Regulatory Institutions Short Answer Type Questions
Discuss briefly the organizational structure of RBI. Dec 2005
The organization of RBI can be divided into three parts:
- Central Board of Directors.
- Local Boards
- Offices of RBI
(1) 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:
(a) 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.
(b) Four Deputy Governors: Four deputy Governors are nominated by Central Govt, for a term of 5 years
(c) 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.
(2) 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 board on general and specific issues referred to them and to perform duties which the central board delegates.
(3) Offices of RBI:
The Head office of the bank is situated in Mumbai and the offices of local boards are situated in Delhi, KoJkata arid 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.
What is monetary policy? Explain its objectives. Or discuss the salient features of the latest monetary policy of RBI.
Monetary policy is the process by which monetary authority of a country, generally a central bank controls the supply of money in the economy by exercising its control over interest rates in order to maintain price stability and achieve high economic growth. In India, the central monetary authority is the Reserve Bank of India (RBI), is so designed as to maintain the price stability in the economy. Other objectives of the monetary policy of India, as stated by RBI, are:
(a) Price Stability:
Price Stability implies promoting economic development with considerable emphasis on price stability. The centre of focus is to facilitate the environment which is favorable to the architecture that enables the developmental projects to run swiftly while also maintaining reasonable price stability.
(b) Controlled Expansion Of Bank Credit:
One of the important functions of RBI is the controlled expansion of bank credit and money supply with special attention to seasonal requirement for credit without affecting the output.
(c) Promotion of Fixed Investment:
The aim here is to increase the productivity of investment by restraining non essential fixed investment.
(d) Restriction of Inventories:
Overfilling of stocks and products becoming outdated due to excess of stock often results is sickness of the unit. To avoid this problem the central monetary authority carries out this essential function of restricting the inventories. The main objective of this policy is to avoid over-stocking and idle money in the organization
(e) Promotion of Exports and Food Procurement Operations:
Monetary policy pays special attention in order to boost exports and facilitate the trade. It is an independent objective of monetary policy.
(f) Desired Distribution of Credit:
Monetary authority has control over the decisions regarding the allocation of credit to priority sector and small borrowers. This policy decides over the specified percentage of credit that is to be allocated to priority sector and small borrowers.
(g) Equitable Distribution of Credit:
The policy of Reserve Bank aims equitable distribution to all sectors of the economy and all social and economic class of people
(h) To Promote Efficiency:
It is another essential aspect where the central banks pay a lot of attention. It tries to increase the efficiency in the financial system and tries to incorporate structural changes such as deregulating interest rates, ease operational constraints in the credit delivery system, to introduce new money market instruments etc.
(i) Reducing the Rigidity:
RBI tries to bring about the flexibilities in the operations which provide a considerable autonomy. It encourages more competitive environment and diversification. It maintains its control over financial system whenever and wherever necessary to maintain the discipline and prudence in operations of the financial system.
What is credit control? Explain the quantitative credit control techniques of RBI.
Credit Control is an important tool used by Reserve Bank of India, a major weapon of the monetary policy used to control the demand and supply of money (liquidity) in the economy.
Quantitative credit control techniques are –
(a) Bank Rate Policy:
The standard rate at which the RBI is prepared to buy or rediscount bills of exchange or other commercial papers eligible for purchase under the provisions of the Act of RBI. Thus the RBI, rediscounts the first class bills in the hands of commercial banks to provide them with liquidity in case of need. This rate is subjected to change from time to time in accordance with the economic stability and its credibility of the nation. The bank rate signals the central bank’s long-term outlook on interest rates. If the bank rate moves up, long-term interest rates also tend to move up, and vice-versa.
(b) Open Market Operation:
It means of implementing monetary policy by which a central bank controls the short term interest rate and the supply of base money in an economy, and thus indirectly the total money supply. In times of inflation, RBI sells securities to mop up the excess money in the market. Similarly, to increase the supply of money, RBI purchases securities.
(c) Adjusting with CRR and SLR:
By adjusting the CRR(Cash Reserve Ratio) and SLR(Statutory Liquidity Ratio) which are short term tools to be used to shortly regulate the cash and fund flows in the hands of the People, banks and Government, the RBI regularly make necessary adjustments in these rates. These variations in the rates will easily have a greater control over the cash flow of the country.
(i) CRR(Cash Reserve Ratio):
All commercial banks are required to keep a certain amount of its deposits in cash with RBI. This percentage is called the cash reserve ratio. The current CRR requirement is 8 percent. This serves two purposes. It ensures that a portion of bank deposits is totally risk-free and secondly it enables that RBI control liquidity in the system, and thereby, inflation by tying their hands in lending money
(ii) SLR(Statutory Liquidity Ratio):
Banks in India are required to maintain 25 per cent of their demand and time liabilities in government securities and certain approved securities. What SLR does is again restrict the bank’s leverage in pumping more money into the economy by investing a portion of their deposits in government securities as a part of their statutory liquidity ratio (SLR) requirements.
(d) Lending Rate:
Lending rates are the ratios fixed by RBI to lend the money to the customers on the basis of those rates. The higher the rate means the credit to the customers is costlier. The lower the rate means the credit to the customers is less which will encourage the customers to borrow money from the banks more that will facilitate the more money flow in the hands of the public.
(e) Repo Rate:
Repo rate is the rate at which banks borrow funds from the RBI to meet the gap between the demand they are facing for money (loans) and how much they have on hand to lend.
(f) Reverse Repo Rate:
The rate at which RBI borrows money from the banks (or banks lend money to the RBI) is termed the reverse repo rate. The RBI uses this tool when it feels there is too much money floating in the banking system
Discuss briefly the organisation structure of SEBI.
The SEBI Act provides for the establishment of a statutory board consisting of 6 members. The chairmen and 2 members are to be appointed by the central government, 1 member to be appointed by the RBI and 2 members to be appointed by the central government. Section II deals with the powers of the Board.
SEBI has divided its activities into 6 operational departments namely:
- Primary market department
- Issue management and intermediaries department
- Secondary market department
- Institutional department
- Legal department
- Investigation department
(a) Primary market department:
Primary market department deals with all-policy matters and regulatory issues to new issue market/primary market.
(b) Issue management and intermediaries department:
This department is concerned with matters like registration, regulation, and monitoring of issue related to intermediaries.
(c) Secondary market department:
It looks after all matters relating to the secondary market; administration of the major stock exchanges registration of brokers etc.
(d) Institutional investment department:
This department is concerned with framing rules and regulations relating to foreign institutional investors, mutual funds and other matters like publications, memberships in international organisations
(e) Legal department:
This department deals with all the legal matters concerned with SEBI
(f) Investigation department:
This department is concerned with various types of market research of investigations carries out by SEBI
What are the power and functions of SEBI?
Powers of SEBI:
SEBI has been vested with the following powers in order to protect the interest of investors:
- Power to call any information or explanation from recognised stock exchanges or their members at any time.
- Power to call periodical returns from recognised stock exchanges
- Power to direct enquires in to functioning of stock exchanges or their members
- Power to grant or create bye-laws relating recognised stock exchanges.
- Power to make or amend bye-laws of recognised stock exchanges.
- Power to control and regulate stock exchanges.
Functions of SEBI:
Section 11 of the SEBI act specifies the functions as follows:
(1) Regulatory functions:
- Regulations of stock exchange and other self regulatory organisations in the country
- Registration and regulation of stock brokers, sub-brokers, register to issue, merchant bankers, underwriters, portfolio managers and such other intermediaries who are associated with-securities market.
- Registration and regulation of various investment schemes including mutual funds.
- Prohibition of fraudulent and unfair trade practices in security market to protect the interest of investors.
(2) Developmental functions:
- Promote investor’s education to increase participation in capital market.
- Training of intermediaries such as brokers, sub-brokers etc
- Conducting research and publishing market information which are useful to all market participants
- Promoting self regulatory organisations
State the objectives of credit control methods adopted by RBI.
- To encourage the overall growth of the “priority sector” i.e. those sectors of the economy which is recognized by the government as “prioritized
- To keep a check over the channelization of credit so that credit is not delivered for undesirable purposes.
- To achieve the objective of controlling “Inflation” as well as “Deflation”.
- To boost the economy by facilitating the flow of adequate volume of bank credit to different sectors.
What do you mean by listing of companies? State the objectives of listing.
The listing of companies in the capital market implies the admission of the shares of that company to dealings on a recognised stock exchange. The securities or shares may be of any public limited company, Central or state government, quasi governmental and other financial institutions/corporations, municipalities and so on.
The objectives of listing are to:
- Provide liquidity to shares
- Mobilize savings for economic development
- Protect interest of investors by ensuring full disclosures
Most stock exchanges have a listing department to grant approval for listing of shares of companies in accordance with the various provisions of the law.
Write a note on RBI.
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 begining. 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 tor 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.
Explain the objectives of RBI.
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.
Explain the functions of RBI.
Functions of the Reserve Bank of India:
The Reserve Bank of India performs all the typical functions of a good Central Bank. In addition, it carries out a variety of developmental and promotional functions attuned to the course of economic planning in the country:
Issuing currency notes, i.e., to act as a currency authority –
- Serving as banker to the Government.
- Acting as bankers’ bank and supervisor.
- Monetary regulation and management.
- Exchange management and control.
- Collection of data and their publication.
- Miscellaneous developmental and promotional functions and activities.
- Agricultural Finance.
- Industrial Finance
- Export Finance.
- Institutional promotion.
What are the procedure to be followed for listing of securities?
The following procedures to be followed for listing of securities are:
(1) Whether the articles of association contain the following provisions.
- A common form of share transfer shall be used.
- Fully paid shares are free from line.
- Calls paid in advance may carry interest, but shall not confer a right to dividend:
- Option to call of shares shall be given only after sanction by the general meeting.
(2) Whether at least 49% of each class of securities issued was offered to the public for subscription through newspapers for not less than three years.
(3) Whether the company is of a fair size and has a broad based capital structure and there is sufficient public interest in its securities.
Why RBI is called Bankers Bank and lender of last resort?
The RBI was formally inaugurated in April 1935, which functions within the framework of a mixed economic systems. RBI is acting as the banker’s bank. In accordance with the provisions of the banking companies Act of 1947, every schedule Bank in the country must keep a cash balance with the RBI equivalent to 5% of demand liabilities.
The objective of this requirement is two-told:
- To safeguard the interest of depositors.
- Helps to centralize the banking reserves in order to regulate & control the credit policies in the country.
It also enables the scheduled banks to borrow from the Reserve Bank by discounting the bills of exchange. RBI can purchase, sell and rediscount bills of exchange and promissory notes payable in India. However they should be arising out of bonafide commercial transaction. They should possess two or more good signatures and one of them be that of scheduled bank.
RBI provides clearing facility to commercial banks by setting off mutual transactions among them. It facilitates scheduled banks to merit money through draft, mail on telegraphic transfer from one place to the other RBI also inspect and sanction license to banks, performs amalgamation of banks and formulate lending policies of banks. So for all these reasons RBI is considered as banker’s banks.
The lender of the last resort the Reserve Bank comes to the rescue of commercial banks in times of this difficulties by means of buying government securities. The Reserve Bank as a banker’s bank regulates the volume of credit by the scheduled banks. RBI act as lender of the last resort under sec. 17 of RBI of act 1934 to all scheduled banks in the country.
Briefly explain the bank rate policy.
Bank rate is the rate of interest which is charged on loans and advances given by the central bank to commercial banks. According to the Reserve Bank of India, Act 1934 “Bank rate is the standard rate at which it is prepared to buy or discounts bills of exchange or others commercial papers eligible for purchase under this Act.” Bank rate policy is that policy by which the Central Bank controls the credit creations of the banks by following two methods.
(a) Contraction of credit:
Contraction of credit is the main functions of bank rate policy. When a central bank want to contract the credit in the country it increases the bank rate. The main objective of the rising the bank rate is to provide Central Bank loan to commercial banks more expensive. Increases in the bank rate the commercial banks also increase the rate of interest. So, increase in the rate of interest will be that the traders and investors will borrow less amount from the banks.
(b) Expansion of credit:
By lowers the bank rate the Central Bank expand credit in the country low bank rate means Central Banks loans to the commercial banks also become cheap. As a result of lower bank rate the rate of interest will also go down. Traders and investors will now borrow more from the banks.
Explain the objectives of SEBI.
According to preamble of the SEBI act the main objective of the SEBI is to promote healthy and orderly growth of the securities market and secure investor protection. SEBI monitors the activities of stock exchange market and merchant bankers.
The objectives of SEBI are as follows:
- To protect the interest of investors.
- To motivate investors for savings on securities.
- To regulate the securities market and ensure fair practices by the issuers of securities.
- To promote efficient services by brokers, merchant bankers and other intermediaries.
- To facilitate for steady flow of savings in to the capital market.