before
submitting the same to the Commission for approval.
4.2 The manner of election, appointment, tenure, resignation, vacation etc. of Shareholder
Directors shall be governed by the Companies Act, 2013 and the Equity Listing
Agreement in case of listed companies, save as otherwise specifically provided under the
Forward Contracts (Regulation) Act, 1952 and directives issued the reunder.
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5. APPOINTMENT OF MANAGING DIRECTOR:

5.1. The appointment, renewal of appointment, terms and conditions of service (including
remuneration) and the premature termination of services of the Managing Director / Chief
Executive (subject to the Managing Director /Chief Executive being given an opportunity
of being heard against such termination or removal), shall be subject to prior approval of
the Commission. However, in case the Managing Director / Chief Executive resigns
voluntarily, which is accepted by the Board of Directors, it would only be informed to the
Commission by the Exchange.
5.2. In case a vacancy of Managing Director arises due to unforeseen reasons, the
Exchange shall forward the new names to the Commission within 60 days from the date
of submission of resignation or such vacation of office.
5.3. In case the post of Managing Director/Chief Executive becomes vacant due to
removal/resignation/premature termination of services or for any other reason, the Board
will devise a suitable arrangement for looking after the work of Managing Director/Chief
Executive until a new incumbent is appointed as Managing Director / Chief Executive.
5.4. The appointment of the Managing Director shall be for a tenure not less than three
years and not exceeding five years.
5.5. The Managing Director of a recognised commodity exchange shall not

a. Be a shareholder or an associate of a shareholder of a recognised commodity
exchange or shareholder of an associate of a recognised commodity exchange as
the case may be;
b. Be a trading member or a clearing member, or his associate and agent, or
shareholder of a trading member or clearing member or shareholder of an
associate and agent of a trading member or a clearing member.
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c. Hold any position concurrently in the subsidiary of a recognised commodity

exchange or in any other entity associated with a recognised commodity
exchange. Provided that the Managing Director of a recognised commodity
exchange may be appointed on the Board of Directors, but not as Managing
Director, of the subsidiary of a recognized commodity exchange as the case may
be.
5.6. The Exchange shall constitute a Committee for the selection of the Managing
Director / Chief Executive, as the case may be. The Managing Director shall be selected
through open advertisement in all editions of at least one national daily from amongst
persons qualified in the fields of commodity market/capital market/ finance/ management
and possessing sufficient experience. In case the Exchange proposes reappointment/
extension or fresh appointment, the Commission should get a proposal from the
Exchange for the appointment of Managing Director/Chief Executive two months prior to
the last working day of such Managing Director. The Exchange shall submit an
undertaking that the necessary due diligence has been carried out by them with respect to
the verification of antecedents, credentials and experience of the proposed person/s. The
proposal seeking approval of the Commission for the appointment / termination of
services of Managing Director/Chief Executive shall be submitted to the Commission
only with the prior approval of the Board of Directors of the Exchange.
5.7. The Selection Committee shall comprise of five persons i.e., two independent
directors, two shareholder directors and one independent external person. Further, the
Exchanges shall ensure that one independent director shall be part of the Selection
Committee and the meetings of such Committee at all times.
5.8. At the time of seeking approval of the Commission for the appointment of the
Managing Director/Chief Executive, the Exchange shall also seek approval for the
remuneration and terms and conditions of the Managing Director /Chief Executive from
Page 64
the Commission. While recommending the remuneration for the Managing Director
/Chief Executive, the Exchange shall take into consideration the following:
i.
Role and responsibilities of the Managing Director /Chief Executive Page 6 of 7
ii.
Financial condition / health of the Exchange
iii.
Comparability to the industry standards
iv.
Revenues, net profit of the Exchange
v.
The Exchange shall ensure that the variable component of the remuneration of
Managing Director /Chief Executive does not exceed one third of the total
remuneration.
vi.
No incentives are provided for excessive risks in the short term.
vii.
The variable component of the remuneration is paid only after the audited annual
accounts for the year are approved by the Board of Directors.
viii.
Any change in the remuneration or conditions of service of Managing

Director/Chief Executive will also require prior approval of the Commission.
ix.
The remuneration of Managing Director/Chief Executive of an Exchange already

appointed with the approval of the Commission shall also be in accordance with
the above norms. The points at (a) to (g) shall be considered by the commodity
exchange while fixing the remuneration of the Key Management Personnel. The
definition of Key Management Personnel will be as per Section 2(51) of the
Companies Act, 2013.
Page 65
5.9. The Managing Director / Chief Executive of the Exchange should be a person of high
calibre, integrity and expertise and should have sufficient authority to manage the affairs
of the Exchange.
5.10. It shall be the duty of the Managing Director/Chief Executive of the Exchange to
ensure that at least once in a quarter, the Board of Directors is informed about the various
directions of Central Government/Forward Markets Commission relating to Exchange
and the status of their compliance.
5.11. It shall be the duty of the Managing Director / Chief Executive to give effect to the
directives, guidelines, orders, circulars issued by the Forward Markets Commission /
Government of India in order to implement the applicable provisions of law, rules, and
regulations as also the Rules, Regulations, Byelaws and Memorandum and Articles of
Association of the Exchange. Any failure in this regard will make the Managing
Director/Chief Executive liable for removal from or termination of service by the Board
of Directors of the Exchange with the prior approval of the Forward Markets
Commission, or on receipt of directions to that effect from the Forward Markets
Commission, subject to the Managing Director/Chief Executive being given an
opportunity of being heard against such termination or removal.
5.12. The person to be appointed as Managing Director / Chief Executive of the
Exchange should satisfy the criteria of fit and proper person as given in Annexure-I.
Page 7 of 7
5.13. The Commission may suomotu remove or terminate the appointment of the
Managing Director of the National Exchange if deemed fit in public interest provided that
no Managing Director shall be removed unless he has been given a reasonable
opportunity of being heard.
5.14. The aforesaid provisions shall also be applicable if the Exchange appoints a Chief
Executive Officer who is not a Managing Director.
Page 66
6. CODE OF CONDUCT FOR DIRECTORS AND KEY MANAGEMENT

PERSONNEL.
6.1. Every director of a recognised Exchange shall abide by the Code of Conduct
specified under Annexure-IV. In addition, an Independent Director will also abide by the
Code of Conduct as specifically laid down in Schedule IV of the Companies Act, 2013
6.2. Every director and key management personnel of a recognised Exchange shall abide
by the Code of Ethics specified under Annexure-V. The Exchange shall ensure that all
key management personnel employed by them satisfy the criteria of fit and proper
person.
6.3. The Commission may, for any failure by the directors to abide by these Norms or the
Code of Conduct or Code of Ethics or in case of any conflict of interest, either upon a
reference from the Exchange or suomotu, take appropriate action including removal or
termination of the appointment of any director or key managerial personnel, after
providing him a reasonable opportunity of being heard.
7. CORPORATE GOVERNANCE NORMS.

Since all the Commodity Exchanges are Companies registered under the Companies Act,
2013, the Rules pertaining to Corporate Governance notified under the Companies Act,
2013 and the requirements there under shall be applicable to all the Exchanges.
Page 67
CHAPTER 6 - SURVEY ANALYSIS
1) 60% people feel that interest rate have an effect on economy and 40% feel it
wont have any effect.
RBI
70%
60%
50%
40%
30%
20%
10%
0%
2) 49% people feel that Mr. Raghuram Rajan will be able to handle the falling Indian
Rupee and 51% people feel he wont to be able
RBI
52%
51%
51%
50%
50%
49%
49%
48%
Page 68
3) 50 % people feel that monetary policy can affect share price of the company and
47% people feels it wont affect the share price of the company.
RBI
51%
50%
49%
48%
47%
46%
45%
4) 30% people feel that the central bank leads or follow the financial markets and
70% people say no that it doesnt lead or follow.
RBI
80%
70%
60%
50%
40%
30%
20%
10%
0%
Page 69
5) 43% say yes that the central bank use derivatives in the conduct of monetary
policy and 57% say that no that they dont use derivatives
RBI
60%
50%
40%
30%
20%
10%
0%
6) 100% people say that the central bank also regulates and/or supervise banks.
RBI
120%
100%
80%
60%
40%
20%
0%
Page 70
7) 79% of the people say yes the monetary policy has lost its credibility and
effectiveness in tackling inflation and the management of the exchange rate while
29% people say no to it.
RBI
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
8) 80% of the people feel that though the governor has come there will be a rise in
inflation rates and 20% people have faith in new governor that rates will fall.
Page 71
RBI
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
9)
96% of the people know the current inflation rate is 7.23% and rest 4% dont
know.
RBI
120%
100%
80%
60%
40%
20%
0%
Page 72
10) 100% of the people know the current CRR rate is 4%
RBI
120%
100%
80%
60%
40%
20%
0%
11) 100% of the people know that the current SLR rate is 22%.
Page 73
RBI
120%
100%
80%
60%
40%
20%
0%
12) 100% of the people know that the current Repo rate is 8%.
RBI
120%
100%
80%
60%
40%
20%
0%
13) 100% of the people know that the current Reverse Repo rate is 7%.
Page 74
RBI
120%
100%
80%
60%
40%
20%
0%
CHAPTER 7 - CONCLUSION
Page 75
Financial Regulation means supervision of financial markets and institutions. Financial

regulations necessitate financial institutions to certain requirements, restrictions and
guidelines. The primary purpose of a financial regulation is to maintain the integrity of
the financial system. Financial regulation protects investors, maintain orderly markets
and promote financial stability. There are four major regulatory bodies in India - Reserve
Bank of India (RBI), Insurance Regulatory and Development Authority (IRDA),
Securities and Exchange Board of India (SEBI), Forward Market Commission (FMC).
The main aim of RBI is to regulate the banking system in India and to control money
flow in the market. RBI issues monetary policy and fiscal policy to control the money
flow in the market. Whereas, IRDA is the regulator of insurance company and its
objective is to regulate and develop the insurance companies. IRDA issues various
guidelines to the insurance sector.
The main purpose of SEBI is to meet the need of following three categories:
Issuers: For issuers it provides a market place in which they can raise finance fairly and
easily.
Investors: For investors it provides protection and supply of accurate and correct
information.
Intermediaries: For intermediaries it provides a competitive
SEBI issues various guidelines, policies and programmes to the securities market.
The main role of FMC is to regulate commodity market. FMC issues various guidelines
to the commodity market. The main objective of Financial Regulation Policies is to
provide various policies and guidelines through Regulatory Bodies to the financial
markets, banking institutions, insurance sector, and commodity markets.
Annexure
Page 76
Questionnaire
1. Do you think that the increasing interest rates will have effect on the economy?
Yes
or
No
2. Do you think that the current Governor Mr. Raghuram Rajan will be able to
handle falling Indian Rupee?
Yes
or
No
3. Does monetary policy can affect the share price of the company?
Yes
or
No
4. Should Central Bank lead or follow the financial markets?

Yes
or
No
5. Should Central Bank use derivatives in the conduct of monetary policy?

Yes
or
No
6. Should the Central Bank also regulate and/or supervise banks?

Yes
or
No
7. Whether monetary policy has lost its credibility and effectiveness in tackling
inflation and the management of the exchange rate?
Yes
or
No
8. According to you, as the new governor has come, do you expect a rise or fall in
inflation rates?
Yes
or
No
9. What is the current inflation rate?

6%
or 7.23%
Page 77
10. What is the current CRR rate?

6%
or
4%
11. What is the current SLR rate?

20%
or
22%
12. What is the current Repo rate?

8%
or
7.25%
13. What is the current Reverse Repo rate?

7%
or
7.25%
REFERENCE
Page 78
www.rbi.com
www.sebi.com
www.fmc.com
www.irda.com
www.businessstandard.com
www.economicstimes.com
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