Comprehensive Guide to the Indian Securities Market Regulatory Framework: A General View (Part 3)

The regulatory framework is rounded out by specialized statutes that govern specific asset classes, control illegal financial flows, manage taxation, and provide for international financial integration.

Specialized Legislations and Market Governance

While SEBI and the RBI provide oversight, several specific Acts define the operational boundaries for government debt, foreign exchange, and market integrity.

1. Government Securities Act, 2006

This Act was enacted to consolidate and amend laws relating to Government Securities and their management by the RBI.

• Scope of Securities: It broadly includes government promissory notes, bearer bonds, stocks (government security), or bonds held in a bond ledger account.
• Purpose: It manages the process by which the Central or State Governments raise public loans or other notified borrowings.

2. Prevention of Money Laundering Act (PMLA), 2002

PMLA forms the core legal framework in India to combat the projection of "proceeds of crime" as untainted property.

• Definition of Offence: Any person who directly or indirectly attempts to indulge, knowingly assists, or is a party to any process connected with the proceeds of crime is guilty of money laundering.
• Mandatory Reporting: Under this Act, banking companies, financial institutions, and intermediaries must maintain records of transactions and verify the identities of all clients.

3. Foreign Exchange Management Act (FEMA), 1999

FEMA replaced the older FERA (1973) to promote the orderly development of the foreign exchange market in India.

• Jurisdiction: It applies to the whole of India and all branches, offices, and agencies outside India owned or controlled by a person resident in India.
• Objective: To facilitate external trade and payments and manage foreign exchange reserves effectively.

4. Bye-Laws of Stock Exchanges

Indian stock exchanges (e.g., BSE, NSE) frame their own Bye-Laws, which are binding on all registered trading members and brokers.

• Approval Process: These must be approved by SEBI and must strictly conform to existing securities laws.
• Regulatory Reach: They cover admission of members, listing requirements, fees, transaction settlements, and arbitration.

Taxation in the Securities Market

Taxation policy ensures the government captures a portion of market activity to fund public expenditure while influencing investor behaviour.

Securities Transaction Tax (STT)

Introduced via the Finance (No. 2) Act, 2004, STT is a tax levied on specific market actions.

• Levy Points: It applies to the purchase or sale of equity shares, derivatives, equity-oriented funds, and equity-oriented mutual funds.

Goods and Services Tax (GST)

Implemented in July 2017, GST is a comprehensive indirect tax that fundamentally changed the Indian fiscal landscape.

• Consolidation: It replaced all other types of indirect taxes previously prevalent in India.
• Structure: It is levied on the supply of goods and services at every value addition stage.

International Financial Services Centre (IFSC)

An IFSC is a specialized jurisdiction designed to provide world-class financial services to both non-residents and residents.

• International Nature: These centres are 'international' because they deal with financial products and services across borders.
• Currency Requirement: Services in an IFSC must be provided in a currency other than the domestic currency (Indian Rupee).
• Operational Goal: To cater to customers outside the domestic jurisdiction, functioning similarly to Offshore Financial Centres (OFCs).

Key Takeaways for Part 3

• Government Debt Management is centralized under the RBI through the Government Securities Act.
• Anti-Money Laundering (PMLA) requires intermediaries to be vigilant, maintaining client records for up to ten years in some instances.
• Transaction Costs in India are significantly affected by STT (direct) and GST (indirect).
• Global Integration is facilitated through IFSCs, which operate under a different currency regime to attract international capital.

Important Terms

• Proceeds of Crime: Assets derived from or involved in money laundering activities.
• Compounding of Offences: A process under the Depositories Act where certain violations can be settled without full prosecution, provided they don't involve only imprisonment.
• Value Addition Stage: The specific point in a supply chain where GST is calculated and levied.
• OFCs: Offshore Financial Centres, a term synonymous with the international nature of IFSCs.

This concludes the "Regulatory Framework: General View" section.