Financial Regulators in India: Who Regulates What

Six bodies do most of the regulating of Indian finance. SEBI takes securities markets and the intermediaries in them, the Reserve Bank of India takes banking, payments and non banking finance, IRDAI takes insurance, PFRDA takes pensions, the Ministry of Corporate Affairs takes company law, and IBBI takes insolvency. Which one binds a firm is decided by the activity it carries on, not by what the firm calls itself.

Underneath that list sits a single chain, and it is worth following once slowly. Everything else about who regulates what is a consequence of it. Parliament passes an Act. The Act creates a body, or empowers one that already exists, and grants it power over a defined activity. The body then makes rules inside the power the Act gave it, and no wider. A firm that carries on the activity registers, and from the moment it does, those rules are the terms on which it operates. Nothing anywhere in that chain asks what the firm considers itself to be.

Each of those six bodies publishes its own current text, and the Act that empowers it is published alongside. A threshold, a rate, a period, a fee, a limit or an effective date is read at that site on the day the answer matters. A requirement that moved last month turns a confident sentence into a wrong one, and a reader who has been taught where to look is better served than a reader who has been handed a number that quietly expired. Naming a requirement and stating a requirement are two different acts, and only the first one is still true a year later.

The route from an activity to a body is short, and it is the same every time. Name the activity in plain words, find the Act that defines it, then read which body that Act empowers. Run the route once for every activity a firm carries on, and a nine person firm with six activities finishes with four bodies against its name rather than one.

Which bodies regulate finance in India, and what does each one answer for?

Start with a picture that has nothing to do with finance. A shop in a municipal market gets three visitors in one week. The fire officer looks at the exit and the wiring. The weights and measures inspector looks at the scale. The food safety officer looks at what is in the jars. None of the three is the shop's regulator. The shop does not have one. Each of them answers for a defined thing, and the shopkeeper meets whichever of them the shop's own activities bring through the door. Selling packaged food brings the third. Selling it by weight brings the second. Having a building at all brings the first.

Indian finance works exactly this way, and six bodies do most of the work. SEBI, the Securities and Exchange Board of India, was created by the Securities and Exchange Board of India Act 1992 and answers for securities markets and the intermediaries operating in them. The Reserve Bank of India was created by the Reserve Bank of India Act 1934 and answers for banking, payments and non banking finance, along with foreign exchange under the Foreign Exchange Management Act 1999. IRDAI, the Insurance Regulatory and Development Authority of India, was created by the Insurance Regulatory and Development Authority Act 1999 and answers for insurance business and the intermediaries who sell it. PFRDA, the Pension Fund Regulatory and Development Authority, was created by the Pension Fund Regulatory and Development Authority Act 2013 and answers for the pension architecture it oversees. The Ministry of Corporate Affairs is not a statutory bodyA body created by an Act of Parliament rather than by a company registration or an executive order, which is why the shape of its powers is described in the Act itself. at all but a ministry of government, and it administers the Companies Act 2013. Administering that Act is why the Ministry reaches every incorporated firm in the country. IBBI, the Insolvency and Bankruptcy Board of India, was created under the Insolvency and Bankruptcy Code 2016 and answers for the insolvency process and the professionals working inside it.

Every one of these six holds its ground because an Act gave it that ground, and the ground is described as an activity rather than as an industry. A ground described that way is the single fact that makes one firm answerable to several of them at once. Read the list again and notice what is missing from it. Nowhere does any Act say that a body regulates advisory firms, or technology led finance companies, or wealth managers. Advisory firm, technology led finance company and wealth manager are descriptions people write about themselves on a website. The Acts speak instead about dealing in securities, about accepting deposits, about carrying on insurance business, and a firm walks into one of those descriptions by doing the thing rather than by adopting the label.

A regulatorA body given power by an Act to make and enforce rules over a defined activity, and given no power at all outside that activity. also has a boundary in the other direction, and the outward boundary is the half people forget. SEBI cannot make a rule about how a bank lends. The Reserve Bank of India cannot make a rule about how a research report discloses a conflict. Each body is confined to the power its own Act granted it, and that confinement is why the map has edges at all. Confinement is also why a question addressed to the wrong body produces a long silence rather than an answer. A long silence is a slow and expensive way to learn the map.

What does the word Regulation actually mean, as an instrument and as an activity?

This is a small point that saves an enormous amount of confusion later, so it is worth thirty seconds. The word regulationBoth a specific instrument made by a body under an Act, and the general activity of regulating. Context decides which sense a sentence is using. carries two meanings in ordinary professional use, and both are used daily by the same people in the same conversation. The first is an instrument: a specific, titled, numbered document that a body has made under the power an Act gave it. The second is an activity: the whole business of regulating, meaning the making of rules, the supervision of firms and the enforcement that follows.

Everyday English does this constantly and nobody trips over it. A charge is a fee and also an accusation. A trial is a court hearing and also an experiment. The sentence around the word settles which one is meant, so the double meaning goes unnoticed. The two senses of regulation behave the same way, and being able to say which sense a sentence is using is the difference between reading a document and guessing at it.

The two sit side by side. Devaki Suresh, the compliance officer at Sarvodaya Capital Advisors Private Limited, invented, says that the regulations changed last month. Devaki Suresh is using the instrument sense: a named document was amended and she can point at it. Kamala Ravindran, the founder, says that regulation of this activity has become heavier. Kamala Ravindran is using the activity sense: nothing in particular was amended, and the claim is about the weight of supervision as a whole. Hearing the second and then going looking for the first costs an hour on a site and finds nothing. There was never anything to find.

A third habit is worth naming, and it is the one that costs money. People say the regulations when they mean everything in writing that binds them, including circulars, master directions, exchange rules and the terms of their own registration. Loose speech is harmless. Loose filing is not. A firm that keeps a folder called regulations and drops circulars into it has quietly built a system that cannot tell which of its contents is the instrument and which is guidance issued under it, and that distinction decides what happens when the two appear to disagree.

How does a regulation reach a particular firm and bind it?

A founder asked why a rule applies to their firm will often answer in terms of fairness, or the industry, or what everybody else does. None of those is the mechanism. The mechanism is a chain of five steps, and it can be walked out loud in about twenty seconds for any rule at hand.

Step one, Parliament passes an Act, and the Act defines an activity in its own words. Step two, the Act creates a body or empowers an existing one, and grants it power over that defined activity and nothing else. Step three, the body makes a rule inside the power it was given. A rule that strayed outside the Act can be challenged on exactly that ground. Step four, a firm carries on the defined activity and registers to do so. Step five, from the moment of registration, that rule is one of the terms on which the firm operates, and so is every amendment made to it afterwards.

Consent is not the mechanism anywhere along that chain, and the firm's own view of what it is appears at none of the five steps. Binding without consent is the part that surprises people who come from a contract world, where nothing binds a party until that party agrees to it. Here the agreement happens once, at registration, and what is agreed to is not a fixed set of rules. The firm agrees to the rulebook as it stands and as it will stand, and a moving rulebook is a very different thing to sign.

The household version runs the same way. When the Bhoite household, invented, took a home loan, it signed a document that ran to many printed sides and it consented to every one of them. But the household did not consent to the law of property, or to the rules about how a lender must handle a grievance. The law of property and the grievance rules apply because a loan was taken, not because anybody agreed to them, and they would apply just as firmly if the household had never read a word of them. A firm's position is the same, one size up.

One more thing follows from the chain, and it is the sharpest edge in this guide. A firm that carries on the defined activity and never registers has not escaped the chain. The firm has stepped over the perimeterThe line between activity that needs permission before it may be carried on and activity that needs none. and is inside the rules already, in breach of the step it skipped. Registration is what makes the activity permitted, not what makes the rules relevant. Once registration is granted, the firm receives a registration numberThe identifier a body gives a registered firm, which appears on the firm's documents and can be checked against that body's own public register., and that number is the visible end of the whole chain: it names one body, and it names one activity.

What decides which body applies, what a firm does or what it is called?

Almost always, the activity the firm carries on. The activity testDeciding which rules apply from what a firm actually does, rather than from what the firm is called or how it describes itself. works in one direction only: write down, in plain words, the thing the business actually does for people, then find the definition that description fits, then read which body that Act empowers. Nothing in that sequence consults the name over the door.

Take an example that has caught a great many founders. A company is set up by engineers, describes itself as a technology company, and builds an application that asks a user some questions and then tells that user which funds to buy. The founders build software and do not manage anybody's money, so they are certain they are outside all of this. But the description of the business, written in plain words, is that it gives personalised advice on investments to individuals. The plain words description is what gets matched to a definition, and the fact that the delivery mechanism is a screen changes the delivery mechanism and nothing else.

Being a technology company describes the founders' background rather than the business's activity, and the rules are written against activities, so the label loses every time. Turn the same test around and it works just as well in reverse. A firm may call itself an advisory business and in fact do nothing but publish general market commentary to a mailing list; the grand name does not summon a body that the activity did not summon. The test is not suspicious of labels because labels are dishonest. The test ignores labels because the Acts never mentioned them.

When does the form of the company decide instead?

The entity test is real, and pretending otherwise would leave half a map. There is a narrow set of cases where the law attaches a duty to what a firm is rather than to what it does, and the clearest of them is company law itself. Sarvodaya Capital Advisors Private Limited answers to the Companies Act 2013 from the day of its incorporation, before it has a single client, and it would answer to it just as fully if it never carried on a single financial activity at all. The duty attached to the form.

The same pattern shows up in a second way. Some registrations are open only to a particular form of entity, so the form does not decide which body regulates a firm but does decide whether a given door is open to it at all. And a firm whose securities are listed picks up conditions that follow from being listed, not from anything the firm chose to do that week.

The entity test decides where the law itself has attached a duty to the form, and outside that narrow set it decides nothing. A test that decides nothing outside a narrow set belongs second in the sequence rather than first. The practical rule is simple and worth keeping. Run the activity test on every activity, then run one final pass asking what form the firm has taken, and add whatever that adds. Doing it in the other order produces a firm that is confident about company law and blank about everything it actually does.

SEBI vs RBI: where does the line between the two fall?

The line between the two gets drawn badly more often than any other on the map, so define both sides properly before comparing them. SEBI answers for securities markets. Securities markets take in the issue and trading of securities, the market infrastructure they trade on, and the intermediaries who stand between a person and a security: those who research them, those who advise on them, those who manage portfolios of them, those who distribute schemes that hold them. Where an intermediary handles client money, the handling arises out of the securities activity, so SEBI reaches the handling too.

The Reserve Bank of India answers for money, credit and payments in their own right. Money, credit and payments take in banking, meaning the acceptance of deposits from the public and the lending that follows; non banking finance, meaning lending as a business without being a bank; and the payment systems that move money between people. Foreign exchange sits with the Reserve Bank of India as well, under the Foreign Exchange Management Act 1999.

The line falls on what is being handled rather than on what kind of firm is handling it, so securities and their intermediaries sit on one side, and money, credit and payments sit on the other. The line divides activities and not organisations. Now watch what that does to real firms. A bank does banking, plainly on the right of the line, and may also carry on securities activities, plainly on the left. The bank does not become a securities firm or stop being a bank. It carries both, and it answers on both.

Sarvodaya Capital Advisors Private Limited sits in a smaller version of the same position. Sarvodaya advises on securities today, and advising puts it on SEBI's side. The founders have twice discussed arranging loans, and arranging one would put the firm on the Reserve Bank of India's side the day the discussion ended. Nobody at Sarvodaya has to choose. A firm doing one activity from each side of the line has not selected a rulebook, it has taken on two.

What happens when two bodies plausibly apply to the same firm?

Sooner or later an activity turns up where two bodies both look as though they reach it, and the honest first reaction is discomfort. A product that behaves partly like a market instrument and partly like a loan. A platform that moves money and also lets people buy something with it. The discomfort is appropriate. An overlap is the one place on the map where a wrong turn is easy to take and slow to discover.

The one move that is never acceptable in an overlapThe position of a firm whose activities bring more than one body's rules to bear at the same time. is choosing the body the firm would rather deal with. A preference has no standing anywhere in the chain that binds a firm. The rule sounds obvious written down. In a room it does not. The argument never presents itself as a choice but as a view, and the view is always that the firm is really doing whatever the friendlier body supervises.

The resolution is unglamorous and it works. An overlap at the level of a product is often two activities wearing one name, so split the product into its separate activities. Describe each activity in plain words. Find which Act defines each description and which body that Act empowers. Very often the answer is that both bodies apply, to different halves, and there was never a conflict to resolve. Where the answer genuinely stays unclear after that work, the route is to put the description in writing to the body concerned and ask, rather than to proceed on an assumption and discover the answer during an inspection.

Keep the household version in mind. If a room is on the boundary between two municipal wards, the household does not get to file its paperwork with whichever office has the shorter queue. Somebody looks at the boundary and reads which side the room is on, and the answer is sometimes that the room straddles it and both offices have something to say.

What binds a firm without being a regulation at all?

Here is a firm that has done everything right by its own lights. The firm has read every regulation on the site of the body that reaches its main activity, twice, and filed them properly. It can still be in breach tomorrow morning, and nothing it read would have warned it. A whole layer of obligation binds firms without being a regulation, without appearing anywhere among the regulations a regulator publishes, and without anybody sending an amendment notice.

Start with the exchanges. An exchange makes rules and byelaws that bind its trading members, and those bind by membership rather than by regulation. A firm that joined agreed to them the way a trader agrees to the rules of a market yard on taking a stall in it: nobody legislated that stall, and the trader is still bound. Listing conditions work the same way for a listed firm, through the agreement it signed to be listed and to remain listed. Exchange rules and listing conditions together are often called the self regulatory layerRules made by exchanges and industry bodies that bind their own members through membership rather than through an instrument made by a regulator.. The name is fair as long as self regulatory is not read as optional.

Then there are industry bodies. An industry body is not a regulator and still holds things a firm cannot operate without. AMFI, the Association of Mutual Funds in India, at amfiindia.com, holds the registration a mutual fund distributor needs. AMFI does not regulate anybody. The association is an industry body, and yet a distributor without what AMFI holds is not distributing. The National Institute of Securities Markets, at nism.ac.in, administers the certification examinations that certain roles require; the institute is not a regulator either, and a person without the right certificate still cannot occupy the role.

Finally, the firm's own agreements bind it. Every client agreement Sarvodaya Capital Advisors Private Limited signs adds obligations that no body imposed and no site publishes, and a promise made in an agreement is enforceable against the firm exactly as written. A firm that files nothing but its regulations has built a system that is blind in three directions. Devaki Suresh, the compliance officer at Sarvodaya, keeps all four of these layers in one register rather than keeping only the first.

Where does the international layer sit in all of this?

Global names turn up while reading about Indian rules, and they are worth placing accurately rather than vaguely. The International Organization of Securities Commissions (IOSCO), at iosco.org, is the international grouping of securities regulators and publishes standards its members work towards. The Financial Action Task Force (FATF), at fatf-gafi.org, sets the international standards on money laundering and terrorist financing that member jurisdictions implement. India participates in both settings, and Indian instruments are shaped by what is agreed there.

An Indian firm is bound never by the global standard itself but by the Indian instrument that implements it, made by an Indian body under an Indian Act. Naming a global standard is therefore the beginning of an answer and never the end of one. The practical consequence is a small habit. A claim that a duty exists because an international standard requires it is background rather than a citation. The question to put is which Indian instrument carries it, made by which body, and that instrument is then read at that body's site. If nobody can name the Indian instrument, what has been offered is the origin of a rule and not the rule.

How is the body that regulates an activity established before the activity begins?

The procedure is short enough to run in an afternoon for a whole business. The activity is written in plain words, the words used to describe it to a stranger who does not work in finance. The definition that description fits is then found inside an Act. The Act then says which body it creates or empowers. Then that body's own site is read before anybody signs anything, and the date of the reading is written down.

The procedure works because it starts with a plain words description rather than with a category, and a plain words description is the only form in which the question can be matched against a definition written in an Act. Step one is the easy one to get wrong. A description that reads, the firm runs a wealth platform, leaves nothing to match; every word of it is a category the Acts never used. A description that reads, the firm tells individual people which mutual funds to put their savings into, for a fee, puts a hook in every clause.

Two habits make the procedure durable. Six months later somebody will ask why the firm concluded what it concluded, so the note is kept, and it answers that in ten seconds. And the note is dated. The answer carried away is the answer as at that date, and the date is not a formality. A note written from an undated reading is a note that cannot be checked, and a firm operating on an undated reading is a firm that cannot tell whether its conclusion has quietly expired.

What does the map look like for one nine person firm?

Devaki Suresh, the compliance officer at Sarvodaya Capital Advisors Private Limited, sits down with one sheet of paper and does the least glamorous and most useful hour of work in the whole registration process. She writes down everything the firm either does or intends to do. Not what it is. Not how it describes itself on a slide. What it does, in plain words, one line each.

Six lines come out. Publishing research, written by Nirmal Achari. Giving advice to individual clients, of whom the Bhoite household is one. Distributing mutual fund schemes. Holding a signed agreement with each advisory client. Arranging loans, discussed twice by the founders and not started. And being a private limited company, a line nobody would have written down at all if the sheet had been organised any other way.

Against those six lines she writes four names, and the mapping is not tidy.

Six activities produced four names and seven marks on the grid, which is the whole lesson in one line: the mapping runs many to many, so a firm never has a regulator in the singular. Look at what the arithmetic exposes. SEBI is marked four times, once each for research, advice, distribution and the client agreements, so four different lines lead to the same door. AMFI is marked once and is not a regulator at all. The Reserve Bank of India is marked once for something that has not started. The Ministry of Corporate Affairs is marked once for something nobody chose.

Notice how the sheet is sorted. The sorting is the part worth copying. Not by body, and not by importance. By activity. The activity is what summons the body, and a sheet sorted by body can only list the bodies somebody already thought of. A sheet sorted by activity has a row for every single thing the firm does, and each row then asks its own question. Asking that question row by row is how the sixth line got written down at all.

How does anyone use this map outside a compliance office?

Four kinds of reader use this map every week, and none of them is a compliance officer.

A founder uses it before launching anything new. The question is never which regulator the firm comes under; it is what this new thing does, written in plain words, and which body that description summons. Run that before the product is built and the answer is cheap. Run it afterwards and the answer arrives as a rebuild.

A person with a complaint uses it to find the right door. The Bhoite household is unhappy with advice it received. The route depends on the activity that produced the harm, not on what the firm calls itself, so advice leads to the body that reaches advice, and the same firm's distribution of a scheme may lead somewhere else entirely. A complaint sent to a body with no power over the activity is not refused with an explanation; it simply sits.

An analyst or a lender assessing a counterparty uses it to check a register, and the trap here is precise. A registration number on a letterhead names one body and one activity. The number is evidence about that activity and silence about every other one. Checking that a firm is registered for one activity tells nothing whatever about the second activity it carries on. The check therefore runs down the list of activities rather than stopping at the first certificate.

And an investor uses it for the smallest and most valuable purpose of all: knowing which register to look in, and knowing that the answer to who regulates this firm is a list rather than a name. Whether any particular firm is registered is settled at the body's own register, run on the day it matters.

Sarvodaya Capital Advisors Private Limited, Kamala Ravindran, Devaki Suresh, Nirmal Achari and the Bhoite household are invented.
Educational material. Not advice on any investment, tax, budget or market position.