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Unit 14: Financial Regulations

Besides, fairness in the market is essential for price discovery, which in turn leads to better Notes
investor participation. Regulation also helps in reducing the systemic risk in the market.
The perception of sound regulation is as important as the reality of regulation. The very existence
of a regulatory body improves the confidence of the market participants and investors.
To sustain the growth of the markets and crystallize the increased awareness and interests of a
discerning and growing pool of investors, it was essential to overcome the inadequacies and
curb the malpractices in the market. It can be observed from the global experience that capital
markets cannot develop in a healthy manner without effective regulations for disclosures,
listing, trading, liquidity, intermediation, settlements, accounting, etc. The regulatory policy
must focus on visible and effective maintenance of market discipline and professionalization of
intermediary and support services.
Regulation of financial institutions is very important for a structured growth of a country. As
you know that the financial institutions play the key role in the growth of an economy so it is
important to regulate the financial institutions. In India Reserve Bank of India (RBI) and Securities
and Exchange Board of India (SEBI) are the main regulators of financial institutions.

14.1 Regulatory Framework of Security Market

The four main legislations governing the securities market are: (a) the SEBI Act, 1992 which
establishes SEBI to protect investors and develop and regulate securities market; (b) the
Companies Act, 1956, which sets out the code of conduct for the corporate sector in relation to
issue, allotment and transfer of securities, and disclosures to be made in public issues; (c) the
Securities Contracts (Regulation) Act, 1956, which provides for regulation of transactions in
securities through control over stock exchanges; and (d) the Depositories Act, 1996 which provides
for electronic maintenance and transfer of ownership of demat securities.

Legislations

SEBI Act, 1992: The SEBI Act, 1992, establishes 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 entities in
the issuance of capital and transfer of securities, in addition to all intermediaries and persons
associated with the securities market. It can conduct enquiries, audits and inspection of all
concerned and adjudicate offences under the Act. It has powers to register and regulate all
market intermediaries and also to penalise them in case of violations of the provisions of the
Act, rules and regulations made thereunder. SEBI has full autonomy and authority to regulate
and develop an orderly securities market.
Securities Contracts (Regulation) Act, 1956: It provides for direct and indirect control of virtually
all aspects of securities trading and the running of stock exchanges and aims to prevent undesirable
transactions in securities. It gives the Central Government/SEBI regulatory jurisdiction over
(a) stock exchanges through a process of recognition and continued supervision, (b) contracts in
securities, and (c) listing of securities on stock exchanges. As a condition of recognition, a stock
exchange complies with the prescribed conditions of the Central Government. Organised trading
activity in securities takes place on a specified recognised stock exchange. The stock exchanges
determine their own listing regulations, which have to conform to the minimum listing criteria
set out in the Rules.
Depositories Act, 1996: The Depositories Act, 1996, provides for the establishment of depositories
in securities with the objective of ensuring free transferability of securities with speed, accuracy
and security by (a) making securities of public limited companies freely transferable subject to
certain exceptions; (b) dematerialising the securities in the depository mode; and (c) providing

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