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Bill on chit funds sector introduced in Lok Sabha


Mains Paper 2: Polity | Parliament & State Legislatures – structure, functioning, conduct of business, powers & privileges & issues arising out of these.

From UPSC perspective, the following things are important:

Prelims level: Chit Funds (Amendment) Bill, 2018, Parliamentary Standing Committee on Finance

Mains level: Chit fund scams and ways to curb them


Bill to streamline and strengthen the chit fund sector

  1. A bill to streamline and strengthen the chit fund sector was introduced in the Lok Sabha
  2. It mandates video conferencing while the opening of bids and seeks to hike commission of foremen from 5% to 7%


  1. Concerns have been expressed by various stakeholders regarding challenges being faced by the chit business
  2. The Central government had constituted a key advisory group on chit funds to review the legal, regulatory and institutional framework for the sector and its efficacy and to suggest initiatives required for its orderly growth
  3. The Chit Funds (Amendment) Bill, 2018 is based on the recommendations of the Parliamentary Standing Committee on Finance and the Advisory Groups on Chit Funds set up by the Central government

Proposed amendments

  1. The amendment bill provides for allowing the mandatory presence of two subscribers, as required either in person or through video conferencing duly recorded by the foreman, while the bids are being opened
  2. It also provides for increasing of a ceiling of foreman’s commission from 5% to 7%

Cabinet nod to amend Chit Funds Act


Mains Paper 2: Polity | Functions & responsibilities of the Union & the States, issues & challenges pertaining to the federal structure

From UPSC perspective, the following things are important:

Prelims level: Chit Funds (Amendment) Bill, 2018, Chit Funds Act, 1982

Mains level: Chit fund scams and ways to eliminate them


Chit Funds (Amendment) Bill, 2018

  1. The Cabinet has given the approval to introduce the Chit Funds (Amendment) Bill, 2018 in Parliament
  2. Amendments to the Chit Funds Act are proposed to facilitate the orderly growth of the sector and provide more financial products to investors
  3. For this purpose, amendments would be made to the Chit Funds Act, 1982

Proposed amendments

  1. One of the amendments is the use of the words “Fraternity Fund” for chit business in the Act
  2. This is to distinguish its working from ‘Prize Chits’ which are banned under a separate legislation
  3. The bill also proposes to allow two minimum required subscribers to join through video conferencing duly recorded by the foreman
  4. This is because the physical presence of subscribers towards the final stages of a chit may not be forthcoming easily
  5. State governments are proposed to be allowed to prescribe the ceiling amount of fund and to increase it from time to time


Chit Funds Act, 1982

  1. This act extends to whole of India except the state of Jammu and Kashmir
  2. Transaction is not called a Chit Fund if
  • Some alone, get the prize money without obligation of paying future installments
  • All subscribers get chit amount by turns with liability to pay future installments

3. Chit fund companies name should include “Chit”, “Chitti” or “Kuri” with their name. No other person have right to use these above-mentioned words as a part of their business names

4. All chit fund companies need to be registered with respective state government wherein they will operate

5. Money so collected cannot be utilized for any other business purpose except carrying on chit business, giving loans to non-prized subscribers on the security of subscriptions paid by them, investing in trustee securities and making deposit in mentioned bank

SEBI gets teeth to act against exchanges, new market outfits


Mains Paper 2: Polity | Statutory, regulatory & various quasi-judicial bodies

From UPSC perspective, the following things are important:

Prelims level: SEBI, REITs, InvITs, SEBI Act, Securities Contracts (Regulation) Act

Mains level: Market regulators and their powers


More power to SEBI

  1. In the proposed amendments in the Finance Bill 2018, the government has given more power to the Securities and Exchange Board of India (SEBI)
  2. This will allow it to impose monetary penalties on important market intermediaries such as stock exchanges and clearing corporations
  3. Also to act against newer categories of participants likes investment advisers, research analysts, real estate investment trusts (REITs) and infrastructure investment trusts (InvITs)

Monetary penalties can be imposed now

  1. Till now, SEBI only had the power to censure or warn against any form of failure
  2. The proposed amendments to the SEBI Act and the Securities Contracts (Regulation) Act now allow the capital markets regulator to impose a monetary penalty of at least ₹5 crore on stock exchanges, clearing corporations and depositories for non-compliance with regulatory norms
  3. The penalty can go up to ₹25 crore or three times the amount of gains made out of such failure or non-compliance
  4. The amendments also allow SEBI to act against entities that furnish false or incomplete information to the regulator
  5. Earlier, it could act only if the entity did not furnish any information

Additional powers

  1. The whole-time members of SEBI have also been given additional powers to act against wrongdoers
  2. The government has also allowed the regulator to pursue cases against the legal representatives of defaulters if in case a defaulter passes away during the course of regulatory proceedings


Real estate investment trusts (REITs)/Infrastructure investment trusts (InvITs)

  1. Real Estate Investment Trusts or REITs are mutual funds like institutions that enable investments into the real estate sector/infrastructure sector
  2. This is done by pooling small sums of money from multitude of individual investors for directly investing in real estate properties/infrastructure so as to return a portion of the income (after deducting expenditures) to unitholders of REITs, who pooled in the money
  3. A REIT in India is allowed to invest mainly in completed and revenue generating assets and other approved investments
  4. REITs/InvITs will have to distribute majority of its income among the unit holders
  5. REITs/InvITs are regulated by SEBI

Sebi planning a ‘riskometer’ for stock market investments


Mains Paper 2: Governance | Government policies & interventions for development in various sectors & issues arising out of their design & implementation

From UPSC perspective, the following things are important:

Prelims level: Riskometer, SEBI, Stock markets, Mutual funds

Mains level: Risks associated with Capital markets and government measures for it


New system proposed for rating stocks

  1. Stock market regulator SEBI will introduce an early-warning system to caution people about the risks of investing in stocks of overvalued companies, those with unsustainable business models and ones that may go bankrupt
  2. SEBI has proposed a system that would rate a stock on a numeric scale or a color-coded system
  3. Mutual funds have a similar system called a riskometer

How will this help?

  1. Since the equity market is rising steadily, investors are prone to take higher unwarranted risks while attempting to gain from the bull market
  2. It will allow investors to easily identify risks associated with a stock on account of its trading pattern or owing to the condition of the company’s business

International examples

  1. Singapore has a system of automatic “trade with caution” alerts which are generated when trading activity in a stock cannot be explained based on publicly available information

Disclosure of other details by companies

  1. Abnormalities in the business could be assessed from certain balance sheet items
  2. SEBI is considering asking listed firms to disclose certain additional details on a quarterly basis
  3. These may include human resource data, cost-cutting details, changes in remuneration of top management, details of loans availed and their usage, and plans to service debts
  4. The public will be shown a company’s business-related risks by comparing its data with the industry benchmark or the average of its listed peer group

[op-ed snap] P2P regulations: A missed opportunity

Image source


Mains Paper 3: Economy | Investment model

From UPSC perspective, the following things are important:

Prelims level: peer-to-peer (P2P) lending, market-access barriers, leverage ratio

Mains level: Mandate of RBI and various issues related to it


  1. The Reserve Bank of India (RBI) issued the much anticipated regulatory framework for peer-to-peer (P2P) lending earlier this month
  2. This model emerged in 2005 as technology fused with lending and has been replicated across jurisdictions since

What is the P2P lending?

  1. In its simplest avatar, it involves a platform that leverages technology to match lenders and borrowers, receiving fees in lieu of transactions successfully closed
  2. Unlike banks that act as intermediaries and engage in liquidity transformation between retail lenders and borrowers, these platforms are genuine two-sided markets (similar to say, Uber)
  3. These bring lenders and borrowers together without taking any credit risk on their own balance sheet
  4. An important feature of such platforms is that they leverage technology to filter borrowers, determine interest at which the transactions execute and reduce the risk of lender exposure through diversification (through one-to-many transactions, for example)

Review of the P2P regulations issued by the RBI

  1. The P2P regulations delegate potentially arbitrary discretion to RBI in gatekeeping
  • One of the principal governance issues of a modern state is injecting accountability into regulatory discretion
  • P2P regulations fail on this parameter and underscore the need for Parliament to implement reform through legislation rather than delegate it to regulators
  • Broad discretion without effective oversight is effectively a permission to engage in arbitrary behavior

2. They impose high market-access barriers that would inhibit innovation in a technology-intensive sector

  • The RBI has prescribed a mandate that would require a minimum net-owned fund (NOF) of Rs 2 crore
  • That would exclude innovative, lean start-ups from entering the market, and it is unclear if there would be any benefit net of costs
  • P2P model “disintermediates” credit risk
  • It may be feasible for the RBI to tailor minimum capital based on the value of loans made through the platform

3. These regulations also lack clarity around critical issues like leverage ratio

  • Leverage ratio is defined as “total outside liabilities divided by owned funds, of the non-banking financial corporation in P2P (NBFC-P2P)”
  • This leverage ratio has been capped at 2
  • The revenue sources for a P2P platform company include: processing fees charged to borrowers and lenders, origination fees for loan-specific insurance products and fees charged from lenders for collection
  • From regular market numbers, the sum of these three sources of revenue is in the order of 4-8% of the credit facilitated through the platform
  • The overall costs of a tech-enabled P2P lending platform is in the range of 2-4% of credit facilitated through the platform
  • The leverage cap of 2 will mean this regulation effectively limits return on equity in the 10-12% range
  • No technology business can operate with such paltry returns

Other concerns in the P2P regulations

  1. Ultra-conservative lender exposure limits
  2. Data-sharing mandate with credit information companies and
  3. Disclosure of borrower information to the lenders

What you need to know about Infrastructure Investment Trusts

  • The initial public offering (IPO) for IRB InvIT, India’s first infrastructure investment trust fund will open for subscription on May 3 and close on May 5.
  • What are InvITs? InvITs are similar to mutual funds. While mutual funds provide an opportunity to invest in equity stocks, an InvIT allows one to invest in infrastructure projects such as road and power.
  • How do InvITs work? InvITs raise funds from a large number of investors and directly invest in infrastructure projects or through a special purpose vehicle.
  • Two types of InvITs have been allowed: one, which invests in completed and revenue generation
    infrastructure projects;
  • the other, which has the flexibility to invest in completed or under-construction projects.
  • InvITs which invest in completed projects take the route of public offer of its units, while those investing in under construction projects take the route of private placement of units.
  • What is the structure of InvITs? InvITs are registered as trusts with SEBI and there are four parties — trustee, sponsors, investment manager and project manager.
  • What do InvITs mean for investors? According to SEBI rules, at least 90% of funds collected, after paying for expenses, taxes and repayment of external debt, should be passed on to investors every six months.
  • Are these investments taxable? Dividend income received by unit holders is tax exempt. Short-term capital gain on sale of units is taxed at 15%, while long-term capital gains are tax exempt. Interest distributed to unit holders is taxed.

Regulator allows options contracts in commodities

  1. News: SEBI has allowed the introduction of options contracts in the commodity derivatives market
  2. Currently: Only futures contracts are available in the commodity segment
  3. Advantages: It would aid the overall development of the commodity derivatives market, attracting broad-based participation, enhancing liquidity, facilitating hedging and bringing in more depth to the market
  4. The decision is based on the recommendations of the Commodity Derivatives Advisory Committee (CDAC)

Discuss: Differentiate between options and futures contracts

What is Partial Credit Enhancement?

  1. Credit Enhancement: A method whereby a company attempts to improve its debt or credit worthiness
  2. Through CE, the lender is provided with reassurance that the borrower will honor the obligation through additional collateral, insurance, or a third party guarantee
  3. Advantage: Credit enhancement reduces default risk of a debt, thereby increasing the overall credit rating and lowering interest rates
  4. PCE Scheme: RBI had introduced a scheme of Partial Credit Enhancement (PCE) to corporate bonds in 2015
  5. Why? This scheme has been essentially designed bearing in mind particularly the large financial requirements of the infrastructure sector and the risks associated with it

What are corporate bonds?

  1. What? These are debt securities issued by private and public corporations
  2. Why? Companies issue corporate bonds to raise money for a variety of purposes, such as building a new plant, purchasing equipment, or growing the business
  3. When one buys a corporate bond, one lends money to the issuer (the company that issued the bond)
  4. In exchange, the company promises to return the money, also known as principal, on a specified maturity date
  5. Until that date, the company usually pays a stated rate of interest, generally semiannually
  6. A corporate bond does not give an ownership interest in the issuing company, unlike when one purchases the company’s equity stock

Banks to issue Masala bonds, RBI opens currency markets

  1. News: The RBI has announced a raft of measures to boost investor participation and market liquidity in both the corporate bond and currency markets
  2. Masala Bonds: The central bank will allow commercial banks to issue rupee bonds in overseas markets, both for their capital requirement and for financing infrastructure and affordable housing
  3. Corporate Bonds: Many of the recommendations of the Khan Committee to develop the corporate bond market have been accepted
  4. PEC: Enhancing the aggregate limit of partial credit enhancement (PCE) provided by banks from 20% to 50% of bond issue size
  5. LAF: RBI will also seek suitable legal amendments to enable it to accept corporate bonds under the Liquidity adjustment Facility (LAF)

SEBI faces complex challenges in regulating commodity markets: Sinha

  1. Reasons: These challenges emanate from underlying markets, which are fragmented, dispersed and not under its regulatory purview
  2. SEBI’s aim is to bring the commodities derivatives market at par with securities market in all aspects
  3. In the years to come, SEBI’s vision is to evolve the commodity market with new products and new categories of participants leading to better liquidity, thus facilitating fair price discovery for the benefit of stakeholders
  4. Background: The commodity derivative market has come under SEBI’s purview since September 2015 after the merger of the erstwhile Forward Markets Commission with SEBI

What is dabba trading?

  1. It is an illegal trading in which exchange prices of commodities are used as benchmarks
  2. Unlike on exchanges, participants may not be asked to put up margin to trade and the contracts will be settled on a weekly basis
  3. The dabba trader gets a fee from both buyer and seller
  4. Implications: Since the trade takes place Off the exchange, the regulated market loses out on transaction charges
  5. Money that has escaped the tax net is used in illegal trading depriving the exchequer of revenues

SEBI’s new initiative to spread investor awareness

  1. Initiative: SEBI plans to explore cinema advertising and digital platforms for its advertising campaigns
  2. About: Ponzi schemes menace and dabba trading etc
  3. Aim: To spread investor awareness and financial education

SEBI, brokers to discuss retail participation

  1. News: The Securities and Exchange Board of India will be discussing with brokers ways to increase retail participation
  2. It also wants to boost the penetration level of the equity market across the country
  3. Fact: All individuals need a demat account to trade in the capital market

Supreme Court allows SEBI to sell Sahara properties

  1. Context: The court had put stringent conditions for the bail of Sahara chairman
  2. News: The SC asked SEBI to initiate the process of selling properties of Sahara group
  3. The apex court asked Sahara group and SEBI to devise a mechanism to sell properties
  4. Impact: The money thus generated will be paid back to the investors of Sahara

70% of P-Notes come via Singapore, Mauritius

  1. Context: More than two-thirds of foreign fund flows through P-Notes have been routed through Singapore and Mauritius
  2. Why? These countries have tax treaties with India that are advantageous for investors in these instruments
  3. P-Note holder does not have to pay any Indian capital gains tax if it is based in Singapore or Mauritius under these treaties
  4. Some 36.5% of the total offshore derivative instruments have been channelled through Singapore and 30% through Mauritius

What are Participatory Notes?

  1. What? Financial instruments used by investors or hedge funds that are not registered with SEBI to invest in Indian securities
  2. Issue: However, Indian regulators are not very happy about participatory notes because they have no way to know who owns the underlying securities
  3. Regulators fear that hedge funds acting through P-Notes will cause economic volatility in India’s exchanges
  4. There are also apprehensions of routing black money into financial markets through P-Notes

:( We are working on most probable questions. Do check back this section.

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