Regulatory Framework - General View

Regulatory Framework - General View (Part 1)

Definition: The regulatory framework is a set of rules and regulations that govern the financial markets to protect the interests of investors and promote the development of the securities market.
Details: The regulatory framework is motivated by the need to safeguard the interests of investors, ensure transparency and fairness in primary and secondary market transactions, and prevent undesirable activities such as insider trading and price manipulation.

Key Concepts

Financial Market Regulators: The main regulators of the financial markets in India are:
- SEBI (Securities and Exchange Board of India): Regulates the securities market, including stock exchanges, brokers, and other intermediaries.
- RBI (Reserve Bank of India): Regulates the banking sector.
- IRDAI (Insurance Regulatory and Development Authority of India): Regulates the insurance sector.
- PFRDA (Pension Fund Regulatory and Development Authority): Regulates the pension fund sector.
Regulatory Bodies: Other regulatory bodies that play a crucial role in the financial markets are:
- ROC (Registrar of Companies): Responsible for registering and regulating companies.
- EOW (Economic Offences Wing): Investigates economic offences, including those related to the securities market.
- FIU-India (Financial Intelligence Unit-India): Responsible for collecting and analyzing financial intelligence to prevent money laundering and other financial crimes.
Securities Appellate Tribunal (SAT): An appellate authority that hears appeals against the decisions of SEBI.
Legislative Framework: The legislative framework governing the financial markets includes the SEBI Act, 1992, the Securities Contracts (Regulation) Act, 1956, and other laws and regulations.
Bye-laws of Stock Exchanges: The bye-laws of stock exchanges, such as the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE), govern the trading of securities on these exchanges.
Taxes on Securities: Taxes, such as securities transaction tax (STT) and capital gains tax, are levied on transactions in securities.

Role of SEBI

Protecting Investor Interests: SEBI's primary objective is to protect the interests of investors in the securities market.
Promoting Market Development: SEBI also aims to promote the development of the securities market.
Regulating the Securities Market: SEBI regulates the securities market, including stock exchanges, brokers, and other intermediaries.
Powers of SEBI: SEBI has various powers, including the power to inspect books and records, summon and examine persons, and impose penalties for non-compliance with regulations.

Regulatory Framework - General View (Part 2)

Role of Reserve Bank of India (RBI)

Definition: The Reserve Bank of India (RBI) is the central bank of India, responsible for administering the country's monetary policy.
Key Functions:
- Formulate, implement, and monitor monetary policy to maintain price stability and ensure adequate credit flow to productive sectors.
- Regulate and supervise the financial system to maintain public confidence and protect depositors' interests.
- Manage foreign exchange to facilitate external trade and payments.
- Issue currency and coins, and exchange or destroy them when necessary.
- Perform developmental roles to support national objectives.
- Regulate and supervise payment and settlement systems.
- Act as a banker to the government and banks.
Governance: The Central Board of Directors, appointed by the Government of India, oversees RBI's affairs.

Role of Insurance Regulatory and Development Authority of India (IRDAI)

Mission: Regulate, promote, and ensure orderly growth of the insurance sector, protecting policyholders' interests.
Powers and Functions:
- Issue, renew, modify, or cancel insurance company registrations.
- Protect policyholders' interests in matters like policy assignment, nomination, and claim settlement.
- Specify qualifications, code of conduct, and training for intermediaries.
- Promote efficiency in the conduct of insurance business.
- Regulate investment of funds by insurance companies.

Role of Pension Fund Regulatory and Development Authority (PFRDA)

Responsibilities: Promote old-age income security, establish, develop, and regulate pension funds, and protect subscribers' interests.
Functions:
- Regulate the National Pension System (NPS) and other pension schemes.
- Protect subscribers' interests.
- Call for information, inspect, and conduct inquiries and investigations.

Role of International Financial Services Centres Authority (IFSCA)

Objective: Develop a strong global connection, focus on the Indian economy, and serve as an international financial platform.
Functions:
- Regulate and supervise financial services in International Financial Services Centres (IFSCs).
- Provide a world-class regulatory environment.

Other Agencies in the Financial Market

Ministry of Finance (MoF): Governs the fiscal system, mobilizes resources, and undertakes tasks for developmental programs.
Department of Economic Affairs (DEA): Formulates and monitors India's economic policies, having a bearing on domestic and international issues.

Regulatory Framework - General View (Part 3)

Department of Economic Affairs (DEA): The main function of the DEA is the formulation and monitoring of macroeconomic policies relating to fiscal policy and public finance, as well as the functioning of the capital market, including stock exchanges.
Department of Financial Services: Administers government policies relating to:
- Public sector banks
- Life insurance and general insurance
- Pension reforms
- Development Financial Institutions (DFIs) like NABARD, SIDBI, IIFCL, NHB, EXIM Bank, and IFCI
Department of Investment and Public Asset Management: Oversees matters relating to the disinvestment of equity shares of Central Government from Central Public Sector undertakings and financial policy relating to the utilization of proceeds of disinvestment.
Ministry of Corporate Affairs: Mainly concerned with the administration of the Companies Act, 1956/2013, and other allied acts, rules, and regulations pertaining to the corporate sector.

Key Regulatory Bodies

Registrar of Companies (ROC):
- Functions: Registration of companies, maintenance of a register of companies, regulation and reporting of companies, administration of government reporting, and fostering a business culture.
- Powers: Calling for information or explanation, seizing documents, and striking off defunct companies.
National Company Law Tribunal (NCLT): A quasi-judicial authority dealing with corporate disputes of a civil nature arising under the Companies Act and Insolvency and Bankruptcy Code.
Serious Fraud Investigation Office (SFIO): A multi-disciplinary organization for detecting and prosecuting white-collar crimes/frauds, consisting of experts in accountancy, forensic auditing, law, information technology, investigation, company law, capital market, and taxation.

Serious Fraud Investigation Office (SFIO)

Establishment: Set up by the Government of India through a notification dated 21.07.2015.
Headquarters and Regional Offices: Headed by a Director, with headquarters in New Delhi and five Regional Offices in Mumbai, New Delhi, Chennai, Hyderabad, and Kolkata.
Investigation Procedure: Assigned by the Central Government, which may designate Inspectors for the purpose of investigation into the affairs of a company.

Regulatory Framework - General View (Part 4)

Introduction to Regulatory Framework: The regulatory framework in India comprises various agencies and laws that work together to prevent and investigate economic offenses, including those related to the securities market.
Serious Fraud Investigation Office (SFIO): The SFIO is responsible for investigating the affairs of a company as per the Companies Act, 2013. The Director, SFIO, has the power to cause the affairs of the company to be investigated by an investigating officer.
Key Provisions of SFIO:
- The SFIO shall submit its report to the Central Government within the specified period.
- The company, its officers, and employees are responsible for providing all information, explanation, documents, and assistance to the investigating officer.
- The SFIO may submit an interim report if directed by the Central Government.
- On completion of the investigation, the SFIO shall submit the Investigation Report to the Central Government.
Computer Forensic and Data Mining Laboratory (CFDML): The CFDML was set up in 2013 to provide support and service to the officers of SFIO in their investigations. The laboratory is equipped with state-of-the-art tools for computer forensics and has adopted a quality system based on internationally accepted standards.
Mission Statement of CFDML: The CFDML is committed to providing quality service, technically valid results, and impartial and objective analysis in a time-bound manner.
Economic Offences Wing (EOW): The EOW was created in 1964 to deal with offenses under various sections of the Indian Penal Code and notified under Special Acts. The EOW has four zones, one of which focuses exclusively on large and complicated security and bank frauds.
Areas Covered by EOW:
- Frauds relating to foreign trade
- Banking frauds
- Insurance frauds
- Foreign exchange frauds
- Frauds involving manipulation of share prices, insider trading, and others
- Smuggling of narcotics and psychotropic substances
- Forgery of travel documents, identity papers, and overseas job rackets
- Counterfeit currency and fake Government stamps and paper
- Smuggling of antiques, arts, and treasures
- Cybercrimes
- Violation of Intellectual Property Rights, audio and video piracy, and software piracy
- Wildlife and environmental offenses
Financial Intelligence Unit - India (FIU-IND): The FIU-IND was set up in 2004 as the central national agency responsible for receiving, processing, analyzing, and disseminating information relating to suspect financial transactions.
Main Functions of FIU-IND:
- Collection of information
- Analysis of information
- Sharing of information
- Acting as a central repository
- Coordination and research and analysis
Police Authorities: The police authorities are responsible for maintaining law and order and enabling the enforcement of The Bharatiya Nyaya Sanhita, 2023 (BNS), which contains laws on crimes of various kinds.
Relevant Sections of BNS:
- Giving false evidence and offenses against public justice
- Offenses against property
- Offenses relating to documents and property marks
- Attempts to commit offenses
Examples of Offenses:
- Fabrication of false evidence
- Dishonest misappropriation of property
- Criminal breach of trust
- Forgery and making a false document
- Falsification of accounts
Appellate Authority: The Securities Appellate Tribunal (SAT) has been set up under the SEBI Act to hear and dispose of appeals against orders passed by SEBI or any adjudicating officer under the Act.
Role of SAT:
- Hearing and disposing of appeals
- Exercising jurisdiction, powers, and authority under the SEBI Act or any other law in force
- Consisting of a presiding officer and other members as determined by the Central Government
- Having specific qualification requirements for appointment
Appeals to SAT: Any person aggrieved by an order passed by SEBI or any adjudicating officer under the Act may appeal to the SAT, provided the aggrieved person had participated in the proceedings before the authority passing the order.

Regulatory Framework - General View (Part 5)

Definition: The regulatory framework for the securities market in India is governed by various laws and regulations, including the SEBI Act, 1992, the Securities Contracts (Regulation) Act, 1956, and the SEBI (Prohibition of Insider Trading) Regulations, 2015.
Details: The SEBI Act, 1992, establishes the Securities and Exchange Board of India (SEBI) to protect the interests of investors in securities and to promote the development of, and to regulate, the securities market.

Key Concepts

SEBI Act, 1992: The SEBI Act, 1992, is an act to provide for the establishment of a Board to protect the interests of investors in securities and to promote the development of, and to regulate, the securities market and related matters.
Securities Contracts (Regulation) Act, 1956: The Securities Contracts (Regulation) Act, 1956, is a legislation designed to prevent undesirable transactions in securities by regulating the business of securities dealing and trading.
SEBI (Prohibition of Insider Trading) Regulations, 2015: The SEBI (Prohibition of Insider Trading) Regulations, 2015, have been put in place to prevent insider trading and to protect the integrity of the market.

Legislative Framework

SEBI Act, 1992: The SEBI Act, 1992, regulates stock exchanges, stockbrokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers, and other intermediaries associated with the securities market.
Securities Contracts (Regulation) Act, 1956: The Securities Contracts (Regulation) Act, 1956, covers various aspects, including granting recognition to stock exchanges, corporatization and demutualization of stock exchanges, and the power of the Central Government to call for periodical returns from stock exchanges.
SEBI (Prohibition of Insider Trading) Regulations, 2015: The SEBI (Prohibition of Insider Trading) Regulations, 2015, define an insider as any person who is connected with a company or who is in possession of or has access to unpublished price sensitive information in respect of securities of a company.

Key Provisions

Connected Person: A connected person means any person who is or has during the six months prior to the concerned act been associated with a company, directly or indirectly, in any capacity, including by reason of frequent communication with its officers or by being in any contractual, fiduciary, or employment relationship.
Insider Trading: Insider trading refers to the trading of securities by an insider based on unpublished price sensitive information.
Generally Available Information: Generally available information means an information that is accessible to the public on a non-discriminatory basis and does not include unverified event or information reported in print or electronic media.

Regulatory Framework - General View (Part 6)

Definition: The SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003, aim to prevent fraudulent, unfair, and manipulative trade practices in the securities market.
Details: These regulations were made in exercise of the powers conferred by section 30 of the SEBI Act, 1992, and define fraud as any act, expression, omission, or concealment committed to induce another person to deal in securities.

Key Concepts

Fraudulent Trade Practices: Include acts such as:
- Knowingly misrepresenting the truth or concealing material facts
- Making promises without intention of performing them
- Representing facts in a reckless and careless manner
- Engaging in deceptive behavior
Dealing in Securities: Includes buying, selling, or subscribing to securities, as well as acts designed to influence investor decisions.
Prohibited Trade Practices: Include:
- Creating a false or misleading appearance of trading in securities
- Dealing in securities to inflate or depress prices
- Inducing people to subscribe to securities through fraudulent means
- Publishing or reporting untrue information about securities

SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011

Definition: These regulations deal with substantial acquisition of shares, takeovers, and disclosures of shareholding and control.
Key Provisions:
- Regulation 3(1): Requires a public announcement of an open offer for acquiring shares of the target company if an acquirer acquires 25% or more voting rights.
- Regulation 3(2): Restricts the acquisition of additional shares or voting rights without making a public announcement of an open offer.
- Regulation 4: Prohibits the acquisition of control over a target company without making a public announcement of an open offer.
- Regulation 5: Deals with indirect acquisition of shares or voting rights and considers it as an indirect acquisition of shares or voting rights in the target company.

Important Terms

Acquirer: A person who acquires shares or voting rights in a target company.
Control: The ability to exercise significant influence over a company's operations or decisions.
Person Acting in Concert: A person who acts together with another person to acquire shares or voting rights in a target company.
Promoter: A person who has control over a company or is a part of the promoter group.
Wilful Defaulter: A person who has defaulted on payments or obligations willfully.
Fugitive Economic Offender: A person who has committed economic offenses and has fled the country to avoid prosecution.

Regulatory Framework - General View (Part 7)

SEBI SAST Regulations, 2011: The regulations describe the disclosure requirements when 5% or more of shares/voting rights are acquired, and the transactions resulting in more than 2% change in shareholding/voting rights.
Indirect Acquisition: If the enterprise value for the entity or business being acquired is in excess of eighty per cent, based on the most recent audited annual financial statements, such indirect acquisition shall be regarded as a direct acquisition of the target company for all purposes of these regulations.
Regulation 29: Describes disclosure requirements, including:
- Regulation 29(1): Disclosure requirements when 5% or more of shares/voting rights are acquired.
- Regulation 29(2): Disclosure requirements pertaining to transactions resulting in more than 2% change in shareholding/voting rights.
- Regulation 29(3): Time limit and intimation to for disclosures required under sub-regulation (1) and sub-regulation (2).

Companies Act, 2013

Legislation: Consolidates and amends the law relating to companies and certain other associations.
Relevant Chapters:
- Chapter III: Prospectus and Allotment of Securities.
- Chapter IV: Share Capital and Debentures.
- Chapter VII: Management and Administration.
- Chapter VIII: Declaration and Payment of Dividend.
- Chapter XI: Appointment and Qualifications of Directors.
- Chapter XII: Meetings of Board and its Powers.
- Chapter XIII: Appointment and Remuneration of managerial personnel.
- Chapter XIV: Inspection, Inquiry and Investigation.
- Chapter XV: Compromises, Arrangements and Amalgamations.
- Chapter XVI: Prevention of Oppression and Mismanagement.
- Chapter XXVII: National Company Law Tribunal and Appellate Tribunal.
- Chapter XXVIII: Special Courts.
- Chapter XXIX: Miscellaneous.

Indian Contract Act, 1872

General Principles: Lays down general principles with regard to contracts and applies to the whole of India.
Essentials of a Valid Contract:
- Agreement.
- Enforceable by law.
- Free consent.
- Lawful consideration.
- Lawful object.
- Capacity to contract.
- Intention to create legal relations.
- Valuable consideration.
- Certainty of terms.
- Capability of performance.
Law of Agency: Governs the relationship between an investor (principal) and a broker (agent).
Agent's Duties:
- Conduct the business of his principal according to the directions given by the principal.
- Conduct the business of the agency skilfully and with reasonable diligence.
- Render proper accounts to his principal on demand.

Regulatory Framework - General View (Part 8)

Introduction to Regulations: Various regulations lay down the duties of principals and agents, such as section 222, which binds the principal to indemnify the agent against the consequences of all lawful acts done by the agent in exercise of the authority conferred.
Prevention of Money-Laundering Act, 2002 (PMLA):
- Definition: The PMLA is an act to prevent money-laundering and to provide for confiscation of property derived from, or involved in, money laundering.
- Details: It describes the offence of money-laundering, classifying offences under Part A, Part B, and Part C of the Schedule, with varying punishments for unlawful activities.
Foreign Exchange Management Act, 1999 (FEMA):
- Definition: FEMA is an act to consolidate and amend the law relating to foreign exchange, external trade, and payments for promoting the orderly development and maintenance of the foreign exchange market in India.
- Details: It extends to the whole of India, applies to all branches and agencies outside India owned or controlled by a person resident in India, and empowers the Central Government to appoint Adjudicating Authorities, Special Directors (Appeals), and an Appellate Tribunal.
Bye-Laws of Stock Exchanges:
- Definition: Indian stock exchanges frame their own Bye-Laws, which are binding on all trading members/brokers registered with the particular exchange.
- Details: The bye-laws need to be approved by the SEBI, lay down rules regarding admission of trading members, listing requirements, fees, suspension, transaction and settlement, rights and liabilities of members, arbitration, etc.
Taxes on Securities:
- Income-Tax Act, 1961: An act to consolidate and amend the law relating to income-tax and super-tax, with provisions for Tax Deducted at Source (TDS) on dividend, capital gains tax, and other related matters.
- Securities Transaction Tax (STT): A tax applicable on the purchase or sale of equity shares, derivatives, equity-oriented mutual funds, etc., introduced by Chapter VII of The Finance (No. 2) Act, 2004.

Regulatory Framework - General View (Part 9)

Securities Transaction Tax (STT): A tax levied on transactions done in a recognized stock exchange, applicable to equity shares, units of equity-oriented mutual funds, and derivatives.
Key transactions subject to STT:
- Purchase or sale of equity shares and units of equity-oriented mutual funds (delivery-based)
- Sale of equity shares and units of equity-oriented mutual funds (non-delivery-based)
- Sale of derivatives
Goods and Services Tax (GST): An indirect tax levied on the supply of goods and services, applicable to stock-broking services.
Key aspects of GST:
- Place of supply of service in case of stock-broking services is the location of the recipient of services on the records of the supplier of service
- GST is applicable on services provided by stock-brokers, including business of supplying stock-broking service and interest/delayed payment charges
International Financial Services Centre (IFSC): A jurisdiction that provides world-class financial services to non-residents and residents in a currency other than the domestic currency.
Key features of IFSC:
- Entities in IFSC are recognized as non-resident entities under FEMA regulations and are exempt from Security Transaction Tax (STT), Commodity Transaction Tax, and Dividend Distribution Tax
- Stock exchanges operating in IFSC are permitted to offer trading in securities in any currency other than the Indian rupee
- Regulators such as RBI, SEBI, and IRDAI have issued regulations allowing Indian and foreign institutions to open their offices in IFSC
SEBI (IFSC) Guidelines, 2015: Permit stock exchanges operating in IFSC to deal in various types of securities and products, including equity shares of companies incorporated outside India, depository receipts, and currency and interest rate derivatives.