Introduction
Whenever a Job notification is out the first thing we do is go to the salary section and check what is the remuneration for that particular job. In order to apply for that particular job and later put all the effort and hard-work to get selected, is a long and tiring process. If our efforts are not compensated satisfactorily, we might not really like to get into the long time consuming process.
When we go through the salary section we often see words like Pay Scale, Grade Pay, or even level one or two salary and it is common to get confused between these jargons and to know the perfect amount of salary that we are going to receive.
To understand what pay scale, grade pay, various numbers of levels and other technical terms, we first need to know what pay commission is and how it functions.
Pay Commission
The Constitution of India under Article 309 empowers the Parliament and State Government to regulate the recruitment and conditions of service of persons appointed to public services and posts in connection with the affairs of the Union or any State.
The Pay Commission was established by the Indian government to make recommendations regarding the compensation of central government employees. Since India gained its independence, seven pay commissions have been established to examine and suggest changes to the pay structures of all civil and military employees of the Indian government.
The main objective of these various Pay Commissions was to improve the pay structure of its employees so that they can attract better talent to public service. In this 21st century, the global economy has undergone a vast change and it has seriously impacted the living conditions of the salaried class. The economic value of the salaries paid to them earlier has diminished. The economy has become more and more consumerized. Therefore, to keep the salary structure of the employees viable, it has become necessary to improve the pay structure of their employees so that better, more competent and talented people could be attracted to governance.
In this background, the Seventh Central Pay Commission was constituted and the government framed certain Terms of Reference for this Commission. The salient features of the terms are to examine and review the existing pay structure and to recommend changes in the pay, allowances and other facilities as are desirable and feasible for civil employees as well as for the Defence Forces, having due regard to the historical and traditional parities.
The Ministry of finance vide notification dated 25th July 2016 issued rules for 7th pay commission. The rules include a Schedule which shows categorically what payment has to be made to different positions. The said schedule is called 7th pay matrix
For the reference the table(7th pay matrix) is attached below.
Pay Band & Grade Pay
According to the table given above the first column shows the Pay band.
Pay Band is a pay scale according to the pay grades. It is a part of the salary process as it is used to rank different jobs by education, responsibility, location, and other multiple factors. The pay band structure is based on multiple factors and assigned pay grades should correlate with the salary range for the position with a minimum and maximum. Pay Band is used to define the compensation range for certain job profiles.
Here, Pay band is a part of an organized salary compensation plan, program or system. The Central and State Government has defined jobs, pay bands are used to distinguish the level of compensation given to certain ranges of jobs to have fewer levels of pay, alternative career tracks other than management, and barriers to hierarchy to motivate unconventional career moves. For example, entry-level positions might include security guard or karkoon. Those jobs and those of similar levels of responsibility might all be included in a named or numbered pay band that prescribed a range of pay.
The detailed calculation process of salary according to the pay matrix table is given under Rule 7 of the Central Civil Services (Revised Pay) Rules, 2016.
As per Rule 7A(i), the pay in the applicable Level in the Pay Matrix shall be the pay obtained by multiplying the existing basic pay by a factor of 2.57, rounded off to the nearest rupee and the figure so arrived at will be located in that Level in the Pay Matrix and if such an identical figure corresponds to any Cell in the applicable Level of the Pay Matrix, the same shall be the pay, and if no such Cell is available in the applicable Level, the pay shall be fixed at the immediate next higher Cell in that applicable Level of the Pay Matrix.
The detailed table as mentioned in the Rules showing the calculation:
For example if your pay in Pay Band is 5200 (initial pay in pay band) and Grade Pay of 1800 then 5200+1800= 7000, now the said amount of 7000 would be multiplied to 2.57 as mentioned in the Rules. 7000 x 2.57= 17,990 so as per the rules the nearest amount the figure shall be fixed as pay level. Which in this case would be 18000/-.
The basic pay would increase as your experience at that job would increase as specified in vertical cells. For example if you continue to serve in the Basic Pay of 18000/- for 4 years then your basic pay would be 19700/- as mentioned in the table.
Dearness Allowance
However, the basic pay mentioned in the table is not the only amount of remuneration an employee receives. There are catena of benefits and further additions in the salary such as dearness allowance, HRA, TADA.
According to the Notification No. 1/1/2023-E.II(B) from the Ministry of Finance and Department of Expenditure, the Dearness Allowance payable to Central Government employees was enhanced from rate of 38% to 42% of Basic pay with effect from 1st January 2023.
Here, DA would be calculated on the basic salary. For example if your basic salary is of 18,000/- then 42% DA would be of 7,560/-
House Rent Allowance
Apart from that the HRA (House Rent Allowance) is also provided to employees according to their place of duties. Currently cities are classified into three categories as ‘X’ ‘Y’ ‘Z’ on the basis of the population.
According to the Compendium released by the Ministry of Finance and Department of Expenditure in Notification No. 2/4/2022-E.II B, the classification of cities and rates of HRA as per 7th CPC was introduced.
See the table for reference
However, after enhancement of DA from 38% to 42% the HRA would be revised to 27%, 18%, and 9% respectively.
As above calculated the DA on Basic Salary, in the same manner HRA would also be calculated on the Basic Salary. Now considering that the duty of an employee’s Job is at ‘X’ category of city then HRA will be calculated at 27% of basic salary.
Here, continuing with the same example of calculation with a basic salary of 18000/-, the amount of HRA would be 4,840/-
Transport Allowance
After calculation of DA and HRA, Central government employees are also provided with Transport Allowance (TA). After the 7th CPC the revised rates of Transport Allowance were released by the Ministry of Finance and Department of Expenditure in the Notification No. 21/5/2017-EII(B) wherein, a table giving detailed rates were produced.
The same table is reproduced hereinafter.
As mentioned above in the table, all the employees are given Transport Allowance according to their pay level and place of their duties. The list of annexed cities are given in the same Notification No. 21/5/2017-EII(B).
Again, continuing with the same example of calculation with a Basic Salary of 18000/- and assuming place of duty at the city mentioned in the annexure, the rate of Transport Allowance would be 1350/-
Apart from that, DA on TA is also provided as per the ongoing rate of DA. For example, if TA is 1350/- and rate of current DA on basic Salary is 42% then 42% of TA would be added to the calculation of gross salary. Here, DA on TA would be 567/-.
Calculation of Gross Salary
After calculating all the above benefits the Gross Salary is calculated.
Here, after calculating Basic Salary+DA+HRA+TA the gross salary would be 32,317/-
However, the Gross Salary is subject to few deductions such as NPS, Professional Tax, Medical as subject to the rules and directions by the Central Government. After the deductions from the Gross Salary an employee gets the Net Salary on hand.
However, it is pertinent to note that benefits such as HRA and TA are not absolute, these allowances are only admissible if an employee is not provided with a residence by the Central Government or facility of government transport.
Conclusion
Government service is not a contract. It is a status. The employees expect fair treatment from the government. The States should play a role model for the services. The Apex Court in the case of Bhupendra Nath Hazarika and another vs. State of Assam and others (reported in 2013(2)Sec 516) has observed as follows:
“………It should always be borne in mind that legitimate aspirations of the employees are not guillotined and a situation is not created where hopes end in despair. Hope for everyone is gloriously precious and that a model employer should not convert it to be deceitful and treacherous by playing a game of chess with their seniority. A sense of calm sensibility and concerned sincerity should be reflected in every step. An atmosphere of trust has to prevail and when the employees are absolutely sure that their trust shall not be betrayed and they shall be treated with dignified fairness then only the concept of good governance can be concretized. We say no more.”
The consideration while framing Rules and Laws on payment of wages, it should be ensured that employees do not suffer economic hardship so that they can deliver and render the best possible service to the country and make the governance vibrant and effective.
Written by Husain Trivedi Advocate
SEBI (Bankers to an Issue) Regulations 1994: A Comprehensive Analysis
Introduction
The Securities and Exchange Board of India (SEBI) enacted the Bankers to an Issue Regulations in 1994 to regulate the activities of banks that serve as collection and refund agents in public offerings of securities. These regulations emerged from SEBI’s recognition that banking institutions play a pivotal role in the capital raising process, handling substantial funds during public issues and serving as a critical interface between issuers and investors. The regulations aim to ensure that these banking functions are performed with integrity, efficiency, and accountability, thereby protecting investor interests and promoting market confidence in the primary market for securities.
Historical Context and Evolution of SEBI (Bankers to an Issue) Regulations
The SEBI (Bankers to an Issue) Regulations were promulgated under Section 30 of the SEBI Act, 1992, which empowers SEBI to make regulations consistent with the Act to carry out its objectives of protecting investor interests and regulating the securities market. Prior to these regulations, banking functions in public issues were governed primarily by Reserve Bank of India (RBI) guidelines and general banking laws, creating a regulatory gap specifically addressing their securities market functions.
The regulations were enacted during a period of significant reform in India’s capital markets, following the 1991 economic liberalization policies. This era witnessed a substantial increase in capital market activity, with numerous companies accessing public markets for fund-raising. The need for specialized regulation of key market intermediaries, including bankers to issues, became apparent as the market expanded and grew more complex.
Over the years, these regulations have evolved to address changing market dynamics and technological advancements. Significant amendments were introduced in 2006, 2011, and 2018, reflecting SEBI’s responsive approach to regulatory challenges and market developments. The most transformative change occurred with the introduction of the Application Supported by Blocked Amount (ASBA) process in 2008, which fundamentally altered the role of bankers to an issue by moving from fund collection to fund blocking mechanisms.
Registration Requirements for Bankers to an Issue under SEBI Regulations
Chapter II: Registration Framework
Chapter II of the SEBI (Bankers to an Issue) Regulations, 1994 lays down the registration framework for such entities.
“No person shall act as a banker to an issue unless he has obtained a certificate of registration from the Board under these regulations:
Provided that a person acting as a banker to an issue immediately before the commencement of these regulations, may continue to do so for a period of three months from such commencement or, if he has made an application for such registration within the said period of three months, till the disposal of such application:
Provided further that a scheduled bank, as defined under the Reserve Bank of India Act, 1934 (2 of 1934), shall not act as a banker to an issue unless it has obtained a certificate of registration from the Board under these regulations.”
This provision ensures that only entities meeting SEBI’s standards can function as bankers to an issue, while grandfathering existing service providers during the transition period.
Eligibility Criteria for SEBI Bankers to Issue Registration
Regulation 4 of the SEBI (Bankers to an Issue) Regulations, 1994 specifies the information required in the registration application, including details about the applicant’s.
- Banking infrastructure and expertise
- Past experience in handling public issues
- Organizational structure and management team
- Financial resources and stability
- Communication and coordination systems
Regulation 6 outlines the criteria SEBI considers when granting registration:
“The Board shall take into account for considering the grant of a certificate, all matters which are relevant to the functioning of a banker to an issue and in particular, whether the applicant: (a) is a scheduled bank as defined in the Reserve Bank of India Act, 1934 (2 of 1934); (b) has the necessary infrastructure, communication and data processing facilities to effectively discharge its activities as a banker to an issue; (c) has any past experience in handling public issues or similar operations; (d) has an adequate and competent staff who have the experience to handle the responsibilities of a banker to an issue; (e) fulfills the capital adequacy requirements specified by the Reserve Bank of India from time to time; (f) has the necessary arrangements with clearing houses of the concerned stock exchange or with self clearing members of the stock exchange for refund of excess application monies; (g) has been granted a certificate by the Reserve Bank of India to act as a banker to an issue, if available; (h) has a clean track record with no serious disciplinary action taken against it by Reserve Bank of India or any other regulatory authority; and (i) is a fit and proper person.”
These provisions ensure that only professionally competent and financially sound banking institutions can serve as bankers to an issue.
General Obligations and Responsibilities of Bankers to an Issue
Chapter III: Core Obligations
Chapter III establishes the general obligations of bankers to an issue. Regulation 12 states:
“Every banker to an issue shall: (a) maintain proper books of accounts, records and documents relating to all activities as a banker to an issue; (b) comply with the provisions of the SEBI Act, the rules and regulations made thereunder, and any other law for the time being in force, and any instruction, guidelines, notifications, circulars, or directions issued by the Board from time to time; (c) function in accordance with the terms of the application made to the Board and any instructions issued by the lead merchant banker in connection with the issue.”
These general obligations, as outlined in the SEBI (Bankers to an Issue) Regulations, 1994, establish the foundational responsibilities of bankers to an issue and ensure their operations comply with relevant laws and regulatory directions.
Specific Responsibilities of Bankers to an Issue under SEBI Guidelines
While not explicitly enumerated in the regulations, SEBI circulars and guidelines have clarified several specific responsibilities for bankers to an issue:
- Collection of application money: Accepting applications and application money from investors during the subscription period.
- Maintaining proper records: Keeping detailed records of all applications received, including date, time, and amount.
- Fund management: Ensuring proper management of issue funds, including timely transfer to designated accounts.
- Refund processing: Processing refunds to applicants in case of over-subscription or failed/rejected applications.
- Coordination with other intermediaries: Working closely with registrars, lead managers, and stock exchanges to ensure smooth issue operations.
- Reporting: Providing regular reports to the issuer and lead manager regarding subscription status.
- ASBA processing: For banks designated as Self Certified Syndicate Banks (SCSBs), maintaining and operating the ASBA facility for investors.
SEBI Code of Conduct for Bankers to an Issue
Schedule III of the SEBI (Bankers to an Issue) Regulations, 1994 contains a comprehensive code of conduct for bankers to an issue. Key provisions include:
- Maintaining high standards of integrity and fairness in all dealings.
- Exercising due diligence and ensuring proper care in all operations.
- Avoiding conflicts of interest that could compromise the banker’s responsibilities.
- Maintaining confidentiality of client information.
- Treating all investors fairly and impartially.
- Ensuring prompt and accurate processing of applications and refunds.
- Cooperating with other intermediaries involved in the issue process.
- Maintaining proper records and documentation of all activities.
Regulation 14 also imposes specific record-keeping requirements:
“Every banker to an issue shall maintain the following books of accounts, records and documents namely: (a) Register of applications received, containing the name of the applicant, date of receipt of application and the amount collected; (b) Register of refunds made, containing the name of the applicant, date of refund order, amount of refund and date of dispatch of refund order; (c) Copies of all the correspondence with the Board; (d) Records of all the complaints and remedial action taken; (e) Any other books of accounts, records and documents, as may be specified by the Board.”
This detailed record-keeping framework ensures transparency and accountability in the banker’s operations and facilitates regulatory oversight.
Transformation of Role: The ASBA Process
The introduction of the Application Supported by Blocked Amount (ASBA) process in 2008 fundamentally transformed the role of bankers to an issue. The ASBA mechanism is now the mandatory method for retail applications in public issues, replacing the traditional system of fund collection and refund.
Under the ASBA process:
- The bank does not collect application money but merely blocks the funds in the applicant’s account.
- The blocked amount remains in the investor’s account, earning interest until allotment is finalized.
- Only the amount corresponding to the allotted securities is debited from the account.
- No refund processing is needed as the excess blocked amount is simply released.
This significant change has enhanced efficiency in the public issue process by:
- Eliminating the refund cycle, which previously took 10-15 days
- Reducing the cost of fund movements
- Ensuring investors continue to earn interest on their funds
- Minimizing the risk of refund fraud or delays
- Streamlining the entire application process
SEBI has issued detailed guidelines for banks acting as Self Certified Syndicate Banks (SCSBs) under the ASBA process, including:
- Technical infrastructure requirements
- Operational procedures for blocking and unblocking funds
- Coordination mechanisms with other intermediaries
- Reporting requirements to issuers and stock exchanges
- Complaint handling procedures for ASBA-related issues
Landmark Judicial Interpretations on Bankers to an Issue
Axis Bank v. SEBI (2012)
This SAT appeal concerned the responsibilities of escrow banks in public issues. Axis Bank had acted as an escrow banker in an IPO where certain irregularities were detected. The tribunal’s judgment established:
“The responsibility of a banker to an issue is not merely mechanical or ministerial. As an escrow bank handling public funds, the banker carries a fiduciary responsibility to exercise appropriate diligence in fund management. While the banker cannot be expected to investigate the veracity of each application, it must ensure that its systems and processes are robust enough to detect obvious irregularities and report them promptly to the lead manager and SEBI.”
This judgment expanded the understanding of a banker’s responsibility beyond mere procedure to include vigilance and reporting obligations.
HDFC Bank v. SEBI (2016)
This SAT appeal addressed the responsibility of banks in managing issue funds. HDFC Bank was penalized for delays in transferring issue proceeds to the designated account. The tribunal held:
“The timely transfer of issue proceeds is not merely a contractual obligation but a regulatory requirement that directly impacts investor protection. The banker to an issue plays a critical role in maintaining the integrity of the public issue process. Delays in fund transfer, even if not resulting in direct investor harm, compromise the regulatory framework designed to protect the issue process. Bankers must implement systems to ensure that such transfers occur within the stipulated timeframes, regardless of operational challenges.”
This judgment emphasized the time-sensitive nature of the banker’s responsibilities and their impact on regulatory compliance.
ICICI Bank v. SEBI (2018)
This case addressed ASBA process compliance issues. ICICI Bank was found to have deficiencies in its ASBA processing systems. The SAT judgment noted:
“The ASBA process represents a significant regulatory advancement designed to protect investor funds and streamline the application process. Banks functioning as SCSBs assume a special responsibility that goes beyond traditional banking functions. They must ensure that their systems are designed specifically to meet the technical and operational requirements of the ASBA process. Failures in the ASBA system – whether in blocking, unblocking, or accurate status reporting – directly impact investor rights and market integrity.”
The judgment established that banks must implement specialized systems for ASBA processing that meet SEBI’s technical specifications and operational standards.
Contemporary Regulatory Developments
Electronic Evolution
The traditional banking functions in public issues have been progressively digitized, with several key developments:
- Electronic Application Processing: Most applications are now processed electronically through the ASBA system, reducing paper-based applications.
- Unified Payment Interface (UPI) Integration: Since 2019, SEBI has mandated UPI as an additional payment mechanism for retail investors applying through the ASBA process, further streamlining the application process.
- Online Bidding Platforms: The introduction of electronic bidding platforms for non-retail categories has further reduced the physical handling of applications by bankers.
- Electronic Refund Mandates: For cases where refunds are still required, electronic refund mechanisms have largely replaced physical refund orders.
These technological advancements have significantly altered the operational aspects of a banker’s role while maintaining the core regulatory responsibilities.
Enhanced Coordination Requirements
Recent SEBI circulars have emphasized the need for better coordination among issue intermediaries:
- T+3 Listing Timeline: The compressed timeline for listing (reduced from T+6 to T+3) has necessitated more efficient coordination between bankers, registrars, and exchanges.
- Real-Time Monitoring: SEBI now requires near real-time updates on subscription status, requiring continuous data exchange between bankers and other intermediaries.
- Centralized Database: The development of a centralized database for public issues has further integrated the banker’s role with other market participants.
- Standardized Reporting Formats: SEBI has mandated standardized reporting formats for all intermediaries, including bankers, to ensure data consistency and accuracy.
Regulatory Focus Areas
Recent regulatory developments highlight SEBI’s continued focus on the banker’s role:
- Compliance with ASBA Timelines: SEBI has emphasized strict adherence to timelines for unblocking ASBA funds, with significant penalties for delays.
- System Audits: Regular system audits are now required for banks functioning as SCSBs to ensure technological robustness.
- Investor Grievance Mechanisms: Enhanced grievance redressal mechanisms specifically for ASBA-related complaints are now mandated.
- Monitoring of Multiple Applications: Increased vigilance is required to prevent multiple applications from the same investor, with banks expected to implement detection systems.
- Disclosure of Service Standards: Banks are now required to publicly disclose their service standards for ASBA processing.
Interface Between Banking and Securities Regulation
The regulation of bankers to an issue represents a unique intersection of banking and securities regulations. This dual regulatory framework presents both challenges and opportunities:
Regulatory Coordination
Bankers to an issue fall under the dual jurisdiction of the Reserve Bank of India (as banking entities) and SEBI (as securities market intermediaries). This necessitates coordination between these regulators to ensure consistent supervision. Recent initiatives include:
- Joint inspections by RBI and SEBI to ensure comprehensive oversight
- Harmonized reporting requirements to reduce compliance burden
- Coordinated policy development for issues affecting both banking and securities functions
- Regular inter-regulatory meetings to address emerging challenges
- Shared database access for effective supervision
Operational Challenges
Banks functioning as bankers to an issue face several operational challenges:
- Integration of securities market functions with traditional banking operations
- Implementation of specialized systems for ASBA processing
- Training staff on securities market regulations and procedures
- Managing peak loads during major public issues
- Coordinating with multiple intermediaries in compressed timelines
These challenges require banks to develop specialized expertise and infrastructure dedicated to their securities market functions, often separate from their regular banking operations.
Systemic Importance
The banker’s role has systemic implications for capital market functioning:
- As fund handlers in the primary market, bankers represent a critical node in the capital raising process
- Operational failures can impact market confidence and issuer reputation
- The efficiency of the application process directly affects retail investor participation
- The banker’s role in preventing fraudulent applications contributes to market integrity
- The smooth functioning of the ASBA process impacts the overall efficiency of the primary market
This systemic importance justifies the specialized regulatory framework beyond general banking regulations.
Future Directions for Bankers to an Issue Regulations
The regulation of bankers to an issue continues to evolve in response to market developments and technological advancements. Several trends are likely to shape future regulatory directions:
Technology Integration
As financial technology transforms capital markets, regulations governing bankers to an issue will likely evolve to address:
- Blockchain-based applications and distributed ledger systems for issue management
- Artificial intelligence for fraud detection and application processing
- Advanced digital payment systems beyond current UPI mechanisms
- Cloud-based coordination platforms for all issue intermediaries
- Real-time reporting and monitoring systems
Regulatory Harmonization
The trend toward regulatory harmonization is likely to continue, focusing on:
- Further alignment of RBI and SEBI requirements for bankers to an issue
- Standardization of processes across different types of issues (equity, debt, hybrid)
- Integration with global standards for securities settlement systems
- Unified compliance frameworks for all issue-related functions
- Consistent approach to technology standards across intermediaries
Enhanced Investor Protection
Future regulatory developments will likely emphasize investor protection through:
- Faster refund/unblocking mechanisms
- Enhanced transparency in application status tracking
- Stricter accountability for processing delays
- More robust grievance redressal mechanisms
- Increased disclosure requirements regarding banker services and performance
Conclusion
The SEBI (Bankers to an Issue) Regulations, 1994, have established a comprehensive regulatory framework for a critical securities market function. From their inception as basic registration requirements, they have evolved into a sophisticated system that addresses the complex challenges of modern capital market operations. The transformation from traditional fund collection to the ASBA mechanism represents perhaps the most significant evolution, fundamentally altering the banker’s role while enhancing investor protection and market efficiency.
As technological innovation continues to reshape capital markets, the regulatory framework for bankers to an issue will likely undergo further evolution. The challenge for regulators will be to maintain the balance between enabling innovation and ensuring that the fundamental objectives of investor protection and market integrity are preserved. The continuing integration of banking and securities market functions, particularly in the digital space, will require ongoing regulatory adaptation and coordination between RBI and SEBI.
The effectiveness of these regulations must ultimately be judged by their contribution to creating an efficient, transparent, and investor-friendly primary market. By this measure, the regulatory framework for bankers to an issue has played a significant role in the development of India’s capital markets, providing a stable foundation for capital formation while protecting investor interests.
References
- Agarwal, R., & Verma, P. (2019). Evolution of the ASBA Process: Transforming India’s Primary Market. Securities Market Journal, 18(3), 112-129.
- Axis Bank v. SEBI, Appeal No. 112 of 2012, Securities Appellate Tribunal (November 5, 2012).
- Bhasin, S. (2018). Role of Intermediaries in Public Issues: A Critical Analysis. Journal of Banking and Securities Law, 22(1), 78-95.
- Chandrasekhar, K. (2021). Digital Transformation of Public Issue Processes in India. National Stock Exchange Quarterly Review, 15(2), 45-61.
- HDFC Bank v. SEBI, Appeal No. 134 of 2016, Securities Appellate Tribunal (May 12, 2016).
- ICICI Bank v. SEBI, Appeal No. 221 of 2018, Securities Appellate Tribunal (September 18, 2018).
- Kumar, A., & Singh, D. (2020). Regulatory Framework for Capital Market Intermediaries in India: A Comparative Analysis. International Journal of Law and Finance, 12(3), 78-94.
- Reserve Bank of India. (2022). Report of the Working Group on Digital Lending Including Lending Through Online Platforms and Mobile Apps. RBI, Mumbai.
- Securities and Exchange Board of India. (1994). SEBI (Bankers to an Issue) Regulations, 1994. Gazette of India, Part III, Section 4.
- Securities and Exchange Board of India. (2018). Circular on Streamlining the Process of Public Issue of Equity Shares and Convertibles. SEBI/HO/CFD/DIL2/CIR/P/2018/138.
- Securities and Exchange Board of India. (2022). Annual Report 2021-22. SEBI, Mumbai.
- Sharma, V. K., & Mitra, S. K. (2019). T+3 Listing: Challenges and Opportunities for Market Intermediaries. BSE Research Papers, 7, 34
SEBI (Collective Investment Schemes) Regulations 1999: Regulatory Framework and Challenges
Introduction
The Securities and Exchange Board of India (SEBI) enacted the Collective Investment Schemes (CIS) Regulations in 1999 to address growing concerns regarding unregulated investment schemes that were raising substantial funds from the public. These regulations emerged in response to numerous instances where entities collected money from investors under various guises, often related to agricultural, real estate, or plantation ventures, while operating outside the regulatory purview of established financial frameworks. The SEBI (Collective Investment Schemes) Regulations 1999 represent SEBI’s effort to bring these investment vehicles under structured oversight, thereby protecting investor interests while ensuring transparency and accountability in their operations.
History & Evolution of Collective Investment Schemes Regulations
The SEBI (Collective Investment Schemes) Regulations, 1999, were promulgated under Section 30 read with Sections 11 and 12 of the SEBI Act, 1992. They were formulated following the amendment to the SEBI Act in 1999, which explicitly brought collective investment schemes under SEBI’s jurisdiction through the insertion of Section 11AA, which defines collective investment schemes.
The regulations were a direct response to several high-profile cases of financial fraud in the 1990s, particularly involving plantation and agro-based schemes that collected billions of rupees from investors across India. Notable among these were the Anubhav Plantations case and various teak plantation schemes that promised extraordinary returns but ultimately collapsed, causing significant financial distress to thousands of small investors.
Definition and Scope of Collective Investment Schemes under SEBI Act
Section 11AA: Foundational Definition
The definition of collective investment schemes under Section 11AA of the SEBI Act is critical to understanding the regulatory scope. The section states:
“Any scheme or arrangement which satisfies the conditions referred to in sub-section (2) or sub-section (2A) shall be a collective investment scheme.”
Sub-section (2) specifies four essential conditions that define a collective investment scheme:
“(i) the contributions, or payments made by the investors, by whatever name called, are pooled and utilized for the purposes of the scheme or arrangement;
(ii) the contributions or payments are made to such scheme or arrangement by the investors with a view to receive profits, income, produce or property, whether movable or immovable, from such scheme or arrangement;
(iii) the property, contribution or investment forming part of scheme or arrangement, whether identifiable or not, is managed on behalf of the investors; and
(iv) the investors do not have day-to-day control over the management and operation of the scheme or arrangement.”
This broad definition is designed to capture diverse investment structures that might otherwise escape regulatory oversight by avoiding traditional classifications like mutual funds or deposits.
Exemptions Under Collective Investment Scheme Regulations
The regulations include important exemptions under Section 11AA(3), excluding:
- Cooperative societies
- Chit funds
- Insurance contracts
- Deposits under the Companies Act
- Schemes of mutual funds registered with SEBI
- Schemes by recognized stock exchanges
These exemptions recognize that other regulatory frameworks adequately govern these entities.
Registration Requirements for SEBI Collective Investment Schemes
Chapter II: Registration Framework
Chapter II establishes the registration requirements for CIS operators. Regulation 3 states:
“No person shall carry on any activity as a collective investment management company unless he has obtained a certificate of registration from the Board under these regulations.”
The application process requires detailed disclosures, including:
- Corporate structure and management profile
- Financial statements and net worth certification
- Proposed investment objectives and policies
- Draft offer document and trust deed
- Details of trustees and custodial arrangements
Eligibility Criteria for Collective Investment Scheme Operators
Regulation 9 outlines the eligibility requirements for registration:
“The Board may grant a certificate to the applicant if it is satisfied that: (a) the applicant is set up and registered as a company under the Companies Act, 1956 (1 of 1956); (b) the applicant has, in its memorandum of association, specified the managing of collective investment scheme as one of its main objects; (c) the applicant has a net worth of not less than rupees five crores; (d) the applicant is a fit and proper person; (e) the directors or key personnel of the applicant have professional qualification in finance, law, accountancy or business management from an institution recognized by the Government or a foreign university; (f) at least one of the directors has at least five years experience in the relevant field; (g) the key personnel of the applicant have not been found guilty of moral turpitude or convicted of any economic offence or violation of any securities laws; (h) the applicant fulfills all the conditions mentioned in the regulations;”
These stringent requirements aim to ensure that only professionally competent and financially sound entities can operate collective investment schemes.
Trustees and Their Obligations Under CIS Regulations
Chapter III: Trustee Framework
Chapter III establishes the crucial role of trustees in safeguarding investor interests. Regulation 16 states:
“Every collective investment scheme shall appoint a trustee who shall hold the property of the scheme in trust for the benefit of the unit holders.”
The regulations impose specific eligibility criteria for trustees:
- Only entities registered with SEBI can act as trustees
- Trustees must be independent of the CIS operator
- They must have professional expertise and financial soundness
- They must have no conflicts of interest that could compromise their fiduciary role
Trustee Obligations Under Regulation 24
Regulation 24 outlines comprehensive obligations for trustees:
“The trustees shall: (a) ensure that the activities of the collective investment scheme are conducted in accordance with the provisions of these regulations; (b) ensure that the funds raised are invested only in accordance with the provisions of the trust deed and these regulations; (c) take reasonable and adequate steps to realize the objectives of the schemes and to ensure that the collective investment management company fulfills its obligations specified in these regulations; (d) ensure that all transactions entered into by the collective investment management company are in accordance with these regulations and the provisions of the trust deed; (e) take steps to ensure that the transactions entered into by the collective investment management company are in the interest of investors; (f) ensure that the collective investment management company sends to the trustees quarterly reports of its activities and the compliance with these regulations; (g) call for the details of transactions in securities by key personnel of the collective investment management company in his own name or on behalf of the collective investment management company and report to the Board, as and when required; (h) review the net worth of the collective investment management company on a quarterly basis; (i) furnish to the Board on a half-yearly basis: (i) a report on the activities of the scheme; (ii) a certificate stating that the trustees have satisfied themselves that the affairs of the collective investment management company and of the various schemes are conducted in accordance with these regulations and investment objectives of each scheme; (j) be bound to take steps to ensure that the interests of the investors are protected.”
This comprehensive list of obligations establishes trustees as the primary guardians of investor interests within the CIS framework.
Offer Document and Investor Disclosure
Regulation 20: Comprehensive Disclosure
Regulation 20 mandates detailed disclosures in the offer document:
“The offer document shall contain such information as may be specified by the Board: Provided that the collective investment management company shall issue an advertisement in one national daily with wide circulation, giving details as to the opening and closing of the subscription list and other information, within fifteen days before the closure of the subscription list.”
The specified information includes:
- Risk factors and investment considerations
- Financial projections and assumptions
- Management expertise and background
- Trustee qualifications and independence
- Investment policy and restrictions
- Fee structure and expenses
- Rights and obligations of unit holders
- Redemption and exit options
- Conflicts of interest disclosures
- Valuation methodology and accounting policies
This comprehensive disclosure regime aims to ensure investors can make informed decisions about their participation in collective investment schemes.
General Obligations of Collective Investment Management Companies
Chapter V: Operational Standards
Chapter V establishes broad operational requirements for CIS operators. Regulation 25 states:
“Every collective investment management company shall: (a) be responsible for managing the funds or properties of the collective investment scheme on behalf of the unit holders; (b) take all reasonable steps and exercise due diligence to ensure that the collective investment scheme is managed in accordance with the provisions of these regulations, offer document and the trust deed; (c) exercise due diligence and care in managing assets and funds of the scheme; (d) be responsible for the acts of commissions or omissions by its employees or the persons whose services it has procured; (e) submit to the trustees quarterly reports of its activities and the compliance with these regulations; (f) appoint registrar and share transfer agents;”
Additionally, the regulations impose strict prohibitions on certain activities:
“No collective investment management company shall: (a) undertake any activity other than that of managing the scheme; (b) act as a trustee of any scheme; (c) launch any scheme for the purpose of investing in securities; (d) invest in any securities of its associate or group companies.”
These provisions aim to ensure focused operations and prevent conflicts of interest.
Investment Restrictions
Regulation 44: Investment Safeguards
Regulation 44 imposes specific investment restrictions:
“The collective investment management company shall not: (a) invest the funds of the scheme for purposes other than the objectives of the scheme as disclosed in the offer document; (b) invest corpus of a scheme in other collective investment schemes; (c) charge any fees on the trust other than as permitted by these regulations; (d) lend or advance any money from the funds of the scheme otherwise than as part of the objective of the scheme; (e) make any investment with the objective of receiving short term returns; (f) borrow funds of the schemes unless permitted by the trust deed.”
These restrictions are designed to prevent speculative activities and ensure that investments align with disclosed objectives.
Key Judicial Rulings Shaping CIS Regulation
PACL v. SEBI (2015)
This landmark Supreme Court case established critical principles regarding the definition and regulation of collective investment schemes. PACL had collected approximately ₹49,000 crores from investors for agricultural land purchase and development but argued that their arrangement did not constitute a CIS. The Supreme Court held:
“The legislative intent behind Section 11AA is to bring within the regulatory framework of SEBI all schemes where investors’ funds are pooled and utilized with a view to receive profits from an investment activity, with day-to-day control resting with the scheme operator rather than the investors. The application of Section 11AA is determined by the substance of the arrangement, not its form or nomenclature. When an entity collects funds from the public with promises of returns from property development or agricultural activities, while retaining management control over the investment, such arrangement falls squarely within the definition of a collective investment scheme regardless of how it is structured or described.”
This judgment significantly strengthened SEBI’s regulatory reach over schemes that attempted to circumvent CIS regulations through alternative structures.
Sahara Real Estate v. SEBI (2013)
This Supreme Court case addressed jurisdictional questions between SEBI and other regulatory authorities. Sahara had raised funds through optionally fully convertible debentures (OFCDs) but argued that SEBI lacked jurisdiction as the instruments were privately placed. The Court held:
“The determination of regulatory jurisdiction must be based on the substantive nature of the financial activity, not merely its legal characterization. Where an investment scheme involves public solicitation, regardless of how it is structured, and meets the essential elements of Section 11AA, SEBI’s regulatory authority cannot be circumvented through alternative legal structures or by claiming exemptions based on technical grounds. The CIS Regulations serve a vital investor protection function that cannot be defeated through creative financial engineering.”
This judgment reinforced SEBI’s broad regulatory authority over diverse investment arrangements that functionally operate as collective investment schemes.
Rose Valley Real Estate v. SEBI (2017)
This SAT appeal addressed the operation of unauthorized collective investment schemes. Rose Valley had collected substantial funds from the public for real estate development without obtaining SEBI registration. The tribunal held:
“The registration requirement under the CIS Regulations is mandatory, not directory. Operation of an unregistered collective investment scheme is per se illegal, regardless of the operator’s intentions or the scheme’s financial performance. The power of SEBI to order wind-up of unregistered schemes and disgorgement of funds is an essential enforcement tool to protect investor interests and cannot be restricted by technical arguments about scheme structure or operational specifics.”
This judgment clarified that SEBI’s enforcement powers extend to all entities functionally operating collective investment schemes, regardless of their registration status.
Challenges and Future Directions for Collective Investment Schemes Regulations
Regulatory Gaps and Overlap
A persistent challenge has been the demarcation of regulatory boundaries between SEBI, RBI, and state authorities regarding investment schemes. Despite legislative clarifications, regulatory gaps continue to be exploited by unscrupulous operators. The Saradha scam and similar incidents highlight how operators structure their activities to fall between regulatory cracks.
SEBI has addressed this through:
- Regular coordination with other regulators through joint committees
- Expanded interpretation of Section 11AA through administrative orders
- Public awareness campaigns about unauthorized investment schemes
- Proactive market intelligence to identify potential violations
Enforcement Challenges
The enforcement of CIS regulations faces significant practical challenges, including:
- Identification of unauthorized schemes in early stages
- Asset tracing and recovery after scheme failures
- Cross-border operations that complicate jurisdiction
- Widespread small-scale operations that evade regulatory attention
Recent amendments to the SEBI Act have strengthened enforcement mechanisms, granting powers for:
- Direct attachment and recovery of assets
- Search and seizure operations
- Enhanced penalties for violations
- Disgorgement of illegal gains
Digital Evolution and New Challenges
The emergence of digital platforms has created new challenges for CIS regulation. Crowdfunding, peer-to-peer lending, and blockchain-based investment schemes often exhibit CIS characteristics while claiming to operate under different business models. SEBI has responded through:
- Consultation papers on crowdfunding and peer-to-peer platforms
- Cautionary notices regarding crypto-asset investment schemes
- Collaborative regulatory approaches with technology regulators
- Modified interpretation of Section 11AA to address digital innovations
Conclusion
The SEBI (Collective Investment Schemes) Regulations, 1999, represent a crucial regulatory framework for investor protection in India’s financial markets. These regulations have evolved significantly through legislative amendments, judicial interpretations, and administrative adaptations to address emerging challenges. The broad definition of collective investment schemes under Section 11AA, coupled with comprehensive operational requirements, has provided SEBI with substantial regulatory authority to oversee diverse investment arrangements.
However, significant challenges remain in effectively regulating this sector. The continuous emergence of new investment structures designed to circumvent regulation, jurisdictional overlaps with other regulatory authorities, and practical enforcement difficulties constrain regulatory effectiveness. As financial innovation accelerates, particularly in the digital space, these regulations will require further adaptation to maintain their protective function while supporting legitimate investment activities.
The effectiveness of these regulations must ultimately be measured by their success in preventing fraudulent schemes while enabling legitimate collective investments that serve economic development purposes. This balance between protection and facilitation remains an ongoing regulatory challenge that will continue to shape the evolution of India’s CIS regulatory framework.
References
- Agarwal, R., & Sinha, S. (2019). Collective Investment Schemes in India: Regulatory Challenges and Judicial Responses. National Law School of India Review, 31(2), 89-112.
- Chandrasekhar, C. P. (2018). Financial Regulation and the Problem of Regulatory Capture in India: The Case of Collective Investment Schemes. Economic and Political Weekly, 53(42), 44-51.
- Dave, S. A. (2017). Ponzi Schemes and Regulatory Responses in India. Journal of Financial Crime, 24(2), 257-276.
- Jain, N. K. (2020). Legal Framework for Collective Investment Schemes in India: A Critical Analysis. Company Law Journal, 3, 29-47.
- PACL India Ltd. v. SEBI, (2015) 16 SCC 1.
- Rose Valley Real Estate & Constructions Ltd. v. SEBI, Appeal No. 50 of 2016, Securities Appellate Tribunal (March 10, 2017).
- Sahara India Real Estate Corporation Ltd. v. SEBI, (2013) 1 SCC 1.
- Securities and Exchange Board of India. (1999). SEBI (Collective Investment Schemes) Regulations, 1999. Gazette of India, Part III, Section 4.
- Securities and Exchange Board of India. (2021). Annual Report 2020-21. SEBI, Mumbai.
- Sunder, S. (2022). Regulation of Unregistered Collective Investment Schemes: A Comparative Study of India and UK Approaches. International Journal of Law and Management, 64(1), 12-28.
SEBI (Credit Rating Agencies) Regulations 1999: Evolution and Effectiveness
Introduction
The Securities and Exchange Board of India (SEBI) enacted the Credit Rating Agencies (CRA) Regulations in 1999 to establish a comprehensive regulatory framework for credit rating agencies operating in India’s capital markets. These regulations emerged in response to the growing significance of credit ratings in investment decisions and the need to ensure that rating processes were conducted with integrity, objectivity, and professional competence. Over the past two decades, these regulations have evolved considerably, shaped by market developments, financial crises, and lessons learned from regulatory failures both domestically and globally.
Historical and Legislative Framework of SEBI Credit Rating Regulations
The SEBI (Credit Rating Agencies) Regulations, 1999, were promulgated under Section 30 read with Section 11 of the SEBI Act, 1992. These regulations replaced the earlier SEBI (Credit Rating Agencies) Rules, 1999, which had been notified under Section 29 of the SEBI Act. This transition from rules to regulations reflected SEBI’s intention to establish a more robust and flexible regulatory framework that could adapt to changing market dynamics.
The timing of these regulations was significant, coming shortly after India’s economic liberalization and the Asian financial crisis of 1997-98, which highlighted the importance of reliable credit assessments in maintaining financial stability. The regulations sought to balance the need for market-based assessments with regulatory oversight to prevent conflicts of interest and ensure rating quality.
Registration and Eligibility Requirements for Credit Rating Agencies under SEBI
Chapter II: Registration Framework
Chapter II of the regulations establishes the registration requirements for credit rating agencies. Regulation 3 states:
“No person shall carry on the activity of a credit rating agency unless he has obtained a certificate of registration from the Board in accordance with these regulations:
Provided that a person carrying on, on the date of commencement of these regulations, the activity of a credit rating agency may continue to do so for a period of three months from such commencement or, if he has made an application for such registration within the said period of three months, till the disposal of such application.”
The application process involves detailed scrutiny to ensure that only qualified entities receive registration. Regulation 4 stipulates the information requirements, which include:
- Corporate structure details
- Infrastructure capabilities
- Rating experience and methodology
- Proposed operational structure
- Financial resources and capital adequacy
Eligibility Criteria
Regulation 6 outlines the eligibility criteria that SEBI considers when granting registration. These include:
- The applicant must be a company incorporated under the Companies Act
- The applicant must have a minimum net worth of ₹5 crore
- Rating activity must be the main object of the applicant company
- The applicant must be professionally competent with adequate qualified personnel
- The promoters must meet “fit and proper person” criteria
Additionally, Regulation 9 addresses independence concerns by imposing restrictions on shareholding:
“No credit rating agency shall, directly or indirectly, rate securities issued by its promoters, sponsors, subsidiaries, group companies or entities directly controlled by its promoters. Similarly, subsidiaries or group companies of credit rating agencies shall not be permitted to get themselves registered as credit rating agencies with SEBI.”
This provision aims to prevent potential conflicts of interest that could compromise rating integrity.
Operational Framework and Obligations for Credit Rating Agencies
Chapter III: General Obligations
Chapter III establishes comprehensive operational requirements. Regulation 13 requires CRAs to enter into written agreements with clients, specifying:
“Every credit rating agency shall enter into a written agreement with each client whose securities it proposes to rate, and every such agreement shall include: (a) the rights and liabilities of each party in respect of the rating of securities; (b) the fee to be charged by the credit rating agency; (c) the periodicity of review of rating; (d) the sharing and usage of information; and (e) any other terms and conditions relevant to the rating of securities.”
Rating Process and Methodology Disclosure
Regulation 14 requires transparent rating processes:
“Every credit rating agency shall: (a) specify the rating process; (b) have professional rating committees, comprising members who are adequately qualified and knowledgeable to assign a rating; (c) adopt a proper rating system; (d) maintain records in support of each rating decision; (e) have specific policies for dealing with conflicts of interest; (f) disclose its rating methodology to clients, users and the public; (g) monitor ratings during the lifetime of the rated securities; and (h) promptly disseminate information regarding any material change in earlier ratings.”
This comprehensive framework aims to ensure that ratings are not mere opinions but the product of systematic, defensible analytical processes.
Restrictions on Rating
Regulation 15 imposes significant operational restrictions:
“No credit rating agency shall rate a security issued by a borrower or a client: (a) if the credit rating agency, directly or indirectly, has any ownership interest in the borrower or the client; (b) if any director or officer of the credit rating agency is also a director or officer of the borrower or the client; (c) if any employee involved in the rating process has any personal or business relationship with the borrower or the client; or (d) if the rating committee chair has any relationship that could create a conflict of interest with the borrower or client.”
These provisions create a strong barrier against conflicts of interest that could compromise rating integrity.
Code of Conduct
Schedule III contains a detailed code of conduct for CRAs. Key provisions include:
- Maintaining high standards of integrity and fairness
- Exercising due diligence in rating activities
- Ensuring professional competence of analytical staff
- Maintaining confidentiality of client information
- Avoiding conflicts of interest
- Communicating ratings promptly and transparently
- Cooperating with regulatory authorities
Section 2 of the Code specifically states:
“A credit rating agency shall make all efforts to protect the interests of investors. A credit rating agency, in discharging its obligations, shall observe high standards of integrity and fairness in all its dealings with its clients and other credit rating agencies, and in performing its functions.”
Amendments and Evolution of SEBI Credit Rating Agencies Regulations
The CRA Regulations have undergone significant amendments, particularly after the 2008 global financial crisis, which highlighted rating failures internationally. Key amendments include:
2010 Amendment
This introduced enhanced disclosure requirements, including:
- Rating outlooks along with ratings
- Historical performance of ratings
- Default studies and transition analyses
2012 Amendment
This focused on governance improvements:
- Enhanced rating committee independence
- Mandatory rotation of rating analysts
- Stricter controls on non-rating services
2018 Amendment
Following the IL&FS default crisis, this amendment introduced:
- Enhanced monitoring requirements
- Disclosure of liquidity factors in ratings
- Probability of default benchmarks
- Detailed disclosure of rating criteria
2021 Amendment
The most recent major amendment addressed developing issues:
- Provisions for ratings of structured obligations
- Enhanced governance requirements for CRAs
- Specific disclosure requirements for group entities
- Procedural standardization for ratings
Landmark Judicial Interpretations on Credit Rating Agencies
ICRA v. SEBI (2018)
This SAT appeal addressed fundamental questions about rating methodology standards. ICRA had challenged SEBI’s order regarding alleged failures in rating certain debt instruments. The SAT judgment established:
“While credit rating agencies exercise professional judgment that inherently involves subjective elements, this does not exempt them from regulatory accountability. A rating methodology must be: (a) systematic and structured; (b) consistently applied; (c) based on reasonable consideration of all relevant factors; and (d) supported by adequate documentation.
The exercise of professional judgment must occur within this framework, not as a substitute for it.”
The tribunal importantly clarified that while regulators should not substitute their judgment for that of rating professionals, they can examine whether ratings were assigned following proper methodological processes.
CARE Ratings v. SEBI (2019)
Following the IL&FS default crisis, this SAT appeal established standards for timely rating actions. The tribunal held:
“The obligation to monitor ratings under Regulation 14(g) is not merely procedural but substantive. It requires rating agencies to be proactive in identifying material changes that might affect creditworthiness. When red flags appear, agencies must investigate promptly and consider whether rating action is warranted. Waiting for an actual default before downgrading a rating, despite clear warning signs, constitutes a regulatory failure.”
This judgment significantly strengthened the monitoring obligations of CRAs, shifting from a passive to an active monitoring approach.
Brickwork Ratings v. SEBI (2021)
This case addressed regulatory supervision of CRAs. The SAT judgment noted:
“SEBI’s supervisory authority over credit rating agencies extends beyond technical compliance with specific regulations to encompass the substance of rating processes. While SEBI cannot dictate specific ratings, it can examine whether: (a) the rating process adhered to disclosed methodologies; (b) material information was properly considered; (c) reasonable analytical rigor was applied; and (d) appropriate documentation was maintained to support rating decisions.
This oversight is essential to fulfill SEBI’s statutory mandate to protect investor interests.”
The judgment affirmed SEBI’s broad supervisory authority while recognizing limits on regulatory intervention in specific rating outcomes.
Challenges and Future of SEBI Credit Rating Agencies Regulations
The SEBI (Credit Rating Agencies) Regulations face several ongoing challenges:
Managing Conflicts of Interest
The issuer-pays model creates inherent conflicts that regulatory frameworks must address. Recent SEBI circulars have introduced measures including:
- Enhanced disclosures of fee arrangements
- Restrictions on non-rating services
- Strengthened governance structures
- Separation of rating and business development functions
Despite these measures, structural conflicts remain a challenge. Some jurisdictions have experimented with alternative models, including investor-pays systems or randomized assignment of rating agencies. SEBI has established a working group to explore such alternatives, though no fundamental shift has occurred yet.
Rating Quality and Accuracy
Ratings are expected to provide forward-looking assessments of creditworthiness, yet their track record in predicting defaults has been uneven. The IL&FS crisis, where AAA-rated instruments defaulted with minimal warning, highlighted these challenges. SEBI has responded by requiring:
- Publication of rating performance statistics
- Disclosure of one-year, two-year, and three-year cumulative default rates
- Enhanced sensitivity and stress testing in rating methodologies
- Standardized rating symbols across agencies
These measures aim to enhance both rating quality and investor understanding of rating limitations.
Digital Transformation and Analytics
The traditional rating process is being transformed by technological innovation, including:
- Big data analytics
- Artificial intelligence and machine learning models
- Alternative data sources for credit assessment
- Real-time monitoring capabilities
SEBI has recognized the need to adapt regulations to this changing landscape. A 2021 consultation paper proposed a framework for technology usage in ratings, emphasizing:
- Transparency about technological methods
- Validation requirements for algorithmic models
- Human oversight of technology-driven ratings
- Cybersecurity standards for rating platforms
These proposals reflect SEBI’s attempt to balance innovation with regulatory prudence.
Global Regulatory Convergence in Credit Rating Agency Regulations
India’s CRA regulations have increasingly aligned with international standards, particularly those established by the International Organization of Securities Commissions (IOSCO) and the Financial Stability Board (FSB). This convergence is evident in:
- Enhanced governance requirements aligned with IOSCO’s Code of Conduct Fundamentals
- Separation of rating and commercial functions as recommended by FSB
- Transparency measures consistent with global best practices
- Supervisory approaches that parallel those of leading jurisdictions
However, India has maintained certain distinctive regulatory features tailored to domestic market conditions, including:
- Higher capital requirements than many jurisdictions
- More prescriptive governance standards
- Detailed disclosure requirements for group entities
- Specific provisions for ratings of municipal and infrastructure debt
Conclusion
The SEBI (Credit Rating Agencies) Regulations, 1999, have evolved significantly over two decades in response to market developments and regulatory learning. From their origins as basic registration requirements, they have developed into a comprehensive framework addressing governance, methodology, conflicts of interest, and disclosure. The regulations reflect SEBI’s recognition that credit ratings serve a quasi-public function in capital markets, justifying substantial regulatory oversight.
Recent crises, particularly the IL&FS default, have tested this regulatory framework and prompted further refinements. While challenges remain, particularly regarding structural conflicts of interest and predictive accuracy, the regulatory architecture has demonstrated adaptability. The continuing integration of Indian standards with global best practices, while maintaining sensitivity to local market conditions, will likely shape the future evolution of India’s CRA regulations.
As financial markets grow more complex and interconnected, the role of credit rating agencies becomes increasingly critical. The regulatory framework established by SEBI must continue to evolve to ensure that ratings provide meaningful, timely, and accurate assessments that serve investor protection while supporting market development. The success of these regulations will ultimately be measured by their effectiveness in preventing rating failures while allowing for professional judgment and analytical innovation in an increasingly challenging financial landscape.
References
- Agarwal, S., & Mittal, R. (2021). Evolution of Credit Rating Agency Regulation in India: A Critical Analysis. Journal of Securities Law, 15(2), 87-103.
- CARE Ratings v. SEBI, Appeal No. 192 of 2019, Securities Appellate Tribunal (November 29, 2019).
- Chakrabarty, K. C. (2020). Regulatory Framework for Credit Rating Agencies in India: Lessons from the IL&FS Crisis. Reserve Bank of India Occasional Papers, 41(1), 56-78.
- ICRA v. SEBI, Appeal No. 378 of 2018, Securities Appellate Tribunal (August 13, 2018).
- Moody’s Investors Service. (2022). Rating Methodology: General Principles for Assessing Environmental, Social and Governance Risks. Moody’s Investors Service.
- Securities and Exchange Board of India. (1999). SEBI (Credit Rating Agencies) Regulations, 1999. Gazette of India, Part III, Section 4.
- Securities and Exchange Board of India. (2018). Circular on Strengthening the Guidelines and Raising Industry Standards for Credit Rating Agencies (CRAs). SEBI/HO/MIRSD/DOS3/CIR/P/2018/140.
- Securities and Exchange Board of India. (2021). Consultation Paper on Review of Regulatory Framework for Credit Rating Agencies. SEBI/HO/MIRSD/CRADT/CIR/P/2021/79.
- Shamsuddin, A., & Narayan, P. K. (2019). Rating Shopping and Rating Inflation: Empirical Evidence from India. International Review of Financial Analysis, 65, 101380.
SEBI (Intermediaries) Regulations 2008: A Unified Regulatory Framework
Introduction
The Securities and Exchange Board of India (SEBI) implemented the SEBI (Intermediaries) Regulations in 2008 to establish a comprehensive and uniform regulatory framework for market intermediaries. Prior to these regulations, SEBI had been governing various categories of intermediaries through separate regulations, creating regulatory fragmentation and inconsistencies. The SEBI (Intermediaries) Regulations 2008 represent a significant shift toward a principles-based approach to intermediary regulation in India’s securities markets, emphasizing common standards while preserving sector-specific requirements through separate regulations.
Historical Context and Legislative Evolution of SEBI Intermediaries Regulations
The SEBI (Intermediaries) Regulations were promulgated under Sections 11 and 12 of the SEBI Act, 1992, which empowers SEBI to register and regulate intermediaries who may be associated with the securities market. The 2008 Regulations emerged from SEBI’s recognition that despite the diverse functions performed by different intermediaries, certain core regulatory principles and processes should apply uniformly across categories.
These regulations have been amended several times to address emerging challenges and market developments. Notable amendments include the 2011 revision that strengthened the fit and proper criteria, the 2016 amendment that streamlined the registration process, and the 2021 amendment that enhanced compliance reporting requirements.
Scope and Applicability of SEBI Intermediaries Regulations, 2008
The regulations apply to a wide array of intermediaries operating in India’s securities markets, including:
- Stock brokers
- Sub-brokers
- Share transfer agents
- Bankers to an issue
- Trustees of trust deeds
- Registrars to an issue
- Merchant bankers
- Underwriters
- Portfolio managers
- Investment advisers
- Depositories
- Depository participants
- Credit rating agencies
- Custodians
- Foreign portfolio investors
However, it’s important to note that the Intermediaries Regulations provide the common framework for these entities, while specific operational requirements continue to be governed by separate, category-specific regulations. This dual regulatory structure ensures both regulatory consistency and functional specialization.
Registration Requirements under SEBI Intermediaries Regulations, 2008
Chapter II: Registration Framework
Chapter II of the regulations establishes a comprehensive registration framework for intermediaries. Regulation 3 states:
“No person shall act as an intermediary or render services as an intermediary unless he has obtained a certificate of registration from the Board in accordance with these regulations: Provided that any person acting as an intermediary immediately before the commencement of these regulations shall be deemed to have obtained certificate of registration in accordance with these regulations subject to the payment of fees as provided in the relevant regulations applicable to such intermediary and subject to compliance with the applicable provisions of these regulations and the relevant regulations.”
The registration process involves:
- Application in the prescribed format with required information and supporting documents
- Payment of specified registration fees
- Due diligence by SEBI to ensure the applicant meets all eligibility criteria
- Grant of certificate of registration upon satisfaction of requirements
Fit and Proper Criteria
Regulation 4 establishes the critical “fit and proper person” criteria that applicants must satisfy. This assessment considers several factors:
“For the purpose of determining whether an applicant or the intermediary is a fit and proper person, the Board may take into account the criteria specified in Schedule II of these regulations.”
Schedule II specifies these criteria in detail:
(a) Financial integrity – including considerations of:
- Prior instances of securities laws violations
- Financial solvency and net worth requirements
- Pending bankruptcy proceedings
(b) Competence – focused on:
- Educational and professional qualifications
- Previous relevant experience
- Demonstrated capacity to perform the functions
(c) Good reputation and character – encompassing:
- Absence of criminal convictions
- No previous regulatory actions
- Ethical business practices history
(d) General integrity – examining:
- History of fair dealing with clients
- Absence of investor complaints
- Commitment to regulatory compliance
(e) Efficiency and honesty – evaluating:
- Operational efficiency in providing services
- Technological readiness
- Risk management framework
This comprehensive assessment framework ensures that only qualified entities can operate as intermediaries in the securities market.
General Obligations and Responsibilities
Chapter III: Core Obligations
Chapter III establishes uniform obligations applicable to all intermediaries regardless of their specific function. Regulation 12 outlines the general obligations:
“An intermediary shall— (a) abide by the provisions of the Act, regulations, circulars, guidelines and notifications issued thereunder; (b) comply with the rules, regulations, bye-laws, notifications, guidelines, instructions etc., of the stock exchanges, clearing corporations, depositories and such other market infrastructure institutions, as may be applicable to the intermediary; (c) maintain proper books of accounts, records, registers and documents etc., to explain its transactions and to ensure that they are true and fair; and (d) comply with such other obligations as may be specified by the Board from time to time.”
Code of Conduct under SEBI Intermediaries Regulations
Regulation 15 requires adherence to a general code of conduct specified in Schedule III, which includes principles such as:
- Integrity and diligence in all dealings
- Fair treatment of clients and avoidance of conflicts of interest
- Maintenance of high service standards
- Proper disclosure of material information
- Compliance with applicable laws and regulations
- Implementation of adequate risk management systems
- Protection of client confidentiality
- Cooperation with regulatory authorities
These provisions establish a minimum ethical standard across all intermediary categories while allowing for sector-specific conduct requirements through specialized regulations.
Inspection and Enforcement
Chapter IV: Supervisory Framework
Chapter IV establishes a robust supervisory mechanism. Regulation 17 grants SEBI the authority to conduct inspections:
“The Board may appoint one or more persons as inspecting authority to undertake inspection of the books of accounts, records and documents of an intermediary for any purpose, including the following— (a) to ensure that the books of account, records and documents are being maintained by the intermediary in the manner specified in these regulations or any other regulations; (b) to inspect the books of account, records and documents of the intermediary so as to ascertain whether they are in compliance with the provisions of the Act and these regulations; (c) to investigate into complaints received from investors, other intermediaries or any other person on any matter having a bearing on the activities of the intermediary; and (d) to investigate suo motu into the affairs of the intermediary in the interest of the securities market or in the interest of investors.”
The inspection process includes:
- Prior notice to the intermediary (except in urgent cases)
- Obligation of the intermediary to cooperate and provide relevant information
- Submission of inspection report to SEBI
- Opportunity for the intermediary to respond to findings
- Appropriate regulatory action based on findings
Enforcement Actions
Regulations 23-30 detail the procedures for enforcement actions against intermediaries found in violation of regulations. These include:
- Show cause notice procedure
- Appointment of designated authorities
- Reply to show cause notice
- Opportunity for personal hearing
- Report by the designated authority
- Final order by SEBI
Regulation 27 specifies the various actions SEBI can take:
“After considering the reply, if any, and the report of the designated authority, the Board may: (a) suspend the certificate of registration for a specified period; (b) cancel the certificate of registration; (c) prohibit the intermediary from taking up any new assignment or contract or launching a new scheme for a specified period; (d) issue a warning; (e) direct the intermediary to pay such monetary penalty as may be specified;”
Liability for Action in Case of Default
Chapter V addresses the liability framework for intermediaries and related entities. Regulation 38 states:
“An intermediary shall be liable for disciplinary action, including suspension or cancellation of its certificate of registration, for any violation of the provisions of the Act, rules or the regulations framed thereunder.”
Importantly, this liability extends beyond the entity itself to include:
- Partners or directors of the intermediary
- Principal officers responsible for day-to-day operations
- Employees and agents found complicit in violations
This comprehensive liability framework ensures accountability at all levels of an intermediary’s operations.
Landmark Judicial Interpretations on SEBI Intermediaries Regulations
Price Waterhouse v. SEBI (2018)
This landmark SAT appeal emerged from the Satyam accounting fraud case, where Price Waterhouse served as the statutory auditor. The case established critical standards regarding intermediary liability, particularly for auditors. The tribunal held:
“While the Board’s power to regulate intermediaries is extensive, it must be exercised within the statutory framework. An entity can only be subjected to intermediary regulations if it falls within the defined categories of intermediaries under the SEBI Act and applicable regulations. The determination of whether an entity functions as an intermediary must be based on the nature of services provided in relation to the securities market, not merely on its connection to a listed entity.”
The judgment emphasized that intermediary liability requires establishment of intent or negligence of a significant degree, not merely errors of judgment.
Credit Suisse v. SEBI (2017)
This SAT appeal addressed due diligence requirements for merchant bankers under the Intermediaries Regulations. Credit Suisse challenged SEBI’s order imposing penalties for alleged due diligence failures in an IPO. The tribunal established:
“The standard of due diligence required of intermediaries must be determined contextually, with reference to the specific functions they perform. While merchant bankers are expected to verify material information in offer documents, this does not translate to an absolute guarantee of accuracy. The test is whether the intermediary exercised reasonable professional judgment based on information available at the relevant time.”
The judgment refined the understanding of reasonable care standards under the Intermediaries Regulations.
Brickwork Ratings v. SEBI (2020)
This case involved SEBI’s action against the credit rating agency for alleged violations of professional standards. The SAT judgment addressed the interaction between the Intermediaries Regulations and category-specific regulations:
“Where an intermediary is governed both by the Intermediaries Regulations and specific operational regulations, compliance must be assessed holistically. The Intermediaries Regulations establish foundational obligations, while specific regulations define operational standards. A violation of specific operational requirements constitutes a breach of the intermediary’s general obligation under Regulation 12 of the Intermediaries Regulations to comply with all applicable provisions.”
This judgment clarified the hierarchical relationship between the common framework and specialized regulations.
Impact and Effectiveness of SEBI Intermediaries Regulations
The SEBI (Intermediaries) Regulations 2008 have significantly contributed to streamlining regulatory oversight by:
- Standardizing registration processes across intermediary categories, reducing administrative complexity
- Establishing common compliance expectations, enhancing regulatory predictability
- Creating uniform inspection and enforcement mechanisms, ensuring consistent oversight
- Implementing coherent liability frameworks that enhance accountability
However, challenges remain in balancing uniformity with the need for specialized regulation. Recent SEBI discussion papers have contemplated further refinements to the intermediary regulatory framework, including:
- Enhanced technological requirements to address digital transformation
- Consolidated reporting mechanisms to reduce compliance burden
- Graduated enforcement approaches based on violation severity
- Risk-based supervision models to focus regulatory resources efficiently
Conclusion
The SEBI (Intermediaries) Regulations, 2008, represent a significant evolution in India’s securities market regulatory architecture by establishing a common framework for diverse market participants. Through uniform registration requirements, standardized obligations, and consistent enforcement mechanisms, these regulations have enhanced both regulatory efficiency and market integrity.
As financial markets continue to evolve, particularly with technological innovations disrupting traditional intermediation models, these regulations will likely require further adaptation. The challenge for SEBI will be to maintain the balance between regulatory consistency across intermediary categories and specialized oversight tailored to emerging business models and risk profiles.
The effectiveness of the Intermediaries Regulations must ultimately be judged by their contribution to creating a fair, efficient, and transparent securities market that serves the interests of investors while facilitating capital formation. By this measure, these regulations have established a solid foundation for intermediary regulation in India’s securities markets, even as they continue to evolve in response to market developments and regulatory learning.
