IV.1 During 2005-06, a number of steps were taken to strengthen the institutional framework for financial markets in terms of instruments and processes so as to improve price discovery. Simultaneously, the orderly functioning and soundness of financial market segments has been pursued through regulatory initiatives. The policy initiatives during 2005-06 were particularly guided by provisions of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003. The FRBM Act, inter alia, prohibits the Reserve Bank from participating in the primary market for Central Government securities with effect from April 2006. This development has completed the transition to a fully market based issuance of Government securities, a process that was initiated in the early 1990s with the introduction of auctions. The implementation of the FRBM Act also necessitated a review of the Reserve Bank’s market operations. A Financial Markets Department (FMD) was set up in July 2005 to fully integrate market operations and improve efficiency in the Reserve Bank’s operations in the money, Government securities and foreign exchange markets. An Informal Group to examine financial market operations by the Reserve Bank was also constituted to evaluate current practices in regard to market operations and refinements in the operating procedure in accordance with evolving circumstances. IV.2 Against this backdrop, this Chapter presents the regulatory and developmental aspects of the Reserve Bank’s oversight of the money, Government securities and foreign exchange markets in 2005-06. The review focuses on the various policy initiatives to widen and deepen the markets so as to improve the day-to-day functioning of market segments.
MONEY MARKET IV.3 The money market provides a focal point for the central bank’s operations in influencing liquidity and transmitting the monetary policy impulses. The broad policy objectives that are being pursued for the development of money market include ensuring stability in short-term interest rates, minimising default risk and achieving a balanced development of various segments of the money market. Following recommendations of the Technical Group on Money Market (May 2005), the focus and policy thrust of the Reserve Bank in the money market has been towards encouraging the growth of collateralised segment, developing the rupee yield curve, ensuring transparency and better price discovery, providing avenues for better risk management and strengthening monetary operations.
Call/Notice Money Market IV.4 In pursuance of the recommendations of the Committee on Banking Sector Reforms (Chairman: Shri M. Narasimham) (1998), the process of transforming the call/notice money market into a pure inter-bank market was completed in August 2005. This has been supported by the development of a repo market outside the Reserve Bank in which non-bank participants are allowed to trade their surplus/deficit liquidity. Prudential limits have been placed on borrowings and lendings of banks and Primary Dealers (PDs) in the call/notice money market.
IV.5 Following the announcement in the Annual Policy Statement for 2005-06, a screen-based negotiated quote-driven system for dealings in call/ notice and term money market (NDS-CALL) has been developed by the Clearing Corporation of India Ltd. (CCIL). The introduction of NDS-CALL will make the deals transparent, enable better price discovery and improve the market microstructure. The system would be launched shortly with participation by market constituents on a voluntary basis.
IV.6 A noteworthy and desirable development during 2005-06 was the substantial migration of money market activity from the uncollateralised call money segment to the collateralised markets (see Chapter I). This shift has largely resulted from measures relating to limiting the call market transactions to banks and primary dealers (Box IV.1). In order to enable market participants to assess the liquidity conditions in an efficient and transparent manner, information on transactions in the collateralised segment of the money market is also being provided on the Reserve Bank’s website since April 24, 2006.
Commercial Paper IV.7 Information on commercial paper (CP) issuance as reported by the issuing and paying agents (IPA) on the negotiated dealing system (NDS) platform has been made available on the Reserve Bank’s website with effect from July 2005 to enhance transparency and facilitate wider dissemination.
Certificates of Deposit IV.8 The minimum maturity period of certificates of deposit (CDs) was reduced from 15 days to 7 days with effect from April 29, 2005 to align it with the minimum maturity of CPs and fixed deposits with banks. Box IV.1
Money Markets: Changing Dynamics Till mid-1980s, the Indian money market was constrained by a paucity of instruments and it was regulated heavily with regard to participants and interest rates. Pursuant to the recommendations of the Committee to Review the Working of the Monetary System (Chairman: Prof. Sukhamoy Chakravarty) (1985) and the Working Group on the Money Market (Chairman: Shri N. Vaghul) (1987), a number of measures were taken by the Reserve Bank to widen and deepen the money market through institution building and instrument development. The Discount and Finance House of India Ltd. (DFHI) set up jointly by the Reser ve Bank, public sector banks and financial institutions commenced operations in April 1988 to deal in short-term money market instruments with the primary objective of improving liquidity. The introduction of new instruments, broadening of par ticipants’ base and strengthening of institutional infrastructure have been pursued during the 1990s based on the framework provided by the Vaghul Committee and the Narasimham Committee II.
Since 2000-01, a number of structural and instrument-specific measures taken by the Reserve Bank have contributed to the growth and sophistication of Indian money market. These include the introduction of Liquidity Adjustment Facility (LAF) effective June 5, 2000. Introduction of Collateralised Borrowing and Lending Obligation (CBLO) through the Clearing Corporation of India Limited (CCIL) from January 20, 2003 and expansion of repo market outside the LAF have also provided an avenue for bank and non-bank participants to trade funds after the conversion of call/money market into a pure inter-bank market. In order to broaden the market, non-scheduled urban cooperative banks and listed companies with gilt accounts with scheduled commercial banks have also been allowed to participate in the repo market outside the Reserve Bank. The minimum maturity period of CDs has been reduced to seven days effective April 29, 2005. The technological infrastructure, particularly with the introduction of Negotiated Dealing System (NDS), Real-Time Gross Settlement (RTGS) system and Centralised Funds Management System (CFMS) has brought about immense benefits to the money market. The functioning of the CCIL as central counterparty guaranteeing settlement for a substantial portion of trade in money, foreign exchange and Government securities market has also helped lowering risks and expanding volumes in money market.
The migration of money market activity from the uncollateralised call money segment to the collateralised segments – market repo and CBLO – has been driven by standardisation of accounting practices, broad- basing of eligibility criteria in the collateralised markets, the gradual phasing out of non-banks from the call money market, exemption of CBLO from CRR requirements and anonymity provided by the order matching systems. Availability of alternate avenues for mobilising short term funds like the market repo and CBLO has also led to market rates aligning to the informal interest rate corridor of repo and reverse repo rate under the LAF.
In recent years, mutual funds and insurance companies have emerged as the main supplier of funds in the repo and the CBLO markets. On the borrowing side, banks and PDs continue to be the major players, while corporates are emerging as significant borrowers in the CBLO segment. PDs are increasing their recourse to collateralised markets to meet their overnight borrowing needs.
In brief, various policy initiatives by the Reserve Bank have facilitated development of a wider range of instruments such as CBLO, market repo, interest rate swaps, CDs and CPs. This approach has avoided market segmentation while meeting demand for various products. These developments in money markets have enabled better liquidity management by the Reserve Bank.
References 1. Mohan, Rakesh (2006), “Coping with Liquidity Management in India: A Practitioner’s View”, Reserve Bank of India Bulletin, April.
2. Reserve Bank of India (2005), Technical Group on Money Market, May. GOVERNMENT SECURITIES MARKET
IV.9 In light of the FRBM Act under which the Reserve Bank can no longer participate in primary issues of Central Government securities from April 1, 2006, a number of initiatives were taken during 2005-06 to deepen and widen the Government securities market. Various initiatives during the year included permitting intra-day short sale; introduction of ‘When Issued’ markets; proposals for active consolidation of Government securities; greater responsibilities for PDs to support primary issuances, such as, 100 per cent underwriting commitments for PDs; allowing PDs to diversify and expand their business; and the operationalisation of NDS-Order Matching (NDS-OM) system.
Technical Advisory Committee
IV.10During 2005-06, two meetings of the Technical Advisory Committee (TAC) on Money, Foreign Exchange and Government Securities Market were held. In the meeting held on April 12, 2005, the draft Report of the Technical Group on Central Government Securities Market was deliberated upon. In the meeting held on September 23, 2005, issues relating to discontinuation of trading in Government securities on Saturday, draft Report of the Sub-Group on Floating Rate Bonds, and permitted structure of PD business to include banks were discussed.
Operationalisation of NDS-Order Matching System
IV.11 As part of its long term objective of developing the Government securities market, the Reserve Bank had introduced the Negotiated Dealing System (NDS) in February 2002 with the broad objectives of (i) ushering in an automated electronic reporting and settlement process, (ii) facilitating electronic auctions and (iii) providing a platform for trading in Government securities on a negotiated basis as well as through a quote driven mechanism. NDS has helped in achieving paperless and straight-through settlement of secondary market transactions and has brought about significant improvements in transactional efficiency and transparency. However, the trading facilities on the NDS (both negotiated and quote driven) were hardly used, largely because they were less user-friendly. In order to provide NDS members with a more advanced and more efficient trading platform, and as recommended by the Working Group on Screen Based Trading in Government Securities (Chairman: Dr. R. H. Patil), the NDS-OM trading module was introduced effective August 1, 2005 (Box IV.2).
Standardisation of Settlement Cycle to T+1
IV.12 The settlement cycle for secondary market Government securities transactions has been standardised to T+1 cycle effective May 11, 2005 to provide the participants with more processing time and therefore, to enable better management of both funds as well as risk. (i) ushering in an automated electronic reporting and settlement process, (ii) facilitating electronic auctions and (iii) providing a platform for trading in Government securities on a negotiated basis as well as through a quote driven mechanism. NDS has helped in achieving paperless and straight-through settlement of secondary market transactions and has brought about significant improvements in transactional efficiency and transparency. However, the trading facilities on the NDS (both negotiated and quote driven) were hardly used, largely because they were less user-friendly. In order to provide NDS members with a more advanced and more efficient trading platform, and as recommended by the Working Group on Screen Based Trading in Government Securities (Chairman: Dr. R. H. Patil), the NDS-OM trading module was introduced effective August 1, 2005 (Box IV.2). Standardisation of Settlement Cycle to T+1 IV.12 The settlement cycle for secondary market Government securities transactions has been standardised to T+1 cycle effective May 11, 2005 to provide the participants with more processing time and therefore, to enable better management of both funds as well as risk. Box IV.2
NDS-Order Matching Trade Module (NDS-OM) As part of its continuous endeavour to improve the facilities for trading and settlement in the Government securities market, the Reserve Bank operationalised an electronic order matching trade module for Government securities on its Negotiated Dealing System (RBI-NDS-GILTS-Order Matching Segment, NDS-OM in short) on August 1, 2005. The system is purely order-driven with all orders being matched based on strict price/time priority and the executed trades flowing straight to Clearing Corporation of India Ltd. (CCIL) in a ready-for-settlement stage. The NDS-OM system is an anonymous order matching system wherein identity of parties is not revealed. CCIL is the central counterparty to each trade done on the system. The NDS-OM system has been made available as an additional facility to the participants and the participants continue to have the option of using the current reporting and trading platform of the NDS. The settlement of both types of transactions are, however, integrated.
In the first phase of operationalisation of NDS-OM, only the Reserve Bank regulated entities, i.e., banks, PDs and FIs were permitted to access the system. Subsequently, insurance companies were allowed access by permitting them (those which did not have a current account with the Reserve Bank) to open a special current account with the Reserve Bank. As announced in the Union Budget 2006-07, the access to NDS-OM has further been extended to all qualified mutual funds, provident funds and pension funds. While bigger participants in these categories can have a direct access to NDS-OM system by obtaining the direct membership to the same, smaller players will be allowed to access the system through their principal member (CSGL route). In the subsequent phases, the access to NDS-OM system would be extended to other participants as well. The increased participant base should improve liquidity thus providing better price discovery.
The NDS-OM system has been well received by the market participants. This system accounted for about 50 to 60 per cent of the total traded volume in Government securities.
Reference
Mohan, Rakesh (2006), “Recent Trends in the Indian Debt Market and Current Initiatives”, Reserve Bank of India Bulletin, April. Extension of Ready Forward Contracts
IV.13 In order to further widen the repo market in Government securities, the participant base has been enlarged by including listed companies and non-scheduled urban cooperative banks effective May 11, 2005.
Sale of Auctioned Stock
IV.14 With a view to deepening the Government securities market and to enable the successful bidders to mitigate the price risk, the sale of Government securities allotted to successful bidders in primary issues on the day of allotment was permitted, with and between Constituents Subsidiary General Ledger (CSGL) account holders under Delivery versus Payment (DvP) III, effective May 11, 2005. Hitherto, the sale contract in respect of securities allotted to successful bidders in primary issues on the day of allotment could be entered into only between entities having SGL account and settled under the Reserve Bank’s DvP system. Primary Dealers IV.15 The Reserve Bank’s non-participation in primary auctions except under exceptional circumstances, effective April 2006, as required in the FRBM Act, has necessitated institutional changes to ensure that debt management objectives are met and the Government is able to borrow under all market conditions without exacerbating market volatility. The Reserve Bank’s role in the primary market hitherto needed to be replaced by a more active and dynamic participation by PDs. Accordingly, the following measures have been undertaken: • The permitted structure of PD business has been expanded to include banks, which fulfil certain minimum eligibility criteria. The guidelines for banks undertaking PD business were issued in February 2006, taking into account the views/ suggestions from banks and PDs (Box IV.3). • For better risk management through generation of alternative streams of income, PDs have been permitted to diversify their activities in addition to their core business of Government securities, subject to limits. The guidelines covering regulatory and prudential norms were issued on July 4, 2006. • Since the extant system of annual bidding commitments did not guarantee that the notified amount will be sold in each auction, a revised scheme for underwriting commitment and liquidity support to PDs has been introduced with effect from April 1, 2006. Under the scheme, PDs are required to meet an underwriting commitment, replacing the earlier requirement of bidding commitment and voluntary underwriting. The underwriting commitment is divided into two parts – minimum underwriting commitment (MUC) and additional competitive underwriting (ACU). The MUC of each PD is computed to ensure that at least 50 per cent of each issue is covered by the aggregate of all MUCs. The remaining portion of the notified amount is open to competitive underwriting under ACU. • Liquidity support would be extended to stand alone PDs only. Of the total liquidity support, half would be divided equally among all the stand alone PDs and the remaining half would be extended on the basis of their performance in the primary auctions and turnover in the secondary market. Box IV.3
Guidelines for Banks’ Undertaking PD Business The permitted structure of Primary Dealership business has been expanded to include banks, subject to certain minimum eligibility criteria. Banks which do not, at present, have a partly or wholly owned subsidiary will be eligible to apply for PD licence if they fulfil the following criteria: a) Minimum net owned funds (NOF) of Rs.1,000 crore; b) Minimum CRAR of nine per cent; and c) Net NPAs of less than three per cent and a profit making record for the last three years. Indian banks which are undertaking PD business through a partly or wholly owned subsidiary will also be allowed to undertake PD business departmentally by merging/taking over PD business from their partly/wholly owned subsidiary subject to fulfilling the criteria at (a) to (c) above. Similarly, foreign banks operating in India will be permitted to undertake PD business departmentally by merging the PD business being undertaken by group companies subject to fulfilment of criteria at (a) to (c) above. The Reserve Bank will grant authorisation to the eligible entities to undertake PD business for a period of one year (July-June) and thereafter, the Reserve Bank will review the authorisation on a yearly basis based on the performance criteria, such as underwriting in auctions of primary issuance of Government dated securities and Treasury Bills or fulfilment of bidding commitment and success ratio in the primary market and achieving the turnover ratio in the secondary market. The Bank-PDs will be subject to underwriting and all other obligations as applicable to stand alone PDs and as may be prescribed from time to time. Furthermore, the banks will have to maintain separate books of accounts for transactions relating to PD business (distinct from the normal banking business) with necessary audit trails. It should be ensured that, at any point of time, there is a minimum balance of Rs.100 crore of Government securities earmarked for PD business. The Bank-PDs will be subject to the following prudential norms: • No separate capital adequacy is prescribed for PD business, and the capital adequacy requirement for a bank will also apply to its PD business. • The Government dated securities and Treasury Bills under PD business will count for Statutory Liquidity Ratio. • The investment valuation guidelines as applicable to banks in regard to “Held for Trading” portfolio will also apply to the portfolio of Government dated securities and Treasury Bills earmarked for PD business. • Bank-PDs will not have separate access to call money market and Liquidity Adjustment Facility (LAF). • The Reserve Bank’s instructions to PDs would apply to Bank-PDs, to the extent applicable. Short Sale in Government Securities
IV.16 In the absence of instruments that allow players to take a view on interest rates, it is observed that the markets are active and liquid when the rates fall but turn lacklustre and illiquid when the rates rise. Low volumes render markets shallow and prone to price manipulations. To enable participants to manage their interest rate risk more efficiently and to impart liquidity to the markets, even in a rising interest rate scenario, the Internal Technical Group on Central Government Securities Market recommended permitting short sales in Government securities in a calibrated manner. This would enable market participants to express their views on interest rate expectations and enable them to better manage their interest rate risk. Accordingly, on February 28, 2006, banks and PDs were allowed to undertake outright sale of Central Government dated securities that they do not own, subject to the same being covered by outright purchase from the secondary market within the same trading day. The intra-day short selling was permitted subject to certain stipulations in terms of stock-wise limits and overall risk limits. The subsequent phases of short sale are proposed to be implemented after assessing the feedback and experience with intra-day short selling.
Active Consolidation of Central Government Securities
IV.17 The Internal Technical Group on Central Government Securities Market had recommended active consolidation of securities in order to impart liquidity to the Government securities market, which would involve, in one form or another, buying back illiquid, small-sized securities and reissuing larger sized liquid securities in their place. Various alternatives of active consolidation have been worked out and the consolidation process would be taken up once the methodology is finalised.
Introduction of ‘When Issued’ Markets
IV.18 As part of restructuring the debt issuance framework in light of the FRBM Act and following the recommendations of the Internal Technical Group on Central Government Securities Market, ‘When Issued’ (WI) transactions have commenced in Central Government securities with effect from August 1, 2006. ‘When Issued’, a short form of ‘when, as and if issued’, indicates a conditional transaction in a security authorised for issuance but not as yet actually issued. All ‘WI’ transactions are on an ‘if’ basis, to be settled if and when the actual security is issued. ‘WI’ transactions have been permitted to be undertaken on NDS-OM platform after the necessary upgradation was done on NDS-OM. ‘When Issued’ market facilitates the distribution process for Government securities by stretching the actual distribution period for each issue and allowing the market more time to absorb large issues without disruption. Furthermore, it also enables price discovery process by reducing uncertainties surrounding auctions. As ‘WI’ transactions required specific exemption under Securities Contract Regulation Act (SCRA), 1956, the relevant Reserve Bank notification under SCRA has been amended.
FOREIGN EXCHANGE MARKET
IV.19 During 2005-06, the Reserve Bank took a number of steps to create a more conducive environment for external transactions while according high priority to customer service. The measures taken on the capital account front are part of gradual and sequenced approach to liberalisation of capital account and for the current account transactions, the objectives were aimed towards the removal of restrictions and simplification of procedures. The procedure for compounding of contraventions was put in place with a view to reducing the transaction costs and providing comfort to the citizens and corporates. Anti-Money Laundering (AML) guidelines have been put in place for prevention of money laundering.
IV.20 Services are one of the fastest growing sectors in the Indian economy and contribute substantially to output, employment and exports. The Foreign Exchange Management Act (FEMA) regulations are, however, generally oriented to trade in both goods and services. The unique features of the services sector may need to be specifically and clearly addressed. It is, therefore, proposed to constitute an Advisory Group to review all foreign exchange regulations relating to services and make appropriate suggestions for further clarification or simplification and prepare a compendium of all foreign exchange regulations that apply to the services sector.
IV.21 For further deepening the foreign exchange market, the closing time for inter-bank foreign exchange market in India was extended by one hour up to 5.00 p.m. effective May 16, 2005.
Facilities for Resident Individuals
IV.22 With the progressive liberalisation in foreign exchange related transactions, a large segment of the population can undertake a variety of current account transactions without approaching the Reserve Bank. More entities are being allowed to handle non-trade current account transactions in order to enable individuals to have easy access to foreign exchange as well as to enhance competition among the service providers. In continuation of this process, select full fledged money changers (FFMCs), urban cooperative banks (UCBs) and regional rural banks (RRBs) were permitted to release/remit foreign exchange for a range of current account transactions such as private visits, business travel, fee for participation in global conferences/training/international events, film shooting, medical treatment, emigration and emigration consultancy fees.
IV.23 Prior permission from the Reserve Bank is not required by authorised dealers (ADs) for issue of Store Value Cards/Charge Cards/Smart Cards to residents travelling on private/business visit abroad for making payments to merchant establishment overseas and also for drawing cash from ATM terminals. However, the use of such cards is limited to permissible current account transactions and is subject to the limits prescribed under the current account transactions rules, as amended from time to time. Facilities for Corporates
IV.24 It has been decided that establishment of Liaison Offices in India by foreign insurance companies may be allowed by Insurance Regulatory and Development Authority (IRDA).
IV.25 ADs have been allowed to open foreign currency accounts for the project offices established under the general/specific approval of the Reserve Bank as well as to permit intermittent remittances by project offices, without approval of the Reserve Bank, subject to certain conditions. Inter-project transfer of funds shall, however, require prior approval of the concerned regional office of the Reserve Bank. In case of disputes between the project office and the project sanctioning authority or other Government/ non-Government agencies, the balance held in such account shall be converted into Indian Rupees and credited to a special account and shall be dealt with as per the settlement of the dispute. Facilities for Exporters and Importers IV.26 With a view to further liberalise the facilities available to exporters/importers and simplify the procedures, following measures were undertaken during the year: • ADs were permitted to grant extension of time for realisation of export proceeds up to US $ 1 million beyond the prescribed period of six months. • The process to open Standby Letters of Credit for import of gold on loan basis was simplified and the period for fixing the price and repayment of gold loan was rationalised in consultation with the Central Government. • ADs were allowed to permit airline companies to remit security deposits with lessor for payment of lease rentals of an aircraft/aircraft engine/ helicopter on operating lease subject to certain specific conditions. • As per the existing guidelines, it was obligatory on the part of the ADs to follow up with the importers for submission of evidence of import where the value of foreign exchange remitted for import proceeds exceeded US $ 1,00,000. It was clarified that ADs need not follow up submission of evidence of import involving amount of US $ 1,00,000 or less provided they are satisfied about the genuineness of the transaction and the bona fides of the remitter. • Residents in India were allowed to enter into contracts in commodity exchanges or markets outside India to hedge the price risk on import/ export of a commodity, subject to certain conditions and repor ting requirements. Powers were delegated to select commercial banks satisfying minimum prescribed norms to grant general permission to companies listed on a recognised stock exchange to hedge the price risk in respect of any commodity except gold, silver, petroleum and petroleum products in the international commodity exchanges/markets. The company is required to submit a board resolution indicating that it understands the risks involved in such transactions, the nature of hedge transactions that it would undertake in the ensuing year and that it would undertake hedge transaction only where it is exposed to price risk. However, the ADs may refuse to undertake any hedge transaction in case of doubt about the bona fides of the transaction or if the corporate is not exposed to price risk. • Powers were granted to AD banks to grant GR approval in cases where goods are being exported for re-import after repairs / maintenance / testing / calibration, etc., subject to the condition that the exporter shall produce the relative Bill of Entry within one month of re-import of the item exported from India. If goods being exported for testing are destroyed during testing, AD banks may, in lieu of Bill of Entry for import, obtain a certificate issued by the testing agency that the goods were destroyed during testing.
Overseas Investment IV.27 To enable Indian companies to reap benefits of globalisation, and to promote Indian investment abroad, the limit of overseas investment in any bona fide business activity, under the automatic route, has been raised from 100 per cent of net worth of the Indian entity to 200 per cent of its net worth, as on date of its last audited balance sheet. In addition to the existing facility of making investments in Indian Rupees, investments in Bhutan can now be made in any freely convertible foreign currency. However, all dues receivable on such investments including winding up and sale proceeds should be repatriated to India in freely convertible currencies only.
IV.28 The scope of guarantees under the automatic route for overseas investment has been enlarged and Indian entities are now allowed to offer other forms of guarantee – corporate or personal/primary or collateral/ guarantee by the promoter company/guarantee by group company, sister concern or associate company in India – subject to certain conditions. IV.29 In order to enable companies to have operational flexibility, the automatic route of disinvestment has been further liberalised by allowing following categories of companies to divest, without prior approval of the Reserve Bank, subject to reporting requirement: (i) cases where Joint Ventures (JV)/ Wholly Owned Subsidiaries (WOS) are listed in the overseas stock exchanges, (ii) cases where the Indian promoter company is listed on a stock exchange in India and has a net worth of not less than Rs.100 crore, and (iii) cases where the Indian promoter is an unlisted company and the investment in overseas venture does not exceed US $ 10 million.
IV.30 With a view to enabling recognised star exporters with a proven track record and consistently high export performance to reap the benefits of globalisation and liberalisation, propr ietary/ unregistered partnership firms, satisfying certain eligibility criteria, have been allowed to set up a JV/WOS outside India with prior approval of the Reserve Bank.
IV.31 AD banks have been permitted to allow remittance for expenses of branch offices opened abroad up to 10 per cent for initial and up to five percent for recurring expenses of the average annual sales/income or turnover during last two accounting years subject to the existing terms and conditions.
IV.32 AD banks have been allowed remittances for acquiring shares under Employees Stock Option Plan (ESOP) schemes, irrespective of the method of the operationalisation of the scheme, subject to certain specific conditions.
Foreign Investment in India
IV.33 Foreign direct investment (FDI) limit in the petroleum sector and air transport services (domestic airlines), under the automatic route, has been further liberalised. FDI up to 100 per cent has been permitted under the automatic route in petroleum product marketing, oil exploration in both small - and medium - sized fields and petroleum product pipelines. In air transport services (domestic airlines) sector, FDI up to 100 per cent has been permitted under the automatic route by Non-Resident Indians (NRIs) and up to 49 per cent by others. No direct or indirect equity participation by foreign airlines is allowed. FDI up to 100 per cent has been permitted in townships, housing, built-up infrastructure and construction development projects under the automatic route, subject to certain guidelines. IV.34 FDI and por tfolio investment are now per mitted in an Indian company publishing newspapers and periodicals dealing with news and current affairs within a composite ceiling of 26 per cent of the paid-up capital of the company, subject to the guidelines issued by the Ministry of Information and Broadcasting. As such, foreign institutional investors (FIIs), NRIs and foreign venture capital investors are now allowed to purchase shares of an Indian company engaged in print media sector.
IV.35 Persons/entities eligible under the FDI route other than FIIs have been permitted to invest in the equity capital of asset reconstruction companies (ARCs) registered with the Reserve Bank. FIIs registered with the Securities and Exchange Board of India (SEBI) are allowed to invest in security receipts (SRs) issued by ARCs registered with the Reserve Bank up to 49 per cent of each tranche of scheme of SRs subject to the condition that investment of a single FII in each tranche of scheme of SRs should not exceed 10 per cent of the issue.
External Commercial Borrowings (ECB)
IV.36 Relaxations in regard to access to ECBs were allowed in certain cases as follows:
• NGOs engaged in micro finance activities were permitted to raise ECBs up to US $ 5 million during a financial year for permitted end-use, under the automatic route. NGOs having satisfactory borrowing relationship of at least three years with a scheduled commercial bank authorised to deal in foreign exchange and ‘fit and proper’ status of the board/management committee, would be eligible to avail ECBs, subject to certain conditions.
• Non-banking financial companies (NBFCs) were allowed to raise ECBs with a minimum average maturity of five years from certain category of lenders under the approval route, to finance import of infrastructure equipment for leasing to infrastructure projects. • Housing finance companies satisfying certain criteria were allowed to raise Foreign Currency Convertible Bonds with prior approval of the Reserve Bank. • In order to facilitate capacity expansion and technological upgradation in the Indian textile industry after the phasing out of Multi-Fibre Agreement (MFA), banks were allowed to issue guarantees / standby letters of credit / letters of undertaking / letters of comfort in respect of ECBs by textile companies for modernisation or expansion of their textile units. • AD banks were permitted to allow prepayment of ECBs up to US $ 200 million against the existing limit of US $ 100 million. • Special Purpose Vehicles (SPVs) or any other entity notified by the Reserve Bank set up exclusively to finance infrastructure companies/ projects will also be treated as financial institutions and ECBs by such entities will be considered under the approval route on a case by case basis. • Multi-State cooperative societies engaged in manufacturing activities were allowed to raise ECBs under the approval route subject to the other parameters of the ECB guidelines.
Facilities for Non-resident Indians and Persons of Indian Origin
IV.37 NRIs/PIOs are permitted to remit an amount not exceeding US $ 1 million, per calendar year, out of balances held in Non-Resident Ordinary (NRO) account/sale proceeds of assets/ assets in India acquired by them by way of inheritance/legacy, on production of certain documents. The facility available under inheritance/legacy has been extended to an arrangement under a “settlement” whereby the property is passed on to the legatees during the lifetime of the owner/parent who normally retains a life interest in the property since “settlement” is also a mode of inheritance from the parent, the only difference being that the property under the “settlement” passes to the beneficiary on the death of the owner/parent without any legal procedures/hassles. This helps in avoiding delay and inconvenience in applying for probate. Accordingly, banks authorised to deal in foreign exchange were allowed remittance facility to a NRI/PIO under a deed of settlement made either by his parents or close relatives (as defined in Section 6 of the Companies Act, 1956). The remittance facility would be available only on demise of the settler.
Anti-Money Laundering (AML) Guidelines for Authorised Money Changers (AMCs)
IV.38 In view of the increased concerns regarding money laundering activities and to prevent AMCs from being misused for such activities, the Reserve Bank has brought out detailed Anti-Money Laundering (AML) guidelines to enable AMCs to put in place the policy framework and systems for prevention of money laundering while undertaking money exchange transactions. All AMCs will formulate suitable policies and procedures for the AML measures which include (i) “Know your Customer” norms, (ii) recognition, handling and disclosure of suspicious transactions, (iii) appointment of Money Laundering Reporting Officer (MLRO), (iv) staff training, (v) maintenance of records, and (vi) audit of transactions in accordance with the guidelines issued. The AML policy framework and measures were to be formulated and put in place before March 31, 2006 with the approval of the board of directors of the AMC. The AML guidelines were further amended in view of the difficulties expressed by AMCs in implementing some of the guidelines. According to the amended instructions: (i) for purchase of foreign exchange less than US $ 200 or its equivalent, photocopies of the identification document need not be kept on record; however, full details of the identification document should be maintained; (ii) for encashment of foreign exchange between US $ 200 and US $ 2,000 or its equivalent, the photocopies of the identification document should be maintained for one year and completion of statutory audit; (iii) for encashment in excess of US $ 2,000 or its equivalent, the photocopies of the identification document should be maintained for a minimum period of five years; and (iv) requests for payment in cash by foreign visitors / NRIs may be acceded to the extent of US $ 2,000 or its equivalent.
Committee on Fuller Capital Account Convertibility
IV.39 India’s cautious approach towards opening of the capital account and viewing capital account liberalisation as a process contingent upon certain preconditions has stood India in good stead. Given the changes that have taken place over the last two decades, a need was felt to revisit the subject and come out with a road-map towards fuller capital account convertibility based on current realities. In consultation with the Government of India, the Reserve Bank, therefore, in March 2006, appointed a Committee on Fuller Capital Account Convertibility under Chairmanship of Shri S.S Tarapore. The terms and conditions the Committee were: • To review the experience of various measures of capital account liberalisation in India, • To examine implications of fuller capital account convertibility on monetary and exchange rate management, financial markets and financial system, • To study the implications of dollarisation in India of domestic assets and liabilities and internationalisation of the Indian rupee, • To provide a comprehensive medium-term operational framework, with sequencing and timing, for fuller capital account convertibility taking into account the above implications and progress in revenue and fiscal deficits of both Centre and States, • To survey regulatory framework in countries which have advanced towards fuller capital account convertibility, • To suggest appropriate policy measures and prudential safeguards to ensure monetary and financial stability, and • To make such other recommendations as the Committee may deem relevant to the subject.
The Committee submitted its Report on July 31, 2006. The Reserve Bank will place the Report in the public domain in due course.
Outlook
IV.40 The Reserve Bank will continue with its efforts to deepen and widen the various segments of the financial markets in order to enable efficient price discovery in interest rate and exchange rate markets. In regard to foreign exchange market, the calibrated liberalisation of capital account transactions will be continued. Given the fact that the Reserve Bank is not participating in primary issuance of Central Government securities with effect from April 1, 2006 and States will have to be more market dependent, this situation calls for a paradigm shift in the Government securities market. The Reserve Bank will, therefore, continue to take initiatives to widen and deepen the market so as to ensure that the borrowing programme of the Government is successfully carried out and the cost of borrowing is also kept at a reasonable level. |
