NISM Series III A – Regulatory Framework: Role of SEBI, RBI, IRDA and PFRDA

NISM Series III A – Regulatory Framework: Role of SEBI, RBI, IRDA and PFRDA

Welcome to Part 2 of our NISM Series III A Short Notes series on PassNISM.in. In this post, we cover the Regulatory Framework of India's Financial Market — a high-weightage topic in the NISM Series III A exam.

This chapter explains the roles of key regulators — SEBI, RBI, IRDA, and PFRDA — along with the legislative framework, appellate authorities, and other agencies that govern India's financial system. These concepts are also tested in SEBI certification exams, making this an essential read.

Why Is the Securities Market Regulated?

Regulation of the securities market exists primarily to safeguard the interests of investors. The core objective is to ensure that investors make decisions based on complete transparency and fairness in both primary and secondary market transactions.

The three basic objectives of SEBI are:

1. To protect the interests of investors in securities markets
2. To promote the development of securities markets
3. To regulate the securities markets

Regulatory Bodies in India's Financial Market

Role of SEBI – Securities and Exchange Board of India

SEBI was established on April 12, 1992 under the provisions of the SEBI Act, 1992. It is the primary regulator of the Indian securities market.

Key Powers of SEBI Under the SEBI Act

• Section 11(2A): Power to inspect books of accounts, registers, or documents of any listed company or a public company intending to list its securities on a recognized stock exchange
• Section 11(3): SEBI has powers equivalent to a civil court — for inspecting books and registers, summoning persons, and examining them on oath
• Section 11A: Power to regulate or prohibit the issue of prospectus, offer documents, or advertisements soliciting money for securities
• Section 11A(1): SEBI can specify regulations on capital issuance, transfer of securities, and disclosure requirements for companies
• Section 11A(2): SEBI can specify requirements for listing and transfer of securities

Role of Reserve Bank of India (RBI)

The RBI is India's central bank and performs the following key functions:

1. Monetary Authority: Formulates, implements, and monitors monetary policy to maintain price stability while ensuring adequate credit flow to productive sectors
2. Regulator and Supervisor of the Financial System: Sets broad parameters for banking operations to maintain public confidence and protect depositors
3. Manager of Foreign Exchange: Administers the Foreign Exchange Management Act (FEMA), 1999, to facilitate external trade and maintain orderly forex markets
4. Issuer of Currency: Issues and manages currency notes and coins; ensures adequate supply of good-quality currency
5. Developmental Role: Performs promotional functions to support national objectives
6. Banking Functions:
   • Acts as banker to the Central and State Governments
   • Manages issuances of Government Securities
   • Acts as banker to all scheduled banks by maintaining their accounts

Insurance Regulatory and Development Authority (IRDA)

IRDA's mission is to regulate, promote, and ensure orderly growth of the insurance sector — including reinsurance — while protecting the interests of insurance policyholders.

IRDA was constituted by an Act of Parliament. As per Section 4 of the IRDA Act 1999, the Authority comprises ten members, all appointed by the Government.

Pension Fund Regulatory and Development Authority (PFRDA)

PFRDA was first constituted by the Government of India in October 2003 with the following responsibilities:

• To promote old-age income security by establishing, developing, and regulating pension funds
• To protect the interests of subscribers to pension fund schemes

It functions under the administrative control of the Ministry of Finance. The Authority consists of a Chairperson and up to five members. PFRDA submits periodic reports to the government on the pension sector.

Other Agencies in India's Financial Market Ministry of Finance

Governs India's entire fiscal system and mobilizes resources for developmental programs.

Department of Economic Affairs (DEA)

The nodal agency for formulating and monitoring India's macroeconomic policies — including fiscal policy, public finance, and capital market functioning (including stock exchanges).

Department of Financial Services

Administers government policies related to public sector banks, term-lending institutions, life and general insurance, and pension reforms.

Department of Disinvestment

Oversees all matters related to disinvestment of Central Government equity in Central Public Sector Undertakings (CPSUs).

Ministry of Corporate Affairs (MCA)

Administers the Companies Act, 1956/2013 and the Competition Act 2002 (which replaced the MRTP Act, 1969).

Registrar of Companies (ROC)

Appointed under Section 609(1) of the Companies Act, 1956. ROC offices cover various states and union territories and are responsible for registering companies and ensuring statutory compliance. Their records are available for public inspection on payment of a prescribed fee.

National Company Law Tribunal (NCLT)

A quasi-judicial body dealing with corporate disputes of a civil nature under the Companies Act and the Insolvency and Bankruptcy Code. NCLT is a single forum for all disputes concerning Indian companies.

Serious Fraud Investigation Office (SFIO)

A multi-disciplinary organization under the Ministry of Corporate Affairs, set up to investigate corporate frauds. It has experts in accountancy, forensic auditing, law, IT, company law, capital markets, and taxation.

Economic Offences Wing (EOW)

Created in 1964 under the Central Bureau of Investigation (CBI) to deal with serious financial crimes — including bank frauds, stock exchange manipulations, counterfeiting, drug trafficking, and violations of the Customs Act.

Financial Intelligence Unit – India (FIU-IND)

Set up in 2004 as the central nodal agency responsible for receiving, processing, analyzing, and disseminating information on suspicious financial transactions to support anti-money laundering efforts. FIU-I reports directly to the Economic Intelligence Council headed by the Finance Minister.

Police Authorities

Responsible for enforcing the Indian Penal Code (IPC), which has 511 sections covering crimes. Sections relevant to the securities market include:

• Sections 191–229: Giving false evidence and offences against public justice
• Sections 378–462: Offences against property
• Sections 463–489E: Offences relating to documents and property marks
• Section 511: Attempts to commit offences

Appellate Authority – Securities Appellate Tribunal (SAT)

SAT has been established under the SEBI Act to hear appeals from persons aggrieved by orders of SEBI or an adjudicating officer.

Key points about SAT:

• Any aggrieved person (who has not consented to the order) can appeal to SAT
• The appeal must be filed within 45 days from receipt of the order copy
• SAT is not bound by the Code of Civil Procedure but follows the principles of natural justice
• SAT has the same powers as a civil court for the purpose of its functions

Legislative Framework Governing the Financial Market

The key laws and regulations governing India's securities market are:

Bye-Laws of Stock Exchanges

Stock exchanges like BSE and NSE frame their own Bye-Laws, which are binding on all trading members and brokers. These Bye-Laws must be approved by SEBI and cover admission of members, listing requirements, fees, settlement procedures, rights and liabilities of members, and arbitration.

Taxation in the Securities Market

• Securities Transaction Tax (STT): Introduced by Chapter VII of the Finance (No.2) Act, 2004. Applicable on purchase or sale of equity shares, derivatives, equity-oriented funds, and equity-oriented mutual funds
• Goods and Services Tax (GST): Indirect tax in effect from July 2017. Replaced all other indirect taxes; levied on supply of goods and services at every value addition stage

International Financial Services Centre (IFSC)

An IFSC provides world-class financial services to non-residents and residents in a currency other than the Indian Rupee. It caters to customers outside its own jurisdiction. GIFT City in Gujarat is India's first IFSC.

Frequently Asked Questions (FAQs) When was SEBI established?

SEBI was established on April 12, 1992, under the SEBI Act, 1992.

What is the role of RBI in India's financial system?

RBI acts as the monetary authority, banking regulator, forex manager, currency issuer, and banker to the government and banks. It also performs developmental functions.

What is the Securities Appellate Tribunal (SAT)?

SAT is the appellate authority for persons aggrieved by SEBI orders. Appeals must be filed within 45 days of receiving the order.

What is FEMA and why was it introduced?

FEMA (Foreign Exchange Management Act, 1999) was introduced to facilitate external trade, payments, and orderly development of India's forex market. It replaced the older, stricter FERA (1973).

This is Part 2 of the NISM Series III A Short Notes series. Read Part 1: Introduction to the Financial System or continue to Part 3: Introduction to Compliance and Role of Compliance Officer.