Regulatory Bodies: The Police of Indian Financial Markets

One more reason why the Indian economy is popular among its peers is the presence of stringent regulations to keep the markets under the scanner. But people seldom realize the importance of the bodies implementing these regulations unless these bodies come to their rescue. Thus, prior to being active participants in the market, it's imperative for us to understand the role and functions of these regulatory bodies.

Regulatory bodies are essential to ensure that a proper system is maintained and any misconduct (the likes of Satyam Scam) is averted. In their absence, the big players will try to dominate the smaller ones, which will be unfavourable for the investors.

List of Regulatory Bodies in India

Let's look at the vital regulatory bodies which act as police of financial markets: 

Securities and exchange board of India (SEBI)

SEBI, incorporated under SEBI Act 1992, is a body to regulate the stock exchanges. Its primary objective is to protect the interest of investors by preventing malpractices and ensuring the proper functioning of stock markets. 

You may believe that the sole purpose of SEBI is to regulate the stock markets. But you are not wholly correct. Besides keeping control on the markets, it also performs these functions:

• Protective Functions: It protects the investors' interest by preventing insider trading, spreading awareness among the investors, and so much more.
• Development Functions: They also promote the growth and development of securities markets by imparting training, conducting research and promoting innovation. It is crucial for economic growth and for attracting foreign investment.

"With great power comes great responsibility." But how can we expect them to fulfil their responsibilities when we don't even give them the powers. That is why SEBI is entrusted with the following powers to achieve its objectives:

• To change laws related to the functioning of the stock exchange.
• To access financial information from the exchanges.
• To act as a court, i.e., conduct hearings and give judgment on cases of malpractice.
• To take disciplinary actions against the financial defaulters.
• To regulate intermediaries.

Reserve bank of India (RBI)

It is the Central Bank of India, established in 1935. Its primary objective is to regulate the monetary policy and financial markets. The RBI governor, along with other members, have the following functions, apart from signing the currency notes used by us:

• Issuing licence for banks.
• Formulation and implementation of prudential norms like Basel Norms.
• Regulating the banking sector.
• Inspecting the financial accounts of banks.
• Overseeing the internal or external reconstruction of financial companies.
• Regulating the payment and settlement systems and infrastructure.
• Circulating currency and regulating the money supply.

Besides the above functions, it also acts as a lender to the government, maintains foreign exchange reserves, and controls the interest rates and liquidity in the economy.

Ministry of corporate affairs (MCA)

As the name suggests, MCA is a government ministry to regulate the corporates incorporated under the Companies Act and other laws. Its objective is to protect the interest of all stakeholders. It also maintains a competitive environment facilitating the growth of corporates. Every company has to provide all the necessary information to it from time to time. It ensures strict control over the companies.

Insurance regulatory and development authority of India (IRDAI)

IRDAI is a statutory body incorporated in 1999. It was established to protect the interest of insurance policyholders. It issues regulations to which insurance companies have to comply so that there is no ambiguity.

Some vital functions of IRDAI are:

• Granting/renewing/cancelling the licence of insurance companies.
• Imposing penalties under IRDAI Act.
• Conducting inspection and investigation of insurance companies.
• Issuing regulations for intermediaries.
• Regulating the insurance policy premium, terms and conditions.
• Protecting the interests of policyholders.

Association of mutual funds of India (AMFI)

Set up in 1995, it is a self-regulatory NPO to develop the mutual fund industry. It aims to make mutual funds more accessible and transparent by improving professional standards and making them more ethical. It also creates awareness among investors about the benefits of mutual funds.

It is a body that has AMCs, brokers, and other intermediaries as its members rather than the government. That is why it tries to protect the interests of mutual fund houses also, besides the investors. To ensure it, AMCs have to follow the prescribed code of conduct, including integrity, due diligence, disclosures and professional selling. 

You would be surprised to know that this body updates the Net Asset Value (NAV) of different Mutual Funds daily to help in determining the returns.

Pension funds regulatory and development authority (PFRDA)

If you have read the article so far, you would have realized that the above bodies protect the investors' interest. But the old generation doesn't invest in equity to safeguard their capital. That is why PFRDA was established to protect the (g)old generation. Incorporated under the PFRDA Act 2013, this body is the sole regulator of the pension industry. Initially, its services were restricted to government employees only. But wouldn't that be unfair to others? Yeah, that'd be. Therefore, they were extended to all Indian citizens.

Its objective is to promote the subscribers' interest in pension schemes by regulating and developing pension funds and providing income security to the old-aged, which is essential post-retirement. It manages the National Pension System (NPS) and regulates trustee banks. It also keeps accounting records of subscribers and provides them services.  

Some of its functions are:

• Conducting inquiries and investigations on intermediaries.
• Spreading public awareness about pension schemes.
• Settling disputes between intermediaries and subscribers.
• Protecting the interest of subscribers by regulating intermediaries.
• Formulating code of conduct and norms for the pension industry.

The Bottom Line

In this article, we understood the various regulatory bodies of financial markets. Here's a snapshot. SEBI helps to protect the investors' interest by regulating the intermediaries of stock markets and helps in developing them. RBI regulates the monetary policy by determining Repo Rate, Reverse Repo Rate, etc. MCA regulates the companies and protects the interest of all stakeholders. IRDAI protects the interest of insurance policyholders by regulating insurance companies. AMFI helps in the development of mutual funds and updates the NAV of different funds. PFRDA helps in promoting pension schemes and protects the interest of subscribers. 

In the end, remember that regulation forces people to do better. So, it better have these bodies operate uninterrupted rather than flooding the newspapers with stories of financial scams.

Invest ethically. Cheers!