How to begin investing

Role of regulators and necessary compliances

Financial Investments
Irshad Mushtaq

Prior to investing one’s hard-earned funds, it is crucial for every investor to have a thorough understanding of certain key questions. What exactly is the Securities and Exchange Board of India (SEBI)? What roles do entities such as the National Securities Depository Limited (NSDL), Central Depository Services Limited (CDSL), the National Stock Exchange (NSE), and the Bombay Stock Exchange (BSE) play in the investment landscape? What is the purpose of the Central Know Your Customer (CKYC) process, and why is it deemed necessary? Additionally, why is direct communication through email and SMS to clients’ registered mobile and email addresses required? Furthermore, what is the rationale behind the prohibition of third-party cheques in clients’ trading accounts, and why is it important to engage only with SEBI-registered brokers or members? Why are Ponzi and pyramid schemes considered fraudulent, and why are high and assured returns viewed as deceptive traps in the Indian context? Additionally, what are the viewpoints of the financial minister regarding Ponzi schemes? It is always advisable to invest only through a SEBI-registered stockbroker, a bank registered with the RBI, or to obtain insurance exclusively through an IRDA-registered insurance company; entities offering high returns without these registrations are engaging in fraudulent activities through Ponzi and pyramid schemes. Prohibiting cash transactions and allowing only mapped bank transactions in the stock market is a fundamental practice, and having a nominee in a demat account is essential. Furthermore, why are hot tips not considered a suitable investment strategy? Taking the time to fully understand these concepts and complying with the established laws of the Government of India is crucial before making any investment decisions in order to avoid involvement in illegal schemes.

The Securities and Exchange Board of India (SEBI) is the regulatory body for the securities market in India, overseeing and regulating the functioning and activities of stock exchanges and other securities markets. Its primary role is to protect the interests of investors and maintain the integrity of the market.

The National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL) are the two central depository agencies in India, responsible for holding securities in an electronic form. They play a crucial role in facilitating the seamless settlement of trades and the transfer of securities.

The National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) are the two primary stock exchanges in India. They provide a platform for trading in securities, including equities, derivatives, and debt instruments, and play a crucial role in price discovery and liquidity in the market.

The Central Know Your Customer (CKYC) process is a mandatory requirement for all financial institutions to verify the identity of their clients. It is aimed at preventing money laundering, terrorist financing, and other illegal activities by ensuring that customers’ identities are verified and their risk profiles are assessed.

Direct communication through email and SMS to clients’ registered mobile and email addresses is required to ensure that investors receive timely and accurate information about their investments and transactions. This helps in enhancing transparency and reducing the risk of fraud and misinformation.

The prohibition of third-party cheques in clients’ trading accounts is aimed at preventing unauthorized transactions and ensuring that the funds are sourced from the investor’s verified bank account. This helps in preventing fraud and unauthorized access to the investor’s funds.

It is important to engage only with SEBI-registered brokers or members to ensure that the investment activities are conducted in compliance with the regulatory requirements and that investors’ interests are protected.

Ponzi and pyramid schemes are considered fraudulent as they involve using new investors’ funds to pay off earlier investors, with the promise of high returns. Such schemes eventually collapse when there are no new investors to sustain the payouts, leading to significant financial losses for the participants.

High and assured returns are viewed as deceptive traps in the Indian context as they often involve high levels of risk and are usually offered by entities that are not registered with SEBI or other regulatory bodies. The financial minister has expressed concerns about the proliferation of Ponzi schemes and has emphasized the need for stricter regulations and enforcement to protect investors from such fraudulent activities.

In conclusion, it is essential for investors to have a clear understanding of the regulatory framework and compliance requirements before making any investment decisions. By engaging with SEBI-registered entities and following the established laws and regulations, investors can safeguard their funds and avoid falling victim to illegal schemes and fraudulent activities in the market.

 The author is the founder of MI Securities and business partner of Sharekhan in Srinagar. He can be reached at irshad@bp.sharekhan.com