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Unit 14: Regulatory Environment

Regulation, 1996. The SEBI regulation on VCF prescribes compulsory registration of VCF, Notes
investment conditions, management of the company and maintenance of records. It also has an
authority to inspect the books and investigate the charges and also take penal action against the
erring VCF. In addition to SEBI regulation, the VCFs are also governed by the Income Tax Act.
The VCFs are required to apply to the Director of Income Tax (Exemptions) to avail favourable
treatment on dividend income and capital gains. The VCFs have to fulfil certain condition laid
down under the Act to get such benefits. The Government of India has allowed the overseas
venture capital companies to operate in India in 1995 and they require the approval of Foreign
Investment Approval Board (FIPB).

14.5.4 Portfolio Management Services

The portfolio manager is one who in pursuant to a contract or arrangement with a client advises
or directs or undertakes on behalf of the client (whether as a discretionary portfolio manager or
otherwise) the management or administration of a portfolio of securities or the funds of the
client. The SEBI has issued a detailed guideline in 1993 (SEBI (Portfolio Managers) Regulations,
1993) to regulate this advisory service. The regulation requires compulsory registration of
portfolio managers before starting their service, terms and conditions of the schemes that could
be offered, managerial requirement, disclosure norms and periodical reporting to SEBI.
The commercial banks are also offering portfolio management service to their customers. These
services are regulated by the RBI which issued a detailed guideline to regulate this service in 1991.

14.5.5 Stock Broking

The stock brokers who are the members of recognized stock exchanges enable the investors to
buy and sell securities in the secondary market. They also act as a broker to the companies which
want to raise capital in the primary market. The stock broking service is regulated by the
Securities Contracts (Regulation) Act, (SCRA) 1956 and its Rules, 1957, SEBI (Brokers and Sub-
brokers) Regulation, 1992 and the by-laws of Stock Exchange where the broker is a member.
While the SCRA regulates the stock exchanges, the Securities Contracts (Regulation) Rules, 1957
prescribes the qualification for membership of a recognized stock exchange, books of accounts
to be maintained by the members and the minimum number of years the documents and books
are to be maintained. The SEBI regulation requires compulsory registration of members of stock
exchange and prescribed net- worth requirement and capital adequacy norms, books and records
to be maintained and code of conducts to be adopted by the members. The SEBI also has the
powers to inspect books and records and investigate the investors and other brokers complaints
against the stock broker. The sub-brokers are also governed by the same regulation and SEBI
requires them to be registered through a member of stock exchange under whom the sub-
broker will transact business. The by-laws of the stock exchange is in the nature of self-regulation
and varies from exchange to exchange. It generally prescribes how the members have to conduct
the business and deal with other members of the exchange. It also prescribes how disputes
between the members and members and investors are to be settled.

Notes In addition to the above three regulations, the members of stock exchange need to
have a working knowledge on the Negotiable Instruments Act, 1881, Indian Stamp Act,
1889 as in force in their respective states, and provisions relating to Service Tax introduced
in the Finance Act, 1994.

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