CA Foundation Business & Commercial Knowledge Study Material Chapter 5 Organizations Facilitating Business – Indian Regulatory bodies

Government of India has constituted several bodies to regulate and control business activities for protecting the interests of various stakeholders. Similarly, several development banks have been established to assist in the establishment and growth of business enterprises. These regulatory bodies and development banks are described in this chapter.

Indian Regulatory Bodies
Regulation and Control of business and related activities are necessary to ensure health growth and to safeguard the interests of various sections of the society. Some of the regulatory bodies in India are given below:

Securities and Exchange Board of India (SEBI)

In order to protect the interests of investors the Government of India constituted the Securities and Exchange Board of India (SEBI) in April, 1988. It is meant to be a supervisory body to regulate and promote the securities market in the country.

Objectives: The main objectives of SEBI are as under:

  1. to promote fair dealings by the issuers of securities and to ensure a market place where they can raise funds at a relatively low cost;
  2. to provide a degree of protection to the investors and safeguard their rights and interests so that there is a steady flow of savings into the market;
  3. to regulate and develop a code of conduct and fair practices by intermediaries like brokers, merchant bankers, etc. with a view to making them competitive and professional.

Thus, the basic objectives of SEBI are to protect the interests of investors in securities and to pro-mote the development of, and to regulate, the securities markets.

Functions: SEBI performs the following functions:

1. Protective Functions – In order to protect the common investor, SEBI undertakes the following activities:

  • It prohibits fraudulent and unfair trade practices on stock exchanges.
  • It prohibits insider trading.
  • It undertakes steps to educate investors.
  • It promotes fair practices and code of conduct in securities market.
  • It is empowered to investigate cases of insider trading, impose fines and imprisonment.
  • It has issued guidelines for preferential allotment of shares.

2. Developmental Functions – These functions are as follows:

  • Training intermediaries in stock market.
  • Developing capital markets through internet trading, permitting stock exchanges to market/ IPO and making underwriting optional.

3. Regulatory Functions:

  • Prescribing rules and regulations for merchant bankers, underwriters and registrars.
  • Registering and regulating stock brokers, sub-brokers, etc.
  • Registering and regulating the working of mutual funds.
  • Regulating takeover of companies.
  • Conducting inquiries and audits of stock exchanges.

Reserve Bank of India (RBI)

Every country has a Central Bank as an apex body to supervise and control the banking sector. Reserve Bank of India is India’s Central Bank. It was set up under the Reserve Bank of India Act, 1934. It began its operations on April 1, 1935. It is managed by a Board of Governors headed by the RBI Governor.

The functions performed by the Reserve Bank of India may be classified broadly into three categories –

  1. traditional central banking functions,
  2. supervisory functions, and
  3. development functions.

The central banking functions are given below:

1. Issue of Bank Notes: Under the RBI Act, the RBI has the monopoly (sole right) to issue bank notes of all denominations. The RBI has a separate Issue Department to make issues of currency notes. It has adopted the minimum reserve system of note issue.

2. Banker to Government: The Reserve Bank acts as the banker, agent and adviser to Government of India:

  • It maintains and operates government deposits.
  • It collects and makes payments on behalf of the government.
  • It helps the government to float new loans and manages the public debt.
  • It sells for the Central Government treasury bills of 91 days duration.
  • It makes ‘Ways and Means’ advances to the Central and State Governments for periods not exceeding three months.
  • It provides development finance to the government for carrying out five year plans.
  • It undertakes foreign exchange transactions on behalf of the Central Government.
  • It acts as the agent of the Government of India in the latter’s dealings with the International institutions.
  • It advises the government on all financial matters such as loan operations, investments, agricultural and industrial finance,
  • banking, planning, economic development, etc.

3. Bankers’ Bank: The RBI keeps the cash reserves of all the scheduled banks and is, therefore, known as the ‘Reserve Bank’. The scheduled banks can borrow in times of need from RBI. The RBI acts not only as the bankers’ bank but also the lender of the last resort by providing rediscount facilities to scheduled banks. The RBI extends loans and advances to banks against approved securities.

4. Controller of Credit: A major function of the RBI is to formulate and administer the country’s monetary policy. The RBI controls the volume of credit created by banks in India. It can ask any particular bank or the entire banking system not to lend against particular type of securities or for a particular purpose. The RBI controls credit in order to ensure price stability and economic growth.

5. Custodian of Foreign Exchange Reserves: The RBI acts as the custodian of India’s reserve of international currencies. In addition, RBI has the responsibility of maintaining exchange rate of the rupee and of administering the exchange controls of the country.

6. Clearing House Facility: As a clearing house, the central bank settles the claims of commercial banks and enables them to clear their dues through book entries. It makes debit and credit entries in their accounts for convenient adjustment of their daily balances with one another.

7. Collection and Publication of Data: The central bank conducts surveys and publishes reports and bulletins. It may provide staff training facilities to the personnel of commercial banks. It maintains relations with international financial institutions such as World Bank, IME etc.

Regulatory and Supervisory Functions:

The RBI is the supreme banking authority in the country. Every bank has to get a licence from the RBI to do banking business in India. The licence can be cancelled if the stipulated conditions are violated. Each scheduled bank is required to send a return of its assets and liabilities to the RBI. In addition, the RBI can call for information from any bank. It also has the power to inspect the accounts of any commercial bank. Thus, the RBI controls the banking system through licensing, inspection and calling for information.

The RBI has been given wide powers of supervision and control over commercial and cooperative banks. It can carry out periodical inspections of the banks and to call for returns from them. The supervisory and regulatory functions of the RBI are meant for improving the standard of banking in India and for developing the banking system on sound lines.

With liberalisation and growing integration of the Indian financial sector with the international market, the supervisory and regulatory role of RBI has become critical for the maintenance of financial stability. RBI has been continuously fine-tuning its regulatory and supervisory mechanism in recent years to match international standards. Migration to new capital adequacy framework (Basel II) based on a three-pillar approach, namely, minimum capital requirements, supervisory review, and market discipline, involves implementation challenges for both RBI and banks. RBI has taken a number of initiatives to make migration to Base II smoother.

Promotional or Developmental Functions:

The RBI is expected to promote banking habit, extend banking facilities to rural and semi-urban areas, establish and promote new specialised financial agencies. The RBI has helped in the setting of the IFCI, the SFCs, the UTI, the IDBI, the Agricultural Refinance Corporation of India, etc. These institutions were established to mobilise savings and to provide finance to industry and agriculture. The RBI has developed the cooperative credit movement to encourage savings, to eliminate moneylenders from the villages and provide short-term credit to agriculture. The RBI has also taken initiative for widening financial facilities for foreign trade. It facilitates the process of industrialisation by setting up specialised institutions for industrial finance. It also undertakes steps to develop bill market in the country.

Functions of the RBI

  1. Monetary Functions: Issue of currency, banker to Government, banker’s bank, credit control, custodian of foreign exchange.
  2. Supervisory Functions: Licensing, branch expansion, liquidity of assets, working methods, inspection, amalgamation and reconstruction.
  3. Developmental Functions: Promotion and mobilisation of savings, extension of banking, elimination of money lenders.

Credit Control by RBI:
As stated earlier, RBI is the controller of credit in India. Credit control means the regulation of credit by the central bank for achieving the desired objectives. It involves expansion and contraction of credit. The control over credit is necessary for preventing too much money supply in the economy and to prevent price rise.

The objectives of credit control are as follows:

  • to stabilise the general price level in the country;
  • to keep the exchange rate stable;
  • to promote and maintain a high level of income and employment;
  • to maintain a normal and steady growth rate in business activity;
  • to eliminate undue fluctuations in production and employment.

In order to control the volume of credit in the country, the RBI employs both general and selective methods:


Fig. Credit Control by RBI

1. Bank Rate – The standard rate at which the RBI is prepared to discount bills of exchange or extends advances to the commercial banks is known as the bank rate. When the RBI increases the bank rate, borrowing from banks becomes costlier and the amount of borrowings from banks is reduced. The effectiveness of bank rate is, however, limited due to certain constraints in the economy. Existence of non-banking finance institutions, large profit margins on speculative dealings, priority sector advances and increase in prices of final products to offset high interest rates are examples of these constraints.

2. Cash Reserve Ratio (CRR) – CRR refers to that portion of total deposits of a commercial bank which it has to keep with the RBI in the form of cash reserves. By raising the CRR, the RBI reduces the amount of loanable funds with commercial banks. As they can lend lesser amount, the volume of credit in the country gets reduced.

3. Statutory Liquidity Ratio (SLR) – SLR means that portion of total deposits of a commercial bank which it has to keep with itself in the form of cash reserves. An increase in the SLR has the same effect on the volume of credit as increase in the CRR.

4. Open Market Operations – These refer to the purchase and sale by the RBI of a variety of assets such as gold, government securities, foreign exchange and industrial securities from the market to increase money supply and lower interest rates. This is done to stimulate banks to give out more loans, boost private spending and increase inflation. It is called quantitative easing. If the RBI wants to reduce the volume of credit, it sells these assets. Such sale reduces money supply with banks and leads to increase in rates of interest. The open market operations of the RBI are however restricted to government securities due to underdeveloped securities market, and narrow gilt edged market.

Selective Credit Controls

Under these measures, the RBI diverts the flow of credit from speculative and unproductive activities to productive and priority areas. Under the Banking Regulation Act, 1949 the RBI is empowered to issue directives to banks, regarding their advances. These directives may relate to:

  • the purpose for which advances may or may not be made;
  • the margins to be maintained in respect of secured advances; ‘
  • the maximum amount of advances to any borrower;
  • the maximum amount upto which guarantees may be given by the bank on behalf of any firm, company, etc.; and
  • the rate of interest and other terms and conditions for granting advances.

The selective methods of credit control are as follows:

  1. Margin Requirements – Commercial banks have to keep a margin between the amount of loan granted and the market value of the security against which the loan is granted. For example, they may be asked to grant loans upto 80 per cent of the security or asset. When the central bank raises margin requirements, the volume of credit is reduced. In the same manner, lowering of margin re-quirements leads to expansion of credit. Margin requirements is a selective method of credit control.
  2. Credit Rationing – Sometimes, the Reserve Bank of India fixes a limit to the credit facilities available to commercial banks. The available credit is rationed among them according to the purpose of credit. This method of credit control is used in exceptional situations of monetary stringency. Moreover, credit rationing cannot be used for the expansion of credit in the economy.
  3. Moral Suasion – Under this method, the central bank requests and persuades the commercial banks not to grant credit for speculative and non-essential activities. It is an informal and non-statutory method. But commercial banks honour the authority of the central bank. The central bank may also issue directives to commercial banks to refrain from certain types of lending. For example, the RBI asked banks to refrain from lending against food grains to check hoarding.
  4. Publicity – The central bank issues reports and review statements of assets and liabilities. These publications keep commercial banks aware of conditions in the money market, public finance, trade and industry in the country. They adjust their credit activities accordingly.

Role of RBI in Economic Development

In a developing country like India, the central bank has to play a vital role. The developing coun¬tries generally do not have well organised money market and capital market. Therefore, the central bank is expected to develop the banking system and financial system of the country. In addition to the traditional functions, the RBI contributes towards the Indian economy in the following ways:

  1. Development of Banking System – The RBI takes steps to develop a sound banking system in the country. Over the years, an integrated commercial banking structure has been developed under the supervision and control of the RBI. Regulation and control by the RBI creates public confidence in the banking system.
  2. Development of Financial Institutions – The RBI has played an active role in the establishment of specialised institutions for agriculture, industry, small scale sector and foreign trade.
  3. Development of Backward Areas – The RBI has encouraged banks to set up branches in backward regions so that financial facilities could be made available to people in these areas and to priority sectors. Social banking made rapid progress in India after the nationalisation of major banks in 1969.
  4. Economic Stability – The RBI has used its monetary and credit policy to regulate inflationary pressures in the economy. The bank has controlled the volume of credit for this purpose. According to the Planning Commission, “the central bank has to take a direct and active role in creating or helping to create the machinery needed for financing development activities all over the country, and in ensuring that the finance available flows in the intended directions”.
  5. Economic Growth – The RBI ensures adequate money supply for meeting the growing needs of different sectors of the economy.
  6. Proper Interest Rate Structure – The RBI has helped in establishing a suitable interest rate structure so as to direct investment in the economy. A policy of low interest rate has been adopted for encouraging investment.
  7. Miscellaneous – The RBI provides training and research facilities. It provides special facilities to priority sectors. It also guides the efforts of planners by its economic policies.

Insurance Regulatory and Development Authority (IRDA)

IRDA is a statutory and apex body that supervises and regulates insurance industry in India. It was established under the IRDA Act on December 16, 2014. It is managed by a chairman, five whole time members and four part time members all appointed by the Government of India.


  • to promote the interests and rights of policy holders
  • to promote and ensure the growth of insurance industry
  • to ensure speedy settlement of genuine claims and to prevent frauds and malpractices, and
  • to bring transparency and orderly conduct of financial markets dealing with insurance.


  • to issue, register and regulate insurance companies
  • to protect the interests of policyholders
  • to provide licence to insurance intermediaries such as agents and brokers who met the qualifications and code of conduct specified by it
  • to promote and regulate the professional organizations related with insurance business so as to promote efficiency in the insurance sector
  • to regulate and supervise the rates of insurance premium and terms of insurance covers
  • to specify the conditions and manners according to which the insurance companies and other intermediaries have to make their financial reports
  • to regulate the investment of policyholders funds by insurance companies, and
  • to ensure the maintenance of solvency margin (Company’s ability to payment claims) by insurance companies.

Competition Commission of India (CCI)

Government of India constituted the CCI under the Competition Act, 2002

Duties, Powers and Functions of the Commission

Duties of Commission
Under Section 18, Competition Commission has been charged with the following duties:

  • to eliminate practices having adverse effect on competition,
  • to promote and sustain competition,
  • to protect the interests of consumers, and
  • to ensure freedom of trade carried by other participants in markets in India.

Powers and Functions of Commission
With a view to perform the duties enumerated under section 18, the Commission has been charged with certain obligations and conferred with certain powers. These obligations and powers are as follows:

1. Inquiry into Certain Agreements (Section 19) – The Commission may inquire into any alleged contravention of the provisions contained in section 3(1) or 4(1) either on its own motion or on:

  • receipt of a complaint from any person, consumer or their association or trade association; or
  • a reference made to it by the Central Government or a State Government or a statutory authority [Section 19(1)].

2. Inquiry whether an Enterprise Enjoys Dominant Position – The Commission shall, while inquiring whether an enterprise enjoys a dominant position or not under Section 4, have due regard to all or any of the following factors, namely:

  • market share of the enterprise;
  • size and resources of the enterprise;
  • size and importance of the competitors;
  • economic power of the enterprise including commercial advantages over competitors;
  • vertical integration of the enterprises or sale or service network of such enterprises;
  • dependence of consumers on the enterprise;
  • monopoly or dominant position whether acquired as a result of any statute or by virtue of being a Government company or a public sector undertaking or otherwise;
  • entry barriers including barriers such as regulatory barriers, financial risk, high capital cost of entry, marketing entry barriers, technical entry barriers, economies of scale, high cost of substitutable goods or service for consumers;
  • countervailing buying power;
  • market structure and size of market;
  • social obligations and social costs;
  • relative advantage by way of contribution to the economic development by the enterprise enjoying a dominant position having or likely to have appreciable adverse effect on compe-tition;
  • any other factor which the Commission may consider relevant for the inquiry [Section 19(4)].

3. Inquiry into Combination by Commission (Section 20) – Inquiry into acquisition, control and combination. The Commission may, upon its own knowledge or information relating to acquisition referred to in Section 5(a) or acquiring of control or merger or amalgamation referred to in Section 5(6) or merger or amalgamation referred to in Section 5(c), inquire into whether such a combination has caused or is likely to cause an appreciable adverse effect on competition in India.

The Commission shall not initiate any inquiry under this sub-section after the expiry of one year from the date on which such combination has taken effect [Section 20(1)].

The Commission shall, on receipt of a notice or upon receipt of a reference under Section 6(2), in¬quire whether a combination referred to in that notice or reference has caused or is likely to cause an appreciable adverse effect on competition in India [Section 20(2)].

Factors having effect on combination. For the purposes of determining whether a combination would have the effect of or is likely to have an appreciable adverse effect on competition in the relevant market, the Commission shall have due regard to all or any of the following factors, namely:

  • actual and potential level of competition through imports in the market;
  • extent of barriers to entry to the market;
  • level of combination in the market;
  • degree of countervailing power in the market;
  • likelihood that the combination would result in the parties to the combination being able to significantly and sustainably increase prices or profit margins;
  • extent of effective competition likely to sustain in a market;
  • extent to which substitutes are available or are likely to be available in the market;
  • market share, in the relevant market, of the persons or enterprise in a combination, individ-ually and as a combination;
  • likelihood that the combination would result in the removal of a vigorous and effective com-petitor or competitors in market;
  • nature and extent of vertical integration in the market;
  • possibility of a failing business;
  • nature and extent of innovation;
  • relative advantage by way of contribution to the economic development, by way of combi-nation having or likely to have appreciable adverse effect on competition;
  • whether the benefits of the combination outweigh the adverse impact of the combination, if any [Section 20(4)].

4. Power to Grant Interim Relief (Section 33) – Section 33 empowers the Commission to grant interim relief by way of temporary injunctions.

Where during an inquiry before the Commission, it is proved to the satisfaction of the Commission, by affidavit or otherwise, that an act in contravention of Section 3(1), or Section 4(1) or Section 5 has been committed and continues to be committed or that such act is about to be committed, the

Commission may grant a temporary injunction restraining any party from carrying on such act until the conclusion of such inquiry or until further orders, without giving notice to the opposite party, where it deems it necessary [Section 33(1)].

5. Power to Award Compensation (Section 34) – Without prejudice to any other provisions contained in this Act, any person may make an application to the Commission for an order for the recovery of compensation from any enterprise for any loss or damage shown to have been suffered, by such person as a result of any contravention of the provisions of Chapter II (Sections 3 to 6), having been committed by such enterprise [Section 34(1)].

The Commission may, after an inquiry made into the allegations mentioned in the application made under sub-section (1), pass an order directing the enterprise to make payment to the applicant, of the amount determined by it as realisable from the enterprise as compensation for the loss or damage caused to the applicant as a result of any contravention of the provisions of Chapter II having been committed by such enterprise [Section 34(2)].

Orders by Commission after Inquiry into Agreements or Abuse of Dominant Position (Section 27)

Orders by Commission. Where after inquiry the Commission finds that any agreement or action of an enterprise in a dominant position, is in contravention of Section 3 or Section 4, it may pass all or any of the following orders, namely:

  • direct any enterprise or association of enterprises or person or association of persons, involved . in such agreement, or abuse of dominant position, to discontinue and not to re-enter such
    agreement or discontinue such abuse of dominant position;
    impose such penalty, as it may deem fit which shall be not more than 10 per cent of the average of the turnover for the three preceding financial years upon each of such person or enterprises which are parties to such agreements or abuse. However, where any agreement referred to in Section 3 (Le., any anti-competitive agreement) has been entered into by any cartel, the Commission shall impose upon each producer, seller, distributor, trader or service provider included in that cartel, a penalty equivalent to three times of the amount of profits made out of such agreement by the cartel or ten per cent of the average of the turnover of the cartel for the last preceding three financial years, whichever is higher;
  • award compensation to parties in accordance with the provisions contained in Section 34;
  • direct that the agreements shall stand modified to the extent and in the manner as may be specified in the order by the Commission;
  • direct the enterprises concerned to abide by such other orders as the Commission may pass and comply with the
  • directions, including payment of costs, if any;
    recommend to the Central Government for the division of an enterprise enjoying dominant position;
  • pass such other order as it may deem fit.

Division of Enterprise Enjoying Dominant Position (Section 28)

The Central Government, on recommendation by the Commission under Section 27(f), may, in writing, direct division of an enterprise enjoying dominant position to ensure that such enterprise does not abuse its dominant position [Section 28(1)]. This order may provide for all or any of the following matters, namely:

  • the transfer or vesting of property, rights, liabilities or obligations;
  • the adjustment of contracts either by discharge or reduction of any liability or obligation or otherwise;
  • the creation, allotment, surrender or cancellation of any shares, stocks or securities;
  • the payment of compensation to any person who suffered any loss due to dominant position of the enterprise;
  • the formation or winding up of an enterprise or the amendment of the memorandum of association or articles of association or any other instruments regulating the business of any enterprise;
  • the extent to which, and the circumstances in which, provisions of the order affecting an enterprise may be altered by the enterprise and the registration thereof;
  • any other matter which may be necessary to give effect to the division of the enterprise [Section 28(2)].