During 2015-16, the Reserve Bank undertook measures aimed at broadening participation – both domestic
and foreign, widening the range of products and bolstering the financial market infrastructure. Initiatives in
the money market included proactive liquidity management, providing market participants more flexibility,
reducing volatility and improving transmission of monetary policy signals. The regulatory regime for the foreign
exchange market was further streamlined in terms of rules for transactions and reporting requirements.
V.1 The Reserve Bank has, over time, guided
and nurtured the evolution of financial markets
in India in tune with the needs of a growing
economy, but making them more accessible
and globally integrated has been a recent focus.
Efforts have also been directed at improving ease
of doing business by way of rationalising existing
regulations on an on-going basis and simplifying
documentation requirements. At the same time,
steps have also been taken to render the financial
markets more resilient to external as well as
internal shocks.
FINANCIAL MARKETS REGULATION
DEPARTMENT (FMRD)
V.2 FMRD is primarily responsible for regulating
and developing money, government securities
(g-secs), foreign exchange and related derivatives
markets. The department took concerted steps to
fulfil its mandate of easing market norms for all
participants, improving accessibility, increasing
the number of financial products, strengthening
market infrastructure as also employing market
analytics and surveillance mechanism for policy
inputs.
Agenda 2015-16: Implementation Status
V.3 Towards developing a more predictable
investment regime, a medium-term framework
(MTF) was announced in October 2015 for a
phased increase in foreign portfolio investment
limits for central government securities and state development loans. Based on the
recommendations of the Implementation Group
on Encouraging Greater Retail Participation in
G-Secs (Chairperson: Smt. Rekha Warriar), the
Clearing Corporation of India Ltd. (CCIL) was
advised to enable participation of demat account
holders in negotiated dealing system order-matching
(NDS-OM).
V.4 A Working Group (Chairman: Harun R.
Khan), set up under the aegis of the Financial
Stability and Development Council Sub-committee
(FSDC-SC) considered several measures for
strengthening participation, improving market
infrastructure and easing the issuance process
for corporate bonds. Unlisted securities and
securitised debt instruments will shortly be added
to the basket of corporate debt for foreign portfolio
investor (FPI) investments.
V.5 Guidelines on the introduction of cross-currency
futures and options on exchanges were
issued on December 10, 2015. Covered options
against underlying currency exposures have been
allowed. Comments were sought from market
participants on the recommendations of the
Working Group on Introduction of Interest Rate
Options (Chairman: Professor P.G. Apte).
V.6 With a view to further liberalising existing
hedging facilities and harmonising the OTC and
exchange traded markets, the limits for all resident
individuals, firms and companies to book foreign exchange forwards and foreign currency-Indian
rupee (FCY-INR) options contracts on the basis
of declaration have been increased from US$
250,000 to US$ 1,000,000. Indian residents having
long term foreign currency (FCY) borrowings
were permitted to enter into FCY-INR swaps with
multilateral or international financial institutions
(MFIs/IFIs), in which the Government of India is
a shareholding member provided such swaps
were undertaken by the MFI/IFI concerned on a
back-to-back basis with an authorised dealer (AD)
Category-I bank in India.
V.7 Existing guidelines on various financial
instruments were comprehensively reviewed with
a view to rationalising participation. In the when-issued
(WI) market, scheduled commercial banks
were allowed to take short positions whereas
all eligible entities were permitted to take long
positions. Primary dealers (PDs) were allowed to
participate in exchange traded currency futures
market. For a more broad based participation
in OTC derivatives, regulated entities other
than banks and PDs such as mutual funds and
insurance companies have been enabled to trade
in such derivatives on electronic platforms with
guaranteed settlements by the CCIL.
V.8 In a move to a more informed policy making
process, a standing group on OTC derivatives
reforms was constituted under the Technical
Advisory Committee on Financial Markets.
V.9 The Financial Benchmarks India Pvt.
Ltd. (FBIL) took over the administration of the
benchmark for the overnight inter-bank rate based
on the actual traded rates on July 22, 2015,
replacing the existing ‘FIMMDA-NSE Overnight
MIBID/MIBOR’ by ‘FBIL-Overnight MIBOR’.
FBIL started publishing the polled term Mumbai
interbank offer rate (MIBOR) for three tenors,
viz., 14-day, one month and three months from
September 23, 2015. In continuation of these efforts, it started publishing the FBIL FC-Rupee
Options Volatility Matrix rates from May 05, 2016.
FBIL proposes to take over the administration of
foreign exchange benchmarks and other Indian
rupee (INR) interest rate benchmarks over a
period of time in consultation with the stakeholders.
The CCIL trade repository expanded the public
dissemination of data on a gross basis in pursuit
of enhanced transparency. In addition to data
on interbank OTC trades on interest rate swaps/
forward rate agreements, credit default swaps
(CDS) and USD/INR forwards and options, CCIL
has also started disseminating data on short
term USD/INR interbank near maturity swaps,
i.e., Cash-Tom, Tom-Spot and Cash-Spot from
December 28, 2015.
Agenda for 2016-17
V.10 Initiatives currently under consideration
include changes in e-Kuber to facilitate seamless
transfer of g-secs between demat accounts
and subsidiary general ledger/gilt accounts
and operationalising electronic platforms for
repo in corporate bonds in coordination with
the Securities and Exchange Board of India
(SEBI). Public feedback on the draft framework
to comprehensively review documentation
requirements in the OTC foreign exchange market
has been received and is being examined for
implementation. Guidelines on commercial paper
(CP), CDS and Separate Trading of Registered
Interest and Principal of Securities (STRIPS) will
be reviewed to bolster trading activity in these
products. Guidelines on currency options relating
to suitability and appropriateness will be revisited
to make them less restrictive. Taking into account
the feedback received from the market, final
guidelines on introduction of interest rate options
will be issued. In order to further develop the
rupee futures market, money market futures will
be introduced.
V.11 In fulfilment of the G20 mandate for shifting
OTC derivatives on to exchanges or electronic
trading platforms, where appropriate, a framework
for authorisation of such platforms will be put in
place. The legal entity identifier (LEI) uniquely
identifies parties to financial transactions globally,
the need for which was felt in the aftermath of the
global financial crisis. The implementation of the
LEI regime for financial market entities will begin
during the year. The scope of dissemination of
OTC forex derivative transactions by the CCIL
Trade Repository will be expanded.
V.12 Market surveillance will be strengthened
through use of technology. Data analytics will be
leveraged to enhance surveillance capabilities
across market segments. Towards leveraging
the benefits of Fin Tech, the adoption of various
innovations in strengthening market infrastructure
will be explored by engaging with industry
participants and other central banks.
V.13 Exposure of Indian entities to commodity
price risks has been accentuated by the growing
integration of the Indian economy with the rest of
the world and increasing volumes of cross border
trade. An expert group will be set up to review the
existing framework for hedging of commodity price
risks by Indian entities in the overseas markets
with the objective of addressing the gaps in terms
of commodities covered, permitted products and
users.
FINANCIAL MARKETS OPERATIONS
DEPARTMENT (FMOD)
V.14 FMOD is responsible for conducting
financial markets operations in consonance
with the policy stance of the Reserve Bank for
supporting monetary policy transmission.
Agenda 2015-16: Implementation Status
Money Markets and Liquidity Management
V.15 Efforts at maintaining appropriate level of
liquidity in the financial system continued through liquidity management operations, using the fixed/
variable rate repo/reverse repo under liquidity
adjustment facility (LAF), the overnight marginal
standing facility (MSF), other standing facilities
and outright open market operations (OMOs)
with a view to aligning money market rates with
the policy rate for more efficient transmission
of monetary policy signals. Towards promoting
the term money segment while keeping in view
evolving liquidity conditions, a 56-day variable rate
repo was conducted in January 2016. As part of
the technological up-gradation for smoothening
liquidity operations, straight through processing
(STP) was introduced for fixed rate repo and
reverse repo, and MSF on August 03, 2015,
enabling eligible participants to receive credit/debit
immediately on placement of bids/offers. More
flexibility was imparted to LAF/MSF windows with
the extension of timing from November 30, 2015.
V.16 With the second and the fourth Saturdays
every month being public holidays for banks
under Section 25 of the Negotiable Instruments
Act, 1881, it was decided to keep open all money
market segments on the working Saturdays from
September 01, 2015. Towards aligning liquidity
operations with the payment system, reverse repo
and MSF are being conducted from February 19,
2016 on all Mumbai holidays when the real time
gross settlement (RTGS) system is in operation.
RBI Reference Rate
V.17 The Committee on Financial Benchmarks
(Chairman: Shri P. Vijaya Bhaskar) constituted by
the Reserve Bank to study various issues relating
to financial benchmarks in India recommended
that the derivation of the USD/INR RBI reference
rate should be based on actual market transactions
so as to ensure that it appropriately represents
the prevailing spot rate. Accordingly, from May 02,
2016, the Reserve Bank reference rate is being
computed on the basis of the volume weighted average of the actual market transactions that have
taken place during a randomly selected 15-minute
window between 11.30 a.m. and 12.30 p.m. every
weekday (excluding Saturdays, Sundays and bank
holidays in Mumbai). The other three reference
rates, viz., EUR/INR, GBP/INR and JPY/INR will
continue to be computed by crossing the USD/
INR reference rate with the ruling EUR/USD, GBP/
USD and USD/JPY rates.
Foreign Exchange Market
V.18 Orderly conditions were maintained in the
forex market during the year through operations
in the spot, forward and futures segments. As an
additional instrument to address the volatility in
the foreign exchange market, intervention in the
exchange traded currency derivatives (ETCD)
segment commenced in September 2015. Over
the last few months, it has proved to be a useful
supplementary tool.
Agenda for 2016-17
V.19 The department aims to carry out liquidity
management operations effectively as per the
revised framework, which entails, inter alia,
lowering the average ex-ante liquidity deficit in
the system to a position closer to neutrality by
supplying durable liquidity over the year. It will
continue to conduct foreign exchange operations,
including interventions, in an effective manner. The
department will be watchful of market conditions
to ensure smooth unwinding of concessional
foreign exchange swaps against foreign currency
non resident (bank) account [FCNR(B)] deposits
maturing from September 2016 onwards.
V.20 The department also intends to introduce
measures which are likely to facilitate development
of the term money market such as introducing
substitution of securities in the LAF window for a
specified tenor of repo transactions and accepting
collateral based on market value of securities for the LAF/MSF windows. It has taken up a number of
research studies on market movements/behaviour
over the year which has helped in shaping the
policy and operational framework. The department
proposes to continue policy oriented research on
financial markets.
FOREIGN EXCHANGE DEPARTMENT (FED)
V.21 The mandate of the FED is to promote
the orderly development and maintenance of the
foreign exchange market in India and to facilitate
external trade and payments. Accordingly, the
measures undertaken during 2015-16 aimed
at promoting ease of doing business, focusing
particularly on dealing with increasing complexities
of international transactions and also reducing the
regulatory costs by rationalising, reviewing and
revising regulations and returns.
Agenda 2015-16: Implementation Status
V.22 The guidelines on external commercial
borrowings (ECBs) were rationalised and
liberalised during 2015-16 in tune with
macroeconomic developments and the
experience gained in administering ECBs over the
years. The overarching principles of the revised
framework for ECBs are: (i) fewer restrictions on
end-uses, higher all-in-cost ceiling for long term
FCY borrowings as the extended term makes
repayments more sustainable and minimises
rollover risks for a borrower; (ii) a more liberal
approach for INR denominated ECBs where the
currency risk is borne by the lender; (iii) expansion
of the list of eligible overseas lenders to include
long term lenders like sovereign wealth funds
and pension funds; and (iv) alignment of the list
of infrastructure entities eligible for ECBs with the
harmonised list of the Government of India.
V.23 To provide greater flexibility in structuring
of trade credit arrangements for imports, resident
importers were allowed to raise trade credits in INR allowing the transfer of currency risk to
overseas lenders. To facilitate rupee denominated
borrowings/bonds from abroad, a framework for
such issuance has been put in place with defined
parameters such as eligible borrowers, recognised
investors, maturity, amount and end-uses
(Box V.1).
V.24 After the operationalisation of the export
data processing and monitoring system (EDPMS),
leading to improved monitoring of export
transactions, an analogous information technology
based system for monitoring import transactions [import data processing and monitoring system
(IDPMS)], is being operationalised.
V.25 The Foreign Exchange Management Act
(FEMA), 1999 enacted with 25 original notifications
has since undergone over 300 amendments.
In this context, the task of rationalising FEMA
notifications (which are subordinate legislations)
was undertaken. So far 15 original notifications and
95 amendments thereof have been rationalised
and consolidated into 13 notifications with ‘R’
series. In addition, 17 Master Directions covering
foreign exchange transactions have been issued which cover different classes of transactions
permitted as per the rules and regulations framed
under FEMA. The Master Directions are updated
simultaneously whenever there is a change in
rules/regulations or there is a change in policy.
Box V.1
Masala Bonds
Foreign currency denominated funding through debt –
including external commercial borrowings (ECBs), trade
credits and bonds – accounts for about one-fifth of the total
corporate funding in India (IMF, 2016). Corporates are thus
exposed to exchange rate risks, if insufficiently hedged. This
makes a case for raising foreign debt (both contractual and
marketable) in Indian rupees.
Issuers from a few countries have floated offshore local
currency bonds in recent years. However, such issuances
have not grown significantly, except in China. Efforts by
Chinese authorities to internationalise the Chinese yuan
(CNY), a large offshore Renminbi deposit base and gradual
CNY appreciation during 2010-14 led to a surge in issuances
of offshore CNY bonds. However, CNY depreciation, default
by some Chinese entities and improved access to local
markets have dampened investor appetite recently. In 2015,
offshore CNY bond issuances slumped to USD equivalent
17 billion after hitting a record USD equivalent 33 billion in
2014 with no new issuances in the first two months of 2016.
Mexico, Brazil and Philippines have also seen some amount
of offshore local currency bond issuances. In summary,
offshore domestic currency bonds still form a very small
portion of issuances from emerging market countries.
In India, while rupee denominated contractual borrowings
from abroad were permitted in September 2011, in
September 2015 the Reserve Bank also allowed Indian
entities to issue rupee denominated bonds overseas. Prior
to this general permission by the Reserve Bank, international
financial institutions like the Asian Development Bank and
the International Finance Corporation (IFC) had already
obtained permission from the Reserve Bank to issue rupee denominated bonds overseas. IFC, which named its
rupee denominated bonds as ‘Masala Bonds’, has been
successful in issuing such bonds on multiple occasions
with maturity as long as 15 years. A robust macroeconomic
scenario in India and a relatively stable currency view could
attract investors to rupee bonds issued overseas by Indian
corporates. Foreign investors already involved in the Indian
domestic currency space could also be interested in the
overseas rupee product. Rupee bonds overseas offer ease
of access compared to the process of direct investments in
India (registration as a foreign portfolio investor (FPI) and
involvement of domestic custodians and brokers and local
settlement systems). With restrictions primarily in the form
of minimum maturity and no restrictions on cost and end-uses
virtually opened up, the window for rupee denominated
bonds overseas is expected to become a meeting ground for
fund seeking Indian corporates and return seeking foreign
investors. The window which witnessed initial activities
in the form of private placements of bonds overseas, has
gathered steam with diverse offshore investors now getting
interested in rupee denominated paper of Indian companies.
Total agreements for such papers till the first week of August
2016 by Indian companies were to the tune of ₹ 60 billion.
The borrowings would help in discovery of benchmark rates.
Further, addressing of issues like: (i) tax adjusted returns
to investors and comparative costs for borrowers and (ii)
liquidity in the secondary market for overseas bonds, will
render the route even more attractive.
Reference:
International Monetary Fund (IMF), 2016 Country Report
No. 16/76 – India, March.
Easing of Foreign Investment Regime
V.26 During the year, regulations pertaining to
the employee stock options (ESOP) scheme were
reframed in sync with the SEBI regulations (for
listed companies) and the Ministry of Corporate
Affairs’ regulations (for unlisted companies).
Furthermore, the National Pension System (NPS)
was made an eligible investment option for non-resident
Indians (NRIs).
V.27 Following the revisions in the foreign
direct investment (FDI) policy announced by the
Government, the regulations have been amended
as: (i) wherever sectoral limits/caps on foreign
investment are in place, such limits/caps are
required to be reckoned in a composite manner
aggregating both FDI and FPI and the ‘total
foreign investment’ in an Indian company is to be
taken as the sum total of direct and indirect foreign
investments; (ii) foreign investment in limited
liability partnership (LLP) is permitted under
the automatic route for sectors where 100 per
cent FDI is allowed without attendant FDI-linked
performance conditionality; (iii) foreign investment
up to 100 per cent under the automatic route is
permitted in the plantation sector which now
includes tea, coffee, rubber, cardamom, palm oil
tree and olive oil tree plantations; (iv) the definition
of ‘real estate business’ has been modified and
rent income on lease of a property, not amounting
to transfer, will not be considered as ‘real estate
business’; (v) manufacturing has been given a
precise definition wherein foreign investment
up to 100 per cent under the automatic route is
permitted; (vi) entities engaged in single brand retail trading through brick and mortar stores
are permitted to undertake retail trading through
e-commerce; and (vii) foreign investment in the
insurance sector under the automatic route has
been increased to 49 per cent from 26 per cent.
Startups
V.28 Pursuant to the Monetary Policy Statement
of February 02, 2016, several steps have been
initiated to facilitate the ease of doing business
and contribute to an ecosystem that is conducive
to the growth of startups. Accordingly, a dedicated
mailbox was set up to provide assistance and
guidance to the startup sector. Further, online
submission of form A2 for outward remittances
has been enabled. Certain transactions related
to startups have been clarified/notified as
under: (i) issue of shares without cash payment
through sweat equity is permitted, provided that
the scheme has been drawn either in terms of
regulations issued by the SEBI or the government;
(ii) issue of shares against legitimate payment
owed by the investee company, remittance of
which does not require permission under FEMA,
is permitted subject to adherence to the FDI policy;
(iii) having an escrow arrangement or paying the
consideration on a deferred basis for an amount up
to 25 per cent of the total consideration for a period
not exceeding 18 months in respect of transfer of
shares between a resident and a non-resident and
(iv) a startup having an overseas subsidiary has
been permitted to open an FCY account with a
bank outside India for the purpose of crediting to
it foreign exchange earnings out of exports/sales
made by the said startup and/or the receivables,
arising out of exports/sales, of its overseas
subsidiary. Furthermore, payments in foreign
exchange arising out of its own or its subsidiaries’
sales/exports, have been allowed as a permissible
credit to an Indian startup’s exchange earners’ foreign currency (EEFC) account. In addition,
the following proposals are under consideration,
in consultation with the Government of India: (i)
permitting startups to access rupee loans under
the ECB framework with relaxations in respect
of eligible lender, end-use and cost of borrowing,
etc.; (ii) issuance of innovative FDI instruments
like convertible notes by startups; (iii) streamlining
of overseas investment operations for startups;
and (iv) simplifying the process for dealing with
delayed reporting of FDI related transactions by
building a penalty structure into the regulation
itself.
Setting up a Liaison Office, Branch Office or
Project Office in India
V.29 In order to improve the ease of doing
business in India, the Reserve Bank has liberalised
the approval process for setting up liaison/branch/
project office in India by delegating most of the
authorities to AD banks except for applications
received from citizens of/companies registered
or incorporated in Pakistan. Furthermore,
applications received from citizens of/companies
registered in Bangladesh, Sri Lanka, Afghanistan,
Iran, China, Hong Kong or Macau for opening
offices in Jammu and Kashmir, the Northeast
region, and Andaman and Nicobar Islands would
require the prior approval of the Reserve Bank.
Non-Resident Deposits and Foreign Currency
Accounts of Residents
V.30 Transfers between non-resident ordinary
rupee (NRO) accounts have been permitted.
Further, NRIs and persons of Indian origin (PIOs)
have been permitted to open NRO accounts jointly
with other NRIs/PIOs. While permitting remittances
outside the country from the balances held in
NRO accounts maintained by NRIs and PIOs,
ADs are now required to obtain a declaration that the remittances represent the account holder’s
legitimate receivables in India and do not represent
any borrowing from any other person or transfer
from any other NRO account. Non-residents
having a business interest in India are permitted
to open a repatriable special non-resident rupee
(SNRR) account with balances commensurate
with business operations. An Indian company
receiving foreign investment under the FDI route
has been permitted to open and maintain an
FCY account with an AD in India provided it has
impending FCY expenditure. The account needs
to be closed immediately after the requirements
are completed or within six months from the date
of opening of such account, whichever is earlier.
Black Money Act
V.31 Pursuant to the enactment of the Black
Money (Undisclosed Foreign Income and Assets)
and Imposition of Tax Act on May 26, 2015, the
Reserve Bank has put in place a process for
regularising assets declared under the Act which
are being held in contravention of FEMA or the
rules and regulations framed thereunder.
Trade Transactions and Settlement
V.32 Use of Nostro accounts of commercial
banks of the Asian Clearing Union (ACU) member
countries, i.e., the ACU dollar and ACU euro
accounts, has been allowed for settling payments
for both exports and imports of goods and services
among the ACU countries.
V.33 Guidelines were issued to banks for settling
export/import transactions where the invoicing is
in a freely convertible currency and the settlement
takes place in the currency of the beneficiary,
which though convertible, does not have a direct
exchange rate.
V.34 To ease operational difficulties faced by
importers of rough, cut and polished diamonds, AD banks have been delegated the powers to
permit clean credit for an additional period of up to
180 days over and above the 180 days prescribed
period, subject to certain conditions.
Rationalisation of Returns
V.35 Towards rationalisation of returns and
liberalisation of procedures, the physical filing of
three FDI related returns, viz., advance remittance
form (ARF), form foreign currency gross provisional
return (FC-GPR) and form foreign currency
transfer of shares (FC-TRS) has been replaced
with online filing on the Government’s e-Biz portal.
Reporting by AD banks to the Reserve Bank under
the Diamond Dollar Account scheme has been
dispensed with. Filing of returns showing details
of trade related loans and advances by exporters
to overseas importers from their EEFC accounts
has also been dispensed with. The submission
of documents by full-fledged money changers
(FFMC)/AD Category-II while opening additional
branches has been relaxed while the single/bulk
filing of the SOFTEX form for certification has
been made available to all software exporters.
Compounding of Contraventions under FEMA,
1999
V.36 With a view to imparting transparency and
providing greater disclosure, the compounding
orders passed on or after June 01, 2016 are
being put on the Reserve Bank website. For the
general public’s information, the guidance note on
the methodology used for calculating the amount
imposed under the compounding process has
been hosted on the Reserve Bank website.
Agenda for 2016-17
V.37 To further facilitate trade, payments and
investments, the department will: (i) complete the
task of rationalising and simplifying notifications
issued under FEMA; (ii) rationalise returns
to reduce the regulatory burden on users of
foreign exchange; (iii) operationalise IDPMS for
monitoring of import transactions and (iv) put in
place a simplified revised framework for dealing
with delayed reporting of FDI transactions.
Furthermore, proposals with respect to startups as
mentioned above (para V.28) will be implemented
in consultation with the government. |