Foundation — The Indian regulatory system and PFRDA

The Indian regulatory system

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1. Why regulation exists

It aims at "creating AN ENABLING ECOSYSTEM where BUSINESSES, GOVERNMENT AND OTHER USERS OF CAPITAL can make their claims for resources, INVESTORS can make informed choices on how to channelize their investible surpluses, and PRODUCT PRODUCERS seek to match the two."

In plain words: regulation lets markets grow in an orderly way, for the investor's benefit. Users of capital ask for money. Investors choose where to put savings. Product makers connect the two.

1.1 The most vulnerable link

In plain words: small investors are the weakest link. They invest little, know less and see less information. Rules try to make up for that through stability, openness and protection.

The five specific mischiefs named:

• ⚠️ "DELIBERATELY ENGINEERED SPECULATIVE ACTIVITIES in the stock market".
• ⚠️ "INSIDER TRADING"
• ⚠️ "Some MUTUAL FUNDS MAY TAKE EXCESSIVE RISKS".
• ⚠️ "Some ISSUERS OF DEBT SECURITIES MAY NOT CARE TO PROVIDE ADEQUATE COLLATERAL".
• ⚠️ "INTERMEDIARIES MAY ADOPT QUESTIONABLE PRACTICES TO SELL PRODUCTS TO INVESTORS THAT ARE NOT SUITABLE TO THEIR NEEDS".

In plain words: regulation guards against rigged speculation, insider trading, risky mutual funds, poorly secured debt and mis-selling.

That last one — mis-selling unsuitable products — is the mischief your own certification exists to prevent.

1.2 The four regulators

"The Indian Financial Markets is overseen by THE MINISTRY OF FINANCE THROUGH ITS VARIOUS ARMS."

"THE CENTRAL GOVERNMENT EXERCISES A CERTAIN LEVEL OF OVERSIGHT ON THESE AND OTHER REGULATORY INSTITUTIONS."

In plain words: RBI oversees banks, SEBI the securities and commodity derivatives markets, IRDAI insurers and PFRDA pensions. The Central Government keeps some oversight over all of them.

1.3 Self-Regulatory Organisations

"Intermediaries representing some segments of the securities markets MAY FORM A SELF-REGULATORY ORGANIZATION (SRO). For recognition as an SRO by SEBI, certain conditions have to be met as spelt out under the SEBI (SELF-REGULATORY ORGANIZATIONS) REGULATIONS, 2004."

In plain words: intermediaries in a segment can form an SRO, if SEBI recognises it under the 2004 regulations. An SRO sets high standards and pushes good practice among its members.

This answers the chapter's first sample question — an SRO encourages best practices amongst members. It does not make regulations, and it does not enforce the regulator's regulations.

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2. PFRDA

2.1 The two statutory objects

"The PFRDA is the authority entrusted with the following responsibilities UNDER THE PFRDA ACT, 2013:"

1. ⚠️ "TO PROMOTE OLD AGE INCOME SECURITY BY ESTABLISHING, DEVELOPING AND REGULATING PENSION FUNDS".
2. ⚠️ "TO PROTECT THE INTERESTS OF SUBSCRIBERS TO SCHEMES OF PENSION FUNDS AND RELATED MATTERS".

In plain words: under the PFRDA Act, 2013, PFRDA has two jobs. It builds and regulates pension funds for old age income. It protects the people who save in them.

2.2 What the Act covers — and what it does not

⚠️ "The Act and its provisions apply to THE NATIONAL PENSION SYSTEM (NPS) AND OTHER PENSION SCHEMES NOT REGULATED BY ANY OTHER ENACTMENT."

"The NPS is based on DEFINED CONTRIBUTIONS. It offers A MENU OF INVESTMENT CHOICES AND FUND MANAGERS. THOUGH THE NEW SYSTEM IS VOLUNTARY, IT IS MANDATORY FOR NEW RECRUITS OF THE CENTRAL GOVERNMENT, EXCEPT THE ARMED FORCES. It is also available on a voluntary basis to all persons INCLUDING SELF-EMPLOYED PROFESSIONALS AND OTHERS IN THE UNORGANIZED SECTOR."

In plain words: the Act covers the NPS and pension schemes not covered by another law. In the NPS, what you get depends on what is paid in. You choose investments and fund managers. It is compulsory for new central government staff, except the armed forces, and open to everyone else by choice.

In plain words: EPFO schemes and other special provident funds stay under their own laws, not PFRDA.

So EPF, EPS and EDLI are not PFRDA's. They belong to the EPFO under a different statute — which is why Chapter 6 treated them separately.

2.3 The functions of PFRDA

• "REGULATING the NPS and any other pension scheme to which the Act applies".
• "APPROVING the schemes, INVESTMENT GUIDELINES AND OTHER MANAGEMENT NORMS".
• "REGISTERING AND REGULATING INTERMEDIARIES"
• "PROTECTING THE INTERESTS OF THE SUBSCRIBERS by ENSURING THE SAFETY OF THE CONTRIBUTIONS and KEEPING THE COSTS associated with the schemes REASONABLE AND ECONOMICAL".
• "ESTABLISHING A SUBSCRIBER GRIEVANCE REDRESSAL MECHANISM" — ⚠️ "today delivered through the AI-powered 'PFRDA PENSION SAHAYAK' PORTAL [which] HAS REPLACED THE EARLIER CENTRALIZED GRIEVANCE MANAGEMENT SYSTEM (CGMS)".
• ⚠️ "The Authority discharges its INVESTOR-EDUCATION function partly through the SUBSCRIBER EDUCATION AND PROTECTION FUND (SEPF); the SEPF (AMENDMENT) REGULATIONS, 2023 EXPRESSLY WIDENED THE FUND'S PERMITTED USE TO INCLUDE FUNDING RESEARCH ON RETIREMENT EDUCATION, AWARENESS AND PLANNING".
• ⚠️ "ADJUDICATING DISPUTES AMONGST THE INTERMEDIARIES".
• "EDUCATING SUBSCRIBERS AND THE PUBLIC about retirement savings".
• ⚠️ "STANDARDISING DISSEMINATION OF INFORMATION ABOUT PERFORMANCE OF PENSION FUNDS AND PERFORMANCE BENCHMARKS".
• ⚠️ "RESTRAIN ANY PERSON FROM INVESTING IN A SCHEME, PREVENT ANY OFFICE BEARER OF AN INTERMEDIARY FROM ACTING AS SUCH AND ATTACH ANY PROCEEDS related to matters under investigation".
• ⚠️ "INITIATE AN INVESTIGATION if the PFRDA believes that the activities of a pension fund or actions of an intermediary are INIMICAL TO THE INTERESTS OF THE SUBSCRIBERS".
• ⚠️ "REPORT TO THE CENTRAL GOVERNMENT if a pension fund or the CRA is acting in a manner PREJUDICIAL to the subscribers, PROVIDED THE CONCERNED ENTITY HAS BEEN GIVEN A CHANCE TO BE HEARD. IF SO WARRANTED, THE GOVERNMENT MAY APPOINT AN ADMINISTRATOR".

In plain words: PFRDA regulates the NPS, approves schemes and registers intermediaries. It keeps contributions safe and costs reasonable. It handles grievances and educates subscribers. It can also investigate, freeze proceeds and report a failing fund to the Government, after giving it a hearing.

⚠️ Its powers: "The PFRDA has SEARCH AND SEIZURE POWERS to investigate any instance of contravention... The Act gives the PFRDA the authority to ENSURE COMPLIANCE of intermediaries and, IF FOUND TO BE IN VIOLATION, IMPOSE PENALTIES AND OTHER CORRECTIVE MEASURES."

In plain words: PFRDA can search and seize, and can penalise intermediaries that break the rules.

⚠️ Its accountability: "The PFRDA WILL BE SUBJECT TO THE DIRECTIONS OF THE CENTRAL GOVERNMENT ON ALL MATTERS OF POLICY. It shall also SUBMIT PERIODICAL REPORTS on various aspects of its functioning."

In plain words: on policy, PFRDA follows the Central Government's directions. It also reports on its work regularly.

2.4 Constitution of the PFRDA

In plain words: PFRDA has a chairperson, three whole-time and three part-time members. The Central Government appoints them for 5 years, and they can be reappointed.

⚠️ "PFRDA frames and periodically reviews its regulations through a structured process laid down in the PFRDA (MECHANISM FOR MAKING AND REVIEW OF REGULATIONS) REGULATIONS, 2024, WHICH CONSTITUTES AN INTERNAL REVIEW COMMITTEE AND A REGULATION ADVISORY COMMITTEE."

In plain words: PFRDA makes and reviews its rules through a set process under its 2024 regulations. Two committees take part.

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3. The Ministry of Finance and its five departments

Note that pension reforms sit with the Department of Financial Services — the same department that notified the Unified Pension Scheme in January 2025.

In plain words: Economic Affairs runs macro policy and capital markets. Expenditure handles financial rules and state borrowing. Revenue runs taxes through two boards. Financial Services covers public sector banks, insurance and pension reform. DIPAM handles disinvestment.

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4. The Ministry of Corporate Affairs

"Mainly concerned with the administration of THE COMPANIES ACT, 2013 and other allied acts."

⚠️ "The Ministry is also responsible for administering THE COMPETITION ACT 2002 WHICH HAS REPLACED THE MONOPOLIES AND RESTRICTIVE TRADE PRACTICES ACT, 1969."

⚠️ It supervises three professional bodies: "THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI), THE INSTITUTE OF COMPANY SECRETARIES OF INDIA (ICSI) AND THE INSTITUTE OF COST ACCOUNTANTS OF INDIA (ICAI)."

It also administers the "PARTNERSHIP ACT, 1932, the COMPANIES (DONATIONS TO NATIONAL FUNDS) ACT, 1951, and SOCIETIES REGISTRATION ACT, 1860."

In plain words: the MCA runs the Companies Act, 2013, the Competition Act and some other laws. It also oversees the institutes of chartered accountants, company secretaries and cost accountants.

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5. Reserve Bank of India

"RBI is THE CENTRAL BANK of the country and is vested with the responsibility of ADMINISTERING THE MONETARY POLICY."

⚠️ The balance it must strike: "Its key concern is TO ENSURE THE ADEQUATE GROWTH OF MONEY SUPPLY IN THE ECONOMY so that economic growth and financial transactions are facilitated, BUT NOT SO RAPIDLY WHICH MAY PRECIPITATE INFLATIONARY TRENDS."

In plain words: RBI is the central bank and runs monetary policy. It must let money supply grow enough for the economy, but not so fast that prices shoot up.

Its Preamble: "…to REGULATE THE ISSUE OF BANK NOTES AND KEEPING OF RESERVES with a view to SECURING MONETARY STABILITY IN INDIA and generally TO OPERATE THE CURRENCY AND CREDIT SYSTEM of the country to its advantage."

In plain words: the RBI Act, 1934 governs RBI itself. The Banking Regulation Act, 1949 governs banks.

5.1 The six functions

That last row answers the chapter's second sample question — the RBI manages the issuance of Central and State Government securities, not SEBI, the Ministry of Finance or the central government itself.

In plain words: RBI sets monetary policy to keep prices stable while credit flows. It regulates banks to protect depositors. It manages foreign exchange under FEMA. It issues currency. It supports development. And it is banker to the Government and to banks.

5.2 Governance and supervision

"The general superintendence and direction of RBI's affairs are looked after by A CENTRAL BOARD OF DIRECTORS WHICH IS APPOINTED BY THE GOVERNMENT OF INDIA." ⚠️ "Each of THE FOUR REGIONS in the country is served by A LOCAL BOARD which advises the Central Board on LOCAL ISSUES and represents TERRITORIAL AND ECONOMIC INTERESTS OF LOCAL CO-OPERATIVE AND INDIGENOUS BANKS."

In plain words: a Government-appointed central board runs RBI, with four local boards advising it. The Board for Financial Supervision, set up in 1994, supervises banks, financial institutions and NBFCs together.

The BFS "oversees the functioning of the DEPARTMENT OF BANKING SUPERVISION, the DEPARTMENT OF NON-BANKING SUPERVISION and FINANCIAL INSTITUTIONS DIVISION."

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6. Securities and Exchange Board of India

Its Preamble: "...to PROTECT THE INTERESTS OF INVESTORS IN SECURITIES and to PROMOTE THE DEVELOPMENT OF, AND TO REGULATE THE SECURITIES MARKET."

In plain words: SEBI was set up by the SEBI Act, 1992. It protects investors, develops the market and regulates it.

Who it regulates: ⚠️ "STOCK EXCHANGES, BROKERS, TRUSTEES OF TRUST DEEDS, MERCHANT BANKERS, BANKERS TO AN ISSUE, UNDERWRITERS, PORTFOLIO MANAGERS, MUTUAL FUNDS, DEPOSITORIES, DEPOSITORY PARTICIPANTS, VENTURE CAPITAL FUNDS, ALTERNATIVE INVESTMENT FUNDS, FOREIGN PORTFOLIO INVESTORS, CUSTODIANS AND REGISTRARS & TRANSFER AGENTS."

How: "by PRESCRIBING REGISTRATION NORMS, ISSUE OF REGULATIONS, NOTIFICATIONS AND CIRCULARS, CALLING FOR INFORMATION, CARRYING OUT INSPECTIONS, AND TAKING ACTION AGAINST NON-COMPLIANCE."

In plain words: SEBI oversees exchanges, brokers, funds, depositories and many other intermediaries. It registers them, makes rules, inspects them and acts against breaches.

6.1 Insider trading — and how it reaches the pension sector

⚠️ "INSIDER TRADING REFERS TO THE DEALING IN SECURITIES BY PERSONS CONNECTED WITH A COMPANY HAVING MATERIAL INFORMATION THAT IS NOT AVAILABLE TO THE PUBLIC. Such persons include THE DIRECTORS AND EMPLOYEES OF THE COMPANY, ASSOCIATES SUCH AS BANKERS AND TAX CONSULTANTS OR GOVERNMENT EMPLOYEES WHO GET SENSITIVE INFORMATION."

In plain words: insider trading is trading on price-sensitive facts the public does not yet have, by someone connected to the company.

The SEBI (Prohibition of Insider Trading) Regulations, 2015 require "(a) THE BOARD OF DIRECTORS OF EVERY LISTED COMPANY AND MARKET INTERMEDIARY and (b) EVERY OTHER PERSON WHO IS REQUIRED TO HANDLE UNPUBLISHED PRICE SENSITIVE INFORMATION... [to] FORMULATE A CODE OF CONDUCT to regulate, monitor and report trading by its employees and other connected persons."

⚠️ The penalties: "MONETARY PENALTIES, CRIMINAL PROSECUTION, PROHIBITING PERSONS FROM SECURITIES MARKETS AND DECLARING TRANSACTIONS AS VOID."

In plain words: every listed company and intermediary needs a code of conduct for trading by its people. Breaches can bring fines, prosecution, a market ban or cancelled trades.

⚠️ "TO AVOID REGULATORY OVERLAP PFRDA DOES NOT PRESCRIBE A SEPARATE PARALLEL CODE; INSTEAD EACH PENSION FUND MUST MAINTAIN A BOARD-APPROVED MODEL CODE OF CONDUCT CONSISTENT WITH THE SEBI FRAMEWORK, WHILE PFRDA RETAINS SUPERVISORY OVERSIGHT."

In plain words: NPS money is invested in SEBI's markets, so SEBI's insider trading rules apply to pension funds and their people too. PFRDA has no separate code. Each pension fund keeps a board-approved code in line with SEBI's, and PFRDA supervises.

6.2 SEBI's enforcement powers

"If SEBI is of the opinion that some intermediary is involved in unfair trade... it has the power to CALL FOR INFORMATION, UNDERTAKE INSPECTION, CONDUCT INQUIRIES AND AUDITS, SUMMON WITNESSES." It may:

• "SUSPEND THE TRADING OF ANY SECURITY in a recognized stock exchange".
• "RESTRAIN PERSONS FROM ACCESSING THE SECURITIES MARKET".
• "SUSPEND ANY OFFICE-BEARER of any stock exchange or SRO".
• "IMPOUND AND RETAIN THE PROCEEDS OR SECURITIES in respect of any transaction under investigation".
• ⚠️ "ATTACH, AFTER PASSING OF AN ORDER ON AN APPLICATION MADE FOR APPROVAL BY THE JUDICIAL MAGISTRATE OF THE FIRST CLASS having jurisdiction, FOR A PERIOD NOT EXCEEDING ONE MONTH, one or more bank accounts".
• ⚠️ "SEBI NOW HAS THE RIGHT TO ATTACH AND SELL MOVABLE AS WELL AS IMMOVABLE PROPERTY OF THE DEFAULTERS WITHOUT RECOURSE TO ANY COURT OF LAW".
• "DIRECT ANY INTERMEDIARY NOT TO DISPOSE OF OR ALIENATE AN ASSET forming part of any transaction under investigation".

In plain words: SEBI can suspend trading, ban people from the market and freeze proceeds. With a magistrate's approval, it can attach bank accounts for up to a month. It can also attach and sell a defaulter's property without going to court.

SEBI is also involved in "PROMOTING INVESTOR EDUCATION AND TRAINING OF INTERMEDIARIES" and "REGULATES SUBSTANTIAL ACQUISITION OF SHARES AND TAKE-OVER OF COMPANIES."

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7. IRDAI

⚠️ "IRDAI was constituted by an act of parliament and ACCORDING TO SECTION 4 OF THE IRDAI ACT, 1999 THE AUTHORITY COMPRISES TEN MEMBERS WHO ARE ALL GOVERNMENT APPOINTEES."

In plain words: IRDAI regulates and develops insurance, including reinsurance, and protects policyholders. It has ten members, all appointed by the Government.

Its powers and functions:

• "ISSUING A CERTIFICATE OF REGISTRATION OR RENEWING, MODIFYING, WITHDRAWING, SUSPENDING OR CANCELLING such registration".
• ⚠️ "PROTECTING THE INTERESTS OF POLICYHOLDERS in matters relating to ASSIGNMENT OF POLICY, NOMINATION BY POLICYHOLDERS, INSURABLE INTEREST, SETTLEMENT OF INSURANCE CLAIM, SURRENDER VALUE OF POLICY and other clauses of insurance contracts".
• ⚠️ "SPELLING OUT THE REQUIRED QUALIFICATIONS, CODE OF CONDUCT AND PRACTICAL TRAINING FOR INTERMEDIARIES INCLUDING INSURANCE INTERMEDIARIES AND AGENTS".
• "SPECIFYING THE CODE OF CONDUCT FOR SURVEYORS AND LOSS ASSESSORS".
• "SEEKING INFORMATION, UNDERTAKING INSPECTION, CONDUCTING INQUIRIES AND INVESTIGATIONS INCLUDING AUDIT".
• ⚠️ "TO CONTROL AND REGULATE THE RATES AND TERMS AND CONDITIONS that may be offered by insurers with regard to GENERAL INSURANCE, WHICH ARE NOT COVERED BY THE TARIFF ADVISORY COMMITTEE".
• ⚠️ "REGULATING THE INVESTMENT OF FUNDS BY INSURANCE COMPANIES".

In plain words: IRDAI registers insurers and can suspend or cancel that registration. It protects policyholders on nomination, claims and surrender value. It sets rules for agents, intermediaries and surveyors. It can inspect and investigate. It controls general insurance rates outside the tariff committee. And it regulates how insurers invest.

IRDAI matters to a Retirement Adviser for one reason above all: every Annuity Service Provider is an IRDAI-registered life insurer, empanelled by PFRDA. The annuity a subscriber buys is an insurance contract regulated by IRDAI, sold under a PFRDA framework.