The regulatory responsibility of the securities market in India is vested in the Securities and Exchange Board of India (SEBI), the Reserve Bank of India (RBI), and two government departments - the Ministry of Company Affairs and the Department of Economic Affairs. In the 2004 report issued by the Advisory Group on Securities Market Regulation, it is noted that all the International Organization of Securities Commissions (IOSCO) Guiding Principles for Collective Investment Schemes are fully implemented for mutual funds in India. SEBI is also by and large compliant with the recommendations of the IOSCO CPSS Task Force on Clearing and Settlement. The Task Force is working towards finalization of its recommendations on the settlement system and central counterparties. According to the Advisory Group, further progress in the area of securities market regulation would need to focus on cross-border transactions, self-regulatory organizations (SROs) and on operational areas of trading in securities markets. However, overall, there is insufficient publicly available information regarding India's compliance with IOSCO's Principles and Objectives of Securities Regulation.
General Overview
The Securities and Exchange Board of India (SEBI) Act contains both regulatory responsibility and the authority to carry it. Also, there is now substantial clarity on market-specific regulation. The Government of India (GOI) has, by issue of a notification under the Securities Contract (Regulation) Act (SCRA), delegated authority to the Reserve Bank of India (RBI) to regulate contracts in Government securities, money market securities, gold-related securities, securities derived from these securities and repos. Thus, RBI effectively regulates money market, government securities market, repo market as also the over-the-counter (OTC) derivatives market. RBI also regulates foreign exchange market under the Foreign Exchange Management Act (FEMA). Equity market and all exchange-traded contracts are regulated by SEBI. Commodity futures market is regulated by the Forward Markets Commission (FMC). However, as regards enforcement/ supervision, since regulations operate on institution-specific basis, there are some gaps/overlaps. (RBI 2004, pp. 56-57)
In the 2004 report issued by the Advisory Group on Securities Market Regulation, it is noted that all the International Organization of Securities Commissions (IOSCO) Guiding Principles for Collective Investment Schemes are fully implemented for mutual funds in India. The Advisory Group also maintains that most of the recommendations of the IOSCO-BIS joint task force on Securities Settlement Systems (SSS) have already been implemented by RBI. SEBI is also by and large compliant with the recommendations of the IOSCO CPSS Task Force on Clearing and Settlement. The Task Force is working towards finalization of its recommendations on the settlement system and central counterparties. According to the Advisory Group, further progress in the area of securities market regulation would need to focus on cross-border transactions, self-regulatory organizations (SROs) and on operational areas of trading in securities markets. (RBI 2004, pp. 61, 57, 58, 63)
SEBI notes in its 2003 annual report that the Securities and Exchange Board of India Act, 1992 has been amended by Securities and Exchange Board of India (Amendment) Act, 2002 with effect from October 2002. The Board has been conferred powers to call for information and record from any bank or other authority or board or corporation constituted under any Central or State Act in respect of any transaction in securities which is under investigation or enquiry by the Board. Section 11 (2A) empowers the Board for taking measures to undertake inspection of any book or register or document or record of any listed company or a public company which intends to get its securities listed on a recognized stock exchange, if the Board has reasonable grounds to believe that such company has been indulging in insider training or fraudulent and unfair trade practices relating to securities market. Section 11(3) further empowers the power of a civil court to the Board in respect of inspecting any book or register or document or record of a listed company or a public company which intends to get its securities listed on a recognized stock exchange and in respect of issuing commissions for the examination of witnesses. (SEBI 2003)
The SEBI Act, 1992 vested SEBI with search and seizure powers in cases relating to insider trading and market manipulations. The amount of penalty has been raised substantially in respect of various offences under the SEBI Act. (RBI 2004, p. 54)
According to a report issued by the World Bank in 2004, the quality of financial disclosure for listed companies is determined by the Department of Company Affairs (DCA), the Securities and Exchange Board of India (SEBI), and Institute of Chartered Accountants of India (ICAI). ICAI lays down the parameters of accounting and auditing standards. According to ICAI, India is materially in conformity with International Financial Reporting Standards (IFRS) and International Standards on Auditing (ISA).
Resource mobilization from the primary market through public issues (excluding offers for sale) increased by 23.1 per cent to Rs.26,940 crore during 2005-06. The increase in resource mobilization during 2005-06 was entirely on account of private sector companies as resources raised by public sector companies were lower than a year ago. Private sector companies continued to dominate the public issues market, mobilizing 78.5 per cent of the total resource mobilization during 2005-06 as compared with 61.6 per cent during 2004-05. In the secondary markets, the stock markets witnessed bullish conditions during 2005-06 with the benchmark indices touching all time high levels. The BSE Sensex rose by 73.7 per cent between end-March 2005 and end- March 2006, while the S&P CNX Nifty increased by 67.1 per cent. (RBI 2006, pp. 80, 82)
The IOSCO multilateral memorandum of understanding (MMoU) is based on the thirty IOSCO Objectives and Principles of Securities Regulation (IOSCO Principles) adopted in 1998 and the experience gathered by securities regulators in using bilateral MoUs. The IOSCO MMoU provides a standardized framework for sharing enforcement-related information and a gradually expanding network of participating regulatory agencies. IOSCO members who wish to sign the IOSCO MMoU participate in a comprehensive screening process to establish that they have the legal capacity to fully comply with the terms of the IOSCO MMoU. SEBI is a signatory to the MMoU and an ordinary member of IOSCO. (IOSCO website; OSC website)
The Principles
1. The responsibilities of the regulator should be clear and objectively stated.
There is insufficient publicly available information regarding India's compliance with this principle.
The regulatory responsibility of the securities market is vested in the Securities and Exchange Board of India (SEBI), the Reserve Bank of India (RBI), and two government departments - the Department of Company Affairs and the Department of Economic Affairs. Investigative agencies such as the Economic Offences Department of the government and consumer grievance redressal forums also play a role. The SEBI, established under the Securities and Exchange Board of India Act, is the apex regulatory body for the securities market. Besides regulation, the Securities and Exchange Board'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. (RBI 2001, p. 8)
In 2004, the Advisory Group on Securities Market Regulation Constituted by the Reserve Bank of India Standing Committee on International Financial Standards And Codes reported that the SEBI Act contains both regulatory responsibility and the authority to carry it. Also, there is now substantial clarity on market-specific regulation. The Government of India (GOI) has, by issue of a notification under the Securities Contract (Regulation) Act (SCRA), delegated authority to the RBI to regulate contracts in Government securities, money market securities, gold-related securities, securities derived from these securities and repos. Thus, RBI effectively regulates money market, government securities market, repo market as also the over-the-counter (OTC) derivatives market. RBI also regulates foreign exchange market under the Foreign Exchange Management Act (FEMA). Equity market and all exchange-traded contracts are regulated by SEBI. Commodity futures market is regulated by the Forward Markets Commission (FMC). However, as regards enforcement/ supervision, since regulations operate on institution-specific basis, there are some gaps/overlaps. (RBI 2004, pp. 56-57)
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, SEBI is mandated to regulate the trading of these securities on recognized stock exchanges in line with the guidelines issued by the RBI. (RBI 2001, p. 8)
In a report sponsored by the International Monetary Fund, one of the contributors notes that the Securities and Exchange Board of India (SEBI) has put timelines for performance of its various functions, such as registration and renewal, on the website. These measures work as a self-disciplining mechanism within SEBI and provide full transparency to its functioning. (Bajpai 2006, p. 96)
2. The regulator should be operationally independent and accountable in the exercise of its functions and powers.
There is insufficient publicly available information regarding India's compliance with this principle.
To ensure operational independence and accountability in the exercise of functions and powers by the regulators, the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (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. Although the SEBI and the RBI are operationally independent, the government can issue directions to both in policy matters. There is also a system of independent judicial review of the decisions of the Securities and Exchange Board of India and the Reserve Bank of India. (RBI 2001, p. 9)
3. The regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers.
In 2001, the Advisory Group on Securities Market Regulation Constituted by the Reserve Bank of India Standing Committee on International Financial Standards And Codes reported that the Securities and Exchange Board of India (SEBI) has powers to carry out routine inspections of market intermediaries to ensure compliance with prescribed standards. It also has investigation powers similar to that of a civil court in terms of summoning persons and obtaining information relevant to its enquiry. Action is taken on the basis of investigation. The enforcement powers of SEBI include issuance of directions, imposition of monetary penalties, cancellation of registration and even prosecution of market intermediaries. To ensure effective and credible use of enforcement powers, SEBI has adopted measures such as development of a stock watch system, uniform price bands and establishment of a Market Surveillance Division. In 2004, the Advisory Group reiterated that the SEBI Act contains both regulatory responsibility and the authority to carry it. (RBI 2001, p. 9; RBI 2004, p. 56)
SEBI notes in its 2003 annual report that the Securities and Exchange Board of India Act, 1992 has been amended by Securities and Exchange Board of India (Amendment) Act, 2002 with effect from October 2002. The Board has been conferred powers to call for information and record from any bank or other authority or board or corporation constituted under any Central or State Act in respect of any transaction in securities which is under investigation or enquiry by the Board. Section 11 (2A) empowers the Board for taking measures to undertake inspection of any book or register or document or record of any listed company or a public company which intends to get its securities listed on a recognized stock exchange, if the Board has reasonable grounds to believe that such company has been indulging in insider training or fraudulent and unfair trade practices relating to securities market. Section 11(3) further empowers the power of a civil court to the Board in respect of inspecting any book or register or document or record of a listed company or a public company which intends to get its securities listed on a recognized stock exchange and in respect of issuing commissions for the examination of witnesses. (SEBI 2003)
The Advisory Group recommended allowing SEBI enhanced authority and powers to impose penalty commensurate with the gravity of the violation (i.e., disgorgement powers). According to the Advisory Group's 2004 review, appropriate action has been taken. The SEBI Act, 1992 vested SEBI with search and seizure powers in cases relating to insider trading and market manipulations. The amount of penalty has been raised substantially in respect of various offences under the SEBI Act. (RBI 2004, p. 54)
The Advisory Group also recommended streamlining the procedures to detect frauds. Further, procedures relating to due process have also to be streamlined. Significant steps have been taken in this direction. The Insider Trading (Amendment) Regulations were notified in February 2002 to enhance market transparency and strengthen insider-trading regulations. These regulations were amended to stipulate a code of conduct for intermediaries and listed companies. The SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations 2003 are now being enforced. These new regulations strengthened the provisions relating to action against market misconduct. The Weekly Joint Market Review Mechanism comprising Surveillance Chief, SEBI and the Chiefs of BSE and NSE are meeting regularly to review the markets in order to ascertain the safety and integrity of the markets and maintain constant vigil. SEBI is in the process of setting up a state-of-the-art online surveillance mechanism. SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations 2002 have been notified for expeditious completion of enquiry proceedings and to bring uniformity in conducting enquiries in respect of all intermediaries. (RBI 2004, pp. 54-55)
4. The regulator should adopt clear and consistent regulatory processes.
There is insufficient publicly available information regarding India's compliance with this principle.
In 2001, the Advisory Group on Securities Market Regulation Constituted by the Reserve Bank of India Standing Committee on International Financial Standards And Codes reported that the Securities and Exchange Board of India (SEBI) has powers to carry out routine inspections of market intermediaries to ensure compliance with prescribed standards. It also has investigation powers similar to that of a civil court in terms of summoning persons and obtaining information relevant to its enquiry. Action is taken on the basis of investigation. The enforcement powers of SEBI include issuance of directions, imposition of monetary penalties, cancellation of registration and even prosecution of market intermediaries. To ensure effective and credible use of enforcement powers, SEBI has adopted measures such as development of a stock watch system, uniform price bands and establishment of a Market Surveillance Division. In 2004, the Advisory Group reiterated that the SEBI Act contains both regulatory responsibility and the authority to carry it. (RBI 2001, p. 9; RBI 2004, p. 56)
In a report sponsored by the International Monetary Fund, one of the contributors notes that the Securities and Exchange Board of India (SEBI) has put timelines for performance of its various functions, such as registration and renewal, on the website. These measures work as a self-disciplining mechanism within SEBI and provide full transparency to its functioning. (Bajpai 2006, p. 96)
5. The staff of the regulator should observe the highest professional standards, including appropriate standards of confidentiality.
There is insufficient publicly available information regarding India's compliance with this principle.
According to the Securities and Exchange Board of India 2005-06 annual report, several training initiatives were undertaken during the year to enhance the skills and efficiencies of staff members. A number of staff members were deputed for training programs/seminars both within India and abroad. During 2005-06, 176 staff members attended 100 training programs. (SEBI 2006, p. 115)
6. The regulatory regime should make appropriate use of Self-Regulatory Organizations (SROs) that exercise some direct oversight responsibility for their respective areas of competence, to the extent appropriate to the size and complexity of the markets.
There is insufficient publicly available information regarding India's compliance with this principle.
In 2001, the Advisory Group on Securities Market Regulation Constituted by the Reserve Bank of India Standing Committee on International Financial Standards And Codes reported that the Securities and Exchange Board of India Act provides for promotion and regulation of self-regulated organizations (SROs) (i.e. stock exchanges). The stock exchanges are empowered to make rules and regulations for their members and for regulating the conduct of respective members. However, self-regulation is not always effective, because the current ownership and governance structures of many stock exchanges allow scope for conflict of interest. These exchanges are owned and managed by members who enjoy exclusive trading rights. In the broker-owned exchanges, brokers elect their representatives to regulate activities of the exchange, including those of the brokers themselves. This raises fairness issues, because the members of stock exchange governing boards have access to valuable information about market participants. Elimination of such conflict of interest through demutualization, which implies separation of ownership of exchange from the right to trade on it, can promote fairness and reinforce investor protection. Further, the slow evolution of the Association of Mutual Funds of India (AMFI) as a SRO has meant continuation of substantial regulatory burden on the SEBI. In this regard, the Group suggests that the Securities and Exchange Board of India assist the AMFI to develop into a full-fledged SRO. Similarly, in money and government securities markets, Fixed Income Money Market and Derivatives Association of India (FIMMDA) and Primary Dealers Association of India (PDAI) are operating as industry level associations, who are gradually taking on the role of SROs. (RBI 2001, p. 11)
As of 2004, the suggestion made by the Advisory Group to demutualize the stock exchanges to prevent conflict of interest is being implemented. An Ordinance called the Securities Laws (Amendment) Ordinance, 2004 has been promulgated. The terms 'corporatization' and 'demutualization' of stock exchanges have been defined. The ordinance also empowers SEBI to restrict the voting rights of the shareholders who are also stockbrokers of recognized stock exchanges. Earlier, SEBI had approved the recommendations of the 'Group on Corporatization and Demutualization of Stock Exchanges' in January 2003, which recommended, inter alia, a uniform model of corporatization and demutualization to be adopted for all stock exchanges. SEBI in its circular of January 2003 had advised the stock exchanges to furnish their schemes on demutualization based on the recommendations of the above Group. The schemes submitted by the exchanges are being examined by SEBI. (RBI 2004, pp. 55-56)
Implementation of the regulations entails a multi-stage process of supervision through on-site and off-site inspections, enforcement through initiation of adjudication and enquiry against violations of rules and regulations, and prosecutions. Inspections of intermediaries are carried out directly by the Securities and Exchange Board of India (SEBI) or through Self Regulatory Organizations (SROs) viz., stock exchanges or depositories. SEBI conducts inspections on a periodical basis to verify the compliance levels of intermediaries and also conducts specific/limited purpose inspections on the basis of complaints, references, surveillance reports, specific concerns etc. SEBI also directs stock exchanges and depositories to carry out periodic/specific purpose inspections of their members/participants. (SEBI 2006, p. 86)
SEBI (Self Regulatory Organizations) Regulations, 2004 were notified on February 19, 2004 with the objective to promote organization of intermediaries representing a particular segment of the securities market as a self regulated entity/organization. For recognition of organization of intermediaries as SROs, SEBI held discussions with various bodies like Association of Merchant Bankers of India (AMBI), Association of NSE Members of India (ANMI) and Registrars Association of India (RAIN). Further response from these bodies is awaited. (SEBI 2006, p. 86)
The proposal to accord legal status as an SRO to the Fixed Income Money Market and Derivatives Association of India (FIMMDA) has been examined in detail by RBI and was not found feasible. However, FIMMDA has established a code of conduct and undertaken related responsibilities appropriate to an industrial body. According self-regulatory status to the Primary Dealers Association of India (PDAI) is a non-issue since all PDAI members are also members of FIMMDA. Regarding the Association of Mutual Funds of India (AMFI), SEBI is assisting AMFI to develop into a full-fledged SRO. AMFI has been designated to issue certificates to agents and distributors under the certification program. AMFI could be given specific statutory recognition and be vested with legal character under the SCRA also. (RBI 2004, p. 61)
SEBI has since advised AMFI to take up the role of SRO for mutual funds in India. SEBI has impressed upon AMFI the importance of an SRO for Mutual Funds industry and has advised AMFI to expedite its recommendations on various aspects related to formation and operation of an SRO and also to fix a timeframe. SEBI also obtains policy inputs from AMFI and it has been included as a member of the Advisory Committee for Mutual Funds. The SEBI (Self-Regulatory Organizations) Regulations, 2004 were notified in February 2004 for development of SROs. According to this notification, 'Self-Regulatory Organization' means an organization of intermediaries which is representing a particular segment of the securities market and which is duly recognized by the SEBI Board under these regulations, but excludes a stock exchange. (RBI 2004, pp. 61-62)
7. SROs should be subject to the oversight of the regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities.
There is insufficient publicly available information regarding India's compliance with this principle.
Implementation of the regulations entails a multi-stage process of supervision through on-site and off-site inspections, enforcement through initiation of adjudication and enquiry against violations of rules and regulations, and prosecutions. Inspections of intermediaries are carried out directly by the Securities and Exchange Board of India (SEBI) or through Self Regulatory Organizations (SROs) viz., stock exchanges or depositories. SEBI conducts inspections on a periodical basis to verify the compliance levels of intermediaries and also conducts specific/limited purpose inspections on the basis of complaints, references, surveillance reports, specific concerns etc. SEBI also directs stock exchanges and depositories to carry out periodic/specific purpose inspections of their members/participants. (SEBI 2006, p. 86)
As of 2004, the suggestion made by the Advisory Group on Securities Market Regulation Constituted by the Reserve Bank of India Standing Committee on International Financial Standards And Codes to demutualize the stock exchanges to prevent conflict of interest is being implemented. An Ordinance called the Securities Laws (Amendment) Ordinance, 2004 has been promulgated recently. The terms 'corporatization' and 'demutualization' of stock exchanges have been defined. The ordinance also empowers SEBI to restrict the voting rights of the shareholders who are also stockbrokers of recognized stock exchanges. Earlier, SEBI had approved the recommendations of the 'Group on Corporatization and Demutualization of Stock Exchanges' in January 2003, which recommended, inter alia, a uniform model of corporatization and demutualization to be adopted for all stock exchanges. SEBI in its circular of January 2003 had advised the stock exchanges to furnish their schemes on demutualization based on the recommendations of the above Group. The schemes submitted by the exchanges are being examined by SEBI. (RBI 2004, pp. 55-56)
The proposal to accord legal status as an SRO to the Fixed Income Money Market and Derivatives Association of India (FIMMDA) has been examined in detail by RBI and was not found feasible. However, FIMMDA has established a code of conduct and undertaken related responsibilities appropriate to an industrial body. According self-regulatory status to the Primary Dealers Association of India (PDAI) is a non-issue since all PDAI members are also members of FIMMDA. Regarding the Association of Mutual Funds of India (AMFI), SEBI is assisting AMFI to develop into a full-fledged SRO. AMFI has been designated to issue certificates to agents and distributors under the certification program. AMFI could be given specific statutory recognition and be vested with legal character under the SCRA also. (RBI 2004, p. 61)
SEBI has since advised AMFI to take up the role of SRO for mutual funds in India. SEBI has impressed upon AMFI the importance of an SRO for Mutual Funds industry and has advised AMFI to expedite its recommendations on various aspects related to formation and operation of an SRO and also to fix a timeframe. SEBI also obtains policy inputs from AMFI and it has been included as a member of the Advisory Committee for Mutual Funds. The SEBI (Self-Regulatory Organizations) Regulations, 2004 were notified in February 2004 for development of SROs. According to this notification, 'Self-Regulatory Organization' means an organization of intermediaries which is representing a particular segment of the securities market and which is duly recognized by the SEBI Board under these regulations, but excludes a stock exchange. (RBI 2004, pp. 61-62)
8. The regulator should have comprehensive inspection, investigation and surveillance powers.
The Advisory Group on Securities Market Regulation states that the Securities and Exchange Board of India (SEBI) has powers to carry out routine inspections of market intermediaries to ensure compliance with prescribed standards. It also has investigation powers similar to that of a civil court in terms of summoning persons and obtaining information relevant to its enquiry. Action is taken on the basis of investigation. The enforcement powers of the SEBI include issuance of directions, imposition of monetary penalties, cancellation of registration and even prosecution of market intermediaries. To ensure effective and credible use of enforcement powers, the SEBI has adopted measures such as development of a stock watch system, uniform price bands and establishment of a Market Surveillance Division. (RBI 2001, p. 9)
The Securities and Exchange Board of India Act, 1992 has been amended by Securities and Exchange Board of India (Amendment) Act, 2002 with effect from October 2002. The Board has been conferred powers to call for information and record from any bank or other authority or board or corporation constituted under any Central or State Act in respect of any transaction in securities which is under investigation or enquiry by the Board. Section 11 (2A) empowers the Board for taking measures to undertake inspection of any book or register or document or record of any listed company or a public company which intends to get its securities listed on a recognized stock exchange, if the Board has reasonable grounds to believe that such company has been indulging in insider training or fraudulent and unfair trade practices relating to securities market. Section 11(3) further empowers the power of a civil court to the Board in respect of inspecting any book or register or document or record of a listed company or a public company which intends to get its securities listed on a recognized stock exchange and in respect of issuing commissions for the examination of witnesses. (SEBI 2003)
In its 2005-06 annual report, the SEBI states that market surveillance is an important function performed by SEBI in pursuance of its objectives to ensure investor protection and to safeguard the integrity of the market. The current surveillance system adopted by SEBI draws mostly on the feedback provided by the two premier stock exchanges, namely the Mumbai (Bombay) Stock Exchange (BSE) and the National Stock Exchange (NSE) which together account for almost the entire trading volume in the market. (SEBI 2006, p. 88)
The market surveillance is carried out at two levels. The stock exchanges are considered to be the primary regulator. They have been given the responsibility of carrying out day-to-day surveillance under the overall supervision of SEBI. SEBI also keeps constant vigil on the activities of stock exchanges to strengthen the surveillance system. The stock exchanges have their own systems in place to detect abnormal activities. In case of any detection of abnormality with regard to market manipulation, price rigging and other regulatory breaches, the stock exchanges take appropriate actions and the findings are communicated to SEBI wherever necessary. (SEBI 2006, p. 88)
The Integrated Surveillance Department of SEBI monitors market movements, analyses trading pattern in scrips and indices and initiates appropriate action, if necessary, in co-ordination with stock exchanges and the depositories. Towards this end, SEBI takes into account any unusual or suspicious market movements, formal or informal information from the stock exchanges, the depositories, and specific complaints from any entities / persons. Based on an initial scrutiny of such information received, the matter is taken up for a preliminary enquiry. Subsequently, depending on the findings of the exchanges, depositories and concerned entities, the matter may be taken up for full-fledged investigation. (SEBI 2006, pp. 88-89)
The Integrated Surveillance Department of SEBI also organizes weekly surveillance meetings with the stock exchanges. The scope of these meetings includes market movements, media reports, highlights of trading activity during the week and any other observation as communicated by the stock exchanges and initiate action as warranted. In the weekly meetings, inputs from SEBI and the stock exchanges are pooled for better coordination, sharing of information and coordinated actions. The meeting also provides a highly specialized and interactive forum to discuss prevailing surveillance issues and emerging concerns, if any, so as to expeditiously initiate appropriate surveillance action. During 2005-06, 47 such surveillance meetings were held. In addition, such meetings were also held as and when felt necessary depending on market exigencies. (SEBI 2006, p. 89)
In order to further enhance efficacy of the surveillance function so as to protect the interests of investors more effectively, SEBI decided to put in place a world-class comprehensive Integrated Market Surveillance System (IMSS) across stock exchanges and across market segments (cash and derivatives markets). The IMSS solution envisaged by SEBI sought to achieve the following objectives: an online data repository with the capacity to capture market transaction data and reference data from a variety of sources like stock exchanges, clearing corporations/houses, depositories etc., in different formats for the securities and derivatives markets; a research and analysis regulatory platform to check for instances of potential market abuse; and sophisticated alert engines, that can work with various data formats (database, numeric and text data) to automatically detect patterns of abuse and then issue an alert. These include insider trading engine, fraud alert engine and market surveillance engine. (SEBI 2006, p. 95)
SEBI has put in place necessary infrastructure to obtain the relevant data from different data sources such as stock exchanges (BSE and NSE) and depositories (CDSL and NSDL). Data obtained from stock exchanges (cash and derivatives segments) and depositories were integrated into the IMSS for generating alerts that would help SEBI identify and detect serious market abuses such as market manipulations, insider trading and other types of frauds that undermine the market integrity. The system has also started generating basic alerts and reports based on pre-defined parameters since February 2006. The IMSS will provide SEBI the capability to analyze information on market transaction immediately and develop parameters that will generate alerts highlighting abnormal market movements. These alerts would also provide SEBI with a tool to manage the voluminous information characteristics of today's markets. It may be emphasized here that IMSS is in no way proposed to be a substitute for the surveillance activities being carried out by the stock exchanges at present. The primary responsibility for surveillance vests and would continue to vest with the stock exchanges. The IMSS is intended to help SEBI supplement the surveillance activities undertaken by the stock exchanges and share information with stock exchanges on cross market alerts. (SEBI 2006, p. 95)
9. The regulator should have comprehensive enforcement powers.
There is insufficient publicly available information regarding India's compliance with this principle.
The Securities and Exchange Board of India (SEBI) states in its 2006 annual report that the major objective of investigation is to identify persons/entities behind irregularities and violation of rules and regulations, which broadly fall under: (a) price manipulation; (b) creation of artificial market; (c) insider trading; (d) public issue related irregularities; (e) takeover violations; and (f) other misconducts. (SEBI 2006, p. 97)
The process begins with preliminary investigation. At this stage, information/data relating to the case are collated to assess whether a formal investigation is required. Once the case is taken up for formal investigation, investigating officer has the power under SEBI Act to: (a) call for information, (b) compel production of documents; and (c) examine the witness. Pursuant to completion of investigation, various actions like administrative directions and penal actions under the SEBI Act and various SEBI Rules and Regulations are taken. These actions include monetary penalties, warning, suspension of activities, cancellation of registration, prohibition of dealing in securities and access to the capital market etc. (SEBI 2006, pp. 97-98)
SEBI notes in its 2003 annual report that the Securities and Exchange Board of India Act, 1992 has been amended by Securities and Exchange Board of India (Amendment) Act, 2002 with effect from October 2002. The Board has been conferred powers for passing an order for reasons to be recorded in writing, in the interest of investors or securities market, either pending investigation or enquiry or on completion of such investigation or enquiry for taking any of the following: suspend the trading of any security in any recognized stock exchange; restrain persons from accessing the securities market and prohibit any person associated with the securities market to buy, sell or deal in securities; suspend any office bearer of any stock exchange or self regulatory organization from holding such position; impound and retain the proceeds or securities in respect of any transaction which is under investigation; attach one or more bank account of any intermediary or person associated with the securities market in any manner involved in violation of any of the provisions of the Act, Rules of Regulations; direct any intermediary or any person associated with the securities market in any manner not to dispose off or alienate an asset forming part of the transaction which is under investigation. The Board may, for the protection of investors, by general or special orders: prohibit any company from issuing prospectus, any offer document, or advertisement soliciting money from the public by the issue of securities; specify the conditions subject to which prospectus, such offer document or advertisement, if not prohibited, may be issued. The Board may specify the requirements for listing and transfer of securities and other matters incidental thereto. (SEBI 2003)
In 2001 the Advisory Group on Securities Market Regulation Constituted by the Reserve Bank of India Standing Committee on International Financial Standards And Codes recommended allowing SEBI enhanced authority and powers to impose penalty commensurate with the gravity of the violation (i.e., disgorgement powers). According to the Advisory Group's 2004 review, appropriate action has been taken. The SEBI Act, 1992 vested SEBI with search and seizure powers in cases relating to insider trading and market manipulations. The amount of penalty has been raised substantially in respect of various offences under the SEBI Act. (RBI 2004, p. 54)
10. The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program.
In 2001, the Advisory Group on Securities Market Regulation Constituted by the Reserve Bank of India Standing Committee on International Financial Standards And Codes reported that the Securities and Exchange Board of India (SEBI) has powers to carry out routine inspections of market intermediaries to ensure compliance with prescribed standards. It also has investigation powers similar to that of a civil court in terms of summoning persons and obtaining information relevant to its enquiry. Action is taken on the basis of investigation. The enforcement powers of SEBI include issuance of directions, imposition of monetary penalties, cancellation of registration and even prosecution of market intermediaries. To ensure effective and credible use of enforcement powers, SEBI has adopted measures such as development of a stock watch system, uniform price bands and establishment of a Market Surveillance Division. In 2004, the Advisory Group reiterated that the SEBI Act contains both regulatory responsibility and the authority to carry it. (RBI 2001, p. 9; RBI 2004, p. 56)
The major objective of investigation is to identify persons/entities behind irregularities and violation of rules and regulations, which broadly fall under: (a) price manipulation; (b) creation of artificial market; (c) insider trading; (d) public issue related irregularities; (e) takeover violations; and (f) other misconducts. (SEBI 2006, p. 97)
The process begins with preliminary investigation. At this stage, information/data relating to the case are collated to assess whether a formal investigation is required. Once the case is taken up for formal investigation, investigating officer has the power under SEBI Act to: (a) call for information, (b) compel production of documents; and (c) examine the witness. Pursuant to completion of investigation, various actions like administrative directions and penal actions under the SEBI Act and various SEBI Rules and Regulations are taken. These actions include monetary penalties, warning, suspension of activities, cancellation of registration, prohibition of dealing in securities and access to the capital market etc. (SEBI 2006, pp. 97-98)
11. The regulator should have authority to share both public and non-public information with domestic and foreign counterparts.
There is insufficient publicly available information regarding India's compliance with this principle.
According to a 2004 report issued by the Advisory Group on Securities Market Regulation Constituted by the Reserve Bank of India Standing Committee on International Financial Standards And Codes, the High Level Co-ordination Committee on Financial and Capital Markets (HLCCFCM) is functioning as an effective forum for consultations and co-ordination in action amongst various regulators. As such its present form is considered suitable. In addition, three sub-committees have been formed, viz., Technical Committee on Securities and Exchange Board of India (SEBI) Regulated Entities, Technical Committee on Reserve Bank of India (RBI) Regulated Entities and Technical Committee on Insurance Regulatory and Development Authority (IRDA) Regulated Entities, consisting of representatives at senior level from each of the regulators. These committees meet regularly to discuss and share information on the issues concerning the entities coming under regulatory jurisdiction of each regulator. Further, to effect a monitoring system on financial conglomerates, a Working Group on Financial Conglomerates was constituted as an inter-agency group with a member each from RBI, SEBI and IRDA. The group, in its report submitted in May 2004, suggested criteria for identifying financial conglomerates, a monitoring system for capturing intra-group transactions and exposures amongst such conglomerates and a mechanism for inter-regulatory exchange of information in respect of conglomerates. (RBI 2004, p. 55)
The Joint Parliamentary Committee (JPC) on stock market scam and matters relating thereto, recommended the necessity for RBI and SEBI to put in place an integrated system of alerts which would piece together disparate signals from different elements of the market to generate special attention to any unusual activity anywhere in the system which might have a bearing on integrity of the stock market. The JPC has also noted that regulation of the market could only be provided through constant vigil and coordination with various other regulatory agencies. Towards this end, a SEBI-RBI Group on integrated system of alerts has been set up to share information and to recommend suitable measures so that coordinated action may be taken. In accordance with the recommendations made by the Group, appropriate alerts have been identified. These are in the nature of pay-in alerts at the stock exchange level involving top brokers accounting for large pay-in. In addition, bank guarantee details of top 25 brokers (based on turnover) as well as information on securities pledged by such brokers are being shared. A system making use of the same has been put in place since February 2004 and this system is now fully functional. (SEBI 2006, pp. 95-96)
SEBI has been regularly informing the prevailing market conditions to the Ministry of Finance and the Ministry of Company Affairs, Government of India. Special references and information have also been shared with other enforcement agencies such as Income Tax Department, Enforcement Directorate and the CBI. (SEBI 2006, p. 96)
In 2004 the Advisory Group reported that SEBI's power to enter into agreements with foreign regulatory authorities did not have statutory backing. Necessary legislative changes need to be made to enhance SEBI's scope in this regard. SEBI has entered into several MOUs with foreign regulatory authorities. The existing provisions of SEBI Act enable SEBI to enter into such agreements. (RBI 2004, p. 55)
During 2005, SEBI signed a Letter of Intent (LoI) with the Securities and Futures Commission, Hong Kong (SFC) on the enhancement of regulatory co-operation between the two jurisdictions. The LoI was signed by Mr. Andrew Sheng, Chairman, SFC, Hong Kong and Shri M. Damodaran, Chairman, SEBI. Under the LoI, both authorities agreed to strengthen co-operation, particularly on matters relating to cross-border trading and the supervision of investment products. (SEBI 2006, p. 117)
The LoI aims at achieving a level of regulatory equivalence between the regulatory regimes, firstly, according to IOSCO standards, and secondly, at a level that would be sufficient to enable the two jurisdictions to develop more cross-border trading of mutually agreed financial products. (SEBI 2006, p. 117)
SEBI has also become one of the signatories to the "South Asian Securities Regulators Forum". The other members of the forum include Securities and Exchange Commission, Bangladesh; Royal Monetary Authority, Bhutan; Financial Services Commission, Mauritius; Securities Board, Nepal; Securities and Exchange Commission, Pakistan and Maldives Monetary Authority. (SEBI 2006, p. 117)
The forum aims at promoting cooperation among members towards fostering a common understanding of the regional regulatory issues and sharing the regional experiences so that eventually the concerned members may attempt harmonization of regulations and policies and financial reporting system to the extent possible in their jurisdictions. (SEBI 2006, p. 117)
12. Regulators should establish information sharing mechanisms that set out when and how they will share both public and non-public information with their domestic and foreign counterparts.
According to a 2004 report issued by the Advisory Group on Securities Market Regulation Constituted by the Reserve Bank of India Standing Committee on International Financial Standards And Codes, the High Level Co-ordination Committee on Financial and Capital Markets (HLCCFCM) is functioning as an effective forum for consultations and co-ordination in action amongst various regulators. As such its present form is considered suitable. In addition, three sub-committees have been formed, viz., Technical Committee on Securities and Exchange Board of India (SEBI) Regulated Entities, Technical Committee on RBI Regulated Entities and Technical Committee on IRDA Regulated Entities, consisting of representatives at senior level from each of the regulators. These committees meet regularly to discuss and share information on the issues concerning the entities coming under regulatory jurisdiction of each regulator. Further, to effect a monitoring system on financial conglomerates, a Working Group on Financial Conglomerates was constituted as an inter-agency group with a member each from RBI, SEBI and IRDA. The group, in its report submitted in May 2004, suggested criteria for identifying financial conglomerates, a monitoring system for capturing intra-group transactions and exposures amongst such conglomerates and a mechanism for inter-regulatory exchange of information in respect of conglomerates. (RBI 2004, p. 55)
The International Organization of Securities Commissions (IOSCO) multilateral memorandum of understanding (MMoU) is based on the thirty IOSCO Objectives and Principles of Securities Regulation (IOSCO Principles) adopted in 1998 and the experience gathered by securities regulators in using bilateral MoUs. The IOSCO MMoU provides a standardized framework for sharing enforcement-related information and a gradually expanding network of participating regulatory agencies. IOSCO members who wish to sign the IOSCO MMoU participate in a comprehensive screening process to establish that they have the legal capacity to fully comply with the terms of the IOSCO MMoU. SEBI is a signatory to the MMoU and an ordinary member of IOSCO. (IOSCO website; OSC website)
SEBI points out that market surveillance is an important function performed by SEBI in pursuance of its objectives to ensure investor protection and to safeguard the integrity of the market. The current surveillance system adopted by SEBI draws mostly on the feedback provided by the two premier stock exchanges, namely the Mumbai (Bombay) Stock Exchange (BSE) and the National Stock Exchange (NSE) which together account for almost the entire trading volume in the market. (SEBI 2006, p. 88)
The market surveillance is carried out at two levels. The stock exchanges are considered to be the primary regulator. They have been given the responsibility of carrying out day-to-day surveillance under the overall supervision of SEBI. SEBI also keeps constant vigil on the activities of stock exchanges to strengthen the surveillance system. The stock exchanges have their own systems in place to detect abnormal activities. In case of any detection of abnormality with regard to market manipulation, price rigging and other regulatory breaches, the stock exchanges take appropriate actions and the findings are communicated to SEBI wherever necessary. (SEBI 2006, p. 88)
The Integrated Surveillance Department of SEBI monitors market movements, analyses trading pattern in scrips and indices and initiates appropriate action, if necessary, in co-ordination with stock exchanges and the depositories. Towards this end, SEBI takes into account any unusual or suspicious market movements, formal or informal information from the stock exchanges, the depositories, and specific complaints from any entities / persons. Based on an initial scrutiny of such information received, the matter is taken up for a preliminary enquiry. Subsequently, depending on the findings of the exchanges, depositories and concerned entities, the matter may be taken up for full-fledged investigation. (SEBI 2006, pp. 88-89)
The Integrated Surveillance Department of SEBI also organizes weekly surveillance meetings with the stock exchanges. The scope of these meetings includes market movements, media reports, highlights of trading activity during the week and any other observation as communicated by the stock exchanges and initiate action as warranted. In the weekly meetings, inputs from SEBI and the stock exchanges are pooled for better coordination, sharing of information and coordinated actions. The meeting also provides a highly specialized and interactive forum to discuss prevailing surveillance issues and emerging concerns, if any, so as to expeditiously initiate appropriate surveillance action. During 2005-06, 47 such surveillance meetings were held. In addition, such meetings were also held as and when felt necessary depending on market exigencies. (SEBI 2006, p. 89)
The Joint Parliamentary Committee (JPC) on stock market scam and matters relating thereto, recommended the necessity for the Reserve Bank of India (RBI) and SEBI to put in place an integrated system of alerts which would piece together disparate signals from different elements of the market to generate special attention to any unusual activity anywhere in the system which might have a bearing on integrity of the stock market. The JPC has also noted that regulation of the market could only be provided through constant vigil and coordination with various other regulatory agencies. Towards this end, a SEBI-RBI Group on integrated system of alerts has been set up to share information and to recommend suitable measures so that coordinated action may be taken. In accordance with the recommendations made by the Group, appropriate alerts have been identified. These are in the nature of pay-in alerts at the stock exchange level involving top brokers accounting for large pay-in. In addition, bank guarantee details of top 25 brokers (based on turnover) as well as information on securities pledged by such brokers are being shared. A system making use of the same has been put in place since February 2004 and this system is now fully functional. (SEBI 2006, pp. 95-96)
SEBI has been regularly informing the prevailing market conditions to the Ministry of Finance and the Ministry of Company Affairs, Government of India. Special references and information have also been shared with other enforcement agencies such as Income Tax Department, Enforcement Directorate and the CBI. (SEBI 2006, p. 96)
In 2005, SEBI signed a Letter of Intent (LoI) with the Securities and Futures Commission, Hong Kong (SFC) on the enhancement of regulatory co-operation between the two jurisdictions. The LoI was signed by Mr. Andrew Sheng, Chairman, SFC, Hong Kong and Shri M. Damodaran, Chairman, SEBI. Under the LoI, both authorities agreed to strengthen co-operation, particularly on matters relating to cross-border trading and the supervision of investment products. (SEBI 2006, p. 117)
The LoI aims at achieving a level of regulatory equivalence between the regulatory regimes, firstly, according to IOSCO standards, and secondly, at a level that would be sufficient to enable the two jurisdictions to develop more cross-border trading of mutually agreed financial products. (SEBI 2006, p. 117)
SEBI has also become one of the signatories to the "South Asian Securities Regulators Forum". The other members of the forum include Securities and Exchange Commission, Bangladesh; Royal Monetary Authority, Bhutan; Financial Services Commission, Mauritius; Securities Board, Nepal; Securities and Exchange Commission, Pakistan and Maldives Monetary Authority. (SEBI 2006, p. 117)
The forum aims at promoting cooperation among members towards fostering a common understanding of the regional regulatory issues and sharing the regional experiences so that eventually the concerned members may attempt harmonization of regulations and policies and financial reporting system to the extent possible in their jurisdictions. (SEBI 2006, p. 117)
13. The regulatory system should allow for assistance to be provided to foreign regulators who need to make inquiries in the discharge of their functions and exercise of their powers.
In 2004 the Advisory Group on Securities Market Regulation Constituted by the Reserve Bank of India Standing Committee on International Financial Standards And Codes reported that the Securities and Exchange Board of India's (SEBI) power to enter into agreements with foreign regulatory authorities did not have statutory backing. Necessary legislative changes need to be made to enhance SEBI's scope in this regard. SEBI has entered into several memoranda of understanding (MOUs) with foreign regulatory authorities. The existing provisions of SEBI Act enable SEBI to enter into such agreements. (RBI 2004, p. 55)
The International Organization of Securities Commissions (IOSCO) multilateral memorandum of understanding (MMoU) is based on the thirty IOSCO Objectives and Principles of Securities Regulation (IOSCO Principles) adopted in 1998 and the experience gathered by securities regulators in using bilateral MoUs. The IOSCO MMoU provides a standardized framework for sharing enforcement-related information and a gradually expanding network of participating regulatory agencies. IOSCO members who wish to sign the IOSCO MMoU participate in a comprehensive screening process to establish that they have the legal capacity to fully comply with the terms of the IOSCO MMoU. SEBI is a signatory to the MMoU and an ordinary member of IOSCO. (IOSCO website; OSC website)
During 2005-06, SEBI signed a Letter of Intent (LoI) with the Securities and Futures Commission, Hong Kong (SFC) on the enhancement of regulatory co-operation between the two jurisdictions. The LoI was signed by Mr. Andrew Sheng, Chairman, SFC, Hong Kong and Shri M. Damodaran, Chairman, SEBI. Under the LoI, both authorities agreed to strengthen co-operation, particularly on matters relating to cross-border trading and the supervision of investment products. (SEBI 2006, p. 117)
The LoI aims at achieving a level of regulatory equivalence between the regulatory regimes, firstly, according to the International Organization of Securities Commissions (IOSCO) standards, and secondly, at a level that would be sufficient to enable the two jurisdictions to develop more cross-border trading of mutually agreed financial products. (SEBI 2006, p. 117)
SEBI has also become one of the signatories to the "South Asian Securities Regulators Forum". The other members of the forum include Securities and Exchange Commission, Bangladesh; Royal Monetary Authority, Bhutan; Financial Services Commission, Mauritius; Securities Board, Nepal; Securities and Exchange Commission, Pakistan and Maldives Monetary Authority. (SEBI 2006, p. 117)
The forum aims at promoting cooperation among members towards fostering a common understanding of the regional regulatory issues and sharing the regional experiences so that eventually the concerned members may attempt harmonisation of regulations and policies and financial reporting system to the extent possible in their jurisdictions. (SEBI 2006, p. 117)
14. There should be full, timely and accurate disclosure of financial results and other information that is material to investors’ decisions.
There is insufficient publicly available information regarding India's compliance with this principle.
The Securities and Exchange Board of India (SEBI) stipulated in December 2001 that the announcement with regard to disclosure of material information should be made within 15 minutes of the conclusion of the Board meeting in which the decision was taken. Regarding disclosure requirement in offer document, the Committee on Disclosure Requirement in Offer Document recommended that in case the issuer company has more than five listed group companies, the financial information of five largest listed companies based on market capitalisation one month before the date of filing draft prospectus with the Board, shall be required to be disclosed. (RBI 2004, p. 60)
SEBI has, in September 2003, prescribed disclosure guidelines for the private placement market. Regarding public issue of debt, SEBI's Disclosure and Investment Protection (DIP) guidelines provide for an IPO of debt. Prior to August 14, 2003, the guidelines required promoters to bring 20 per cent of the project cost. This requirement was slightly modified without sacrificing the basic intent and the promoters have been given flexibility to bring 20 per cent of the issue size in order to ensure their commitment to the project. However, they are required to arrange for funds from other sources to the extent of 20 per cent of the project cost in order to ensure financial closure of the project. (RBI 2004, pp. 59-60)
During 2005-06, policy initiatives in the capital market were directed towards further broadening and deepening of the capital market. In order to make Indian primary market more efficient and transparent, SEBI amended the SEBI (Disclosure and Investor Protection) Guidelines, 2000 with reference to rationalization of disclosure requirements for listed companies, disclosure of issue price, further issue of shares and lock-in provisions. (RBI 2006, p. 11)
The Electronic Data Information Filing and Retrieval (EDIFAR) System was launched in July 2002. EDIFAR was set up as a website by the Securities and Exchange Board of India (SEBI) in association with National Informatics Center (NIC) to facilitate filing of certain documents/statements by the listed companies online. This would enable electronic filing of information in a standard format by the companies and would benefit various classes of market participants like investors, regulatory organization, research institutions, etc. Initially the company would be allowed to file the documents both physically with the stock exchanges and electronically on the website. Till March 31, 2003, 1750 companies were brought within the scope of EDIFAR. It is intended that after gaining experience and further refining as well as the security aspect, the physical filling will be discontinued. (SEBI 2003)
15. Holders of securities in a company should be treated in a fair and equitable manner.
The 2004 Report on the Observance of Standards and Codes by the World Bank on Corporate Governance in India indicates that India partially observes the principle on equitable treatment of shareholders of the Organization for Economic Cooperation and Development (OECD) principles of Corporate Governance, which implies that the legal and regulatory framework complies with OECD principles, while practices and enforcement diverge. (WB 2004, p. 6)
The Companies Act (CA) confers rights to shareholders in matters of oppression by the majority or mismanagement. The lesser of 100 shareholders or those representing 10 percent of shareholders can apply to the Company Law Board (CLB) for redress. CLB can instruct management to buy out dissenting shareholders, terminate or modify agreements entered into by the company or remove/appoint directors to the board. CLB's decisions may be appealed to the high and supreme courts. Any shareholder may apply for the winding up of a company. Investors can also apply to Securities and Exchange Board of India (SEBI) for redress. SEBI can disbar company directors and de-list companies or pass a judicial order. Clause 49 requires issuers to set up a "Grievance Committee," chaired by a non-executive director, to look into the redress of shareholders rights and investor complaints. (WB 2004, p. 6)
Shareholders have the same voting rights within the same class. Information about the voting rights of each class is easy to obtain. Custodians do not usually have to consult beneficial owners on how to vote the underlying shares of ADRs. Most contracts give voting rights to management. Infosys is the exception - the ADR holders may instruct the custodian on how to vote. (WB 2004, p. 6)
16. Accounting and auditing standards should be of a high and internationally acceptable quality.
According to the assessment of accounting and auditing practices conducted by the World Bank in 2004, considerable efforts have been made to align Indian Accounting Standards (ASs) with the International Financial Reporting Standards (IFRSs). The Institute of Chartered Accountants of India (ICAI) uses IFRSs in developing the national standards, departing in some cases from IFRSs, if justified. Over the last years, the ICAI has issued and revised several accounting standards, significantly reducing the gap between ASs and IFRSs. However, differences still exist. Certain IFRS concepts are yet to be adopted, less detailed disclosures are required in some AS, and certain AS are narrower in scope than equivalent IFRSs. In the October 2006 message to the members of the ICAI, the President of the ICAI T. N. Manoharan announced a creation of the 11-member task force to explore the possibility of adopting all IFRSs in full, without modification, as Indian standards. As stated in the Press Release of the ICAI dated October 14, 2006, the Accounting Standards Board (ASB) of the ICAI, recognizing the growing need of full convergence of its ASs with IFRSs, will examine various issues involved and will formulate a concept paper in this regard. Full convergence would involve adoption of IFRSs in the same form as that issued by the International Accounting Standards Board (IASB) without any modifications. The concept paper would deal with legal, regulatory and other implications and in case the task force recommends full convergence for all enterprises or a class of enterprises such as listed enterprises, it would also consider laying down a road map for full convergence. (WB 2004, p. i; ICAI 2006b, p. 2; Deloitte IAS Plus website)
Under the Companies Act (CA), management must explain any deviations from the prescribed accounting standards in the financial statements. The sanctions for non-compliance with financial disclosures range from a maximum fine of Rs 2,000 (USD 44) to imprisonment of up to six months. In practice, there have been no instances of imprisonment. Usually, if a company does not comply with proper audit practices or does not make available the necessary financial documents, the penalty is a maximum fine of Rs 500 (USD 11). Qualified auditor opinions do not prompt automatic action from SEBI. However, companies must disclose the qualification in each quarterly report. If the auditor's signed reports do not conform with the law, the maximum penalty is Rs 10,000 (USD 220). Moreover, judicial delays diminish the deterrence-factor of such penalties. ICAI can take disciplinary actions against its members. (WB 2004, p. 9)
The Companies Act requires annual accounts to be audited by a certified chartered accountant who is an ICAI member. Quarterly reports are subject to a limited audit review. Auditors must also issue an annual certification that Clause 49 has been complied with. Auditors are appointed at the annual general meeting. Auditor independence is defined under Section 226 of the CA. (WB 2004, p. 9)
SEBI has made some modifications in accounting norms pertaining to the mutual funds industry, such as norms for valuation for listed and unlisted securities, uniform method of calculation of sale/repurchase price and other disclosure norms. SEBI continues to track further developments in national and international markets with a view to improving regulatory oversight. This has led to development of a legal and regulatory framework for mutual funds that is comparable to many advanced markets. In particular areas, the level of sophistication is considered to be much more than even in UK. It is noted that all the International Organization of Securities Commissions (IOSCO) Guiding Principles for Collective Investment Schemes are fully implemented for mutual funds in India. Further, reforms in a large number of areas of mutual funds have been implemented in the last few years, some of which (like comprehensive risk management system, introducing benchmarks for performance measurement, strengthening the accountability of Chief Executives, Fund Managers and Compliance Officers of Mutual Funds, certification and code of conduct for agents/distributors, introducing fund of funds, allowing use of derivative instruments and permitting investments in overseas markets) are based on an extensive review of international practices. (RBI 2004, pp. 60-61)
17. The regulatory system should set standards for the eligibility and the regulation of those who wish to market or operate a collective investment scheme.
There is insufficient publicly available information regarding India's compliance with this principle.
In a 2004 report issued by the Advisory Group on Securities Market Regulation Constituted by the Reserve Bank of India Standing Committee on International Financial Standards And Codes, the Group claims that all the International Organization of Securities Commissions (IOSCO) Guiding Principles for Collective Investment Schemes are fully implemented for mutual funds in India. Further, reforms in a large number of areas of mutual funds have been implemented in the last few years, some of which (like comprehensive risk management system, introducing benchmarks for performance measurement, strengthening the accountability of Chief Executives, Fund Managers and Compliance Officers of Mutual Funds, certification and code of conduct for agents/distributors, introducing fund of funds, allowing use of derivative instruments and permitting investments in overseas markets) are based on an extensive review of international practices. (RBI 2004, p. 61)
18. The regulatory system should provide for rules governing the legal form and structure of collective investment schemes and the segregation and protection of client assets.
There is insufficient publicly available information regarding India's compliance with this principle.
In a 2004 report issued by the Advisory Group on Securities Market Regulation Constituted by the Reserve Bank of India Standing Committee on International Financial Standards And Codes, the Group claims that all the IOSCO Guiding Principles for Collective Investment Schemes are fully implemented for mutual funds in India. Further, reforms in a large number of areas of mutual funds have been implemented in the last few years, some of which (like comprehensive risk management system, introducing benchmarks for performance measurement, strengthening the accountability of Chief Executives, Fund Managers and Compliance Officers of Mutual Funds, certification and code of conduct for agents/distributors, introducing fund of funds, allowing use of derivative instruments and permitting investments in overseas markets) are based on an extensive review of international practices. (RBI 2004, p. 61)
19. Regulation should require disclosure, as set forth under the principles for issuers, which is necessary to evaluate the suitability of a collective investment scheme for a particular investor and the value of the investor’s interest in the scheme.
There is insufficient publicly available information regarding India's compliance with this principle.
In a 2004 report issued by the Advisory Group on Securities Market Regulation Constituted by the Reserve Bank of India Standing Committee on International Financial Standards And Codes, the Group claims that all the IOSCO Guiding Principles for Collective Investment Schemes are fully implemented for mutual funds in India. Further, reforms in a large number of areas of mutual funds have been implemented in the last few years, some of which (like comprehensive risk management system, introducing benchmarks for performance measurement, strengthening the accountability of Chief Executives, Fund Managers and Compliance Officers of Mutual Funds, certification and code of conduct for agents/distributors, introducing fund of funds, allowing use of derivative instruments and permitting investments in overseas markets) are based on an extensive review of international practices. (RBI 2004, p. 61)
20. Regulation should ensure that there is a proper and disclosed basis for asset valuation and the pricing and the redemption of units in a collective investment scheme.
There is insufficient publicly available information regarding India's compliance with this principle.
In a 2004 report issued by the Advisory Group on Securities Market Regulation Constituted by the Reserve Bank of India Standing Committee on International Financial Standards And Codes, the Group claims that all the IOSCO Guiding Principles for Collective Investment Schemes are fully implemented for mutual funds in India. Further, reforms in a large number of areas of mutual funds have been implemented in the last few years, some of which (like comprehensive risk management system, introducing benchmarks for performance measurement, strengthening the accountability of Chief Executives, Fund Managers and Compliance Officers of Mutual Funds, certification and code of conduct for agents/distributors, introducing fund of funds, allowing use of derivative instruments and permitting investments in overseas markets) are based on an extensive review of international practices. (RBI 2004, p. 61)
21. Regulation should provide for minimum entry standards for market intermediaries.
There is insufficient publicly available information regarding India's compliance with this principle.
Section 11(2) of the Securities and Exchange Board of India (SEBI) Act, 1992 provides that SEBI shall register and regulate the working of intermediaries. (SEBI 2006, p. 88)
22. There should be initial and ongoing capital and other prudential requirements for market intermediaries that reflect the risks that the intermediaries undertake.
There is insufficient publicly available information regarding India's compliance with this principle.
Section 11(2) of the Securities and Exchange Board of India (SEBI) Act, 1992 provides that SEBI shall register and regulate the working of intermediaries. (SEBI 2006, p. 88)
23. Market intermediaries should be required to comply with standards for internal organization and operational conduct that aim to protect the interests of clients, ensure proper management of risk, and under which management of the intermediary accepts primary responsibility for these matters.
There is insufficient publicly available information regarding India's compliance with this principle.
Section 11(2) of the Securities and Exchange Board of India (SEBI) Act, 1992 provides that SEBI shall register and regulate the working of intermediaries. (SEBI 2006, p. 88)
24. There should be procedures for dealing with the failure of a market intermediary in order to minimize damage and loss to investors and to contain systemic risk.
There is insufficient publicly available information regarding India's compliance with this principle.
Section 11(2) of the Securities and Exchange Board of India (SEBI) Act, 1992 provides that SEBI shall register and regulate the working of intermediaries. (SEBI 2006, p. 88)
To control excess volatility in the markets, circuit breakers have been introduced on the stock exchanges. Effective June 2, 2001, index-based marketwide circuit breakers applicable on the Bombay Stock Exchange (BSE) Sensex and the S&P CNX NIFTY (the two major indexes of stock prices) are operational at 10 percent, 15 percent, and 20 percent on movement on either side of any of the indices. (Jadhav 2006, p. 116)
To provide necessary funds and ensure timely completion of settlement in cases of member brokers' failure to fulfill their settlement obligations, major stock exchanges have set up settlement guarantee funds (SGFs). These funds are like self-insurance schemes, with the members contributing to the fund. SGFs have played a key role in ensuring timely settlement, especially during periods of market turbulence. Furthermore, the clearinghouses set up by each of the stock exchanges have substantially reduced counterparty risk in the settlement system. Various risk management mechanisms, such as capital adequacy requirements, trading and exposure limits, and daily margins composed of mark-to-market margins and value at risk margins, are now in place. (Jadhav 2006, p. 116)
25. The establishment of trading systems including securities exchanges should be subject to regulatory authorization and oversight.
There is insufficient publicly available information regarding India's compliance with this principle.
According to the Securities and Exchange Board of India (SEBI), the stock exchanges are granted recognition by SEBI under Section 4 of the Securities Contracts (Regulation) Act, 1956. Presently, there are twenty-two stock exchanges recognized under SC(R)A. Of the 22 stock exchanges, eight stock exchanges were granted permanent recognition. During 2005-06, SEBI had granted tenure period renewal to one stock exchange and yearly renewal to 10 stock exchanges. (SEBI 2006, p. 82)
26. There should be ongoing regulatory supervision of exchanges and trading systems which should aim to ensure that the integrity of trading is maintained through fair and equitable rules that strike an appropriate balance between the demands of different market participants.
There is insufficient publicly available information regarding India's compliance with this principle.
According to the Securities and Exchange Board of India (SEBI), market surveillance is carried out at two levels. The stock exchanges are considered to be the primary regulator. They have been given the responsibility of carrying out day-to-day surveillance under the overall supervision of SEBI. SEBI also keeps constant vigil on the activities of stock exchanges to strengthen the surveillance system. The stock exchanges have their own systems in place to detect abnormal activities. In case of any detection of abnormality with regard to market manipulation, price rigging and other regulatory breaches, the stock exchanges take appropriate actions and the findings are communicated to SEBI wherever necessary. (SEBI 2006, p. 88)
The Integrated Surveillance Department of SEBI monitors market movements, analyses trading pattern in scrips and indices and initiates appropriate action, if necessary, in co-ordination with stock exchanges and the depositories. Towards this end, SEBI takes into account any unusual or suspicious market movements, formal or informal information from the stock exchanges, the depositories, and specific complaints from any entities / persons. Based on an initial scrutiny of such information received, the matter is taken up for a preliminary enquiry. Subsequently, depending on the findings of the exchanges, depositories and concerned entities, the matter may be taken up for full-fledged investigation. (SEBI 2006, pp. 88-89)
The Integrated Surveillance Department of SEBI also organizes weekly surveillance meetings with the stock exchanges. The scope of these meetings includes market movements, media reports, highlights of trading activity during the week and any other observation as communicated by the stock exchanges and initiate action as warranted. In the weekly meetings, inputs from SEBI and the stock exchanges are pooled for better coordination, sharing of information and coordinated actions. The meeting also provides a highly specialized and interactive forum to discuss prevailing surveillance issues and emerging concerns, if any, so as to expeditiously initiate appropriate surveillance action. During 2005-06, 47 such surveillance meetings were held. In addition, such meetings were also held as and when felt necessary depending on market exigencies. (SEBI 2006, p. 89)
In order to further enhance efficacy of the surveillance function so as to protect the interests of investors more effectively, SEBI decided to put in place a world-class comprehensive Integrated Market Surveillance System (IMSS) across stock exchanges and across market segments (cash and derivatives markets). The IMSS solution envisaged by SEBI sought to achieve the following objectives: an online data repository with the capacity to capture market transaction data and reference data from a variety of sources like stock exchanges, clearing corporations/houses, depositories etc., in different formats for the securities and derivatives markets; a research and analysis regulatory platform to check for instances of potential market abuse; and sophisticated alert engines, that can work with various data formats (database, numeric and text data) to automatically detect patterns of abuse and then issue an alert. These include insider trading engine, fraud alert engine and market surveillance engine. (SEBI 2006, p. 95)
SEBI has put in place necessary infrastructure to obtain the relevant data from different data sources such as stock exchanges (BSE and NSE) and depositories (CDSL and NSDL). Data obtained from stock exchanges (cash and derivatives segments) and depositories were integrated into the IMSS for generating alerts that would help SEBI identify and detect serious market abuses such as market manipulations, insider trading and other types of frauds that undermine the market integrity. The system has also started generating basic alerts and reports based on pre-defined parameters since February 2006. The IMSS will provide SEBI the capability to analyze information on market transaction immediately and develop parameters that will generate alerts highlighting abnormal market movements. These alerts would also provide SEBI with a tool to manage the voluminous information characteristics of today's markets. It may be emphasized here that IMSS is in no way proposed to be a substitute for the surveillance activities being carried out by the stock exchanges at present. The primary responsibility for surveillance vests and would continue to vest with the stock exchanges. The IMSS is intended to help SEBI supplement the surveillance activities undertaken by the stock exchanges and share information with stock exchanges on cross market alerts. (SEBI 2006, p. 95)
27. Regulation should promote transparency of trading.
There is insufficient publicly available information regarding India's compliance with this principle.
The Securities and Exchange Board of India (SEBI) states in its 2006 annual report that the major objective of investigation is to identify persons/entities behind irregularities and violation of rules and regulations, which broadly fall under: (a) price manipulation; (b) creation of artificial market; (c) insider trading; (d) public issue related irregularities; (e) takeover violations; and (f) other misconducts. (SEBI 2006, p. 97)
The process begins with a preliminary investigation. At this stage, information/data relating to the case are collated to assess whether a formal investigation is required. Once the case is taken up for formal investigation, investigating officer has the power under SEBI Act to: (a) call for information, (b) compel production of documents; and (c) examine the witness. Pursuant to completion of investigation, various actions like administrative directions and penal actions under the SEBI Act and various SEBI Rules and Regulations are taken. These actions include monetary penalties, warning, suspension of activities, cancellation of registration, prohibition of dealing in securities and access to the capital market etc. (SEBI 2006, pp. 97-98)
Market surveillance is an important function performed by SEBI in pursuance of its objectives to ensure investor protection and to safeguard the integrity of the market. The current surveillance system adopted by SEBI draws mostly on the feedback provided by the two premier stock exchanges, namely BSE and NSE which together account for almost the entire trading volume in the market. (SEBI 2006, p. 88)
The market surveillance is carried out at two levels. The stock exchanges are considered to be the primary regulator. They have been given the responsibility of carrying out day-to-day surveillance under the overall supervision of SEBI. SEBI also keeps constant vigil on the activities of stock exchanges to strengthen the surveillance system. The stock exchanges have their own systems in place to detect abnormal activities. In case of any detection of abnormality with regard to market manipulation, price rigging and other regulatory breaches, the stock exchanges take appropriate actions and the findings are communicated to SEBI wherever necessary. (SEBI 2006, p. 88)
The Integrated Surveillance Department of SEBI monitors market movements, analyses trading pattern in scrips and indices and initiates appropriate action, if necessary, in co-ordination with stock exchanges and the depositories. Towards this end, SEBI takes into account any unusual or suspicious market movements, formal or informal information from the stock exchanges, the depositories, and specific complaints from any entities / persons. Based on an initial scrutiny of such information received, the matter is taken up for a preliminary enquiry. Subsequently, depending on the findings of the exchanges, depositories and concerned entities, the matter may be taken up for full-fledged investigation. (SEBI 2006, pp. 88-89)
The Integrated Surveillance Department of SEBI also organizes weekly surveillance meetings with the stock exchanges. The scope of these meetings includes market movements, media reports, highlights of trading activity during the week and any other observation as communicated by the stock exchanges and initiate action as warranted. In the weekly meetings, inputs from SEBI and the stock exchanges are pooled for better coordination, sharing of information and coordinated actions. The meeting also provides a highly specialized and interactive forum to discuss prevailing surveillance issues and emerging concerns, if any, so as to expeditiously initiate appropriate surveillance action. During 2005-06, 47 such surveillance meetings were held. In addition, such meetings were also held as and when felt necessary depending on market exigencies. (SEBI 2006, p. 89)
29. Regulation should aim to ensure the proper management of large exposures, default risk and market disruption.
There is insufficient publicly available information regarding India's compliance with this principle.
To provide necessary funds and ensure timely completion of settlement in cases of member brokers' failure to fulfill their settlement obligations, major stock exchanges have set up settlement guarantee funds (SGFs). These funds are like self-insurance schemes, with the members contributing to the fund. SGFs have played a key role in ensuring timely settlement, especially during periods of market turbulence. Furthermore, the clearinghouses set up by each of the stock exchanges have substantially reduced counterparty risk in the settlement system. Various risk management mechanisms, such as capital adequacy requirements, trading and exposure limits, and daily margins composed of mark-to-market margins and value at risk margins, are now in place. (Jadhav 2006, p. 116)
30. Systems for clearing and settlement of securities transactions should be subject to regulatory oversight, and designed to ensure that they are fair, effective and efficient and that they reduce systemic risk.
The Advisory Group on Securities Market Regulation Constituted by the Reserve Bank of India Standing Committee on International Financial Standards And Codes maintains in its 2004 review that most of the recommendations of the International Organization of Securities Commissions-Bank for International Settlements (IOSCO-BIS) joint task force on Securities Settlement Systems (SSS) have already been implemented by the Reserve Bank of India (RBI). SEBI is also by and large compliant with the recommendations of the IOSCO Committee on Payment and Settlement Systems (CPSS) Task Force on Clearing and Settlement. The Task Force is working towards finalization of its recommendations on the settlement system and central counterparties. (RBI 2004, pp. 57, 58)
The Advisory Group also notes that, as of 2004, Indian law does not require settlement of trades by clearing corporation. Hence, some trades are settled by clearing houses and some others by clearing corporations. The recently promulgated Securities Laws (Amendment) Ordinance, 2004 has, however, provided for the transfer of the duties and functions of a clearing house by a recognized stock exchange (with the prior approval of the Securities and Exchange Board [SEBI]) to a clearing corporation for the purpose of periodical settlement of contracts and differences under it and the delivery of, and payment for, securities. (RBI 2004, p. 58)
The Indian stock markets, which previously followed a Monday-to-Friday settlement cycle, gradually switched to a rolling settlement cycle. The rolling settlement cycle was reduced to T+3 effective April 2002 and further to T+2 effective April 2003 in line with best international practices. (Jadhav 2006, p. 117)
On a T+2 cycle, all securities are fully cleared electronically through a CCP on a rolling settlement. The CCP of the exchanges, which operates a tight risk management system and maintains a short (T+2) and consistent settlement cycle, is now financially able to meet the obligations for four to five consecutive settlements even if all the trading members default in their obligations. (Bajpai 2006, p. 98)
The SEBI reports that it was observed that institutional investors were relying on the mechanism of hand delivery bargains/Delivery versus Payment (DvP) for settlement of some of their transactions executed on the stock exchanges. Since the stock exchanges have been acting as central counterparty and providing trade/settlement guarantee through the clearing corporation/clearing house and all trades on the stock exchanges are settled through the depository system, such hand delivery bargains/DvP have outlived their purpose. Hence, with effect from September 19, 2005, all transactions executed on the stock exchanges have been mandated to be settled through the clearing corporation/clearing house of the stock exchanges. However, hand delivery bargains have been permitted under the following exceptional circumstances such as: a) total connectivity failure to the exchange/STP (specific connectivity issues of the custodians and members shall not be considered as valid exceptions); b) international holidays that may be decided upfront by the stock exchanges in consultation with the custodians; and c) closing down of the national/international centers due to calamities. SEBI maintains that this mandatory requirement to settle transactions through the clearing corporation/clearing house of a stock exchange is in accordance with the international standards of clearing and settlement laid down by the Task Force of the Committee on Payment and Settlement Systems and the International Organization of Securities Commissions. (SEBI 2006, p. 16)
Securities and Exchange Board of India, "Annual Report 2005-06," 2006. Available from the Securities and Exchange Commission of India website. Accessed on April 13, 2007. (SEBI 2006)
Reserve Bank of India, "Review of the Recommendations of the Advisory Groups Constituted by the Standing Committee on International Financial Standards And Codes: Report on the Progress and Agenda Ahead," Mumbai: Reserve Bank of India, December 2004. Available from Reserve Bank of India website. Accessed on April 10, 2007. (RBI 2004)
Securities and Exchange Board of India (SEBI), "Annual Report 2002-2003," March 2003. Available from Securities and Exchange Board of India website. Accessed on February 6, 2007. (SEBI 2003)
Reserve Bank of India, "Report of the Advisory Group on Securities Market Regulation," May 2001. Available from Reserve Bank of India website. Accessed on April 23, 2007. (RBI 2001)
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Jadhav, N., "Development of Securities Market: The Indian Experience," in Aziz, Jahangir, Steven Dunaway, and Eswar Prasad, eds., China and India: Learning from Each Other Reforms and Policies for Sustained Growth, Washington, D.C.: International Monetary Fund, 2006, pp. 114-34. Available from International Monetary Fund website. Accessed on April 13, 2007. (Jadhav 2006)
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World Bank, "Report on the Observance of Standards and Codes (ROSC), Corporate Governance Country Assessment - India," April 2004. Available from World Bank website. Accessed on February 7, 2007. (WB 2004)
Umarji, R., "Trends And Developments In Insolvency Systems And Risk Management: The Experience Of India," Forum on Asian Insolvency Reform (FAIR), November 2004. Available from Organization for Economic Cooperation and Development website. Accessed on February 7, 2007. (Umjari 2004)
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