Regulatory Institutions Long Answer Type Questions

Question 1.
Write a note on National Bank for Agriculture and Rural Development (NABARD).
Answer:
NABARD is set up by the Government of India as a development bank with the mandate of facilitating credit flow for the promotion and development of agriculture and integrated rural development. The mandate also covers supporting all other allied economic activities in rural areas, promoting sustainable rural development, and ushering in prosperity in the rural areas.

With a capital base of Rs 2,000 crore provided by the Government of India and Reserve Bank of India, it operates through its head office at Mumbai, 28 regional offices situated in state capitals and 391 district offices at districts.

Its functions are:
→ Initiates measures toward institution-building for improving absorptive capacity of the credit delivery system, including monitoring, formulation of rehabilitation schemes, restructuring of credit institutions, training of personnel, etc.

→ Coordinates the rural financing activities of all the institutions engaged in developmental work at the field level and maintains liaison with the government of India , State governments, the Reserve Bank of India and other national level institutions concerned with policy formulation

→ Prepares, on annual basis, rural credit plans for all the districts in the country. These plans form the base for annual credit plans of all rural financial institutions

→ Undertakes monitoring and evaluation of projects refinanced by it.

→ Promotes research in the fields of rural banking, agriculture and rural development

→ Functions as a regulatory authority, supervising, monitoring and guiding cooperative banks and regional rural banks

Question 2.
What do you understand by selective credit control? Describe the various methods selective or qualitative credit control.
Answer:
Qualitative Method controls the manner of channelizing of cash and credit in the economy. It is a ‘Selective method’ of control as it restricts credit for certain section where as expands for the other known as the ‘priority sector’ depending on the situation.

Various methods are used as below:
Marginal Requirement:
Marginal Requirement of loan = current value of security offered for loan-value of loans granted. The marginal requirement is increased for those business activities, the flow of whose credit is to be restricted in the economy.

Example – A person mortgages his property worth Rs. 1,00,000 against loan. The bank will give loan of Rs. 80,000 only. The marginal requirement here is 20%. In case the flow of credit has to be increased, the marginal requirement will be lowered. RBI has been using this method since 1956.

Rationing of credit
Under this method there is a maximum limit to loans and advances that can be made, which the commercial banks cannot exceed. RBI fixes ceiling for specific categories. Such rationing is used for situations when credit flow is to be checked, particularly for speculative activities. Minimum of “Capital: Total Assets” (ratio between capital and total asset) can also be prescribed by Reserve Bank of India.

Publicity:
RBI uses media for the publicity of its views on the current market condition and its directions that will be required to be implemented by the commercial banks to control the unrest. Though this method is not very successful in developing nations due to high illiteracy existing making it difficult for people to understand such policies and its implications.

Direct Action:
Under the banking regulation Act, the central bank has the authority to take strict action against any of the commercial banks that refuses to obey the directions given by Reserve Bank of India. There can be a restriction on advancing of loans imposed by Reserve Bank of India on such banks, e.g. – RBI had put up certain restrictions on the working of the Metropolitan Co-operative Banks. Also the ‘Bank of Karad’ had to come to an end in 1992.

Moral Suasion:
This method is also known as “Moral Persuasion” as the method that the Reserve Bank of India, being the apex bank uses here, is that of persuading the commercial banks to follow its directions/orders on the flow of credit. RBI puts a pressure on the commercial banks to put a ceiling on credit flow during inflation and be liberal in lending during deflation.

Question 3.
What are the procedure to be followed for listing of securities?
Answer:
An Issuer has to take various steps prior to making an application for listing its securities on the Stock Exchange. These steps are essential to ensure the compliance of certain requirements by the Issuer before listing its securities on a recognized stock exchange.
The various steps to be taken include:

  • Approval of Memorandum and Articles of Association
  • Approval of draft prospectus
  • Submission of Application
  • Listing conditions and requirements

(a) Approval of Memorandum and Articles of Association:
Rule 19(2) (a) of the Securities Contracts (Regulation) Rules, 1957 requires that the Articles of Association of the Issuer wanting to list its securities must contain provisions as given here under.

The Articles of Association of an Issuer shall contain the following provisions namely:

  • That there shall be no forfeiture of unclaimed dividends before the claim becomes barred by law
  • That a common form of transfer shall be used
  • That fully paid shares shall be free from all lien and that in the case of partly paid shares the Issuer’s lien shall be restricted to moneys called or payable at a fixed time in respect of such shares
  • That registration of transfer shall not be refused on the ground of the transferor being either alone or jointly with any other person or persons indebted to the Issuer on any account whatsoever
  • That any amount paid up in advance of calls on any share may carry interest but shall not in respect thereof confer a right to dividend or to participate in profits
  • That option or right to call of shares shall not be given to any person except with the sanction of the Issuer in general meetings.
  • Permission for Sub-Division/Consolidation of Share Certificate.

(b) Approval of draft prospectus:
The Issuer shall file the draft prospectus and application forms with the Stock Exchange. The draft prospectus should have been prepared in accordance with the statutes, notifications, circulars, guidelines, etc. governing preparation and issue of prospectus prevailing at the relevant time.

The Issuers may particularly bear in mind the provisions of Companies Act, Securities Contracts (Regulation) Act, the SEBI Act and the relevant subordinate legislations thereto. Draft prospectus should be in accordance with the listing requirements. The Issuer should also submit the SEBI acknowledgment card or letter indicating observations on draft prospectus or letter of offer by SEBI.

(c) Submission of Letter of Application:
As per Section 73 of the Companies Act, 1956, a company seeking listing of its scrips on an exchange is required to submit a letter of application to all the stock exchanges where it proposes to have its shares listed before filing the prospectus with the Registrar of Companies.

(d) Payment of Listing Fee and Deposit of Security money:
The companies making public issues are generally required to deposit 1 per cent of the issue amount with the regional stock exchange before the issue opens. This amount is liable to be forfeited in the event of the company not resolving the complaints of investors regarding delay in sending refund orders/ share certificates, non-payment of commission to underwriters, brokers and so on. The listing fee is payable on an annual basis to the stock exchanges.

(e) Supporting documents:
Issuers desiring to list existing/new securities on the stock exchanges shall make application for admission of their securities to dealings on the exchange in the forms prescribed in this regard by the exchange or in such other form or forms as the Relevant Authority may from time to time prescribe in addition thereto or in modification or substitution thereof along with the following documents:

  • Clauses of Articles of Association.
  • Application Letter for Listing.
  • Listing Application providing pre-issue details of securities.
  • Listing Application providing post-issue details of securities.
  • Checklist for supporting documents ( as applicable to the issuer)
  • Schedule of Distribution
  • Listing Agreement

(f) Compliance of Listing Agreement and Laws:
The Issuer shall comply with all prevailing requirements of law including all requirements of and under any notifications, directives and guidelines issued by the Central Government, SEBI or any statutory body or local authority or any body or authority acting under the authority or direction of the Central Government and all prevailing listing requirements and conditions of the exchange and of each recognized Stock Exchange where the Issuer has applied for permission for admission to dealings of the securities, within the prescribed or stipulated period.

Question 4.
What do you mean by SEBI ? What are its functions? Explain.
Answer:
Securities and exchange board of India was set up on April 12, 1998 as a non statutory body. Govt, of India passed a separate legislation called securities and exchange board of India Act 1992 conferring statutory powers to SEBI. This act gave SEBI with comprehensive powers over practically all aspects of capital market operations.

Functions:
Section 11 of the SEBI Act specifies the functions as follows:
(i) Regulatory functions:

  • Regulation of stock exchange and self regulatory organizations.
  • Registration and regulation of stock brokers, sub brokers, registrar to all issue, merchant bankers, underwriters, portfolio managers and such other intermediaries who are associated with securities market.
  • Registration and regulation of the working of collective investment schemes including mutual funds.
  • Prohibition of fraudulent and unfain trade practices relating to securities market.
  • Prohibit insider trading in securities.
  • Regulating substantial acquisition of shares and take over of companies.

(ii) Developmental functions:

  • Promote investor’s education
  • Training of intermediaries
  • Conducting research and published information useful to all market participants.
  • Promotion of fair practices code of conduct for self regulatory organisation.
  • Promoting self regulatory organizations.

Question 5.
What are the powers of SEBI? Explain organisational structure of SEBI.
Answer:
SEBI has been vested with the following powers:

  • Power to call periodical returns from recognised stock exchange.
  • Power to call any information or explanation from recognized stock exchanges or their members.
  • Power to direct enquireies to be made in relation to affairs of stock exchanges or their members.
  • Power to grant approval to bye laws of recognized stock exchanges.
  • Power to make or amend bye-laws of recognized stock exchanges.
  • Power to compel listing of securities by public companies.
  • Power to control and regulate stock exchange,
  • Power to grant registration to market intermediaries.
  • Power to levy fees or other charges for carrying out the purpose of regulation.
  • Power to declare applicability of section 17 of the securities contract (regulation) Act in any state or area to grant licences to dealers in securities.

Organisation:
Chapter II of the SEBI Act deals with establishment, incorporation, administration and management of the Board of directors etc. SEBI Act provides for the establishment of a statutory board consisting of six members. The chairman and two members are to be appointed by the central government, one member to be appointed by the reserve bank and two members having experience of securities market to be appointed by the central govt.

SEBI has divided its activities into four operational departments namely:
→ Primary market department: It deals with all policy matters and regulatory issues relating to primary market, market intermediaries and redressel of investor grievances.

→ Issue management and intermediaries department: It is concerned with vetting of offer documents and other things like registration, regulation and monitoring of issue related to intermediaries.

→ Secondary market department: It looks after all the policy and regulatory issues for the secondary market, administration of the major stock exchange and other matters related to it.

→ Institutional investment department: This department is concerned with framing policy for foreign institutional investors, mutual funds and other matters like, publications, membership in international organizations, etc

Apart from these there are 2 other departments viz., legal department and investigation department also headed by officials of the rank of executive directors. SEBI has two advisory committees, one each for primary and secondary markets. The committees are constituted from among the market players, recognized investor associations and eminent persons associated with the capital market. They provide advisory inputs in framing policies and regulations. These committees are non-statutory in nature and SEBI is not bound by the committees.

Question 6.
Explain the functions of RBI.
Answer:
The Reserve Bank of India is authorized to undertake the following central banking functions.
(i) To Issue Bank Notes : The RBI has the sole right to issue bank notes in India. In addition, it issues currency notes of the Govt, of India supplied to it by the govt. The issue of bank notes is undertaken by the bank in its issue department.

This department issue such notes to the banking department or to other person in exchange for other bank notes, or for coins, bullion or securities as permitted in the Act, which form part of the reserves. Balance sheet of this department is prepared separately from that of the banking dept.
The liabilities of the issue department are equal to the amount of the –

  • Currency notes of the govt, of India and
  • Bank notes in circulation.

Assets of the issue department consists of:

  • Gold Coins and Gold bullion : The aggregate value of which shall be not less than Rs. 115 crore, valued as a price not exceeding the current international market price.
  • Foreign securities : The aggregate value of such securities together with Gold coin and bullion shall be not less than Rs. 200 crore valued as current market rates.
  • Rupee coins, at their face value.
  • Govt, of India rupee securities of any maturity
  • Promissory notes drawn by NABARD for any loans taken by it.
  • Bills of exchange and promissory notes payable in India, which are eligible for purchase by RBI.

RBI follows the minimum reserve system of note issue:
(ii) To transact Govt. Business in India: The RBI acts as banker to the Central Govt, and undertakes all Govt, business, i.e. it accept Money for the Govt., makes payment out of the same and carries out its exchange, remittance and other banking operations. The cash balances of the Central Govt, are kept deposited with it free of interest. The Reserve bank also undertakes the aforesaid business on behalf of the state Govt, after entering into an agreement with them.

(iii) To manage public debt: The RBI has also been entrusted with the task of managing the public debt of the central govt, and the state govt. Issues new loans on behalf of the govt, is also undertaken by the RBI. It undertakes auction for the treasury bills and govt, dated securities on behalf of the govt.

(iv) To undertake transactions in Foreign Exchange and to act as controller of foreign exchange: Sec. 40 of the RBI Act authorises the RBI to undertake transactions in foreign exchange. The bank sells to or buys from any authorized person. Who makes a demand in this behalf. The authorized person means a person who is entitled to buy or sell foreign exchange under the foreign exchange management Act, RBI also acts as the controller of foreign exchange and undertakes various functions.

(v) To keep cash reserves of scheduled banks: Under section 42(1) of the RBI Act, 1934 every scheduled bank is required to maintain with the RBI an average daily balance, the amount of which shall not be less than 3% of the total demand and time liabilities of such bank in India. The bank is empowered to increase this rate to such higher rate not exceeding 20% of the net demand and time liabilities. Since 16th Nov. 2002 such reserve is required to be maintained @ 4.75%.

(vi) To grant loans and advances to scheduled commercial banks and co-operate banks; Under See. 17(4) of the RBI Act, the Bank grants loans and advances to the scheduled commercial banks, local authorities, state co-operative banks and state financial corporations repayable on demand or on the expiry of fixed periods not exceeding 90 days against the security of stocks, trustee securities, gold or silver and eligible bills of exchange and promissory notes, etc., Under Sec 17(2) and 17(3) RBI may purchase, sale and rediscount bills of exchange and promissory notes of various kinds prescribed therein.

(vii) To grant loans and advances to other financial institutions: Under various sub-section of section 17 BBI may grant loan and advances to various financial institution for the period specified there in. RBI is also authorised to make annual contribution to the national rural credit (long term operations) fund established under NABARD Act. Loans and advance may also be made out of National industrial credit (long-term operations) fund, etc. Bank may also invest in the shares of NABARD, IDBI, SBI any other bank and financial institution. It is also permitted to promote, establish, support or aid financial institutions.

(viii) To grant advances to governments:
RBI is also authorized to make advances to the central Govt, and state govt. These advances are made in the form of overdrafts for very short period or as ways and means advances.  It may also purchase and sell securities of the central and state or local authorities. It also acts as agent for the Central Govt, any state Govt., IFCI or local authority for undertaking specified business.

(ix) To act as controller of credit:
RBI acts as the controller of credit by exercising various statutory powers vested in it .viz, by changing the bank rate (U/S 49) cash reserves requirement (U/S 42), refinancing and rediscounting policy (U/S 17) open market operations policy and statutory liquidity ratio (U/S 24) of the Banking regulations Act) and through directive issued under Sec 21 and 35A of the Banking Regulation act 1949.

(x) To act as regulatory and supervisory authority:
RBI has been vested with wide powers under the banking regulation act, 1949 and RBI act 1934, to regulate, inspect and supervise the banking companies, non-banking financial companies and various financial institutions. In exercice of these powers RBI undertakes inspection of these institutions and issues them directives and regulatory guidelines etc., RBI has issued prudential norms and capital adequancy norms for all these institutions.

(xi) Publications:
RBI publishes its annual report and the report on trends and progress of Banking in India. Which are submitted to the Govt, of India under RBI Act, 1934 and banking regulations Act, 1949 respectively. In addition, it publishes RBI Bulletin (Monthly) and Report on currency and finance (annual) which contain valuable information on the Indian economy and the working of the financial system.