role of rbi & sebi

8/10/2019 Role of Rbi & Sebi

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Role and Function of the Reserve Bank of India (RBI)

In every country there is one organization which works as the central bank. The function of the

central bank of a country is to control and monitor the banking and financial system of thecountry. In India, the Reserve Bank of India (RBI) is the Central Bank.

The RBI was established in 1935. It was nationalised in 1949. The RBI plays role of regulator of

the banking system in India. The Banking Regulation Act 1949 and the RBI Act 1953 has given

the RBI the power to regulate the banking system.The RBI has different functions in different roles. Below, we share and discuss some of the

functions of the RBI.

RBI is the Regulator of Financial System

The RBI regulates the Indian banking and financial system by issuing broad guidelines and

instructions. The objectives of these regulations include:

Controlling money supply in the system,

Monitoring different key indicators like GDP and inflation,

Maintaining people’s confidence in the banking and financial system, and

Providing different tools for customers’ help, such as acting as the “Banking

Ombudsman.”

RBI is the Issuer of Monetary Policy

The RBI formulates monetary policy twice a year. It reviews the policy every quarter as well.

The main objectives of monitoring monetary policy are:

Inflation control

Control on bank credit

Interest rate control

The tools used for implementation of the objectives of monetary policy are:

Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR),



Open market operations,

Different Rates such as repo rate, reverse repo rate, and bank rate.

RBI is the Issuer of Currency

Section 22 of the RBI Act gives authority to the RBI to issue currency notes. The RBI also takesaction to control circulation of fake currency.

RBI is the Controller and Supervisor of Banking Systems

The RBI has been assigned the role of controlling and supervising the bank system in India. The

RBI is responsible for controlling the overall operations of all banks in India. These banks may

be:

Public sector banks

Private sector banks

Foreign banks Co-operative banks, or

Regional rural banks

The control and supervisory roles of the Reserve Bank of India is done through the following:

Issue of Licence: Under the Banking Regulation Act 1949, the RBI has been given

powers to grant licenses to commence new banking operations. The RBI also grants

licenses to open new branches for existing banks. Under the licensing policy, the RBI

provides banking services in areas that do not have this facility.

Prudential Norms: The RBI issues guidelines for credit control and management. The

RBI is a member of the Banking Committee on Banking Supervision (BCBS). As such,they are responsible for implementation of international standards of capital adequacynorms and asset classification.

Corporate Governance: The RBI has power to control the appointment of the chairman

and directors of banks in India. The RBI has powers to appoint additional directors in banks as well.

KYC Norms: To curb money laundering and prevent the use of the banking system for

financial crimes, The RBI has “Know Your Customer” guidelines. Every bank has toensure KYC norms are applied before allowing someone to open an account.

Transparency Norms: This means that every bank has to disclose their charges for

providing services and customers have the right to know these charges.

Risk Management: The RBI provides guidelines to banks for taking the steps that arenecessary to mitigate risk. They do this through risk management in basel norms.

Audit and Inspection: The procedure of audit and inspection is controlled by the RBI

through off-site and on-site monitoring system. On-site inspection is done by the RBI on

the basis of “CAMELS”. Capital adequacy; Asset quality; Management; Earning;Liquidity; System and control.

Foreign Exchange Control: The RBI plays a crucial role in foreign exchange

transactions. It does due diligence on every foreign transaction, including the inflow and



outflow of foreign exchange. It takes steps to stop the fall in value of the Indian Rupee.

The RBI also takes necessary steps to control the current account deficit. They also give

support to promote export and the RBI provides a variety of options for NRIs.

Development: Being the banker of the Government of India, the RBI is responsible for

implementation of the government’s policies related to agriculture and rural

development. The RBI also ensures the flow of credit to other priority sectors as well.Section 54 of the RBI gives stress on giving specialized support for rural development.Priority sector lending is also in key focus area of the RBI.

Purpose and Role of SEBI:

SEBI was set up with the main purpose of keeping a check on malpractices and protect theinterest of investors. It was set up to meet the needs of three groups.

1. Issuers:

For issuers it provides a market place in which they can raise finance fairly and easily.

2. Investors:

For investors it provides protection and supply of accurate and correct information.

3. Intermediaries:

For intermediaries it provides a competitive professional market.

Objectives of SEBI:

The overall objectives of SEBI are to protect the interest of investors and to promote thedevelopment of stock exchange and to regulate the activities of stock market. The objectives of

SEBI are:

1. To regulate the activities of stock exchange.

2. To protect the rights of investors and ensuring safety to their investment.

3. To prevent fraudulent and malpractices by having balance between self regulation of business

and its statutory regulations.



4. To regulate and develop a code of conduct for intermediaries such as brokers, underwriters,

etc.

Functions of SEBI:

The SEBI performs functions to meet its objectives. To meet three objectives SEBI has three

important functions. These are:

i. Protective functions

ii. Developmental functions

iii. Regulatory functions.

1. Protective Functions:

These functions are performed by SEBI to protect the interest of investor and provide safety of

investment.

As protective functions SEBI performs following functions:

(i) It Checks Price Rigging:

Price rigging refers to manipulating the prices of securities with the main objective of inflating or

depressing the market price of securities. SEBI prohibits such practice because this can defraud

and cheat the investors.

(ii) It Prohibits Insider trading:

Insider is any person connected with the company such as directors, promoters etc. These

insiders have sensitive information which affects the prices of the securities. This information is

not available to people at large but the insiders get this privileged information by working insidethe company and if they use this information to make profit, then it is known as insider trading,

e.g., the directors of a company may know that company will issue Bonus shares to its

shareholders at the end of year and they purchase shares from market to make profit with bonus

issue. This is known as insider trading. SEBI keeps a strict check when insiders are buyingsecurities of the company and takes strict action on insider trading.

(iii) SEBI prohibits fraudulent and Unfair Trade Practices:

SEBI does not allow the companies to make misleading statements which are likely to induce thesale or purchase of securities by any other person.



(iv) SEBI undertakes steps to educate investors so that they are able to evaluate the securities of

various companies and select the most profitable securities.

(v) SEBI promotes fair practices and code of conduct in security market by taking following

steps:

(a) SEBI has issued guidelines to protect the interest of debenture-holders wherein companies

cannot change terms in midterm.

(b) SEBI is empowered to investigate cases of insider trading and has provisions for stiff fine and

imprisonment.

(c) SEBI has stopped the practice of making preferential allotment of shares unrelated to market

prices.

2. Developmental Functions:

These functions are performed by the SEBI to promote and develop activities in stock exchange

and increase the business in stock exchange. Under developmental categories following

functions are performed by SEBI:

(i) SEBI promotes training of intermediaries of the securities market.

(ii) SEBI tries to promote activities of stock exchange by adopting flexible and adoptable

approach in following way:

(a) SEBI has permitted internet trading through registered stock brokers.

(b) SEBI has made underwriting optional to reduce the cost of issue.

(c) Even initial public offer of primary market is permitted through stock exchange.

3. Regulatory Functions:

These functions are performed by SEBI to regulate the business in stock exchange. To regulate

the activities of stock exchange following functions are performed:

(i) SEBI has framed rules and regulations and a code of conduct to regulate the intermediaries

such as merchant bankers, brokers, underwriters, etc.

(ii) These intermediaries have been brought under the regulatory purview and private placement

has been made more restrictive.

(iii) SEBI registers and regulates the working of stock brokers, sub-brokers, share transfer

agents, trustees, merchant bankers and all those who are associated with stock exchange in anymanner.



(iv) SEBI registers and regulates the working of mutual funds etc.

(v) SEBI regulates takeover of the companies.

(vi) SEBI conducts inquiries and audit of stock exchanges.

The Organisational Structure of SEBI:

1. SEBI is working as a corporate sector.

2. Its activities are divided into five departments. Each department is headed by an executivedirector.

3. The head office of SEBI is in Mumbai and it has branch office in Kolkata, Chennai and Delhi.

4. SEBI has formed two advisory committees to deal with primary and secondary markets.

5. These committees consist of market players, investors associations and eminent persons.

Objectives of the two Committees are:

1. To advise SEBI to regulate intermediaries.

2. To advise SEBI on issue of securities in primary market.

3. To advise SEBI on disclosure requirements of companies.

4. To advise for changes in legal framework and to make stock exchange more transparent.

5. To advise on matters related to regulation and development of secondary stock exchange.

role of rbi & sebi

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