Page 225 - DCOM510_FINANCIAL_DERIVATIVES

Financial Derivatives

Notes 14.2 Securities Market Regulation in India

A stable and efficient financial system provides the foundation for implementation of effective
stabilisation policies, more accurate pricing of risk and more efficient use of capital. Efficiency
of the financial system is governed by the role of markets in mobilising and allocating financial
resources, in providing liquidity and payment services and in gathering information on which
to base investment decisions. Stability, on the other hand, is concerned with safeguarding the
value of liabilities of financial intermediaries that serve as stores of wealth. This also involves
questions relating to prudential supervision, financial regulation and good governance. It needs
to be added here that as financial systems get increasingly globalised, capital moves not only in
response to competing monetary policies, but also to competing financial systems. Inefficient
and unstable financial systems are therefore likely to be increasingly penalised.

In India, as in other parts of the world, securities regulations have evolved in the face of two
apparently diverging trends. One relates to a move toward liberalisation of financial markets,
which entails elimination of measures of financial repression such as direct controls on interest
rates, mandatory investment in government securities, administrative pricing of securities and
so on. The other force is toward stronger regulation. The need for stronger regulation comes to
the fore since financial markets are characterised by significant asymmetries of information,
which contribute to moral hazard and in extreme cases leads to market failure. In sum, an
unregulated market can entail high systemic risk.

Notes The regulatory responsibility of the securities market is vested in the SEBI, the RBI,
and two government departments - Department of Company Affairs and Department of
Economic Affairs.
Investigative agencies such as Economic Offences Wing of the government and consumer
grievance redressal forums also play a role. The SEBI, established under the SEBI Act, is the apex
regulatory body for the securities market. Besides regulation, the SEBI’s mandate includes
responsibilities for ensuring investor protection and promoting orderly growth of the securities
market. The RBI, on the other hand, is responsible for regulation of a certain well-defined
segment of the securities market.

!
Caution As the manager of public debt, the RBI is responsible for primary issues of
Government Securities.
The RBI’s mandate also includes the regulation of all contracts in government securities, gold
related securities, money market securities, and in securities derived from these securities. To
foster consistency of the regulatory processes, the SEBI is mandated to regulate the trading of
these securities on recognised stock exchanges in line with the guidelines issued by RBI. Although
there is a clear division of regulatory responsibilities between RBI and SEBI, and efforts have
been made to make the regulatory process consistent, the distribution of regulatory
responsibilities among a number of institutions can potentially create confusion among the
regulated as to which body is responsible for a particular area of regulation.
To ensure operational independence and accountability in the exercise of functions and powers
by the regulators, SEBI and RBI have been constituted as autonomous bodies and are established
under separate acts of the Parliament. Both regulators are accountable to the Parliament through
Central Government and the regulations framed by them are required to be laid before Parliament
by the Central Government. There is also a system of independent judicial review of the decisions

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