Reserve Bank of India and Secuirity Exchange Board of India The Primary

Financial Regulators.

Submitted by,
Arati Prakash
Fm-622
MBA, 8 B

The Reserve Bank of India

The origin of RBI can be traced back to 1926, when the royal commission of Indian currency and
finance also known as the Hilton committee recommended the creation of a central bank to
separate the control of credit and currency from the government and to augment financial
facilities throughout the country. The Reserve Bank of India act 1934 established reserve bank as
the banker to the central government and since then the role of RBI has gone through a number
of changes as the Indian economy changed.

Some activities of RBI

1935: Started operations
1950: India embarks on planned economic development. The reserve bank becomes the active
agent and participant.
1969: Nationalization of 14 major commercial banks.
1974: Introduction of priority lending sectors.
1985: Financial markets reform begins.
1991: India faces payment crisis.
1993: Exchange rate becomes market determinant.
1994: Board For Financial Supervision set up.
2002: Clearing Corporation Of India Limited commences.
2005: Focus on financial inclusion.
2007: RBI empowered to regulate payment system.

Structure, Organization and Governance:

About the Central Board
The Central Board has primary authority for the oversight of the Reserve Bank. It delegates
specify functions to its committees and sub-committees. The Reserve Bank is wholly owned by
the Government of India. The Central Board of Directors oversees the Reserve Banks business.
Central Board of Directors by the Numbers
Official Directors
1 Governor
4 Deputy Governors, at a maximum
Non-Official Directors
4 directorsnominated by the Central Government to represent each local board
10 directors nominated by the Central Government with expertise in various segments
of the economy
1 representative of the Central Government
6 meetingsat a minimumeach year
1 meetingat a minimumeach quarter
Central Board: Includes the Governor, Deputy Governors and the nominated Directors and a
government nominee Director.

Committee of Central Board: Oversees the current business of the central bank and typically
meets every week, on Wednesdays. The agenda focuses on current business, including approval
of the weekly statement of accounts related to the Issue and Banking Departments.
Board for Financial Supervision: Regulates and supervises commercial banks, Non-Banking
Finance Companies (NBFCs), development finance institutions, urban co-operative banks and
primary dealers.
Board for Payment and Settlement Systems: Regulates and supervises the payment and
settlement systems.
Sub-committees of the Central Board: Includes those on Inspection and Audit, Staff, and
Building. Focus of each sub- committee is on specific areas of operations.
RBI consists of:
26 Departments: These focus on policy issues in the Reserve Banks functional areas and
internal
Operations.
26 Regional Offices and Branches: These are the Reserve Banks operational arms and
customer interfaces, headed by Regional Directors. Smaller branches / sub-offices are headed by
a General Manager / Deputy General Manager.
The major function performed by the bank to stabilize the economy at large is:

Monetary Authority

Issuer of Currency

Banker and Debt Manager to Government

Banker to Banks

Regulator of the Banking System

Manager of Foreign Exchange

Regulator and Supervisor of the Payment and Settlement Systems

Developmental Role

Major acts that govern the functioning of RBI includes the following
Reserve Bank of India Act 1934
Banking Regulation Act 1949
Acts governing specific functions

Public Debt Act, 1944/Government Securities Act (Proposed): Governs government debt
market

Securities Contract (Regulation) Act, 1956: Regulates government securities market

Indian Coinage Act, 1906:Governs currency and coins

Foreign Exchange Regulation Act, 1973/Foreign Exchange Management Act, 1999:

Governs trade and foreign exchange market

"Payment and Settlement Systems Act, 2007: Provides for regulation and supervision of
payment systems in India"

Acts governing Banking Operations

Companies Act, 1956:Governs banks as companies

Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980: Relates

to nationalization of banks

Bankers' Books Evidence Act

Banking Secrecy Act

Negotiable Instruments Act, 1881

Acts governing Individual Institutions

State Bank of India Act, 1954

The Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003

The Industrial Finance Corporation (Transfer of Undertaking and Repeal) Act, 1993

National Bank for Agriculture and Rural Development Act

National Housing Bank Act

Deposit Insurance and Credit Guarantee Corporation Act

Monetary Policy by RBI

Monetary policy refers to the use of instruments under the control of the central bank to regulate
the availability, cost and use of money and credit. The goal: achieving specific economic
objectives, such as low and stable inflation and promoting growth.
The main objectives of monetary policy in India are:
Maintaining price stability.
Ensuring adequate low of credit to the productive sectors of the economy to support economic
growth.
Financial stability Instruments.
Cash Reserve Ratio (CRR): The share of net demand and time liabilities that banks must
maintain as cash balance with the Reserve Bank.
Statutory Liquidity Ratio (SLR): The share of net demand and time liabilities that banks must
maintain in safe and liquid assets, such as, government securities, cash and gold.
Issuer of Currency
The Reserve Bank is the nations sole note issuing authority. Along with the Government of
India, they are responsible for the design and production and overall management of the nations
currency, with the goal of ensuring an adequate supply of clean and genuine notes. The Reserve
Bank also makes sure there is an adequate supply of coins, produced by the government. In
consultation with the government, they routinely address security issues and target ways to
enhance security features to reduce the risk of counterfeiting or forgery.

Banker and Debt Manager to Government

Managing the governments banking transactions is a key RBI role. Like individuals, businesses
and banks, governments need a banker to carry out their financial transactions in an efficient and
effective manner, including the raising of resources from the public. As a banker to the central
government, the Reserve Bank maintains its accounts, receives money into and makes payments
out of these accounts and facilitates the transfer of government funds. They also act as the banker
to those state governments that have entered into an agreement with RBI.
Banker to Banks
Like individual consumers, businesses and organizations of all kinds, banks need their own
mechanism to transfer funds and settle inter-bank transactionssuch as borrowing from and
lending to other banksand customer transactions. As the banker to banks, the Reserve Bank
fulfills this role. In effect, all banks operating in the country have accounts with the Reserve
Bank, just as individuals and businesses have accounts with their banks.
Regulator of the Banking System
Banks are fundamental to the nations financial system. The central bank has a critical role to
play in ensuring the safety and soundness of the banking systemand in maintaining financial
stability and public confidence in this system. As the regulator and supervisor of the banking
system, the Reserve Bank protects the interests of depositors, ensures a framework for orderly
development and conduct of banking operations conducive to customer interests and maintains
overall financial stability through preventive and corrective measures.
Manager of Foreign Exchange
With the transition to a market-based system for determining the external value of the Indian
rupee, the foreign exchange market in India gained importance in the early reform period. In
recent years, with increasing integration of the Indian economy with the global economy arising
from greater trade and capital lows, the foreign exchange market has evolved as a key segment
of the Indian financial market.

Regulator and Supervisor of Payment and Settlement Systems

Payment and settlement systems play an important role in improving overall economic
efficiency. They consist of all the diverse arrangements that we use to systematically transfer
money or currency, paper instruments such as cheques, and various electronic channels.
Developmental role this role is, perhaps, the most unheralded aspect of our activities, yet it
remains among the most critical. This includes ensuring that credit is available to the productive
sectors of the economy, establishing institutions designed to build the countrys financial
infrastructure, expanding access to affordable financial services and promoting financial
education and literacy.

SEBI
The Securities and Exchange Board of India (SEBI) is the regulatory authority in India
established under Section 3 of SEBI Act, 1992. In 1988 the Securities and Exchange Board
of India (SEBI) was established by the Government of India through an executive resolution,
and was subsequently upgraded as a fully autonomous body (a statutory Board) in the year
1992 with the passing of the Securities and Exchange Board of India Act (SEBI Act) on 30th
January 1992. In place of Government Control, a statutory and autonomous regulatory board
with defined responsibilities, to cover both development & regulation of the market, and
independent powers has been set up.
SEBI Act, 1992 provides for establishment of Securities and Exchange Board of India
(SEBI) with statutory powers for (a) protecting the interests of investors in securities (b)
promoting the development of the securities market and (c) regulating the securities market.
Its regulatory jurisdiction extends over corporate in the issuance of capital and transfer of
securities, in addition to all intermediaries and persons associated with securities market. In
particular, it has powers for:

Regulating the business in stock exchanges and any other securities markets

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

Promoting and regulating self-regulatory organizations.

Prohibiting fraudulent and unfair trade practices. It calls for information from,
undertaking inspection, conducting inquiries and audits of the stock exchanges,
intermediaries, self - regulatory organizations, mutual funds and other persons
associated with the securities market.

The absence of conditions of perfect competition in the securities market makes the role of
the Regulator extremely important. The regulator ensures that the market participants behave
in a desired manner so that securities market continues to be a major source of finance for
corporate and government and the interest of investors are protected.
Outline of functions performed by SEBI:
Power to make rules for controlling stock exchange:
SEBI has power to make new rules for controlling stock exchange in India. All stock
exchanges in India are to be compulsorily registered with SEBI.
To provide license to dealers and brokers:
SEBI has power to provide license to dealers and brokers of capital market. If SEBI sees that
any financial product is of capital nature, then SEBI can also control to that product and its
dealers.
To foresee fraud in Capital Market:
SEBI has many powers for stopping fraud in capital market. It can ban on the trading of
those brokers who are involved in fraudulent and unfair trade practices relating to stock
market. It can impose the penalties on capital market intermediaries if they involve in insider
trading.
To Control the Mergers, Acquisitions and Takeover the companies:
Many big companies in India wants to create monopoly in capital market. So, these
companies buy all other companies or deal of merging. SEBI sees whether this merger or
acquisition is for development of business or to harm capital market.
To audit the performance of stock market:
SEBI uses his powers to audit the performance of different Indian stock exchange for

bringing transparency in the working of stock exchanges.

To make new rules on carry - forward transactions:
Share trading transactions carry forward cannot exceed 25% of broker's total transactions. A
90 day limit for carry forward has also been imposed.
To create relationship with ICAI:
ICAI is the authority for making new auditors of companies. SEBI creates good relationship
with ICAI for bringing more transparency in the auditing work of company accounts because
audited financial statements are mirror to see the real face of company and after these
investors can decide to invest or not to invest. Moreover, investors of India can easily trust
on audited financial reports.
Introduction of derivative contracts on Volatility Index:
For reducing the risk of investors, SEBI has now been decided to permit Stock Exchanges to
introduce derivative contracts on Volatility Index, subject to the condition that:

The underlying Volatility Index has a track record of at least one year.

The Exchange has in place the appropriate risk management framework for such
derivative contracts.

VARIOUS FINANCIAL SERVICES AND THE ROLE PLAYED BY RBI

AND SEBI
BANCASSURANCE
Bancassurance is a widely increasing channel of distribution of insurance companies. This is
selling of insurance products through banks.
Section 6(1)(o) of The Banking Regulation Act,1949, RBI gives the guidelines on Insurance
business for banks.

Any scheduled commercial bank would be permitted to undertake insurance business as

an agent of insurance companies on fee basis without any risk participation

Banks which satisfy the eligibility criteria given below will be permitted to set up a Joint
Venture Company for undertaking insurance business with risk participation, subject to
safeguards. The maximum equity contribution such a bank can hold in the Joint Venture
Company will normally be 50% of the paid up capital of the insurance company.

All banks entering into insurance business will be required to obtain prior approval of the
Reserve Bank Of India. The Reserve Bank will give permission to banks on case to case basis
keeping in view all relevant factors including the position in regard to the level of NonPerforming Assets of the applicant bank so as to ensure that Non-Performing Assets do not pose
any future threat to the bank in its present or the proposed line of activity, viz., insurance
business. It should be ensured that risks involved in insurance business do not get transferred to
the bank. There should be arms length relationship between the bank and the insurance outfit.

NBFCS IN INSURANCE
The Reserve Bank of India has recently issued revised guidelines for Non Banking Financial
Companies (NBFCs) entering into the insurance industry. The new norm clarified that in case
more than one company (irrespective of doing financial activity or not) in an NBFC group
wishes to take a stake in the insurance company, the contribution by all companies in the same
group shall be counted for the limit of 50 percent prescribed for the NBFC in an insurance JV.
According to the previous guideline issued by RBI on the matter, the maximum equity
contribution an NBFC can hold in a joint venture company is 50 per cent of the paid-up capital
of the insurance company.
Further, the new guideline says that a subsidiary or company in the same group of an NBFC or
of another NBFC engaged in the business of a non-banking financial institution or banking
business shall not be allowed to join the insurance company on risk participation basis.

MUTUAL FUNDS
The Securities and Exchange Board of India (SEBI) has brought in sweeping changes for the
mutual fund industry. The impact of which will be felt on the investor in more ways than one.
1. First, for New Fund Offers (NFOs), they will only be open for 15 days. (ELSS
funds though will continue to stay open for up to 90 days) It will save investors

from a prolonged NFO period and being harangued by advisors and

advertisements.
2. NFOs can only be invested at the close of the NFO period. Earlier, Mutual funds
would keep an NFO open for 30 days, and the minute they received their first
cheque, the money would be directly invested in the market; creating a skewed
accounting for those that entered later since they get a fixed NFO price.The
market regulator has corrected this by extending Application Supported by
Blocked Amount (ASBA) to mutual funds. This will become effective starting
July 1st this year.
3. Dividends can now only be paid out of actually realized gains. Impact: it will
reduce both the quantum of dividends announced, and the measures used by MFs
to garner investor money using dividend as a carrot to entice new investors.
4. Equity Mutual funds have been asked to play a more active role in corporate
governance of the companies they invest in. This will help mutual funds become
more active and not just that, they must reveal, in their annual reports from next
year, what they did in each vote. SEBI has now made it mandatory for funds to
disclose whether they voted for or against moves (suggested by companies in
which they have invested) such as mergers, demergers, corporate governance
issues, appointment and removal of directors. MFs have to disclose it on their
website as well as annual reports.
5. Equity Funds were allowed to charge 1% more as management fees if the funds
were no-load; but since SEBI has banned entry loads, this extra 1% has also
been removed.
6. SEBI has also asked Mutual Funds to reveal all commission paid to its sponsor or
associate companies, employees and their relatives.
7. Regarding the Fund-of-Fund (FOF) The market regulator has stated that
information documents that Asset Management Companies (AMCs) have been
entering into revenue sharing arrangements with offshore funds in respect of
investments made on behalf of Fund of Fund schemes create conflict of interest.
Henceforth, AMCs shall not enter into any revenue sharing arrangement with the

underlying funds in any manner and shall not receive any revenue by whatever
means/head from the underlying fund.
These guidelines set by the SEBI will lead to greater transparency for the common investor.
SEBI formulates policies and regulates the mutual funds to protect the interest of the investors.
With these guidelines falling in place it would create better trust and transparency and an
investable environment that would attract investors with greater faith and confidence. A
welcome & refreshing move!

FOREIGN INSTITUTIONAL INVESTORS

SEBI controls the FIIs in India through the SEBI (Foreign Institutional Investors) Regulations
Act 1995. SEBI (Foreign Institutional Investors) Regulations, 1995 prescribe certain restrictions
on the manner of investments to be made by the FIIs in the equity and debt as given in provision
of regulation 15(2).In terms of Regulation 15(2) of the FII Regulations:1) Notwithstanding
anything contained in sub-regulation (1) of this regulation, the total investments in equity and
equity related instruments (including fully convertible debentures, convertible portion of
partially convertible debentures and tradable warrants) made by a Foreign Institutional Investor
in India, whether on his own account or on account of his sub-accounts, shall not be less than
seventy per cent of the aggregate of all the investments of the Foreign Institutional Investor in
India, made on his own account and on account of his sub-accounts. Provided that nothing
contained in sub-regulation (2) shall apply to any investment of the Foreign Institutional Investor
either on its own account or on behalf of its sub-accounts in debt securities which are unlisted or
listed or to be listed on any stock exchange if the prior approval of the Board has been obtained
for such investments. Provided further that the Board may while granting approval for the
investments impose conditions as are necessary with respect to the maximum amount which can
be invested in debt securities by the foreign institutional investor on its own account or through
its sub accounts. As per the amendment FII can be registered for 100% debt, as well as invest up
to 100% in equity, there should not be any restriction regarding allocation of investments by an
FII between equity and debt.

PENSION FUND
As per the regulators i.e. RBI, SEBI and PFRA Banks will be allowed to undertake
Pension Fund Management (PFM) through their subsidiaries only. Pension Fund Management
should not be undertaken departmentally. Banks may lend their names/abbreviations to their
subsidiaries formed for Pension Fund Management, for leveraging their brand names and
associated benefits thereto, only subject to the banks maintaining arms length' relationship with
the subsidiary. In order to provide adequate safeguards against associated risks and ensure that
only strong and credible banks enter into the business of pension fund management, the banks
complying with the following eligibility criteria (as also the solvency margin prescribed by
PFRDA) may approach the Reserve Bank of India for necessary permission to enter into the
business of pension funds management:

Networth of the bank should be not less than Rs.500 crore.

CRAR should be not less than 11% during the last three years.

Bank should have made net profit for the last three consecutive years.

Return on Assets (ROA) should be atleast 0.6% or more.

Level of net non-performing assets (NPAs) should be less than 3%.

Performance of the bank's subsidiary/ies, if any, should be satisfactory.

MERCHANT BANKING
Certificate from SEBI is a must for merchant banking and the capital adequacy norms are to be
satisfied. The capital adequacy norms are as follows:
Category I: Rs. 5 crores
Category II: Rs. 50 lakhs
Category III: Rs.20 lakhs
SEBIs authorization is a must to act as merchant bankers. Authorization criteria include

Professional qualification in finance, law or business management.

Infrastructure like office space, equipment and manpower

Capital adequacy

Past track of record, experience, general reputation and fairness in all transactions

Every merchant banker should maintain copies of balance sheet, profit and loss account,
statement of financial position, half- yearly unaudited result should be submitted to SEBI. Every
merchant banker shall appoint a compliance officer to monitor compliance of the Act. SEBI has
the right to send inspecting authority to inspect books of account, records etc. of the merchant
bank.

QUALIFIED INSTITUTIONAL INVESTORS

In a major policy decision, the Central Government has decided to allow Qualified Foreign

Investors (QFIs) to directly invest in Indian equity market in order to widen the class of
investors, attract more foreign funds, and reduce market volatility and to deepen
the Indian capital market. QFIs have been already permitted to have direct access to
Indian Mutual Funds schemes pursuant to the Budget announcement 2011-12. Todays
decision is a next logical step in the direction.

As a first step in this direction, QFIs have been permitted direct access to Indian
Mutual Funds schemes pursuant to the Budget announcement 2011-12. As a next logical
step, it has now been decided to allow QFIs to directly invest in Indian equity market in
order to widen the class of investors, attract more foreign funds, and reduce market
volatility and to deepen the Indian capital market.
The QFIs shall include individuals, groups or associations, resident in a foreign country
which is compliant with FATF and that is a signatory to IOSCOs multilateral MoU. QFIs do
not include FII/sub-accounts.
Salient Features of the Scheme:

RBI would grant general permission to QFIs for investment under Portfolio
Investment Scheme (PIS) route similar to FIIs.

The individual and aggregate investment limit for QFIs shall be 5% and 10%
respectively of the paid up capital of Indian company. These limits shall be over

and above the FII and NRI investment ceilings prescribed under the PIS route for
foreign investment in India.

QFIs shall be allowed to invest through SEBI registered Qualified Depository

Participant (DP). A QFI shall open only one demat account and a trading account
with any of the qualified DP. The QFI shall make purchase and sale of equities
through that DP only.

DP shall ensure that QFIs meet all KYC and other regulatory requirements, as
per the relevant regulations issued by SEBI from time to time. QFIs shall remit
money through normal banking channel in any permitted currency (freely
convertible) directly to the single rupee pool bank account of the DP maintained
with a designated AD category - I bank. Upon receipt of instructions from QFI, DP
shall carry out the transactions (purchase/sale of equity).

DP shall be responsible for deduction of applicable tax at source out of the

redemption proceeds before making redemption payments to QFIs.

Risk management, margins and taxation on such trades by QFIs may be on lines
similar to the facility available to the other investors.

FOREIGN DIRECT INVESTMENTS GUIDELINES BY RBI

Forms in which business can be conducted by a foreign company in India
A foreign company planning to set up business operations in India may:

Incorporate a company under the Companies Act, 1956, as a Joint Venture or a Wholly
Owned Subsidiary.

Set up a Liaison Office / Representative Office or a Project Office or a Branch Office of

the foreign company which can undertake activities permitted under the Foreign
Exchange Management (Establishment in India of Branch Office or Other Place of
Business) Regulations, 2000.

Procedure for receiving Foreign Direct Investment in an Indian company?

An Indian company may receive Foreign Direct Investment under the two routes as given under
i. Automatic Route
FDI up to 100 per cent is allowed under the automatic route in all activities/sectors except where
the provisions of the consolidated FDI Policy, paragraph on 'Entry Routes for
Investment' issued by the Government of India from time to time, are attracted.
FDI in sectors /activities to the extent permitted under the automatic route does not require any
prior approval either of the Government or the Reserve Bank of India.
ii. Government Route
FDI in activities not covered under the automatic route requires prior approval of the
Government which are considered by the Foreign Investment Promotion Board (FIPB),
Department of Economic Affairs, Ministry of Finance.
Indian companies having foreign investment approval through FIPB route do not require any
further clearance from the Reserve Bank of India for receiving inward remittance and for the
issue of shares to the non-resident investors. Further, the Indian company is required to issue the
equity instrument within 180 days, from the date of receipt of inward remittance or debit to
NRE/FCNR (B) account in case of NRI/ PIO. After issue of shares / fully and mandatorily
convertible debentures / fully and mandatorily convertible preference shares, the Indian company
has to file the required documents along with Form FC-GPR with the Regional Office concerned
of the Reserve Bank of India within 30 days of issue of shares to the non-resident investors.
Sectors where FDI investments can be made:

FDI is prohibited under the Government Route as well as the Automatic Route in the following
sectors:
1. Retail trading except in single brand retailing.
2. Atomic energy

3. Lottery business\gambling and betting

4. Business of chit fund
5. Nidhi company
6. Agriculture excluding Floriculture, Horticulture, Development of seeds, Animal
Husbandry, Pisciculture and cultivation of vegetables, mushrooms, etc. under
controlled conditions and services related to agro and allied sectors and
Plantations
7. Housing and real estate except development of townships, construction of
residential/commercial premises, roads or bridges to the extent specified in
Notification No. FEMA 136/2005-RB dated July 19, 2005.
8. Trading in transferable development rights.
9. Manufacture of cigars , cheroots, cigarillos and cigarettes , of tobacco or of
tobacco substitutes