REGULATION OF

SECURITIES
MARKETS
ASSIGNMENT

1
SEBI
AND
RBI
2
 INDEX

PARTICULARS PAGE
NO.
I. Securities and Exchange Board of India

1. Introduction and Objectives 4

2. SEBI Administration 6
3. Functions of Board 8
4. Investors Know-how 9
5. Conclusion 20

II. Reserve Bank of India

1. Introduction 23
2. Objectives of the Reserve Bank of India
24
3. Organization and Management of Reserve Bank of India
25
4. Functions of Reserve Bank of India
27
5. Conclusion 33

3
SECURITIES AND
EXCHANGE
BOARD OF INDIA

4
 INTRODUCTION

In 1988 the Securities and Exchange Board of India (SEBI) was

established by the Government of India through an executive
resolution, and was subsequently upgraded as a fully
autonomous body (a statutory Board) in the year 1992 with the
passing of the Securities and Exchange Board of India Act (SEBI
Act) on 30th January 1992. In place of Government Control, a
statutory and autonomous regulatory board with defined
responsibilities, to cover both development & regulation of the
market, and independent powers have been set up.
Paradoxically this is a positive outcome of the Securities Scam
of 1990-91.

The BASIC OBJECTIVES of the Board were identified

as:

• to protect the interests of investors in securities;

• to promote the development of Securities Market;
• to regulate the securities market and
• for matters connected therewith or incidental thereto.

Since its inception SEBI has been working targetting the

securities and is attending to the fulfillment of its objectives
with commendable zeal and dexterity. The improvements in
the securities markets like capitalization requirements,
margining, establishment of clearing corporations etc. reduced
the risk of credit and also reduced the market.

SEBI has introduced the comprehensive regulatory measures,

prescribed registration norms, the eligibility criteria, the code
of obligations and the code of conduct for different
intermediaries like, bankers to issue, merchant bankers,
brokers and sub-brokers, registrars, portfolio managers, credit
rating agencies, underwriters and others. It has framed bye-
laws, risk identification and risk management systems for
Clearing houses of stock exchanges, surveillance system etc.
which has made dealing in securities both safe and transparent
to the end investor.

Another significant event is the approval of trading in stock

5
indices (like S&P CNX Nifty & Sensex) in 2000. A market Index
is a convenient and effective product because of the following
reasons:

• It acts as a barometer for market behavior;

• It is used to benchmark portfolio performance;
• It is used in derivative instruments like index futures and
index options;
• It can be used for passive fund management as in case of
Index Funds.

Two broad approaches of SEBI is to integrate the securities

market at the national level, and also to diversify the trading
products, so that there is an increase in number of traders
including banks, financial institutions, insurance companies,
mutual funds, primary dealers etc. to transact through the
Exchanges. In this context the introduction of derivatives
trading through Indian Stock Exchanges permitted by SEBI in
2000 AD is a real landmark.

SEBI appointed the L. C. Gupta Committee in 1998 to

recommend the regulatory framework for derivatives trading
and suggest bye-laws for Regulation and Control of Trading and
Settlement of Derivatives Contracts. The Board of SEBI in its
meeting held on May 11, 1998 accepted the recommendations
of the committee and approved the phased introduction of
derivatives trading in India beginning with Stock Index Futures.
The Board also approved the "Suggestive Bye-laws" as
recommended by the Dr LC Gupta Committee for Regulation
and Control of Trading and Settlement of Derivatives Contracts.

SEBI then appointed the J. R. Verma Committee to

recommend Risk Containment Measures (RCM) in the Indian
Stock Index Futures Market. The report was submitted in
november 1998.

However the Securities Contracts (Regulation) Act, 1956

(SCRA) required amendment to include "derivatives" in the
definition of securities to enable SEBI to introduce trading in
derivatives. The necessary amendment was then carried out by
the Government in 1999. The Securities Laws (Amendment)

6
Bill, 1999 was introduced. In December 1999 the new
framework was approved.

Derivatives have been accorded the status of `Securities'. The

ban imposed on trading in derivatives in 1969 under a
notification issued by the Central Government was revoked.
Thereafter SEBI formulated the necessary regulations/bye-laws
and intimated the Stock Exchanges in the year 2000. The
derivative trading started in India at NSE in 2000 and BSE
started trading in the year 2001.

SEBI ADMINISTRATION

The Securities and Exchange Board of India Act, 1992 is having

retrospective effect and is deemed to have come into force on
January 30, 1992. Relatively a brief act containing 35 sections,
the SEBI Act governs all the Stock Exchanges and the
Securities Transactions in India.

A Board by the name of the Securities and Exchange Board of

India (SEBI) was constituted under the SEBI Act to administer
its provisions. It consists of one Chairman and five members.

One each from the department of Finance and Law of the

Central Government, one from the Reserve Bank of India and
two other persons and having its head office in Bombay and
regional offices in Delhi, Calcutta and Madras.

The Central Government reserves the right to terminate the

services of the Chairman or any member of the Board. The
Board decides questions in the meeting by majority vote with
the Chairman having a second or casting vote.

Section 11 of the SEBI Act provides that to protect the interest

of investors in securities and to promote the development of
and to regulate the securities market by such measures, it is
the duty of the Board. It has given power to the Board to
regulate the business in Stock Exchanges, register and regulate
the working of stock brokers, sub-brokers, share transfer
agents, bankers to an issue, trustees of trust deeds, registrars
to an issue, merchant bankers, underwriters, portfolio
7
managers, investment advisers, etc., also to register and
regulate the working of collective investment schemes
including mutual funds, to prohibit fraudulent and unfair trade
practices and insider trading, to regulate take-overs, to conduct
enquiries and audits of the stock exchanges, etc.

All the stock brokers, sub-brokers, share transfer agents,

bankers to an issue, trustees of trust deed, registrars to an
issue, merchant bankers, underwriters, portfolio managers,
investment advisers and such other intermediary who may be
associated with the Securities Markets are to register with the
Board under the provisions of the Act, under Section 12 of the
Sebi Act. The Board has the power to suspend or cancel such
registration. The Board is bound by the directions vested by the
Central Government from time to time on questions of policy
and the Central Government reserves the right to supersede
the Board. The Board is also obliged to submit a report to the
Central Government each year, giving true and full account of
its activities, policies and programmes. Any one of the
aggrieved by the Board's decision is entitled to appeal to the
Central Government.

8
 FUNCTIONS OF THE BOARD

• The Board is responsible for the securing the interests of

investors in securities and to facilitate the growth of and to
monitor the securities market in an appropriate manner.
• To monitor and control the performance of stock
exchange and derivative markets.
• Listing and monitoring the functioning of stock brokers,
sub brokers, share transfer agents, bankers to an issue,
trustees of trust deeds, registrars to an issue, merchant
bankers, underwriters, portfolio managers, investment advisers
and others associated with securities markets by any means.
• Monitoring and Controlling the functioning of venture
capital funds and mutual funds.
• Forbid unjust and dishonest trade practices in the security
markets and forbid insider trading in the security market.
• Undertake periodic audits of stock exchanges, mutual
funds, individuals and self regulatory organizations associated
with the security market.

9
 INVESTORS KNOWHOW
PUBLIC ISSUE
Any company or a listed company making a public issue or a
rights issue of value of more than Rs 50 lakhs is required to file
a draft offer document with SEBI for its observations. The
company can proceed further only after getting observations
from SEBI. The company has to open its issue within three
months from the date of SEBI's observation letter.

Through public issues, SEBI has laid down eligibility norms for
entities accessing the primary market. The entry norms are
only for companies making a public issue (IPO or FPO) and not
for listed company making a rights issue.

The entry norms are as follows

Entry Norm I (EN I): The company shall meet the following
requirements

• Net Tangible Assets of at least Rs. 3 crores for 3 full years.

• Distributable profits in atleast three years.
• Net worth of at least Rs. 1 crore in three years.
• If change in name, atleast 50% revenue for preceding 1
year should be from the new activity.
• The issue size does not exceed 5 times the pre- issue net
worth.

SEBI has provided two other alternative routes to company not

satisfying any of the above conditions to provide sufficient
flexibility and also to ensure that genuine companies do not
suffer on account of rigidity of the parameters, for accessing
the primary Market. They are as under

Entry Norm II (EN II)

• Issue shall be through book building route, with at least

50% to be mandatory allotted to the Qualified Institutional
Buyers (QIBs).
• The minimum post-issue face value capital shall be Rs. 10
crore or there shall be a compulsory market-making for at
least 2 years.

OR
10
Entry Norm III (EN III)

• The "project" is appraised and participated to the extent

of 15% by FIs/Scheduled Commercial Banks of which at
least 10% comes from the appraiser(s).
• The minimum post-issue face value capital shall be Rs. 10
crore or there shall be a compulsory market-making for at
least 2 years.
Note :- The company should also satisfy the criteria of
having at least 1000 prospective allotees.

The following are exempted from the ENs

• Private Sector Banks

• Public sector banks
• An infrastructure company whose project has been
appraised by a PFI or IDFC or IL&FS or a bank which was
earlier a PFI and not less than 5% of the project cost is
financed by any of these institutions.
• Rights issue by a listed company

SECONDARY MARKET
Section 3 of SEBI Act protects the interests of the investors in
securities and also promotes the development of, and
regulates, the securities market and related matters.

The following are the financial products/instruments which the

secondary market deals with

• Equity Shares
• Rights Issue/ Rights Shares
• Bonus Shares
• Preferred Stock/ Preference shares
• Cumulative Preference Shares
• Cumulative Convertible Preference Shares
• Participating Preference Share
• Bond
• Zero Coupon Bond
• Convertible Bond
• Debentures
• Commercial Paper
11
 • Coupons
• Treasury Bills

MUTUAL FUNDS
To protect the interest of the investors, SEBI formulates policies
and regulates the mutual funds. It notified regulations in 1993
(fully revised in 1996) and issues guidelines from time to time.
MF either promoted by public or by private sector entities
including one promoted by foreign entities are governed by
these Regulations.

SEBI approved Asset Management Company (AMC) manages

the funds by making investments in various types of securities.
Custodian, registered with SEBI, holds the securities of various
schemes of the fund in its custody. The general power of
superintendence and direction over AMC is vested with the
trustees.

According to SEBI Regulations, two thirds of the directors of

trustee company or board of trustees must be independent .
They should not be associated with the sponsors. 50% of the
directors of AMC must be independent. All mutual funds are
required to be registered with SEBI before they launch any
scheme.

Increase of load more than the level mentioned in the offer

document is applicable only to prospective investments by the
MFs. For original investments, the offer documents has to be
amended to make investors aware of loads at the time of
investments.

TAKEOVER

• Imposing of curbs on off-market deals.

1. Upto a threshold level of 5 per cent, off-market deals
to be allowed.
2. Between 5 per cent and 15 per cent, all deals to be
made only through the stock market. Otherwise,
open offer will be attracted.

12
 3. Exception : the "preferential allotment" route with
approval from shareholders.
• Reducing the time limit for completion of the open offer
from 4 months at present to 3 months.
• Putting restrictions on the sale of shares by the acquirer
during the open offer period.
• Independant comment to be ginven by the board of
directors to the shareholders of a target company
regarding its future plans.
• Merchant banker to stop dealing in the shares of the
target company, following his appointment as manager to
the offer. Also to disclose its shareholding in the offer
document.

FOREIGN INSTITUTIONAL INVESTOR

One who propose to invest their proprietary funds or on behalf

of "broad based" funds or of foreign corporates and individuals
and belong to any of the undergiven categories can be
registered for FII.

• Pension Funds
• Mutual Funds
• Investment Trust
• Insurance or reinsurance companies
• Endowment Funds
• University Funds
• Foundations or Charitable Trusts or Charitable Societies
who propose to invest on their own behalf, and
• Asset Management Companies
• Nominee Companies
• Institutional Portfolio Managers
• Trustees
• Power of Attorney Holders
• Bank

An application for registration has to be made in Form A, the

format of which is provided in the SEBI(FII) Regulations, 1995
and submitted with under mentioned documents in duplicate
addressed to SEBI as well as to Reserve Bank of India (RBI) and
13
sent to the following address within 10 to 12 days of receipt of
application.

Supporting documents required are:

• Application in Form A duly signed by the authorised

signatory of the applicant.
• Certified copy of the relevant clauses or articles of the
Memorandum and Articles of Association or the
agreement authorizing the applicant to invest on behalf of
its clients
• Audited financial statements and annual reports for the
last one year , provided that the period covered shall not
be less than twelve months.
• A declaration by the applicant with registration number
and other particulars in support of its registration or
regulation by a Securities Commission or Self Regulatory
Organisation or any other appropriate regulatory authority
with whom the applicant is registered in its home country.
• A declaration by the applicant that it has entered into a
custodian agreement with a domestic custodian together
with particulatrs of the domestic custodian.
• A signed declaration statement that appears at the end of
the Form.
• Declaration regarding fit & proper entity.

The eligibility criteria for applicant seeking FII

registration
As per Regulation 6 of SEBI (FII) Regulations,1995, Foreign
Institutional Investors are required to fulfill the following
conditions to qualify for grant of registration:

• Applicant should have track record, professional

competence, financial soundness, experience, general
reputation of fairness and integrity;
• The applicant should be regulated by an appropriate
foreign regulatory authority in the same capacity/category
where registration is sought from SEBI. Registration with
authorities, which are responsible for incorporation, is not
adequate to qualify as Foreign Institutional Investor.

14
 • The applicant is required to have the permission under the
provisions of the Foreign Exchange Management Act,
1999 from the Reserve Bank of India.
• Applicant must be legally permitted to invest in securities
outside the country or its in-corporation / establishment.
• The applicant must be a "fit and proper" person.
• The applicant has to appoint a local custodian and enter
into an agreement with the custodian. Besides it also has
to appoint a designated bank to route its transactions.
• Payment of registration fee of US $ 5,000.00

DEPOSITORIES AND CUSTODIANS

There are two Depositories and approximately 390 Depository
Participants (DP) are registered with SEBI at present. The two
Depositories are:

• National Securities Depository Limited

• Central Depository Services (I) Limited

The benefits of availing Depository Services are as follows:

• A safe, convenient way to hold securities;

• Instant transfer of securities;
• Stamp duty is not required on transfer of securities;
• Elimination of risks associated with physical certificates
such as bad delivery , fake securities, Delays, thefts etc.;
• Reduction in paperwork involved in transfer of securities;
• Reduction in the cost of transaction,
• No odd lot problem, even one share can be sold;
• Facility of nomination;
• Change in address recorded with DP gets registered with
all companies in which investor holds securities
electronically eliminating the need to correspond with
each of them separately;
• Transmission of securities is done by DP eliminating
correspondence with companies;
• Credited automatically into demat account of shares,
arising out-of bonus or split or consolidation or merger
etc.

Opening of an account with any of the depository Participant of

any depository is required to avail the services.
15
Opening of an account

The investor has to approach a Depository Participant and fill

up an account opening form with the support proof of identity
and address.

Proof of Identity : Photograph and Signature of investor must

be authenticated by investor's bank or by an existing demat
account holder. Alternatively, one can submit a copy of a valid
Passport, Voters Id Card, Driving License or PAN card with
photograph.

Proof of Address : A copy of ration card or passport or voter ID

or PAN card or driving license or bank passbook as proof of
address.

The investor has to sign an agreement with DP in a depository

prescribed standard format, which holds a detail of investor's
and DPs rights and duties. DP provides investor with a copy of
the agreement and schedule of charges for future reference.
The DP opens the account for the investor in the system and
give an account number, which is also called BO ID (Beneficiary
owner Identification number).

Kindly note that there is no balance of securities required in the

account and more than one account in the same name can be
opened either with the same DP or with other irrespective of
the brokers account.

DERIVATIVES
Derivatives trading takes place under the Securities and
Exchange Board of India Act, 1992 and the framework including
suggestive bye-law and its Clearing Corporation/House has
been laid down by Dr. L.C. Gupta Committee, constituted by
SEBI.

Some of the eligibility conditions laid down by SEBI for

Derivative Exchange/Segment and its Clearing
Corporation/House are as follows:

16
• The Derivatives Exchange/Segment shall have on-line
surveillance capability to monitor positions, prices, and
volumes on a real time basis so as to deter market
manipulation.
• The Derivatives Exchange/ Segment should have
arrangements for dissemination of information about
trades, quantities and quotes on a real time basis through
atleast two information vending networks, which are
easily accessible to investors across the country.
• The Derivatives Exchange/Segment should have
arbitration and investor grievances redressal mechanism
operative from all the four areas / regions of the country.
• The Derivatives Exchange/Segment should have
satisfactory system of monitoring investor complaints and
preventing irregularities in trading.
• The Derivative Segment of the Exchange would have a
separate Investor Protection Fund.
• The Clearing Corporation/House shall perform full
novation, i.e., the Clearing Corporation/House shall
interpose itself between both legs of every trade,
becoming the legal counterparty to both or alternatively
should provide an unconditional guarantee for settlement
of all trades.
• The Clearing Corporation/House shall have the capacity to
monitor the overall position of Members across both
derivatives market and the underlying securities market
for those Members who are participating in both.
• The level of initial margin on Index Futures Contracts shall
be related to the risk of loss on the position. The concept
of value-at-risk shall be used in calculating required level
of initial margins. The initial margins should be large
enough to cover the one-day loss that can be encountered
on the position on 99% of the days.
• The Clearing Corporation/House shall establish facilities
for electronic funds transfer (EFT) for swift movement of
margin payments.
• In the event of a Member defaulting in meeting its
liabilities, the Clearing Corporation/House shall transfer
client positions and assets to another solvent Member or
close-out all open positions.
• The Clearing Corporation/House should have capabilities
to segregate initial margins deposited by Clearing
17
 Members for trades on their own account and on account
of his client. The Clearing Corporation/House shall hold the
clients' margin money in trust for the client purposes only
and should not allow its diversion for any other purpose.
• The Clearing Corporation/House shall have a separate
Trade Guarantee Fund for the trades executed on
Derivative Exchange / Segment.

Presently, SEBI has permitted Derivative Trading on the

Derivative Segment of BSE and the F&O Segment of NSE.

The rights of investors in the Derivative Market are well

protected by SEBI. The measures specified by SEBI are as
follows:

• Investor's money has to be kept separate at all levels and

is permitted to be used only against the liability of the
Investor and is not available to the trading member or
clearing member or even any other investor.
• The Trading Member is required to provide every investor
with a risk disclosure document which will disclose the
risks associated with the derivatives trading so that
investors can take a conscious decision to trade in
derivatives.
• Investor would get the contract note duly time stamped
for receipt of the order and execution of the order. The
order will be executed with the identity of the client and
without client ID order will not be accepted by the system.
The investor could also demand the trade confirmation
slip with his ID in support of the contract note. This will
protect him from the risk of price favour, if any, extended
by the Member.
• In the derivative markets all money paid by the Investor
towards margins on all open positions is kept in trust with
the Clearing House/ Clearing corporation and in the event
of default of the Trading or Clearing Member the amounts
paid by the client towards margins are segregated and not
utilised towards the default of the member. However, in
the event of a default of a member, losses suffered by the
Investor, if any, on settled / closed out position are
compensated from the Investor Protection Fund, as per

18
 the rules, bye-laws and regulations of the derivative
segment of the exchanges

COLLECTIVE INVESTMENT SCHEMES

At the time of commencement of CIS Regulations i.e. (October
15, 1999), entities operating a collective investment scheme
are deemed to be an existing collective investment scheme.

SEBI does not ensure the refund of money invested in

defaulting entities registered before October 15, 1999.

By any means the under mentioned do not constitute a CIS

where any scheme or arrangement

• Made or offered by a co-operative society or a society

being a society registered or deemed to be registered
under any law relating to co-operative societies for the
time being in force in any State
• Being under which deposits are accepted by non-banking
financial companies e.g. a contract of insurance to which
the Insurance Act, applies.
• Providing for any Scheme, Pension Scheme or the
Insurance Scheme framed under the Employees Provident
Fund and Miscellaneous Provisions Act, 1952.
• Under which deposits are accepted under section 58A of
the Companies Act, 1956 (1 of 1956).
• Under which deposits are accepted by a company
declared as a mutual benefit society under section 620A
of the Companies Act, 1956 (1 of 1956).
• Falling within the meaning of Chit business as defined in
clause (d) of section 2of the Chit Fund Act, 1982 (40 of
1982).
• Under which contributions made are in the nature of
subscription to a mutual fund.

Registered with SEBI under the SEBI (Collective Investment

Schemes) Regulations, 1999 and incorporated under the
provisions of the Companies Act, 1956 whose object is to
organise, operate and manage a Collective Investment Scheme
forms a Collective Investment Management Company.

These companies can raise funds from the public by launching

schemes which has to be credit rated and appraised by
19
appraising agencies. It also has to be approved by the Trustee
and contain disclosures according to the Regulations to enable
investors to make informed decision. The offer document to the
public is issued after 21 days of filing document to SEBI and in
return no modifications are suggested by SEBI.

The CIS cannot do such.

SEBI is not responsible either for the financial soundness of any

scheme for which the offer document has been filed or for the
correctness of the statements made or opinions expressed in
the offer document. CIMC has to ensure the disclosures.

BUY BACK OF SECURITIES

A company buy back its shares in any one of the
undermentioned manners even without shareholders'
resolution to the extent of 10% of paid up equity capital and
reserves. For 25% buy back, it has to get approved by
Shareholders Resolution as specified in Section 77 A of
Companies Act, 1956.

• From the existing shareholders on a proportionate basis

through the tender offer;
• From open market through:
o Book building process
o Stock exchange,
• From odd lot holders.

The listed companies requires intimation to the stock exchange

of general meetings and resolutions passed thereof. The
informations can be obtained from the stock exchanges.

SEBI issues a press release and the offer document is put on

the SEBI website when buyback offer document or public
announcement is filed.

20
 CONCLUSION

SEBI, if not 100%, than for sure it has been near to 100%
success as far as the protections of the investors are
concerned. As we have seen that via different guidelines it had
made it sure that no stone remains unturned in the path of the
mission of protecting the investors. But at present the two
greatest challenges are the scams relating to mutual fund and
the disgorgement of money.

As regards to the mutual fund problem, according to a current

issue in a newspaper it had become clear that, the Capital
market regulator SEBI is concerned about the kind of service
mutual funds are providing to their investors and wants the
industry to focus on the hassle-free redemptions and also
conduct an investor survey, in their own interest. Furthermore
Mr.C.B. Bhave while pointing towards the mutual fund
institutions commented that, “Take up investor survey to find
out what they feel about your products, why do they like
certain products……….”, “Focus on what the client wants, as
this will be in your interest,” he added. He also assured that
SEBI would be having an advisory committee for the MF
institutions. The SEBI Chairman also suggested setting up of a
depository that will maintain database of all mutual fund
investors across the country, much in line with the depositories
for the equity market. SEBI is also planning to hold a workshop
for the trustees to get their feedback and to know their
requirements. The regulator has also decided to set up a
mutual fund advisory committee to address the issues faced by
the industry.

In India, the position is not so well and hence the picture is not
clear as to how the disgorged money is to be treated.
Generally, the payments received by way of penalties are
deposited in Consolidated Fund of India. In its first ever
disgorgement order on 21st November, 2006, in Karvey case,
SEBI directed NSDL, CDSL and eight depository participants
(DPs) to return Rs115.81 crore in six months. The DPs include
Karvey, HDFC Bank, Khandwala Securities, IDBI Bank, Jhavei
Securities, ING Vysya Bank, PR Stock Broking and Pratik Stock
Vision. On the issue of disgorgement, in the order passed in the
Karvey case, SEBI said, “It is well established worldwide that
21
the power to disgorge is an equitable remedy and is not a
penal or even a quasi- penal action. Thus it differs from actions
like forfeiture and impounding of assets or money. Unlike
damages, it is a method of forcing a defendant to give up the
amount by which he or she was unjustly enriched. The point of
importance here is that the order was passed with the need felt
to restore confidence about the market process in the minds of
investors who were deprived of their entitlement to shares
under the IPO as a result of illegal cornering of shares by some
financiers. The Wadhwa Committee report of December 2007
recommended making good deprived investors in money
terms, which, it seems, went well with the SEBI, as understood
from its order of disgorgement.

22
RESERVE BANK
OF INDIA

23
 INTRODUCTION

The central bank of the country is the Reserve Bank of India

(RBI). It was established in April 1935 with a share capital of Rs.
5 crores on the basis of the recommendations of the Hilton
Young Commission. The share capital was divided into shares
of Rs. 100 each fully paid which was entirely owned by private
shareholders in the beginning. The Government held shares of
nominal value of Rs. 2,20,000.

Reserve Bank of India was nationalised in the year 1949. The

general superintendence and direction of the Bank is entrusted
to Central Board of Directors of 20 members, the Governor and
four Deputy Governors, one Government official from the
Ministry of Finance, ten nominated Directors by the
Government to give representation to important elements in
the economic life of the country, and four nominated Directors
by the Central Government to represent the four local Boards
with the headquarters at Mumbai, Kolkata, Chennai and New
Delhi. Local Boards consist of five members each Central
Government appointed for a term of four years to represent
territorial and economic interests and the interests of co-
operative and indigenous banks.

The Reserve Bank of India Act, 1934 was commenced on April

1, 1935. The Act, 1934 (II of 1934) provides the statutory basis
of the functioning of the Bank.

The Bank was constituted for the need of following:

• To regulate the issue of banknotes

• To maintain reserves with a view to securing monetary
stability and
• To operate the credit and currency system of the country
to its advantage.

24
 OBJECTIVES OF THE RESERVE BANK OF INDIA
The Preamble to the Reserve Bank of India Act, 1934 spells out
the objectives of the Reserve Bank as: “to regulate the issue of
Bank notes and the keeping of reserves with a view to securing
monetary stability in India and generally to operate the
currency and credit system of the country to its advantage.”

Prior to the establishment of the Reserve Bank, the Indian

financial system was totally inadequate on account of the
inherent weakness of the dual control of currency by the
Central Government and of credit by the Imperial Bank of India.

The Hilton-Young Commission, therefore, recommended that

the dichotomy of functions and division of responsibility for
control of currency and credit and the divergent policies in this
respect must be ended by setting-up of a central bank – called
the Reserve Bank of India – which would regulate the financial
policy and develop banking facilities throughout the country.
Hence, the Bank was established with this primary object in
view.

Another objective of the Reserve Bank has been to remain free

from political influence and be in successful operation for
maintaining financial stability and credit. The fundamental
object of the Reserve Bank of India is to discharge purely
central banking functions in the Indian money market, i.e., to
act as the note- issuing authority, bankers’ bank and banker to
government, and to promote the growth of the economy within
the framework of the general economic policy of the
Government, consistent with the need of maintenance of price
stability.

A significant object of the Reserve -Bank of India has also been

to assist the planned process of development of the Indian
economy. Besides the traditional central banking functions,
with the launching of the five-year plans in the country, the
Reserve Bank of India has been moving ahead in performing a
host of developmental and promotional functions, which are
normally beyond the purview of a traditional Central Bank.

25
 ORGANIZATION AND MANAGEMENT OF RESERVE
BANK OF INDIA

CENTRAL BOARD OF DIRECTORS:

The organization and management of RBI is vested on the
Central Board of Directors. It is responsible for the
management of RBI.Central Board of Directors consist of 20
members. It is constituted as follows:

• One Governor: it is the highest authority of RBI. He is

appointed by the Government of India for a term of 5
years. He can be re-appointed for another term.
• Four Deputy Governors: Four deputy Governors are
nominated by Central Govt. for a term of 5 years
• Fifteen Directors: Other fifteen members of the Central
Board are appointed by the Central Government. Out of
these , four directors, one each from the four local Boards
are nominated by the Government separately by the
Central Government.

Ten directors nominated by the Central Government are among

the experts of commerce, industries, finance, economics and
cooperation. The finance secretary of the Government of India
is also nominated as Govt. officer in the board. Ten directors
are nominated for a period of 4 years.
The Governor acts as the Chief Executive officer and Chairman
of the Central Board of Directors. In his absence a deputy
Governor nominated by the Governor, acts as the Chairman of
the Central Board. The deputy governors and government’s
officer nominee are not entitled to vote at the meetings of the
Board. The Governor and four deputy Governors are full time
officers of the Bank.

LOCAL BOARDS:
Besides the central board, there are local boards for four
regional areas of the country with their head-quarters at
Mumbai, Kolkata, Chennai, and New Delhi. Local Boards consist
of five members each, appointed by the central Government
for a term of 4 years to represent territorial and economic
interests and the interests of co-operatives and indigenous
banks. The function of the local boards is to advise the central

26
board on general and specific issues referred to them and to
perform duties which the central board delegates.

OFFICES OF RBI:
The Head office of the bank is situated in Mumbai and the
offices of local boards are situated in Delhi, Kolkata and
Chennai. In order to maintain the smooth working of banking
system, RBI has opened local offices or branches in
Ahmedabad, Bangalore, Bhopal, Bhubaneshwar, Chandigarh,
Guwahati, Hyderabad, Jaipur, Jammu, Kanpur, Nagpur, Patna,
Thiruvananthpuram, Kochi, Lucknow and Byculla (Mumbai). The
RBI can open its offices with the permission of the Government
of India. In places where there are no offices of the bank, it is
represented by the state Bank of India and its associate banks
as the agents of RBI.

ADMINISTRATIVE DEPARTMENT OF RBI:

In order to maintain smooth functioning, RBI has established

different administrative departments which are the part of its
internal organization. These are as follows:
• Department of currency management.
• Department of banking supervision.
• Rural planning and credit department.
• Department of banking operations and development.
• Exchange control department.
• Secretary’s department
• Industrial and export credit department
• Department of administration and personnel management
• Department of Government and Bank accounts.
• Department of non-Banking supervision.
• Internal debt management cell.
• Inspection department.
• Department of information and technology.
Other department: Besides these above departments RBI has
other departments such as premises department, press relation
department, personnel policy department etc.

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 FUNCTIONS OF RESERVE BANK OF INDIA

The Reserve Bank of India Act of 1934 entrust all the important
functions of a central bank the Reserve Bank of India.

BANK OF ISSUE

Under Section 22 of the Reserve Bank of India Act, the Bank

has the sole right to issue bank notes of all denominations. The
distribution of one rupee notes and coins and small coins all
over the country is undertaken by the Reserve Bank as agent
of the Government. The Reserve Bank has a separate Issue
Department which is entrusted with the issue of currency
notes. The assets and liabilities of the Issue Department are
kept separate from those of the Banking Department.
Originally, the assets of the Issue Department were to consist
of not less than two-fifths of gold coin, gold bullion or sterling
securities provided the amount of gold was not less than Rs. 40
crores in value. The remaining three-fifths of the assets might
be held in rupee coins, Government of India rupee securities,
eligible bills of exchange and promissory notes payable in
India. Due to the exigencies of the Second World War and the
post-was period, these provisions were considerably modified.
Since 1957, the Reserve Bank of India is required to maintain
gold and foreign exchange reserves of Ra. 200 crores, of which
at least Rs. 115 crores should be in gold. The system as it
exists today is known as the minimum reserve system.

BANKER TO GOVERNMENT

The second important function of the Reserve Bank of India is

to act as Government banker, agent and adviser. The Reserve
Bank is agent of Central Government and of all State
Governments in India excepting that of Jammu and Kashmir.
The Reserve Bank has the obligation to transact Government
business, via. to keep the cash balances as deposits free of

28
interest, to receive and to make payments on behalf of the
Government and to carry out their exchange remittances and
other banking operations. The Reserve Bank of India helps the
Government - both the Union and the States to float new loans
and to manage public debt. The Bank makes ways and means
advances to the Governments for 90 days. It makes loans and
advances to the States and local authorities. It acts as adviser
to the Government on all monetary and banking matters.

BANKERS' BANK AND LENDER OF THE LAST RESORT

The Reserve Bank of India acts as the bankers' bank. According

to the provisions of the Banking Companies Act of 1949, every
scheduled bank was required to maintain with the Reserve
Bank a cash balance equivalent to 5% of its demand liabilites
and 2 per cent of its time liabilities in India. By an amendment
of 1962, the distinction between demand and time liabilities
was abolished and banks have been asked to keep cash
reserves equal to 3 per cent of their aggregate deposit
liabilities. The minimum cash requirements can be changed by
the Reserve Bank of India.

The scheduled banks can borrow from the Reserve Bank of

India on the basis of eligible securities or get financial
accommodation in times of need or stringency by rediscounting
bills of exchange. Since commercial banks can always expect
the Reserve Bank of India to come to their help in times of
banking crisis the Reserve Bank becomes not only the banker's
bank but also the lender of the last resort.

CONTROLLER OF CREDIT

The Reserve Bank of India is the controller of credit i.e. it has

the power to influence the volume of credit created by banks in
India. It can do so through changing the Bank rate or through
open market operations. According to the Banking Regulation
Act of 1949, the Reserve Bank of India can ask any particular
29
bank or the whole banking system not to lend to particular
groups or persons on the basis of certain types of securities.
Since 1956, selective controls of credit are increasingly being
used by the Reserve Bank.

The Reserve Bank of India is armed with many more powers to

control the Indian money market. Every bank has to get a
licence from the Reserve Bank of India to do banking business
within India, the licence can be cancelled by the Reserve Bank
of certain stipulated conditions are not fulfilled. Every bank will
have to get the permission of the Reserve Bank before it can
open a new branch. Each scheduled bank must send a weekly
return to the Reserve Bank showing, in detail, its assets and
liabilities. This power of the Bank to call for information is also
intended to give it effective control of the credit system. The
Reserve Bank has also the power to inspect the accounts of
any commercial bank.

As supreme banking authority in the country, the Reserve Bank

of India, therefore, has the following powers:
(a) It holds the cash reserves of all the scheduled banks.

(b) It controls the credit operations of banks through

quantitative and qualitative controls.

(c) It controls the banking system through the system of

licensing, inspection and calling for information.

(d) It acts as the lender of the last resort by providing

rediscount facilities to scheduled banks.

CUSTODIAN OF FOREIGN RESERVES

The Reserve Bank of India has the responsibility to maintain

the official rate of exchange. According to the Reserve Bank of
India Act of 1934, the Bank was required to buy and sell at
fixed rates any amount of sterling in lots of not less than Rs.
30
10,000. The rate of exchange fixed was Re. 1 = sh. 6d. Since
1935 the Bank was able to maintain the exchange rate fixed at
lsh.6d. though there were periods of extreme pressure in
favour of or against

the rupee. After India became a member of the International

Monetary Fund in 1946, the Reserve Bank has the
responsibility of maintaining fixed exchange rates with all other
member countries of the I.M.F.

Besides maintaining the rate of exchange of the rupee, the

Reserve Bank has to act as the custodian of India's reserve of
international currencies. The vast sterling balances were
acquired and managed by the Bank. Further, the RBI has the
responsibility of administering the exchange controls of the
country.

SUPERVISORY FUNCTIONS

In addition to its traditional central banking functions, the

Reserve bank has certain non-monetary functions of the nature
of supervision of banks and promotion of sound banking in
India. The Reserve Bank Act, 1934, and the Banking Regulation
Act, 1949 have given the RBI wide powers of supervision and
control over commercial and co-operative banks, relating to
licensing and establishments, branch expansion, liquidity of
their assets, management and methods of working,
amalgamation, reconstruction, and liquidation. The RBI is
authorised to carry out periodical inspections of the banks and
to call for returns and necessary information from them. The
nationalisation of 14 major Indian scheduled banks in July 1969
has imposed new responsibilities on the RBI for directing the
growth of banking and credit policies towards more rapid
development of the economy and realisation of certain desired
social objectives. The supervisory functions of the RBI have
helped a great deal in improving the standard of banking in
India to develop on sound lines and to improve the methods of
31
their operation.

PROMOTIONAL FUNCTIONS

With economic growth assuming a new urgency since

Independence, the range of the Reserve Bank's functions has
steadily widened. The Bank now performs a varietyof
developmental and promotional functions, which, at one time,
were regarded as outside the normal scope of central banking.
The Reserve Bank was asked to promote banking habit, extend
banking facilities to rural and semi-urban areas, and establish
and promote new specialised financing agencies. Accordingly,
the Reserve Bank has helped in the setting up of the IFCI and
the SFC; it set up the Deposit Insurance Corporation in 1962,
the Unit Trust of India in 1964, the Industrial Development
Bank of India also in 1964, the Agricultural Refinance
Corporation of India in 1963 and the Industrial Reconstruction
Corporation of India in 1972. These institutions were set up
directly or indirectly by the Reserve Bank to promote saving
habit and to mobilise savings, and to provide industrial finance
as well as agricultural finance. As far back as 1935, the Reserve
Bank of India set up the Agricultural Credit Department to
provide agricultural credit. But only since 1951 the Bank's role
in this field has become extremely important. The Bank has
developed the co-operative credit movement to encourage
saving, to eliminate moneylenders from the villages and to
route its short term credit to agriculture. The RBI has set up the
Agricultural Refinance and Development Corporation to provide
long-term finance to farmers.

CLASSIFICATION OF RBIS FUNCTIONS

The monetary functions also known as the central banking

functions of the RBI are related to control and regulation of
money and credit, i.e., issue of currency, control of bank credit,
control of foreign exchange operations, banker to the
Government and to the money market. Monetary functions of
32
the RBI are significant as they control and regulate the volume
of money and credit in the country.

Equally important, however, are the non-monetary functions of

the RBI in the context of India's economic backwardness. The
supervisory function of the RBI may be regarded as a non-
monetary function (though many consider this a monetary
function). The promotion of sound banking in India is an
important goal of the RBI, the RBI has been given wide and
drastic powers, under the Banking Regulation Act of 1949 -
these powers relate to licencing of banks, branch expansion,
liquidity of their assets, management and methods of working,
inspection, amalgamation, reconstruction and liquidation.
Under the RBI's supervision and inspection, the working of
banks has greatly improved. Commercial banks have
developed into financially and operationally sound and viable
units. The RBI's powers of supervision have now been extended
to non-banking financial intermediaries. Since independence,
particularly after its nationalisation 1949, the RBI has followed
the promotional functions vigorously and has been responsible
for strong financial support to industrial and agricultural
development in the country.

33
 CONCLUSION
RBI is the apex banking institution in India. RBI is an
autonomous body promoted by the government of India and is
headquartered at Mumbai. The RBI plays a key role in the
management of the treasury foreign exchange movements and
is also the primary regulator for banking and non-banking
financial institutions. The RBI operates a number of
government mints that produce currency and coins.

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THANK YOU

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