## _cr13266 — Executive Summary and Key Findings ## Source details **Canonical URL:** [_cr13266 — Executive Summary and Key Findings](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13266.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13266.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13266.pdf.json) --- ### Key progress in implementation of the IOSCO Principles - SEBI’s legal authority strengthened; SEBI now has broad regulatory, licensing, investigation, supervision, and enforcement powers. - Robust regulations developed for issuers, collective investment schemes (CIS), brokers, portfolio managers, underwriters, and recognized stock exchanges (RSEs). - Robust market surveillance system and separate investigation and enforcement departments established; effective enforcement of unfair trading practices (market manipulation and insider trading). - SEBI has established a reputation as a credible enforcement agency; continued commitment to enforcement requires dedicated human and technological resources and strengthening of the supervision function. ### Main supervisory challenges and implementation gaps - Three main challenges: - Strengthen supervision of securities intermediaries, including fund managers and the funds they administer. - Improve mechanisms to ensure compliance of issuers with reporting requirements. - Improve mechanisms to ensure compliance with accounting and auditing requirements. - Actions underway: - From FY 2011–2012 SEBI implemented a risk-based supervisory approach for fund managers, the funds they administer, and merchant bankers. - Coordination committees set up with RSEs and the Ministry of Corporate Affairs (MCA) to address issuer reporting and accounting standard compliance. - SEBI creating a unit to review periodic reports submitted by issuers. - Government created the Quality Review Board (QRB); QRB not yet operational. ### Strategic issues for long-term effectiveness - Decisions needed on roles/responsibilities affecting resources and structure: - Review reliance on demutualised exchanges for self-regulation, particularly if exchanges become listed companies. - SEBI and MCA should review whether reviews of information submitted by listed companies should be carried out by SEBI only. - Authorities should analyze whether QRB will meet IOSCO requirements for independent oversight of auditors or whether a different body under securities regulator oversight is necessary. - All such decisions will have implications for SEBI’s resources. ### Criminal enforcement - Criminal enforcement needs to be stepped up; largely outside SEBI’s direct control and involves complex measures. - Past SEBI success: arranging dedicated designated criminal courts to hear CIS-related cases. - SEBI could explore extending dedicated criminal-court arrangements to other types of securities offenses. *Source: _cr13266 - Executive Summary* --- ### Institutional structure, coordination, and roles ### SEBI mandate and statutory basis - SEBI established under the Securities and Exchange Board of India Act, 1992 (SEBI Act); mandate to protect investor interests, regulate and promote securities market development. - Legal/statutory bases for SEBI responsibilities include: - SEBI Act - Securities Contract (Regulation) Act, 1956 (SC(R) Act) - Depositories Act, 1996 - Companies Act, 1956 (in respect of listed companies and companies proposed to be listed on RSEs) - Regulatory scope: public offering of equity, debt, asset-backed securities, CIS; trading of securities and derivatives in RSEs; intermediaries; infrastructure providers (exchanges, CCPs, central securities depositories). ### Other authorities and coordination mechanisms - Ministry of Corporate Affairs (MCA): registers and regulates all companies (except listed companies in respect of issue, transfer and nonpayment of dividend); main authority reviewing annual financial reports pursuant to the Companies Act. - Reserve Bank of India (RBI): regulatory responsibility over contracts on government securities, gold related securities and money market securities and securities derived from those securities and repo contracts in debt securities; execution of those contracts on exchanges is under SEBI’s responsibility. - Coordination mechanisms: - Coordination committees between SEBI and RBI, and between SEBI and MCA. - Two committees for financial conglomerates with representation from SEBI, RBI and IRDA. - Financial Stability Development Council (FSDC) created in 2010 with representation from the MoF and the three regulatory authorities; a subcommittee on inter-regulatory coordination exists. - Joint mechanism (created in 2010) to resolve differences over the nature of a product. --- ### Recognized Stock Exchanges (RSEs) and self-regulation ### Roles and SEBI oversight - RSEs act as listing authorities and are responsible for monitoring issuers’ disclosure compliance under the listing agreement. - RSEs act as primary regulator and supervisor for brokers and perform real-time market surveillance. - Functions mainly rest with two nationwide RSEs: Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). - SEBI oversight of RSEs includes periodic reporting, regular meetings on market developments, annual on-site inspections, and a committee on non-compliance with listing obligations. ### RSE staffing (nationwide RSEs) - Listing: BSE 28, NSE 30 - Market Surveillance: BSE 8, NSE 8 - Supervision of brokers: BSE 25, NSE 62 - Investigation: BSE 10, NSE 25 ### Recommended actions regarding RSEs (selected) - Ensure enforcement of recognition requirements (financial resources and independent IT systems certification). - Maintain SEBI approval oversight of all RSE rules and retain powers to suspend or revoke RSE authorization. - Strengthen SEBI and RSE surveillance capabilities and coordination. - Consider requiring RSEs to conduct onsite visits in connection with registration of new members; reassess reliance on RSEs for broker supervision. --- ### Market structure — key statistics and observations ### Equity markets (as of June 2011 and 2010–2011 data) - As of June 2011, there were 5,025 listed companies in the BSE. - Market capitalization amounted to roughly 100 percent of GDP. - Top 10 companies represented 31 percent of total market capitalization (as of 2011). - During 2011, 23 new companies were listed in the BSE, compared to 80 in 2010. - Fifty-eight IPOs took place during 2010–2011, compared to 39 in 2009–2010. - A fourth of the issuances amounted to Rs. 500 crores (roughly US$108,157,135) or more. - Trading frequency (2009-2010): - BSE: 3,371 shares traded; 2,986 traded above 100 days (roughly 89 percent of shares traded). - NSE: 1,401 shares traded; 1,301 traded above 100 days (roughly 93 percent of shares traded). - Top 10 shares accounted for 26 percent (NSE) and 23 percent (BSE) of annual cash market turnover (2009-2010). - Percentage share of securities traded for less than 10 days: BSE 4.1 percent; NSE 0.9 percent (2009-2010). ### Corporate bond markets (data 2011–2012; monthly table preserved from source) - Apr-11: - Listed only on NSE — No. of Issues 88; Amount (Rs Crores) 10322.30. - Listed only on BSE — No. of Issues 678; Amount (Rs Crores) 316.49. - Listed Both on NSE and BSE — No. of Issues 0; Amount (Rs. Crores) 0.00. - Total — No. of Issues 155; Amount (Rs Crores) 18638.79. - May-11: - Listed only on NSE — No. of Issues 51; Amount (Rs Crores) 7405.27. - Listed only on BSE — No. of Issues 611; Amount (Rs Crores) 542.64. - Listed Both on NSE and BSE — No. of Issues 24; Amount (Rs. Crores) 650.00. - Total — No. of Issues 114; Amount (Rs Crores) 13597.91. - Jun-11: - Listed only on NSE — No. of Issues 74; Amount (Rs Crores) 17508.05. - Listed only on BSE — No. of Issues 451; Amount (Rs Crores) 513.62. - Listed Both on NSE and BSE — No. of Issues 0; Amount (Rs. Crores) 0.00. - Total — No. of Issues 119; Amount (Rs Crores) 19021.67. - Jul-11: - Listed only on NSE — No. of Issues 84; Amount (Rs Crores) 15127.25. - Listed only on BSE — No. of Issues 607; Amount (Rs Crores) 557.48. - Listed Both on NSE and BSE — No. of Issues 11; Amount (Rs. Crores) 100.00. - Total — No. of Issues 145; Amount (Rs Crores) 22784.73. - Aug-11: - Listed only on NSE — No. of Issues 78; Amount (Rs Crores) 16690.33. - Listed only on BSE — No. of Issues 473; Amount (Rs Crores) 778.87. - Listed Both on NSE and BSE — No. of Issues 11; Amount (Rs. Crores) 500.00. - Total — No. of Issues 126; Amount (Rs Crores) 21969.20. - Sep-11: - Listed only on NSE — No. of Issues 106; Amount (Rs Crores) 15725.17. - Listed only on BSE — No. of Issues 604; Amount (Rs Crores) 53.52. - Listed Both on NSE and BSE — No. of Issues 25; Amount (Rs. Crores) 84.00. - Total — No. of Issues 168; Amount (Rs Crores) 20362.69. - Total (Apr-11 to Sep-11) (table entries preserved exactly as presented in source): - Listed only on NSE — No. of Issues 481; Amount (Rs Crores) 82778.37. - Listed only on BSE — No. of Issues 3,402; Amount (Rs Crores) 67,62.62. - Listed Both on NSE and BSE — No. of Issues 6,683; Amount (Rs. Crores) 4.00. - Total — No. of Issues 827; Amount (Rs Crores) 116375.00. ### Derivatives markets - Derivatives turnover substantially higher than cash equity market turnover. - Trading in derivatives dominated by the NSE, with more than 99 percent of total turnover. - Product composition (recent years): index options largest share with 45.5 percent of total derivatives turnover; in 2009–2010 index options were followed by single stock futures (29.4 percent) and index futures (22.3 percent). ### Mutual funds (as of March 2011 and August 31, 2011) - Number of mutual funds: 51 (compared to 47 as of March 2010). - Assets under management (AUM): Rs. 592,249.54 crores (US$123,927.5 million). - Asset allocation: roughly 70 percent of AUM in debt funds (out of which 20 percent in money market funds), 32.98 percent in equity funds, and 3.11 percent in balanced funds. - Investor composition (as of August 31, 2011): - Retail investors: roughly 97 percent of total investors’ accounts; held 40 percent of AUM. - Total investor accounts: 47.07 million. - Corporations and other institutions: roughly 1 percent of total investors but held 54 percent of AUM. - Foreign investors: 2 percent of total accounts and hold 4.5 percent of AUM. - By asset class: retail investors accounted for roughly 90 percent of AUM in equity funds; institutional investors accounted for roughly 90 percent of AUM in debt funds. --- ### Intermediaries and market participation ### Brokers (as of March 2010 and December 2011 counts) - As of March 2010, there were 10,203 brokers authorized to trade on an RSE. - Majority licensed in both NSE and BSE. - Legal forms permitted: corporations or individuals. - Corporate brokers constitute: - 90 percent of brokers at the NSE. - 82 percent of brokers at the BSE. - For 2010 the top 10 brokers represented: - roughly 25 percent of annual cash market turnover of the NSE. - roughly 23 percent of annual cash market turnover of the BSE. - Proprietary trading in 2010 represented: - roughly 26 percent of the annual cash market turnover for the NSE. - roughly 23 percent of the annual cash market turnover for the BSE. - Funding and leverage for proprietary trading: - Brokers fund proprietary trading activities mostly with own funds. - Leverage is not common (per information provided by SEBI). - Authorities reported counts as of December 2011: - brokers: 19,557 - sub-brokers: 78,228 - foreign institutional investors: 1,767 - merchant bankers: 199 - portfolio managers: 246 - custodians: 19 - depository participants: 823 ### Merchant bankers and underwriters - There were 192 merchant bankers and three underwriters registered with SEBI. - Most merchant bankers also registered as underwriters; few “stand-alone” underwriters. - Book building is preferred placement mechanism; issues usually oversubscribed. - Underwriters’ practical obligations often limited to: - (a) a 5 percent portion required to retain by regulation (“skin on the game”); - (b) filling gaps from retail investor withdrawals. - Funding: merchant bankers fund obligations mostly with own funds; leverage is not common. ### Portfolio managers - There were 267 portfolio managers registered with SEBI. - Authorization: portfolio managers authorized only to manage individual accounts; cannot pool investor money. - Bulk of accounts are discretionary. - Assets under management (AUM) by portfolio managers: - As of March 2011, AUM amounted to Rs. 295,435.80 crores. - As of March 2010, AUM amounted to Rs. 282,720.75 crores. --- ### Market infrastructure, clearing and settlement ### RSEs and settlement - Number of RSEs: 21 RSEs; equity listing and secondary market trading concentrated in the BSE and the NSE. - Trading/settlement: - Both RSEs operate anonymous order driven systems. - Settlement takes place on a t+2 basis. - Clearing counterparties and settlement arrangements: - NSE: - Central clearing counterparty: National Securities Clearing Corporation (NSCCL), a wholly owned subsidiary of the NSE; NSCCL handles risk management functions including margins and settlement guarantee fund. - BSE: - Bank of India Shareholding Limited (BOISL) facilitates settlement for the equity cash segment and delivery based stock derivatives by coordinating with clearing banks and depositories as per exchange directions; BOISL processes pay-in and pay-out based on input files. - BSE Ltd. acts as the central counterparty and guarantees settlement for such segments, manages the settlement guarantee fund, and handles risk management functions. - Indian Clearing Corporation Limited (ICCL) handles the mutual fund segment and the corporate bond segment of BSE Ltd., and currency derivatives segment of the United Stock Exchange of India Ltd. - BOISL ownership: Bank of India (51 percent holding) and BSE Ltd. (49 percent holding). - ICCL is a wholly owned subsidiary of BSE Ltd. ### CCPs, margins, and market protections - CCPs monitor exposures in real time; brokers post initial and variation margin and contribute to a settlement fund. - A system of Market-Wide Circuit Breakers and Securities Level Price Bands is in place. - RSEs maintain settlement guarantee funds and conduct stress testing. --- ### Supervision, enforcement, and cooperation ### Assessment methodology and mission - Assessment period: mission conducted from June 15 to July 1, 2011 as part of the Financial Sector Assessment Program (FSAP). - Methodology: assessment based on IOSCO Principles and Objectives of Securities Regulation and its Methodology adopted in 2003 (updated in 2008); assessment based on 2003 Principles and methodology because a revised methodology for 2010 Principles had not been approved at the time of assessment. - Principle 30 not assessed. ### Enforcement powers and sanctions - SEBI civil enforcement powers include cease and desist orders, money penalties, disgorgement, directions, suspension/cancellation of licenses. - Monetary penalties (Sections 15A to–HB): - Insider trading and market manipulation penalty could go up to 25 crores (US$5.23 million) or three times the benefit obtained. - For breaches without specific penalty in Act, money penalty could go up to one crore rupees (US$0.21 million). - Criminal sanctions under SEBI Act, Depositories Act and SCRA: - imprisonment of up to 10 years or fine of up to 25 crore rupees (US$5.23 million) or both. - SEBI may file criminal complaints; parallel civil and criminal proceedings allowed. ### Investigation and enforcement resources and activity - SEBI staff: 583 staff, out of which 110 are support staff; recently added 90 professional staff. - Investigation department: approximately 45 staff. - Enforcement department: approximately 25 staff. - Investigations statistics (Taken up / Finalized): - Market Manipulation: Taken up 2008-2009: 52; 2009-2010: 44. Finalized 2008-2009: 62; 2009-2010: 46. - Insider Trading: Taken up 2008-2009: 14; 2009-2010: 10. Finalized 2008-2009: 12; 2009-2010: 10. - Total: Taken up 2008-2009: 76; 2009-2010: 71. Finalized 2008-2009: 83; 2009-2010: 74. - Enforcement actions (2010–2011): - total enforcement actions initiated during 2010–2011: 958 - total enforcement actions disposed during 2010–2011: 1,803 ### Criminal enforcement assessment and issues - Criminal enforcement: assessed as Partly implemented; effective criminal enforcement has focused on CIS cases in practice. - Constraints: protracted criminal procedures in courts; limited speed of criminal prosecutions. - Recommendations: explore extension of dedicated criminal-court arrangements beyond CIS; amendments proposed to empower Court of Sessions to take cognizance of and try offences under SEBI Act to reduce delays. ### International cooperation (Principles 11–13) - SEBI Act interpreted to authorize sharing public and non-public information domestic and foreign. - SEBI signatory of the IOSCO MMOU and several bilateral MOUs. - Average of thirty requests per annum received over last three years; roughly 70–80 percent related to fit and proper information; answered on average within 15 days. - Assessment: Principle 11 — Fully implemented; Principle 12 — Fully implemented; Principle 13 — Fully implemented. --- ### Supervision practices, gaps, and priority recommendations ### Off-site and on-site supervision - Off-site reporting: annual audited financial statements and semi-annual unaudited statements required from intermediaries. - Use of third-party experts as gatekeepers: semiannual audits by accountants paneled by RBI (since 2009) for brokers and PMs; trustee role for MFs. - SEBI shifted FY 2011–2012 to a risk-based supervisory approach for AMCs/MFs and merchant bankers; leading MFs to be inspected annually based on risk criteria. - On-site inspections: - Brokers: RSEs required to inspect active members annually; SEBI conducts purpose-driven inspections (e.g., 38 inspections in 2008–2009; 36 inspections in 2009–2010). - Portfolio managers: inspections linked to renewal every three years; no regular inspection program historically. - Merchant bankers: increased inspections under risk-based criteria starting in referenced year. - Mutual funds: historically inspected every two years by outsourced external agencies; from FY 2011–2012 SEBI to inspect directly under risk-based approach. ### Main limitations and assessor recommendations (summary) - Limitations identified: - Supervision of securities intermediaries needs strengthening (inspection coverage and follow-up). - Enforcement of reporting obligations by issuers and compliance with accounting/auditing standards weak. - Criminal enforcement constraints. - Priority recommendations: - Develop strategy for resource allocation across organization accounting for risks by category. - Strengthen thematic inspections and make them routine across intermediary types. - Establish inspection programs for all intermediary categories with cycles and scopes based on entity/category-specific risk assessments. - Upgrade off-site monitoring and reporting to support risk-based supervision. - Improve follow-up on supervisory findings, including imposition of sanctions when necessary. - Reassess reliance on exchanges for on-site inspections of brokers and evaluate inspection quality and RSE resource allocation. - Develop mechanisms to ensure proper oversight of sub-brokers. --- ### Issuers, disclosure, accounting and auditing ### Disclosure framework for issuers and listing obligations (Principle 14) - Prospectus and offering rules: - Section 2 (36) Companies Act, 1956 defines “prospectus.” Section 56 requires matters in Schedule II; contravention punishable with a fine of Rs 50,000. - Public offering defined as offer to 50 or more persons per Section 67. - SEBI reviews all equity prospectuses; RSEs review debt prospectuses. - Prospectuses posted on website: equity prospectuses for 30 days prior to SEBI clearance; debt prospectuses posted on RSEs’ website for seven days. - Ongoing disclosure (Listing Agreement clauses for equity): - Clause 32 and 49 require Consolidated Financial Statements, Cash Flow Statements, Related Party Transactions; Management Discussion and Analysis; CEO declaration; Corporate Governance section and auditor certificates. - Clause 41: audited annual report to RSE within 60 days of fiscal year end. - Quarterly financial reports: publish within 45 days of the last day of every quarter. - Clause 36: immediate informing of exchange of material events; material Board decisions filed within 15 minutes of Board meeting. - Clause 35: file Shareholding Pattern within 21 days from each quarter. - Enforcement of listing obligations: - RSEs responsible for monitoring and enforcement; SEBI has set up committee on noncompliance with listing obligations. - Suspensions historically used but RSEs reluctant due to investor effects. - Section 23E of SCRA: failure to comply with listing conditions liable to penalty not exceeding 25 crore rupees (US$5.23 million). - Committee identified active noncompliant companies: 60 in NSE and 365 in BSE; RSE action plans required. ### Accounting and auditing standards (Principle 16) - Accounting framework: - Financial statements prepared according to accounting standards approved by the Institute of Chartered Accountants of India (ICAI); India pursuing convergence toward IFRS-equivalent standards. - ICAI issued “equivalent” standards notified by the CG on February 25, 2011; convergence path intended with implementation timelines discussed (ICAI suggested April 2013 for convergence, implementation expected to be finalized by 2014 in source context). - Auditor oversight and bodies: - ICAI statutory body with Accounting Standards Board (ASB) and Auditing and Assurance Standards Board (AASB); SEBI is member of both. - Financial Reporting Review Board (FRRB) constituted in 2002 (non-standing ICAI committee) reviews issuer compliance; limited remedial powers; referrals to MCA/SEBI. - Quality Review Board (QRB) constituted by CG in 2007 to review quality of chartered accountants’ services; QRB devising strategy; not yet fully operational per parts of the text. - Companies Bill, 2011 proposes National Financial Reporting Authority (NFRA) (Clause 132) with quasi-judicial powers to investigate, levy penalty and bar professionals. - Observed weaknesses and recommendations: - Insufficient mechanisms to ensure issuer compliance with accounting standards and auditing independence in practice. - FRRB is advisory with limited enforcement; MCA oversight of annual reports is not demonstrated to be fully effective. - Assessor recommends SEBI create a dedicated unit for monitoring issuer periodic reports and consider whether SEBI should directly review issuer periodic reports. - Operationalize QRB or consider alternative independent auditor oversight under securities regulator. - Implement IFRS-equivalent standards as soon as possible; authorities intend dialogue with IASB on differences. --- ### Collective Investment Schemes and Mutual Funds (Principles 17–20) ### Regulatory framework and supervision (mutual funds) - Applicable regulations: SEBI (Mutual Fund) Regulations, 1996 and Collective Investment Schemes Regulations, 1999. - Mutual fund structure: - Mutual funds constituted as trusts; AMCs manage schemes; trustees act as first-level supervisors. - AMC minimum net worth requirement: Rs 10 cores. - AMCs required to buy insurance for errors and omissions, minimum cover Rs 5 crores (US$1 million); MFs with assets less than Rs.100 crores may take less cover as determined by trustees. - Supervision and inspection approach: - Off-site reporting: annual audited financials; half-yearly financials; independent systems audit by CISA-certified entity every two years; annual trustee compliance report. - On-site inspections historically every two years by external agencies; from FY 2011–2012 SEBI adopting risk-based inspections and direct inspections for highest-risk funds (leading MFs covering at least 75 percent of AAUM, high complaint funds, prior noncompliance). - Thematic inspections implemented for valuation, inter-scheme transfer, and brokerage differences. ### Disclosure, valuation, pricing and redemption (Principles 18–20) - Disclosure: - Offer documents, Key Information Memorandum (KIM), Statement of Additional Information (SAI); KIM updated at least once a year; offer documents revised at least once in two years. - Valuation and NAV: - Regulation 47: valuation norms in Eighth Schedule; NAV calculated daily for both open and close ended funds. - For debt securities two firms provide bond valuation metrics (mean used); providers mentioned: Cricil and Ecra. - Pricing and redemption: - Regulation 49: - Open end fund must publish sale and redemption price at least once a week in a daily newspaper of all India circulation. - Repurchase price shall not be lower than 93 per cent of NAV and sale price not higher than 107 per cent of NAV. - Repurchase price of close ended scheme shall not be lower than 95 per cent of NAV. - Difference between repurchase and sale price shall not exceed 7 per cent calculated on the sale price. - SEBI Circular dated June 30, 2009: no entry load for all mutual fund schemes; disclosure on commissions to distributors. - Empirical data as of September 16, 2011: - Total number of mutual fund schemes: 1403 - Schemes with no exit load: 809 (58 percent) - Schemes with exit load of 1 percent and below: 548 (39 percent) - Schemes with exit load above 1 percent: 46 (3 percent) - Redemption timing: - Regulations: open end funds must redeem participation in t + 10. - Practice: MMF have redeemed in t + ½ and other funds usually in t + 1. - Pricing errors: - Tolerance threshold of 1 percent for errors in pricing; if exceeded AMC must pay difference from its own capital. ### Assessment and recommendations for CIS/MFs - Assessment: Broadly implemented for CIS-related supervision; Principles 17–20 generally well covered. - Recommendations: - Inspections should critically review internal controls and risk management vis-à-vis AMC business models. - Enhance follow-up of inspection findings, including “harder” enforcement measures where warranted. - Upgrade off-site monitoring systems for better analysis and inspection targeting. - Consider whether CRAs providing valuation services should be regulated for that activity. --- ### Capital, prudential requirements, internal controls and failure procedures ### Capital and prudential requirements (Principle 22) - Minimum capital requirements by intermediary category (examples): - Broker dealers: BSE cash segment minimum capital Rs 10,00,000 (US$20,925); initial deposit requirement Rs100,00,000. - Underwriters: net worth Rs 20 lakhs (US$41,850); underwriting obligations shall not exceed 20 times net worth. - Merchant bankers: net worth not less than five crore rupees (US$1 million). - Portfolio managers: net worth not less than two crore rupees (US$0.42 million). - No explicit requirements to adjust capital based on actual risk of activities undertaken. - Assessment: Partly implemented. - Recommendations: - Implement a risk-based capital system reflecting authorized activities and adjust on an ongoing basis for actual risk exposures. - Strengthen reporting frequency (consider quarterly or monthly capital adequacy reporting and immediate notification if capital falls below thresholds). ### Internal organization, conduct, and investor protection (Principles 23–24) - Internal controls and compliance: - Intermediaries required to appoint compliance officers; semi-annual internal audits required (except merchant bankers and underwriters). - Asset segregation requirements and client account segregation enforceable. - Records retention: generally 10 years under PML Rules; RSEs required to keep records five years under SCRA rules. - Failure procedures and crisis coordination: - RSE by-laws contain default procedures for brokers; defaulters’ committee mechanisms and settlement guarantee funds exist. - SEBI powers to suspend intermediaries, transfer business, or issue interim orders. - No recent broker default since late 1990s. - Assessment: Broadly implemented. - Recommendations: - Make RSE default procedures operational through testing. - For other intermediaries, develop more frequent capital reporting and a plan to deal with their failure. - Regulators should develop coordination framework for failures within financial conglomerates. --- ### Secondary markets (Principles 25–30): key findings and recommended actions ### Key findings (selected) - Principle 25 (Grading: FI): Only RSEs can operate in India, subject to recognition by SEBI; recognition requirements include financial resources and IT system certifications; SEBI can suspend or revoke recognition. - Principle 26 (Grading: FI): RSEs have robust market surveillance; SEBI conducts surveillance on t+1 and has its Integrated Market Surveillance System. - Principle 27 (Grading: FI): RSEs required to have both pre- and post-trade transparency. - Principle 28 (Grading: FI): Market manipulation and insider trading are both civil infractions and criminal offenses; criminal enforcement needs strengthening. - Principle 29 (Grading: FI): CCPs monitor exposures in real time; margins and settlement fund arrangements in place. - Principle 30: Not assessed in this report. ### Recommended actions (selected) - Principle 25: - Continue enforcement of recognition requirements for RSEs; maintain SEBI’s approval oversight of RSE rules. - Principles 26–28: - Strengthen criminal enforcement of market manipulation, insider trading, and other unfair practices. - Enhance SEBI’s and RSEs’ surveillance capabilities and coordination across plurality of trading platforms. - Principle 29: - Maintain and test CCP and RSE real-time exposure monitoring, margining, and settlement fund arrangements. - Ensure Market-Wide Circuit Breakers and Securities Level Price Bands remain calibrated to market conditions. - Cross-cutting: - Strengthen supervision program for securities intermediaries and consider directing RSEs to conduct onsite visits for new member registrations. - Move toward a risk-based capital system and review prudential reporting for intermediaries different from brokers. - Make default procedures operational and test them across participants; develop plans to deal with failure of entities other than brokers. --- ### Auditors, FRRB, SFIO and public enforcement of accounting/auditing ### Auditor independence and oversight mechanisms - Section 226 of the Companies Act prohibits an internal auditor from being the statutory auditor; indebted persons or share-holding persons cannot be statutory auditors. - ICAI has Code of Ethics and Guidance Note on Auditor’s independence. - FRRB (Financial Reporting Review Board) constituted in 2002 (non-standing ICAI committee) reviews issuer compliance with accounting standards; limited enforcement powers; referrals to MCA/SEBI. - FRRB reviews: Total reviews commenced 2008–2011 — 459; referrals to MCA/SEBI relatively small in number. - SFIO (Serious Fraud Investigation Office): - Total referred cases so far: 79. - SFIO submitted investigation reports in 52 cases as of 31.12.2010. - As of 31.12.2010, 823 cases of prosecution filed in different courts against persons involved in fraudulent activities. - Quality Review Board (QRB) constituted by CG in 2007; devising strategy for operation; status varies across text (not yet operational in Executive Summary; later material states QRB is in operation — source text provides both statements in different sections). - Companies Bill, 2011 proposes National Financial Reporting Authority (NFRA) (Clause 132) with powers to scrutinize accounting/audit compliance and impose penalties. - Assessor assessment for auditor oversight: Partly implemented. - Recommendations: - Strengthen framework to ensure issuer compliance with accounting standards. - Operationalize QRB or establish an independent oversight mechanism for auditors (e.g., NFRA). - SEBI to create a dedicated monitoring unit for issuer periodic reports and consider direct review authority. --- ### Selected enforcement and complaint handling metrics - Backlog in complaints handled by intermediaries: - 2009: 18,602 - 2010: 9,879 - 2011: 7,132 - RSE investigations initiated: - 2007–2008: 1,978 - 2008–2009: 1,126 - 2009–2010: 1,588 - RSEs forwarded to SEBI for necessary action: - 2007–2008: 179 - 2008–2009: 169 - 2009–2010: 240 --- *Source: _cr13266 — IMF Financial Sector Assessment Program (FSAP) country report content from the provided PDF excerpt.* ### Executive Summary ...................................................................................................... ### _cr13266 - Executive Summary ...................................................................................................... ### Key progress in implementation of the IOSCO Principles - SEBI’s legal authority has been strengthened and SEBI now has broad regulatory, licensing, investigation, supervision, and enforcement powers. - SEBI has developed robust regulations for issuers, collective investment schemes (CIS), brokers, portfolio managers, underwriters, and recognized stock exchanges (RSEs). - SEBI has built a robust market surveillance system and separate investigation and enforcement departments, translating into effective enforcement of unfair trading practices, such as market manipulation and insider trading. - SEBI has established a reputation as a credible enforcement agency; continued commitment to enforcement requires dedicated human and technological resources and strengthening of the supervision function. ### Main supervisory challenges and implementation gaps - Three main challenges impacting effectiveness of supervisory programs: - Strengthening the supervision approach toward securities intermediaries, including fund managers and the funds they administer. - Improving mechanisms to ensure compliance of issuers with reporting requirements. - Improving mechanisms to ensure compliance with accounting and auditing requirements. - Actions underway: - From FY 2011–2012 SEBI implemented a risk-based supervisory approach for fund managers, the funds they administer, and merchant bankers. - SEBI has set up coordination committees with the RSEs and the Ministry of Corporate Affairs (MCA) to address issuer reporting and accounting standard compliance. - SEBI is creating a unit to review periodic reports submitted by issuers. - The government created the Quality Review Board (QRB) to review the quality of auditors’ work; QRB is not yet operational. ### Strategic issues for long-term effectiveness - Decisions needed on the roles and responsibilities that will affect resources and structure: - SEBI should review reliance on demutualised exchanges for self-regulation, particularly if exchanges themselves become listed companies. - SEBI and MCA should review whether reviews of information submitted by listed companies should be carried out by SEBI only. - Authorities should analyze whether the QRB will meet IOSCO requirements for independent oversight of auditors or whether a different body under the securities regulator’s oversight is necessary. - All such decisions will have implications for SEBI’s resources. ### Criminal enforcement - Criminal enforcement needs to be stepped up; this is largely outside SEBI’s control and involves complex measures. - Past SEBI success: arranging dedicated designated criminal courts to hear CIS-related cases. - SEBI could explore extending dedicated criminal-court arrangements to other types of securities offenses. ### Institutional structure and coordination - SEBI: established under the Securities and Exchange Board of India Act, 1992 (SEBI Act); mandated to protect investor interests, regulate and promote securities market development. - Legal/statutory bases for SEBI responsibilities include: - SEBI Act - Securities Contract (Regulation) Act, 1956 (SC(R) Act) - Depositories Act, 1996 - Companies Act, 1956 (in respect of listed companies and companies proposed to be listed on RSEs) - SEBI regulates public offering of equity, debt, asset-backed securities, CIS, trading of securities and derivatives in RSEs, intermediaries, and infrastructure providers (exchanges, CCPs, central securities depositories). - Other authorities with roles: - Ministry of Corporate Affairs (MCA): registers and regulates all companies (except listed companies in respect of issue, transfer and nonpayment of dividend); main authority currently reviewing annual financial reports submitted pursuant to the Companies Act. - Reserve Bank of India (RBI): regulatory responsibility over contracts on government securities, gold related securities and money market securities and securities derived from those securities and repo contracts in debt securities; execution of those contracts on exchanges is under SEBI’s responsibility. - Coordination mechanisms established or evolving: - Coordination committees between SEBI and RBI, and between SEBI and MCA. - Two committees for financial conglomerates with representation from SEBI, RBI and IRDA. - Financial Stability Development Council (FSDC) created in 2010 with representation from the MoF and the three regulatory authorities; a subcommittee on inter-regulatory coordination exists. - Joint mechanism (created in 2010) to resolve differences over the nature of a product. ### Role of Recognized Stock Exchanges (RSEs) - RSEs act as listing authorities and are responsible for monitoring issuers’ disclosure compliance under the listing agreement. - RSEs act as primary regulator and supervisor for brokers and perform real-time market surveillance for the markets they operate. - Functions mainly rest with two nationwide RSEs: Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). - SEBI oversight of RSEs includes periodic reporting, regular meetings on market developments, annual on-site inspections, and a committee on non-compliance with listing obligations. ### Market structure — key statistics and observations - Equity markets: - As of June 2011, there were 5,025 listed companies in the BSE. - Market capitalization amounted to roughly 100 percent of GDP. - Top 10 companies represented 31 percent of total market capitalization (as of 2011). - During 2011, 23 new companies were listed in the BSE, compared to 80 in 2010. - Fifty-eight IPOs took place during 2010–2011, compared to 39 in 2009–2010. - A fourth of the issuances amounted to Rs. 500 crores (roughly US$108,157,135) or more. - Trading frequency (2009-2010): in the BSE, 3,371 shares were traded and 2,986 were traded above 100 days (roughly 89 percent of shares traded); in the NSE, 1,401 shares were traded and 1,301 were traded above 100 days (roughly 93 percent of shares traded). - Top 10 shares accounted for 26 percent (NSE) and 23 percent (BSE) of annual cash market turnover (2009-2010). - Percentage share of securities traded for less than 10 days: 4.1 percent at the BSE and 0.9 percent at the NSE (2009-2010). - Corporate bond markets: - Corporate bond markets are less developed but growing; bulk of debt offerings are private placements. - Data (2011–2012) for corporate bonds (Table 1 summary by month and exchange): - Apr-11: Listed only on NSE — No. of Issues 88; Amount (Rs Crores) 10322.30. Listed only on BSE — No. of Issues 678; Amount (Rs Crores) 316.49. Listed Both on NSE and BSE — No. of Issues 0; Amount (Rs. Crores) 0.00. Total — No. of Issues 155; Amount (Rs Crores) 18638.79. - May-11: Listed only on NSE — No. of Issues 51; Amount (Rs Crores) 7405.27. Listed only on BSE — No. of Issues 611; Amount (Rs Crores) 542.64. Listed Both on NSE and BSE — No. of Issues 24; Amount (Rs. Crores) 650.00. Total — No. of Issues 114; Amount (Rs Crores) 13597.91. - Jun-11: Listed only on NSE — No. of Issues 74; Amount (Rs Crores) 17508.05. Listed only on BSE — No. of Issues 451; Amount (Rs Crores) 513.62. Listed Both on NSE and BSE — No. of Issues 0; Amount (Rs. Crores) 0.00. Total — No. of Issues 119; Amount (Rs Crores) 19021.67. - Jul-11: Listed only on NSE — No. of Issues 84; Amount (Rs Crores) 15127.25. Listed only on BSE — No. of Issues 607; Amount (Rs Crores) 557.48. Listed Both on NSE and BSE — No. of Issues 11; Amount (Rs. Crores) 100.00. Total — No. of Issues 145; Amount (Rs Crores) 22784.73. - Aug-11: Listed only on NSE — No. of Issues 78; Amount (Rs Crores) 16690.33. Listed only on BSE — No. of Issues 473; Amount (Rs Crores) 778.87. Listed Both on NSE and BSE — No. of Issues 11; Amount (Rs. Crores) 500.00. Total — No. of Issues 126; Amount (Rs Crores) 21969.20. - Sep-11: Listed only on NSE — No. of Issues 106; Amount (Rs Crores) 15725.17. Listed only on BSE — No. of Issues 604; Amount (Rs Crores) 53.52. Listed Both on NSE and BSE — No. of Issues 25; Amount (Rs. Crores) 84.00. Total — No. of Issues 168; Amount (Rs Crores) 20362.69. - Total (Apr-11 to Sep-11): Listed only on NSE — No. of Issues 481; Amount (Rs Crores) 82778.37. Listed only on BSE — No. of Issues 3,402; Amount (Rs Crores) 67,62.62. Listed Both on NSE and BSE — No. of Issues 6,683; Amount (Rs. Crores) 4.00. Total — No. of Issues 827; Amount (Rs Crores) 116375.00. - Note: Table entries preserved exactly as presented in source. - Derivatives markets: - Derivatives turnover substantially higher than cash equity market turnover. - Trading in derivatives is dominated by the NSE, with more than 99 percent of total turnover. - Product composition (recent years): index options largest share with 45.5 percent of total derivatives turnover; in 2009–2010 index options were followed by single stock futures (29.4 percent) and index futures (22.3 percent). - Mutual funds (as of March 2011): - Number of mutual funds: 51 (compared to 47 as of March 2010). - Assets under management (AUM): Rs. 592,249.54 crores (US$123,927.5 million). - Asset allocation: roughly 70 percent of AUM in debt funds (out of which 20 percent in money market funds), 32.98 percent in equity funds, and 3.11 percent in balanced funds. - Investor composition (as of August 31, 2011): - Retail investors: roughly 97 percent of total investors’ accounts; held 40 percent of AUM. - Total investor accounts: 47.07 million. - Corporations and other institutions: roughly 1 percent of total investors but held 54 percent of AUM. - Foreign investors: 2 percent of total accounts and hold 4.5 percent of AUM. - By asset class: retail investors accounted for roughly 90 percent of AUM in equity funds; institutional investors accounted for roughly 90 percent of AUM in debt funds. ### Implementation and assessment methodology - Assessment period: mission conducted from June 15 to July 1, 2011 as part of the Financial Sector Assessment Program (FSAP). - Methodology: assessment based on IOSCO Principles and Objectives of Securities Regulation and its Methodology adopted in 2003 (updated in 2008); at time of assessment the revised 2010 IOSCO Principles had been approved but a revised methodology had not been approved; assessment therefore based on 2003 Principles and methodology. - Principle 30 was not assessed due to a separate standard for securities settlement systems; a technical note on payment issues was to be delivered during the mission. - Sources used by assessor: - SEBI self-assessment; - Relevant laws and documents provided by authorities, including annual reports; - Meetings with SEBI Chairman and Board members, SEBI staff, RBI, MoF, MCA, and other public authorities; - Meetings with market participants including issuers, brokers, merchant bankers, fund managers, stock exchanges, external auditors, credit rating agencies, and law firms. ### Conclusions and priority recommendations (summary) - SEBI has made significant progress since the 2000 assessment and has strong enforcement and regulatory frameworks. - Priority areas for further improvement: - Strengthen supervision of securities intermediaries and fund managers through enhanced risk-based supervision and resources. - Improve mechanisms to ensure issuer compliance with periodic reporting and enhance review of financial statements and disclosure—consider whether SEBI should directly review issuer periodic reports. - Strengthen oversight of accounting and auditing—ensure QRB or an alternative meets IOSCO requirements for independent auditor oversight. - Consider reducing reliance on RSEs for self-regulation if exchanges become listed entities. - Explore mechanisms to strengthen criminal enforcement of securities offenses, including potential expansion of designated criminal courts. *Source: _cr13266 - Executive Summary ......................................................................................................* ### 18. As of March 2010, there were 10,203 brokers ### 18. As of March 2010, there were 10,203 brokers ### Brokers and market participation - As of March 2010, there were 10,203 brokers authorized to trade on an RSE. - The majority of the brokers are licensed in both the NSE and the BSE. - Legal forms permitted: corporations or individuals. - Corporate brokers constitute: - 90 percent of brokers at the NSE. - 82 percent of brokers at the BSE. - For 2010 the top 10 brokers represented: - roughly 25 percent of annual cash market turnover of the NSE. - roughly 23 percent of annual cash market turnover of the BSE. - Proprietary trading in 2010 represented: - roughly 26 percent of the annual cash market turnover for the NSE. - roughly 23 percent of the annual cash market turnover for the BSE. - Funding and leverage for proprietary trading: - Brokers fund proprietary trading activities mostly with own funds. - Leverage is not common (per information provided by SEBI). ### Merchant bankers and underwriters - There were 192 merchant bankers and three underwriters registered with SEBI. - Most merchant bankers are also registered as underwriters; few “stand-alone” underwriters. - Book building is the preferred placement mechanism; issues are usually oversubscribed. - Practical exposure of merchant bankers/underwriters is usually limited. - Regulatory and market features limiting exposure: - Qualified institutional investors are not allowed to walk away from expressions of interest. - Underwriters’ obligations in practice are often limited to: - (a) a 5 percent portion that they are required to retain by regulation (“skin on the game”); - (b) filling any gap resulting from retail investors who withdraw their applications. - Funding and leverage for underwriter obligations: - Merchant bankers fund their obligations mostly with own funds. - Leverage is not common (per information provided by SEBI). ### Portfolio managers and assets under management - There were 267 portfolio managers registered with SEBI. - Authorization and constraints: - Portfolio managers are only authorized to manage individual accounts. - They cannot pool the money of investors. - The bulk of accounts are discretionary. - Assets under management (AUM): - As of March 2011, AUM by portfolio managers amounted to Rs. 295,435.80 crores. - As of March 2010, AUM by portfolio managers amounted to Rs. 282,720.75 crores. ### Market infrastructure - Number of RSEs: 21 RSEs; equity listing and secondary market trading concentrated in the BSE and the NSE. - Trading and settlement: - Both RSEs operate anonymous order driven systems. - Settlement takes place on a t+2 basis. - Clearing counterparties and settlement arrangements: - NSE: - Central clearing counterparty: National Securities Clearing Corporation (NSCCL), a wholly owned subsidiary of the NSE. - NSCCL handles risk management functions including margins and settlement guarantee fund. - BSE: - Bank of India Shareholding Limited (BOISL) facilitates settlement process of the equity cash segment and delivery based stock derivatives by coordinating with clearing banks and depositories as per exchange directions. - BOISL processes pay-in and pay-out for such segments based on input files from the exchange, clearing banks and depositories. - BSE Ltd. acts as the central counterparty and guarantees settlement for such segments, manages the settlement guarantee fund, and handles risk management functions (collateral management, margins, etc.) and overall settlement process. - Indian Clearing Corporation Limited (ICCL) handles the mutual fund segment and the corporate bond segment of BSE Ltd., and currency derivatives segment of the United Stock Exchange of India Ltd. - BOISL ownership: Bank of India (51 percent holding) and BSE Ltd. (49 percent holding). - ICCL is a wholly owned subsidiary of BSE Ltd. ### Preconditions for effective securities regulation - General observations requiring further strengthening: - No significant barriers to entry and exit for market participants. - Foreign ownership of securities intermediaries is allowed, but investment by foreign investors in Indian issuers and mutual funds must be done through FIIs, which are required to register with SEBI. - Since August 2011, SEBI has allowed foreign investors who meet “know your customer” requirements to invest in equity and debt schemes of mutual funds. - The Companies Act provides a basic corporate framework that could usefully be updated. - Market participants highlighted the insolvency regime as requiring a major overhaul; protracted insolvency proceedings are a key weakness. - A Companies Bill 2011 has been tabled in parliament (authorities informed). - Criminal enforcement in the courts is a challenge due to protracted procedures. - Convergence toward IFRS: - IFRS equivalent standards have been notified by the central government. - ICAI has suggested April 2013 for implementation. - Some differences with IFRS remain; authorities intend to initiate dialogue with the International Accounting Standards Board to address such differences. - Taxation concerns: - Market participants expressed concerns about the taxation framework, in particular the existence of a securities transaction tax with different percentages for different asset classes, which can distort market development. - The MoF has initiated a review of such tax with a view toward rationalization of securities transaction tax percentages (authorities informed). - General concerns about the level of corruption; creation of an independent anticorruption agency is being discussed in parliament. ### Main findings (overview of principles) - Principles for the regulator (1–5): - SEBI’s responsibilities are clearly established by law. - Several coordination mechanisms among SEBI and other domestic authorities exist; many are recent and still evolving. - In practice, SEBI has acted with a high degree of independence from governmental and commercial interest. - SEBI has broad licensing, supervision, investigation, and enforcement powers. - Challenges: number of staff relative to market size and capacity to hire personnel with market experience, especially at senior level. - Development of regulations subject to public consultation. - Licensing requirements established by regulations available on SEBI’s website. - Parties affected by SEBI decisions have a right to appeal. - Code of conduct for staff includes provisions on use of information, transactions in securities, gifts, and cool-off periods; separate provisions for Board members. - Principles for enforcement (8–10): - SEBI has broad authority to request information, testimony, and conduct inspections on regulated entities and third parties. - SEBI can impose a wide range of measures and sanctions including cease and desist orders, money penalties, and disgorgement. - Onsite inspection plans require further strengthening, particularly for securities intermediaries. - Enforcement of listing obligations by issuers and of accounting and auditing standards needs strengthening. - While law provides for strong criminal penalties, effective criminal enforcement has focused on CIS cases in practice. - Principles for cooperation (11–13): - SEBI’s Act provides authority to cooperate and share public and nonpublic information with domestic and foreign authorities, without limitations. - SEBI is signatory of the IOSCO MMOU and several bilateral MOUs and has demonstrated effective cooperation with foreign regulators. - Principle for issuers (14–16): - Public offering subject to disclosure requirements mainly via a prospectus broadly in line with the IOSCO principles. - SEBI reviews all prospectuses of equity issuers; RSEs review those of debt issuers. - Periodic requirements on listed companies include prompt disclosure of material events. - Mechanisms to ensure compliance with listing obligations are RSE responsibilities and have limitations. - A committee on noncompliance of listing agreement has recently been set up to address this issue. - Issuers required to submit financial statements according to local accounting standards; auditors required to conduct audits based on local auditing standards. - Current mechanisms to ensure compliance with accounting and auditing standards including auditors’ independence have limitations. - Principles for collective investment schemes (17–20): - Robust registration requirements for sponsors and asset management companies that manage mutual funds. - Individuals who sell CIS are subject to a certification process. - Mutual funds and asset management companies subject to offsite reporting. - Starting in 2011/12, SEBI enhanced supervisory approach with inspections carried out directly by SEBI staff under a risk-based approach; thematic inspections becoming integral to supervisory plan. - Asset management companies must submit a prospectus for every mutual fund scheme; content broadly in line with IOSCO principles. - Assets of mutual funds must be entrusted to an independent custodian. - Clear rules on valuation, including detailed guidelines for valuation of illiquid securities; for debt, assets must be valued using prices provided by independent third parties. - Asset management companies are responsible to investors for errors in valuation. - Principles for market intermediaries (21–24): - Robust registration requirements for all types of securities intermediaries. - RSEs do not conduct visits in connection with broker registration. - Portfolio managers have not been subject to regular inspections but are subject to inspection every three years upon renewal of registration. - SEBI implemented a more comprehensive inspection program for merchant banks only in the referenced year. - Inspections for all types of intermediaries have been compliance based; follow up of inspection findings should be strengthened. - All types of intermediaries except merchant banks and underwriters must submit semiannual audits of internal controls and risk management systems. - All types of intermediaries must appoint compliance officers. - RSEs have established early warning mechanisms for brokers and detailed provisions to deal with broker failure. *Source: _cr13266 - 18. As of March 2010, there were 10,203 brokers* ### 30. Principles for secondary markets (25–30): Only RSEs can operate in India, subject ### Principles for secondary markets (25–30): Only RSEs can operate in India, subject to recognition by SEBI ### Key findings on secondary markets (Principles 25–30) - Principle 25 (Grading: FI) - Only RSEs can operate in India, subject to recognition by SEBI. - Recognition requirements include financial resources and certifications by experts of the robustness of their IT systems, among others. - All rules of the RSEs have to be approved by SEBI. - SEBI has broad powers over the RSEs including suspension, and power to revoke the authorization. - Principle 26 (Grading: FI) - RSEs have established robust market surveillance systems and monitor the market in real time. - Given the plurality of trading platforms, SEBI has established its own surveillance system to complement the role of the RSEs. - SEBI conducts its surveillance on t+1. - There is evidence that the RSEs are active in investigations, and so is SEBI. - Principle 27 (Grading: FI) - RSEs are required to have both pre- and post-trade transparency vis-à-vis other market participants and the public. - Principle 28 (Grading: FI) - Market manipulation, insider trading, and other unfair practices are by law both civil infractions and criminal offenses; parallel proceedings are allowed. - Together with the exchanges, SEBI and the RSEs have established a robust system of market surveillance. - All customers are required to have one single number for purposes of transacting in the securities markets. - Criminal enforcement needs to be stepped up. - Principle 29 (Grading: FI) - The RSEs, through the CCPs, monitor exposures on a real time basis and have powers to deal with exposures, including setting limits. - Brokers are required to post initial and variation margin and to contribute to a settlement fund. - A system of Market-Wide Circuit Breakers and Securities Level Price Bands has been put in place. - Principle 30 - Not assessed. ### Related findings from the IOSCO Principles summary (selected cross-cutting points) - SEBI oversight and RSE self-regulation - RSEs act as listing authorities, frontline regulators and supervisors for brokers, and have roles in market surveillance and enforcement of listing obligations, though enforcement by RSEs requires further strengthening. - SEBI requires recognition of RSEs and can impose conditions to address conflicts of interest, including independent Board members and specialized committees. - SEBI’s oversight of RSEs includes offsite reporting, meetings, and onsite inspections (the latter on an annual basis). - Surveillance, enforcement, and information sharing - SEBI has broad powers to request information, testimony, and documents, and to inspect regulated entities. - SEBI Act provides authority to cooperate with domestic and foreign authorities and to share both public and nonpublic information; SEBI is signatory of the IOSCO MMOU and other bilateral MOUs. - SEBI’s civil enforcement powers include cease and desist orders, money penalties, disbars, and disgorgement; criminal enforcement needs strengthening. - Clearing, settlement, and risk management - CCPs monitor exposures in real time; brokers post initial and variation margin; settlement fund contributions required. - Market-Wide Circuit Breakers and Securities Level Price Bands are in place to contain market disruption. ### Recommended actions (selected, mapped to Principles 25–30 and cross-cutting priorities) - Principle 25 - Ensure continued enforcement of recognition requirements for RSEs, including financial resources and independent IT systems certification. - Maintain SEBI’s approval oversight of all RSE rules and retain powers to suspend or revoke RSE authorization where warranted. - Principle 26–28 - Strengthen criminal enforcement of market manipulation, insider trading, and other unfair practices. - Continue to enhance SEBI’s and RSEs’ surveillance capabilities and coordination, including addressing plurality of trading platforms. - Principle 29 - Maintain and test CCP and RSE real-time exposure monitoring, margining, and settlement fund arrangements. - Ensure Market-Wide Circuit Breakers and Securities Level Price Bands remain calibrated to market conditions. - Cross-cutting recommendations relevant to secondary markets (from broader plan) - SEBI should strengthen its program for the supervision of securities intermediaries and consider directing RSEs to conduct onsite visits in connection with registration of new members. - SEBI should consider moving to a risk-based capital system and review prudential reporting for intermediaries different from brokers. - SEBI and the RSEs should make operational and test current default procedures; SEBI should develop a plan to deal with the failure of entities other than brokers. *Source: IMF assessment excerpt (Table 2 and Recommended Action Plan) contained in the provided content unit.* ### 31. SEBI would like to appreciate the effort and time that is put in by IMF and ### 31. SEBI would like to appreciate the effort and time that is put in by IMF and World Bank team to assess the Indian securities markets ### Overview and general appreciation - SEBI appreciates the effort and time put in by IMF and World Bank team to assess the Indian securities markets. - The assessment recognizes that the regulatory and supervisory regime for securities market is well developed and largely in compliance with international standards. - SEBI notes the assessor applied higher standards than those given in IOSCO Principles. - SEBI provides the following comments regarding the FSAP report. ### Supervision of securities market intermediaries - The report recognizes SEBI has built the reputation of a credible enforcement agency. - The report suggests SEBI should focus on strengthening supervision of securities market intermediaries including fund managers. - The authorities face a challenge from the sheer number of intermediaries operating in the securities market as on December 2011: - brokers: 19,557 - sub-brokers: 78,228 - foreign institutional investors: 1,767 - merchant bankers: 199 - portfolio managers: 246 - custodians: 19 - depository participants: 823 - Onsite inspections of brokers are primarily the responsibility of the RSEs. - RSEs have developed a risk based approach dividing brokers into three categories based on criteria including trading volume, number of clients, funds settled and number of complaints. - Enforcement actions: - total number of enforcement actions initiated during 2010–2011: 958 - total number of enforcement actions disposed during 2010–2011: 1,803 - Half-yearly internal audit reports by brokers to be submitted as on March 31, 2011: - BSE: 979 - NSE: 1,212 ### Mutual funds supervision - SEBI has established a two-tier supervision system for mutual funds: - First level: trustees of mutual funds supervise day-to-day operations and compliance by the asset management company. - Comprehensive guidelines issued by SEBI include SEBI (Mutual Fund) Regulations, 1996 and circulars thereunder; mutual funds must be authorized and registered by SEBI. - Asset management company minimum net worth requirement: Rs 10 cores. - Asset management companies must periodically report operations/activities and make disclosures to SEBI as required. - SEBI adopts a risk-based approach to mutual fund inspections: - Inspections undertaken based on assets under management and other factors including number of complaints received. - Inspections can also be discretionary based on issues identified in previous inspection reports or regulatory filings. ### Auditing and accounting standards; NFRA and corporate governance reviews - The assessment suggests developing better mechanisms to ensure better auditing and accounting standards. - Existing frameworks: - Companies Act and Chartered Accountants Act provide a framework to maintain objectivity and integrity of accounting and audit. - Government has created Quality Review Board for reviewing the quality of auditors which is already in operation. - SEBI conducted peer review on the audits of top 50 companies during the Satyam scam in 2009. - New Companies Bill, 2011 (placed before the parliament on December 14, 2011) contains provisions for establishment of an independent agency, National Financial Reporting Authority (NFRA) (Clause 132 of the Bill). - NFRA functions and powers as described: - Ensure scrutiny and compliance of accounting and auditing standards. - Independent of audit professionals. - Ensure quality of service of professionals associated with compliance and monitoring of corporate financial management. - Quasi-judicial powers to levy penalty for misconduct on auditors. - Can order investigation, levy penalty, and bar professionals from practice in case of professional or other misconduct. - Corporate governance review: - Review based on reports filed by listed companies during January 2006 to March 2007 at BSE and NSE. - Adjudication proceedings initiated against five public sector undertakings and 15 private sector companies based on identified criteria. ### Demutualised exchanges, surveillance, and governance - India among the first countries where demutualised exchanges were set up. - NSE started functioning as demutualised stock exchange in November 1994. - BSE demutualised in the year 2004. - Demutualised and for-profit exchanges face challenges in discharging regulatory functions while being commercial entities and potentially listed. - Surveillance arrangements: - Normally surveillance is conducted by the exchanges. - SEBI has set up Integrated Market Surveillance System to generate alerts arising out of unusual market movements. - The Integrated Market Surveillance System: - assists SEBI in monitoring the market and discharging regulatory functions. - is used for detecting aberrations, analyzing them, and identifying cases for investigation and further action. - is used for monitoring activities of market participants and issuing instructions to stock exchanges and market participants. - findings are shared with stock exchanges to ensure they continue to act as the first level regulator for proactively detecting and examining abnormal trading patterns. - Governance review on exchanges: - SEBI constituted a committee under the chairmanship of Dr. Bimal Jalan on February 8, 2010 to examine ownership, governance and listing of stock exchanges. - The committee submitted its report on November 23, 2010 which is under consideration of SEBI. ### Criminal enforcement and legal context - India follows a criminal justice system where a person is treated as innocent till proved guilty; enforcement agencies must prove guilt beyond reasonable doubt and the standard of proof is very high. - Civil/criminal court cases pending as on March 31, 2011: 59. ### Observations on Principle 10 and assessment methodology - Principle 10 assesses effective and credible use of inspection or enforcement powers. - The assessor provided a rating for Principle 10. - SEBI observes the element of inspection and enforcement powers was again considered when giving ratings for Principles 14, 16, 17, 21, and 28. - SEBI raises the question of whether Principles 14, 16, 17, 21, and 28 should be assessed primarily per their own key questions or be rated based on adequacy/effectiveness of enforcement given that a separate principle (Principle 10) is dedicated to inspection and enforcement. *Source: IMF/World Bank FSAP assessment comments provided by SEBI in the referenced chapter.* ### 38. All the intermediaries who operate in the Indian securities market are mainly ### _cr13266 - 38. All the intermediaries who operate in the Indian securities market are mainly ### Intermediaries, business model, and risk allocation - Intermediaries operating in the Indian securities market are mainly engaged in fee-based activities and act as intermediaries or pass-through entities; risk is mainly borne by the investors. - SEBI has specified both initial and continuing minimum net worth requirements for various intermediaries. - For trading by any client or fund-based activity by an intermediary (such as a broker engaging in proprietary trading) members must bring margins (i.e., initial margins, extreme loss margins, and mark-to-market losses) or additional deposit depending on exposure or risk. - Stock exchanges monitor and manage such exposures; assertions that there is no additional requirement to adjust by risk do not take into account the business model and the stock exchanges’ risk management systems. - SEBI has specified a comprehensive risk management framework for stock exchanges that includes: - categorization of securities for imposition of margins into groups based on liquidity and volatility of the scrip; - adjustment of margins from the liquid assets deposited by members. ### Principle 1 — Responsibilities of the regulator (description) - SEBI is the main regulator of the securities market in India, established under the Securities and Exchange Board of India Act, 1992 (SEBI Act), with mandate to protect investors’ interests, regulate and promote development of the securities market. - SEBI’s responsibilities stem from statutes including: - the SEBI Act; - the Securities Contract Regulation Act, 1956 (SCR Act); - the Depositories Act, 1996; - the Companies Act, 1956. - Regulatory scope includes: - public offering of equity, debt and asset backed securities, collective investment schemes (CIS) including mutual funds (MF); - trading of securities and derivatives on recognized stock exchanges (RSEs); - regulation and supervision of intermediaries and infrastructure providers, including exchanges, central clearing counterparties and central securities depositories. - Other authorities with responsibilities: - Central Government (CG) via Ministry of Corporate Affairs (MCA); - Reserve Bank of India (RBI). - Pursuant to Section 55A of the Companies Act, SEBI has responsibility over issue and transfer of securities and non-payment of dividends for listed public companies and public companies intending to get securities listed. - Registrar of Companies (RoC) retains statutory powers to review and request changes to prospectuses even after SEBI review; MCA conducts reviews of annual reports pursuant to the Companies Act. - SRCA (SCR Act) provides CG with regulatory powers over exchanges and contracts; CG has delegated regulatory powers over exchanges to SEBI via Notifications. ### Regulatory interaction and notifications - Notification dated January 3, 2000 (pursuant to Section 16 of the SRCA) provides RBI regulatory responsibility over contracts in: - government securities, money market securities, gold related securities and securities derived from these; - ready forward contracts in bonds, debentures, debenture stock, securitized debt and other debt securities. - Such contracts entered on recognized stock exchanges must comply with: - rules/regulations/by-laws made under SCRA or SEBI Act or directions issued by SEBI under those Acts; - rules/guidelines/directions under the RBI Act or the Banking Regulation Act, 1949 or the Foreign Exchange Regulation Act, 1973 by the RBI; - provisions in the notification issued by the RBI under the SCRA. - RSEs have regulatory and supervisory responsibilities in listing, licensing and supervision of broker dealers and market surveillance. ### Interpretative guidance and regulatory reach - SEBI Informal Guidance Scheme, 2003: - Paragraph 5 (ii): informal guidance may be sought regarding a specific provision of any Act, Rules, Regulations, Guidelines, Circulars or other legal provision administered by SEBI in the context of a proposed transaction or specific factual situation. - Paragraph 8: SEBI may not respond where applicable legal provisions are not cited. - Paragraph 11: such requests and SEBI’s response shall be available to the public with or without ensuring confidentiality requirements. ### Gaps, inequities, and regulatory perimeter - Current regulatory gaps noted: - No regulations for provision of “pure” investment advisory services (advisors who only provide advice, do not deal on behalf of clients, and do not have custody of assets). - No regulations for hedge funds; authorities noted there are currently no hedge funds operating in India. - Concerns about differential treatment of financial companies (NBFCs): - Section 67 of the Companies Act affords NBFCs exemption in context of private placements (do not need to abide by threshold applicable to public companies). - NBFCs are not required to comply with regulations applicable to brokers regarding margin trading. - Authorities indicated the exemption provided to NBFCs regarding private placements is removed in the Companies Bill (currently placed before the parliament) and the issue of margins is being examined by RBI. - IOSCO Principles observations: - IOSCO Principles do not require regulation of hedge funds or investment advisers who do not hold custody or deal on behalf of clients, provided intermediaries they rely on are adequately licensed. - The revised methodology will require regulation of hedge funds and/or hedge fund managers. - SEBI Act provides SEBI authority to bring new intermediaries into regulation via regulations without law changes. ### Coordination arrangements and committees - Coordination mechanisms highlighted by authorities: - One representative each from RBI and MCA on SEBI’s Board to ensure high-level coordination. - SEBI’s consultative rulemaking process takes other regulators’ opinions into account. - Standing committee between SEBI and RBI since 1994; example cited: introduction of currency and interest rates futures on exchanges. - Coordination committee with MCA established June 2011. - Ad-hoc committees have addressed specific issues (e.g., use of issue proceeds). - Two committees for financial conglomerates (one technical, one high level) with SEBI, RBI and IRDA representation; technical committee usually meets quarterly. - SEBI does not generally share inspection reports; where investigations indicate potential violations under another regulator, SEBI forwards orders to concerned authorities; joint inspections are not conducted. - A standardized template has been developed to gather information on financial groups. - High level committee meets semiannually with CEOs of financial groups to discuss regulatory concerns. - Financial Stability Development Council (FSDC) and subcommittee: - HLCCFM operated since 1995 (Finance Secretary—MoF, Governor of RBI, Chairperson of SEBI, Chairperson of IRDA). - CG Notification December 2010 established FSDC to institutionalize mechanisms for financial stability, sector development and inter-regulatory coordination; FSDC chaired by Union Finance Minister; Capital Markets Division of Department of Economic Affairs, MoF acts as Secretariat. - FSDC is at an early stage; meets as and when deemed necessary; has met twice since constitution. - Subcommittee on inter-regulatory coordination integrated by heads of regulators (RBI, SEBI, IRDA, and PFRDA), chaired by RBI; Central Government represented by senior officials; subcommittee aims to meet at least once in three months or as necessary; subcommittee has met four times since creation. - FSDC subcommittee (meeting on August 28, 2011) constituted an Inter Regulatory Technical Group including Executive Director-level representatives to address systemic financial stability risks and inter-regulatory coordination. - Joint mechanism (Ordinance 2010) to resolve differences about hybrid/composite instruments: - Committee integrated by Union Finance Minister, RBI Governor, Finance Secretary, Secretary-Financial Services, Chairperson of IRDA, Chairperson of SEBI, Chairperson of PFRDA; committee opinion is binding. - Created after jurisdictional dispute between SEBI and IRDA over ULIPs; law later assigned jurisdiction to IRDA for that case. - Reporting and engagement with RSEs and depositories: - SEBI established reporting obligations for RSEs to oversee self-regulatory functions. - Weekly meetings between SEBI and each national RSE (NSE and BSE) to discuss market developments. - Monthly meetings with depositories to discuss market developments. - SEBI instituted a committee on non-compliance with listing obligations including NSE and BSE participation; the committee developed detailed recommendations and required RSEs to prepare action plans to deal with noncompliant issuers. ### Assessment, comments, and recommendations (Principle 1) - Assessment: Broadly implemented. - Basis for grade: - Evaluation against questions 3a) and c) of the Methodology; to a lesser degree question 2b) regarding treatment of NBFCs. - Observations and recommended actions: - Coordination at high/policy level is generally well covered, though many mechanisms are recent and evolving. - SEBI and MCA could agree on a mechanism/format for regular updates on reviews and follow up actions; in the long term SEBI and MCA should review whether all reviews related to listed companies should be carried out by SEBI only. - SEBI might consider regular reporting on listing obligations following the committee on non-compliance with listing obligations. - Authorities should consider sharing inspection reports as a matter of course in committees on financial groups and review other information to be exchanged regularly. - Assessor recommends reexamining differences in regulatory treatment of NBFCs; authorities informed exemption under Section 67 is eliminated in Companies bill pending in Congress and RBI is examining margins. ### Principle 2 — Operational independence, accountability, and funding (description) - Independence and consultation: - SEBI does not have to consult any governmental authority to carry out licensing/registration, surveillance, investigation and enforcement functions under SEBI Act, SCR Act, Depositories Act, or Section 55A of the Companies Act. - SEBI can issue regulations under the SEBI Act, the Depositories Act and the SCR Act; such regulations need to be tabled in parliament for 30 days, and parliament can make modifications. - SEBI Board composition and terms: - SEBI is governed by a Board; constitution and terms governed by sections 3 to 5 of the SEBI Act. - Section 4: Board consists of nine members: a Chairman, two members from the MoF and the MCA, one from the RBI, and five additional members, three of which must be whole-time members. - All members are appointed/nominated by the CG except the RBI representative who is nominated by the RBI. - SEBI Act does not specify a fixed term; current rules prescribe a five-year term appointment that can be renewed. - Section 4 prescribes minimum fit and proper requirements for Board members. - Section 6: a member can be removed for due cause, including insolvency, incapacity declared by court, conviction, or abuse of power; member must be afforded reasonable opportunity to be heard. - Section 5(2): CG may terminate services of chairman or member at any time by giving a notice of three months; SEBI informed this power has never been exercised. - Section 16: CG empowered to issue directions on questions of policy; CG’s decision on whether a question is one of policy is final. - Section 17: CG has power to supersede the Board in grave emergency where Board unable to discharge functions or persistent default in complying with CG directions or deterioration of Board’s financial position/administration where supersession is necessary in public interest; SEBI informed this power has never been used. - Funding: - SEBI is not dependent on government or any authority for its funds. - Section 11k of SEBI Act authorizes SEBI to levy fees and other charges for carrying out the purpose of that section. - SEBI does not have to consult any authority to set levels of fees applicable to market participants; fees are charged as per regulations which are approved after consultation with regulated entities. - SEBI has a general fund to which all grants, fees and charges received by it under the SEBI Act are credited. *Source: _cr13266 - 38. All the intermediaries who operate in the Indian securities market are mainly* ### Section 23 of SEBI Act provides legal protection from suits, prosecution or any legal ### _cr13266 - Section 23 of SEBI Act provides legal protection from suits, prosecution or any legal ### Legal protection (Section 23) - Section 23 of SEBI Act provides legal protection from suits, prosecution or any legal proceedings to the CG, SEBI’s Board or any officer of the CG or any member, officer or other employee of the Board for anything, which is in good faith done or intended to be done under the SEBI Act, rules or regulations made. - There have not been suits against SEBI staff for actions taken in the exercise of SEBI’s responsibilities. - SEBI’s legal staff believes that such provision would allow SEBI to pay for the defense of staff in the case of a suit. - SEBI’s legal staff’s position: the provision would apply even if the person no longer works for SEBI provided that the actions for which the staff is sued took place during employment by SEBI. ### Independence from commercial interests - Section 4 of the SRCA provides SEBI with the authority to appoint government representatives in the Board of RSEs, but SEBI informed that after the demutualization of the exchanges such power has not been used. - The provision allowing SEBI to appoint representatives on a RSE could create a conflict of interest; however, this authority has not been used since demutualization and therefore does not pose a material concern in practice. - Market participants highlighted SEBI’s independence vis-à-vis commercial interests, demonstrated by SEBI’s stance in enforcement. ### Accountability — main means to the government - Section 18 of SEBI Act requires SEBI to submit to the CG annual reports on its activities and programs within 90 days after the end of each financial year; a copy must also be submitted to each house of parliament. - Parliamentary oversight: - SEBI regulations must be tabled before parliament and are reviewed by the Committee on Subordinate Legislations. - Activities of SEBI are reviewed by the Standing Committee on Finance; SEBI authorities are called roughly four times a year to answer questions to this Committee. - Financial accountability: - Section 15 of SEBI Act requires SEBI’s accounts to be audited by the Comptroller and Auditor General of India (CAG). - SEBI’s accounts are tabled at the Table of Lok Sabha and reviewed by a parliamentary committee. ### Transparency and information obligations - SEBI is subject to the Right to Information Act, 2005 (RTI) and must: - publish/disclose particulars of the organization, functions and duties; powers and duties of officers and employees; procedures for decision making; norms for discharge of functions; rules, regulations, instructions, manuals and records; categories of documents held; and particulars of arrangements for public consultation or representation. - publish all relevant facts while formulating important policies or announcing decisions which affect the public; and provide reasons for administrative or quasi-judicial decisions to affected persons. - SEBI Act requires SEBI to provide reasons for enforcement decisions. - Confidential information: - Section 8 of the RTI Act exempts fiduciary information from disclosure. - Employees Service Regulation requires SEBI staff to maintain secrecy and not to use or communicate official information except in the course of official duty. ### Judicial review and procedural protections - Suspension/cancellation of license or imposition of penalties subject to procedural rules: SEBI (Intermediaries) Regulations, 2008; Adjudication Rules, 1995; Adjudication Rules, 2005 — overall require due process including opportunity to be heard. - Section 15T: any person aggrieved by an order of the Board or an adjudicating officer has the right to appeal to the Securities Appellate Tribunal (SAT); appeals must be filed within 45 days from the day of receipt of order. - Section 15Z: decisions of the SAT can be appealed to the Supreme Court within 60 days of communication of the decision, but limited to points of law. - Current regulatory practice: enforcement actions are public once a decision has been reached by SEBI. ### Assessment and key recommendations (Independence, accountability, protections) - Assessment: Partly implemented (grade stems from evaluation vis-a-vis question 5 of the Methodology). - Comments / findings: - Provisions allowing the CG to terminate the chairman or member of the Board at any time by giving notice of three months, provide directions to the Board and supersede the Board when such directions are not followed, are a threat to SEBI’s independence and could have a “chilling” effect. - Representation of MCA and the MoF in the Board and CG participation in the committee to solve product-nature differences could limit SEBI’s independence vis-à-vis the Government. - In practice SEBI has acted with a high level of independence vis-à-vis the government; market participants have recognized this independence (example: SEBI’s stance on ULIPS). - Recommendations: - Remove the provision on termination of services without due cause as contained under Section 5(2) of the SEBI Act. - CG should clarify that the authority to provide orders should not be construed as giving the MoF authority to supersede SEBI’s decisions on individual cases, either in licensing, supervision or enforcement. - Review the participation of the MoF in the joint mechanism to solve jurisdictional disputes. - SEBI should explore whether more detailed provisions to protect Board members and staff should be put in place. - Consider establishing non-binding consultation mechanisms on fees and use of funding with the industry (encouraged; not affecting the grade). ### Principle 3 — powers, resources, capacity - Powers: SEBI has broad licensing, surveillance, investigation, and enforcement powers and authority to make regulations pursuant to the SEBI Act, the Depositories Act and the SRCA. - Human resources: - SEBI has currently 583 staff, out of which 110 are support staff. - SEBI has recently added 90 professional staff. - Two career streams: general stream (mainly business administrators) amount to roughly 70 percent of the staff; legal stream recruited from top legal schools. - Recruitment policy: recruit at entry level and “groom” staff; percentage of staff with direct market experience is low; market experience mainly concentrated at the Executive Director level. - Rotation policy for general career stream: roughly every three to five years. - Salaries: better than other public employees; competitive at entry/junior level; cannot compete with private sector salaries for senior positions. - Attrition: currently less than 5 percent; has been higher (roughly 10 percent) in the past. - Internal controls: - Regulation 3(i) of the SEBI (Procedure for Board Meetings) Regulations, 2001: Board meetings at least once in each quarter convened by the Chairman or by a member nominated by the Chairman. - Section 19: all functions except policy delegated at different organizational levels (chairman, whole time member, executive director). - Whole time members (WTMs) oversee day-to-day operations; each WTM assigned oversight over particular departments. - Periodic reporting to the Board; Executive Director in charge of Legal Affairs must provide an annual report of compliance. - SEBI highlighted existence of an audit committee consisting of independent Board members. - Technological resources: projects include upgrade to the Integrated Market Surveillance System; automated system to consolidate investor complaints; automated system to consolidate information (reports) required from issuers and intermediaries. - Training: - National Institute of Securities Markets (NISM) set up by SEBI in 2006 for training SEBI staff and persons associated with securities market. - All entry-level staff required to attend an induction program of about two months. - Wide variety of NISM courses for continuous learning; training abroad available. - Assessment: Broadly implemented. - Comments / challenges: - Two challenges: number of staff vis-à-vis market size (additional resources appear needed for effective off site supervision of periodic disclosures by issuers and supervision of securities intermediaries); ability to hire and retain qualified personnel, particularly at senior levels due to private sector salary gap. - Recommendation: consider creation of an internal “audit” unit to review departmental performance (SEBI has an audit committee and is examining the necessity of setting up an internal audit department and its scope). ### Principle 4 — clear and consistent regulatory processes - General obligations: - SEBI is bound by the RTI Act which requires publication/disclosure of organizational particulars, powers, procedures, norms, rules, categories of documents, and consultation arrangements; publish relevant facts when formulating important policies or decisions affecting the public; provide reasons for administrative/quasi-judicial decisions. - Rule making: consultation process via specialized consultative committees with stakeholders; draft regulations posted on SEBI’s website for comments. - Licensing: licensing requirements established via regulations available on SEBI’s website; circulars and guidelines also available. - Enforcement: - Procedural rules (SEBI (Intermediaries) Regulations, 2008; Adjudication Rules, 1995; Adjudication Rules, 2005) require making investigation findings available to persons against whom proceedings are initiated, opportunity to be heard, written reasons and reasoned orders; similar obligations for refusal or revocation of licenses. - Aggrieved persons can appeal to SAT challenging SEBI orders on merit and procedural fairness. - Current practice: enforcement actions are public once a decision has been reached by SEBI. - Investor education: - SEBI conducts workshops, disseminates investor education materials via advertisements, radio, television, and a dedicated website. - SEBI grants financial assistance to 33 recognized investor association for investor education. - SEBI has certified 150 people as resource people to help disseminate knowledge. - Financial market included as one of the subjects for secondary education by CBSE. - Assessment: Fully implemented. - Comment: Other regulators disclose enforcement cases once “charges have been filed”; assessor encourages authorities to consider whether that policy would strengthen enforcement (without affecting the grade). ### Principle 5 — professional standards and confidentiality - Obligations under SEBI (Employee Service) Regulation, 2001: - Prohibition to use information: staff must maintain secrecy and not make use of or communicate official information except in official duty. - “Cool-off periods”: during two years after leaving SEBI, staff must get prior approval from the Board to take on work on a regulated entity. - Restrictions on holding and trading in securities: SEBI employees are prohibited from dealing in equities; all other trades permitted but must be reported immediately if they exceed roughly $100.00. - Annual reporting of assets and liabilities (including dependents) to the Chief Vigilance Officer (CVO). - Prohibition of receiving gifts except if of minimum value. - Regulation 79: violation of these standards is subject to penalties, including criminal liability; under Insider Trading regulation SEBI staff are considered insiders and subject to provisions and sanctions. - Board Code of Conduct: - Board members must disclose interests that may conflict with duties and excuse themselves when conflicted. - Board members must disclose holdings of shares and family holdings within 15 days of assumption and annually within 15 days of the close of the financial year. - Must disclose any employment or fiduciary position held during previous five years with a regulated entity and any other significant relationship with a regulated entity. - Whole time members: additional obligations to disclose substantial transactions; not allowed to hold any other office of profit or engage in other professional activity that entails salary or professional fees. - Oversight: - The Central Vigilance Officer (CVO) is the main authority for staff compliance with conflict of interest regulations; CVO currently has three staff to check compliance and identify potential corruption. - The CVO reports directly to the Central Vigilance Commission. - Assessment: Fully implemented. - Comment: Assessor encourages SEBI to develop a more comprehensive regulation on conflict of interest for staff, including disclosure and recusal procedures for regulatory decisions. ### Principles of Self-Regulation (Principles 6–7) - Principle 6 description: - There are a total of 21 RSEs including two nationwide exchanges, BSE and NSE; trading activity in RSEs excluding BSE and NSE is minimal or non-existent, so references to RSEs are effectively to BSE and NSE. - RSEs perform market regulation and member regulation functions; membership of a RSE is mandatory to act as stock broker per Regulation 6A(1)(a) of Stock Broker Regulations issued by SEBI. - Depositories perform SRO role vis-à-vis depository participants (issues related to depositories covered by CPSS-IOSCO standard and not in this assessment). - Other industry organizations (ANMI, AMFI, AMBI, FPSBI) function mostly as industry associations. - Principle 6 assessment: Not rated (per IOSCO Methodology, an assessor only verifies existence of any entity performing self-regulatory functions; if present, Principle 7 must be graded). - Principle 7: Exchanges as self-regulatory organizations — eligibility (text continues beyond provided content). *Source: _cr13266 - Section 23 of SEBI Act provides legal protection from suits, prosecution or any legal* ### Section 19 of the SRC Act prohibits the operation of a stock exchange (SE), unless ### Section 19 of the SRC Act prohibits the operation of a stock exchange (SE), unless prior recognition has been given by SEBI ### Recognition and organizational requirements - Section 3: a SE that wants to be a recognized stock exchange (RSE) must file an application with SEBI. - Section 4: SEBI can impose conditions for recognition, including relating to: - (i) the qualifications for membership; - (ii) the manner in which contracts shall be entered and enforced; - (iii) the representation of the CG on the exchange Board by a maximum of three members; - (iv) the maintenance of accounts of members and their audit. - Section 4A: requires that stock exchange be demutualized. - A more detailed description of recognition criteria is provided in Principle 25. ### RSE rulemaking and SEBI oversight - Section 9 empowers a RSE to make rules, subject to SEBI approval, on: - hours of trade; - clearinghouse; - number and class of contracts in which settlements will be made; - terms and conditions of contracts, including margins; - listing of securities; - settlement of claims or disputes; - levy and recovery of fees, fines and penalties; - regulation of dealing by members for their own account; - limitations on volume of trading, information obligations by members. - SCRA provides SEBI the following powers vis-à-vis RSEs: - Direct a RSE to make rules or changes within two months; if RSE fails, SEBI can directly make the rules (Section 7). - Make rules in any of the areas where RSE can make by-laws or amend them (Section 10). - Issue directions to exchange or clearing corporation, to any company whose securities are listed (Section12A). - Supersede the governing body of a RSE, provided the RSE is given an opportunity to be heard (Section 11). - Suspend the business of a RSE for not more than seven days by gazette notification; period can be extended via new notification (Section 12). - Withdrawal of recognition (Section 5). - Levy penalty up to Rs. 25 crores for failure to furnish periodical returns, failure to make or amend bylaws or failure to comply with directions issued by SEBI (Section 23G). - Sections 11, 11B, and 11C of SEBI Act: SEBI retains full authority to inquire into any matter affecting investors or the market. - SEBI can amend regulations and circulars assigning self-regulatory functions to exchanges at any point. ### Resources dedicated to self-regulatory functions by nationwide RSEs — Number of Staff - Listing: BSE 28, NSE 30 - Market Surveillance: BSE 8, NSE 8 - Supervision of brokers: BSE 25, NSE 62 - Investigation: BSE 10, NSE 25 ### Reporting, supervision, and system robustness - Off-site supervision: - RSEs required to submit a wide array of periodic reports to SEBI, covering trading platform operations and self-regulatory performance. - Reporting includes: - Risk management certification of RSEs subsidiaries on a half yearly basis; - Compliance reports regarding inspection observations, on a quarterly basis; - System audit reports on an annual basis; - Oversight of listing obligations; - A committee on noncompliance with listing obligations was set up in February 2011 with BSE and NSE participation; - Market surveillance; - Monthly development reports for four exchanges (NSE, BSE, MCX-SX, and USE) or quarterly for remaining exchanges; - SEBI holds weekly meetings with the NSE and RSE to discuss market developments; - Supervision of brokers; - Monthly reports on investors complaints; - Findings of on-site inspections and consolidated reports regarding audit reports that brokers are required to submit, along with actions taken by the RSE. - On-site supervision: - RSEs are subject to periodic inspections by SEBI covering trading infrastructure robustness and the SEs' role as SROs. - Record keeping: - Section 6 of the SCRA requires RSE to keep records for five years. ### Conflict of interest and governance conditions - Section 4 of the SRCA: SEBI can impose conditions for recognition affecting RSE Boards: - Not more than 25 per cent of the Board can represent trading members. - 25 percent must be public interest directors. - Shareholders directors constitute the balance. - Detailed rules define director categories; public interest directors selected by the governing Board from a SEBI constituted panel. - SEBI mandated standing committees: ethics committee, membership selection committee, audit committee. - SEBI mandated limits on statutory committees: not more than 20 percent of members of disciplinary committee, defaulters committee, arbitration committee and investor services committee shall be trading members. ### Self-Regulatory Organizations (SROs) - Section 11(2)(d) of SEBI Act: explicitly empowers SEBI to promote and regulate SROs; currently no SROs constituted under this Section. - SRO Regulation, Regulation 4: minimum requirements for recognition as an SRO: - Minimum net worth of Rs. 1 crore (US$0.21 million). - Adequate infrastructure. - Directors must be fit and proper. - Regulation 12: Board should consist of nine members, five appointed by SEBI and four by the SRO; at least four directors must be independent. - Regulation 5: SEBI can impose recognition conditions relating to (i) qualifications for membership; (ii) representation of SEBI in the Board; (iii) maintenance of accounts of members and their audit by chartered accountants whenever such audit is required by SEBI. - Regulation 15: SRO may make governing norms or articles on: - (i) eligibility criteria; - (ii) reporting by members; - (iii) arbitration mechanisms for resolving disputes; - (iv) disciplinary proceedings; - (v) internal control standards; - (vi) code of conduct. ### Assessment and policy recommendations (assessor comments) - Assessment: Broadly implemented. - Comments: - SEBI has relied heavily on RSEs for listing, regulation and supervision of brokers, and market surveillance; SEBI is increasingly more active in surveillance given plurality of platforms. - SEBI imposed conditions to address conflict of interest between for-profit demutualized RSEs and their self-regulatory function; these measures and oversight have created a satisfactory oversight framework. - The assessor recommends SEBI continue to strengthen arrangements to ensure RSEs dedicate sufficient resources to self-regulatory roles and discharge them actively. - Recent SEBI actions include constitution of a committee on noncompliance with listing obligations and sampling of on-site inspections by RSEs to determine inspection quality. - Possible further measures for SEBI to examine: - Requiring creation of a separate regulatory Board or a regulatory oversight committee to assist RSE Boards in ensuring proper discharge of self-regulatory functions. - In the long-term, consider whether conflicts of interest require spin-off of self-regulatory functions into a separate SRO. - Note: Some participants proposed existing associations (such as ANMI) take SRO role, but ANMI’s current structure would not support an independent SRO. - Assessor recommends SEBI review whether special requirements (e.g., risk management certification for smaller RSEs with broking subsidiaries) sufficiently address ownership-related conflicts of interest. ### Principles for the Enforcement of Securities Regulation — inspection, investigation and surveillance (Principle 8) - SEBI enforcement powers mainly stem from Sections 11, 11A, 11B, 11C, and 11D of SEBI Act. - Section 11: SEBI can call for information, undertake inspection, conduct inquiries and audits of stock exchanges, mutual funds, other persons associated with securities market, intermediaries and SROs. - Section 11(2A): SEBI can inspect any books, register, or other documents or records where reasonable grounds exist to believe insider trading or fraudulent or unfair practices relating to securities market occurred. - Section 11 grants SEBI the civil court powers under Code of Civil Procedure for: - Discovery and production of books and accounts and other documents at specified place and time; - Summoning and enforcing attendance of persons and examining them under oath; - Inspection of books, registers and other documents or records of persons referred to in section 12 (SEBI regulated entities), listed companies or companies intending to get securities listed on any recognized stock exchange; - Issuing commissions for examination of witnesses. - Section 209A of the Companies Act, 1956: SEBI can inspect listed public companies and those intending to list during business hours without prior notice. - Section 18 of the Depositories Act: SEBI can call for information and make inquiry from any issuer, depository, depository participants or any beneficial owner regarding securities held in a depository. - Regulation 59 of SEBI (Depositories and Participants) Regulations, 1996: empowers SEBI to inspect any issuer, depository, depository participants, any beneficial owner, issuer or its agent. - SEBI Regulations governing intermediaries empower inspections and information requests from intermediaries and registered entities. - Section 7 of the SCRA: requires every recognized stock exchange to furnish annual report to SEBI. ### Record-keeping and AML / client identification - PML Rules, Rule 10: intermediaries must maintain records of identity of clients for a period of 10 years from date of cessation of transactions. - PML Rules, Rule 6: records of transactions must be maintained for a period of 10 years from date of transactions. - SEBI Master Circular dated December 31, 2010 reiterates PML requirements in paragraphs 8.2 and 8.1. - Securities Contracts (Regulation) Rules, 1957, Rules 14 and 15: require every recognized stock exchange and every member of recognized stock exchange to maintain and preserve books of account and other documents for five years. - Regulations 38 and 49 of SEBI (Depositories and Participants) Regulations, 1996: provide for maintenance of records and documents by every depository and depository participant respectively. - PAN requirement: SEBI Circular MRD/DoP/cir-05/2007 dated April 27, 2007, and AML Master Circular dated December 31, 2010 make permanent account number (PAN) mandatory for transactions in the securities market. - PMLA Section 12: requires banking companies, financial institutions and intermediaries to: - (i) maintain a record of all transactions, the nature and value of which may be prescribed; - (ii) furnish information of transactions to the director within such time as may be prescribed; - (iii) verify and maintain the records of the identity of all its clients, in such manner as may be prescribed. - Records shall be maintained for a period of 10 years from the date of cessation of transactions. - SEBI Guidelines Sections 3.2.1-3.2.2: require registered intermediaries to have systems for identifying, monitoring and reporting suspected money laundering or terrorist financing, and to: - issue policies and procedures (group basis where applicable); - ensure guidelines are understood by all staff; - regularly review policies and procedures with reviewer different from developer; - adopt customer acceptance policies sensitive to money laundering/terrorist financing risk; - undertake customer due diligence (“CDD”) measures proportionate to risk; - develop staff awareness and vigilance. ### Outsourcing of inspections - Regulation 24 of SEBI (Stock Brokers and Sub-Brokers) Regulations: SEBI may appoint a qualified auditor to investigate books or affairs of a stock-broker; such auditor has same powers as inspecting authority (regulation 19) and stock broker obligations in regulation 21 apply to the investigation. - SEBI has not used such powers since 2009. - When used, SEBI appointed auditors from the Reserve Bank panel as Statutory Central Auditors, provided detailed guidance notes, formats for inspection reports, confidentiality and conflict of interest instructions, and held pre-inspection meetings with auditors. - Assessment: Fully Implemented. ### Enforcement powers and sanctions (Principle 9) - SEBI may: - Block one or more bank accounts for a period not exceeding one month, provided there is approval of the judicial magistrate. - Direct any intermediary or any person associated with the securities market not to dispose or alienate an asset forming part of any transactions under investigation. - Impose “civil” sanctions. - Breaches to SEBI Act, the Depository Act, the SRC Act and corresponding regulations constitute a “civil” infraction; SEBI is competent authority to impose sanctions including: - Directions to any regulated entity or any person associated with the securities market (Section 11B); - Cease and desist orders (Section 11D); - Suspension or cancellation of certificate of license/certificate of registration by initiating enquiry proceedings against intermediaries (Section 12.3). - Monetary penalties (Sections 15A to–HB): - Insider trading and market manipulation penalty could go up to 25 crores (US$5.23 million) or three times the benefit obtained. - For breaches without specific penalty in Act, money penalty could go up to one crore rupees (US$0.21 million). - Disgorgement of illicit gains: SEBI may require disgorgement; authority not explicitly in SEBI Act but supported by Supreme Court jurisprudence. - Civil sanctions other than money penalties are imposed by a WTM; monetary penalties are imposed by an adjudicating officer who should be any officer of SEBI not below rank of Division Chief. - Section 15I: adjudicating officers can summon and enforce attendance or produce documents. - Section 24B: CG can grant immunity on recommendation of SEBI. - Appeals: Orders by WTM or adjudicating officer are subject to appeal before the Securities Appellate Tribunal (Section 15T). - SAT composition: Section 15L and 15N: SAT shall consist of a presiding officer and two other members, appointed by the CG; presiding officer and other members hold office for five years and are eligible for re-appointment. *IMF staff assessment material contained in content unit _cr13266* ### Section 15M provides minimum qualification for appointment of members of the SAT. ### _cr13266 - Section 15M provides minimum qualification for appointment of members of the SAT. ### SAT procedures, powers, and judicial status - Section 15U establishes that the SAT shall not be bound by the procedures of the Code of Civil Procedure, 1908 but shall be guided by the principles of natural justice. - The SAT is empowered to regulate its own procedures. - The SAT shall have the powers vested in a civil court under the Code of Civil Procedure, including: - (i) summoning and enforcing attendance of any person and examining them under oath; - (ii) requiring the discovery and production of documents; - (iii) receiving evidence on affidavits; - (iv) issuing commissions for the examination of witnesses. - As per Section 15U any proceeding before SAT shall be deemed to be a judicial proceeding. ### Criminal sanctions under SEBI Act, Depositories Act and SCRA - Breaches to SEBI Act, the Depository Act and the SCRA including rules and regulations made under those Acts constitute a crime, punishable with: - imprisonment of up to 10 years or - with a fine of up to 25 crore rupees (US$5.23 million) or - both. - Failure to pay a penalty imposed by the adjudicating officer or to comply with any of his/her directions or orders also constitutes a crime, punishable with: - imprisonment of up to 10 years to a fine of up to 25 crore rupee (US$5.23 million) or both. - SEBI can file a criminal complaint for violations to the statutes it administers (SEBI Act, Depositories Act and SCR Act). - Under the Indian legal system parallel proceedings are allowed; jurisprudence recognizes differences in burdens of proof between civil (preponderance of the evidence) and criminal (beyond reasonable doubt) proceedings. ### Other statutes and private right of action - Under Section 209A of the Companies Act SEBI has power to inspect any book or record of a public company in connection with the functions afforded to it by Section 55A. - SEBI is empowered to initiate criminal action in respect of offences under the Companies Act relating to the provisions administered by it (Sec 621 of the CA). - Sections 15Y and 20A of SEBI Act: only SEBI is empowered to take action for violation of such statutes and their regulations; such sections explicitly bar the jurisdiction of civil courts in matters within the purview of Adjudicating Officer, SAT or SEBI. - Private persons can seek remedies: - compensation for deficiency of services against an intermediary before the Consumer Forum, pursuant to the Consumer Protection Act, 1986; - claims against a broker before an arbitrator under the by-laws of the RSEs. - Under the Companies Act, 1956 private right of actions, i.e., civil as well as criminal, is specifically available. - Assessment: Fully implemented. - Comments: - No explicit statutory private right of action, but redress is available via the Consumer Protection Act; assessor considers the principle fully implemented. - Recommendation: explicit right of action would be useful. - Recommendation for civil enforcement: consider providing SEBI with authority to access telephone records under similar conditions than the blocking of bank accounts (i.e., with approval of a judicial magistrate). Note: in many countries wiretapping would be allowed only within a criminal investigation. ### Principle 10 — Supervision, investigation, surveillance and enforcement (overview) - Principle 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. - SEBI’s supervisory approach: - Focuses heavily on institution-based supervision. - RSEs act as front-line supervisors for brokers; SEBI is front-line supervisor for other categories including MFs and AMCs. ### Off-site supervision mechanisms - Three off-site mechanisms used by SEBI: - Off-site reporting: securities intermediaries required to submit annual audited financial statements and semi-annual unaudited financial statements. - Use of third-party/independent experts as “gatekeepers”: - Since 2009, brokers and PMs required to have a semiannual audit by an accountant paneled by the RBI. - For MFs the trustee is the front line supervisor of compliance and must submit an annual report to SEBI. - Brokers and MFs required to have their IT systems certified by experts. - A system of redress for grievances: intermediaries must have systems to address investors’ complaints; complaints older than 30 days must be reported to SEBI. ### On-site supervision practice and recent changes - Historical approach: - SEBI previously used auditors paneled by the RBI to conduct on-site inspections. - After 2006 changes: brokers’ inspections rely on RSEs; SEBI began directly conducting inspections for remaining intermediaries. - Brokers: - Subject to regular on-site inspections by RSEs; SEBI requires all active members to be inspected on an annual basis by their RSE. - SEBI has conducted “purpose-driven” inspections on brokers: - 2008–2009: 38 inspections. - 2009–2010: 36 inspections. - SEBI reviews a sample of RSE inspections to oversee quality; findings indicate room for improvement. - Portfolio managers (PMs): - No regular program of on-site inspections; renewal process used as a compliance check and involves on-site visits. - Merchant bankers: - Prior to 2011 limited inspections (examples: 2007–2008 two inspections; none for 2008–2009; two for 2009–2010). - In the reported year SEBI introduced risk-based criteria and conducted inspections on the top 10 MBs by number of issues. - Asset Management Companies (AMCs) and Mutual Funds (MFs): - Historically inspected on a two year cycle by accountants paneled by the RBI with SEBI-provided terms of reference. - Starting FY 2011–2012 SEBI changed approach: inspections to be carried out directly by SEBI under a risk based approach; MFs that pose the greatest risk to the system will be inspected on an annual basis. - Thematic inspections: - Not systematically used historically; becoming an integral part of SEBI’s inspection plan for AMCs/MFs. - SEBI’s supervisory approach lacks a systematic identification mechanism for problems/risks across multiple intermediaries. ### Supervision of RSEs and market surveillance - RSEs: - Subject to comprehensive off-site supervision via reports, regular meetings, and a committee focused on compliance with listing obligations. - SEBI conducts annual inspections on the nationwide RSEs. - Market surveillance: - RSEs perform real time surveillance of markets. - SEBI developed an Integrated Market Surveillance System to monitor markets across exchanges and segments. - SEBI conducts market surveillance functions on a t+1 basis. - SEBI is upgrading the capabilities of its surveillance system. ### Investors’ complaints, arbitration, and complaints handling outcomes - Complaints handling requirements: - Issuers and intermediaries required to have mechanisms to address investors’ complaints. - SEBI routes complaints received directly to the corresponding intermediary; intermediaries must inform SEBI how they dealt with complaints and are expected to resolve complaints within 30 days. - Brokers report complaints via RSEs. - SEBI used complaint reports to identify brokers and depository participants with concentrated complaints and recurrent topics; SEBI held meetings with top offenders. - Backlog in attention to complaints by intermediaries: - 2009: 18,602 - 2010: 9,879 - 2011: 7,132 - SEBI has no authority to settle monetary disputes but can impose disciplinary actions for breaches of laws and regulations. - Arbitration system under RSE by-laws: - Investors unsatisfied with intermediaries’ complaint handling can go to mediation and then arbitration. - Arbitration system of the RSEs: cases usually completed within six months. - SEBI is upgrading its complaints system to allow investors to check complaint status via website. ### Systems of compliance and investigation resources - Compliance officers: - Securities intermediaries required to appoint compliance officers. - Regulations do not explicitly require compliance officers to be accountable only to the Board. - Compliance officers must inform the Board and SEBI immediately of any material violation. - Investigation and enforcement departments: - SEBI has a separate investigation department with approximately 45 staff. - SEBI has a separate enforcement department composed of approximately 25 staff. ### Investigations statistics (taken up and finalized) - Investigations (Taken up / Finalized): - Market Manipulation: - Taken up 2008-2009: 52 - Taken up 2009-2010: 44 - Finalized 2008-2009: 62 - Finalized 2009-2010: 46 - Capital Issue related to Manipulation: - Taken up 2008-2009: 2 - Taken up 2009-2010: 2 - Finalized 2008-2009: 1 - Finalized 2009-2010: 7 - Insider Trading: - Taken up 2008-2009: 14 - Taken up 2009-2010: 10 - Finalized 2008-2009: 12 - Finalized 2009-2010: 10 - Takeover: - Taken up 2008-2009: 3 - Taken up 2009-2010: 2 - Finalized 2008-2009: 1 - Finalized 2009-2010: 5 - Others: - Taken up 2008-2009: 5 - Taken up 2009-2010: 13 - Finalized 2008-2009: 7 - Finalized 2009-2010: 6 - Total: - Taken up 2008-2009: 76 - Taken up 2009-2010: 71 - Finalized 2008-2009: 83 - Finalized 2009-2010: 74 ### Enforcement approach, consent orders, and disposal data - Enforcement approach: - No written enforcement strategy, but staff demonstrate understanding of deterrent effects. - SEBI uses both “soft” measures (deficiency observations, warnings) and “harder” measures (directions, suspensions, monetary penalties). - SEBI’s stance on unfair trading practices contributed to a reputation as a strong enforcement agency. - Staff indicated SEBI has roughly a 75–80 percent success rate when cases are appealed to the SAT. - Softer actions preferred for findings from inspections of regulated entities, particularly AMCs/MFs. - Consent orders (settlement powers): - SEBI uses consent orders to improve enforcement efficiency. - Guidelines restrict types of cases eligible for consent orders. - Procedures include approval by a committee for consent orders and the amount paid. - Data relating to Disposal of applications under the Consent Scheme (as on March 2011) — key figures preserved as reported: - Table entries include large numeric values; total figures reported: - Total amount (table column): 1612196115455.2879536631528 - Total disgorgement / related: 5191.1 - Other reported amounts and entities across years are recorded in the source tables as presented. - Applications received and disposed under consent scheme by year (reported formatting preserved): - Year / Applications received / Applications disposed by way of / Acceptance / Rejections / Amount collected (`crore) - 2007-08 6175425 2.17 - 2008-09 666428164 45.71 - 2009-10 680359317 68.57 - 2010-11 333171237 72.14 - Total 22,9611,012743 188.592 - Notes: - Of these, 284 applications have been treated as withdrawn/infructuous. - As part of settlement process, apart from the amount collected, settlement in 132 cases included debarment from dealing in securities market/suspension of certificate of registration for varying period of time. - The amount of `188.59 crore received through consent mechanism comprises: - `28.97 crore toward disgorgement, - `158.53 crore toward settlement charges, - `1.09 crore toward administrative and legal charges. ### Enforcement of listing obligations and criminal enforcement - Enforcement of listing obligations (periodic and ongoing reporting): - Mainly responsibility of RSEs; MCA responsible for reviewing compliance of financial statements with accounting principles. - RSEs have suspended companies for breaches to listing obligations in the past. - SEBI instructed nationwide RSEs to develop action plans to deal with non-compliance, including enforcement actions. - Limited number of monetary penalties imposed by SEBI for breaches to listing obligations (notably clause 49 of LA). - No information provided on findings of MCA’s review of financial statements or resulting enforcement actions. - Findings from MCA on-site inspections of listed companies are shared with RSEs, but no information that RSEs have taken enforcement actions as a result. - Criminal enforcement: - Market participants believe SEBI has been active filing criminal cases; SEBI provided supporting information. - Convictions have taken place, with many recent cases focused on frauds related to CIS where SEBI secured dedicated tribunals. - Protracted procedures are identified as an area needing improvement. - Assessment of criminal enforcement: Partly implemented. ### Overall assessment, main limitations, and recommendations - Assessment: Partly implemented (grade reflects limitations across supervision of intermediaries, enforcement of reporting obligations and accounting/auditing standards, and criminal enforcement). - Key limitations identified: - Limitations in supervision of securities intermediaries are material. - Gaps in enforcement of reporting obligations by issuers and accounting and auditing standards. - Constraints in criminal enforcement processes. - Recommended priorities for SEBI: - Develop an overall strategy toward resource allocation across the organization that accounts for the risk posed by different categories of intermediaries and business models. - Strengthen thematic inspections and make them a regular component of supervisory approach for all intermediary types; develop mechanisms to identify clusters of risks across participants. - Establish inspection programs for all categories of intermediaries and determine inspection cycles and scope based on entity- and category-specific risk assessments. - Include thorough assessment of internal controls and risk management relative to each regulated entity’s business model in inspections. - Upgrade off-site monitoring and reporting arrangements to support risk-based supervision. - Improve follow-up on supervisory findings, including imposition of sanctions when necessary. - Reassess reliance on exchanges (RSEs) for on-site inspections of brokers given potential conflicts of interest; evaluate the proper balance between RSE and SEBI inspections and review RSE resource allocation for inspections. - Discuss with RSEs mechanisms to ensure proper oversight of sub-brokers. - Progress noted: - SEBI has begun strategic planning and changes to supervisory approach (notably for MFs/AMCs) that, once fully implemented, could improve compliance with IOSCO Principles and warrant a review of the grade. *Source: _cr13266 - Section 15M provides minimum qualification for appointment of members of the SAT.* ### conclusion is also supported by comments from market participants. ### _cr13266 - conclusion is also supported by comments from market participants. ### Enforcement capacity and trends - Medium term: SEBI should analyze whether current resources allocated to investigation and enforcement will be sufficient to keep up with increased market and case complexity. - SEBI commitment: continue developing sophisticated surveillance systems to store and analyze massive amounts of information in an automated manner. - Forensic enhancements: SEBI proposed creation of a forensic account cell in its 2011–2012 budget; the cell was set up via Office Order dated February 2012 to improve quality of financial information disclosed and assist in detecting financial irregularities as an early warning mechanism. - Criminal enforcement: not effective enough, except in the area of unauthorized CIS; limitations mitigated by strong civil enforcement powers of SEBI, but imprisonment carries a more powerful deterrent effect. - Proposed legal reform: amendments to the SEBI Act proposed, including empowering the Court of Sessions to take cognizance of and try offences under the SEBI Act, expected to reduce delay in criminal enforcement. ### Enforcement quality concerns and institutional roles - Market feedback raises concerns about the quality of enforcement by the RSEs, particularly in compliance by issuers with reporting obligations. - Recent committee recommendation: RSEs to develop a plan of action to deal with events of noncompliance. - Accounting standards compliance: insufficient information to conclude that MCA has been effective in ensuring issuer compliance with accounting standards. - Coordination: recently created coordination committee between SEBI and MCA should bring benefits; long term: SEBI and MCA should review whether any functions related to listing companies should be vested only in SEBI. - Auditors: currently no independent oversight mechanisms. ### Information sharing and international cooperation (Principles 11–13) - Legal basis: Section 11 (2) (1a) of SEBI Act interpreted to authorize SEBI to share both public and non public information, domestic and foreign, including documents and testimony. - Practice with foreign counterparts: SEBI shares information on condition of reciprocity based on Memoranda of Understanding (MoUs); obtained consent of CG before entering into MoUs, including IOSCO MMoU. - Assessment: Principle 11 — Fully implemented. - Recommendation: amend Section 11 to explicitly refer to cooperation with foreign counterparties; SEBI staff informed such reform has been included in a draft bill of amendments to SEBI Act. - International cooperation performance: - SEBI is signatory of the IOSCO MMoU and has bilateral MoUs (examples listed in source). - During the last three years SEBI has received an average of thirty requests per annum. - Roughly 70–80 percent of such requests refer to fit and proper information already in SEBI’s files. - On average such requests are answered within 15 days. - Requests involving collection from other entities/authorities (e.g., bank records) have taken between 45 -90 days. - IOSCO monitoring: no complaints brought against SEBI. - Assessment: Principle 12 — Fully implemented. - Assistance to foreign regulators (Principle 13): - Section 11 interpreted to allow SEBI to collect information not in its files on behalf of foreign regulators, including bank records and answers akin to testimony. - SEBI staff acknowledges some uncertainty about compelling testimony for foreign regulators but reports in practice it has obtained requested testimony. - SEBI cannot approach a Court to obtain injunctions on behalf of foreign regulators. - Assessment: Principle 13 — Fully implemented. ### Disclosure framework for issuers (Principle 14) - Prospectus definitions and obligations: - Section 2 (36) Companies Act, 1956 defines “prospectus.” - Section 56 requires every prospectus to state matters in Schedule II; contravention punishable with a fine of Rs 50,000. - Public offering defined as offer to 50 or more persons per Section 67; exception for NBFCs to issue securities by private placement even if directed to more than 50 persons is informed to be omitted in the Companies Bill placed before the parliament. - Schedule II and SEBI powers (Section 55A Companies Act; Section 11A SEBI Act) set further disclosure and prohibition authorities. - SEBI regulations: - Separate regulations for equity/convertibles, debt and securitized debt; provisions require prospectuses to be true, fair and accurate. - Equity/convertible issuers have one year from SEBI’s observations to open the offer; if significant changes occur, a supplement to the prospectus is required. - Financial statements in prospectus cannot be more than six months old. - Once offer closed, regulations do not require periodic updating of the prospectus. - Responsibility and sanctions: - Section 62 civil liability for misstatements in prospectus covering directors, promoters and persons who signed the prospectus. - Section 63: misstatements constitute a crime punishable with imprisonment of up to two years or a fine of 50,000 rupees or both. - Merchant bankers: prospectuses must be filed through a SEBI registered merchant banker; SEBI empowered to take action against merchant bankers for lack of due diligence. - Periodic and ongoing disclosure obligations: - Sections 210 to 219 Companies Act require public companies to submit annual reports to shareholders for annual meetings including balance sheet, profit and loss accounts, external auditor’s report, directors’ report; these reports should be filed with the RoCs within 30 days of the shareholders meeting. - Section 73: all issuers of public offerings must request listing in a RSE, resulting in no practical distinction in disclosure requirements between issuers of public offering and listed companies. - Listing Agreement (LA): issuers must enter into LA with RSEs; SEBI prescribes LA provisions by circular to RSEs. - Equity-specific LA requirements: - Clauses 32 and 49 require: Consolidated Financial Statements, Cash Flow Statements and Related Party Transactions; Management Discussion and Analysis Report; Declaration signed by CEO regarding compliance with Code of Conduct; Separate Corporate Governance section with compliance report and certificate from auditors or practicing company secretaries. - Clause 41: submit audited annual report to corresponding RSE within 60 days of end of fiscal year. - Quarterly financial reports: publish within 45 days of last day of every quarter. - Clause 36: immediate informing of exchange of events bearing on performance/price sensitive information; material Board decisions filed within 15 minutes of Board meeting. - Clause 35: file Shareholding Pattern within 21 days from each quarter. - Debt-specific LA requirements: - Clause 28: annual report to include disclosures of amounts at year end and maximum amount of loans/advances/investments outstanding during the year for parent and subsidiaries; Cash flow statement. - Annual report to RSE: Listing Agreement requires prompt submission but does not specify a deadline. - Clause 27: half-yearly communication, counter signed by debenture trustee within one month from the end of the half year (September and March) including credit rating, asset cover, debt-equity ratio, previous due date payment status, next due date. - Clause 29: publish half yearly financial statements within one month from the end of the half year; reports subject to limited review by external auditors. - Clause 19: promptly inform the exchange of material events; list of events specified. - Advertisements: - Regulations require public communications by issuers or intermediaries to contain only factual information; no projections, estimates, conjectures, or extraneous matter. Communications during the period from Board approval meeting until issue should be consistent with past practices or contain a prominent warning if inconsistent. - Practice on review and oversight: - Prospectus review: - RSEs and SEBI both review equity prospectuses. Process coordinated: RSE provides “in principle approval for listing” conditioned on SEBI comments. - SEBI currently reviews all prospectuses for equity offerings. One analyst conducts main review, with one/two levels of oversight depending on amount of issue. - Issues of less than Rs. 100 crores (US$20.92 million) can be cleared at a level below the ED. - Analysts use a checklist; SEBI is developing a manual. - Prospectuses are posted on website for 30 days prior to SEBI clearance; any person can send comments during that period. - SEBI issued circulars and held meetings with MBs to improve prospectus quality; ANMI is developing a due diligence manual for MBs. - Debt prospectuses: - SEBI does not review debt prospectuses; relies on RSEs to conduct such review. RSEs do ask for changes in practice, but limited number of debt issues may limit instances. - SEBI oversees RSEs’ role through regular inspections. - Prospectuses are posted on RSEs’ website for seven days. - Ongoing disclosure review: - SEBI does not conduct routine reviews of material events or periodic reports unless a specific complaint is received. - Issuers file periodic reports with RSEs, not SEBI; review responsibility mainly with RSEs. - FRRB and MCA have roles in reviewing annual reports focused on compliance with accounting standards. *Source: _cr13266 - conclusion is also supported by comments from market participants.* ### section 23E of SCRA, if a company fails to comply with the listing conditions, it shall be ### section 23E of SCRA, if a company fails to comply with the listing conditions, it shall be ### Enforcement of listing obligations and sanctions - Section 23E of SCRA: failure to comply with listing conditions shall be liable to a penalty not exceeding 25 crore rupees (US$5.23 million). - SEBI is authorized to appoint an adjudicating officer. - SEBI has imposed money penalties in the past on issuers not complying with listing obligations. - Adjudication proceedings (based on periodic review and criteria such as market capitalization and repetitive violations) were initiated against identified entities; the adjudicating officer levied penalty on six entities. ### Reviews of periodic reports by Recognized Stock Exchanges (RSEs) - RSEs conduct reviews focused on: - Timeliness of submission against deadlines established by the Listing Agreement (LA). - Completeness vis-à-vis prescribed forms and minimum content. - Historical enforcement actions: - Suspensions for failure to comply with listing agreement obligations: 143 companies by the NSE and 1480 companies by the BSE. - Reluctance from RSEs to apply suspension measures due to negative investor effects. - Committee on noncompliance with listing agreements (constituted by SEBI with nationwide RSE participation): - Identified active noncompliant companies: 60 in the NSE and 365 in the BSE. - Committee recommendations: - RSEs to develop a plan of action to address noncompliance. - RSEs to issue notices for appropriate action to noncompliant companies. - Amend Listing Agreement to clearly spell out sanctions for noncompliance, including possibility of money penalties. - Additional RSE actions: disclose noncompliant companies on RSE websites and implement a scoring system to assign weight to different listing obligations. - Required initial step: RSEs to issue notice for appropriate action to noncompliant companies. ### Enforcement of clause 49 (corporate governance provisions) - SEBI advised RSEs to encourage/exhort companies to ensure compliance with revised clause 49 provisions. - Periodic review of clause 49 compliance undertaken by NSE and BSE based on reports filed by listed companies during the period January 2006 to March 2007. - From that review, identified entities: five public sector undertakings (PSUs) and 15 private sector companies; adjudication proceedings initiated and disposed; penalty levied on six entities. - Review of subsequent periods is in progress; necessary actions to be initiated against violators of clause 49. ### Monitoring of material events and news/rumors - RSE responsibilities: - Review material events; for some cases (bonus issue or rights issue) verify information before public release. - Periodic review of corporate announcements and Board decisions. - Active monitoring of print and electronic news pertaining to traded companies using pre-determined filtering criteria. - Seek clarifications from companies when necessary; clarifications are published on RSE websites and issued as press releases. - Intraday verification of news/rumors for price-sensitive information on leading websites. - Rumor verification actions performed: - 2007–2008: 437 actions - 2008–2009: 252 actions - 2009–2010: 132 actions - Procedures on company responses: - If company denies news items: RSE sends letter advising company to take up matter with the media organization. - If company confirms news: RSE advises company to inform exchanges of matters as required under Clause 36 of the Listing Agreement. - RSEs have processes to seek clarifications when there are significant price/volume variations. - SEBI holds weekly meetings with RSEs to discuss material events and market developments. ### Assessment and recommendations (enforcement of periodic reporting) - Assessment: Partly implemented - Comments and findings: - RSEs review periodic reports but have not acted as vigorously as necessary in enforcing compliance with listing/reporting obligations. - Market participants reported a need to step up enforcement mechanisms. - RSEs have shown reluctance to use suspension powers to deal with noncompliance. - Committee recommendations are considered a step in the right direction. - Assessor recommendations (not factored into grade): - SEBI and RSEs should review whether arrangements to review material events should be strengthened to enable “real time” review (right after issuer communication). - RSEs need not review all material events but should develop criteria/alerts to determine cases subject to review. - SEBI should consider instructing RSEs to establish more specific deadlines for submission of annual reports by debt issuers—as is the case for equity issuers. ### Holders’ rights, voting, and corporate governance (Principle 15) - Shareholders’ voting rights: - Entitled to vote in elections of directors by virtue of powers u/s 87 of Companies Act. - Sec. 176 provides for proxy voting. - Section 192A allows passing resolutions through postal ballots (including e-voting). - Members cast votes equal to number of shares held. - Section 265 provides option to adopt proportional representation for director appointment. - Section 252(1) provides option for large companies to have directors elected by small shareholders. - Director conflicts: Sec. 299/300 requires directors to inform Board of interest in contracts/arrangements and bars participation/voting when directly or indirectly interested. - Additional corporate governance requirements under the Listing Agreement (LA) for equity issuers: - Appointment of independent directors. - Creation of specialized committees including an audit committee and a nominations committee. - Major structural changes: - Section 391 of the Companies Act: mergers and amalgamations require approval by majority in numbers and ¾ in value of shareholders; requires acquisition of shares of dissenting shareholders. ### Takeover framework (SEBI Takeover Regulations, 2011) - Effective date: October 22, 2011. - Salient features: - Regulations 3 to 5: mandatory open offer required from any acquirer who wants to acquire: - (i) 25 percent; - (ii) more than 5 percent in a year if the person is holding 25 percent or more but less than maximum permissible shareholding limit; - (iii) acquisition of control regardless of whether there has been an acquisition of shares or voting rights. - Shareholders holding shares entitling them to exercise 25 percent or more of voting rights may voluntarily make an open offer to consolidate shareholding without breaching minimum public shareholding requirements under LA. - Definition of acquirer: any person who directly or indirectly acquires or agrees to acquire shares or voting rights, or control of target company, alone or with persons acting in concert. Control includes right to appoint majority of directors or control of management or policy decisions. - Regulation 7: open offer must be made for at least 26 percent of total shares of the company. - Uniform price requirement: same price payable to all shareholders, controlling or noncontrolling, irrespective of acquisition under agreement or open offer; paying higher price to promoters eliminated. - Regulation 13: public announcement timing — same date when acquisition or agreement to acquire control or shares beyond threshold is taken; announcement to all stock exchanges where target is listed and simultaneously to SEBI. - Detailed public statement required within five days of public announcement in specified newspapers; simultaneously submitted to SEBI. - Draft letter of offer filed with SEBI within five working days from date of detailed public statement; SEBI to comment within fifteen working days and may require changes. - Regulation 8: guidance on offer price depending on trading status. - Disclosure requirements related to insiders and substantial holdings: - Regulation 13 of Prohibition of Insider Trading Regulation: - Directors/officers must disclose to the company the number of shares and voting rights held by them and dependents and positions in derivatives within two working days of appointment. - Changes disclosed within two working days even if shareholding falls below 5 percent, if change exceeds Rs. 5 lakhs in value or 25,000 shares or 1 percent of total shareholding or voting rights, whichever is lower. - Persons holding more than 5 percent must disclose to the company number of shares or voting rights within two working days of allotment intimation or acquisition; changes disclosed within same deadline if they exceed 2 percent of total outstanding shares or voting rights. - Company must disclose such information to exchanges within two days. - Regulation 29 of the Takeover Regulations, 2011: - Any acquirer acquiring shares or voting rights entitling him/her to more than 5 percent must disclose aggregate holdings to company and exchanges within two days of acquisition or receipt of allotment intimation. - Shareholders holding more than 5 percent must disclose purchases or sales aggregating to 2 percent or more; details and aggregate shareholding after such transactions to be made within two days. - Regulation 30: yearly disclosures of number and percentage of shares applicable to persons holding more than 25 percent or promoters; disclosures within seven working days from the end of each financial year to each stock exchange where company is listed and the target company. ### Enforcement of shareholders’ rights and SEBI powers - Remedies under Companies Act: - Sections 397 and 398: redress for oppression of minority shareholders’ rights or mismanagement via suit before Company Law Board/National Company Law Tribunal which can grant appropriate relief. - SEBI enforcement powers (derived from SEBI Act): - Regulation 32 allows SEBI to issue directions including: - Directing public offers, - Requiring disinvestment, - Cancellation of shares acquired in contravention, - Debarring persons from dealing in securities markets pursuant to investigation. ### Assessment (Principle 15) - Assessment: Broadly implemented - Comments and recommendations: - Grade based on evaluation vis-à-vis question 3d) of the Methodology, particularly partial offer rules where acquirer can commit to buy entire promoter holding at same price as other shareholders. - Committee recommended offer for all outstanding shares to give full exit opportunity to all shareholders; SEBI Board did not accept due to restrictions on banks financing acquisitions. - SEBI increased minimum offer size from 20 percent to 26 percent of share capital of target company. - Assessor view: elimination of non-compete fee is significant improvement since October 2011. - Remaining gap: elimination of difference in percentage of shares that could be acquired from promoters vis-à-vis other shareholders needed for full implementation — achievable by pro-rata rule or mandatory offer for total shares. - Interim recommendation: SEBI should actively monitor new provisions and amend if practice leaves only promoters with exit in partial offers. ### Accounting and auditing standards (Principle 16) — description and framework - Obligations of listed companies: - Listed companies must submit annual audited financial statements; equity issuers must submit quarterly financial statements; debt issuers must submit semiannual financial statements subject to limited review. - Financial statements prepared according to accounting standards approved by the Institute of Chartered Accountants of India (ICAI). - Listing Agreement requires equity issuers to comply with all Accounting Standards issued by ICAI from time to time. - Audits to be conducted according to standards approved by ICAI. - ICAI institutional structure: - ICAI established under Chartered Accountants Act of 1949; responsible for establishing accounting and auditing standards. - Separate committees: Accounting Standards Board (ASB) and Auditing and Assurance Standards Board (AASB) with wide public interest representation; SEBI is member of both Committees. - Government oversight: - National Advisory Committee on Accounting Standards (NACAS), constituted in 2001 under Indian Companies Act, 1956, reviews standards and recommends changes; ICAI acts on recommendations and standards are notified by the CG. - Current standards and convergence to IFRS: - Current standards: Indian GAAP. - Expert opinion: in some areas Indian GAAP requires less rigorous disclosure than IFRS (examples: financial instruments and acquisitions). - India is in a process of convergence toward IFRS (not adoption). - ICAI issued “equivalent” standards notified by the CG on February 25, 2011. - Adoption intended on a gradual basis (a period of three years); implementation expected to be finalized by 2014, but CG has not officially notified dates for implementation. - Some differences vis-à-vis IFRS will remain; Government intends to initiate dialogue with the IASB to address such differences. - Auditing standards and oversight: - ICAI has adopted local auditing standards and is seeking to adopt International Standards on Auditing (ISA) under the Clarity Project. - No current oversight mechanism for ensuring compliance of auditing standards by auditors. - Companies bill placed in Parliament requires mandatory compliance with Auditing Standards. - Qualified financial statements: - Current framework allows publication of qualified financial statements. - Clause 49 contains a non-mandatory requirement stating that companies may move toward regime of unqualified financial statements. *Italic: IMF — Financial Sector Assessment Program (FSAP) country report content provided in the source PDF.* ### Section 226 of the Companies Act contains a few provisions aimed to ensure auditors ### _cr13266 - Section 226 of the Companies Act contains a few provisions aimed to ensure auditors ### Auditor independence and regulatory framework - Section 226 prohibits an internal auditor from being the statutory auditor of a company. - A person indebted to the company or holding shares of the company cannot be appointed as statutory auditor. - ICAI has issued a Code of Ethics and a Guidance Note on Auditor’s independence. - The Companies Bill placed in the parliament contains more stringent provisions on auditors’ independence, including qualification, rotation, performance of non-audit services, and liability. - Current listing agreement requirements: - Audit Committee should recommend to the Board regarding appointment, re-appointment, replacement/removal of the statutory auditor and fixation of audit fees. - Two thirds of the members of the Audit Committee should be independent directors. ### Compliance with accounting standards — FRRB and SEBI interaction - Financial Reporting Review Board (FRRB) constituted in 2002; non-standing committee of ICAI without direct enforcement powers. - FRRB composition includes ICAI representatives and other stakeholders including regulatory authorities. - FRRB selection criteria for reviews: mainly net worth, industrial class, and random sampling; roughly 150–200 companies selected annually. - FRRB cannot request information from companies nor take disciplinary actions; deficiencies notified to MCA or SEBI (for listed companies). - FRRB referrals (financial year 2003–04 to 2006–07): 53 cases referred to SEBI. - Of 53 audit reports, eight audit reports had qualifications. - Of these eight qualified reports, seven contained “subject to” type qualifications considered technical. - Three qualified audit reports had recurring qualifications not rectified by management. - SEBI subcommittee (SCODA) recommended creating a mechanism to ascertain the impact of audit qualifications on listed entities' financial positions and to enable action against management; recommendations under consideration by SEBI. ### FRRB case counts 2008–09 to 2010–11 - Total no of reviews commenced during the year: - 2010–11: 175 - 2009–10: 136 - 2008–09: 148 - Total: 459 - Number referred to Ministry of Corporate Affairs and SEBI: - 2010–11: 4 - 2009–10: 10 - 2008–09: Nil - Total: 1 (Note: source table formatting preserved as presented in the text.) ### MCA reviews and on-site inspections - MCA off-site reviews: - Reviews focused on companies with an IPO since 2001 (about 20 percent of SEBI’s actively traded companies) and companies selected via a warning/alert system based on nine parameters. - Objective in practice: cover around 20 percent of all companies. - Enforcement actions under the Companies Act include monetary penalties; RoCs communicate SEBI-related violations to SEBI. - No comprehensive information available on outcomes of annual off-site reviews or resulting enforcement actions. - MCA on-site inspections pursuant to Section 29 A of the Companies Act; inspections mainly triggered by complaints. - Number of companies inspected by MCA (including listed and unlisted): - 2005–06: 253 - 2006–07: 220 - 2007–08: 189 - 2008–09: 207 - 2009–10: 204 - 01.04.2010–31.12.2010: 168 - SEBI created a database of inspection reports forwarded by MCA to SEBI. ### SFIO investigations and prosecutions - Serious Fraud Investigation Office (SFIO) is a multi-disciplinary agency under MCA for complex corporate frauds. - Referrals to SFIO: - Total referred so far: 79 cases. - SFIO submitted investigation reports in 52 cases as of 31.12.2010. - Two cases stayed or dismissed by courts; remaining cases under investigation. - As of 31.12.2010, 823 cases of prosecution filed in different courts against persons involved in fraudulent activities. ### SEBI peer review exercises and findings - Post-Satyam, SEBI reviewed last quarterly results and last audited annual financial statements for companies in NSE-Nifty 50, BSE-Sensex and others (sample covered companies comprising 60 percent of total market capitalization). - SEBI indicated the peer review was not a one-time exercise and could be repeated; results did not suggest significant adverse findings warranting regulator action. ### Compliance with auditing standards and auditor oversight - ICAI Peer Review Board established in 2002; focuses on documentation and processes; issues peer review certificates valid for three years. - SEBI circular dated April 05, 2010: auditors of listed entities must have subjected themselves to ICAI peer review and hold a valid certificate; auditors signing financial information in offer documents must hold peer review certificates. - FRRB findings can form basis for action under the Chartered Accountants Act, 1949. - ICAI disciplinary framework: Disciplinary Board, Disciplinary Committee and Appellate Board with CG-appointed members in addition to ICAI representatives. - ICAI actions in past 3 years: initiated action against 306 members and found 115 members guilty. - (Reference link shown in source text; link text preserved but not emitted as navigational listing.) - Quality Review Board (QRB) constituted by CG in 2007 to review quality of chartered accountants’ services; Chairman appointed by CG; equal representation of ICAI Council members and CG appointees; QRB devising strategy to fulfill mandate. - Assessment for this area: Partly implemented. ### Assessor observations and recommendations on issuer and auditor oversight - Observations: - Two entities review issuer compliance with accounting standards: FRRB (advisory, limited powers) and MCA (limited to annual financial statements). - Inherent limitations of FRRB due to advisory nature and inability to request issuer information. - Insufficient evidence that FRRB referrals led to enforcement actions; SEBI working to implement recommendations. - Lack of available information on MCA off-site reviews outcomes and enforcement follow-up. - RSEs not active enough in ensuring compliance with listing obligations according to committee minutes. - ICAI oversight is active but resembles professional-body oversight rather than independent oversight; processes appear slow (e.g., Satyam case). - Recommendations: - Strengthen framework to ensure issuer compliance with accounting standards. - SEBI to create a dedicated unit for monitoring compliance and review its authority to request restatements. - Committee between SEBI and MCA should improve coordination on listed issuer enforcement matters. - Consider transferring certain listed-company related functions to SEBI in the long term. - Strengthen auditor oversight system; operationalize QRB and review its composition to determine if it can function as an independent oversight mechanism. - Implement IFRS-equivalent standards as soon as possible; ICAI suggested April 1, 2013 for convergence for listed companies. - Develop an independent oversight system for formulation of auditing standards; CG contemplating expanding NACAS role to cover auditing standards. - Additional SEBI measures noted: - Company Bill proposes National Financial Reporting Authority to oversee auditors. - SEBI proposed and set up a forensic account cell via Office Order dated February 2012 to improve financial information quality and early detection of irregularities. ### Principles for Collective Investment Schemes (CIS) — Overview and implementation (Principles 17–19) - Regulatory recognition: - Two types of CIS: Mutual funds (majority of IOSCO-type CIS) and Collective investment schemes (narrow category investing in agricultural projects/assets like teak plantations). - Applicable regulations: Mutual Fund Regulations, 1996 and Collective Investment Schemes Regulations, 1999. - No CIS currently in operation; one Collective Investment Management Company (CIMC) registered and one has provisional authorization but no CIS floated. - UTI Act repealed in 2003; UTI MF under SEBI registration from January (year not specified in source excerpt). - Principle 17 — eligibility and regulation of those who wish to market or operate a CIS: - Registration requirement: Section 11 (1B) of SEBI Act requires registration with SEBI for sponsoring or managing a CIS, including mutual funds. - Mutual funds must be managed by an asset management company (AMC) and require a sponsor. - Eligibility for sponsors (Regulation 7) includes fit and proper requirements defined as: - carrying on financial services for not less than five years; - positive net worth; - the net worth in the immediately preceding year should be more than the capital contribution of the sponsor to the asset management company; - the sponsor must have profits; and should contribute to at least 40 percent of the net worth of the asset management company. - Eligibility for AMCs (Regulation 21) includes: - Fit and proper requirements for the company, directors, and key personnel; - Board independence: at least 50 percent of directors should not be associated with the sponsor or trustees; - A net worth of not less than Rs. 10 cores (US$2.12 million). - SEBI noted the Rs. 10 cores net worth requirement is not risk-adjusted, but other SEBI-imposed requirements effectively increase practical capital needs. - Top 10 mutual funds by AAUM manage around 80 percent of total industry AAUM; these AMCs have net worth in the range of Rs 578 million to Rs 10386 million. - AMCs required to buy insurance against third party losses from errors and omissions, minimum cover Rs 5 crores (US$1 million); MFs with assets less than Rs.100 crores may take less than Rs.5 crore cover as determined by trustees. - AMCs required to have internal controls and risk management; allowed to provide other services provided segregation and capital adequacy for each activity. - Registration process: two stages — “in principle approval” after sponsor background checks; subsequent AMC registration involves SEBI inspection and systems/controls review. - Marketing/selling mutual funds: - Section 12(1) of SEBI Act requires registration to buy, sell or deal in securities (including MF units). - Mandatory NISM certification (Advisors Module) and AMFI registration number for entities/persons marketing/selling mutual funds; certification valid for five years. - Sanctions for unlicensed operation: SEBI measures include directions, cease and desist orders, money penalties, and criminal proceedings; SEBI has pursued criminal sanctions. - Principle 17 — supervision (off-site and on-site): - Off-site reporting requirements from AMCs to SEBI: - annual audited financial statements; - half yearly financial statements aimed to oversee capital adequacy; - independent systems audit by a CISA certified entity every two years; - compliance report by the trustee annually. - SEBI staff stated review of all periodic reports is current practice. - On-site inspections: - Historically, inspection of every active MF once in two years by outsourced external agencies (chartered accountants) with SEBI officials accompanying. - Specific-purpose inspections performed in response to complaints or reporting of non-compliance. - Inspection counts and outcomes: - 2003–2005: Inspected 29 Mutual Funds — Warnings 8; Deficiencies 12. - 2005–2007: Inspected 29 Mutual Funds — Warnings 13; Deficiencies 17. - 2007–2009: Inspected 36 Mutual Funds — Warnings 22; Deficiencies 25. - Enforcement “harder” measures: investor compensation ordered in valuation error cases — Rs. 200 millions in one case and Rs. 30 million in another; consent settlement requiring AMC, trustee and CEO to pay a significant amount in another case. - From current year onward (source context FY 2011–2012), SEBI adopting a risk-based inspection approach with criteria including: - Leading MFs contributing at least 75 percent of total assets under management of the entire MF industry; - MFs with highest number of investor complaints relative to number of investors; - MFs with previous noncompliance or flagged in off-site monitoring; - MFs not inspected in the last three years to be inspected in the fourth year. - Theme-based inspections to verify valuation, inter-scheme transfer, and brokerage differences among top fund houses are being implemented. - Record-keeping obligations: - Regulation 50 requires AMCs to keep books of accounts and records for a period of eight years. - PMLA regulations require keeping client information for a period of 10 years. - Conflicts of interest and delegation: - Detailed requirements to avoid conflicts of interest; trustees act as first-level supervisors. - Delegation rules prohibit delegation of investment management; outsourcing permitted for back-office services but AMC retains responsibility as per Regulation 25(3). - Assessment for CIS-related supervision: Broadly implemented. - Comments and recommendations: - SEBI’s new supervisory approach (FY 2011–2012) addresses prior shortcomings by intensifying supervision of higher-risk MFs and introducing thematic inspections. - Further actions urged: - Inspections should critically review internal controls and risk management vis-à-vis AMC business models. - Enhance follow-up of inspection findings, including “harder” enforcement measures where warranted. - Enrich criteria for AMCs/funds under shorter supervisory cycles. - Upgrade off-site monitoring systems for better analysis and focus for inspections. - IOSCO note: lack of risk-based capital requirement for AMCs not a deficiency versus IOSCO Principles; in practice AMCs hold more than statutory capital and insurance coverage differentiates by AUM. - A current case pooling public funds for real estate development raises concerns on whether CIS definitions need further guidance. ### Legal form, investor rights and disclosures for MFs (Principles 18–19) - Principle 18 — legal form and segregation of client assets: - Regulation 14: a mutual fund shall be constituted in the form of a trust; a trust deed executed by a sponsor in favor of trustees; trust deed contents governed by SEBI regulations. - Regulation 29(1): a MF must disclose legal form, structure, and rights of unit holders in the standard offer document. - Regulation 2(z) and (zi): unit holder holds units representing one undivided share in scheme assets. - Trustees: - Regulation 16(1) and 20(1): appointment of trustees required; no AMC or its officers can be appointed as trustee. - Two thirds of trustees must be independent and not associated with sponsors; appointment requires SEBI approval (Regulation 17). - Trustees’ oversight role (Regulation 18): ensure AMC systems, key personnel, auditors, compliance officer, registrar, broker/marketing norms, compliance manual, internal controls before launch of any scheme; verify compliance and submit annual report to SEBI. - Regulation 25 details trustees’ due diligence obligations. - Separation of assets: - Regulation 26: fund must have a custodian; custodian cannot be one where sponsor or associates hold 50 percent or more voting rights. - Code of Conduct Clause 5: trustees and AMC must ensure scheme-wise segregation of bank and securities accounts; beneficial ownership recorded at individual scheme level at the CSD. - Wind-up of a scheme (Regulation 39 and 41): - Grounds include trustees’ opinion, 75 percent unit holder resolution, SEBI direction in unit holders’ interest. - Trustees must give public notice, call unit holder meeting; simple majority authorizes wind-up steps; trustees submit final report to Board and unit holders. - Assessment: Fully implemented. - Principle 19 — disclosure requirements: - Regulation 28: no scheme launch unless approved by trustees and offer document filed with SEBI. - Regulation 29(1): offer document must contain disclosures adequate for informed investment decisions; abridged Key Information Memorandum (KIM) must be issued. - Statement of Additional Information (SAI) and addenda required where changes occur. - SEBI circular July 28, 2004: KIM must be updated at least once a year. - SEBI circular SEBI/MFD/CIR/10/039/2001 dated February 9, 2001: offer document fully revised and updated at least once in two years. - SEBI issued standard observations via circular MFD/CIR/06/275/2001 dated July 9, 2001 to standardize disclosure in offer documents and KIM. - SEBI review powers: - Regulation 28: SEBI can require changes to offer documents; SEBI reviews all prospectuses via an analyst plus one additional review level; checklists and operational manual guide prospectus review; additional guidance provided via email. - Advertisements: - Regulation 30: advertisements must conform to Sixth Schedule advertisement code; clause 1 requires advertisements be truthful, fair, and not misleading. - Detailed advertising guidelines issued via circulars MFD/Cir/4/51/2000 dated 5th June 2000 and MFD/CIR/6/12357/03 dated 26th June (year as in source). *Source: _cr13266 - Section 226 of the Companies Act contains a few provisions aimed to ensure auditors* ### 2003. As per regulation 49(1), the price at which units may be subscribed or sold and ### _cr13266 - 2003. As per regulation 49(1), the price at which units may be subscribed or sold and ### Periodic and ongoing disclosure for mutual funds - Regulatory requirements (MF Regulations and SEBI): - Annual report and annual statement of accounts for each MF (Regulation 54). - Annual report must be audited by an auditor independent from the auditor who audited the statements for the AMC. - Submission deadline: within four months from the date of closure of each financial year (Pursuant to Regulation 57). - Section 56: report or an abridged form must be mailed to all unit holders. - Half year unaudited accounts (Regulation 58). Publication requirement: within one month from the close of each half year (Regulation 59). - Quarterly statement of movements in the net asset for each scheme (Regulation 58). - Quarterly portfolio statement, including changes from the previous periods, for each scheme. - Section 59A: send to all unit holders a complete statement of its scheme portfolio (unless published) within one month of the close of each half year. Staff noted most MFs send monthly statements in practice. - Trustees’ half-yearly submissions to the Board: - A report of the activities of the fund; - A certificate stating trustees have satisfied themselves that there have not been instances of self dealing or front running by the trustees or AMC; and - A certificate that the AMC has managed the schemes independently of any other activities. - Accounting standards: - SEBI-prescribed specific accounting policies and standards for MFs; these require stricter disclosures than Indian GAAP. - Assessment: Fully implemented. - Comment: Semiannual client statement requirement appears long; practice is monthly statements. Recommends SEBI consider shortening the cycle. ### Principle 20 — Asset valuation, frequency, pricing and redemption of units - Asset valuation: - Regulation 47: every MF shall compute and carry out valuation of investments in its portfolio in accordance with valuation norms specified in Eighth Schedule and guidelines issued by SEBI. - Frequency: - NAV should be calculated daily for both open and close end funds. - Valuation of illiquid securities: - SEBI guidelines for valuation of illiquid equities and debt. - For debt securities: two firms provide bond valuation metrics (based on government yield curve); AMCs take the mean of the two metrics. If the spread exceeds three percent then the firms must review the prices. - Current providers mentioned: Cricil and Ecra. - Pricing and redemption (regulatory thresholds and practice): - Regulation 49: - An open end fund must publish the sale and redemption price of units at least once a week in a daily newspaper of all India circulation. - The repurchase price shall not be lower than 93 per cent of NAV and sale price not higher than 107 per cent of NAV. - The repurchase price of close ended scheme shall not be lower than 95 per cent of NAV. - The difference between the repurchase price and sale price of unit shall not exceed 7 per cent calculated on the sale price. - SEBI Circulars further tightened provisions (SEBI Circular dated June 30, 2009): - There shall be no entry load for all mutual fund schemes. - Scheme application forms shall disclose that upfront commission to distributors will be paid by the investor directly to the distributor. - Of the exit load or Contingent Deferred Sales Charge charged to the investor, a maximum of 1% of the redemption proceeds shall be maintained in a separate account which can be used by the AMC to pay commissions to the distributor and to take care of other marketing and selling expenses. Any balance shall be credited to the scheme immediately. - Effect of ban on entry load: - Entry load historically 2-2.5 percent; after ban preferences shifted toward exit loads of 1 percent or lower. - Empirical data on exit loads (data as of September 16, 2011): - Total number of mutual fund schemes: 1403 - Total number of schemes which charge no exit load: 809 (58 percent) - Total number of schemes which charge exit load of 1 percent and below: 548 (39 percent) - Total number of schemes which charge exit load above 1 percent: 46 (3 percent) - Interpretation of data: - 97 percent of schemes charge an exit load of 1 percent or less; 3 percent charge over 1 percent. - For schemes charging over 1 percent, exit loads are highest in the first year and usually decrease to nil over the next two–three years to encourage longer-term investment. - Conclusion: in a huge majority of schemes (97 percent), the difference between sale and repurchase price is negligible, if any. - Redemption timing: - Current regulations: all open end funds must redeem participation in t + 10. - Practice: MMF have redeemed in t + ½ and all other funds usually in t + 1. - Disclosure of NAV: - Regulations 48 and 49 require disclosure of NAVs in newspapers and AMC/AMFI websites. - SEBI circular SEBI/IMD/CIR No.5/96576/2007 dated June 25, 2007: NAV of the scheme shall be displayed on the AMFI website by 9:00 p.m. of the same day and for funds of fund scheme by 10:00 a.m. of the following day. - Errors in pricing: - Clause 6 of Eight Schedule: threshold of tolerance of 1 percent for errors in pricing. If error exceeds 1 percent then the AMC must pay the difference to the unit holders from its own capital. - Suspension of redemptions: - Prospectus must establish conditions under which suspension of redemptions can be made. - SEBI may direct an AMC to suspend redemptions, or to uplift a suspension. - Assessment: Fully implemented. - Comment: CRAs currently provide price vending services in addition to rating services; SEBI might consider whether valuation services should be a regulated activity and whether specific regulations should apply to CRAs providing these services. ### Principles for Market Intermediaries — registration, standards, and supervision - Principle 21 — Minimum entry standards and registration: - Section 12 of SEBI Act: no market intermediary associated with securities market shall buy, sell or deal in securities except in accordance with certificate of registration from SEBI. - Intermediaries Regulation: general framework for registration and basic obligations; specific regulations for brokers, merchant bankers, underwriters, and portfolio managers. - No specific regulations for “pure” investment advisors; regulations for brokers and portfolio managers include provisions applicable to advisory services. - Regulation 8(2): separate certificates of registration are needed for multiple categories; exceptions noted for merchant banker or stock broker acting as underwriter. - Licenses for most intermediaries subject to renewal (usually two/three years); a system of permanent licenses has just been approved (SEBI informed). - Fit and proper requirements (Schedule II): integrity, reputation and character, absence of convictions and restraint orders, competence including financial solvency and net worth. Minimum net worth differs by service. - Application materials required: detailed corporate and affiliate information, arbitration/litigation details, group structure, management details, audited financial statements for past three years and latest net worth, infrastructure details. - SEBI powers (Regulation 8, Regulation 9, Section 11(3)): reject application, impose conditions, suspend or cancel registration. - Brokers — registration, reporting, inspections: - Stock Brokers Regulation: brokers submit applications to RSEs; RSEs check compliance and have registration committees. RSEs do not conduct on-site visits for granting license but conduct compliance visits on newly registered brokers. - Brokers required to obtain pre-approval from RSEs for changes in control and certain material changes. - Additional broker eligibility: admitted as member of SE, necessary infrastructure, experience. - Off-site reporting by brokers: - Annual audited financial statements; - Semiannual unaudited financial statements; - Semi-annual audit report on compliance with SEBI Act and effectiveness of grievance redressal systems. - On-site inspections: - RSEs instructed in 2009 to conduct on-site inspections of all active brokers on an annual basis. Active brokers: minimum of 50 clients and at least one transaction during the year. Roughly 1,500 active brokers. - RSEs use risk-based approach; brokers divided into three categories based on trading volume, number of clients, funds settled, number of complaints. - SEBI conducts “purpose driven” inspections; criteria include number of complaints, RSE reports, previous sanctions. SEBI conducted 38 inspections in 2008–2009 and 36 in 2009–2010. - SEBI conducts “for cause” and occasional “thematic” inspections. - Other intermediaries (portfolio managers, merchant bankers, underwriters): - Registration: two-step process with “in-principle approval” followed by on-site inspections for infrastructure, resources, IT. - Off-site reporting obligations: - Annual audited financial statements; - Half yearly unaudited financial statements (regulation 15 for merchant bankers, and 18 for portfolio managers); - Annual compliance officer report confirming compliance and veracity of application information; - Half-yearly reporting by merchant bankers relating to merchant banking activities. - On-site inspections: - SEBI does not have a regular inspection program for PMs; licenses for PMs renewed every three years with renewal inspections. - Merchant bankers: prior to 2011 limited inspections; in the referenced year SEBI shifted to risk-based criteria and inspected top 10 MBs by number of issues. - Record-keeping: all intermediaries must keep records for a period of 10 years pursuant to the PML rules. - Certification (Regulation 3 of the Certification of Associated Persons in the Securities Market, 2007): - SEBI can require associated persons to obtain certificates. NISM implements certification program, accredits examination organizations, conducts Continuing Professional Education, and maintains register of certificate holders. - Categories subject to certification include persons associated with stock brokers/trading members/clearing members involved in investor assets or redress; distributors/agents selling mutual funds (certificate can be given by AMFI); persons associated with currency derivatives trading members; persons employed with registrars to an issue or share transfer agents; and staff dealing/interacting with investors in specified operational roles. - Assessment for Principle 21: Partly implemented. - Comment: Grade reflects supervisory deficiencies — lack of regular/comprehensive inspection plan for PMs, only recent improvement for MB inspections, need to enhance inspection quality focusing on risks. Limited resources at RSEs for annual inspections raise quality concerns. SEBI developing framework for investment advisers; welcome development to distinguish tied agents from independent advisers. ### Principle 22 — Capital and prudential requirements for intermediaries - Regulatory framework: - Four categories of intermediaries: brokers, underwriters, merchant bankers and portfolio managers. Each subject to minimum capital (net worth) requirement to be kept at all times. Intermediaries holding multiple licenses must hold minimum capital of all categories combined. - Specific minimum capital requirements and related rules: - Broker dealers: - Minimum capital differs by exchange and segment. Example: BSE cash segment minimum capital is Rs 10,00,000 (US$20,925). This capital must be kept at all times. - No requirement to adjust capital based on risk of activities undertaken. - To trade on the exchange broker required initial deposit in cash or near cash of Rs100,00,000. This deposit allows broker to trade up to certain volume and is adjusted via margins depending on exposure. - By Laws allow RSEs to impose additional capital requirements if necessary. - Broker contributions required: - Settlement guarantee fund initial contribution: Rs 10,00,000 (US$20,925). - Investor protection fund initial contribution: Rs 2,50,000 (US$5,231). - Underwriters: - Regulation 7 requires net worth of Rs 20 lakhs (US$41,850) to be kept at all times. - Regulation 15: total underwriting obligations shall not exceed 20 times the net worth of the underwriter. - Merchant bankers: - Regulation 7 requires net worth of not less than five crore rupees (US$1 million), to be kept at all times. - Portfolio managers: - Regulation 7 of the Portfolio Managers Regulation requires net worth not less than two crore rupees (US$0.42 million), to be kept at all times. - No explicit requirements to adjust capital by actual level of risks/activities undertaken for these categories. - Compliance and monitoring: - RSEs responsible for monitoring brokers’ capital compliance; actions include suspension of activity or membership if capital deteriorates. - SEBI monitors other intermediaries via half-yearly financial statements and can suspend or cancel registration if capital levels deteriorate. - Risks from affiliates and conglomerates: - SEBI requires “no objection” for constitution of foreign affiliate company by a regulated entity; domestic affiliates require RSE permission per By Laws. - Two committees set up to deal with financial conglomerates: technical committee (meets quarterly) and high level committee (meets semi-annually with CEOs). Conglomerates required to send periodic information to lead supervisor. - Current count: 12 financial conglomerates. Lead regulator allocation: RBI in eight conglomerates, SEBI in one, IRDA in three. - Assessment: Partly implemented. - Comments and recommendations: - Limitations: - Minimum capital categories not well segmented by activity risk (e.g., proprietary vs third-party trading for brokers). - Framework does not require on-going adjustment of capital according to actual risks undertaken. - Semi-annual capital reporting for intermediaries other than brokers is too infrequent for forward-looking supervision. - Practical mitigants observed: - Settlement risk managed through CCPs with margin requirements and settlement funds; brokers’ proprietary trading with own funds; minimal leverage; daily monitoring by RSEs. - For merchant bankers and underwriters, market practices (oversubscription of issues) have limited disruption risk. - Assessor’s recommendations: - Implement a risk-based capital system with minimum capital requirements that reflect different authorized activities and which are adjusted on an ongoing basis for actual risks (credit, market, liquidity, operational, etc.). - Example: different minimum capital for a broker trading only on behalf of third parties versus one taking proprietary positions. - Strengthen reporting: consider quarterly financial statements and monthly capital adequacy reporting (or at least monthly capital adequacy), with immediate notification obligation if capital falls below a threshold. ### Principle 23 — Internal organization and operational conduct standards - Management, organization and controls: - Code of Conduct requires intermediaries to have: - Good corporate policies and corporate governance; - Internal control procedures and financial and operational capabilities to protect operation, clients, investors and registered entities from theft, fraud and other dishonest acts; - Adequate infrastructure, operating procedures and systems backed by operation manuals. - Insider trading regulations require systems to restrict access to confidential information, segregation and Chinese wall, and prevention of misuse of price sensitive information. - Compliance officers and internal audits: - All types of securities intermediaries must appoint a compliance officer (Regulation 18A of Stock Brokers Regulation; 23A of Portfolio Managers Regulation; 28A of Merchant Bankers Regulation; 17A of Underwriters Regulation). Compliance officer must report material non-compliance to Board and SEBI. - From 2009, securities intermediaries except merchant bankers and underwriters required to carry out a complete internal audit on a half yearly basis by an independent qualified professional (Chartered Accountant, Company Secretary or Cost and Management Accountant) without conflicts of interest. Audit covers internal control system, compliance with regulations, data security and insurance, and efficacy of investor grievance redressal. - Internal auditor must submit audit report to member and respective SE within three months from end of half year period. - Redress of investor grievances: - Intermediaries must endeavor to redress grievances within 30 days and keep records of complaints and resolutions. - Quarterly submissions to SEBI on complaints addressed and unresolved beyond three months; SEBI receives monthly reports from RSEs. - Backlog of complaints exists but diminishing. - Broker arbitration system in By-Laws: mediation and arbitration routes; adjudication timelines and appeal rights; arbitration decisions requiring compensation to be deposited with RSE irrespective of appeal. Typical case finalization within six months. - RSEs must publish complaints on the website (Master Circular on Oversight of Members). - SEBI developing centralized system to consolidate complaints and their status for investors to consult. - Asset segregation and custody: - Code of Conduct requires segregation of each client’s funds and securities separately from intermediary’s own. - Portfolio Managers Regulation (Regulation 15): discretionary portfolio managers must manage funds of each client individually; non-discretionary managers also apply separate accounting; funds of all clients must be kept in a separate account in a commercial bank regulated by RBI. - If assets under management amount to Rs 500 crores (US$105 million) or more, portfolio manager must appoint a custodian for securities. - Conflicts of interest and suitability: - Code of Conduct requires mechanisms to avoid and resolve conflicts of interest and to disclose potential conflicts to clients. - Code contains general obligation to protect client interests and render advice suitable to investors’ needs. - Portfolio Managers Regulation (Regulation 14): require collection and documentation of client investment profile and objectives; Regulation 21 requires statements of account to clients at least on a half-yearly basis and upon client request, detailing portfolio composition, value, transactions, beneficial interest received, expenses and risks foreseen. - Regulation 14 also requires agreement defining rights and obligations; SEBI prescribes minimum contract content and disclosure document prior to agreement (fees, portfolio risks, related party transactions, performance). - Investment advice: - No specific regulation for independent investment advisers; brokers and portfolio managers have suitability obligations. - SEBI concept paper (September 9, 2011) proposing framework for regulation of investment advisers through an SRO; personalized paid investment advice would be regulated under this framework. - Assessment: Broadly implemented. - Comments: - Semi-annual internal audit strengthens oversight but does not apply to MBs or underwriters. - Need for explicit periodic objective assessment of internal controls and reporting on results. - Inspections should focus more on internal controls and risk management; comprehensive guidelines on internal controls/risk management would be beneficial, especially if moving to risk-based capital system. ### Principle 24 — Procedures for intermediary failure, investor protection and crisis coordination - Default procedures and powers: - By-laws of SEs contain detailed procedures for default of a broker; SEBI has not developed similar procedures for other intermediaries (staff does not consider them critical given fee-based models and asset segregation). - Regulation 9 of Intermediaries Regulations: SEBI authority to impose registration conditions and issue interim orders. - SEBI can suspend an intermediary and impose actions regarding custody of clients’ money/securities. - Circular 11.05.07: SEBI can order a portfolio manager to transfer business to another SEBI registered portfolio manager. - RSEs can request members to reduce exposures, order not to take new positions, ask for additional/special margins, deactivate terminals for non-payment of margins/settlements or on apprehension of financial difficulties or irregularities. - RSE default mechanics: - Declaration of default communicated to all members and SEBI. Default in one exchange triggers default in other exchanges where member is a member. Upon declaration of default, all deposits, assets or collateral vested in the RSE. Defaulters' Committee assesses and pays claims and can initiate legal proceedings in name of Exchange or creditors. Supreme Court upheld RSE power. - Investor protection measures: - Segregation of clients’ money and securities; beneficial ownership at CSD at individual level. - Brokers must “square-off” money owed to clients at least once in a calendar quarter or month (client preference) per circular MIRSD/SE/Cir-19/2009. - Portfolio managers: custodian requirement if AUM >= Rs 500 crores (US$105 million). - Brokers contribute to investor protection scheme; IPF processes claims via defaulters committee; no similar IPF for other intermediaries. - Early warning and monitoring: - SEBI oversees solvency of non-broker intermediaries via half-yearly financial statements. - RSEs oversee brokers’ capital adequacy daily and have alerts (cash market) and position limits (derivatives market). - Coordination and crisis management: - Crisis management contingency contact comprising SEBI, RBI, RSEs and clearing banks to address market disruption. - Regulators’ committees for conglomerates and FSDC coordination; SEBI has MoUs with foreign intermediaries. - Regulators provided examples: Lehman Brothers subsidiaries failure and money market fund redemption pressure coordination. - Practice and assessment: - Last broker default in late 1990s; none since. - Assessment: Broadly implemented. - Comments and recommendations: - Make RSE by-law procedures operational through a tested default plan. - For other intermediaries, require more frequent capital adequacy reporting and develop a basic plan to deal with their failure. - Regulators in technical committee on financial conglomerates should develop basic coordination framework for failures within groups. *Italic: IMF staff report content as provided in the supplied PDF excerpt.* ### Section 19 of the SCRA prohibits the operation of an exchange, unless prior ### Section 19 of the SCRA prohibits the operation of an exchange, unless prior ### Recognition framework and requirements - Section 19 of the SCRA prohibits the operation of an exchange, unless prior recognition has been given by SEBI. - Section 3 requires a RSE that wants to be a RSE to file an application with SEBI. - The SCRA does not recognize any other market operator different from a RSE. - Section 13A allows a RSE to establish additional trading floors with prior approval from SEBI, on terms and conditions stipulated by SEBI as per Section 13A of SC(R) Act. - Derivative Exchanges or separate derivative segment of an existing exchange require approval from SEBI. - Composition of governing body of the SEs and appointment of executive director or the managing director require prior approval of SEBI. - Pursuant to Section 4 SEBI can impose conditions for recognition, including relating to: - (i) the qualifications for membership; - (ii) the manner in which contracts shall be entered and enforced; - (iii) the representation of the CG on the exchange Board by a maximum of three members; and - (iv) the maintenance of accounts of members and their audit. - Section 4A requires that stock exchange be demutualized, and authorizes SEBI to impose conditions for such demutualization/corporatization. - Basic criteria for new stock exchanges include financial capacity (minimum of Rs 100 crores of net worth) and fit and proper requirements. - SEBI requires proper risk management policies and procedures given the use of CCPs; examples (NSE and BSE) include: - real time basis measurement of exposures; - initial and variation margins and contribution to a settlement fund; - access criteria for members and haircut of collateral; - regular stress testing and back testing. - Documentation required with recognition request includes business plan, business continuity plan and technology infrastructure proposed, proposed organizational structure, details on clearing and settlement, and an appraisal of the SE done by an independent accountant (RBI approved panel). - Registration is two-step: - SEBI reviews application and conducts an initial visit; satisfactory documentation yields “in principle approval” subject to infrastructure put in place and submission of by-laws and regulations. - A second inspection checks whether all infrastructure is in place. ### Supervision, oversight powers and off-site monitoring - SEBI assesses robustness of trading platform including clearing and settlement facilities; requires: - annual certification of risk management systems; - annual audit on the IT of the SE. - SEBI issues “model” bye-laws for SEs; bylaws/regulations must cover: - hours of trade; - Clearing house; - Number and class of contracts in which settlements will be made; - Terms and conditions of contracts, including margins; - Listing of securities; - Settlement of claims or disputes; - Levy and recovery of fees, fines and penalties; - regulation of dealing by members for their own account; - limitations on volume of trading, information obligations by members; - principles to deal with breaches to the Bylaws and regulations; - conditions for trading halts. - Powers of SEBI under SCRA (via notification from the CG) include: - direct a RSE to make rules or changes within a period of two months; failure permits SEBI to make the rules (Section 8); - power to make by-laws or amend them (Section 10); - power to issue directions to exchange or clearing corporation, to any company whose securities are listed (Section 12A); - supersede governing body of a RSE, after an opportunity to be heard (Section 11); - suspend the business of a RSE for not more than seven days, by notification in the gazette, for not more than 7 days; period can be extended via a new notification (Section 12); - withdrawal of recognition (Section 5); - levy penalty up to Rs. 25 crore rupees for failure to furnish periodical returns, failure to make or amend byelaws or failure to comply with directions issued by SEBI (Section 23G). - Off-site supervision and reporting: - RSEs submit a wide array of periodic reports to SEBI (including on trading platform robustness and self-regulatory function performance). - Regular meetings on market development; committee on non compliance with listing requirements. - Specific reporting cadence: - Risk management certification of the subsidiary on a half yearly basis. - Compliance reports regarding inspection observations on a quarterly basis. - System audit reports on an annual basis. - Market surveillance: Monthly (for NSE and BSE) or quarterly (for remaining exchanges). - SEBI holds weekly meetings with NSE and BSE and monthly meeting with depositories. - Supervision of brokers: Monthly reports on investors complaints; findings of on-site inspections; consolidated reports regarding broker audit reports and actions by RSE. - On-site supervision: NSE and BSE are subject to annual inspections covering trading infrastructure robustness and SRO roles. ### Fairness of access, order matching and operational information - SEBI oversees exchange by-laws and regulations to ensure fair treatment of members. - SEBI requires anonymous automated order driven systems where trades are matched automatically (based on an algorithm) based on time and price; complemented by prohibitions on front-running. - SEBI has constituted a Technical Advisory committee to address technological challenges (e.g., co-location and high frequency trading). - SEBI regulation allows direct market access; “naked” DMA is not permitted. - All by-laws and rules of exchanges are available on their websites. - Trading Member record-keeping requirements (preserve reports for a period of five years): - (i) activity log; - (ii) orders cancelled today; - (iii) new orders today; - (iv) outstanding orders today; - (v) trades done today. - Surveillance mechanisms have access to trading information of members and their clients and can audit all transactions; system maintains a log of all events from order entry to execution; provides a perfect audit trail by logging in/the trade execution process. - Exchanges have adopted anonymous order matching system; a single consolidated order book for each stock displays, on a real time basis, buy and sell orders from all over the country. - The Open Electronic Consolidated Limit Order Book (OECLOB) ensures full anonymity by accepting orders, big or small, from members without revealing their identity. ### Transparency of trading and OTC reporting - Market participants can see the best five bids and offer on real-time basis, as well as total volume; information on executed transactions (last price) is also available. - Definition and disclosure rules for a bulk trade: - A bulk trade is defined as all transactions in a security where the total quantity of shares bought/sold is more than 0.5 percent of the number of equity shares of the company listed on the exchange. - The quantitative limit of 0.5 percent can be reached through one or more transactions executed during the day in the normal market segment. - Disclosure requirements: - brokers shall disclose to the stock exchange the name of the security, name of the client, quantity of shares bought/sold and the traded price; - the disclosure shall be made immediately upon execution of the trade; - the RSEs shall disseminate such information on the same day after market hours to the general public. - Conditions for ‘block deals’ window: - window may be kept open for a limited period of 35 minutes from the beginning of trading hours; - orders may be placed in this window at a price not exceeding 1 percent from the ruling market price/previous day closing price, as applicable; - an order may be placed for a minimum quantity of 5,00,000 shares or minimum value of Rs.50 million ($1.11 million approximately, assuming exchange rate of $1=Rs 45.00); - every trade executed in this window must result in delivery and shall not be squared off or reversed. - OTC trades: - SEBI imposed post-trade reporting obligations for OTC trades. - OTC trades are allowed in corporate bonds under Section 18 of SCRA with reporting obligation. - SEBI circular SEBI/CFD/DIL/BOND/1/2006/12/12 dated December 12, 2006, requires that all transactions in corporate bonds of the value of Rs.1,00,000 or above be reported to the corporate bond platform within 30 minutes of closing the deal; reporting responsibility lies with intermediary if executed through one, otherwise by authorized intermediary or contracting parties. - Equity cash segment: SEBI circular SMD/RCG/CIR/(BKG)/293/95 dated March 14 1995 directed brokers to report all transactions done on a spot basis (off-the-floor transactions) on the same day. - OTC trades in equity derivatives are not allowed. ### Market surveillance, misconducts and enforcement - Prohibitions and statutory provisions: - Section 11(2)(e) and section 12A of SEBI Act prohibit fraudulent or deceptive conduct, market abuse, manipulation, and deceptive devices. - Section 12A states that no person shall directly or indirectly: - (a) use or employ any manipulative or deceptive device or contrivance; - (b) employ any device, scheme or artifice to defraud; - (c) engage in any act, practice, course of business which operates or would operate as fraud or deceit; - (d) engage in insider trading; and - (e) deal in securities while in possession of material and non-public information or communicate such material non public information in contravention of the Act or regulations. - SEBI has issued Regulations on Market Manipulation and Insider Trading. - Penalties and criminal sanctions: - As per Section 15 H and G the penalty for such misconducts is of 25 crore rupees(US$ 5 million) or three times the amount of profits made, whichever is higher. - As per Section 24 such violations constitute a crime, punishable with imprisonment up to 10 years or a fine up to 25 crore rupees (US$ 5 million) or both. - SEBI can also impose other sanctions including directions and debarring (see Principle 9). - Market surveillance systems and identifiers: - RSEs have automated market surveillance; SEBI has an Integrated Market Surveillance System (IMSS) receiving intraday data from exchanges across segments; SEBI conducts analysis on a t+1 basis. - Unique identification number for each client and a 13 digit code for each transaction enhance monitoring capability. - Investigations and enforcement activity (RSEs): - RSEs initiated 1,978, 1,126 and 1,588 investigations for the years 2007–2008, 2008–2009, and 2009–20010 respectively. - The majority of cases pertain to manipulation, insider trading, front running, etc.; after preliminary investigations exchanges have imposed penalties or issued warning letters; where third parties are involved (e.g., insider trading) RSEs forward investigations to SEBI for disciplinary proceedings. - Tabulated particulars as presented: - Particulars 2009–10 2008–09 2007–08 - Preliminary Investigation Taken Up 1,588 1,126 1,978 - Finalized/completed 1/ 1,5751,131 2,003 - Closed 1,335 962 1,824 - Forwarded to SEBI for necessary actions 240 169 179 - 1/ Includes completed cases which were taken up in the previous period. - Cross-border surveillance: - Level of cross border trading of Indian securities is limited; a few IDRs exist. - India has been active providing information to foreign counterparties (see Principles 12 and 13). - Assessment and comments: - Assessment: Fully implemented. - Comments note challenges in criminal enforcement; SEBI committed to improving surveillance capabilities (IMSS upgrades). ### Management of large exposures, default procedures and market disruption - Risk management and exposures: - RSEs have systems including base minimum capital, margining, including mark to market margin. - Margins are posted by the broker in the cash market, and by the client in the derivatives market (client margins segregated from brokers’ own account). - Clear rules on haircut of collateral; real time monitoring of member exposures; single identification number for clients to monitor positions at client level. - RSEs can request members to reduce exposures, order them not to take new positions, ask for additional/special margins, or deactivate a member’s terminal for nonpayment or irregularities. - Settlement guarantee fund (SGF) and stress testing: - RSEs are required to maintain a settlement guarantee fund to meet shortages arising out of nonfulfillment or partial fulfillment of funds obligations before declaring a member defaulter. - Since 1997, RSEs/clearing corporations have been advised to assess minimum level of corpus of SGF (Stress Test of SGF) on a regular basis. - Default procedures: - By-Laws contain default procedures; declaration of default must be communicated to all members and SEBI. - SEBI circular: default in one exchange automatically triggers default of the broker in any other exchange of which he is a member. - Upon declaration of default all deposits, assets or collateral vest in the RSE; a defaulters committee assesses and pays claims and is empowered to initiate recovery proceedings in court in the name of the Exchange or the defaulter or creditors. - Market disruption controls: - Individual securities bands in the cash market of 2, 5, 10, and 20 percent; securities moved between bands based on exchange-set parameters; coordinated action between NSE and BSE to apply the more stringent price band across exchanges. - Market-wide circuit breakers when Sensex or NIFTY breaches thresholds of 10, 15, and 20 percent of the previous quarter’s index closing. - “Dummy” filters for securities with derivatives or in indices with derivatives, triggered when prices vary more than 20 percent; filter triggers an alert and RSE requires explicit confirmation from the member. - Coordination and crisis management: - Crisis management contingency contact group comprising officials of GoI, SEBI, RBI, IRDA, Stock Exchanges etc. operates as a quick response team in crisis to ensure smooth functioning of securities market including payment settlement. - Assessment and comments: - Assessment: Fully implemented. - Comments: Framework meets key issues of the IOSCO Methodology; a full assessment of CCPs under the CPSS-IOSCO Methodology found the current risk management framework robust with a few recommendations (included in TN on payments). ### Principle 30 note - Principle 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. - Description: Not assessed. - Assessment: (blank) - Comments: (blank) *Source: _cr13266 - Section 19 of the SCRA prohibits the operation of an exchange, unless prior* ### ANNEX I. STATUS OF IMPLEMENTATION OF THE NEW IOSCO PRINCIPLES ### ANNEX I. STATUS OF IMPLEMENTATION OF THE NEW IOSCO PRINCIPLES ### The Regulator should have or contribute to a process to monitor, mitigate and manage systemic risk, appropriate to its mandate - Description: - SEBI authorities highlighted that while the institution has not formally had a strategy toward systemic risk identification and monitoring; in practice it has done so via the supervision that departments do of the specific segment of the market under their supervision. - Once a risk is identified, then SEBI decides whether regulatory or other types of measures are needed. - Examples: arrangements required for RSEs to address settlement risks (including margins and a settlement fund); circuit breakers to address market disruption. - Coordination between SEBI and the RBI for systemic stability concerns has worked well; examples include coordinated measures after the failure of Lehman Brother subsidiaries in the country, and regarding redemption pressures in the money market industry. - SEBI has recently created a systemic stability unit that would allow it to take a more systematic approach toward systemic risk identification and monitoring. - Via Notification of the CG of December 2010, a Financial Stability Development Council (FSDC) was established to develop a process to identify, monitor and address systemic risk. The FSDC is chaired by the MoF, which also holds the secretariat. - The FSDC is still at an early stage; there are no formal arrangements regarding frequency of meetings nor voting arrangements. The authorities informed that the FSDC meets when and as necessary, decisions are taken on a consensual basis. Since its constitution it has met twice and a third meeting has already been scheduled. When an issue is decided, the agenda for the next meeting includes a follow up on actions taken. - Within the FSDC a subcommittee on inter-regulatory coordination has been set up, integrated by the heads of the regulatory agencies, and chaired by the RBI. There are no formal arrangements regarding the frequency of the meetings of the subcommittee; it meets when and as necessary. Since its creation it has met three times. - FSDC subcommittee in its meeting on August 26, 2011 constituted an Inter Regulatory Technical Group to address issues related to risks to Systemic Financial stability and inter regulatory coordination and to provide essential inputs for meetings of subcommittee. The group includes representatives of four regulators at the level of Executive Directors. - Pursuant to the decision by SEBI Board in its meeting on July 28, 2011, SEBI approved the constitution of a Systemic Stability Unit (SSU) in SEBI. - SSU mandate includes: identify and collect systemic risk information through a template for regular review to identify, assess & mitigate emerging systemic risks; develop a time series of core set of securities market indicators having bearing on systemic stability of financial market; conduct stress test of systemically important institutions in securities market to assess resilience; conduct research relating to Systemic Issues in securities market (ownership structure; leverage; inter-connectedness of market segments; risk concentration; behavior under stressed conditions; unregulated products/markets/entities, etc.) and recommend regulations to manage systemic c risk; prepare periodic Systemic Stability Report in respect of securities market in India; mandate risk assessment methodologies to relevant market participants for their self-assessment and reporting to SEBI; coordinate with and provide assistance to FSDC/FSB/ Standing Committee (SC7) of IOSCO on issues pertaining to financial stability, macro prudential regulation and supervision. - The SSU was set up on September 30, 2011, and has already started functioning. - Assessment: - N/A. - Comments: - (none provided) ### The Regulator should have or contribute to a process to review the perimeter of regulation regularly - Description: - SEBI’s review of the perimeter of regulation is to a large extent imbedded in its process of identification of risk described in Principle 6. - Several standing/advisory committees look into issues pertaining to primary market, secondary market, mutual funds, debt market, etc., and can take on issues relating to the perimeter of regulation in their respective areas. - Section 12 (1) of SEBI Acts provides authority to extend the perimeter of regulation to other entities not covered by the registration regime via regulations. The provision states that “no stock-broker, sub-broker, share transfer agent, banker to an issue, trustee of trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser and such other intermediary who may be associated with securities market shall buy, sell or deal in securities except under, and in accordance with, the conditions of a certificate of registration obtained from the Board in accordance with the regulations made under this Act.” - SEBI Board in its meeting on July 28, 2011 approved a proposal to set up an inter-departmental regulations review committee chaired by a WTM with Executive Directors as members to make rigorous and regular review of rules and regulations in Indian securities markets to: - identify gaps and comply with relevant global standards; - consider the extent to which current regulation adequately addresses investor protection, fair, efficient and transparent markets; - consider the degree to which existing regulations are outmoded or no longer necessary or the degree to which they should be modified to take into account new market developments; - whether regulatory premises underlying any existing regulatory exemptions continue to be valid; - undertake assessment of overall costs to stakeholders; and - seek legislative amendments to securities laws and regulations, etc. - SEBI has setup Regulators Review Committee which has started functioning from October 14, 2011. - Assessment: - N/A. - Comments: - (none provided) ### The Regulator should seek to ensure that conflicts of interest and misalignment of incentives are avoided, eliminated, disclosed, or otherwise managed - Description: - Obligation to address conflicts of interest is imbedded in the regulations for all types of intermediaries, as well as in corresponding codes of conduct. - The supervisory process (mainly on-site inspection program) allows monitoring whether conflicts of interest are in practice been adequately address. - SEBI has a separate department on derivatives and new products to identify risks and problems with products at an early stage. - SEBI Board in its meeting on July 28, 2011 approved a proposal to prescribe Guidelines for dealing with Conflicts of Interests of Associated Persons in Securities Market. These Guidelines are aimed at dealing with conflicts of interests by all participants in Indian securities market, associated persons, investment vehicles, collective pools of capital, institutional investors, stock exchanges, etc. - The Guidelines would focus on active involvement of senior management of market participants; adoption of clear and concise policies; adequate disclosures; information barriers; effective procedures; remuneration to commensurate the activities; maintaining record of activities; specific prohibitions, etc. - Assessment: - N/A. - Comments: - (none provided) ### Auditors should be subject to adequate levels of oversight - Description: - Current system of auditors oversight lies mainly in ICAI, a professional body created by statute with representation of the regulatory authorities. - ICAI established the Peer Review Board in 2002, which undertakes peer reviews of firms focusing on documentation and processes to ensure compliance with technical standards. It issues peer review certificates if compliance, processes and documentation are satisfactory. Such certificate is valid for a period of three years. - As per SEBI’s circular dated April 05, 2010, for all listed entities, limited review/statutory audit reports submitted to the concerned stock exchanges shall be given only by auditors who have subjected themselves to the peer review process of ICAI and who hold a valid certificate. SEBI has mandated that financial information disclosed in the offer documents need to be signed by auditors holding peer review certificates. - A Financial Reporting Review Board (FRRB) was constituted in 2002 to review compliance by issuers with accounting standards; it is a non-standing committee of ICAI with representatives from ICAI and different stakeholders including regulatory authorities. - FRRB selection criteria (mainly net worth, industrial class and random sampling) result in roughly 150–200 companies selected; in the past three years FRRB has reviewed 459 cases and referred 14 cases out of the same to regulatory bodies for necessary action. - Under the Chartered Accountants Act, ICAI has disciplinary powers exercised via a Disciplinary Board, the Disciplinary Committee and Appellate Board which has representation of members appointed by the CG, in addition to representatives of ICAI. ICAI informed that in the past three years it has initiated action against 306 members and found 115 members guilty. The List of Persons/Members found guilty under First & Second Schedule is displayed on ICAI website. - In 2007, the CG constituted a Quality Review Board to review quality of services provided by chartered accountants, provide guidance for improvement and make recommendations to the Council of ICAI. The Chairman of the Board is appointed by CG and it has equal representation of ICAI Council members and members appointed by CG. The assessor was informed that such body is currently in the process of developing a plan/strategy for its operation. - SEBI Board has approved a proposal for SEBI to benchmark the operation and oversight of audit profession and accounting standards in India to the new Principles relating to oversight and independence of auditors, and audit standards and to write to the CG pointing out the gaps and possible solutions. - Assessment: - N/A. - Comments: - (none provided) ### Auditors should be independent of the issuing entity that they audit - Description: - Section 226 of the Companies Act contains provisions aimed at ensuring auditors’ independence: an internal auditor cannot be the statutory auditor of a company; a person who is indebted to the company or who is holding the shares of the company cannot be appointed as a statutory auditor. - ICAI has issued a Code of Ethics and a Guidance Note on Auditor’s independence. - SEBI staff informed that the Companies Bill placed in the parliament has more stringent provisions pertaining among others to auditors’ independence, including qualification, rotation, performance of non-audit services, liabilities of auditors. - Current listing agreement requires that Audit Committee should recommend to the Board regarding the appointment, reappointment and, if required, the replacement or removal of the statutory auditor and the fixation of audit fees. Two thirds of the member of the Audit Committee should be independent directors. - Assessment: - N/A. - Comments: - (none provided) ### Audit standards should be of a high and internationally acceptable quality - Description: - Listed companies are required to submit annual audited financial statements and quarterly financial statements per listing agreements. As per the Companies Act, such statements must be prepared according to the accounting standards approved by ICAI. - Auditors must conduct their audits according to the auditing standards approved by ICAI. - ICAI is a statutory body established under the Chartered Accountants Act of 1949, in charge of establishing accounting and auditing standards via the Accounting Standards Board (ASB) and the Auditing and Assurance Standard Board (AASB). Both Committees have wide representation of public interest; SEBI is member of both Committees. - ICAI has adopted local auditing standards and, under the Clarity Project, is seeking to adopt the International Auditing Standards (IAS). - There is currently no independent oversight mechanism for ensuring compliance of auditing standards by the auditors. - ICAI established the Peer Review Board in 2002 (see above). Listed companies and companies making public offers need to get their financial results certified by peer reviewed auditors as per SEBI Regulations/listing Agreement. - The CG constituted a QRB to review quality of services provided by chartered accountants; the body is currently devising a strategy to fulfill its mandate. - Current framework allows publication of qualified financial statements. Clause 49 of the Equity Listing Agreement contains a non-mandatory requirement stating that company may move toward a regime of unqualified financial statements. - Assessment: - N/A. - Comments: - (none provided) ### Credit rating agencies should be subject to adequate levels of oversight. The regulatory system should ensure that credit rating agencies whose ratings are used for regulatory purposes are subject to registration and ongoing supervision - Description: - In India Credit Rating Agencies (CRAs) are registered and regulated under the SEBI (Credit Rating Agency) Regulations, 1999. There are currently six credit agencies registered with SEBI under this regulation. - SEBI regulations for CRAs address the principles developed by IOSCO in the IOSCO Code of Conduct. The Regulations and circulars provide for submission of periodic reports, inspection of CRAs and initiating action(s) against them after following the prescribed procedure. - SEBI strengthened regulations for CRAs via circular dated 3.5.2010, mandating additional disclosures and measures to deal with conflict of interest, including: - Disclosure on a semiannual basis of the fees they charge companies for assessing their debt profile and the default rate on their previous ratings. - Ensure their analysts do not participate in any marketing and business development, including fee negotiations with the issuer whose securities they are rating and employees involved in the rating process and their dependents do not own shares of the issuer. - Maintain records of the important factors underlying the credit rating and a summary of discussions with all the stakeholders involved, as well as decisions of the rating committee, including voting details and notes of dissent. - SEBI requires half yearly internal audit for credit rating agencies to be conducted by Chartered Accountants, Company Secretaries or Cost and Management Accountants who are in practice and who do not have any conflict of interest with the CRA. The audit shall cover all aspects of CRA operations and procedures, including investor grievance redress mechanism and compliance with the provisions of the securities laws. - SEBI informed that onsite inspections of CRAs have been carried out in the past. The CRAs are also scheduled to be inspected in the current financial year. - Assessment: - N/A. - Comments: - (none provided) ### Other entities that offer investors analytical or evaluative services should be subject to oversight and regulation appropriate to the impact their activities have on the market or the degree to which the regulatory system relies on them - Description: - There are no specific regulations for research analysts. Indirect provisions relating to analytical or evaluative services are included in the Regulations for brokers and portfolio managers, including general obligations regarding provision of investment advice and suitability; investment advice in publicly accessible media shall include a disclosure of interest of the broker as well as the specific employee responsible for it. - CRAs currently provide a service that might be considered under this Principle: provision of a pricing methodology for mutual funds. SEBI has mandated that mutual funds value their portfolios based on the bond valuation metrics provided by two credit rating agencies. Such activity is currently not subject to regulation. - SEBI Board in its meeting on July 28, 2011 approved a proposal to regulate research analysts in Indian securities market through an exclusive and comprehensive regulation. - Assessment: - N/A. - Comments: - (none provided) ### Regulation should ensure that hedge funds and/or hedge fund managers/advisers are subject to appropriate oversight - Description: - SEBI has developed regulations for venture capital funds (VCFs). There is no separate regulatory framework for regulating private pool of capital except Venture Capital Funds and Foreign Venture Capital Investors. SEBI authorities informed that hedge funds do not appear to be operating from India. - SEBI authorities informed they are in the process of developing regulations for hedge funds so that such type of investment vehicles is available in the jurisdiction. - SEBI Board in its meeting on July 28, 2011 approved a proposal to have a clear regulatory framework for private pools of capital, including Venture Capital Fund, Private Equity Fund, Strategy Fund (Residual Category, including all varieties of funds such as Hedge funds, if any). - Accordingly, SEBI on August 1, 2011, put a Concept Paper on the Proposed Alternative Investment Funds and the draft Alternative Investment Funds Regulations on SEBI website for public comments. - Assessment: - N/A. - Comments: - (none provided) *Source: _cr13266 - ANNEX I. STATUS OF IMPLEMENTATION OF THE NEW IOSCO PRINCIPLES* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13266.pdf_