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 framework includes various regulatory institutions, such as SEBI, RBI, IRDAI, and PFRDA, which regulate different sectors of the financial system.

Key Concepts

Financial Market Regulators:
- 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:
- ROC (Registrar of Companies): Responsible for registering and regulating companies.
- EOW (Economic Offences Wing): Investigates economic offences, such as fraud and insider trading.
- 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 decisions made by SEBI.
Legislative Framework: The legislative framework governing the financial markets includes the SEBI Act, Securities Contracts (Regulation) Act, and other laws and regulations.
Bye-laws of Stock Exchanges: The rules and regulations that govern the functioning of stock exchanges.
Taxes on Securities: The taxes levied on securities, such as STT (Securities Transaction Tax) and capital gains tax.

Role of SEBI

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

Regulatory Framework - General View (Part 2)

Reserve Bank of India (RBI): The central bank of India, responsible for administering monetary policy and ensuring monetary stability.
Key Functions of RBI:
- Formulating, implementing, and monitoring monetary policy to maintain price stability and ensure adequate credit flow to productive sectors.
- Regulating and supervising the financial system to maintain public confidence and protect depositors' interests.
- Managing foreign exchange to facilitate external trade and payments.
- Issuing currency and coins, and exchanging or destroying them when necessary.
- Performing developmental roles to support national objectives.
- Regulating and supervising payment and settlement systems to maintain public confidence.
- Acting as a banker to the government and banker to banks.
Insurance Regulatory and Development Authority of India (IRDAI): Regulates and promotes the insurance sector, protecting policyholders' interests.
Key Functions of IRDAI:
- Issuing certificates of registration to insurance companies.
- Protecting policyholders' interests in matters like assignment, nomination, and claim settlement.
- Specifying qualifications and code of conduct for insurance intermediaries.
- Promoting efficiency in the conduct of insurance business.
- Regulating investment of funds by insurance companies.
Pension Fund Regulatory and Development Authority (PFRDA): Regulates and promotes pension funds, protecting subscribers' interests.
Key Functions of PFRDA:
- Regulating and promoting the National Pension System (NPS).
- Protecting subscribers' interests in pension schemes.
- Calling for information, inspecting, and investigating pension fund intermediaries.
International Financial Services Centres Authority (IFSCA): A unified regulator for International Financial Services Centres (IFSCs), promoting ease of doing business and providing a world-class regulatory environment.
Ministry of Finance (MoF): Governs the fiscal system of the Government of India, centralizing economic and financial issues.
Department of Economic Affairs (DEA): Formulates and monitors India's economic policies, having a bearing on domestic and international economic management.

Regulatory Framework - General View (Part 3)

Overview: The regulatory framework in India encompasses various departments and institutions responsible for monitoring and regulating different aspects of the economy, including macroeconomic policies, capital markets, and corporate affairs.
Department of Financial Services: Administers government policies related to:
- Public sector banks
- Life insurance and general insurance
- Pension reforms
- Development Financial Institutions (DFIs) such as NABARD, SIDBI, IIFCL, NHB, EXIM Bank, and IFCI
Department of Investment and Public Asset Management: Oversees matters related to the disinvestment of equity shares of Central Government from Central Public Sector undertakings and the utilization of proceeds from disinvestment.
Ministry of Corporate Affairs: Responsible for administering the:
- Companies Act, 1956/2013 and other allied acts, rules, and regulations
- Competition Act, 2002
- Supervises professional bodies such as ICAI, ICSI, and ICMAI
- Administers the Partnership Act, 1932, Companies (Donations to National Funds) Act, 1951, and Societies Registration Act, 1980

Registrar of Companies (ROC)

Definition: The ROC is responsible for registering companies and ensuring compliance with statutory requirements under the Companies Act.
Functions:
1. Registration of companies
2. Maintenance of a register of companies
3. Regulation and reporting of companies and their shareholders and directors
4. Administration of government reporting
5. Fostering a business culture
6. Seeking supplementary information from companies when necessary
7. Filing petitions for winding up of companies
Powers: The ROC has the power to:
- Maintain a register of charges
- Enter memoranda of satisfaction
- Call for information or explanation
- Demand production of documents
- Seize documents
- Strike off defunct companies

National Company Law Tribunal (NCLT)

Definition: The NCLT is a quasi-judicial authority that deals with corporate disputes of a civil nature arising under the Companies Act and Insolvency and Bankruptcy Code.
Establishment: Constituted under Section 408 of the Companies Act, 2013, with effect from June 1, 2016.
Benches: Eleven benches have been set up, including one Principal Bench at New Delhi and ten other benches at different locations.

Serious Fraud Investigation Office (SFIO)

Definition: The SFIO is a multi-disciplinary organization that investigates serious cases of fraud and recommends prosecution.
Establishment: Set up through a Government of India notification dated July 21, 2015.
Functions:
- Investigation of serious cases of fraud
- Recommendation for prosecution
- Detection and prosecution of white-collar crimes
Investigation Procedure:
1. Assignment of investigation by the Central Government
2. Designation of inspectors for investigation
3. Investigation into the affairs of a company
Headquarters and Regional Offices: The SFIO is headquartered in New Delhi, with five regional offices in Mumbai, New Delhi, Chennai, Hyderabad, and Kolkata.

Regulatory Framework - General View (Part 4)

Introduction: The regulatory framework for investigating the affairs of a company is specified in Chapter XIV of the Companies Act, 2013. The Serious Fraud Investigation Office (SFIO) submits its report to the Central Government within the specified period.
Key Provisions:
- The Director, SFIO, causes the affairs of the company to be investigated by an investigating officer with powers of an Inspector under section 217 of the Companies Act, 2013.
- The company, its officers, and employees must provide all required information, explanations, documents, and assistance to the investigating officer.
- The SFIO submits an interim report if directed by the Central Government and a final investigation report upon completion of the investigation.
Computer Forensic and Data Mining Laboratory (CFDML):
- Mission Statement: To provide quality service, technically valid results, and impartial analysis in a time-bound manner.
- Functions: The CFDML is equipped with state-of-the-art tools for computer forensics and provides support to SFIO officers in their investigations.
Economic Offences Wing (EOW):
- Establishment: Created in 1964 to deal with economic offenses, including serious frauds in banks, stock exchanges, and financial institutions.
- Expansion: Strengthened and expanded in 1994 to form the Economic Offences Division (EOD) with four zones, one focusing on large and complicated security and bank frauds.
- Areas of Coverage: Includes frauds relating to foreign trade, banking, insurance, foreign exchange, share price manipulation, insider trading, and cybercrimes.
Financial Intelligence Unit - India (FIU-IND):
- Establishment: Set up in 2004 as the central national agency for receiving, processing, analyzing, and disseminating information related to suspect financial transactions.
- Functions:
  - Collection of information: Receives cash transaction reports, suspicious transaction reports, and other reports from reporting entities.
  - Analysis of information: Analyzes received information to uncover patterns of transactions suggesting suspicion of money laundering and related crimes.
  - Sharing of information: Shares information with national intelligence/law enforcement agencies, national regulatory authorities, and foreign Financial Intelligence Units.
- Powers: The Director, FIU-IND, has powers to impose fines on non-compliant banking companies, financial institutions, or intermediaries, and to furnish information to officers, authorities, or bodies in the public interest.
Police Authorities:
- Role: Responsible for maintaining law and order and enforcing The Bharatiya Nyaya Sanhita, 2023 (BNS), which contains laws on various crimes.
- Relevant Sections: Sections related to giving false evidence, offenses against property, documents, and property marks, and attempts to commit offenses.
Appellate Authority:
- Securities Appellate Tribunal (SAT): Established under the SEBI Act to hear and dispose of appeals against orders passed by SEBI or adjudicating officers.
- Role: Exercises jurisdiction, powers, and authority under the SEBI Act or other laws in force, and hears appeals against orders passed by the Pension Fund Regulatory and Development Authority (PFRDA) and the Insurance Regulatory Development Authority of India (IRDAI).

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 and related matters.

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 has come into force w.e.f. May 2015 to prevent insider trading and to protect the integrity of the market.

Legislative Framework

SEBI Act, 1992: SEBI’s regulatory ambit includes 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 Act covers a variety of 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 regulations define an “insider” as any person who is connected with a company or who is in possession of or as having access to unpublished price sensitive information in respect of securities of a company.

Key Provisions

Section 15U: The SAT shall not be bound by the procedure laid down by the Code of Civil Procedure, 1908, but shall be guided by the principles of natural justice.
Section 15V: The appellant may either appear in person or authorize one or more chartered accountants or company secretaries or cost accountants or legal practitioners or any of its officers to present his or its case before the SAT.
Section 15W: The provisions of the Limitation Act, 1963 shall apply to an appeal made to a SAT.
Section 15Y: No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which SAT constituted under the SEBI Act is empowered to decide upon.
Section 15Z: Any person aggrieved by any decision or order of the SAT may file an appeal to the Supreme Court within 60 days from the date of communication of the decision or order of the SAT to him, on any question of law arising out of the order.

Regulatory Framework - General View (Part 6)

SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003: These regulations prohibit fraudulent, unfair, and manipulative trade practices in securities, made in exercise of the powers conferred by section 30 of the SEBI Act, 1992.
Definition of Fraud: Includes any act, expression, omission, or concealment committed by a person or their agent while dealing in securities to induce another person to deal in securities, whether or not there is any wrongful gain or avoidance of loss.
Dealing in Securities: Includes buying, selling, or subscribing to securities, or agreeing to buy, sell, or subscribe to securities, and providing assistance to carry out these acts.
Prohibited Trade Practices: Include creating a false appearance of trading, dealing in securities without intending to transfer beneficial ownership, inducing people to subscribe to securities for fraudulent purposes, and manipulating security prices.
Investigation and Penalties: The regulations provide for investigation and penalties for fraudulent and unfair trade practices, including the duty to produce documents and appear before the Investigating Authority.

Key Concepts

SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011: Regulate substantial acquisitions of shares and takeovers, requiring public announcements and open offers in certain circumstances.
Important Terms: Include acquirer, acquisition, control, person acting in concert, promoter, promoter group, wilful defaulter, and fugitive economic offender.
Regulation 3: Requires a public announcement of an open offer when an acquirer acquires shares or voting rights exceeding 25% of the voting rights in a company.
Regulation 4: Prohibits an acquirer from acquiring control over a target company without making a public announcement of an open offer.
Regulation 5: Deals with indirect acquisitions of shares or voting rights, considering them as direct acquisitions in certain circumstances.

Regulatory Framework - General View (Part 7)

Definition: The regulatory framework for securities markets in India is governed by various laws and regulations, including the SEBI SAST Regulations, 2011, the Companies Act, 2013, and the Indian Contract Act, 1872.
Details: These regulations cover aspects such as disclosure requirements, public offers, and substantial acquisitions of shares.

Key Concepts

SEBI SAST Regulations, 2011: These regulations govern the process of substantial acquisitions of shares and require disclosure of certain information to the public.
Companies Act, 2013: This Act consolidates and amends the law relating to companies and certain other associations, covering aspects such as prospectus and allotment of securities, share capital and debentures, and management and administration.
Indian Contract Act, 1872: This Act lays down general principles with regard to contracts and applies to the whole of India, covering aspects such as essentials of a valid contract, classification of contracts, and law of agency.

Companies Act, 2013 - Key Chapters

Chapter III: Prospectus and Allotment of Securities, covering public offers, private placement, and civil and criminal liabilities for misstatements in the prospectus.
Chapter IV: Share Capital and Debentures, describing kinds of share capital, numbering and certificate of shares, voting rights, and issue of sweat equity shares.
Chapter VII: Management and Administration, covering registered office and name, Register of Members and debenture holders, Annual Returns, and meetings and proceedings.
Chapter XI: Appointment and Qualifications of Directors, dealing with the Board of Directors, selection of independent directors, and appointment, resignation, and removal of directors.

Indian Contract Act, 1872 - Key Concepts

Essentials of a Valid Contract: A contract must satisfy two conditions: there must be an agreement, and the agreement must be enforceable by law.
Law of Agency: This governs the relationship between an investor (principal) and a broker (agent), covering aspects such as the agent's duties and the principal's duties.
Agent's Duties: An agent is bound to conduct the business of his principal according to the directions given by the principal, with skill and reasonable diligence, and to render proper accounts to his principal on demand.

Regulatory Framework - General View (Part 8)

Definition: The regulatory framework in India is designed to prevent money laundering, manage foreign exchange, and oversee stock exchanges and securities transactions.
Details: The framework includes various acts and regulations, such as the Prevention of Money-Laundering Act, 2002, the Foreign Exchange Management Act, 1999, and the Securities Transaction Tax.

Key Concepts

Prevention of Money-Laundering Act, 2002: This act aims to prevent money laundering and provides for the confiscation of property derived from or involved in money laundering.
Foreign Exchange Management Act, 1999: This act consolidates and amends the law relating to foreign exchange, external trade, and payments to promote the orderly development and maintenance of the foreign exchange market in India.
Bye-Laws of Stock Exchanges: Indian stock exchanges frame their own bye-laws, which are binding on all trading members and need to be approved by the SEBI.
Stamp Duty: The Indian Stamp (Collection of Stamp-Duty through Stock Exchanges, Clearing Corporations and Depositories) Rules, 2019, regulate the liability of instruments of transaction in stock exchanges and depositories to stamp duty.

Taxes on Securities

Income-Tax Act, 1961: This act consolidates and amends the law relating to income-tax and super-tax, and it extends to the whole of India.
Tax Deducted at Source (TDS) on Dividend: Dividend in excess of Rs. 5000 in a financial year is taxable in the hands of investors, with a TDS rate of 10% for resident investors.
Capital Gains Tax: Long-term capital gains tax is 12.5% for equity shares and units of equity-oriented funds, while short-term capital gains tax is 20% when securities transaction tax is applicable.
Securities Transaction Tax (STT): STT was introduced by Chapter VII of The Finance (No. 2) Act, 2004, and is applicable on certain securities transactions.

Regulatory Framework - General View (Part 9)

Securities Transaction Tax (STT): A tax applicable on the purchase or sale of equity shares, derivatives, equity-oriented funds, and equity-oriented mutual funds.
- Applies to transactions done in a recognized stock exchange, including:
  - 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
- Rate of STT differs based on the type of security traded and whether the transaction is a purchase or a sale
Goods and Services Tax (GST): An indirect tax that replaced all other types of indirect taxes in India, levied on the supply of goods and services at every value addition stage
- Applies to services provided by stockbrokers, including:
  - Business of supplying stock-broking services
  - Interest/delayed payment charges charged for delay in payment of brokerage
- Place of Supply: Determined by the location of the recipient of services on the records of the supplier of service
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
- Benefits: Exemptions from Security Transaction Tax (STT), Commodity Transaction Tax, Dividend Distribution Tax, Capital Gains Waiver, and no income tax
- Regulations: Allow Indian and foreign institutions to open their office in the IFSC, with regulations issued by RBI, SEBI, and IRDAI
- SEBI (IFSC) Guidelines: Permit stock exchanges operating in IFSC to deal in various types of securities and products in any currency other than the Indian rupee
- Products: Include Equity Shares, Depository Receipts, Debt Securities, Currency and Interest Rate Derivatives, and Index-based Derivatives