Why in the news-

• Recent actions by both India’s banking regulator RBI and the securities watchdog SEBI have startled the market, exposing various malpractices in the financial sector.

Financial Landscape and its Regulation

[1] Reserve Bank of India (RBI)

• The RBI is the central bank and monetary authority of India.
• It is established on April 1, 1935, under the Reserve Bank of India Act, 1934.
• Its idea was incepted from the recommendations of the Hilton Young Commission.
• It is a centralized institution for India to effectively regulate its monetary and credit policies.
• RBI had its initial headquarters in Kolkata, later moving permanently to Mumbai in 1937.
• Initially, the RBI operated as a privately owned entity until its full nationalization in 1949.

Key Regulatory Functions of the RBI:

(i) Monetary Policy:

• The RBI formulates and implements monetary policies to achieve price stability, economic growth, and financial stability.
• The Monetary Policy Committee (MPC) determines the policy interest rates, such as the repo rate, reverse repo rate, and marginal standing facility rate, based on inflation targeting and growth objectives.
• By adjusting these rates, the RBI influences money supply, credit flow, and interest rates in the economy.

(ii) Banking Regulation and Supervision:

• The RBI regulates and supervises banks and financial institutions to ensure their stability, soundness, and compliance with regulatory norms.
• It issues guidelines, directives, and prudential regulations covering aspects like capital adequacy, asset quality, management effectiveness, and liquidity risk management.
• The RBI conducts regular inspections, audits, and assessments of banks to assess their financial health and adherence to regulations.
• It also intervenes in troubled banks to protect depositors’ interests and maintain financial stability.

(iii) Payment and Settlement Systems:

• The RBI manages and oversees payment and settlement systems to ensure efficiency, safety, and reliability in financial transactions.
• It operates the Real-Time Gross Settlement (RTGS) system for large-value transactions and the National Electronic Funds Transfer (NEFT) system for retail transactions.
• The RBI formulates regulations and standards for payment systems, promotes innovation in payment technologies, and monitors systemically important payment infrastructures to mitigate risks and enhance resilience.

(iv) Financial Markets Regulation:

• The RBI regulates and supervises financial markets, including money, bonds, foreign exchange, and derivative markets, to maintain market integrity and investor confidence.
• It issues guidelines, directives, and regulations governing market participants, intermediaries, and trading activities.
• The RBI monitors market developments, enforces compliance with regulations, and intervenes in markets to address disorderly conditions, liquidity shortages, or excessive volatility.
• It also conducts open market operations (OMOs) to manage liquidity and stabilize interest rates.

[2] Securities and Exchange Board of India (SEBI)

• SEBI is the regulatory authority overseeing India’s securities and commodity markets.
• Established in 1988 as a non-statutory body, SEBI was granted statutory powers with the enactment of the SEBI Act 1992 by the Indian Parliament.
• It operates under the purview of the Ministry of Finance.
• SEBI’s structure includes a chairman nominated by the GoI, members from the Union Finance Ministry, the Reserve Bank of India, and others.
• Its headquarters is in Mumbai, with regional offices in Ahmedabad, Kolkata, Chennai, and Delhi.

Key Regulatory Functions of the SEBI:

(i) Formulating Regulations:

• SEBI formulates regulations, guidelines, and directives to govern various aspects of the securities market.
• This includes regulations related to public issuances, disclosures, insider trading, takeover bids, corporate governance, and investor protection.

(ii) Monitoring Market Participants:

• SEBI regulates and supervises market intermediaries such as stock exchanges, brokers, merchant bankers, portfolio managers, and mutual funds.
• It sets eligibility criteria, registration requirements, and conduct norms for these entities and monitors their compliance with regulations.

(iii) Overseeing Market Infrastructure:

• SEBI oversees the functioning of stock exchanges, clearing corporations, depositories, and other market infrastructure institutions.
• It ensures that these entities maintain adequate systems, procedures, and safeguards to facilitate fair, transparent, and efficient trading and settlement operations.

(iv) Enforcing Securities Laws:

• SEBI enforces securities laws and regulations by conducting inspections, investigations, and enforcement actions against violations.
• It has the authority to impose penalties, suspend licenses, and initiate legal proceedings against individuals or entities found to be engaged in fraudulent or unfair practices.

(v) Regulating Securities Offerings:

• SEBI regulates public offerings of securities, including initial public offerings (IPOs), rights issues, and follow-on public offerings.
• It reviews offer documents, ensures disclosure of material information to investors, and supervises the conduct of issuers, underwriters, and other intermediaries involved in the offering process.

(vi) Monitoring Insider Trading and Market Manipulation:

• SEBI monitors and regulates insider trading, market manipulation, and other fraudulent activities that can undermine market integrity.
• It prohibits insider trading, imposes restrictions on share buybacks and open market operations, and investigates suspicious trading activities to maintain market fairness and transparency.

PYQ:

2015: In the light of Satyam Scandal (2009), discuss the changes brought in the corporate governance to ensure transparency and accountability.

2021: With reference to India, consider the following statements:​

1. Retail investors through demat account can invest in ‘Treasury Bills’ and ‘Government of India Debt Bonds’ in primary market.​
2. The ‘Negotiated Dealing System-Order Matching’ is a government securities trading platform of the Reserve Bank of India. ​
3. The ‘Central Depository Services Ltd.’ is jointly promoted by the Reserve Bank of India and the Bombay Stock Exchange. ​

Which of the statements given above is/are correct?​

1. 1 only ​
2. 1 and 2 only ​
3. 3 only ​
4. 2 and 3 only ​

Practice MCQ:

With reference to the Securities and Exchange Board of India (SEBI), consider the following statements:

1. It was established in 1988 as a non-statutory body.
2. It operates under the Ministry of Corporate Affairs.
3. It consists of a chairman, members from the Union Finance Ministry and the Reserve Bank of India.

How many of the given statements is/are correct?

1. One
2. Two
3. Three
4. None

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