Need for regulatory environment - Security Analysis and Investment Management

Generally, the central banks of the country serve as the apex body of a country's financial system, for example, RBI in India and Bank of England in the UK. These are the channels through which the plans and monetary policy initiative are implemented.

The banking and financial sector in India have an objective to promote the economic growth and economic welfare of the citizens. For this purpose, various regulatory bodies are set up with specific objectives and functions. In order to promote the interest and welfare of consumers in the banks, financial institutions, and the capital market, there is a need to follow business ethics and consumer protection initiatives.

The enlargement of market and the economic growth, with the added burden of managing the effects of globalization, has created the need to evolve umbrella organizations specifically designed to look after certain aspects of the market activities. Many institutions such as HDFC, National Bank for Agriculture and Rural Development [NABARD], and administrative and controlling institutions like Securities and Exchange Board of India [SEBI] and Insurance Regulatory and Development Authority [IRDA] have been established in response to the growing needs of economic development. These specialized institutions are created with specific objectives such as:-

  • Protection of investors' interest
  • Registration requirements
  • Controlling the orderly development of the institutions and intermediaries
  • Advance of undue speculations
  • Ensuring the financial strength of organizations in the industry

The reserve bank of India, as an apex body, serves as a conduit for implementation of the monetary policy, which is articulated by the government. The Securities and Exchange Board of India [SEBI] serves as a watchdog and controller over the institutions and intermediaries associated with capital market. The Insurance Regulatory and Development Authority [IRDA] concentrates on the insurance industry in India, which has a large complementary association with the capital market and its development.

RBI has from time to time introduced broad guidelines about the processes to be followed by banks, financial institutions and intermediaries to know their customers. These guidelines are commonly known as Know Your Customer [KYC] guidelines. The primary objectives of these guidelines are:

  • Verification of the identity of the customer
  • Identify the location of the customer
  • Manage risks associated with customers in a prudent manner
  • Prevent unintentional introduction of anti-social, criminal, or terrorist elements to the banking system.

The KYC guidelines prevent banks, financial institutions, and intermediaries from being used, intentionally or unintentionally by criminals, for money laundering activities. They enable such institutions to know and understand their customers and their financial dealings better, which in turn, help them to manage risks prudently.

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