MMS-Financial-Regulations-3-munotes

Page 1

1 1
INTRODUCTION TO FINANCIAL
REGULATIONS
Unit Structure
1.0 Learning Objectives
1.1 Introduction
1.2 Need and significance of Indian financial system regulations
1.3 Structure of financial regulations in India
1.4 Global financial crisis – response of the Indian regulations
1.5 Summary
1.6 Unit End Questions
1.7 References
1.0 LEARNING OBJECTIVES
After studying this unit, you will be able:
o To understand the need and significance of Indian financial system
regulations
o To discuss structure of financial regulations in India
o To analyse Global fina ncial crisis – response of the Indian regulations
1.1 INTRODUCTION
Financial regulation is a type of regulation or supervision that places
limitations, rules, and guidelines on financial institutions with the goal of
preserving the integrity and stability of the financial system.
Governmental or non -governmental organisations may manage this.
Because there are now more financial products available as a result of
financial regulation, this has also had an impact on how banking sectors
are structured. One of three legal categories that make up the content of
financial law —the other two being market practices and case law —is
financial regulation.
1.2 NEED AND SIGNIFI CANCE OF INDIAN
FINANCIAL SYSTEM REG ULATIONS
Financial regulation entails placing restrictions o n the ability of banks and
other financial institutions to implement particular practices. Regulations
make sure banks handle risk reasonably well so they don't choose risky
assets. As a shock absorber, bank capital helps manage disastrous
investments. munotes.in

Page 2

Financial Regulations
2 Regulations are also employed to make it less likely for people to remove
large sums of money suddenly. Additionally, banks are protected by
deposit guarantee programmes in the event that they fall short of a
predetermined deposit threshold. To cover any unfo reseen withdrawals,
banks must also have cash on hand or other liquid assets.
The importance of Indian financial system regulations can be understood
in the following ways:
o Maintaining Financial Stability: The regulations aim to promote the
stability of th e financial system in India by ensuring that financial
institutions are well -capitalized, have adequate risk management systems,
and follow sound lending practices. This helps to prevent financial crises
and reduces the likelihood of bank failures and defa ults.
o Consumer Protection: The regulations aim to protect consumers by
ensuring that financial institutions operate with transparency and
accountability, provide accurate and timely information, and adhere to
ethical practices. This helps to reduce the ris k of financial frauds, scams,
and mis -selling of financial products to customers.
o Encouraging Investment: The regulations encourage investment by
providing a transparent and fair playing field for investors. The regulations
aim to ensure that investors hav e access to reliable information, and that
capital markets operate in a fair and efficient manner. This helps to
promote investor confidence, which in turn attracts more investment to the
Indian economy.
o Promoting Economic Growth: The regulations aim to pr omote
economic growth by ensuring that the financial system is sound and
efficient. A stable and efficient financial system provides the necessary
infrastructure for economic growth by facilitating capital formation,
mobilization, and allocation.
o Supportin g Government Policies: The regulations support government
policies aimed at promoting economic development, financial inclusion,
and social welfare. The regulations ensure that the financial system
supports the needs of the economy and the society and alig ns with the
broader objectives of the government.
1.3 STRUCTURE OF FIN ANCIAL REGULATIONS I N
INDIA
The financial regulatory framework in India is a complex system
comprising several regulators responsible for overseeing different
segments of the financial s ector. The primary regulators include:
o Reserve Bank of India (RBI): The RBI is the central bank of India and
is responsible for regulating the monetary policy of the country. It
regulates and supervises the banking system in India and provides
oversight to other financial institutions like non -banking financial
companies (NBFCs) and payment systems. munotes.in

Page 3

Introduction to Financial
Regulations
3 o Securities and Exchange Board of India (SEBI): The SEBI is the
regulator for the securities market in India. It is responsible for regulating
the issuance and t rading of securities, overseeing market intermediaries
like brokers, and ensuring fair and transparent trading practices.
o Insurance Regulatory and Development Authority of India (IRDAI):
The IRDAI is responsible for regulating and promoting the insurance
sector in India. It oversees the registration, functioning, and performance
of insurance companies and agents.
o Pension Fund Regulatory and Development Authority (PFRDA): The
PFRDA is responsible for regulating and promoting pension funds in
India. It overse es the registration, functioning, and performance of pension
funds and pension fund managers.
o Ministry of Corporate Affairs (MCA): The MCA is responsible for
regulating companies in India. It oversees the registration, functioning,
and performance of compa nies in India.
In addition to these primary regulators, there are several other regulators
and self -regulatory organizations that oversee specific segments of the
financial sector. These include:
 National Bank for Agriculture and Rural Development (NABARD) :
Regulates and supervises the rural financial sector, including rural
cooperative banks, regional rural banks, and agricultural credit societies.
 Small Industries Development Bank of India (SIDBI): Regulates and
supervises the micro, small, and medium ent erprise (MSME) sector in
India.
 Financial Stability and Development Council (FSDC): Coordinates the
work of various financial regulators and monitors the overall stability and
development of the financial sector.
 Association of Mutual Funds in India (AMFI) : Self -regulatory
organization for the mutual fund industry in India.
 Clearing Corporation of India Limited (CCIL): Provides clearing and
settlement services for financial transactions in India.
1.4 GLOBAL FINANCIAL CRISIS – RESPONSE OF THE
INDIAN REGULATI ONS
The mid -2007 to early -2009 era of high stress in the world's banking
institutions and financial markets is referred to as the global financial
crisis (GFC). A decline in the US home market during the GFC served as
the impetus for a worldwide financial crisis that expanded from the US
through connections in the global financial system. Many banks
experienced significant losses and needed assistance from the government
to stay afloat. As the major industrialised economies went through their
biggest recess ions since the Great Depression in the 1930s, millions of munotes.in

Page 4

Financial Regulations
4 people lost their employment. Additionally, compared to other recessions
that were not accompanied by a financial crisis, the recovery from the
crisis was much slower.
Main Causes of the GFC
1. Exce ssive risk -taking in a favourable macroeconomic environment
Economic conditions in the US and other nations were favourable in the
years before to the GFC. Strong and consistent economic growth was
accompanied by low rates of unemployment, inflation, and i nterest. In this
setting, home values climbed rapidly.
Homes were bought and built with reckless borrowing by households,
particularly in the US, who anticipated that home prices would climb
further. Property developers and households in European nations ( such as
Iceland, Ireland, Spain, and certain countries in Eastern Europe) similarly
took on excessive debt due to similar expectations regarding home prices.
Particularly in the United States, many mortgage loans were for sums that
were comparable to (or e ven higher than) the purchase price of a home.
Investors looking to make quick money by "flipping" homes and
"subprime" borrowers (who have higher default risks due mostly to their
income and wealth being relatively low and/or they have missed loan
repayme nts in the past) made up a significant portion of this hazardous
borrowing.
For a variety of reasons, banks and other lenders were prepared to issue
growing numbers of riskier loans:
o Individual lenders competed more fiercely to offer ever -larger housing
loans, which at the time appeared to be quite profitable given the booming
economy.
o Many lenders who offered mortgages did not carefully examine the
applicants' capacity to repay their loans. This also demonstrated the
popular expectation that the favourable circumstances would persist.
Lenders also had little motivation to exercise caution when making loans
because they did not anticipate suffering any losses. Instead, they offered
investors a sizable number of loans, typically packaged into securities
known as "mortgage -backed securities" (MBS) and made up of thousands
of different home loans of variable quality. MBS products grew more
complicated and opaquer over time, yet external organisations maintained
to rate them as being extremely safe.
o Investors who bought MBS products believed they were purchasing a
very low risk asset because it was believed that most mortgage loans in the
package would be repaid, even if some of them were not. Large US banks
as well as international banks from Europe and other nat ions that desired
larger profits than could be attained in their home markets were among
these investors.
munotes.in

Page 5

Introduction to Financial
Regulations
5 2. Increased borrowing by banks and investors
Up until the Great Financial Crisis, banks and other investors in the US
and overseas borrowed more mon ey to increase their lending and buy
MBS securities. Leverage increases when money is borrowed to buy an
asset, which can increase both potential gains and losses. [1] As a result of
taking on so much debt, banks and investors suffered significant losses a s
housing values started to collapse.
In addition, banks and certain investors borrowed money for longer and
longer periods of time, even overnight, to buy assets that were difficult to
sell. As a result, they were forced to depend more and more on lenders ,
including other banks, who provided new loans as old short -term loans
were returned.
3. Regulation and policy errors
MBS products and subprime loans were subject to too little regulation.
Particularly, there was insufficient regulation of the organisatio ns that
produced and offered investors sophisticated, opaque MBS. Not only were
many individual borrowers given loans that were too big for them to
manage, but fraud was also becoming more prevalent. Examples include
exaggerating a borrower's income and mi sleading investors about the
security of the MBS products they were being offered.
Additionally, many governments and central banks failed to properly
comprehend the extent to which subprime loans had been extended during
the boom and the numerous ways in which mortgage losses were
spreading throughout the financial system as the crisis developed.
Role of Reserve Bank of India:
The Reserve Bank of India (RBI) played a critical role in responding to
the crisis. Some of the key measures taken by the RBI inclu de:
 Providing liquidity support: The RBI injected liquidity into the
financial system to support banks and financial institutions facing liquidity
pressures. The RBI also reduced the cash reserve ratio (CRR) and the
statutory liquidity ratio (SLR) to provi de additional liquidity to the
banking system.
 Regulatory measures: The RBI introduced several measures to
strengthen the regulatory framework of the banking sector. It revised the
prudential norms for asset classification and provisioning and introduced
more stringent norms for the valuation of securities. The RBI also
tightened the regulatory oversight of non -banking financial companies
(NBFCs) to enhance their resilience.
 Exchange rate management: The RBI intervened in the foreign
exchange market to stab ilize the exchange rate and prevent excessive
volatility in the currency market. munotes.in

Page 6

Financial Regulations
6 In addition to the RBI, other regulators like SEBI, IRDAI, and PFRDA
also took several measures to strengthen the regulatory framework of their
respective sectors. SEBI, for i nstance, introduced new regulations to
enhance transparency and reduce systemic risk in the securities market.
IRDAI and PFRDA introduced new guidelines to strengthen the risk
management practices of insurance companies and pension funds.
1.4 SUMMARY
 Finan cial regulation entails placing restrictions on the ability of banks
and other financial institutions to implement particular practises.
Regulations make sure banks handle risk reasonably well so they don't
choose risky assets.
 A financial crisis results a s a result of this spreading to other areas of
the financial system.
 The Capital Market deals with transactions that have been going on for
more than a year and is intended to finance long -term investments.
 Economic conditions in the US and other nations w ere favourable in
the years before to the GFC.
 Individual lenders competed more fiercely to offer ever -larger housing
loans, which at the time appeared to be quite profitable given the
booming economy.
 Leverage increases when money is borrowed to buy an a sset, which can
increase both potential gains and losses.
1.5 UNIT END QUESTIONS
A. Descriptive Questions:
Short Answers:
1. Explainthe need of Indian financial system regulations.
2. Discuss the role of RBI Indian financial system regulations.
3. What are t he causes of GFC?
4. Write note on Financial Regulations.
5. Explain structure of Financial regulations in India.
B. Fill in the blanks:
1. ………………….. regulates and supervises the banking system in India
and provides oversight to other financial institution s like non -banking
financial companies (NBFCs) and payment systems.
2. ……… provides clearing and settlement services for financial
transactions in India. munotes.in

Page 7

Introduction to Financial
Regulations
7 3. IRDAI and ……………..introduced new guidelines to strengthen the
risk management practices of insurance companies and pension funds.
4. The ……………… also reduced the cash reserve ratio (CRR) and the
statutory liquidity ratio (SLR) to provide additional liquidity to the
banking system.
5. CRR stands for …………..
Answers :
1- RBI, 2 - Clearing Corporation of India Limited., 3 - PFRDA , 4-RBI, 5 -
cash reserve ratio
1.6 REFERENCES
References book
 Mishkin, F. (1999) ‘Global financial instability: framework, events,
issues’, Journal of Economic Perspectives, Vol. 13.
 Padoa -Schioppa, T. (2003) ‘Central banks and financial stability:
exploring the land in between’, The Transformation of the European
Financial System.
 Rahim, N.H.A. and Abedin, N.F.Z. (2014) ‘Trade liberalisation,
financial development and growth in Malaysia’, International
Proceedings of Economics Developmen t and Research.
 Luintel, K.B. and Khan, M. (1999) ‘A quantitative reassessment of the
finance -growth nexus: evidence from a multivariate VAR’, Journal of
Development Economics, Vol. 60.
 Mattoo, A. (1998) Financial Services and the WTO: Liberalization in
the Developing and Transition Economies, Staff Working Paper, No.
TISD9803, World Trade Organization Trade in Services Division.

munotes.in

Page 8

8 2
RESERVE BANK OF INDIA AND
SECURITIES EXCHANGE BOARD OF
INDIA
Unit Structure
2.0 Learning Objective
2.1 Reserve Bank of India
2.3 Measures of Credit Control /Monetary Control
2.4 Financial Inclusion
2.5 Security exchange board of India
2.6 Unit End Questi ons
2.0 LEARNING OBJECTIVE:
 To enable students to describe the functioning of the Reserve Bank of
India in detail.
 Students will understand the Monetary Control Mechanism of Reserve
Bank Of India
 To acquaint Students with Securities Exchange Board Of India And its
functioning.
2.1 RESERVE BANK OF INDIA
Introduction
Reserve Bank of India is the apex financial institution governing and
regulating the Indian Banking sector. The Reserve Bank of India is the
Central Bank of the country or Bank of Economy. Reserv e Bank of India
came into existence in 1934 by passing an act in the parliament. It started
functioning from 1st April 1935. Earlier the Reserve Bank of India was a
private shareholders' Bank and it got nationalized in 1949. After
nationalization RBI was e mpowered with the power of the Central Bank
of the economy. Reserve Bank of India has four headquarters in the 4
metropolitan cities i. e. Mumbai, Delhi, Kolkata and Chennai.
Functions of RBI
Functions of RBI are classified in three categories
1. Traditional Functions
2. Regulatory and Supervisory Functions
3. Promotional and Developmental Functions munotes.in

Page 9

Reserve Bank of India and
Securities Exchange Board of India
9 Traditional functions
1. Issuing currency
Reserve Bank of India as a Central Bank of economy has a sole right to
print and issue currency notes in the country. RBI issues the currency
notes of all denominations i.e. Rs.5, Rs.10, Rs.20, Rs.50 , Rs.100, Rs.200,
Rs.500, Rs.2000. Rupee 1 notes and coins are issued by the Government
of India. The Minimum Reserve system followed by the RBI for issuing
currency notes in India.
2. Controlling Credit
Commercial Banks create credit in multiples of their deposits. RBI
controls credit created by banks. Various monetary control techniques are
used by the RBI to control the credit creation vis -s vis to money supply in
the economy. Dependi ng on the situation of the economy RBI uses various
tools of monetary control via monetary policy.
3. Banker to government
The Reserve Bank of India acts as banker to the government. All the funds
and transactions of the government are routed through the Rese rve Bank
of India. RBI maintains the consolidated fund of the country. RBI
maintains the accounts of Central Government and state governments. The
Reserve Bank of India acts as agent and financial advisor to the
Government of India.
4. Banker to Bank
Reserve Bank of India is banker to bank. It performs the functions of a
banker likewise other commercial banks perform for their customers. The
Reserve Bank of India provides loans to banks in the country. Commercial
Banks are required to maintain reserves with RB I.
5. Custodian of foreign exchange
RBI keeps strict control on uses of foreign exchange by the government
and citizens. RBI maintains and manages the foreign exchange of the
country and it acts as custodian of foreign exchange of the country.
6. Lender of last resort and Bank of rediscount
RBI is a banker to commercial banks hence at the time of the financial
crisis RBI helped commercial banks by providing funds to them. These
funds are often extended at higher rates of interest but help banks to tackle
financi al emergencies and difficulties.
Supervisory function
1. Granting license to banks
RBI has the right to issue licenses to the banks who apply in a prescribed
format. RBI can issue licenses as well as withdraw licenses of banking munotes.in

Page 10

Financial Regulations
10 companies. All banks have to take permission from RBI for launching new
branches as well as relocating the existing branches.
2. Inspection of banks
In order to maintain stability in the banking sector RBI monitors the
functioning of banking companies in India. The Reserve Bank of India can
inspect the accounts of banks and it keeps record of all the details of the
day today working of banks. It can ask banks to produce required
documentation information as and when required.
3. Implementing deposit insurance scheme
The Reserve Bank of India introduced the deposit insurance scheme 1962.
India is the second country to issue such a scheme after the USA who
issued this scheme in 1933. This scheme provides a safety net for banks in
the consequences of bankruptcy.
4. Controlling Non -Bank finance com panies
Non-Bank finance companies are the agencies which provide various
finance services to the people. All these NBFCs have to get registered
with the RBI and RBI supervises the working of NBFCs.
Promotional and development functions
1. Development of the financial system.
RBI works on preparing comprehensive parameters for regulating and
smooth functioning of banking as well as financial sector of the
country.RBI conducts system wide risk analysis to promote confidence
and improve efficiency of Financial I nstitutions.
2. Development of agriculture
India is an agrarian economy where the majority of the population is
engaged in agriculture and allied activities. Regular flow of finance is
expected to develop and modernize the agricultural sector. Hence the
Reser ve Bank of India provides the funds to agriculture by the route of
National bank for agriculture and rural development (NABARD). Nabard
is the apex institution for agriculture finance in India. NABARD is the
outcome of the agriculture credit function of RB I. It started functioning
from 12th July 1982.
3. Providing industrial finance
Adequate and timely supply of funds to the industry accelerates the
economic growth in the country. In India the industrial sector faces the
problem of inadequate finance. Banks pr ovide finance to the industrial
sector but not at a required level. In order to promote industrial growth
vis-vis the economic growth of a country RBI promoted some institutes at
various levels to provide finance to the industrial sector.
munotes.in

Page 11

Reserve Bank of India and
Securities Exchange Board of India
11 i. Industrial f inance corporation of India -1948
ii. State Financial Corporations - 1951 -52
iii. Industrial development Bank of India - 1964
iv. The unit trust of India -1964
v. Industrial Credit and Investment Corporation of India Ltd. (ICICI) -
1955.
vi. Refinance Corpor ation for Industry Ltd. (RCI) - 1958
vii. Industrial Reconstruction Corporation of India Ltd. (IRCI), 1971.
In order to administer the credit guarantee scheme of small scale
industries, RBI had launched the Industrial Finance (credit) Department in
1957 wh ich was later on closed in 1981 after introducing deposit
insurance and guarantee Corporation.
4. Promoting Export
Exports play a significant role in economic development. India as a
developing country; increasing exports strengthen the balance of payment
of the country. RBI takes an active part in promoting export by launching
various schemes.. In order to meet the short term finance needs of
exporters in India, RBI launched the export financing scheme in 1967.
RBI directs and controls the export finance of c ommercial banks. In India
export finance is available in rupees as well as in foreign currencies.
5. Economic Data Collection
The Reserve Bank of India collects the economic and statistical data of the
country by conducting research. These data later on compi le and published
via RBI bulletin. RBI collects data regarding banking companies, export
management, price trends in the country, agriculture credit, industrial
finance, security market etc.
6. Publishing Reports
The Reserve Bank of India publishers various r eports. Some reports are
occasional, the sum are periodical i.e. monthly quarterly half yearly and
yearly.
RBI publishers following reports
a. Annual report
b. Report on trends and progress of banking industry
c. Report on currency and Finance
d. Handbook on statistic s of Indian economy
e. State finances : A study of budget munotes.in

Page 12

Financial Regulations
12 f. Monetary policy report
g. Financial stability report
h. RBI bulletin etc.
2.3 MEASURES OF CREDIT CONTROL /MONETARY
CONTROL
RBI uses various instruments of credit control in order to control money
supply in t he country. These techniques include both quantitative and
qualitative credit control methods.
.Quantitative (General) Credit control method
1. Bank Rate Policy
Bank rate is the interest rate at which RBI rediscounts bills produced by
commercial banks. In the case of inflation RBI increases the bank rate to
contract the money supply in the country whereas in deflation in order to
expand the money supply RBI decreases the bank rate.
2. Open market operations
Open Market operation deals with buying and selling of g overnment
securities by RBI in the open market. In inflation RBI tightens the money
supply selling government securities and in deflation RBI purchases the
government securities which enable increased money supply in the
country.
3. Cash Reserve Ratio (CRR)
Cash Reserve Ratio (CRR) is the portion of total deposits of a bank
maintained with RBI. Maintenance of CRR is obligatory to every bank in
the country. Cash Reserve Ratioe is to be maintained in the form of liquid
cash. CRR helps to keep inflation under control. During high deflation
RBI decreases CRR to increase the amount of money left with banks for
sanctioning loans to the general public. It increases the flow of money in
the ec onomy, which induces investments and brings up price change in the
economy. In inflation the same action is taken reversed.
4. Statutory Liquidity Ratio (SLR)
Statutory Liquidity Ratio or SLR is a minimum percentage of deposits that
a commercial bank has to m aintain in the form of liquid cash, gold or
other securities. During high inflation RBI raises the level of SLRR to
squeeze the lendable amount of money with the banks. It decreases the
money supply in the country. In deflation RBI adopts low SLR policy to
reverse the effect of inflation.
5. Repo
REPO stands for Repurchase Agreement / Repurchase Option.
Repurchase Agreement (repo) is a kind of short -term lending offered by munotes.in

Page 13

Reserve Bank of India and
Securities Exchange Board of India
13 RBI to the commercial banks in the country. Repo Rate (RR) is the rate at
which the Re serve Bank of India (RBI) extends short term finance to
commercial banks against government securities. It is basically an
agreement between the RBI and the bank where both the parties agree to
repurchase securities at a predetermined date and price. Chang es in the
repo rate are connected with the position of the money supply. In order to
tighten the money supply RBI increases the Repo Rate and vice versa.
6. Reverse Repo Rates
Reverse repo rate is the rate at which the Reserve Bank of India borrows
money fro m commercial banks. It is the arrangement where commercial
banks park their surplus funds with RBI. Reverse Repo Is a tool of
monetary control exercised via monetary policy. Lowering of reverse repo
increases purchasing power in the country and vice versa.
B. Qualitative (Selective) Credit Control Methods
1. Consumer Credit Regulations
Consumer Credit Regulation is used to control flow of consumer credit in
the country. Under this system, consumers pay a certain percentage of the
price of the durable goods in cash and the remainder is paid through bank
finance. Consumers have to pay the same balance amount in installments.
The Reserve Bank of India can control consumer credit by changing the
amount of consumer durable loan and by changing the number of
installment over which the loan can be repaid.
2. Margin Requirements
Difference between market value of a security or collateral and available
maximum loan for the same security is called Margin requirement.
Changes In margin requirement influences flow credit i n the economy. For
example if the market value of a security is Rs. 1000 and margin
requirement is 50% then maximum value of loan will be Rs.500. If margin
requirement is increased to 60% then borrowing amount will drop to Rs.
400. Means increase in margin requirement reduces the borrowing amount
and vice versa.
3. Credit Rationing
Under Rationing of credit the Central Bank of a country puts limits on the
maximum amount of loans a bank can grant to specific sectors. Sometimes
the central bank fixes ceiling spe cific categories on loans and advances of
specific categories.
4. Directives
Reserve Bank of India issues directives on various issues of monetary
control. Commercial banks are advised to follow the said directives of
RBI. First directive was issued on 17th m ay 1956. It was towards
restricting credit against paddy and rice. munotes.in

Page 14

Financial Regulations
14 5. Moral Suasion
Central bank implements monetary policy. Moral suasion deals with
guiding, requesting, persuading the commercial banks to cooperate with
the central bank in the implementation of its monetary policy. Moral
Suasion is used by central banks mainly to morally influence commercial
banks to follow its policies.
6. Direct Action
In this method RBItake action against those banks which do not follow the
guidelines, conditions and require ments given by RBI on time to time
basis. As a penal action RBI can refuse their rediscounting offer, charging
higher interest rate on credit demanded, refuse granting loan to a bank etc.
2.4 FINANCIAL INCLUSION
Financial inclusion is considered as a key d river of attaining Sustainable
Development Goals. When people do not have access to common financial
services like, saving account, credit, cashless transactions; it is referred as
financial exclusion. Financial Excluded people live in such a socio -
economic environment where they do not meet the requirements of
common banking services.
Financial inclusion means providing excess to the formal Financial
Services to financial excluded classes population. Financial excluded
classes population includes lower inco me group people, marginalised
labourers, unorganised sector workers and people living with valuable
conditions. Formal financial services means saving deposits, loans or
credit, cashless transactions and other traditional banking services.
Definition:
“Fin ancial inclusion means that individuals and businesses have access to
useful and affordable financial products and services that meet their needs
– transactions, payments, savings, credit and insurance – delivered in a
responsible and sustainable way.” - The World Bank Group
Financial inclusion has been defined as “the process of ensuring access to
financial services, timely and adequate credit for vulnerable groups such
as weaker sections and low -income groups at an affordable cost”.
(Committee on Financia l Inclusion - Chairman: Dr C Rangarajan, RBI,
2008)
Regulatory Measures taken by RBI to facilitate Financial Inclusion
RBI has taken many initiatives to promote financial inclusion in India.
1. No frills account
These accounts were introduced by the RBI in 20 12. NO frill accounts are
saving accounts which do not have a minimum balance requirement rule.
The account holder is given with a debit card, access to ATMs across the munotes.in

Page 15

Reserve Bank of India and
Securities Exchange Board of India
15 country and access to internet banking too. These accounts are also
known as zero bala nce accounts. Unnecessary rules or ‘frills’ are not
applicable to types of accounts. In 2020 ‘No Frill Accounts’ were renamed
as ‘BSBDA – Basic Savings Bank Deposit Account’. Unlimiteddeposits,
No fine on inactive accounts, Zero charges on debit cards and ATM use
are the key highlights of these accounts
2. BSBDA – Basic Savings Bank Deposit Account
In 2020 No Frill Accounts were converted as BSBDA by the government.
So all the facilities of NO FrillAccounts are applicable to Basic savings
bank deposit account s.
3. LBS – Lead banking scheme
The Lead Bank Scheme was launched in 1969. Under this scheme
individual banks were assigned the lead role. Every Lead bank was
allotted with a district. The lead bank was expected to act as a leader and
to coordinate among the all credit institutions of allotted districts. Which
will in turn increase the flow of credit to agriculture, small scale industries
and other economic activities in the district..
4. PMJDY – PradhanMantri Jan DhanYojana
PradhanMantri Jan DhanYojana was launc hed with the slogan ‘MeraKhata
– BhagyaVidhata’ means my bank account is my god. Under this scheme
people were allowed to open BSBDA in banks or with business
correspondents. In this scheme Adhar linked PMJDY account holders are
given the overdraft facili ty of Rs. 10,000, Rupay Debit Card, accident
cover of 2 lakhs, etc.
5. Business correspondent system / Bank Mitra
Banks appoint some retail agents to provide banking services at locations
other than a bank branch and ATM; they are called as Business
Correspon dents. Simply Business Correspondents are the representatives
of banks who help villagers in banking transactions e.g., opening bank
accounts, depositing and withdrawing money etc.
2.5 SECURITY EXCHANGE BOARD OF INDIA
Security exchange board of India is Ap ex institution governing and
controlling the capital market in India. Security exchange board of India is
established by the provisions of SEBI act 1992. Firstly it was established
as a non -statutory body in 1988 and later on it was given a status as a
statutory body in 1992.
Security exchange board of India Act was passed in 1992.this act is
divided into 7 chapters and 35 sections. The structure of SEBI Act is as
follow;
munotes.in

Page 16

Financial Regulations
16 Chapter I : Preliminary
Chapter II : Establishment of the Securities and Exchange B oard of India
Chapter III : Transfer of Assets, Liabilities, etc., of the Existing Securities
and Exchange Board to the Board
Chapter IV : Powers and Functions of the Board
Chapter V : Registration Certificate
Chapter VA: Prohibition of Manipulative and Deceptive Devices, Insider
Trading and Substantial Acquisition of Securities or Control
Chapter VI : Finance, Accounts and Audit
Chapter VIA: Penalties and Adjudication
Chapter VIB : Establishment, Jurisdiction, Authority and Procedure of
Appellate Tri bunal
Chapter VII : Miscellaneous
Functions of SEBI
Securities exchange board of India mainly focuses on protecting the
interest of investors. SEBI has handed over with the three types of
functions
1. Protective functions
2. Regulatory functions
3. Developmental f unctions
Let's have a detailed view of those three types of function.
1. Protective functions
Protective Functions of SEBI includes following
 To keep watch on price rigoring
 To prohibit insider trading
 To prevent unfair and fraudulent trade practices in fina ncial markets.
 To promote fair practices
 To educate and create awareness among the investors.
2. Regulatory functions
Security exchange board of India regulates the functioning of the Indian
capital market. Regulatory Functions includes following munotes.in

Page 17

Reserve Bank of India and
Securities Exchange Board of India
17  To register brokers, sub brokers, merchant bankers and other financial
intermediaries in the capital market
 To regulate the takeovers of companies
 To conduct enquiries and audit of stock exchange
 To Design guidelines for proper functioning of financial intermediarie s.
 To Register and regulate credit rating agencies
3. Developmental functions
Besides regulating the capital market SEBI also plays a vital role in
developing the capital market. Development functions of SEBI Includes
following
 To train an educate financial i ntermediaries
 To conduct research
 To promote fair trading practices
 To develop and promote activities in the stock exchanges
 To Encourage self -regulatory organizations
Powers of SEBI
As like three tier functions SEBI is allotted with three tier powers
1. Quas i-judicial powers
In order to maintain fairness and transparency in the functioning of stock
exchange and capital market SEBI can hear and pass judgment on the
legal cases pertaining to Fraudulent and unfair practices in the capital
market.
2. Quasi legislati ve powers
To reduce fraudulent and Malpractices in capital market SEBI drafts
rules, regulations and other policies which in terms helps to protect the
interest of investors, intermediates and traders. SEBI also frames listing
obligations, insider trading regulations, and disclosure requirements.
3. Quasi executive powers
SEBI has a power to inspect records of the parties involved in any
suspicious activity found in capital market transactions. SEBI has power
to take legal action against those who violate the given regulations.


munotes.in

Page 18

Financial Regulations
18 2.6 UNIT END QUESTIONS
Multiple Choice Questions
1. The Reserve Bank of India started functioning from ……….
a. 1st April 1934
b. 1st April 1935.
c. 1st January 1934.
d. 1st January 1935.
2. Under ………… the Central Bank of a country puts limits on the
maximum amount of loans a bank can grant to specific sectors.
a. Margin Requirement
b. Capital Rationing
c. Credit Rationing
d. Moral Suasion
3. ………..means providing excess to the formal Financial Services to
financial excluded classes’ population.
a. Financial inclusion
b. Financial Digitization
c. Financial Upgradation
d. Financial Intermediation
4. Under the Lead bank scheme a Lead bank was allotted with a ………..
a. Village
b. Sub District
c. District
d. State
5. India is the ………country to issue a deposit insurance scheme.
a. First
b. Second
c. Third
d. Fourth munotes.in

Page 19

Reserve Bank of India and
Securities Exchange Board of India
19 6. In the case of inflation RBI ………the bank rate to contract the money
supply
a. Increases
b. Decreases
c. Keeps stable
d. Cancels
True or False
1. The Minimum Reserve system followed by the RBI for issuing
currency notes in India.
2. Security exchange board of India Act was passed in 1992
3. NO frill accounts are saving accounts which do not have a minimum
balance requirement rule.
4. Rupee 1 notes and coins are issued by the Reserve Bank of India.
5. Deposit insurance schemes provide a safety net for banks in the
consequences of bank ruptcy.
6. Difference between market value of a security or collateral and
available maximum loan for the same security is called Margin
requirement.
7. In deflation in order to expand the money supply RBI increases CRR.
8. Open Market operation deals with buying and selling of gold Reserves
Short Notes
1. Tradition functions of RBI
2. Promotional Functions of RBI
3. Supervisory Functions of RBI
4. Quantitative ( General) Credit control method
5. Qualitative ( Selective) Credit control method
6. SEBI Act 1992
Explain in Details
1. Functions of RBI
2. Techniques of Monetary Control
3. Measures taken by RBI towards Financial Inclusion
4. Powers and Functions of SEBI

munotes.in

Page 20

20 3
INTRODUCTION TO IMPORTANT SEBI
REGULATIONS PERTAINING TO
CAPITAL MARKET
Unit Structure
3.0 Learning Objective
3.1 Issue of the Capital Disclosure Requirements 2009
3.2 SEBI (Prohibition of Insider Trading) Regulations 2015
3.3 SEBI (Prohibition of Fraudu lent and Unfair Trade Practices Related to
Securities market) Regulations - 2003
3.4 Mutual Fund: SEBI (Mutual Funds) Regulations -1996
3.5 Unit End Questions
3.0 LEARNING OBJECTIVE:
 To facilitate Students with various capital market regulations issued by
SEBI
 To introduce learners with various Issue of capital regulations
3.1 ISSUE OF THE CAPITAL DISCLOSURE
REQUIREMENTS 2009
The SEBI (Issue of Capital and Disclosure Requirements) Regulations,
2009 were published by SEBI on 26th August, 2009.
These regulati ons are divided into ten chapters and twenty schedules
Chapter I PRELIMINARY
Chapter II COMMON CONDITIONS FOR PUBLIC ISSUES AND
RIGHTS ISSUES.
Chapter III PROVISIONS AS TO PUBLIC ISSUE
Chapter IV RIGHTS ISSUE
Chapter V MANNER OF DISCLOSURES IN THE OFFE R
DOCUMENTS munotes.in

Page 21

Introduction to Important
SEBI regulations pertaining to Capital Market
21 Chapter VI GENERAL OBLIGATIONS OF ISSUER AND
INTERMEDIARIES WITH RESPECT TO PUBLIC
ISSUE AND RIGHTS ISSUE
Chapter VII PREFERENTIAL ISSUE
Chapter VIII QUALIFIED INSTITUTIONS PLACEMENT
Chapter IX BONUS ISSUE
Chapter X ISSUE OF INDIAN DEPOSI TORY RECEIPTS

These guidelines regulate following issues
 Public Issues and Offers for Sale by any company
 Rights issue, in excess of 50 lakhs by a listed company
 Preferential Allotments; Bonus Issue; QIPs by listed companies
 An issue of Indian Depository Receipts
Public Issue: Public Issue means Initial Public Offer or further Public
Offer.
Initial public offer means an offer of spec ified securities by an unlisted
issuer to the public for subscription and includes an offer for sale of
specified securities to the public by any existing holders of such securities
in an unlisted issuer; whereas further public offer means an offer of
specified securities by a listed issuer to the public for subscription and
includes an offer for sale of specified securities to the public by any
existing holders of such securities in a listed issuer.
Conditions for Public Issue
In order to go for public is sue an issuer must satisfy the following
conditions.
 Net tangible assets At least 3 crore rupees in each of the preceding
3 full years, of which not more than 50% are
held in monetary assets.
 Distributable profit
in terms of section 205
of companies act for at least three out of the immediately
preceding 5 years munotes.in

Page 22

Financial Regulations
22  Net worth at least one crore rupees in each of the
preceding three full years
 Issue size the aggregate of the proposed issue and all
previous issues made in the same financial year
in terms of issue size does not exceed five times
its pre -issue net worth as per the audited balance
sheet of the preceding financial year
 Name Change if it has changed its name within the last one
year, at least fifty per cent. of the revenue for
the preceding one f ull year has been earned by it
from the activity indicated by the new name

If an issuer fails to satisfy above mentioned regulation then such issuer can
go for public offer by book building process. Where issuer Undertaker to
allot at least 50% of net of fer to public to Qualified Institutional Buyers
and to refund full subscription money if it fails to make allotment to the
Qualified Institutional Buyers.
Also issues allowed to make an initial public offer of convertible dep
instruments without making a p rior public issue of its equity shares and
listing thereof.
Right Issue: Rights issue means an offer of specified securities by a listed
issuer to the shareholders of the issuer as on the record date fixed for the
said purpose.
Conditions for Public Issue
Record Date.  A listed issuer wishing to go for a rights issue has
to announce a record date for the purpose of
determining the shareholders eligible to apply for
specified securities in the proposed rights issue.
 The issuer is not allowed to withdraw rig hts issue
after announcement of the record date.
 If the issuer withdraws the rights issue after
announcing the record date, it shall not make an
application for listing of any of its specified securities
on any recognised stock exchange for a period of
twelve months from the record date munotes.in

Page 23

Introduction to Important
SEBI regulations pertaining to Capital Market
23 Restriction  No issuer shall make a rights issue of equity shares
if it has outstanding fully or partly convertible debt
instruments at the time of making rights issue, unless
it has made reservation of equity shares of the same
class in favour of the holders of such outstanding
convertible debt instruments in proportion to the
convertible part thereof.

 The equity shares reserved for the holders of fully
or partially convertible debt instruments shall be
issued at the time of conversion of such convertible
debt instruments on the same terms on which the
equity shares offered in the rights issue were issued.
Letter of offer /
abridged letter of
offer  The abridged letter of offer, along with application
form, shall be dispa tched through registered post or
speed post to all the existing shareholders at least
three days before the date of opening of the issue:
Pre-Issue
Advertisement  The issuer has to issue an advertisement for rights
issue which includes The date of comple tion of
despatch of abridged letter of offer , the centers other
than registered office of the issuer where the
shareholders or the persons entitled to receive the
rights entitlement and other matters related to right
issue.

Issuers can make Reservation for employees along with rights issue (but
value of allotment to any employee shall not exceed one lakh rupees)
Preferential Issue: Preferential issue means an issue of specified
securities by a listed issuer to any selected person or group of persons on a
private placement basis and does not include an offer of specified
securities made through a public issue, rights issue, bonus issue, employee
stock option scheme, employee stock purchase scheme or qualified
institutions placement or an issue of sweat eq uity shares or depository
receipts issued in a country outside India or foreign securities;
Conditions for preferential issue
Special resolution: A special resolution has been passed by its
shareholders;
Dematerialised form: All the equity shares, if any , held by the proposed
allottees in the issuer are in dematerialised form;
Compliance: The issuer is in compliance with the conditions for
continuous listing of equity shares as specified in the listing agreement munotes.in

Page 24

Financial Regulations
24 with the recognised stock exchange where t he equity shares of the issuer
are listed;
Permanent Account Number: The issuer has obtained the Permanent
Account Number of the proposed allottees
Bonus Issue: Bonus issue means offering free additional shares to existing
shareholders. This issue is made by capitalizing the reserves of a
company.
Conditions for Bonus issue:
1. Provision in Articles of Association: A company can issue bonus
shares if it is authorised by its articles of association for issue of bonus
shares, capitalisation of reserves, etc. I f there is no such provision in the
articles of association, the issuer shall pass a resolution at its general
body meeting making provisions in the articles of associations for
capitalisation of reserve;
2. Issuer should not have defaulted in payment of inte rest or principa l
in respect of fixed deposits or debt securities issued by it.
3. It has sufficient reason to believe that it has n ot defaulted in respect of
the payment of statutory dues of the employees such as contribution
to provident fund, gratuity and bonus;
4. The partly paid shares, if any outstanding on the date of allotment, are
made f ully paid up
Issue of Indian Depository Receipts
Depository receipt is a way to raise funds from foreign countries. Foreign
companies can enter into the Indian securitie s market by issuingIndian
depository receipts. An issuing company should be listed in its home
country and not prohibited to issue securities by any regulatory body.
Also the issuing company should have a track record of compliance with
securities market r egulations in its home country.
Conditions for issue of IDR
Issue Size Issue size shall not be less than fifty crore rupees;
Procedure procedure to be followed by each class of applicant
for applying shall be mentioned in the prospectus
minimum
applicat ion
amount minimum application amount shall be twenty
thousand rupees;
Manner of
allocation 1. At least fifty per cent. of the IDR issued shall be
allotted to qualified institutional buyers on munotes.in

Page 25

Introduction to Important
SEBI regulations pertaining to Capital Market
25 proportionate basis as per illustration given in Part C
of Sch edule XI;
2. The balance fifty per cent. may be allocated
among the categories of non -institutional investors
and retail individual investors including employees
at the discretion of the issuer
Denomination of
IDR At any given time, there shall be only one
denomination of IDR of the issuing company.
3.2 SEBI (PROHIBITION OF INSIDER TRADING)
REGULATIONS 2015
Insider trading is considered as unethical practice. Insider trading means
buying and selling of a company's securities by people who have
nonpublic or material information which can influence investment
decisions. Employees, promoters, directors, executives of a company have
access to the company's internal or strategic information; by virtue of their
position in the company. These Employees, promoters, directors,
executives are called insiders. Insiders use strategic information of a
company for buying and selling of a company's securities. Securities
Exchange Board of India strongly prohibits practicing Insider Trading in
Stock Market. Because such ac tivities are detrimental to the interest of
general investors. If company’s employees take undue benefit of their
position to trade in the market then other common shareholders will be at
disadvantage. But if such strategic, non -public information is made open
to general public or common investors then such practice won’t be
considered as illegal insider trading.
For example, a director of a company knows about a proposed merger of
the company. He discussed this confidential information in family
gatherings with his relatives. Very next day all relatives and their friends
sold out all their holdings in the company before such a proposal was
officially announced by the company. Here the said director did Insider
Trading.
According to SEBI (Prohibition of Insi der Trading) Regulations 2015;
Insider means A Person connected to a company or person having
Unpublished Price Sensitive Information (UPSI). Connected Person means
any person who has any connection i.e. directly or indirectly with
company in any capacity, Unpublished Price Sensitive Information (UPSI)
means Any information relating to Company or, Its securities which can
affect price of the security in the market. This information includes
information about financial results, dividend declaration, proposed merger
or acquisition, change in the management and capital structure of the
company. The definition of trading includes buying, selling,dealing ,
subscribing or entering into agreement to buy or sell securities of said
company.
munotes.in

Page 26

Financial Regulations
26 Restriction on Communicat ion And Trading by Insiders
Chapter II - Regulation 3 of SEBI (Prohibition of Insider Trading)
Regulations 2015 prohibits insiders fromecommunicating unpublished
price sensitive information, related to a company or securities of
company whether liste d or to be listed ; to any person including
company’s other employees (insiders). Insiders are only allowed to share
such information in case of discharging their legal duties and obligations.
This regulation also prohibits outsider from procuring any U npublished
Price Sensitive Information from Insiders. Also directors are expected to
maintain confidentiality and follow non disclosure obligations. The
regulation entrusts the duty of maintaining a digital database of concerned
insiders having access to s uch unpublished information.
Trading when in Possession of Unpublished Price Sensitive
Information
Chapter II - Regulation 4 of SEBI (Prohibition of Insider Trading)
Regulations 2015 prohibits insiders possessing Unpublished Price
Sensitive Information tra ding in the securities of company whether listed
on to be listed. But an Insider entering into such a transaction is exempted
from above regulation if he proves that the transaction was
 an off market transaction among themselves(inter se),
 block deal tra nsaction i.e.(single transaction of minimum Rs.Crore)
 pursuant to statutory or regulatory obligation
 pursuant to exercise pre - determine (pre priced)stock option plan
 Undertaken through trading plan ( Regulation 5 explain Trading Plan as
an insider should prepare a trading plan, present it and get approved from
compliance officer,make public disclosure of such plan and then carry out
the trading according to that plan)
Disclosures of Trading By Insiders:
Chapter III - Regulation 6 of SEBI (Prohibition of In sider Trading)
Regulations 2015 throws light on General provision of Disclosures of
Trading to be made Insiders. According to this regulation an insider has to
make all disclosures in prescribed manner only. Insider has to give
disclosure of trading by imm ediate relatives, disclosure of trading in
derivatives of securities and the traded value of the derivatives.
Companies should maintain record of these disclosures for a minimum
period of five years in a specified manner.
Regulation 7 (1) explains initial disclosures which states that, A Key
Managerial Personnel or Director (promoter) has to give disclosure of his
holdings in the company since he was appointed as promoter within the
seven days from the appointment as promoter.
munotes.in

Page 27

Introduction to Important
SEBI regulations pertaining to Capital Market
27 Regulation 7 (2) expla ins Continual Disclosures which states that, A
Promoter or Director has to disclose to a company regarding acquisition
and disposal of shares or securities; if value of transaction or serious
transactions exceeds Rupees Ten Lakhs (or any other specified a mount) in
one calendar quarter. Also the company has to give disclosure to Stock
Exchange regarding the above said transaction within two days of receipt
of such disclosure.
Regulation 7 (3) explains Disclosures by Other Connected Persons which
states that , in order to monitor compliance with these regulations, a
company whose securities are listedon a stock
exchange may, at its discretion can ask any other connected person or
class of connected persons to make disclosures of holdings and tradin g
in securities of the company in prescribed form.
Code of Fair Disclosure
Chapter III - Regulation 8 of SEBI (Prohibition of Insider Trading)
Regulations 2015 explains Code of Fair Disclosure. According to this
regulation The board of directors of every company, whose securities
are listed on a stock exchange, should formulate a code of practices
and procedures for fair disclosure of unpublished price sensitive
information ; and publish on its official website. Company should sent
prom pt intimation of every such code of practice and procedures for fair
disclosure of unpublished price Sensitive information and every
amendment thereto to the stock exchanges where the securities are
listed.
3.3 SEBI (PROHIBITION OF FRAUDULENT AND
UNFAI R TRADE PRACTICES RELATED TO
SECURITIES MARKET) REGULATIONS - 2003
Securities Exchange Board of Indiais entrusted with a primary
responsibility of protecting the interest of investors. SEBI regulates
operations in the security market and tries to bring tran sparency in the
mechanism. SEBI prohibits fraudulent and unfair trade practices in the
security market for which it keeps close eye on the security market
operations.
As per SEBI (Prohibition of Fraudulent and Unfair Trade Practices
Relating to Securities Market) Regulations, 2003 “Fraud includes any act,
expression, omission or concealment committed whether in a deceitful
manner or not by a person or by any other person with his connivance or
by his agent while dealing in securities in order to induce anot her person
or his agent to deal in securities, whether or not there is any wrongful
gain or avoidance of any loss”.
The definition of fraud also includes knowing misrepresentation of the
truth, concealment of material fact, wrong suggestion , fake promise , munotes.in

Page 28

Financial Regulations
28 reckless and careless representation, fraudulent act or omission specified
under law, deceptive behaviour, false statement, giving misinformation.
Prohibition of unfair dealings in Securities
Chapter II - regulation 3 of SEBI (Prohibition of Fraudulent and Unfair
Trade Practices Related to Securities market) Regulations - 2003 states that
Nobody is directly or indirectly allowed to sell, buy or deal in securities
in a fraudulent way. No one is allowed to use any manipulative or
deceptive mechanism to br each the provisions of the Act; No one is
allowed to use any scheme or device or a strategy to defraud the dealings
connected with securities (listed or proposed to be listed). No one should
get engaged with any fraudulent activity which against the provis ions of
the Regulations
Prohibition of Manipulative, Fraudulent and Unfair trade practices
Chapter II -Regulation (4) of SEBI (Prohibition of Fraudulent and Unfair
Trade Practices Related to Securities market) Regulations - 2003 states that
No person shall e nter in a transaction having frauds or unfair trade
practices in the securitiesmarket. Manipulative, fraudulent or an unfair
trade practice involves
 Knowingly creating false or misleading appearance of trading in
securities market;
 Dealing in securitie s in order to inflate or cause fluctuations in
securities. ( A person should have intention of transfer of ownership
only.)
 Paying money or money equivalent to any person for the artificially
inflating,depressing, maintaining of creating fluctuations i n the price
of securities
 Doing any act which can manipulate the price of securities. This
includes manipulating or influencing reference price or benchmark
price.
 Publishing or reporting any kind of false information relating to
securities, inclu ding financial results, financial statements,
mergers and acquisitions, regulatory approvals, to make a person
handle with securities
 Entering into securities transaction without any intention of performing
the said transaction or changing ownership of involved security in said
transaction
 dealing, selling, or pledging with stolen, counterfeit (fake or
fraudulently issued securities.
Investigation/ Investigating Authority
Chapter III -Regulation (5) of SEBI (Prohibition of Fraudulent a nd Unfair
Trade Practices Related to Securities market) Regulations - 2003 deal with munotes.in

Page 29

Introduction to Important
SEBI regulations pertaining to Capital Market
29 Power of the SEBI to order investigation. It states that If any person or
intermediary is found dealing in any securities market transaction in such
a way that is detrimen tal to investors interest , violating these Regulations
or any provision of Securities Exchange Board of India Act, in such case
SEBI can appoint ‘Investigating Authority’ to investigate affairs of such
person or intermediary. Investigating authority ha s to report SEBI in the
manner prescribed in Section 11C of Securities Exchange Board of India
Act.
In order to conduct investigation Authority is conferred with following
powers
 To call for information or records from any person specified in section
11(2) (i) of the SEBI Act;
 To undertake inspection of any book, register, or other document or
record of any listed public company or a public companywhich intends
to go for securities listing on any recognised stock exchange, and has
violated these regulation s.
 To furnish information or to ask to produce any book, register, or other
document or record from any intermediary or person associated with
the securities market.
 To keep custody of books, registers, or other documents or records
produced for the purpo se of investigation, these documents are kept in
the custody of Investing Authority maximum upto one month which
can be further extended upto six months. Investing authority has power
to call such documents again if required.
 To orally examine any person w ho is under investigation or any
director, partner, member or employee of such person and record his
statement to use as evidence against him. But the signature of the said
person is mandatory on these notes.
 To examine on oath any manager, managing direct or, officer or any
other employee of any intermediary or any person associated with the
securities market in any manner in relation to his business.
Regulation 7 says that investing authority can exercise following powers
with prior approval of Chairman or members of SEBI.
 To call for information or records in respect of any transaction which is
under investigation; from any bank , authority , board or corporation
established under Central, State or Provincial Act.
 To seize books, registers, or other doc uments or records If investing
authority believes that book, register, or other document or record of
any intermediary or person associated to securities market are under
threat of destroyal, mutilation ,falsification, alteration, or secretion
during cours e of investigation, investigating authority can apply to First
Class Judicial Magistrate who has jurisdiction to issue order for seizure
of such books, registers, or other documents or records munotes.in

Page 30

Financial Regulations
30  To keep custody of books, registers, or other documents or rec ords
seized under these regulations. These documents are kept in custody till
the conclusion of the investigation.
 Search and seizure in these regulations should be carried out in
accordance with The Code of Criminal Procedure 1973 (2 of 1974).
According to Regulation 8; every person who is under investigation
should cooperate with the investing authority. After completing the
investigation the investing authority has to submit a report to SEBI. If
required, the investing authority may submit an interim re port.
(Regulation 9)
Enforcement by Board
Chapter III -Regulation (10) of SEBI (Prohibition of Fraudulent and Unfair
Trade Practices Related to Securities market) Regulations - 2003 deal with
Enforcement by SEBI. After considering the report submitted by in vesting
authority if SEB Iis satisfied that there is violation of these regulation and
after giving reasonable opportunities of hearing SEBI can take following
actions (Mentioned in Regulation 11 and 12)
 Suspension of trading of security found to be involv ed in fraudulent or
unfair trade practice in any recognised stock exchange.
 Restraining a person from accessing the securities market and
prohibiting dealing in securities.
 Suspending any office bearer of any stock exchange from holding
such a position.
 Retaining or impounding proceeds from such a transaction in securities
which is in violation of these regulations.
 Directing any intermediary or person associated with the securities
market in respect of not to dispose of or alienate the assets forming pa rt
of fraudulent and unfair trade practice.
 Calling upon any officer,employee or representative of the person
concerned to refrain from dealing in securities in a particular manner.
 Prohibiting the person from disposing of any securities acquired in
contravention to these regulations.
 Directing the person in disposing of any securities acquired in
contravention to these regulations in the manner prescribed by SEBI.
SEBI has to release a press note and notification on the official website in
respect of the final order.
SEBI Substantial Acquisition and Takeover Regulations - 2011
In order to regulate the acquisition of shares in listed companies in India
SEBI issued Substantial Acquisition and Takeover Regulations in 2011 munotes.in

Page 31

Introduction to Important
SEBI regulations pertaining to Capital Market
31 Chapter 1 -Article 2 explains the various terms like, acquisition,
acquirer,control etc.
“Acquisition” means, directly or indirectly, acquiring or agreeing to
acquire shares or voting rights in, or control over, a target company.
“Acquirer” means any person who, directly or indirectly, a cquires or
agrees to acquire whether by himself, or through, or with persons acting in
concert with him, shares or voting rights in, or control over a target
company
“Control” includes the right to appoint majority of the directors or to
control the manage ment or policy decisions exercisable by a person or
persons acting individually or in concert, directly or indirectly, including
by virtue of their shareholding or management rights or shareholders
agreements or voting agreements or in any other manner
According to Chapter II -Regulation 3 - no one is allowed to acquire more
than twenty percent of the shares or voting power of the target company
without making a public announcement of an open offer of acquisition of
shares of the target company.
If any pers on already has twenty percent or more voting power but less
than maximum permissible non -public shareholding with him and he
acquires additional five percent voting power in a financial year then
mandatory public announcement of an open offer of acquisitio n of shares
of the target company is required.
Delisting Offer
Regulation 5A deals with delisting offer. When the acquirer makes a
public announcement of an open offer for acquiring shares or voting rights
or control of a target company as per sub regulati on (1) of regulation 3,
regulation 4 or regulation 5, the acquirer may seek the delisting of the
target company by making a delisting offer in accordance with this
regulation:
Provided that the acquirer shall have declared his intention to so delist the
target company at the time of making such a public announcement of an
open offer as well as at the time of making the detailed public statement.
Voluntary Offer
An acquirer, holds shares or voting rights in a target company entitling
them to exercise twenty -five per cent or more but less than the maximum
permissible non -public shareholding, can voluntarily make a public
announcement of an open offer for acquiring shares in accordance with
these regulations, subject to their aggregate shareholding after comple tion
of the open offer not exceeding the maximum permissible nonpublic
shareholding. Provided that where an acquirer has acquired shares of the
target company in the preceding fifty -two weeks without attracting the
obligation to make a public announcement of an open offer, he shall not be munotes.in

Page 32

Financial Regulations
32 eligible to voluntarily make a public announcement of an open offer for
acquiring shares under this regulation:
3.4 MUTUAL FUND: SEBI (MUTUAL FUNDS)
REGULATIONS -1996
Chapter I, Section 2(q) defines mutual fund as ― “mutua l fund means a
fund established in the form of a trust to raise monies through the sale of
units to the public or a section of the public under one or more schemes
for investing in securities including money market instruments or gold or
gold related inst ruments or real estate assets.”
Registration of Mutual Fund (Chapter 2
Sponsors have to make an application to SEBI for the registration of
MutualFund. This application has to be made in Form alongwith non -
refundable application fees mentioned in Schedule II of the regulation.
SEBI can reject incomplete applications.
Eligibility Criteria
 Sponsors should have a sound track record and general reputation in
fair business activities. Sound track record means
1. Carrying business in financial services for not less than five years
2. Positive net worth for immediately preceding five years
3. Net Worth of immediately preceding one year should be more than
capital contribution made in asset management company.
4. Sonser should have profit after depreciation, interest and tax fo r
immediately preceding five years.
 For existing funds; trust deed must be approved by SEBI
 Sponsor has contributed at least 40% to the net worth of Asset
management company.
 Sponsor, director or principal officer should not be guilty of any fraud
or any e conomic offense or convicted of offenses involving moral
turpitude.
 Appointment of trustees to the fund ,asset management company,
custodian ( Custodian of securities gold and other instruments) should
be made as per the provisions of regulations.
Those sp onsors who fulfill above mentioned criteria get Registration
Certificate.
Note : “Sponsor means any person who, acting alone or in combination
with another body corporate, establishes a mutual fund”
munotes.in

Page 33

Introduction to Important
SEBI regulations pertaining to Capital Market
33 Trustees and Trust Deed (Chapter III)
Mutual funds operat e in the form of trust. Trust deed is the instrument of
trust. Trust deed has to be registered as per Indian Registration Act 1906.
Sponsor Executes this deed in favour of Trustees. Chapter III also puts
light on appointment of trustees, disqualification o f trustees, rights and
obligations of trustees.
Asset Management Company
The Asset Management Company has to apply for approval with SEBI.
Thais application s made in the Form D. Sponsors or trustees can appoint
the asset management company which has got approval from SEBI. In
order to get approval from SEBI an asset management company should
fulfill following criteria
 Asset Management Company should have a sound track record and
general reputation in fair business activities.
 Directors Or key personnel o f asset management company should not
be guilty of any fraud or any economic offense or convicted of offenses
involving moral turpitude.
 At least 50% of the board of directors should not be associated in any
manner with any sponsor, subsidiary of sponsor o r the trustees.
 The Chairman should not be a trustee of any other mutual fund
company.
 The Asset Management Company should have networth of not less
than Rs. Fifty crore
Custodian
In order to carry out custodial services every mutual fund has to appoint a
custodian. As soon as an appointment is made mutual fund has to intimate
SEBI about such appointment within fifteen days. Custodian in which the
sponsor, associates of sponsor hold 50% or more voting rights or 50 % or
more directors of custodian representi ng the interest of sponsor should be
appointed as custodian for the same sponsor. Mutual funds have to enter in
the agreement with custodian.
A real estate mutual fund scheme
A real estate mutual fund scheme of a mutual fund registered under this
regulatio n mainly (at least 35% ) invests in the real estate. Every real
estate mutual fund scheme has to invest at least 75% of net assets of the
scheme in real estate assets; mortgage backed securities, equity shares or
debentures of companies engaged in dealing in real estate assets or in
undertaking real estate development projects, whether listed on a
recognized stock exchange in India or not; and the balance (25%) in other
securities.
munotes.in

Page 34

Financial Regulations
34 Infrastructure debt fund scheme
Infrastructure debt fund scheme means a mutual fund scheme that invests
primarily (minimum 90% of scheme assets) in
 The debt securities or securitized debt instrument of infrastructure
companies or infrastructure capital companies or infrastructure projects
or
 special purpose vehicles which ar e created for the purpose of
facilitating or promoting investment in infrastructure, and other
permissible assets in accordance with these regulations or
 Bank loans in respect of completed and revenue generating projects of
infrastructure companies or proj ects or special purpose vehicles.
Procedure and Action in Case of Default (Chapter IX)
If any mutual fund contravenes or violates the provisions specified under
this regulation, or fails to furnish information required, does not cooperate
with the inspec tion carried out by SEBI,guilty of misconduct, fails to
resolve complaints etc,
Such cases are dealt as per the provisions given under the Securities and
Exchange Board of India (Procedure for Holding Enquiry by Enquiry
Officer and Imposing Penalty) Regula tions, 2002.
The Board may suspension or cancellation of registration of an
intermediary holding a certificate of registration who fails to exercise due
diligence or to comply with the obligations under these regulations
3.5 UNIT END QUESTIONS
Multiple Cho ice Questions
1. ………….means an offer of specified securities by an unlisted issuer to
the public for subscription
a. Initial public offer
b. Further Public Offer
c. Preferential Allotment
d. Private Placement

2. Rights issue means an offer of specified securities by a list ed issuer to
the …………of the issuer.
a. Employees
b. Promoters
c. Shareholders
d. Creditors

3. Mutual funds operate in the form of ……….
a. Company
b. Association
c. Trust.
d. Registered Society munotes.in

Page 35

Introduction to Important
SEBI regulations pertaining to Capital Market
35 4. In order to carry out custodial services every mutual fund has to
appoint a …………..
a. Mercha nt Banker
b. Issuer Manager
c. Agent
d. Custodian

5. Securities Exchange Board of India is entrusted with a primary
responsibility of protecting the interest of ………
a. Investors
b. Policyholderss
c. Customers
d. Employees

True or False
1. Further public offer means an offer of spe cified securities by a listed
issuer to the public for subscription
2. Insider trading is considered as unethical practice
3. Acquisition means, directly or indirectly, acquiring or agreeing to
acquire shares or voting rights in, or control over, a target comp any.
4. Trust deed is the instrument of trust.
5. An acquirer, holds shares or voting rights in a target company entitling
them to exercise twenty -five per cent or more but less than the
maximum permissible non -public shareholding, can voluntarily make a
publi c announcement of an open offer for acquiring shares in
accordance with these regulations,
6. Insider trading means buying and selling of a company's securities by
people who have non -public or material information which can
influence investment decisions.
Write Short Notes
1. Investigating Authority
2. Conditions for Public Issue
3. Conditions for Right Issue
4. Conditions for Bonus Issue
5. Conditions for Preferential Issue
6. Conditions for Issue of Indian Depository Receipt
7. Real Estate Mutual Funds
8. Infrastructure Debt F und munotes.in

Page 36

Financial Regulations
36 Explain in Details
1. Issue of the Capital Disclosure Requirements 2009
2. Prohibition of Insider Trading Regulations 2015
3. Prohibition of Fraudulent and Unfair Trade Practices Related to
Securities market Regulations - 2003
4. Substantial Acquisition and Takeove r Regulations - 2011
5. Mutual Funds Regulations -1996





munotes.in

Page 37

37 4
IRDA
Unit Structure
4.0 Learning Objectives
4.1 Introduction
4.2 Salient features of the IRDA Act, 1999 IRDA (protection of policy
holder interests) Regulations 2002 (duties, power and functions)
4.3 Competition Commission of India Concept of competition
4.4 Development of Competition Law
4.5 Competition Policy – Competition Act, 2002
4.5.1 Anti-Competitive Agreements
4.5.2 Abuse of dominant position
4.5.3 Combination, regulation of combinations
4.5.4 Competition commission of India
4.5.5 Appearance before commission and Appellate Tribunal
4.5.6 Compliance of Com petition Law
4.6 Summary
4.7 Unit End Questions
4.8 References
4.0 LEARNING OBJECTI VES
After studying this unit, you will be able to:
 To describe Salient features of the IRDA Act, 1999
 To understand IRDA (protection of policy holder interests) Regulations
2002 (duti es, power and functions)
 To discuss competition Commission of India Concept of competition
 To describe Development of Competition Law
 To analyze Competition Policy – Competition Act, 2002
munotes.in

Page 38

Financial Regulations
38 4.1 INTRODUCTION
The idea of insurance has been around for more tha n 6,000 years, and
people back then were likewise looking for some sort of safety net. When
this need was recognised, the idea of insurance was born. "An agreement
by which an organisation commits to offer a guarantee of compensation
for defined loss, dama ge, illness, or death in return for payment of a
specified premium," according to the dictionary, is what insurance is.
This concept of security's expanding necessity gave rise to general
insurance first, then life insurance. When insurance was first intro duced in
India, it was governed by law. However, a separate regulatory
organisation known as the Insurance Regulatory and Development
Authority was established to establish a stand -alone body to oversee the
operation of the expanding insurance industry.
The apex body that oversees and controls the insurance industry in India is
called IRDA, or Insurance Regulatory and Development Authority of
India. The main goals of the IRDA are to protect policyholder interests
and promote the expansion of insurance in th e nation. The IRDA oversees
both general insurance businesses operating in the nation as well as life
insurance when it comes to insurance industry regulation.
4.2 SALIENT FEATURES OF THE IRDA ACT, 199 9
1. The insurance sector in India is thrown open to th e private sector. The
2nd and 3rd schedules of the Act provide for removal of existing
corporations (or companies) to carry out the business of life and general
(non-life) insurance in India.
2. An Indian insurance company is a company scheduled under the
Companies Act, 1956, in which foreign equity does not exceed 26% of the
total equity shareholding, including the equity shareholding of NRIs, FIIs
and OCBs.
3. After start of an insurance company, the Indian promoters can hold
more than 26% of the total eq uity holding for a period of 10 years, the
balance shares being held by non -promoter Indian shareholders who will
not include the equity of the foreign promoters, and the shareholding of
NRIs, FIIs and OCBs.
4. After the permissible period of 10 years, exc ess equity above the
prescribed level of 26% is disinvested as per a phased programme to be
indicated by IRDA. The Central Government is empower to extend the
period of ten years in individual cases and also to provide for higher
ceiling on share holding o f Indian promoters in excess of which
disinvestment is required.
munotes.in

Page 39

IRDA

39 4.3 IRDA (PROTECTION OF POLICY HOLDER
INTERESTS) REGULATIO NS 2002 (DUTIES,
POWER AND FUNCTIONS)
Under Section 14 of the IRDA Act, 1999, the responsibilities, authority,
and functions of the IRDA are outlined. In accordance with the terms of
this Act and any other applicable laws that are being enforced, the IRDA
Authority is responsible for promoting, regulating, and ensuring the
orderly expansion of the insurance and re -insurance industries throughout
India.
Without limiting the breadth of the IRDA Act's sub -section (1) provisions,
the Authority shall have the following powers and duties:
o A certificate of registration will be given to the applicant, and any
registration that is judged inappro priate will be modified, renewed,
withdrawn, suspended, or cancelled.
o defending the rights of policyholders in situations involving the transfer
of insurance policies, policyholder nominations, the payment of
insurance claims, insurable interests, policy s urrender values, and other
terms and conditions based on insurance contracts.
o Specifying requisite qualifications, practical training and code of
conduct for insurance intermediaries, insurance brokers and agents.
o Specifying the code of conduct for surveyo rs and loss assessors.
o Promotion of efficiency in the conduct of insurance business.
o Promoting and regulating professional organizations connected with the
insurance and re -insurance business across India.
o Levying fees, commission and other charges for car rying out the
purposes of this Act.
o Calling for data or information from, undertaking inspection of,
conducting enquiries and investigations, conducting audit of the
insurers, intermediaries, insurance intermediaries and other
organizations connected with the insurance business.
o Under section 64U of the Insurance Act, 1938 (4 of 1938), controlling
and regulation of the rates, advantages, terms and conditions etc that
may be offered by insurers (or Insurance Companies) in respect of
general insurance busines s not so controlled and regulated by the Tariff
Advisory Committee.
o Specifying the manner and form in which books of account shall be
maintained and statement of accounts, financial statements etc shall be
rendered by insurers and other insurance intermedi aries.
o Keeping a tab, exercising control and regulating investment of funds by
insurance companies. munotes.in

Page 40

Financial Regulations
40 o Regulating the maintenance of margin of solvency by the Insurers.
o Adjudication of disputes between insurers and intermediaries or
insurance intermediaries, hospitals, healthcare organizations or with
customers.
o To effectively supervise the functioning of the Tariff Advisory
Committee.
o Specifying the percentage of premium income of the insurer to finance
schemes for promoting and regulating professional organi zations
referred to in clause (f);
o Specifying the percentage of life insurance business and general (or
non-life) insurance business to be undertaken by the insurance
company in the rural or social sector.
o Exercising any such other powers that may be presc ribed with passage
of time.
4.4 COMPETITION COMM ISSION OF INDIA
In order to administer, implement, and enforce the Competition Act, 2002,
the Government of India formed the Competition Commission of India
(CCI) in March 2009.
In India, the CCI regulates t he market for goods and services. The
Commission was founded in 2003, but it wasn't until 2009 that it reached
full functionality. Through active involvement with all stakeholders, the
government, and international jurisdiction, it seeks to create a compet itive
environment in the Indian economy. The Commission's goals are as
follows:
o in order to stop actions that hurt competitiveness.
o to encourage and maintain market competition.
o to safeguard consumers' interests.
o to guarantee trade freedom.
The CCI was est ablished by the Vajpayee government, under the
provisions of the Competition Act 2002 .
1. The Competition (Amendment) Act, 2007 was enacted to amend the
Competition Act, 2002.
2. This led to the establishment of the CCI and the Competition Appellate
Tribunal.
o The Competition Appellate Tribunal has been established by the
Central Government to hear and dispose of appeals against any
direction issued or decision made or order passed by the CCI. munotes.in

Page 41

IRDA

41 o The government replaced the Competition Appellate Tribunal
(COMPAT) wi th the National Company Law Appellate Tribunal
(NCLAT) in 2017.
4.5 DEVELOPMENT OF C OMPETITION LAW
Competition law, also known as antitrust law in some countries, is a legal
framework designed to promote fair competition and prevent anti -
competitive practi ces in the marketplace. The development of competition
law can be traced back to the late 19th and early 20th centuries, when
industrialization led to the growth of large corporations and concerns
about monopolies and their negative effects on competition and
consumers.
One of the earliest competition laws was the Sherman Antitrust Act, which
was enacted in the United States in 1890. The law prohibited monopolies
and other anti -competitive practices, such as price fixing and market
allocation agreements. Th e Sherman Act was followed by other U.S.
antitrust laws, including the Clayton Antitrust Act in 1914 and the Federal
Trade Commission Act in 1914, which established the Federal Trade
Commission to enforce the antitrust laws.
In Europe, competition law deve loped later than in the United States, with
the first European competition law being the German Law Against
Restraints of Competition in 1958. The Treaty of Rome, signed in 1957,
also included provisions on competition policy and established the
European E conomic Community, which later became the European Union.
The European Commission was given the responsibility of enforcing EU
competition law, which has become one of the most influential
competition regimes in the world.
Competition law has continued to evolve and expand over the years, with
many countries around the world enacting their own competition laws and
regulatory agencies. The focus of competition law has also shifted over
time, with an increased emphasis on protecting consumer welfare and
promo ting innovation and economic growth. Today, competition law
remains a key tool for promoting competition and preventing anti -
competitive practices in the global marketplace.
4.6 COMPETITION POLI CY – COMPETITION ACT,
2002
Indian competition law is governed by the Competition Act, 2002, which
was passed by the Indian Parliament. In 2003, the Act was given
presidential approval.
1. The Competition Act of 2002 replaced the Monopolies and Restrictive
Trade Practices Act of 1969 (MRTP Act).
o Based on the Raghavan Com mittee's recommendations, this was carried
out. munotes.in

Page 42

Financial Regulations
42 2. The Act:
o prohibits agreements that are anti -competitive
o prohibits businesses from abusing their dominant position, and
o regulates mergers and acquisitions (M&A), control acquisitions, and
other combinations th at may or may not have a significant negative
impact on Indian competition.
3. The Act adheres to the principles of contemporary competition laws.
Competition Commission of India – Functions
The Competition Act's preamble emphasises the need of preventing unf air
business practises and fostering healthy competition for the growth of the
nation's economy.
1. Ensuring that consumer welfare and benefits are maintained in the
Indian market is one of the CCI's primary responsibilities.
2. A faster and more inclusive pace of economic growth by promoting fair
and healthy competition in the country's economic operations.
3. Ensuring the effective use of the nation's resources through putting
competition policies into practise.
4. The Commission also advocates for increased competi tion.
5. It also serves as the small business antitrust ombudsman..
6. In order to make sure that any foreign firm that joins the Indian market
through a merger or purchase complies with India's competition
regulations, the Competition Act, 2002, the CCI will al so closely
examine the company.
7. CCI also facilitates communication and collaboration with the other
economic regulatory bodies. This will guarantee that the sectoral
regulatory legislation and the laws governing competition are
compatible.
8. It also serves a s a business facilitator by making sure that there is
harmonious coexistence between small and large businesses and that a
small number of companies do not come to dominate the market.
4.6.1 Anti -Competitive Agreements
Anti-competitive agreements are agree ments between businesses that
restrict competition and harm consumers by limiting their choices and
increasing prices. The Competition Act, 2002, prohibits anti -competitive
agreements that have an adverse impact on competition in the market.
Here are some examples of anti -competitive agreements: munotes.in

Page 43

IRDA

43  Price -fixing: This is an agreement between competitors to set prices at
a certain level, which can result in higher prices for consumers and
restrict competition.
 Market allocation: This is an agreement between comp etitors to divide
markets or customers among themselves, which can reduce competition
and result in higher prices for consumers.
 Bid-rigging: This is an agreement between competitors to rig bids in
order to eliminate competition and increase prices.
 Collus ive tendering: This is an agreement between businesses bidding
for a contract to share information and coordinate their bids, which can
eliminate competition and result in higher prices.
 Output restrictions: This is an agreement between competitors to limi t
the production or supply of goods or services, which can result in
higher prices for consumers.
 Exclusive dealing: This is an agreement between a supplier and a
customer that restricts the customer from dealing with competitors of
the supplier.
 Refusal t o deal: This is an agreement between competitors to refuse to
deal with certain customers or suppliers, which can harm competition
and restrict consumer choice.
Competition -preventing, -restraining, or -distorting agreements are known
as anti -competitive a greements. Anti -competitive agreements, decisions,
and activities are forbidden by Section 34 of the Competition Act.
Competitors who agree to fix, control, or maintain the pricing of goods or
services are said to be engaged in price fixing.
4.6.2 Abuse of dominant position
In English, "dominant position" refers to something that, in comparison to
others, is in a better position. However, unless someone is abusing their
power, remaining in a superior position doesn't hurt anyone. Thus, holding
a dominant po sition cannot be viewed as inherently evil. However, it is
deemed insufficient to abuse a position based on superiority.
Abuse of the dominating position makes it impossible for other
competitors to compete with the dominant enterprise on the basis of meri t,
prevents fair competition between the firms, and abuses consumers. The
Act views misuse of dominance rather than it being anti -competitive. The
focus of competition policy should be on abuse of dominance rather than
dominance itself. Competition authori ties should condemn any abuse of
dominance that stifles, restricts, or distorts competition.

munotes.in

Page 44

Financial Regulations
44 Abuse of dominant position includes:
 Imposing unfair condition or price
 Predatory pricing
 Limiting production/market or technical development
 Certain barrier to entry
 Applying dissimilar conditions to similar transactions
 Denying market access
 Using dominant position in one market to gain advantages in another
market
4.6.3 Combination, regulation of combinations
Combination refers to a merger or amalgamation of tw o or more
businesses, as well as the acquisition of control, ownership, voting rights,
or assets of a business by a third party, provided that I the financial
requirements outlined in Section 5 of the Act are met, and (ii) the merger,
amalgamation, or acqu isition is not subject to any notification of an
exemption. According to Section 6(2) of the Act, anyone or any enterprise
that intends to join into a combination must notify the Commission before
the deal is finalised. However, schedule l of the Combinati on Regulation's
types of combinations are typically not anticipated to have a materially
unfavourable impact on competition in India, hence notice under
subsection (2) of section 6 of the Act is typically not required.
The Commission may modify or prohibit a combination if it has or is
likely to have a materially unfavourable impact on competition in the
relevant market in India.
The Competition Act of 2002 established the Indian Competition
Commission. The Competition Act may be governed and enforced by th is
legislative authority, including through the imposition of fines. When the
Vajpayee administration's liberalisation made a robust competitive
environment required, it was founded.
A chairman, a minimum of two board members, and a maximum of six
board me mbers make up the Commission. These members must have at
least 15 years of professional experience in their respective disciplines.
Its goals, responsibilities, and authority are listed in the Competition Act
of 2002. Its primary responsibility and goal is to guarantee that Indian
markets retain a healthy and fair competitive environment, and it has the
authority to do so.
In order to conduct business in India, one must be aware of and follow all
applicable laws and regulations. Market competition is a sign ificant
challenge that requires careful management. munotes.in

Page 45

IRDA

45 Businesses must understand that while competition leads to wealth,
thriving and striving must be an ongoing effort. The following are some of
the various considerations for commercial establishments:
 Mark ets are prone to cartel development, which increases the
possibility of monopoly formation.
 It is crucial to understand that such associations are prohibited by the
Competition Act of 2002.
 When discussions are made with competitors documentation of the
same should be done.
 Any meetings wherein any matter is being discussed, which shall raise
issues under the Competition Law shall be avoided.
 It is advisable to avoid discussions pertaining to price and the actual
cost to the company.
 Appointment of an Ombu dsman for advice on the Competition Law so
as to prevent any legal issues may be done.
 Communication aspects although seem trivial may leave an impact
when it comes to abuse of dominant position issues. Any statements
made shall be weighed carefully.
The C ompetition Act, 2002 is a comprehensive law and the intent of the
legislation is to promote fair competition, catch up with the global
economy, safeguard the interest of the consumers and ensure a stable
market for India.
4.6.4 Competition commission of In dia
The Competition Commission of India (CCI) is an independent statutory
body established under the Competition Act, 2002, which is the primary
legislation governing competition law in India. The Act was enacted with
the objective of promoting competition in the Indian market and
preventing anti -competitive practices.
The Competition Act, 2002, provides for the establishment of the CCI as a
quasi -judicial body with the power to investigate and adjudicate on cases
related to anti -competitive practices and a buse of dominant position. The
Act also provides for the establishment of an appellate body, the
Competition Appellate Tribunal (COMPAT), which hears appeals against
the orders of the CCI.
The CCI has a wide range of powers and functions, including:
 Invest igating and adjudicating on cases of anti -competitive agreements,
abuse of dominant position, and combinations (mergers and
acquisitions). munotes.in

Page 46

Financial Regulations
46  Regulating and promoting competition in various sectors of the
economy.
 Making recommendations to the central governm ent on competition -
related issues.
 Conducting advocacy and creating awareness about competition law
and its benefits.
 The CCI has the power to impose fines and penalties on companies
found to be in violation of the Competition Act, 2002. The penalties
can be as high as 10% of the turnover of the company in the preceding
financial year. In addition to fines and penalties, the CCI can also issue
orders directing companies to cease and desist from anti -competitive
practices, modify agreements, or even dissolve companies in certain
cases.
Overall, the Competition Commission of India plays a critical role in
ensuring a level playing field in the Indian market and promoting
competition for the benefit of consumers and the economy as a whole.
4.6.5 Appearance befor e commission and Appellate Tribunal
The Competition Act, 2002 provides for the procedure to be followed by
parties appearing before the Competition Commission of India (CCI) and
the Competition Appellate Tribunal (COMPAT). Here are some key
points to keep in mind:
 Appearance before the CCI: Parties appearing before the CCI must do
so in person or through their authorized representatives. They have the
right to be heard and present evidence in support of their case.
 Written submissions: Parties may submit wr itten arguments and
evidence to the CCI, either before or after their appearance in person.
The CCI may also request parties to submit additional information and
evidence.
 Confidentiality: Parties may request confidentiality for any information
or evidence submitted to the CCI, but the CCI has the final decision on
whether such information will be treated as confidential or not.
 Opportunity to respond: The CCI will provide parties with an
opportunity to respond to any evidence or arguments presented by the
other party.
 Orders of the CCI: The CCI may issue interim orders or final orders
after the hearing, depending on the nature of the case. These orders
may require parties to take certain actions or refrain from certain
activities. The orders are enforceable by law.
 Appeals before the COMPAT: Parties aggrieved by the orders of the
CCI may file an appeal before the COMPAT. The appeal must be filed munotes.in

Page 47

IRDA

47 within 60 days of the date of the order. The COMPAT has the power to
confirm, modify or set aside the order of the CCI.
 Appearance before the COMPAT: Parties appearing before the
COMPAT must do so in person or through their authorized
representatives. They have the right to be heard and present arguments
and evidence in support of their case.
 Written submissions: Part ies may submit written arguments and
evidence to the COMPAT, either before or after their appearance in
person. The COMPAT may also request parties to submit additional
information and evidence.
 Opportunity to respond: The COMPAT will provide parties with an
opportunity to respond to any evidence or arguments presented by the
other party.
 Orders of the COMPAT: The COMPAT may issue orders after the
hearing, which may confirm, modify or set aside the order of the CCI.
The orders of the COMPAT are final and bi nding on the parties.
4.6.6 Compliance of Competition Law
Compliance with competition law is important for businesses as it helps
promote fair competition and prevents anti -competitive practices. Here are
some key steps that businesses can take to ensure c ompliance with
competition law:
 Develop a compliance program: Businesses should develop and
implement a comprehensive compliance program that includes policies
and procedures for identifying and addressing potential competition
law risks.
 Training: All emp loyees, especially those involved in sales, marketing,
and pricing, should receive regular training on competition law
compliance. This will help to raise awareness and ensure that
employees understand the importance of compliance.
 Monitor industry trends: Businesses should monitor industry trends and
market developments, including the activities of competitors, to
identify potential anti -competitive behavior.
 Review contracts: Businesses should review all agreements with
competitors, suppliers, and custome rs to ensure that they do not include
any anti -competitive provisions, such as price -fixing, market allocation,
or bid -rigging.
 Seek legal advice: Businesses should seek legal advice on competition
law matters to ensure that their activities do not violate competition
law. munotes.in

Page 48

Financial Regulations
48  Conduct internal audits: Businesses should conduct regular internal
audits to identify potential competition law risks and take appropriate
action to address them.
 Reporting violations: If a business becomes aware of a violation of
compet ition law, it should report it to the appropriate authorities.
 Compliance with competition law is essential for businesses to operate
in a fair and competitive market. Failing to comply with competition
law can result in significant fines and reputational damage. Therefore,
it is important for businesses to take proactive steps to ensure
compliance with competition law.
4.7 SUMMARY
 An Indian insurance company is a company scheduled under the
Companies Act, 1956, in which foreign equity does not exceed 26% o f
the total equity shareholding, including the equity shareholding of
NRIs, FIIs and OCBs.
 A certificate of registration will be given to the applicant, and any
registration that is judged inappropriate will be modified, renewed,
withdrawn, suspended, or c ancelled.
 The Competition Appellate Tribunal has been established by the
Central Government to hear and dispose of appeals against any
direction issued or decision made or order passed by the CCI.
 The government replaced the Competition Appellate Tribunal
(COMPAT) with the National Company Law Appellate Tribunal
(NCLAT) in 2017.
 The Competition Act's preamble emphasises the need of preventing
unfair business practises and fostering healthy competition for the
growth of the nation's economy.
 Competition -preventing, -restraining, or -distorting agreements are
known as anti -competitive agreements. Anti -competitive agreements,
decisions, and activities are forbidden by Section 34 of the Competition
Act.
 Competitors who agree to fix, control, or maintain the pri cing of goods
or services are said to be engaged in price fixing.
4.8 UNIT END QUESTIONS
A. Descriptive Questions:
Short Answers:
1. Write note on IRDA.
2. Explainin Salient features of the IRDA Act, 1999. munotes.in

Page 49

IRDA

49 3. Discuss protection of policy holder interests.
4. What is Competition Commission of India?
5. Discuss Competition Act, 2002 in detail.
B. Fill in the blanks:
1. The apex body that oversees and controls the insurance industry in India
is called ………….
2. IRDA stands for ……………
3. The Competition Act of 20 02 replaced the Monopolies and Restrictive
Trade Practices Act of……… .
4. In English, "…………….." refers to something that, in comparison to
others, is in a better position.
5. In India, the ……………..regulates the market for goods and services.
Answers :
1- IRDA , 2- Insurance Regulatory and Development Authority of India, 3 -
1969 , 4-dominant position, 5 - CCI
4.9 REFERENCES
 Mishkin, F. (1999) ‘Global financial instability: framework, events,
issues’, Journal of Economic Perspectives, Vol. 13.
 Padoa -Schioppa, T. ( 2003) ‘Central banks and financial stability:
exploring the land in between’, The Transformation of the European
Financial System.
 Rahim, N.H.A. and Abedin, N.F.Z. (2014) ‘Trade liberalisation,
financial development and growth in Malaysia’, International
Proceedings of Economics Development and Research.
 Luintel, K.B. and Khan, M. (1999) ‘A quantitative reassessment of the
finance -growth nexus: evidence from a multivariate VAR’, Journal of
Development Economics, Vol. 60.
 Mattoo, A. (1998) Financial Service s and the WTO: Liberalization in
the Developing and Transition Economies, Staff Working Paper, No.
TISD9803, World Trade Organization Trade in Services Division.

munotes.in

Page 50

50 5
FOREIGN EXCHANGE MANAGEMENT
AND REGULATIONS
Unit Structure
5.0 Learning Objective
5.1 Introduction
5.2 Important Definitions under FEMA
5.3 Current Account transaction and Capital Account Transaction
5.4 Establishment of Branch & Office in India
5.5 Real ization & Repatriation of Foreign Exchange
5.6 Authorised Person
5.7 Penalties and Enforcement
5.8 Foreign Contribution Act 2010
5.9 Unit End Questions
5.0 LEARNING OBJECTIVE:
 To get learners acquainted with various foreign exchange market
related termino logy.
 To equip learners with the detailed knowledge of various foreign
exchange management regulations.
5.1 INTRODUCTION
Scope of business is not limited to the domestic territories of a country.
When a business crosses the borders of a country it gets exp osure to wider
opportunities and markets around the globe. When a country or business
starts transacting with international customers it has to deal with various
regulations of different countries. These regulations include foreign
exchange rules of variou s countries too. Every country has its own set of
rules and regulations. Foreign exchange plays an important role in
promoting foreign trade and exchange transactions of a country. In India,
the Reserve Bank of India has authority to control foreign exchan ge.
FEMA stands for Foreign Exchange Management Act. This is the statute
that governs all foreign exchange regulations in India. Foreign Exchange
Management Act came into force from 1st June 2000 by passing an act in
parliament in 1999. Foreign Exchange M anagement Act replaced the
Foreign Exchange Regulations Act (FERA) which was enacted in 1973. munotes.in

Page 51

Foreign Exchange
Management a nd Regulations
51 Objectives of FEMA
 To facilitate international trade and exchange payments.
 To promote orderly development of foreign exchange market in India
 To define procedure s and formalities for all for an exchange
transactions in India
5.2 IMPORTANT DEFINITIONS UNDER FEMA
Foreign Exchange
"Foreign Exchange" means foreign currency which includes following
(i) deposits, credits and balances payable in any foreign currency,
(ii) drafts, travellers cheques, letters of credit or bills of exchange,
expressed or drawn in Indian currency but payable in any foreign
currency,
(iii) drafts, travellers cheques, letters of credit or bills of exchange drawn
by banks, institutions or per sons outside India, but payable in Indian
currency”
Foreign Security
“foreign security” means any security, in the form of shares, stocks,
bonds, debentures or any other instrument denominated or expressed in
foreign currency and includes securities expr essed in foreign currency,
but where redemption or any form of return such as interest or dividends
is payable in Indian currency;
Currency
“currency” includes all currency notes, postal notes, postal orders, money
orders, cheques, drafts, travellers chequ es, letters of credit, bills of
exchange and promissory notes, credit cards or such other similar
instruments, as may be notified by the Reserve Bank;
“Currency notes” means and includes cash in the form of coins and bank
notes;
Foreign Currency
any curr ency other than Indian currency is considered as Foreign Currency
Person
“person” includes — an individual, a Hindu undivided family, a company,
a firm, an association of persons or a body of individuals, whether
incorporated or not, every artificial juri dical person, not falling within any
of the preceding sub -clauses, and any agency, office or branch owned or
controlled by such person; munotes.in

Page 52

Financial Regulations
52 Person Resident in India
A Person who stayed in India for more than 182 days during preceding
financial year is treated as a Person Resident in India. but this definition
is not applicable to a person who left India for the purpose of
employment/ business/ vocation outside India, or for any other reason
showing his intention to stay outside India for an uncertain period. Also
any person who visits India, for the purpose of employment/ business/
vocation in India, or for any other reason showing his intention to stay in
India for an uncertain period is an exception to the above case.
Above said definition is also applica ble to any person or body corporate
registered or incorporated in India, and an office, branch or agency in
India which is owned or controlled by a person who is resident outside
India,
Whereas A person who is not resident in India; Is considered as “P erson
resident outside India”
Service
“service” means service of any description which is made available to
potential users and includes the provision of facilities in connection with
banking, financing, insurance, medical assistance, legal assistance, c hit
fund, real estate, transport, processing, supply of electrical or other
energy, boarding or lodging or both, entertainment, amusement or the
purveying of news or other information, but does not include the rendering
of any service free of charge or un der a contract of personal service”
Transfer
“transfer” includes sale, purchase, exchange, mortgage, pledge, gift, loan
or any other form of transfer of right, title, possession or lien.
5.3 CURRENT ACCOUNT TRANSACTION AND
CAPITAL ACCOUNT TRANSACTION
Foreign Exchange Management Act classifies foreign exchange
transaction into two types
1. Current Account Transactions
2. Capital Account Transactions
1. Current Account Transactions
A foreign exchange transaction that does not change the assets and
liabilities (incl uding contingent liabilities) position outside India is called
a Current Account Transaction. Section 5 of FEMA deals with current
account transactions. According to section 5 Any person residing in India
is free to enter into foreign exchange transactions pertaining to current
account except transaction prohibited by Central Government such
prohibited transactions includes munotes.in

Page 53

Foreign Exchange
Management a nd Regulations
53  remittance out of winnings from lottery, racing, riding, etc., or any
other hobby;
 remittance for purchase of lottery tickets, banned magazines, football
pools, sweepstakes, etc.;
 remittance of dividend by any company to which the requirement of
dividend balancing is applicable;
 payment of commission on exports under Rupee State Credit Route
except commission up to 10% of invoice value of exports of tea and
tobacco;
 payment of commission on exports made towards equity investment in
Joint Ventures / Wholly Owned Subsidiaries abroad of Indian
companies; remittance of interest income on funds held in Non -
Resident Special Rupee (Account) S cheme and payment related to “call
back services” of telephones.
Current Account Transaction Limit
According to Liberalised Remittance scheme Current account transactions
per financial are permitted in two ways
I. Upto USD 2,50,000 - without RBI approval.
II. Above USD 2,50,000 - requires prior approval of RBI.
2. Capital Account Transactions
A foreign exchange transaction that changes the assets and liabilities
(including contingent liabilities ) position outside India is called a Capital
Account Transaction. Such change in assets or liabilities held outside
India can be made by Person who is Resident of India or in assets or
liabilities held in India by A person who is resident outside of India.
Provisions towards a Person Resident of India
Schedule I - Regulation 3 states that any person who is resident of India
can enter in foreign currency transactions for following capital account
transactions. but the amount of said transaction should not e xceed
permitted limits.
 Investment in foreign securities
 Foreign currency loans raised in India and abroad
 Transfer of immova ble property outside India
 Guarantees issued in favor of a person resident outside India.
 Export , import and holding of currency/currency notes
 Loans and overdrafts (borrowings) taken from a person resident outside
India. munotes.in

Page 54

Financial Regulations
54  Maintenance of foreign currency accounts in India and outside India
 Taking out an insurance policy from an insurance company outside
India.
 Loans and overdrafts to a person res ident outside India.
 Remittance outside India of capital assets
 Sale and purchase of foreign exchange derivatives in India and abroad
and commodity derivatives abroad
Provisions towards a Person Resident Outside India
Schedule I - Regulation 3 states th at any person who is resident outside
India can enter in foreign currency transactions for following capital
account transactions. but the amount of said transaction should not exceed
permitted limits.
 Investment in Indian Security issued by a body corpo rate /entity in
India
 investment made by way of capital contribution to the capital of a firm
/a proprietorship concern/ an association of persons in India.
 Acquisition and transfer of immovable property in India
 Guarantee in favor of, or on behalf of, a person resident in India.
 Import and export of currency/currency notes into/from India
 Deposits between a person resident in India and a person resident
outside India.
 Foreign currency accounts in India
 Remittance outside India of capital assets in India
 Undertaking derivative contracts.
Capital Account Transaction Limit
According to Liberalised Remittance scheme Capital account transactions
per financial year are permitted in two wa ys
I. Upto USD 2,50,000 - without RBI approval.
II. Above USD 2,50,000 - requires prior approval of RBI.
The Limit of USD 2,50,000 can be used for Capital Accout Transactions
or Current Account Transaction or Combination of Both According to
Section 6 of FEMA; if a person who is a Resident of India and he earned
foreign currency when he was A Resident outside India can use that
earned currency without any restriction Rules of Liberalised Remi ttance
scheme are not applicable to this case.
munotes.in

Page 55

Foreign Exchange
Management a nd Regulations
55 Prohibited Capital Account transactions
Regulation No. 4 puts lights on prohibited capital account transactions. As
per regulation No. 4 any capital account transaction. Which is not covered
under Schedule I and Schedule II of the Act are considered as Prohibited
Capital Account transactions Also A person who is resident outside India
is prohibited to make investment in any entity in India which is engaged
/proposes to engage in chit fund company / Nidhi Company, in
agricultural or plantation activities, In real estate business, construction of
farmhouses , In trading in Transferable Development Rights (TDRs).
5.4 ESTABLISHMENT OF BRANCH & OFFICE
IN INDIA
A person resident outside India who fulfills criter ia mentioned below is
allowed to a open branch office or a liaison office in India.
If A person resident outside India wants to open a Branch Office in India
;he should have a profit making track record during the immediately
preceding five financial years in the home country and net worth of not
less than USD 100,000 or its equivalent. where as when a person resident
outside India wants to open a Liaison Office in India:he should have a
profit making track record during the immediately preceding three
financial years in the home country and net worth of not less than USD
50,000 or its equivalent.
Criteria For Branch Office For Liaison Office
a profit making track
record in home
country immediately preceding
five financial years immediately preceding
three financial years
net worth not less than USD
100,000 or its equivalent. not less than USD
50,000 or its equivalent.
Those subsidiary companies or persons resident outside India are
financially unsound have to submit a Letter of Comfort stating that thei r
parent company is satisfying the net worth and profit criterion .
A person resident outside India who is permitted by RBI to open a
branch or liaison office in India is allowed to undertake only those
activities which are specified in Schedule I or II of the regulations.
Which include
Permitted activities for a branch office in India of a person resident
outside India
1. Export/import of goods.
2. Rendering professional or consultancy services munotes.in

Page 56

Financial Regulations
56 3. Carrying out research work in which the parent company is engaged.
4. Promoting technical or financial collaborations between Indian
companies and parent or overseas group companies.
5. Representing the parent company in India and acting as buying/selling
agent in India
6. Rendering services in Information Technology and developm ent of
software in India.
7. Rendering technical support to the products supplied by parent/group
companies.
8. Representing a foreign airline/shipping company
Permitted activities For Liaison Office in India of a person resident
outside India
1. Representing the p arent company / group companies in India.
2. Promoting export / import from / to India.
3. Promoting technical/ financial collaborations between parent / group
companies and companies in India
4. Acting as a communication channel between the parent company and
Indian companies.
Such entities are not allowed to enter any other activities other than
activities mentioned and activities specifically permitted by the Reserve
Bank.
AnyPerson who is resident outside India is not allowed to open a branch
and office in India without prior approval of the Reserve Bank. But A
banking company resident outside India or An insurance company
resident outside India or A company resident outside India in Special
Economic Zones (SEZs) established after respective approvals from
conc erned authorities does not require any approval under these
Regulations for establishing any office in India.
5.5 REALIZATION & REPATRIATION OF FOREIGN
EXCHANGE
Repatriation means returning or sending to the country of origin.
According to Section 8 of the FEMA any person resident in India, is
allowed to take all reasonable steps to realise and repatriate to India any
amount of foreign exchange is due to him or has accrued to him. He has to
take above said all reasonable steps within the time limit and mann er
specified by the Reserve Bank.

munotes.in

Page 57

Foreign Exchange
Management a nd Regulations
57 Exemption from realisation and repatriation
a. holding foreign currency including foreign coins up to the limit
specified by the Reserve Bank
b. foreign currency account held or operated by such person or class of
persons an d the limit up to which the Reserve Bank may specify;
c. foreign exchange acquired or received before the 8th day of July, 1947
or any income arising or accruing thereon which is held outside India
by any person in pursuance of a general or special permissi on granted
by the Reserve Bank;
d. foreign exchange held by a person resident in India up to such limit as
the Reserve Bank may specify, if such foreign exchange was acquired
by way of gift or inheritance from a person referred to in clause (c),
including any income arising therefrom;
e. foreign exchange acquired from employment, business, trade, vocation,
services, honorarium, gifts, inheritance or any other legitimate means
up to such limit as the Reserve Bank may specify; and
f. Such other receipts in foreign e xchange as the Reserve Bank may
specify.
5.6 AUTHORISED PERSON
RBI is custodian of foreign exchange but it cannot control all the foreign
exchange tractions in a country and RBI delegates its power to
'Authorized Persons'. Chapter 3 section 10 of forei gn exchange
management act deals with Authorised Persons. An Authorised person is
an entity authorised by RBI to deal in foreign exchange or foreign
securities. Subsection 1 gives the list of such entities who can be
appointed as authorised person which in cludes authorised dealer, money
changer, off -shore banking unit or any other person who fits to the said
role.
While dealing in foreign exchange or in securities all authorised persons
have to follow the rules, regulations or orders issued by RBI.
Author ised Person should conduct the activities for which he is authorised,
he is not allowed to engage in the foreign exchange or foreign securities
transactions for which he is not authorised.
Whenever an authorised person undertakes a transaction in foreign
exchange on behalf of any person he should ask for written undertaking
stating that such transaction do not involve any element controversial to
the provisions of the act. The said person refuses to give written
undertaking authorised person should refuse all dealings in the transaction
and matter should be reported to the Reserve Bank of India.
munotes.in

Page 58

Financial Regulations
58 5.7 PENALTIES AND ENFORCEMENT
Section 13 says that If any person breaches any provision, rule, regulation,
notification, direction, order and RBI's Authorisation , penalty will be
charged in the following ways
a. When amount of contravention is quantifiable, penalty up to three
times of the amount involved in such where contravention or
b. When the amount of contravention is not quantifiable, penalty up to
Rs.2,00,000 and
c. if such contravention is a continued, further penalty which may extend
to Rs. 5000 for every day after the first day during which the
contravention continues.
Government time to time issues threshold limit for aggregate value of
foreign exchange, f oreign security or immovable property, to be held
outside India. If any person exceeds the threshold limit given under the
section 37A, in such case penalty will be charged
a. up to three times of the amount involved in such where contraventions
and
b. confis cation of the value equivalent, situated in India
c. Imprisonment for a term which may extend to five years and fine.
5.8 FOREIGN CONTRIBUTION ACT 2010
Foreign Contribution Acts was originally passed in 1976 when India was
under national emergency. In this pe riod foreign entities were injecting
money in the country in order to dilute internal affairs of the country. This
act was passed in order to regulate foreign donations received by Indians
and Indian associations so that they should not function against t he
values of a sovereign democratic republ ic.
The said act was amended in 2010. This amendment was done to
“consolidate the law to regulate the acceptance and utilization of foreign
contribution / funds by certain individuals, associations and companies
and to prohibit the acceptance and utiliz ation of foreign contribution /
funds for any activities detrimental to national interest”.
The law was amended again in 2020 and put tighter control and scrutiny
over the acceptance and utilization of foreign contribution / funds by
NGOs. AS per this amen dment any person or NGO wishing to receive any
foreign contribution or foreign fund has to register with this act. Such an
NGO has to open a bank account with State Bank Of India, Delhi. Such
NGOs were strictly advised to use said funds for only those prog rammes
for which it was sanctioned. Diversion of funds is not allowed. Individuals
and associations working for social, cultural, economical, educational
religious and social programmes were allowed to register under the act. munotes.in

Page 59

Foreign Exchange
Management a nd Regulations
59 Registration made by individua ls and associations under this Act will
remain valid for five years a nd then applicable for renewal of registratio n.
If any NGO or association found to be violating the regulations of this act
will be subject to cancellation of the said registration. If an y NGO has not
undertaken any activity in its definite programme field for two consecutive
years; government can cancel the registration and once the registration is
suspended the association can't apply for the re-registration for next three
years.
5.9 UNI T END QUESTIONS
Multiple ChoiceQuestion
1. Foreign Exchange Management Act came into force from………….
a. 1st April 2000
b. 1st October 2000
c. 1st June 2000
d. 1st Jan 2000
2. Once the registration under Foreign contribution Act is suspended by
the government the associatio n can't apply for the re -registration for
next ……….years.
a. Two
b. Three
c. Four
d. Five
3. If A person resident outside India wants to open a Branch Office in
India ;he should have a profit making track record during the
immediately preceding …….. financial years in th e home country and
net worth of not less than USD ……….
a. Five , 1,00,000
b. Ten, 2,00,000
c. Three , 1,00,000
d. Two, 2,00,000
4. A foreign exchange transaction that does not change the assets and
liabilities position outside India is called a …….. Account
Transaction.
a. Capital
b. National Saving
c. Reserve
d. Current
munotes.in

Page 60

Financial Regulations
60 True or False
1. FEMA stands for Foreign Exchange Monitoring Act.
2. An Authorised person is an entity authorised by RBI to deal in foreign
exchange or foreign securities.
3. As per FEMA when the amount of contravention i s quantifiable, a
penalty up to three times of the amount involved in such contravention
is charged by the government.
4. A person who is resident outside India is allowed to make investment
in any entity in India which is engaged /proposes to engage in chit
fund company / Nidhi Company, in agricultural
Write Short Notes
1. Person Resident in India
2. Foreign Contribution Act 2010
3. Penalties and Enforcement Under FEMA 2000
4. Objectives of FEMA 2000
5. Authorised Person
6. Realization & Repatriation of Foreign Exchange
Explain in Details
1. Capital Account Transactions and Current Account Transactions
2. Provisions related to Establishment of Branch & Office India under
FEMA
munotes.in

Page 61

61 6
PREVENTION OF MONEY LAUNDERING
ACT 2000
Unit Structure
6.0 Learning Objective
6.1 Introduction
6.2 Genesis of Prevention of Money Laundering Act
6.3 Important concepts and definitions under PMLA
6.4 KYC - Know Your Customer
6.5 Unit End Questions
6.0 LEAR NING OBJECTIVE:
 Learners will be made aware of genesis of money laundering
legislation in India and around the globe
 Learners will know about various provisions of Prevention of money
laundering Act
 Learners will get the glimpse of Know Your Customer pol icy
framework in India
6.1 INTRODUCTION :
Money Laundering is considered as a crime. Money Laundering means
hiding the source of money generated from illegal or criminal activity so
that it can appear as legitimate money. In the common man's words
Money La undering means converting black money into white money. For
example, a member of a criminal organisation runs a beach resort and
hotel. He deposits his illegal money into the bank by way of the hotel's
cash collection. Illegal money is added to the resort 's daily cash collection
and then deposited into the bank so black money is converted into white
money.
Sometimes money laundering can lead to serious issues like terrorism and
corruption in the country.
Forms of Money Laundering
Following are some of the common methods of money laundering.
 Hawala,
 bulk cash smuggling, munotes.in

Page 62

Financial Regulations
62  fictional loans,
 cash-intensive businesses,
 round -tripping,
 trade -based laundering,
 Shell companies and trusts,
 real estate,
 gambling,
 fake invoicing
Money Laundering is a three ste p process.
1. Placement
2. Layering
3. Integration
6.2 GENESIS OF PREVENTION OF MONEY
LAUNDERING ACT
UN global programme against money laundering
In order to boost the efficacy of global action against money laundering
via comprehensive technical cooperation serv ices offered to
Governments; United Nations Office of the Drug Control and Crime
Prevention implement a programme against Money Laundering
The above said programme involves following three areas of activities.
These activities provide various opportuniti es to Governments and
institutions to effectively combat money laundering:
1. Technical co -operation includes creating awareness, institution
building and training activities
2. The research and analysis focuses on providing Key Information to
understand the p henomenon of money laundering in a better way and it
enables the global community to devise more efficient and effective
countermeasure strategies.
3. The commitment towards supporting the establishment of financial
investigation services for uplifting the o verall efficacy of law
enforcement measures.
The Financial Action Task Forc e
The Financial Action Task Force is an intergovernmental organization.
FATF was established in 1989 by G7 countries. The Financial Action munotes.in

Page 63

Prevention of Money
Laundering Act 2000
63 Task Force is established to develop a pol icy framework in order to fight
against money laundering.
In 2001 the scope of The Financial Action Task Force was expanded and
it was entrusted with the objective of strongly acting against terrorism
financing. The Financial Action Task Force observes pr ogress of various
countries towards implementing the FATF Recommendations.
Objectives of the FATF are:
 To monitor progress of members in applying measures to counter
money laundering.
 To review money laundering techniques and countermeasures.
 To promote the adoption and implementation of appropriate measures
by non -member countries.The Financial Action Task Force primary
policies issued are the
Since 1990 FATF has issued Forty recommendations on money
laundering htough its Primary policies and the Nine Special
Recommendations on Terrorism Financing.
The Financial Action Task Force also sets the international standard for
anti-money laundering measures and combating the financing of terrorism
and terrorist acts.
Indian Scenario
A political declaration as king for adoption of money laundering legislation
was made by Members States of the United Nation in the special session
of the United Nations General Assembly held in 1999.
Prevention of Money Laundering Act was passed in 2002 in the
parliament but it ca me into force from 1st January 2005. This Act was
passed in response to the Vienna Convention. Prevention of Money
Laundering Act hasten chapters further divided into seventy five sections.
PMLA is applicable to
 Individuals
 Companies
 Firms
 Association of Person
 Or any other kind of person
This Act was enacted with following objects
1. Preventing and controlling money laundering
2. Confiscating and seizing property obtained from money laundering munotes.in

Page 64

Financial Regulations
64 3. Dealing with any other issues related with money laundering in Ind ia
6.3 IMPORTANT CONCEPTS AND DEFINITIONS
UNDER PMLA :
Attachment:
Attachment means Prohibition of transfer, conversion, disposition or
movement of property by an order issued by appropriate authority, this
attachment has to be done for the period of 90 da ys from the order is
issued and attachment should be conducted as per the second schedule of
Income Tax Act 1961.
Proceeds of Crime
Proceeds of crime means any property obtained directly or indirectly by
any person as result of criminal activity relating t o scheduled offence.
Money Laundering
If anyone directly or indirectly tries to indulge, knowingly assist or
knowingly party or actually involved in any process or activity connected
with crime and shows that it is uncorrupt (clean source) property shal l be
guilty of Money laundering offence.
Property
Any asset or property of any description. It includes corporal and corporal
property, movable and immovable property, tangible and intangible
property, deeds and instruments evidencing title touch propert y.
Payment System
A system that enables payment to be effected between a payer and a
beneficiary, involving clearing, payment or settlement service or all of
them. It includes the credit card operations, debit card operations, smart
card operations, money transfer or similar kind of operations .
Transfer
“transfer” includes sale, purchase, mortgage, pledge, gift, loan or any
other form of transfer of right, title , possession or lien.
Person
People include individuals, Hindu Undivided Family, a company, a fir m,
an association of persons, body of individuals whether incorporated or not,
artificial judicial person.

munotes.in

Page 65

Prevention of Money
Laundering Act 2000
65 Obligation of Banking Companies, Financial Institutions &
Intermediaries
Verification of Identity [Section 11 A]
The bank, financial institutions a nd intermediary has to verify the identity
of the client and the beneficial owner. This verification can be done by
a. Authentication under Aadhar if reporting entity is Banking Company or
b. Offline Verification of Aadhar or
c. Passport or
d. Any the official docume nt and mode specified by Central Government,
Maintain records [Section 12]
The bank, financial institutions and intermediary has
A. To maintain records of all transactions and value as prescribed. Such
transactions can be of a single transaction or a series of transactions
internally connected to each other when such series take place within
a month.
B. To inform the director within prescribed time.
C. To verify the identity of its clients in a prescribed manner.
D. To maintain record of documents evidencing identity of its clients and
beneficial owners as well as account files and business
correspondence relating to its clients.
The records mentioned above should be maintained for 10 years from the
date of transaction.
Furnish information [Section 12 A]
Director has the right to access information he can call for any records
additional information which is necessary as per this act from any banking
company, financial institution or financial intermediary. Every reporting
authority has to furnish the required informati on to the Direction within
the prescribed manner and time limit.
Enhanced Due diligence [Section 12 AA]
Every bank, financial institution and intermediary should check the
identity of the client prior to commencement of such transaction. This
verification can be done under Aadhar. Reporting entities should take
additional steps to check ownership, financial position, and sources of
funds of clients. If a client fails to fulfill the condition he should not be
allowed to carry out such a transaction. Informa tion obtained under
carrying out above said due diligence measures should be kept with the
reporting entity for the period of five years. munotes.in

Page 66

Financial Regulations
66 Powers of Director to impose fine [Section 13]
Director can carry out enquiry of banks, financial institutions and
intermediaries. While in the course of enquire if director finds that the
reporting authorities are not following the provisions of the Act such
reporting authority can be penalised by director with the fine of Rs.10,000
to Rs, 1,00,000
No civil or criminal p roceedings against reporting entity [Section 14]
Banks, financial institutions and intermediaries provide information to the
authority. Employees or directors of such reporting are not liable for any
civil proceedings against them for providing such inform ation to the
authority.
Procedure and manner of furnishing information by reporting entities
[Section 15]
For the purpose of implementation of this act Central Government in
consultation with the RBI may prescribe the procedure and the manner of
maintaining and furnishing information by a reporting entity
6.4 KYC - KNOW YOUR CUSTOMER
In terms of the provisions of Prevention of Money -Laundering Act, 2002
and the Prevention of Money -Laundering (Maintenance of Records)
Rules, 2005, Regulated Entities (REs) are required to follow certain
customer identification procedures while undertaking a transaction either
by establishing an account -based relationsh ip or otherwise and monitor
their transactions..
As per RBI KYC Guidelines “Customer” means a person who is engaged
in a financial transaction or activity with a Regulated Entity (RE) and
includes a person on whose behalf the person who is engaged in the
transaction or activity, is acting.
KYC - Know Your Customer guidelines help banks to identify and
understand the customers. It prevents banks from being an instrument of
money laundering activities.
As per KYC guidelines issued by RBI; KYC policy should be approved by
the Board of directors or any committee of board to which power has been
delegated.
The KYC policy shall include following four key elements:
1. Customer Acceptance Policy;
2. Risk Management;
3. Customer Identification Procedures (CIP); and
4. Monitoring of Transactions munotes.in

Page 67

Prevention of Money
Laundering Act 2000
67 Customer Acceptance Policy:
Customer acceptance policy gives guidelines for accepting a customer.
This policy may include following points
 No account is opened in anonymous or fictitious/benami name.
 No account is opened without applying a ppropriate Customer Due
Diligence measures,
 No transaction or account -based relationship is undertaken without
following the CDD procedure.
 The mandatory information to be sought for KYC purpose while
opening an account and during the periodic updation, i s specified.
 CDD Procedure is followed for all the joint account holders, while
opening a joint account.
 Circumstances in which a customer is permitted to act on behalf of
another person/entity, is clearly spelt out.
Risk Management:
Regulated Entities sho uld have a risk based approach for managing risk.
As per risk assessment and risk perception; the customers should be
categorised as
1. Low risk customers
2. Medium risk customers
3. High risk customers
Parameters such as customer’s identity, social/financial stat us, nature of
business activity, and information about the customer’s business and their
location etc. should be considered while categorizing risk.
Customer Identification Procedures (CIP)
Customer Identification is required in certain cases like
 startin g an account -based relationship with the customer,
 international money transfer operations for a non account holder of
the bank,
 doubtful authenticity or adequacy of the customer identification data,
 Selling third party products as agents, selling their own products,
 payment of dues of credit cards/sale and reloading of prepaid/travel
cards and any other product for more than rupees fifty thousand etc.
 Transactions for walk -in customers etc. munotes.in

Page 68

Financial Regulations
68 Monitoring of Transactions
Ongoing monitoring is an important ingredient of effective KYC
procedure. Financial institutions should keep attention on large value
transactions. Threshold limit can be prescribed for particular categories of
accounts and banks should monitor whether such limit is exceeded by
customers or not. Unusual large cash transactions inconsistent with regular
pattern of account and balance maintained by customer should attract the
attention of banks. Key indicators should be set for such account
which considering various factors of background check of a customer. ,
which may include checking country of origin and sources of fund.
Periodic review of risk categorization is needed.
6.5 UNIT END QUESTIONS
Multiple Choice Question
1. Following is not a step of the Money Laundering process.
A. Identification
B. Placement
C. Layering
D. Integration
2. Which of the following is not a element of The KYC policy
A. Customer Acceptance Policy;
B. Risk Management;
C. Portfolio Management
D. Monitoring of Transactions
3. According to …………..The bank, financial institutions and
intermediary has t o maintain records of all transactions and value as
prescribed.
A. Section 11
B. Section 12
C. Section 13
D. Section 14
4. If reporting authorities are failing to comply with the provisions of the
Act such reporting authority can be penalised by the director with the
fine of …………
A. Rs.10,000 to Rs, 1,00,000 munotes.in

Page 69

Prevention of Money
Laundering Act 2000
69 B. Rs.20,000 to Rs, 2,00,000
C. Rs.1,00,000 to Rs, 2,00,000
D. Rs.1,000 to Rs, 10,000
5. “Transfer” includes……
A. Sale, purchase, mortgage,
B. Pledge, gift, loan
C. Transfer of right, lien
D. All of above
6. The Financial Action Task Force is a n intergovernmental organization.
established in ………. by ……….countries.
A. 1989 , G7 Countries
B. 1989, G20 Countries
C. 1999 , G7 Countries
D. 1999, G20 Countries
7. Which of the following is not a form of The Money Laundering
Practices
A. Hawala,
B. bulk cash smugglin g,
C. fictional loans
D. Loan Syndication
True or False
1. Prevention of Money Laundering Act was passed in 2000
2. PMLA is applicable only for immovable property.
3. Proceeds of crime means any property obtained directly or indirectly by
any person as result of crimina l activity
4. Financial Institutions should keep watch on large value transactions.
5. KYC stands for Know Your Code
6. Passport is not an official document to verify the identity of a client.

munotes.in

Page 70

Financial Regulations
70 Write Short Notes
1. Money Laundering
2. UN global programme against Money L aundering
3. Financial Action Task Force
4. Objectives of PMLA
5. KYC
Explain in Details
1. Genesis of PMLA
2. Obligation of Banking Companies, Financial Institutions &
Intermediaries
3. KYC - Know Your Customer Policy




munotes.in

Page 71

71 7
REGULATORY FRAMEWORK FOR
INTERNATIONAL FUNDS
Unit Structure
7.0 Learning Objective
7.1 Introduction
7.2 Sources of International Fund
7.3 Regulatory Framework for issuing Depository Receipts
7.4 Foreign Direct Investment Regulations
7.5 SEBI (Foreign Por tfolio Investors) Regulations - 2014
7.6 Features of the FDI policy in India
7.7 Unit End Questions
7.0 LEARNING OBJECTIVE:
 To know about various sources of raising international fund and
respective regulatory framework
 To get deep insight of Foreign Dire ct Investment Policy of India
7.1 INTRODUCTION
Business operations are not limited to a specific region or country.
Globalisation has paved ways for exploring international markets and
other opportunities. Business needs finance for growth and expansion as
well as carrying day to day operations. Such a need of finance can be
fulfilled by using internal as well as external Sources. Internal sources deal
with using retained profit or selling asset. Internal Sources of finance are
owned by the company itself. whereas external sources deal with raising
funds from outside of business.
International Funds are an important source of finance from external
sources. There are various ways of raising funds from International
Sources. International finance supports cro ss border transactions of a
company. It also promotes financial transactions between two countries.
7.2 SOURCES OF INTERNATIONAL FUND
 Global Depository Receipts
 American Depository Receipts munotes.in

Page 72

Financial Regulations
72  Indian Depository Receipts
 Foreign Currency Convertible Bonds
 External Commercial Borrowings
 Inter -Corporate Deposits
 Loans from International Commercial Banks
 Loans from International Agencies
 Loans From International Development Banks
In this chapter we are going to discuss regulatory framework of some of
the above me ntioned sources of international funds
Global Depository Receipts (GDR)
Global depository receipt is a financial instrument issued to raise funds
from international. GDR is an instrument that can be traded in the
financial markets. GDR allows issues to rai se funds by way of private
placement or public offerings. GDRs are issued by depository banks.
Depository banks purchase shares of foreign companies and distribute the
shares to the investors in the form of Depository receipts.
American Depository Receipt s (ADR)
American Depository receipts are issued by American Bank. which allows
foreign stocks to be traded in American stock exchanges. American
Depository Receipts are listed in the USA therefore Capitan gain on the
stocks and dividend is paid in Us Dolla rs.There are basically two types of
ADRs i.e. Sponsored and Unsponsored. Sponsored ADRs are further
classified into Level -I , Level -II, Level -III ADR
Indian depository Receipts
Indian Depository Receipts are only applicable to the Indian markets. IDR
also operates in the same way as GDR works where shares are transferred
to depository and depository convert them into Depository receipts. In this
case the depository bank belongs to the Indian Economy and the currency
of denomination is Indian Rupee. IDR is a way to raise funds from the
Indian market for foreign entities as well as Indians. SEBI acts as a
depository in case of IDR. First IDR’s were issued by Standard Chartered
Bank
7.3 REGULATORY FRAMEWORK FOR ISSUING
DEPOSITORY RECEIPTS
1. Companies incorporate d and listed in India are allowed to issue
Depository Receipts. Such Listed Company should comply with the
requirements prescribed under SEBI (Listing Obligations and
Disclosure Requirements) Regulations, 2015 and any amendments
thereof. munotes.in

Page 73

Regulatory Framewor k for
International Funds
73 2. Any of its promote rs, promoter group or directors or selling
shareholders should not be debarred from accessing the capital market
by SEBI, should not be a fugitive economic offender or should not be
a willful defaulter.
3. Existing holders shall be eligible to transfer Permi ssible Securities, for
the purpose of issue of DRs, if the Listed Company or the holder
transferring Permissible Securities are not debarred from accessing the
capital market by SEBI or not a wilful defaulter; or not a fugitive
economic offender.
4. In case of an initial issue and listing of DRs, pursuant to ‘transfer by
existing holders’, Listed Company should provide an opportunity to its
equity shareholders to tender their shares for participation in such
listing of DRs
5. Subsequent issue and listing of DRs , pursuant to ‘transfer by existing
shareholders’ may take place subject to the limits approved pursuant to
a special resolution in terms of GDR Rules
6. Listed Company should issue Permissible Securities or transfer
Permissible Securities of existing holder s, for the purpose of issue of
DRs, only in Permissible Jurisdictions and said DRs should be listed
on any of the specified International Exchange(s) of the Permissible
Jurisdiction.
7. Listing of DRs on specified International Exchange shall meet the
highest applicable level / standards for such listing by foreign issuers.
8. Listed Company should comply with extant laws relating to issuance
of DRs, which includes
a. requirements prescribed in this Circular, the Companies Act,
2013,
b. Foreign Exchange Management Ac t, 1999 (‘FEMA’),
c. Prevention of Money -Laundering Act, 2002, and rules and
regulations made thereunder.
9. Listed Company may also enter into necessary arrangements with
Custodian, Indian Depository and Foreign Depository.
10. Companies are allowed to issue DRs only with Permissible Securities
as the underlying
11. DR issuing companies should ensure that the aggregate of Permissible
Securities which may be issued or transferred for the purpose of issue
of DRs, along with Permissible Securities already held by person s
resident outside India, shall not exceed the limit on foreign holding of
such Permissible Securities under the applicable regulations of FEMA
munotes.in

Page 74

Financial Regulations
74 External Commercial Borrowing (ECB)
External Commercial Borrowing (ECB) means borrowing of funds made
by Indian companies from foreign sources. ECB can be made in the form
of loans, bonds, or other financial instruments. Funds obtained from
External Commercial Borrowing can be utilized for business expansion,
acquiring assets, and the repayment of existing debt. In dian companies can
borrow funds from foreign banks, international financial institutions, and
foreign subsidiaries of Indian companies. Companies can obtain External
Commercial Borrowing in rupee -denominated loans, which are repayable
in Indian rupees, o r foreign currency -denominated loans, which are
repayable in a foreign currency. ECB are regulated by the Reserve Bank
of India (RBI),ntial impact on their financial position.
Important Element of ECB Regulation
Currency of
borrowing A. Any freely convertib le foreign currency
B. Indian Rupee
C. Any other currency as specified by the Reserve
Bank in consultation with the Government of India.
Forms  As prescribed by the Reserve Bank in
consultation with the Government of India.
 Certain hybrid instruments, such as op tionally
convertible debentures,
Eligibility of
borrowers  All entities eligible to receive foreign direct
investment, in terms of Foreign Exchange
Management
Maturity  Minimum average maturity will be 3 years
Lenders  Resident of Financial Action Task For ce or
international Organization of Securities
Commissions Compliant country
 Multilateral and Regional Financial Institutions
where India is a member country
 Lender specified by Reserve Bank, in
consultation with the Government of India
All-in-cost A. For E CBs raised in foreign exchange
 The maximum spread over the benchmark of 6 -
month LIBOR or
 Applicable benchmark for the respective
currency will be 450 basis points per annum or
 as prescribed by the Reserve Bank in
consultation with the Government of India . munotes.in

Page 75

Regulatory Framewor k for
International Funds
75 B. For ECBs raised in Indian Rupees
 The maximum spread will be 450 basis points
per annum over the prevailing yield of the
Government of India securities of corresponding
maturity or
 as prescribed by the Reserve Bank in
consultation with the Government of India
End-uses  For all purposes except for those activities
prescribed in the negative end -use list by the
Reserve Bank in consultation with the
Government of India.
Borrowing
Limit  up to USD 750 million or equivalent per
financial year.
 For Startups up to USD 3 million or equivalent
per financial year.
Security  as specified by the Reserve Bank
 may also provide corporate and / or personal
guarantee

7.4 FOREIGN DIRECT INVESTMENT REGULATIONS
Foreign Direct Investment (FDI) regulations are rules and polic ies
established by a country’s government to control the inflow and outflow
of foreign investments into their economy. The regulations aim to create a
favourable investment climate for foreign investors while balancing the
interests of domestic businesses and the country’s economic development
goals.
Examples of FDI regulations that countries may impose:
Investment Approval: Countries may require foreign investors to obtain
prior approval from the government before investing in certain sectors or
industries . This is to ensure that the investment aligns with the
country's economic goals, doesn't; it threatens national security, and
is consistent with environmental regulations.
Equity Caps: Governments may impose limits on the percentage of
equity ownershi p that foreign investors can hold in certain industries or
companies. For example, a government may allow foreign investors to
hold no more than 49% of a company’s equity in certain sectors.
Performance Requirements: Governments may require foreign investo rs
to meet certain performance criteria, such as export targets, job creation,
and technology transfer, to encourage them to contribute to the
country's economic development. munotes.in

Page 76

Financial Regulations
76 Taxation: Countries may impose different tax rates for foreign investors
comp ared toDomestic investors. For example, they may offer tax
incentives to encourage foreign investors to invest in certain sectors or
regions.
Currency Controls: Governments may impose restrictions on the
repatriation of profits or capital by foreign invest ors to control the flow of
foreign currency out of the country.
FDI regulations vary by country and can change over time. It is important
for foreign investors to understand and comply with the regulations in the
countries where they plan to invest to avoi d any legal or financial
repercussions.
The Foreign Direct Investment (FDI) policy and the Securities and
Exchange Board of India (SEBI) regulations are two distinct regulatory
frameworks that govern foreign investment in India. brief overview of
each segm ents is given below
Foreign Direct Investment (FDI) Policy:
The FDI policy is a set of guidelines and regulations issued by the
Department of Industrial Policy and Promotion (DIPP), Ministry of
Commerce and Industry, Government of India. The policy regulat es
foreign investment in various sectors of the Indian economy, including
manufacturing, services, and infrastructure.
The FDI policy is regularly reviewed and updated to ensure that it remains
relevant to the changing economic conditions and business envi ronment.
The latest FDI policy was released on 28th August 2017, which
consolidates all the previous regulations and guidelines on FDI.
The FDI policy outlines the sectors where foreign investment is permitted,
the entry routes for foreign investors, and t he conditions and limitations
for foreign investment. The policy also specifies the sector -specific caps
on foreign investment, which may vary depending on the strategic
importance of the sector to the Indian economy.
7.5 SEBI (FOREIGN PORTFOLIO INVESTORS)
REGULATIONS - 2014:
The SEBI (Foreign Portfolio Investors) Regulations - 2014 is a set of
guidelines issued by the Securities and Exchange Board of India (SEBI) to
regulate foreign portfolio investments in India. The regulations provide a
framework for fo reign investors to invest in Indian securities, including
equities, debt securities, and derivative instruments.
The SEBI (Foreign Portfolio Investors) Regulations - 2014 replaced the
earlier SEBI (Foreign Institutional Investors) Regulations - 1995, and
introduced a more liberalized and streamlined framework for foreign
portfolio investments in India. munotes.in

Page 77

Regulatory Framewor k for
International Funds
77 The SEBI (Foreign Portfolio Investors) Regulations - 2014 classify
foreign portfolio
investors into three categories - Category I, Category II, and Category III -
based on their level of regulation and risk. The regulations also provide for
the registration process for foreign portfolio investors, the investment
limits for each category of investors, and the operational and compliance
requirements.
SEBI (Alter nate Investment Fund) Regulations – 2012:
The SEBI (Alternate Investment Fund) Regulations - 2012 is a set of
guidelines issued by the Securities and Exchange Board of India (SEBI) to
regulate alternate investment funds (AIFs) in India. The regulations
provide a regulatory framework for private equity funds, hedge funds, and
other types of AIFs that invest in India.
The SEBI (Alternate Investment Fund) Regulations - 2012 replaced the
earlier SEBI (Venture Capital Funds) Regulations - 1996, and introduced a
more comprehensive and flexible framework for AIFs in India.
The SEBI (Alternate Investment Fund) Regulations - 2012 provide for the
registrationprocess for AIFs, the investment restrictions and conditions for
AIFs, the valuation and reporting requirements , and the obligations of the
fund manager and custodian. The regulations also classify AIFs into three
categories - Category I, Category II, and Category III - based on their
investment strategy, level of regulation, and investor eligibility.
Foreign Direc t Investment (FDI) policy in India is a set of guidelines
issued by the Department of Industrial Policy and Promotion (DIPP),
Ministry of Commerce and Industry, Government of India. The FDI policy
regulates foreign investment in various sectors of the Indi an economy,
including manufacturing, services, and infrastructure. The aim of the
policy is to attract foreign investment to promote economic growth,
employment, and technology transfer in India.
7.6 FEATURES OF THE FDI POLICY IN INDIA:
Sectors where FDI i s permitted: The FDI policy in India allows foreign
investment in various sectors, subject to certain conditions and limitations.
Some sectors are fully open to foreign investment, while others are subject
to sector -specific caps and restrictions.
Entry ro utes for foreign investors: The FDI policy allows foreign
investors to enter the Indian market through various routes, including
automatic route, government route, and approval route. The entry route
depends on the sector, the level of foreign investment, and the strategic
importance of the sector to the Indian economy.
Sector -specific caps on FDI: The FDI policy specifies the sector -specific
caps on foreign investment, which may vary depending on the strategic munotes.in

Page 78

Financial Regulations
78 importance of the sector to the Indian economy . For example, the FDI
limit in the defense sector is 74%, while it is 100% in most other sectors.
Conditions and limitations for FDI: The FDI policy specifies the
conditions and limitations for foreign investment, such as minimum
capitalization requiremen ts, technology transfer requirements, and
performance requirements.
Investment promotion measures: The FDI policy includes various
measures to promote foreign investment in India, such as single -window
clearance, fast -track approvals, and tax incentives.
The FDI policy in India is regularly reviewed and updated to ensure that it
remains relevant to the changing economic conditions and business
environment. The latest FDI policy was released on 15th October 2021,
which consolidates all the previous regulatio ns and guidelines on FDI.
7.7 UNIT END QUESTIONS
Multiple Choice Question
1. Depository banks purchase shares of foreign companies and distribute
the shares to the investors in the form of ……….
A. Convertible Bonds
B. Foreign Company Shares
C. International Funds
D. Depo sitory receipts.
2. Minimum average maturity is …….. For ECB
A. 1 Year
B. 2 Years
C. 3 Years
D. 4 Years
3. For Startups up to USD………… or equivalent per financial year.
A. 3 million
B. 4 million
C. 5 million
D. 6 million
4. External Commercial Borrowing can be done in
A. Any freely convertib le foreign currency
B. Indian Rupee
C. currency as specified by the Reserve Bank
D. All of the above
munotes.in

Page 79

Regulatory Framewor k for
International Funds
79 5. Which of the following is not a FDI regulation
A. Taxation
B. Performance Requirement
C. Investment Cap
D. Nome of the above
True or False
1. American Depository Receipts can be listed in India.
2. Companies incorporated and listed in India are allowed to issue
Depository Receipts in India.
3. The FDI policy regulates foreign investment in various sectors of the
Indian economy.
4. The FDI policy is a set of guidelines and regulations is sued by the
Department
5. International Affairs
6. Governments cannot impose limits on the percentage of equity
ownership that foreign investors can hold in certain industries or
companies.
7. Countries may impose different tax rates for foreign investors
compared to domestic investors.
Write Short Notes
1. International Sources of Fund
2. Features of FDI Policy in India
3. GDR v.s ADR
4. ExternalCommercial Borrowings
5. Examples of Foreign Direct Regulations
Explain in Details
1. Regulatory Framework to issue Depository Receipts
2. Regulatory Framework to raise fund by issuing External Commercial
Borrowings
3. Foreign Direct Investment Policy in India
REFERENCES
 Mishkin, F. (1999) ‘Global financial instability: framework, events,
issues’, Journal of Economic Perspectives, Vol. 13. munotes.in

Page 80

Financial Regulations
80  Padoa -Schioppa, T. (2003) ‘Central banks and financial stability:
exploring the land in between’, The Transformation of the European
Financial System.
 Rahim, N.H.A. and Abedin, N.F.Z. (2014) ‘Trade liberalisation,
financial development and growth in Malaysia’, I nternational
Proceedings of Economics Development and Research.
 Luintel, K.B. and Khan, M. (1999) ‘A quantitative reassessment of the
finance -growth nexus: evidence from a multivariate VAR’, Journal of
Development Economics, Vol. 60.
 Mattoo, A. (1998) Fin ancial Services and the WTO: Liberalization in
the Developing and Transition Economies, Staff Working Paper, No.
TISD9803, World Trade Organization Trade in Services Division.


munotes.in

Page 81

81 8
REGULATORY FRAMEWORK RELATED
TO CREDIT RATING AGENCIES
Unit Structure
8.0 Learning Objective:
8.1 Introduction
8.2 Key provisions of the SEBI (Credit Rating Agencies)Regulations,
1999:
8.3 Importance of Credit Rating Agencies: in India
8.4 P rovisions of Credit Rating Agencies Regulations – 1999.
8.5 Unit End Questions
8.6 References book
8.0 LEARNING OBJECTIVE:
 To know about various sources of raising international fund and
respective regulatory framework
 To get deep insight of Foreign Direct Investment P olicy of India
8.1 INTRODUCTION
SEBI (Credit Rating Agencies) Regulations, 1999 is the regulatory
framework in India related to Credit Rating Agencies. These regulations
were enacted by the Securities and Exchange Board of India (SEBI) to
regulate and ov ersee the functioning of Credit Rating Agencies (CRAs)
operating in India.
8.2 KEY PROVISIONS OF THE SEBI (CREDIT RATING
AGENCIES) REGULATIONS, 1999:
Registration of CRAs: The regulations require CRAs to register with
SEBI before they can provide credit rating services in India. Toobtain
registration, CRAs must comply with certain eligibilitycriteria, including a
minimum net worth requirement.
Disclosure norms: The regulations mandate CRAs to disclose all
information related to the credit rating process, including the methodology
used, key rating assumptions, and any limitations or qualifications in the
rating process. The CRAs are also required to make certain disclosures in
their rating reports, including their track record of rating performance. munotes.in

Page 82

Financial Regulations
82 Code o f Conduct: The regulations prescribe a code of conduct that CRAs
must follow while providing credit rating services. This includes
maintaining independence, avoiding conflicts of interest, and maintaining
confidentiality of information.
Monitoring and Enfo rcement: The regulations empower SEBI to
monitor the performance of CRAs and take appropriate action against non-
compliant CRAs. This includes imposing penalties, suspending or
cancelling registration, or taking legal action against the CRA and its
offic ials.
Overall, the SEBI (Credit Rating Agencies) Regulations, 1999 provide a
comprehensive regulatory framework for CRAs in India. The regulations
aim to promote transparency and accountability in the credit rating process
and protect the interests of inve stors and other stakeholders.

Credit Rating Agencies (CRAs) are companies that assess the
creditworthiness of corporate and government entities by evaluating their
ability to meet their financial obligations, including the timely repayment
of debt. CRAs provide credit ratings on various types of debt instruments,
such as bonds, loans, and commercial paper.
The credit rating is a measure of the issuer's creditworthiness, and it
reflects the likelihood of default on the debt instrument. CRAs use a
varie ty of factors to assess creditworthiness, including the issuer's
financial health, past credit history, management quality, and market
conditions.
The three major global CRAs are Standard & Poor's (S&P), Moody's, and
Fitch Ratings. These agencies domina te the credit rating industry and
hold significant influence in financial markets. There are also several
smaller CRAs that operate in different regions or specialize in specific
industries.
CRAs play a critical role in the financial markets by providin g investors
with independent and objective assessments of credit risk.Investors rely on
credit ratings to make informed investment decisions and to manage their
portfolio risk. CRAs also help issuers by providing them with a credible
credit rating, whic h can help lower borrowing costs.
However, CRAs have been criticized for their role in the 2008financial
crisis, when they assigned overly optimistic credit ratings to mortgage -
backed securities that turned out to be much riskier than initially thought.
This has led to increased regulatory scrutiny and reforms to improve the
quality and transparency of credit ratings.
Credit Rating Agencies (CRAs) play an important role in the Indian
financial markets by providing independent credit assessments of
corpora te and government entities. There are several CRAs operating in
India, including the three major global CRAs, namely Standard & Poor's
(S&P), Moody's, and Fitch Ratings, as well as several domestic CRAs. munotes.in

Page 83

Regulatory Framework
related to Credit Ratin g Agencies
83
In India, the primary regulator of CRAs is the Secu rities and Exchange
Board of India (SEBI). SEBI regulates the functioning of CRAs through
the SEBI (Credit Rating Agencies) Regulations, 1999, which provides a
framework for the registration, disclosure, and code of conduct for
CRAs. SEBI also monitors and enforces compliance with these
regulations, including imposing penalties or revoking registration for
non-compliance.
Some of the prominent domestic CRAs in India include CRISIL, ICRA,
CARE Ratings, and Brickwork Ratings. These agencies have developed
expertise in assessing credit risk across various sectors of the
Indian economy and provide credit ratings for a wide range of debt
instruments, including bonds, loans, and commercial paper.
The role of CRAs in India has grown significantly in recent years, a s
the Indian economy has expanded and diversified. Credit ratings
provided by CRAs are widely used by investors, financial institutions,
and issuers to evaluate credit risk and make informed investment
decisions. However, like in other markets, CRAs in Ind ia have also
faced criticism for their role in the 2008 financial crisis and have
since been subject to increased regulatory scrutiny to improve the
quality and transparency of credit ratings.
8.3 IMPORTANCE OF CREDIT RATING AGENCIES: IN
INDIA
Credit Ratin g Agencies (CRAs) play a crucial role in the Indian
financial markets, providing independent and objective assessments of
credit risk for corporate and government entities. Some of the key
importance of CRAs in India are:
Facilitating access to credit: CRA s provide credit ratings that help
issuers of debt securities to access credit at competitive interest
rates. High credit ratings indicate low credit risk, making it easier
for issuers to access credit at lower interest rates.
Enhancing transparency and cr edibility: Credit ratings provide
transparency and credibility to the creditworthiness of issuers. Credit
ratings are based on a rigorous and transparent methodology that considers
various factors, including financial health, past credit history, and
mana gement quality.
Managing risk: Credit ratings are used by investors to assess credit
risk and make informed investment decisions. Investors use credit ratings
to manage risk by diversifying their portfolios across different credit
ratings.
Promoting accoun tability and good governance : CRAs have a
significant influence on the financial markets, and their credit ratings can
affect the cost of borrowing for issuers. This puts pressure on issuers to munotes.in

Page 84

Financial Regulations
84 maintain good governance practices and financial discipline to maintain a
high credit rating..
Promoting investor protection: Credit ratings provide valuable
information to investors, enabling them to make informed investment
decisions. The SEBI (Credit Rating Agencies) Regulations, 1999, also
provide investor protec tion by requiring CRAs to disclose all information
related to the credit rating process, including the methodology used, key
rating assumptions, and any limitations or qualifications in the rating
process.
Overall, the importance of CRAs in India cannot be overstated, as they
play a critical role in promoting financial stability, market transparency,
and investor protection. By providing independent and objective credit
assessments, CRAs help issuers to access credit at competitive interest
rates and enabl e investors to manage risk and make informed investment
decisions.
Advantages of Credit Rating Agencies?
Credit Rating Agencies (CRAs) provide a number of advantages to
various stakeholders in the financial markets, including investors,
issuers, and regula tors. Some of the key advantages of CRAs are:
Independent and objective credit assessment: CRAs provide an
independent and objective assessment of credit risk, enabling investors to
make informed investment decisions. Credit ratings are based on a
rigorous and transparent methodology that considers various factors,
including financial health, past credit history, and management quality.
Facilitate access to credit: CRAs provide credit ratings that help
issuers of debt securities to access credit at competit ive interest rates. High
credit ratings indicate low credit risk, making it easier for issuers to access
credit at lower interest rates.
Market transparency: CRAs provide transparency to the credit
worthiness of issuers, which promotes market transparency. The credit
rating process requires CRAs to disclose all information related to the
credit rating process, including the methodology used, key rating
assumptions, and any limitations or qualifications in the rating
process.
Enhance credibility: Credit rati ngs provide credibility to the
creditworthiness of issuers, which is particularly important for
smaller or less established issuers. Credit ratings from reputable
CRAs can help enhance the credibility of issuers and make them more
attractive to investors.
Promote financial stability: CRAs play a critical role in promoting
financial stability by providing an independent assessment of credit
risk. Credit ratings help investors to manage risk by diversifying
their portfolios across different credit ratings. Th is promotes munotes.in

Page 85

Regulatory Framework
related to Credit Ratin g Agencies
85 financial stability by reducing the likelihood of systemic risk in the
financial markets.
Encourage good governance: The credit rating process puts pressure on
issuers to maintain good governance practices and financial discipline
to maintain a high credit rating. This promotes good governance
practices and financial discipline among issuers, which is beneficial
for the financial markets as a whole.
Overall, the advantages of CRAs are significant, as they promote
transparency, credibility, finan cial stability, and good governance in
the financial markets.
limitations of Credit Rating Agencies?
While Credit Rating Agencies (CRAs) provide several advantages, there
are also some limitations to their operations. Some of the key
limitations of CRAs ar e:
Potential conflicts of interest: CRAs are paid by the issuers of debt
securities to provide credit ratings, which creates a potential
conflict of interest. The issuers may pressure the CRAs to provide
favorable ratings to make it easier to sell their se curities,
potentially compromising the independence and objectivity of the
credit rating process.
Limited transparency: While CRAs are required to disclose their credit
rating methodologies, the information provided may not be sufficient
for investors to u nderstand the factors that determine a credit rating. In
addition, CRAs may not disclose certain information due to confidentiality
agreements or other factors, which limits transparency.

Reliance on historical data: Credit ratings are based on historical
data and may not accurately reflect future credit risk. Economic and
financial conditions can change rapidly, which can affect the credit
worthiness of issuers.
Herding behavior: CRAs may exhibit herding behavior, where they tend
to converge on similar cr edit ratings for issuers. This can create a
self-fulfilling prophecy, where the ratings themselves affect the credit
worthiness of issuers.
Inadequate coverage: CRAs may not provide credit ratings for all
issuers or debt securities, particularly for smalle r or less established
issuers. This can limit the ability of these issuers to access credit at
competitive rates.
Rating downgrades can trigger systemic risks: If multiple issuers are
downgraded by a CRA simultaneously, it can lead to a panic in the
financ ial markets, triggering a sell -off and increasing systemic risks. munotes.in

Page 86

Financial Regulations
86
Overall, the limitations of CRAs need to be considered while using
credit ratings as an investment tool. Investors should not rely solely
on credit ratings and should conduct their own anal ysis of the
creditworthiness of issuers.
8.4 PROVISIONS OF CREDIT RATING AGENCIES
REGULATIONS – 1999.
The Credit Rating Agencies Regulations 1999 are a set of regulations
issued by the Securities and Exchange Board of India (SEBI) to govern
the operations of Credit Rating Agencies (CRAs) in India. The key
provisions of the regulations are as follows:
Registration: The regulations require CRAs to be registered with SEBI
to operate in India. The registration process includes a review of the
CRA's operational, financial, and management capabilities, as well as
a review of its credit rating methodology.
Disclosure requirements: The regulations require CRAs to disclose
their credit rating methodologies, rating scales, and key rating
assumptions. CRAs must also di sclose any conflicts of interest, such
as financial relationships with issuers or investors, that may affect
the independence and objectivity of the rating process.
Rating process: The regulations require CRAs to have a rigorous and
transparent rating proc ess that considers all relevant information.
The rating process must be based on a comprehensive analysis of the
issuer's creditworthiness, financial health, past credit history, and
management quality.
Monitoring and surveillance: CRAs must monitor and re view the credit
ratings of issuers on an ongoing basis to ensure that the ratings
remain accurate and up -to-date. CRAs must also conduct periodic
reviews of their rating methodologies to ensure that they remain
relevant and effective.
Rating dissemination: CRAs must promptly disseminate their credit
ratings to the public and ensure that the ratings are widely available
through appropriate channels, such as financial publications or online
databases.
Remedial action: The regulations require CRAs to take appr opriate
remedial action if any deficiencies or weaknesses are identified in
their rating process. The CRA must also promptly notify SEBI of any
material changes in its operations, management, or financial
condition.
Penalties: The regulations provide for p enalties and disciplinary
action against CRAs that violate the regulations or engage in any
fraudulent or unfair practices. munotes.in

Page 87

Regulatory Framework
related to Credit Ratin g Agencies
87 Overall, the Credit Rating Agencies Regulations 1999 are designed to
promote transparency, objectivity, and accountability in the
operations of CRAs in India. The regulations aim to ensure that credit
ratings are accurate, reliable, and independent, and that investors
have access to all relevant information to make informed investment
decisions.

Penalties for Credit Rating Agencies Re gulations – 1999.
The Credit Rating Agencies Regulations 1999 provide for penalties and
disciplinary action against Credit Rating Agencies (CRAs) that violate
the regulations or engage in any fraudulent or unfair practices. The
penalties and disciplinary a ction that can be imposed on CRAs include:
Monetary penalties: SEBI can impose monetary penalties on CRAs for
violations of the regulations, which can range from a small amount to
a substantial sum, depending on the severity of the violation.
Suspension or cancellation of registration: SEBI has the power to
suspend or cancel the registration of a CRA that violates the
regulations. If a CRA's registration is suspended or cancelled, it
cannot operate as a credit rating agency in India.
Disciplinary action aga inst key personnel: SEBI can take disciplinary
action against key personnel of a CRA, such as directors or senior
management, who are found to be involved in any violations of the
regulations.
Public censure: SEBI can issue a public censure against a CRA f or any
violations of the regulations. This can harm the reputation of the CRA
and reduce investor confidence in its credit ratings.
Referral to law enforcement agencies: SEBI can refer cases of fraud or
other criminal offenses by CRAs to law enforcement ag encies for
investigation and prosecution.
Any other action as deemed fit: SEBI has the power to take any other
action it deems fit in the interest of investors and the capital
markets.

Overall, the penalties and disciplinary action available under the
Credit Rating Agencies Regulations 1999 are designed to ensure that
CRAs operate in a fair, transparent, and responsible manner, and that
they provide accurate and reliable credit ratings to investors.
Rules of Credit Rating Agencies Regulations – 1999.
The Cr edit Rating Agencies Regulations 1999 are a set of rules issued
by the Securities and Exchange Board of India (SEBI) to govern the
operations of Credit Rating Agencies (CRAs) in India. The key rules
under the regulations are as follows: munotes.in

Page 88

Financial Regulations
88 Eligibility criteri a for registration : The rules specify the
eligibility criteria that CRAs must meet to be registered with SEBI.
This includes requirements related to capital adequacy, track record,
and management competence.
Registration process: The rules outline the regi stration process for
CRAs, including the application requirements, the fees payable, and
the timeline for approval or rejection of the application.
Disclosure requirements: The rules require CRAs to make various
disclosures to the public, including informa tion on their credit
rating methodologies, rating scales, and rating criteria. CRAs must
also disclose any conflicts of interest that may arise in their rating
process.

Rating process: The rules require CRAs to have a rigorous and
transparent rating proce ss that considers all relevant information.
The rating process must be based on a comprehensive analysis of the
issuer's creditworthiness, financial health, past credit history, and
management quality.
Monitoring and surveillance: The rules require CRAs to monitor and
review the credit ratings of issuers on an ongoing basis to ensure
that the ratings remain accurate and up -to-date. CRAs must also
conduct periodic reviews of their rating methodologies to ensure that
they remain relevant and effective.
Rating dissemination: The rules require CRAs to promptly disseminate
their credit ratings to the public and ensure that the ratings are
widely available through appropriate channels, such as financial
publications or online databases.
Remedial action: The rules require CRAs to take appropriate remedial
action if any deficiencies or weaknesses are identified in their
rating process. The CRA must also promptly notify SEBI of any material
changes in its operations, management, or financial condition.
Penalties: The rules provide for penalties and disciplinary action
against CRAs that violate the regulations or engage in any fraudulent
or unfair practices.
Overall, the rules under the Credit Rating Agencies Regulations 1999
are designed to promote transparency, object ivity, and accountability
in the operations of CRAs in India. The rules aim to ensure that
credit ratings are accurate, reliable, and independent, and that
investors have access to all relevant information to make informed
investment decisions.
Eligibility criteria for registration of Credit Rating Agencies under
Regulations – 1999. munotes.in

Page 89

Regulatory Framework
related to Credit Ratin g Agencies
89 The eligibility criteria for registration of Credit Rating Agencies
(CRAs) under the Credit Rating Agencies Regulations 1999 are as
follows:

Minimum net worth: The CRA must have a minimum net worth of Rs. 5
crore at the time of registration.
Promoters: The CRA must have promoters who have a sound track
record and are of good repute.
Management: The CRA must have a competent and qualified
management team with sufficient experience in the field of credit rating.
Infrastructure: The CRA must have adequate infrastructure, including
office space, equipment, and technology, to support its operations.
Board of Directors: The CRA must have a Board of Directors that is
composed of at least 50% independent directors, and the Chairperson of
the Board must be an independent director.
Credit rating experience: The CRA must have at least three years of
experience in rating debt instruments or other securities.
Rating methodology: The CRA must ha ve a well -defined and transparent
rating methodology that is based on a comprehensive analysis of the
issuer's creditworthiness, financial health, past credit history, and
management quality.
Disclosure norms: The CRA must have a policy of full disclosure of its
rating process, rating criteria, and any conflicts of interest that
may arise.
Code of Conduct: The CRA must have a code of conduct for its
employees that is in line with the guidelines issued by SEBI.
Compliance: The CRA must have a system of comp liance that ensures
compliance with the Credit Rating Agencies Regulations 1999 and any
other applicable laws and regulations.
In summary, the eligibility criteria for registration of CRAs under
the Credit Rating Agencies Regulations 1999 are designed to e nsure
that only competent and well -managed entities are registered as CRAs,
and that they have adequate infrastructure and systems in place to
provide reliable and independent credit ratings.
Registration process for registration of Credit Rating Agencies under
Regulations – 1999?
The registration process for Credit Rating Agencies (CRAs) under the
Credit Rating Agencies Regulations 1999 is as follows:
Submission of application: The CRA must submit an application in the
prescribed format to SEBI along with t he required documents and fees. munotes.in

Page 90

Financial Regulations
90 Initial scrutiny: SEBI will scrutinize the application and documents
submitted by the CRA to determine whether the CRA meets the
eligibility criteria specified under the regulations.
Inspection: SEBI may conduct an inspectio n of the CRA's premises and
records to verify the information provided in the application and to
assess the CRA's infrastructure and systems.
Approval or rejection: Based on the application, documents, and
inspection report, SEBI will either approve or rej ect the CRA's
application for registration. If approved, SEBI will issue a
certificate of registration to the CRA.
Renewal of registration: The CRA's registration is valid for three
years, after which it must apply for renewal of its registration. The
renewal process is similar to the initial registration process and
requires the CRA to submit an application and documents to SEBI.
Surrender of registration: If the CRA wishes to surrender its
registration, it must inform SEBI in writing and follow the proced ures
specified under the regulations.
Overall, the registration process for CRAs under the Credit Rating
Agencies Regulations 1999 is designed to ensure that only competent
and well -managed entities are registered as CRAs, and that they have
adequate infra structure and systems in place to provide reliable and
independent credit ratings. The process involves a rigorous evaluation
of the CRA's eligibility criteria, infrastructure, and systems to
ensure that they meet the regulatory standards set by SEBI.
Disclosure requirements of Credit Rating Agencies under
Regulations – 1999?
Under the Credit Rating Agencies Regulations 1999, Credit Rating
Agencies (CRAs) in India are required to comply with various
disclosure requirements. These requirements are designed to ensure
transparency and accountability in the rating process, and to provide
investors and issuers with accurate and reliable information. Some of
the key disclosure requirements for CRAs under the regulations are:
Rating disclosure: CRAs must disclose th e rating assigned to the
instrument being rated, the date of the rating, and the rating
outlook.
Methodology disclosure: CRAs must disclose their rating methodology
and the key assumptions used in the rating process.
Rating history: CRAs must maintain a ra ting history of the issuer,
which includes details of all previous ratings assigned by the CRA.
Disclosure of rating limitations: CRAs must disclose the limitations
of their rating, including any factors that may have a negative impact
on the rating. munotes.in

Page 91

Regulatory Framework
related to Credit Ratin g Agencies
91 Confl ict of interest disclosure: CRAs must disclose any conflict of
interest that may arise in the rating process, including any financial
or other relationship with the issuer.
Annual report disclosure: CRAs must prepare and disclose an annual
report that prov ides details of their operations, rating performance,
and any other relevant information.
Timely disclosure: CRAs must ensure that all information related to
the rating process is disclosed in a timely manner.
Website disclosure: CRAs must maintain a websi te that provides details
of their rating methodology, rating history, and other relevant
information.
Overall, the disclosure requirements for CRAs under the Credit Rating
Agencies Regulations 1999 are comprehensive and designed to ensure
transparency and accountability in the rating process. By complying
with these requirements, CRAs can help to build trust and confidence
among investors and issuers, and contribute to the development of a
robust credit market in India.
Rating process of Credit Rating Agenc ies under Regulations – 1999.
The rating process of Credit Rating Agencies (CRAs) in India under the
Credit Rating Agencies Regulations 1999 involves the following steps:
Request for rating: The issuer of the debt instrument (or an investor)
approaches a CR A to request a credit rating for the instrument.
Analysis of information: The CRA obtains information from the issuer,
such as financial statements, industry reports, and other relevant
data. The CRA then analyzes this information to assess the issuer's
creditworthiness.
Rating committee: The CRA convenes a rating committee consisting of
experienced professionals who review the analysis and arrive at a
rating based on their collective judgment.
Rating communication: The CRA communicates the rating to the is suer
and/or investor, along with the key factors that influenced the
rating.
Ongoing monitoring: The CRA continuously monitors the issuer's
financial performance, market conditions, and other relevant factors
to assess the ongoing creditworthiness of the i ssuer.
Rating review: The CRA periodically reviews the rating to ensure that
it remains accurate and up -to-date. If the CRA determines that the
rating needs to be revised, it communicates the revised rating to the
issuer and/or investor.
The rating process of CRAs under the Credit Rating Agencies
Regulations 1999 is designed to ensure that credit ratings are munotes.in

Page 92

Financial Regulations
92 independent, accurate, and reliable. The process involves a rigorous
analysis of the issuer's financial performance and creditworthiness,
as well as on going monitoring to ensure that the rating remains
accurate over time. By following this process, CRAs can provide
valuable information to investors and help to facilitate the
development of a robust credit market in India.
Monitoring and surveillance on C redit Rating Agencies under
Regulations – 1999.
The Securities and Exchange Board of India (SEBI) is the regulator of
Credit Rating Agencies (CRAs) in India and is responsible for
monitoring and surveillance of CRAs to ensure compliance with the
Credit Rati ng Agencies Regulations 1999. Some of the key monitoring
and surveillance activities undertaken by SEBI are:
Inspection: SEBI conducts periodic inspections of CRAs to verify
compliance with the regulations, assess the adequacy of their systems
and processe s, and identify areas for improvement.
Review of rating methodologies: SEBI reviews the rating methodologies
and processes used by CRAs to ensure that they are consistent with
best practices and are transparent.
Disclosure monitoring: SEBI monitors the dis closures made by CRAs to
ensure that they are accurate, timely, and adequate.
Investigation of complaints: SEBI investigates complaints and
allegations against CRAs to ensure that they are operating in
compliance with the regulations and are providing accu rate and
reliable credit ratings.
Enforcement action: SEBI takes enforcement action against CRAs for
non-compliance with the regulations, such as issuing warnings,
imposing fines, and revoking registration.
SEBI's monitoring and surveillance activities are designed to ensure
that CRAs operate in compliance with the regulations and maintain the
highest standards of transparency, independence, and reliability in
their credit rating activities. By promoting good governance and
accountability in the credit rati ng industry, SEBI helps to build
trust and confidence in the Indian capital markets and promotes the
development of a robust credit market.
Rating dissemination of Credit Rating Agencies under Regulations –
1999.
Credit Rating Agencies (CRAs) are required t o comply with specific
rating dissemination requirements under the Credit Rating Agencies
Regulations 1999 in India. These requirements include:
Rating symbols: CRAs must use a rating symbol to indicate the
creditworthiness of the rated entity or financial instrument. The munotes.in

Page 93

Regulatory Framework
related to Credit Ratin g Agencies
93 rating symbols used by CRAs must be consistent with the definitions
and meanings specified in the regulations.
Disclosure of rating rationales: CRAs must disclose the key factors
that influenced the rating, including the strengths and weak nesses of
the rated entity or financial instrument.
Timeframe for dissemination: CRAs must disseminate the credit rating
within a specified timeframe, which is typically within a few days of
the rating committee meeting.
Public dissemination: CRAs must mak e credit ratings available to the
public, either through their own website or through other media.
Confidentiality of information: CRAs must ensure the confidentiality
of any information received from issuers and must not disclose such
information to third parties without the issuer's consent.
Monitoring and updating of ratings: CRAs must continuously monitor
and update ratings as appropriate, including issuing revised ratings if
necessary.
The rating dissemination requirements of the Credit Rating Agencies
Regulations 1999 are designed to ensure that credit ratings are
accurate, reliable, and easily accessible to investors and other
market participants. By providing clear and transparent information
about the creditworthiness of rated entities and financial instruments,
CRAs can help investors to make informed investment decisions and
promote the development of a robust credit market in India.

Remedial action on Credit Rating Agencies under Regulations – 1999.
The Credit Rating Agencies (CRAs ) Regulations 19 99 in India provide
for remedial action against CRAs in case of non -compliance with the
regulations. Some of the remedial actions that can be taken by the
Securities and Exchange Board of India (SEBI) are:
Warning: SEBI may issue a warning to the CRA for m inor non -
compliance with the regulations. The warning may also specify the
corrective action that the CRA needs to take.
Imposition of penalties: SEBI may impose penalties on the CRA for
non-compliance with the regulations. The penalties may be in the form
of monetary fines or other actions, such as suspension or cancellation
of registration.
Suspension of registration: SEBI may suspend the registration of a CRA
for a specified period of time if it is found to be in violation of
the regulations. During the suspension period, the CRA is not
permitted to undertake any credit rating activities. munotes.in

Page 94

Financial Regulations
94 Cancellation of registration: SEBI may cancel the registration of a
CRA if it is found to be in serious violation of the regulations or if
it repeatedly fails to comply with the regulations.
Prosecution: SEBI may initiate prosecution proceedings against the CRA
in case of serious non -compliance with the regulations.
These remedial actions are intended to ensure that CRAs comply with
the regulations and maintain the highes t standards of transparency,
independence, and reliability in their credit rating activities. By taking
strict action against non -compliant CRAs, SEBI can help to protect
investors and promote the development of a trustworthy credit market in
India.
8.5 U NIT END QUESTIONS
Write Short Notes
1. Credit Rating Agencies
2. Advantages of Credit Rating Agencies
3. Key provisions of the SEBI (Credit Rating Agencies)Regulations,
1999:
Explain in Details
1. Regulatory Framework of Credit Rating Agencies
2. Importance of Credit Rating Agencies
3. Remedial action on Credit Rating Agencies under Regulations – 1999.
8.6 REFERENCES BOOK
 Mishkin, F. (1999) ‘Global financial instability: framework, events,
issues’, Journal of Economic Perspectives, Vol. 13.
 Padoa -Schioppa, T. (2003) ‘Cen tral banks and financial stability:
exploring the land in between’, The Transformation of the European
Financial System.
 Rahim, N.H.A. and Abedin, N.F.Z. (2014) ‘Trade liberalisation,
financial development and growth in Malaysia’, International
Proceedings of Economics Development and Research.
 Luintel, K.B. and Khan, M. (1999) ‘A quantitative reassessment of the
finance -growth nexus: evidence from a multivariate VAR’, Journal of
Development Economics, Vol. 60.
 Mattoo, A. (1998) Financial Services and the WTO: Liberalization in
the Developing and Transition Economies, Staff Working Paper, No.
TISD9803, World Trade Organization Trade in Services Division.
munotes.in