Capital Markets: Challenges and Developments

Capital Markets: Challenges and Developments

What are Social Stock Exchanges?


From UPSC perspective, the following things are important :

Prelims level : Social Stock Exchanges (SSEs)

Mains level : NGOs and their funding issues

A working group constituted by the Securities and Exchange Board of India (SEBI) on Social Stock Exchanges (SSEs) has recommended allowing non-profit organisations to directly list on such platforms.

Practice questions for mains:

Q. What are Social Stock Exchanges? Discuss how it will help finance social enterprises in India.

What are Social Stock Exchanges (SSEs)?

  • An SSE is a platform which allows investors to buy shares in social enterprises vetted by an official exchange.
  • The Union Budget 2019 proposed setting up of first of its kind SSE in India.
  • The SSE will function as a common platform where social enterprises can raise funds from the public.
  • It will function on the lines of major stock exchanges like BSE and NSE. However, the purpose of the Social Stock Exchange will be different – not profit, but social welfare.
  • Under the regulatory ambit of SEBI, a listing of social enterprises and voluntary organizations will be undertaken so that they can raise capital as equity, debt or as units like a mutual fund.

Why SSEs?

  • India needs massive investments in the coming years to be able to meet the human development goals identified by global bodies like the UN.
  • This can’t be done through government expenditure alone. Private enterprises working in the social sector also need to step up their activities.
  • Currently, social enterprises are very active in India. However, they face challenges in raising funds.
  • One of the biggest hurdles they face is, apparently, the lack of trust from common investors.


  • There is a great opportunity to unlock funds from donors, philanthropic foundations and CSR spenders, in the form of zero-coupon zero principal bonds. These bonds will be listed on the SSE.
  • At first, the SSE could become a repository of social enterprises and impact investors.
  • The registration could be done through a standard process.
  • The SEs could be categorized into different stages such as- Idea, growth stage and likewise, investors can also be grouped based on the type of investment.

Capital Markets: Challenges and Developments

Minimum Public Shareholding (MPS) Requirement


From UPSC perspective, the following things are important :

Prelims level : Minimum Public Shareholding (MPS)

Mains level : Not Much

The Securities and Exchange Board of India (SEBI) has relaxed the 25 per cent minimum public shareholding norm and advised exchanges not to take penal action till August 2020 in case of non-compliance.

A statement based question can be asked about the SEBI in the prelim asking-

If it is a statutory or quasi-judicial body ; Scope of its regulation; Appointment of its chairman etc..

What is a Public Shareholding Company?

  • A Public Shareholding Company is a company whose capital is divided into shares of equal value, which are transferable.
  • Shareholders of a Public Shareholding Company are not liable for the company’s obligations except for the amount of the nominal value of the shares for which they subscribe.

What is MPS requirement?

  • The 25 per cent MPS norms were introduced in 2013, whereby no listed company was permitted to have more than 75 per cent promoter stake.
  • The rules were aimed at improving liquidity and better stock price discovery by making higher float available with public.
  • The average promoter holding in India is among the highest globally.
  • Last year, the government had proposed to increase the minimum public float from the current 25 per cent to 35 per cent. It had met with opposition, forcing the government to drop the plan.

Why ease MPS norms?

  • The Sebi move is aimed at easing such compliance rules amid the disruptions caused by the coronavirus pandemic.
  • The decision has been taken after receiving requests from listed entities and industry bodies as well as considering the prevailing business and market conditions.
  • As per the norms, exchanges can impose a fine of up to Rs 10,000 on companies for each day of non-compliance with MPS requirements.
  • Besides, exchanges can intimate depositories to freeze the entire shareholding of the promoter and promoter group. This circular will come into force with immediate effect.

Back2Basics: Securities and Exchange Board of India (SEBI)

  • The SEBI is the regulator of the securities and commodity market in India.
  • It was first established in 1988 as a non-statutory body for regulating the securities market.
  • It became an autonomous body on 12 April 1992 and was accorded statutory powers with the passing of the SEBI Act 1992.
  • SEBI has to be responsive to the needs of three groups, which constitute the market:

1) issuers of securities

2) investors

3) market intermediaries

Capital Markets: Challenges and Developments

Sovereign Gold Bonds: A substitute for physical gold


From UPSC perspective, the following things are important :

Prelims level : Sovereign Gold Bonds

Mains level : Not Much

Gold bond prices rise to near record highs after the second tranche of subscription were closed.

Questions based on capital markets are quite frequent these years.  Consider this-

Which of the following is issued by registered foreign portfolio investors to overseas investors who want to be part of the Indian stock market without registering themselves directly? (CSP 2019)

(a) Certificate of Deposit

(b) Commercial Paper

(c) Promissory Note

(d) Participatory Note

What is a Sovereign Gold Bond (SGB)?

  • SGB is a substitute for holding physical gold.
  • The bonds are issued by the RBI on behalf of the government and are a bond denominated in gold.
  • The government issues such bonds in tranches at a fixed price that investors can buy through banks, post offices and also in the secondary markets through the stock exchange platform.

What are the benefits of buying SGB?

  • These bonds are backed by a sovereign guarantee and can also be held in Demat form.
  • Further, they are priced as per the underlying spot gold prices.
  • Hence, investors who want to invest in gold can buy the bonds without worrying about the safekeeping of physical gold along with locker charges, making charges or purity issues.
  • Plus, these bonds offer interest at the rate of 2.5% per annum on the principal investment amount.
  • While the interests on the bonds are taxable, the capital gains at the time of redemption are exempt from tax.
  • These bonds can also be used as collateral for availing loans from banks and NBFCs.

How are the bonds structured?

  • SGB has a fixed tenure of eight years, though early redemption is allowed after the fifth year from issuance.
  • Since the bonds are listed on the exchange, these can be transferred to other investors as well.
  • The bonds are priced in rupees based on the simple average of the closing price of gold of 999 purity which published by the India Bullion and Jewellers Association.
  • At the time of redemption, cash equivalent to the number of units multiplied by the then prevailing price would be credited to the bank account of the investor.

Are there any risks in investing in SGB?

  • A capital loss is a risk since the bond prices would reflect any change in gold prices.
  • If gold prices fall, the principal investment would fall proportionately.

Why need such bonds?

  • The gold demand rises in times of uncertainty or high inflation.
  • Gold demand is mostly met through imports
  • Years of high imports are ones of high current account deficits which, in turn, have weakened the rupee.
  • It is to reduce this huge import bill that, in November 2015, the government tried to introduce gold bonds.

Capital Markets: Challenges and Developments

 Indian Debt market, that never was


From UPSC perspective, the following things are important :

Prelims level : Asset-to-liability mismatch, Types of debt markets, Priority sector lending certificates, roll-over etc.

Mains level : Paper 3- What is the importance of debt market for the economy of a country? What are the factor responsible for the shallowness of the India's debt market?

India’s bond market suffers from several issues. This article discusses such issues, and also highlights the recent positive trends seen in the debt market owing to several steps taken by the government.

The Indian debt market, primarily of the fixed-income variety, can be broadly classified into:

  • 1. Money Market
  • Where the borrowing is for a tenor of less than a year.
  • Different types of money market instruments: Inter-Bank Term Money, repo transactions, Certificate of Deposits, Commercial Papers, T-Bills, etc. are some of the money market instruments.
  • Through these instruments, short term requirement of funds is met by banks, institutions and the state and central governments.
  • 2. Bank and Corporate Deposits
  • Bank fixed deposits (FDs) have been popular and widely subscribed to, as the feeling of no-default-risk.
  • Corporate deposits are FDs issued by a company (non-bank).
  • 3. Government Securities
  • G-Secs are sovereign-rated debt papers, issued by the government with a face value of a fixed denomination.
  • 4. Corporate & PSU Bond Market
  • Corporate bonds are issued by public sector undertakings (PSUs) and private firms.
  • These bonds are issued for a wide tenor between 1 year – 15 years.
  • These bonds carry a different risk profile and hence will have associated rating.

Debt market plays a significant role in the economy of a country. But India’s debt market suffers from shallowness. Some of the steps taken by the government to improve the situation have been showing positive trends. In the light of this development, the UPSC can frame a direct question, for ex. “What are the factors responsible for the shallowness of the debt market in India? Suggest ways to increase the depth of the debt market in India.”

What are the problems of India’s debt market?

  • Wholesale market: The Indian debt market is largely a wholesale market.
  • It is a wholesale market in a sense that a majority of institutional investors comprises of mainly banks, financial institutions, mutual funds, EPFO, insurance companies and corporates.
  • The concentration of these large players has resulted in the debt markets being fairly skewed, evolving into a wholesale & bilaterally-priced trades.
  • Lack of retail sell and transparency: It also lacks the retailness and the contractual transparency that the Indian capital markets have been able to build in the past 2 decades.
  • Skewed towards G-secs: Structurally, the debt market remains firmly skewed towards government securities (G-secs).
  • Also, the largest investor group in the G-secs market are the banks, due to their regulatory requirement to invest in SLR.
  • Low and unstable trading in the corporate bond market: The Indian corporate bond market has low & unstable trading volumes.
  • Sadly, the corporate bond market remains largely about top-rated financial and public sector issuances.
  • The domestic debt managers have forgotten that the logic of the business of finance is “to price the risk”.

Regulation and comparison with other countries

  • RBI regulates money markets & G-secs.
  • SEBI regulates the Corporate debt market & bond markets.
  • The domestic debt market in India amounts to about 67% of GDP.
  • The size of India’s corporate bond market is a mere 16% of GDP — compared with 46% in Malaysia, and 73% in South Korea.

The recent positive trend in the debt market

  • In the past few years, the domestic corporate bond market had seen increasing volumes, largely due to financial investments going into it, including retail participation.
  • Also, the banks had ceded space to NBFCs over past many years.
  • This is because banks found it easier to buy securitisation pools to achieve their PSL targets rather than develop competencies that NBFCs had built-in serving affinity groups, in smaller cities & towns.
  • And post the ILFS crisis, the markets have started shunning non-banks again.
  • Policy initiative by the government: The various policy initiatives undertaken in the last few years would take time to fructify and to stabilise.
  • These include the IBC, SEBI’s bond market policies, RBI’s large borrower framework for enhancing credit supply.
  • Some of these have already seen changes/addendums to the original draft, with the intent being to course-correct, for the stability of the markets.

Roll over of debt papers in India

  • We have seen liquidity problems in our markets every few years.
  • The concept of “roll-over” of debt paper was usual as our markets did not build long term papers.
  • With the ILFS slowdown, it was easy for name-calling on “ALM mismatch” concept.
  • Not much had been anyways done before and later to address the availability of debt to reduce the Asset-to-Liability mismatches.
  • Also, we have played it safe so far by even lending for large infra projects with shorter paper and hoped to roll it over at the end of the debt term.


This is the time that our regulators need to work along with the various governments, especially the states, for smoother ironing of fiscal hiccups and use this to redress any structural glitches. It’s time that there is actual intent to deepen the domestic debt market and to listen to the industry about their requirements.

Back2Basics: What is ASM?

  • Banks’ primary source of funds is deposits, which typically have short- to medium-term maturities.
  • They need to be paid back to the investor in 3-5 years.
  • In contrast, banks usually provide loans for a longer period to borrowers.
  • Home loans, for instance, can have a tenure of up to 20 years.
  • Providing such loans from much shorter maturity funds is called an asset-liability mismatch.
  • It creates risks for banks that need to be managed.
  • The most serious consequences of asset-liability mismatch are interest rate risk and liquidity risk.
  • Because deposits are of shorter maturity they are repriced faster than loans.
  • Every time a deposit matures and is rebooked if the interest rates have moved up the bank will have to pay a higher rate on them.
  • But the loans cannot be repriced that easily. Because of this faster adjusting of deposits to interest rates asset-liability mismatch affects net interest margin or the spread banks earn.

Priority Sector Lending (PSL)

  • Priority Sector Lending is an important role given by the (RBI) to the banks for providing a specified portion of the bank lending to few specific sectors like agriculture and allied activities, micro and small enterprises, poor people for housing, students for education and other low-income groups and weaker sections etc.

Roll over of debt

  • When debt becomes due there is a need to either repay the principal or alternatively, to enter into a new agreement.
  • Structurally, funds from the second debt are used to repay the first debt.
  • Then you repay the second debt as required. Quite often these new terms will be agreed with the initial lender.
  • In essence, you’re ‘rolling’ the repayment obligation from one period into the next.
  • This all leads to rollover risk, which is the risk you that you won’t be able to find anyone willing to lend the value of the outstanding debt and/or offer a comparable rate as the first principle repayment obligation approaches.
  • This may be due to either movement in the borrowers perceived credit status and/or changes to the broader credit environment.
  • This was a key theme during the financial crisis of 2007 – 2008.
  • The reasons for refinancing may include the above, but also other themes such as debt consolidation (which doesn’t directly imply a change to the debt term).

Capital Markets: Challenges and Developments

What is Operation Twist?


From UPSC perspective, the following things are important :

Prelims level : Operation Twist, OMOs

Mains level : Operation Twist

The Reserve Bank of India (RBI) has announced simultaneous purchase and sale of government bonds in a bid to soften long-term yields under its Operation Twist.

Operation Twist

  • Operation Twist is a move taken by U.S. Federal Reserve in 2011-12 to make long-term borrowing cheaper.
  • It first appeared in 1961 as a way to strengthen the U.S. dollar and stimulate cash flow into the economy.
  • It is the name given to a Federal Reserve monetary policy operation that involves the purchase and sale of bonds.
  • The operation describes a form of monetary policy where the bank buys and sells short-term and long-term bonds depending on their objective.

Its genesis

  • The name “Operation Twist” was given by the mainstream media due to the visual effect that the monetary policy action was expected to have on the shape of the yield curve.
  • If we visualize a linear upward sloping yield curve, this monetary action effectively “twists” the ends of the yield curve, hence, the name Operation Twist.
  • To put another way, the yield curve twists when short-term yields go up and long-term interest rates drop at the same time.

 Back2Basics: Open Market Operations

  • Open market operations are the sale and purchase of government securities and treasury bills by RBI or the central bank of the country.
  • The objective of OMO is to regulate the money supply in the economy.
  • When the RBI wants to increase the money supply in the economy, it purchases the government securities from the market and it sells government securities to suck out liquidity from the system.
  • OMO is one of the tools that RBI uses to smoothen the liquidity conditions through the year and minimise its impact on the interest rate and inflation rate levels.

Capital Markets: Challenges and Developments

How a dollar swap line with US Fed can help in uncertain times?


From UPSC perspective, the following things are important :

Prelims level : Currency Swap

Mains level : Currency Swap and its significance

India is working with the US to secure a dollar swap line that would help in better management of its external account and provide an extra cushion in the event of an abrupt outflow of funds.

What are Currency Swaps?

  • A currency swap, also known as a cross-currency swap, is an off-balance sheet transaction in which two parties exchange principal and interest in different currencies.
  • The purpose of a currency swap is to lower exposure to exchange rate risk or reduce the cost of borrowing a foreign currency.

Why do we need dollars?

  • According to RBI data, 63.7% of India’s foreign currency assets — or $256.17 billion — are held in overseas securities, mainly in the US treasury.
  • While FPIs investors looking for safer investments, the current global uncertainty over COVID outbreak have led to a shortfall in Indian stock markets.
  • This has pulled down India’s foreign exchange reserves.
  • This means that the government and the RBI cannot lower their guard on the management of the economy and the external account.

How does a swap facility work?

  • In a swap arrangement, the US Fed provides dollars to a foreign central bank, which, at the same time, provides the equivalent funds in its currency to the Fed, based on the market exchange rate at the time of the transaction.
  • The parties agree to swap back these quantities of their two currencies at a specified date in the future, which could be the next day or even three months later, using the same exchange rate as in the first transaction.
  • These swap operations carry no exchange rate or other market risks, as transaction terms are set in advance.

Benefits of currency swap

  • The absence of an exchange rate risk is the major benefit of such a facility.
  • This facility provides India with the flexibility to use these reserves at any time in order to maintain an appropriate level of balance of payments or short-term liquidity.
  • currency swaps between governments also have supplementary objectives like promotion of bilateral trade, maintaining the value of foreign exchange reserves with the central bank and ensuring financial stability (protecting the health of the banking system).

Recent examples

  • India already has a $75 billion bilateral currency swap line with Japan, which has the second-highest dollar reserves after China.
  • The RBI also offers similar swap lines to central banks in the SAARC region within a total corpus of $2 billion.

Note: Relate all other terminologies related to USD-INR convertiblity viz. Current Account, BoP etc.

Capital Markets: Challenges and Developments

Euro Zone ‘Coronabonds’


From UPSC perspective, the following things are important :

Prelims level : Coronabonds, Eurozone

Mains level : Not Much

The coronavirus pandemic has revived the acrimonious debate between euro zone countries about jointly issuing debt through instruments called Coronabonds.


  • Coronabonds are proposed debt instruments amongst EU member states, with the aim of providing financial relief to Eurozone countries battered by the coronavirus.
  • They aim to meet healthcare needs and address the deep economic downturn that is set to follow.
  • The funds would be mutualised and supplied by the European Investment Bank, with the debt taken collectively by all member states of the European Union.
  • The euro zone jointly issues debt through its bailout fund, the European Stability Mechanism, which borrows on the market against the security of its paid-in and callable capital provided by euro zone governments.


What is Eurozone?

  • The Eurozone officially called the euro area is a monetary union of 19 of the 27 European Union (EU) member states which have adopted the euro as their common currency and sole legal tender.
  • The monetary authority of the Eurozone is the Eurosystem.
  • It consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.

Capital Markets: Challenges and Developments

India VIX Index


From UPSC perspective, the following things are important :

Prelims level : India VIX Index

Mains level : Impact of coronovirus outbreak on Economy

The  India VIX Index, an indicator of the volatility of the stock market has been plunging after the outbreak of novel coronavirus.

What is Volatility Index?

  • Volatility Index is a measure of the market’s expectation of volatility over the near term.
  • Volatility is often described as the “rate and magnitude of changes in prices” and in finance often referred to as risk.
  • It is a measure, of the amount by which an underlying Index is expected to fluctuate, in the near term, (calculated as annualized volatility, denoted in percentage e.g. 20%) based on the order book of the underlying index options.

India VIX Index

  • India VIX is a volatility index based on the NIFTY Index Option prices.
  • From the best bid-ask prices of NIFTY Options contracts, a volatility figure (%) are calculated which indicates the expected market volatility over the next 30 calendar days.
  • “VIX” is a trademark of Chicago Board Options Exchange, Incorporated (“CBOE”) and Standard & Poor’s.
  • The firm has granted a license to NSE to use such mark in the name of the India VIX and for purposes relating to the India VIX.

Capital Markets: Challenges and Developments

Short Selling of Stocks


From UPSC perspective, the following things are important :

Prelims level : Short selling of stocks

Mains level : Stock prices volatility: Various causative factors

The stock exchanges have clarified that the Securities and Exchange Board of India (SEBI) was not considering any proposal regarding a ban on short selling to curb the ongoing volatility and equity sell-off.

What is Short Selling?

  • Short-selling allows investors to profit from stocks or other securities when they go down in value.
  • In order to do a short sale, an investor has to borrow the stock or security through their brokerage company from someone who owns it.
  • The investor then sells the stock, retaining the cash proceeds.
  • The short-seller hopes that the price will fall over time, providing an opportunity to buy back the stock at a lower price than the original sale price.
  • Any money left over after buying back the stock is profit to the short-seller.

When does short-selling makes sense?

  • Most investors own stocks, funds, and other investments that they want to see rise in value.
  • Over time, the stock market has generally gone up, albeit with temporary periods of downward movement along the way.
  • For long-term investors, owning stocks has been a much better bet than short-selling the entire stock market.
  • Sometimes, though, you’ll find an investment that you’re convinced will drop in the short term (as in case of COVID 19 outbreak).
  • In those cases, short-selling can be the easiest way to profit from the misfortunes that a company is experiencing.
  • Even though short-selling is more complicated than simply going out and buying a stock, it can allow making money when others are seeing their investment portfolios shrink.

The risks of short-selling

  • Short-selling can be profitable when one makes the right call, but it carries greater risks than what ordinary stock investors experience.
  • When we buy a stock, the most we can lose is what you pay for it. If the stock goes to zero, we suffer a complete loss, but will never lose more than that.
  • By contrast, if the stock soars, there’s no limit to the profits one can enjoy. With a short sale, however, that dynamic is reversed.


  • For instance, say you sell 100 shares short at a price of $10 per share. Your proceeds from the sale will be $1,000.
  • If the stock goes to zero, you’ll get to keep the full $1,000. However, if the stock soars to $100 per share, you’ll have to spend $10,000 to buy the 100 shares back.
  • That will give you a net loss of $9,000 — nine times as much as the initial proceeds from the short sale.

Capital Markets: Challenges and Developments

The circuit breaker in the stock market

The stock markets in India are witnessing historic single-day falls with an increase in the number of COVID-19 cases.  Since the indexes plunged more than 10 per cent each day earlier, a circuit breaker was triggered for the first time since 2009 halting trading.

What are circuit breakers?

  • In June 2001, the SEBI implemented index-based market-wide circuit breakers.
  • Circuit breakers are triggered to prevent markets from crashing, which happens when market participants start to panic induced by fears that their stocks are overvalued and decide to sell their stocks.
  • This index-based market-wide circuit breaker system applies at three stages of the index movement, at 10, 15 and 20 per cent.
  • When triggered, these circuit breakers bring about a coordinated trading halt in all equity and equity derivative markets nationwide.


Capital Markets: Challenges and Developments

AT-1 bonds


From UPSC perspective, the following things are important :

Prelims level : AT-1 Bonds

Mains level : Read the attached story

India’s fourth-largest private lender YES bank was placed under a moratorium by RBI and its perpetual debt additional tier-1 (AT1 bonds) would become worthless if RBI does ask mutual funds to write down their value.

What are AT1 bonds?

  • AT-1, short for Additional Tier-1 bonds, are a type of unsecured, perpetual bonds that banks issue to shore up their core capital base to meet the Basel-III norms.
  • AT-1 bonds are complex hybrid instruments, ideally meant for institutions and smart investors who can decipher their terms and assess if their higher rates compensate for their higher risks.
  • They carry a face value of ₹10 lakh per bond.
  • There are two routes through which retail folk have acquired these bonds — initial private placement offers of AT-1 bonds by banks seeking to raise money; or secondary market buys of already-traded AT-1 bonds based on recommendations from brokers.

Why are they important?

AT-1 bonds have several unusual features lurking in their fine print, which make them very different from plain bonds.

  • One, these bonds are perpetual and carry no maturity date. Instead, they carry call options that allow banks to redeem them after five or 10 years. But banks are not obliged to use this call option and can opt to pay only interest on these bonds for eternity.
  • Two, banks issuing AT-1 bonds can skip interest payouts for a particular year or even reduce the bonds’ face value without getting into hot water with their investors, provided their capital ratios fall below certain threshold levels. These thresholds are specified in their offer terms.
  • Three, if the RBI feels that a bank is tottering on the brink and needs a rescue, it can simply ask the bank to cancel its outstanding AT-1 bonds without consulting its investors. This is what has happened to YES Bank’s AT-1 bond-holders who are said to have invested ₹10,800 crore.

Capital Markets: Challenges and Developments

Dividend Distribution Tax (DDT)


From UPSC perspective, the following things are important :

Prelims level : DDT

Mains level : Not Much


Finance Minister announced abolition of DDT to be paid by companies in her budget speech.

What is DDT?

  • A dividend is a return given by a company to its shareholders out of the profits earned by the company in a particular year.
  • Dividend constitutes income in the hands of the shareholders which ideally should be subject to income tax.
  • However, the income tax laws in India provide for an exemption of the dividend income received from Indian companies by the investors by levying a tax called the DDT on the company paying the dividend.

Who were required paid DDT?

  • Any domestic company which is declaring/distributing dividend is required to pay DDT at the rate of 15% on the gross amount of dividend as mandated under Section 115O of the Income Tax Act.
  • DDT was also applicable on mutual funds.

Why it is scrapped?

  • Every MNE investing in India is faced with the question of tax-efficient repatriation of profits that accumulate here.
  • The dividend that the holding company would receive would have already suffered substantial tax in India, although indirectly.
  • The foreign company would normally be required to pay tax on the dividend so received in its home jurisdiction.
  • DDT being a tax in the Indian company and the foreign company not paying taxes directly on such dividend income in India, it would not be able to claim foreign tax credit in its home jurisdiction.
  • This resulted in a double whammy for foreign companies as, at a group level, they suffered double taxation.

Capital Markets: Challenges and Developments

InvITs and REITs


From UPSC perspective, the following things are important :

Prelims level : InvITs and REITs

Mains level : Not Much


Markets regulator SEBI has put in place a framework for the rights issue of units by listed REIT and InvITs.

What are InvITs and REITs?

Infrastructure Investment Trusts (InvIT)

  • An Infrastructure Investment Trust (InvITs) is like a mutual fund, which enables direct investment of small amounts of money from possible individual/institutional investors in infrastructure to earn a small portion of the income as return.
  • InvITs work like mutual funds or real estate investment trusts (REITs) in features.
  • InvITs can be treated as the modified version of REITs designed to suit the specific circumstances of the infrastructure sector.
  • They are similar to REIT but invest in infrastructure projects such as roads or highways which take some time to generate steady cash flows.

Real Estate Investment Trusts (REIT)

  • A REIT is roughly like a mutual fund that invests in real estate although the similarity doesn’t go much further.
  • The basic deal on REITs is that you own a share of property, and so an appropriate share of the income from it will come to you, after deducting an appropriate share of expenses.
  • Essentially, it’s like a group of people pooling their money together and buying real estate except that it’s on a large scale and is regulated.
  • The obvious pitch for a REIT is that it enables individuals to generate income and capital appreciation with money that is a small fraction of what would be required to buy an entire property.
  • However, the resemblance to either mutual funds or to owning property ends there.
  • According to Indian regulation on REITs, these are meant to primarily own finished and rented out commercial properties –– 80 per cent of the investments must be in such assets. That excludes a real estate that is under development.

Why need InvITs and REITs?

  • Infrastructure and real estate are the two most critical sectors in any developing economy.
  • A well-developed infrastructural set-up propels the overall development of a country.
  • It also facilitates a steady inflow of private and foreign investments, and thereby augments the capital base available for the growth of key sectors in an economy, as well as its own growth, in a sustained manner.
  • Given the importance of these two sectors in the country, and the paucity of public funds available to stimulate their growth, it is imperative that additional channels of financing are put in place.

What did SEBI rule?

  • SEBI said the issuer will have to disclose objects of the issue, related-party transactions, valuation, financial details, review of credit rating and grievance redressal mechanism in the placement document.
  • The SEBI had first notified REITs and InvIT Regulations in 2014, allowing setting up and listing of such trusts which are popular in some advanced markets.

Capital Markets: Challenges and Developments

[op-ed of the day] Revisiting the NBFC Crisis


From UPSC perspective, the following things are important :

Prelims level : Types of NBFC.

Mains level : Paper 3- NBFC crisis.


While India was trying to deal with the problems arising out of the large NPA accumulated by the commercial banks, the Indian financial sector was dealt with another blow in the form of the NBFC crisis.

Effects of IL&FS and DHFL collapse:

  • Balance sheets affected: The collapse of these two big entities affected the balance sheets of banks and mutual fund companies.
  • Credit crunch: It also resulted in a credit crunch that dampened demand and pushed a slowing economy towards recession.
  • Tarnished image of NBFCs: Being leaders in the industry, their failure has tarnished the image of the NBFC sector as a whole.

Types of NBFCs and their numbers

  • Total number: As of September 2019 there were a total 9,642 NBFCs in India.
  • Deposit-taking NBFC (NBFCs-D): Only 82 of India’s NBFCs were deposit-taking institutions (NBFCs-D) permitted to mobilise and hold deposits.
  • Non-deposit taking NBFCs (NBFCs-ND): The rest of the NBFCs which are not deposit-taking, are categorised as non-deposit taking NBFCs.
    • They did not have access to the savings of ordinary households.
    • For this reason, the majority of these institutions were not considered to be entities that needed strict regulation
  • Systematically important (NBFCs-ND-SI): Of a large number of non-deposit taking NBFCs (NBFCs-ND), only 274 were identified as being systematically important (NBFCs-ND-SI), by virtue of having an asset size of ₹500 crores or more.

Significance of NBFCs as expressed by assets holdings

  • A significant player in the financial markets: As at the end of March 2019, these two sets-NBFCs-D and NBFC-ND-SI- held assets that amounted to almost a fifth of that held by the scheduled commercial banks.
    • This made them significant players in the web of credit, as well as large enough as a group to affect the health of the financial sector.
  • Non-deposit taking NBFCs must rely on resources garnered from the “market,” including the banking system, besides the market for bonds, debentures, and short-term paper.
  • Extension of financial entities: Individual investors would only be marginally involved in direct investment in these instruments.
    • So, the NBFCs are essentially extensions of the activity of other financial entities such as banks, insurance companies, and mutual funds.

Concentrated lending by NBFCs

  • Industry getting lion’s share: Industry accounted for the biggest chunk of lending, amounting to 57% of gross advances in September 2019.
    • Much of this lending to industry went to the infrastructural sector.
  • At second place-retail sector: A second major target for lending by the NBFCs was the retail sector, with retail loans accounting for 20% of gross advances.
    • Within the retail sector, vehicle/auto loans accounted for as much as 44% of loans.

What went wrong?

  • Diversification by commercial banks: Following a surge in capital flows into India which began in 2004, banks were flush with liquidity.
    • Under pressure to lend and invest to cover the costs of capital and intermediation and earn a profit, banks were looking for new areas into which they could move
    • Increase in retail lending by banks: The pressure resulted in a significant increase in retail lending, with lending for housing, automobiles and consumer durables.
    • There was also a substantial increase in lending to the infrastructural sector and commercial real estate.
  • Why NBFCs flourished even in the face of competition by banks? What the growth of the NBFCs indicates is that banks were unable to exhaust the liquidity at their disposal.
    • Banks were also unable to satisfy the potential for lending to these sectors, providing a space for NBFCs to flourish.
  • The willingness of NBFCs suited the banks: The willingness of the NBFCs to enter these areas suited the banks in two ways.
    • First, it permitted the banks to use their liquidity even when they themselves were stretched and could not discover, scrutinise and monitor new borrowers.
    • Banks could lend to the NBFCs, which could then take on the tasks associated with expanding the universe of borrowers to match the increased access to liquid funds.
    • The second was that it helped the banks to move risks out of their own books.
  • Short term lending to NBFCs, and long-term lending by NBFCs: Banks accepts short term deposits, so there is limit in their ability to lend that short term deposits as a long term debt.
    • On the other hand, these were the sectors to which additional credit could be easily pushed.
    • Lending to NBFCs that in turn lent to these sectors, appeared to be a solution to the problem.
    • Bank lending to the NBFCs was short term, and the latter used these short-term funds to provide long-maturity loans
    • NBFCs expected that they would be able to roll over much of these loans so that they were not capital short.
    • Role of rating agencies: What they needed for the purpose were ratings that ranked their instruments as safe.
    • The ratings companies were more than willing to provide such ranks.
  • The two risks involved in this model: The NBFC-credit build-up was an edifice that was burdened with two kinds of risks.
    • First risk: A possible default on the part of borrowers.
    • The probability of which only increases as the universe of borrowers is expanded rapidly to exhaust the liquidity at hand.
    • The second risk: The second was the possibility that developments in the banking sector and other segments of the financial sector would reduce the appetite of these investors for the debentures, bonds and commercial paper issued by the NBFCs
    • Since the NBFCs banked on being able to roll-over short-term debt to sustain long-term lending.
    • A slowdown in or halt to the flow of funds would lead to a liquidity crunch that can damage the balance sheet of these institutions.
  • Which of the two risks is involved in the present crisis? The crisis that affected the NBFCs was a result of both kinds of setbacks.
    • First setback: Loans to areas like infrastructure, commercial real estate and housing went bad.
    • Second setback: With the non-performing assets problem in the commercial banking sector curtailing their access to bank lending.
  • Why the problem turned systemic? Given the importance of ratings and “image” in ensuring access to capital, some firms with the requisite image were able to mobilise large sums of capital and expand their business.
    • When entities like that go bust, the response of lenders and investors to the event tends to be drastic, with systemic effects on the sector as a whole.


The episode was a shadow banking crisis that has had far-reaching consequences for the economy as a whole. Therefore, its high time that measures are taken to avoid the occurrence of such a crisis in the future.

Capital Markets: Challenges and Developments

[pib] Bharat Bond Exchange Traded Fund (ETF)


From UPSC perspective, the following things are important :

Prelims level : Bharat Bond Exchange Traded Fund (ETF)

Mains level : Not Much

The Union Cabinet has given its approval for creation and launch of Bharat Bond Exchange Traded Fund (ETF).

Bharat Bond ETF

  • Bharat Bond ETF would be the first corporate Bond ETF in the country.
  • It aims to create an additional source of funding for Central Public Sector Undertakings (CPSUs) Central Public Sector Enterprises (CPSEs), Central Public Financial Institutions (CPFIs) and other Government organizations.
  • ETF will be a basket of bonds issued by CPSE/CPSU/CPFI/any other Government organization Bonds.
  1. Tradable on exchange
  2. Small unit size Rs 1,000
  3. Transparent NAV (Periodic live NAV during the day)
  4. Transparent Portfolio (Daily disclosure on website)
  5. Low cost (0.0005%)

Bharat Bond ETF Structure:

  • Each ETF will have a fixed maturity date
  • The ETF will track the underlying Index on risk replication basis, i.e. matching Credit Quality and Average Maturity of the Index
  • Will invest in a portfolio of bonds of CPSE, CPSU, CPFI or any other Government organizations that matures on or before the maturity date of the ETF
  • As of now, it will have 2 maturity series – 3 and 10 years. Each series will have a separate index of the same maturity series.

Index Methodology

  • Index will be constructed by an independent index provider – National Sock Exchange
  • Different indices tracking specific maturity years – 3 and 10 years

Benefits to investors

  • Bond ETF will provide safety (underlying bonds are issued by CPSEs and other Government owned entities), liquidity (tradability on exchange) and predictable tax efficient returns (target maturity structure).
  • It will also provide access to retail investors to invest in bonds with smaller amount (as low as Rs. 1,000) thereby providing easy and low-cost access to bond markets.
  • This will increase participation of retail investors who are currently not participating in bond markets due to liquidity and accessibility constraints.
  • Tax efficiency compared to Bonds as coupons from the Bonds are taxed at marginal rates. Bond ETFs are taxed with the benefit of indexation which significantly reduces the tax on capital gains for investor.

Benefits for CPSEs

  • Bond ETF would offer CPSEs, CPSUs, CPFIs and other Government organizations an additional source of meeting their borrowing requirements apart from bank financing.
  • It will expand their investor base through retail and HNI participation which can increase demand for their bonds. With increase in demand for their bonds, these issuers may be able to borrow at reduced cost thereby reducing their cost of borrowing over a period of time.
  • Further, Bond ETF trading on the exchange will help in better price discovery of the underlying bonds.
  • Since a broad debt calendar to assess the borrowing needs of the CPSEs would be prepared and approved each year, it would inculcate borrowing discipline in the CPSEs at least to the extent of this investment.

Capital Markets: Challenges and Developments

Bharat 22 ETF


From UPSC perspective, the following things are important :

Prelims level : Bharat 22

Mains level : Disinvestment processes in India

  • The Further Fund Offer 2 (FFO 2) of Bharat 22 Exchange-Traded Fund (ETF), which is part of the government’s divestment programme, will be open for subscription for investors.

Bharat 22

  • Bharat 22 is an ETF that will track the performance of 22 stocks, which the government plans disinvest.
  • The ETF unit represents a slice of the fund, issued units are listed on exchanges for anyone to buy or sell at the quoted price.
  • The B22 will span six sectors, such as basic materials, energy, finance, FMCG, industrials and utilities.
  • Besides public sector banks, miners, construction companies, and energy majors, the ETF will also include some of the government’s holdings in SUUTI (Specified Undertaking of Unit Trust of India).
  • The B22 ETF will be managed by ICICI Prudential AMC while Asia Index will be the index provider.
  • The index will be rebalanced annually.

About Exchange Traded Funds (ETFs)

  • ETFs are mutual funds listed and traded on stock exchanges like shares.
  • The ETF simply copies an index and endeavors to accurately reflect its performance.
  • In an ETF, one can buy and sell units at a prevailing market price on a real-time basis during market hours.
  • There are four types of ETFs already available — Equity ETFs, Debt ETFs, Commodity ETFs and Overseas Equity ETFs.
  • The Bharat 22 ETF to be offered now allows the Government to park its holdings in selected PSUs in an ETF and raise disinvestment money from investors at one go.

Capital Markets: Challenges and Developments

[op-ed snap] Go easy on the public float rule


From UPSC perspective, the following things are important :

Prelims level : Nothing much

Mains level : Budget decision on public shareholding and its impact

The government’s budget decision to raise the minimum public shareholding in listed companies to 35% from 25% has worried the markets.


  1. The number of companies that would be affected by this proposal is quite large. As many as 1,100 listed companies currently have a promoter stake of more than 65% – reduction to the prescribed limit could entail as much as a trillion rupees worth of share sales.
  2. This may lead the promoters to rush through the sales at low prices since share prices are mostly in a slump. 
  3. A slowdown in the economy and a pullout by foreign investors are also pressuring markets.

Way ahead

  1. Defer the implementation of the proposal to a day when the economy is in better shape
  2. Companies should be allowed a few years to comply so that fire sales are avoided. This way, promoters would get the best value for their shares. It will ensure markets face the least disruption.

Capital Markets: Challenges and Developments

[op-ed snap] Rupee matters


From UPSC perspective, the following things are important :

Prelims level : Offshore trading

Mains level : Impact of offshore trading on rupee


Over the past few years, there has been a concern over the sharp rise in offshore rupee trading volumes. 


  1. Data from the Bank of International Settlements pegs daily offshore rupee trading at around $16 billion in 2016, almost equal to onshore trading. 
  2. Recent data from the Bank of England pegs offshore rupee trades at $23 billion in 2018.


  1. This indicates greater investor interest in the rupee


  1. Which forces determine the rupee’s value?
  2. What is the ability of the central bank to ensure “currency stability”?
  3. Offshore markets allow participants to trade in non-convertible currency. These markets have evolved for currencies where restrictions are imposed in domestic markets on foreign exchange convertibility.
  4. The constraints on foreign participation in domestic currency markets stem from cumbersome documentation and KYC requirements, restrictions on products, inconvenient trading hours. These restrictions push investors into the trade offshore markets to hedge their currency risks.
  5. These markets have begun to play a critical role in “price discovery”, more so during “periods of uncertainty” like the taper tantrum in 2013 and 2018 emerging market crises — when the offshore market was driving the onshore exchange rate. This has reduced the efficacy of foreign currency intervention by the central bank.


  1. Incentivize market participants to shift to onshore markets, like extending onshore market hours, examining issues of taxation.
  2. Allowing market participants to take exposure up to $100 million, without any need to establish the existence of an underlying risk 
  3. Incentivize greater participation in rupee-denominated bonds
  4. As the economy grows, expand onshore currency markets in a calibrated manner
  5. The ability to hedge currency risks will increase the rupee’s attractiveness for trade invoicing and portfolio diversification

This can lead to the gradual internationalization of the currency.

Capital Markets: Challenges and Developments

Explained: Overseas Bond


From UPSC perspective, the following things are important :

Prelims level : Overseas bond

Mains level : Financial implications of Overseas bonds


  • Finance Minister announced in her Budget speech plans to raise a portion of its gross borrowing from overseas markets.
  • The government and the RBI will reportedly finalise the plans for the overseas issue of sovereign bonds by September.
  • While several commentators have argued that this is a risky move, the government itself is convinced that it will help boost private investment in the country.


  • A bond, also known as a fixed-income security, is a debt instrument created for the purpose of raising capital.
  • They are essentially loan agreements between the bond issuer and an investor, in which the bond issuer is obligated to pay a specified amount of money at specified future dates.

Overseas Bond

  • A government bond or sovereign bond is a form of debt that the government undertakes wherein it issues bonds with the promise to pay periodic interest payments and also repay the entire face value of the bond on the maturity date.
  • So far, the government has only issued bonds in the domestic market.
  • According to FM, India’s sovereign external debt to GDP ratio is among the lowest around the world, at less than 5%.
  • Against this background, the government will start raising a part of its gross borrowing programme in external markets in external currencies.

Why issue such bonds?

  • Government borrowing is at such a level that there are not enough funds available for the private sector to adequately meet its credit and investment needs.
  • If the private sector cannot borrow adequately, then it cannot invest as it wants to, and that cripples one major engine of economic growth.
  • Government borrowing accounts for about 80-85% of domestic savings.
  • The overseas borrowing programme allows the government to maintain its gradual reduction of the fiscal deficit.
  • Borrowing overseas allows the government to raise funds in such a way that there is enough domestic credit available for the private sector.

Pricing of the bonds

  • The appetite of the international market for Indian bonds and their price will say a lot about how India is viewed globally on the risk factor.
  • For example, if the rate at which India can borrow overseas is low, then this would mean the global market assigns a low risk to India defaulting.

Risks associated

  • Several economists have expressed their concerns over the fact that India might follow the path of some Central and South American countries such as Mexico and Brazil.
  • In the 1970s, several of these countries borrowed heavily overseas when the global market was flush with liquidity.
  • But then, when their currencies depreciated sharply a decade later, these countries were in big trouble as they could not repay their debt.
  • India is not likely to be viewed as a risky proposition by the international market and so is likely to fetch an attractive rate for the bonds.

I. Limitations on borrowing

  • Cheap and plentiful funds should not encourage the government to borrow too heavily from abroad.
  • Another risk to India from overseas borrowings is that this would lead to a quicker increase to its foreign exchange reserves, which would lead to a stronger rupee at a time when it is already appreciating against the dollar.
  • This would be an adverse outcome.

II. Uncontrolled Imports

  • A stronger rupee would encourage imports at a time when the government is trying to curb them, and discourage exports at a time when they are being encouraged.
  • On the other hand, rupee depreciation for whatever external reason would prove even more disastrous as it would make it far more expensive for India to repay its external debt.

III. Less Control over Inflation

  • Another problem with an overseas bond issue is that the government would not be able to inflate itself out of trouble.
  • That is, in the domestic market, if the government does ever reach the stage where it is finding it difficult to repay its debt, it can simply print more money, let inflation rise quickly and repay its debt.
  • This is not an option in an overseas bond issue. The Indian government cannot print foreign currency to repay its debt.

IV. Impact on Domestic market

  • According to the government’s own reasoning, there are not enough funds in the domestic market to cater to its needs as well as those of the private sector.
  • This shallowness of the bond market is not a good thing, especially at a time when the government needs the bond market to finance several of its commitments.
  • The Ujwal Discom Assurance Yojana (UDAY) scheme, for example, involves State governments taking over the debt of State power distribution companies and issuing bonds to repay that debt.
  • A shallow bond market would make it difficult for the government to expand any of these schemes.


  • Ideally, the government should have enough revenue that it does not need to borrow as much.
  • However, at a time when both direct and indirect tax collections have disappointed, the government is forced to borrow to finance its expenditure.
  • In such a scenario, it is a welcome move for the private sector that the government is leaving it room to borrow in the domestic market.

Capital Markets: Challenges and Developments

SEBI, MCA sign pact for more data scrutiny


From UPSC perspective, the following things are important :

Prelims level : Not Much

Mains level : Curbing corporate frauds

  • The Securities and Exchange Board of India (SEBI) and the Ministry of Corporate Affairs (MCA) signed a MoU to facilitate seamless sharing of data and information for carrying out scrutiny, inspection, investigation and prosecution.

A move for data scrutiny

  • The MCA has the database of all registered firms while SEBI only regulates listed entities that may have unlisted subsidiaries, with the MCA having access to all the data of such unlisted entities.
  • The MoU comes in the wake of increasing need for surveillance in the context of corporate frauds affecting important sectors of the economy.
  • As the private sector plays an increasingly vital role in economic growth, the need for a robust corporate governance mechanism becomes the need of the hour.

Impact of the MoU

  • Incidentally, there is already a protocol of sharing of data between the capital markets regulator Ministry and, in many cases; the regulator has also sent its orders against various entities to the MCA for further action.
  • The MoU will facilitate the sharing of data and information between the regulator and the MCA on an automatic and regular basis.
  • It will enable sharing of specific information such as details of suspended companies, delisted firms, shareholding pattern from the SEBI and financial statements filed with the Registrar by corporates, returns of allotment of shares and audit reports relating to corporates.
  • The MoU will ensure that both the MCA and the SEBI have seamless linkage for regulatory purposes.
  • In addition to regular exchange of data, the two will also exchange with each other, on request, any available information for scrutiny, inspection, investigation and prosecution.
  • A Data Exchange Steering Group will meet periodically to review the data exchange status.

Capital Markets: Challenges and Developments

[op-ed snap] Deserved penalty


From UPSC perspective, the following things are important :

Prelims level : SEBI

Mains level : SEBI's imposition of fine on NSE will restire invetor's confidence in the market.


The Securities and Exchange Board of India (SEBI) last week ordered the National Stock Exchange of India (NSE) to pay a fine of about ₹1,000 crore within 45 days for its supervisory laxity that led to some of its broker-clients gaining preferential access to certain market data.

Details of order

1.Payback from NSE Chiefs – Two former NSE chiefs have been ordered to pay back a part of their past salaries as punishment for their failure to ensure that the exchange was fully compliant with all provisions of the norms governing securities exchanges.

2.Use of tick by tick protocol is responsible for data breach – In its order, SEBI noted that the NSE’s use of the tick-by-tick server protocol had allowed certain high-frequency trading firms using the exchange’s secondary server to receive important market data before other market participants, who were thus put at a disadvantage.

3.Doubts regarding market fairness – While it has not yet been proven decisively that the firms with preferential access to data from the exchange managed to profit from such data, the episode raised serious questions about market fairness.

4.No fraudulent activity but lack of diligence – SEBI ruled that it did not find sufficient evidence to conclude that the NSE committed a fraudulent act, but was unequivocal in ruling that the Exchange had failed to exercise the necessary due diligence to ensure that it served as a fair marketplace.

5.Switch to new data system worked in favour – The fact that the NSE had opted to switch to a new data transmission system, which relays data to all market participants at the same time, prior to a whistle-blower’s complaint in 2015 may have worked in the NSE’s favour.

The relevance of the verdict

1.Relief to stock exchange –

  • Despite the sizeable fine that it imposes on the NSE, the SEBI verdict must surely come as a relief to the erring stock exchange for at least two reasons.
  • First, the fact that it has not been found to have intentionally favoured certain market players over others should help it retain investor confidence.
  • Also, the exchange, which had been barred from proceeding with its initial public offering during the pendency of the SEBI probe, will now finally be able to tap the capital markets to fund its growth, after a six-month moratorium.

2.Welcome regulatory Action

  • While there is bound to be debate about the magnitude of the fine, overall the financial penalty is a welcome regulatory action.
  • Millions of investors choose to do their trading on market platforms like the NSE every year in the belief that the marketplace offers an equitable environment to carry out their trades.


As the markets regulator, SEBI must deal with breaches of their supervisory brief by exchanges in an exemplary manner to ensure that small investors retain confidence in the fairness and soundness of key institutions that enable a market economy.

Capital Markets: Challenges and Developments

[pib] Investor Education and Protection Fund (IEPF)


From UPSC perspective, the following things are important :

Prelims level : IEPF

Mains level : Investers education

  • In a major success, the IEPF Authority has been able to enforce a company to transfer deposits worth about Rs 1514 Cr to IEPF.
  • This depositor’s money was pending with the company for the last 15 years.

Investor Education and Protection Fund (IEPF)

  • IEPF is a fund where unclaimed dividend, refunded application money, matured company deposits and debentures, as well as the interest on them, is used, provided it is not claimed within seven years.
  • It is a fund set up under the Ministry of Corporate Affairs to help promote investor awareness and protection of investor interests.

About IEPF Authority

  • IEPF Authority has been set up under the Ministry of Corporate Affairs, Government of India as a statutory body under Companies Act 2013 to administer the IEPF with the objective of promoting Investor’s Education, Awareness and Protection.
  • The Authority takes various initiatives to fulfil its objectives through Investor Awareness Programmes and various other mediums like Print, Electronic, Social Media, and Community Radio etc.
  • Secretary Ministry of the Corporate Affairs is the Chairperson of the Authority.
  • Joint Secretary Ministry of the Corporate Affairs is the Chief Executive Officer of the Authority.

Capital Markets: Challenges and Developments

[op-ed snap] Capital high


From UPSC perspective, the following things are important :

Prelims level : FDI,FPI

Mains level : Foreign Investment is high and how to maintain flow in Indian Economy


The inflow of foreign capital into India’s stock market in the month of March hit a high of $4.89 billion, the biggest foreign inflow into Indian stocks since February 2012.

Foreign Investment  Situation in India

  • Foreign investment in Indian equities stood at $2.42 billion in February, as against a net outflow of $4.4 billion during the same month a year earlier, and is expected to be strong in April as well.
  • Both cyclical and structural factors are behind this sudden uptick in foreign investment that has helped the rupee make an impressive comeback.
  • Last year, India received more foreign direct investment than China for the first time in two decades
  • While the Chinese economy has been slowing down considerably in the last one year, India has emerged as the fastest-growing major economy.


  • Other short-term reasons may also be behind some of the recent inflow of capital into the country.
  • For one, there is a sense among a section of investors that their fears of political instability are misplaced.
  • More important, there are clear signs that western central banks have turned dovish.
  • Both the Federal Reserve and the European Central Bank, for instance, have promised to keep interest rates low for longer.
  • This has caused investors to turn towards relatively high-yielding emerging market debt.
  • Indian mid-cap stocks, which suffered a deep rout last year, are now too attractive to ignore for many foreign investors.

Need for a cautious approach

  • The return of foreign capital is obviously a good sign for the Indian economy.
  • But policymakers need to be careful not to take foreign investors for granted.
  • Other emerging Asian economies will be competing hard to attract foreign capital, which is extremely nimble.
  • Any mistake by policymakers will affect India’s image as an investment destination.
  • To retain investor confidence, whichever government comes to power after the general election this summer will need to increase the pace of structural reforms and also ensure proper macroeconomic management with the help of the Reserve Bank of India.


  • Long-pending reforms to the labour and land markets are the most pressing structural changes that will affect India’s long-term growth trajectory.
  • The high fiscal deficit of both the Centre and the State governments and the disruptive outflow of foreign capital are the other macroeconomic challenges.
  • These are some issues that need to be solved sooner rather than later.

Capital Markets: Challenges and Developments

SEBI mulls SRO for investment advisers


From UPSC perspective, the following things are important :

Prelims level : SRO and its mandate

Mains level : Regulation of capital markets in India

  • The SEBI has proposed a self regulatory organisation (SRO) for the growing number of investment advisers to address issues related to the quality of advice given to investors by such entities.

What is Self Regulatory Organisation?

  • An SRO is the first-level regulator that performs the crucial task of regulating intermediaries representing a particular segment of securities market on behalf of the regulator.
  • An SRO would be seen as an extension of the regulatory authority of the SEBI and would perform the tasks delegated to it by the SEBI.
  • The role of an SRO is developmental, regulatory, related to grievance redressal and dispute resolution as well as taking disciplinary actions.

Why need SRO?

  • SEBI is in receipt of a large number of complaints alleging charging of exorbitant fees, assurance of returns, misconduct etc. by investment advisers.
  • Incidentally SEBI has said that there was a need for an SRO for mutual fund distributors — that currently register with Association of Mutual Funds in India (AMFI).
  • It was aimed to bring in consistency in industry practices and also to take disciplinary action against alleged malpractices such as mis-selling of products and churning of portfolio.

Expected functions

  • SEBI has proposed the strengthening of the existing regulatory framework for SROs by introducing features such as a governing board with public interest directors and a clear policy for arbitration and dispute resolution.
  • The regulator has proposed a governing board with at least 50% public interest directors along with 25% representation each of shareholder directors and elected representatives.
  • Further, the governing board can appoint a managing director or chief executive officer to manage the daily affairs of the SRO.

Capital Markets: Challenges and Developments

Systematic Investment Plan (SIP)


From UPSC perspective, the following things are important :

Prelims level : SIP

Mains level : Not Much

What is SIP?

  • A SIP is a way to invest in mutual funds wherein a fixed sum of money is put into a mutual fund scheme at a specified date every month.
  • It is considered to be investor-friendly and an efficient manner of investing in the capital markets as one can start investing with small monthly contributions instead of first building a huge investment corpus.
  • It is a hassle-free manner of investment as well since one can issue standing instructions to the bank for a specified amount to be transferred to the fund house/distributor every month at a pre-determined date.

How can one start a SIP?

  • There are two ways of starting an SIP. One can use the direct way of investing though the fund house or go through a distributor.
  • For direct plans, an investor can go to the website of the fund house for the scheme in which the SIP has to be started.
  • All the fund houses have a link on their portals for investors who want to start an SIP.
  • Typically, only the PAN and/or Aadhaar is needed to open an account.
  • Thereafter, one can select the scheme, SIP amount, starting date and duration of SIP.
  • If one opts for a distributor, then the same process can be done online on the distributor’s portal.

Benefits of a SIP

  • Timing the market is the most difficult thing when it comes to equity investment. SIPs, in a way, address this issue.
  • SIPs capture every rise and fall of the market and hence, an investor need not worry about the level of the market.

Capital Markets: Challenges and Developments

India’s first Real Estate Investment Trust subscribed 2.58 times


From the UPSC perspective, the following things are important:

Prelims level: REIT

Mains level: Not Much


  • The initial public offering (IPO) of India’s first Real Estate Investment Trust (Embassy REIT) was subscribed 2.5 times, with the share sale generating a demand of over Rs 5,300 crore.

What is REIT?

  • REITs provide a way for individual investors to earn a share of the income produced through commercial real estate ownership – without actually having to go out and buy commercial real estate.
  • It is a company that owns, and in most cases operates, income-producing real estate.
  • REITs own many types of commercial real estate, ranging from office and apartment buildings to warehouses, hospitals, shopping centers, hotels and timberlands.

How does it work

  • Unlike shares, investors in a REIT get units, somewhat similar to units in a mutual fund.
  • A REIT owns a number of rent-yielding commercial and hotel properties, and the unit-holders get a portion of this rental income in the form of dividend and interest income in proportion to their equity contribution.
  • It gives the investor an option to buy partial stake in rent-yielding commercial properties, with the benefit of a professional manager managing these assets.
  • Increase in rentals of underlying assets, improvement in occupancy rate and commencement of under construction properties are the growth drivers that an investor can
  • The net distributable cash flows of the Embassy REIT are based on the cash flows generated from the assets.
  • In terms of the REIT Regulations, at least 90 per cent of the net distributable cash flows are required to be distributed to the Embassy REIT.
  • The trust distributes the cash flow to unit-holders in the form of dividend and interest income, generally, once every quarter.

Associated risks

  • Since this is the first REIT issue, there is no comparable data in terms of pricing and attractiveness of the issue.
  • Real estate properties are always prone to litigation and operational challenges.
  • Even though its assets are in cities offering good rental clients, the rate of occupancy is always a critical factor.
  • Also, with future development of new office spaces in upcoming areas, the old buildings lose their charm and thereby their premium to get higher rental.
  • The management fee and operating expenses can rise, eating into the returns of investors. The biggest concern is the valuation of the units.
  • Since the Net Asset Value of the REIT is based on estimated future cash flows and certain assumptions, it is difficult to gauge the margin of safety for an investor.

Capital Markets: Challenges and Developments

[op-ed snap]Credit rating firms came under criticism from RBI


Mains Paper 3: Economy | Mobilization of resources

From the UPSC perspective, the following things are important:

Prelims level: Credit ratings

Mains level: Problems being faced due to credit rating sector in India & need for revamping the market structure for same.



Credit rating firms came under sharp criticism from the Reserve Bank of India (RBI) for failing to identify financial troubles in various companies, especially in the case of IL&FS.

Concerns over rating agencies
  • Inability to assess credit risk and take timely rating actions.
  • Ratings are supposed to be forward-looking, but they are always a laggard.
  • The central bank is said to have told credit ratings officials that the abrupt ratings downgrades in recent months have hurt investors and banks.
  • Credit Rating agencies have been criticised for being late in identifying the stress in the IL&FS Group, which defaulted on its loans from banks, mutual funds and provident funds.
  • Various debt mutual fund schemes saw erosion in their net asset values, or NAVs, because of the defaults.
  • The crisis soon spread to other non-banking finance companies — mainly housing finance — which have been struggling to sort out their asset-liability mismatches.
  • RBI said one third of the total NPAs (non-performing assets) in the system stemmed from investment grade ratings.
  • Total stressed assets are about Rs 12 lakh crore in the banking system.

Conflict of Interest

  • Globally, rating agencies limit themselves to ratings and research related to credit ratings.
  • All other businesses like market research, training, risk solutions are carried out under separate entities with no common directors, employees and shareholding from the rating entity.
  • In India, the same rating agency rates and provides valuation opinions to the same set of securities to investors like mutual funds and provides advisory services.
  • The central bank governor disapproved of the practice of “rating shopping”— where companies migrate from one rating agency to another for better ratings.
  • RBI was also concerned about issues such as rating agency CEOs being part of rating committees and rating advisors who promise better ratings to an issuer due to their special relationship with rating agencies.


  • RBI is examining the matter and along with Sebi, it will bring out regulations to address this.
  • Though credit rating agencies are registered with the capital market regulator Sebi, they are jointly regulated by both Sebi and RBI as these firms rate bank loans which constitute 70% of their business.
  • On short-term instruments like commercial paper, RBI feels that the ratings do not reflect the pricing these papers command.

Capital Markets: Challenges and Developments

[op-ed snap] Wiggle space: on SEBI’s new rules


Mains Paper 3: Economy | Mobilization of resources

From the UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: Need for better regulation of CRAs to maintain investor confidence in Indian markets



According to new regulations issued by the Securities and Exchange Board of India (SEBI), liquid mutual funds holding debt securities with a maturity term of more than 30 days will have to value these securities on a mark-to-market basis.

Changes in rules

  • Until now, liquid mutual funds could report the value of debt instruments with a maturity term of up to 60 days using the amortisation-based valuation method.
  • Only debt securities with a maturity term of over 60 days were to be valued on a mark-to-market basis. So the new rule seemingly narrows the scope for amortisation-based valuation.
  • Amortisation-based valuation, which is completely detached from the market price of the securities being valued, allowed mutual funds to avoid the volatility associated with mark-to-market valuation.


  • By exempting securities with a maturity period of up to 30 days from mark-to-market valuation, however, SEBI may be doing no favour to individual investors.
  • this helps avoid the volatility of mark-to-market accounting and the need to provide a fair account of the value of their investments.
  • What is likely is a decrease in the yields received on securities maturing in 30 days or less and an increase in the yields on debt instruments with a maturity period of 31 to 60 days.
  • It will, however, do nothing to make investors in mutual funds become more informed about the real value of their investments.

Contrast with earlier arrangements

  • The latest SEBI rules are also in direct contrast to the usual accounting practices when it comes to the valuation of securities.
  • Generally accepted accounting principles mandate securities with the least maturity to be reported on a mark-to-market basis while allowing the amortisation-based method to be employed to value other securities with longer maturity periods.
  • This makes sense as the profits and losses associated with securities with shorter terms are closer to being realised by investors when compared to longer-term securities.


  • SEBI would do well to mandate that all investments made by liquid mutual funds should be valued on a mark-to-market basis. Simultaneously, it should work on deepening liquidity in the bond market so that bond market prices can serve as a ready reference to ascertain the value of various debt securities.



Capital Markets: Challenges and Developments

Unregulated deposit schemes to be banned


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

From UPSC perspective, the following things are important:

Prelims level:  Particulars of the Bill, Ponzi Schemes,

Mains level: The new bill seeks to protect investors from rising instances of scams


  • The Union Cabinet has approved the official amendments to an Act that classifies any deposit scheme not registered with the government as an offence and bans it.
  • The Banning of Unregulated Deposit Schemes Bill 2018 was introduced in Parliament on July 18, 2018 and was referred to the standing committee.

Banning of Unregulated Deposit Schemes Bill, 2018

  1. The Bill contains a substantive banning clause which bans deposit takers from promoting, operating, issuing advertisements or accepting deposits in any unregulated deposit scheme.
  2. The amendment bill aims to effectively tackle the menace of illicit deposit-taking activities, and prevent such schemes from duping poor and gullible people of their hard-earned savings.
  3. The principle is that the bill would make the activities an offence ex-ante rather than the existing legislative-cum-regulatory framework which only comes into effect ex-post with considerable time lags.
  4. It bans deposit takers from promoting, operating, issuing advertisements or accepting deposits in any unregulated scheme.

Provisions of the Bill

  1. The Bill has adequate provisions for disgorgement or repayment of deposits in cases where such schemes nonetheless manage to raise deposits illegally.
  2. The Bill provides for attachment of properties/assets by the competent authority, and subsequent realization of assets for repayment to depositors.
  3. The Bill provides for “severe punishment and heavy pecuniary fines” to act as a deterrent.
  4. The penalties could involve jail term as well as the sale of the offenders’ assets to pay back the defrauded party within set timelines.

Definition of Deposit Takers

  • Deposit Takers include all possible entities (including individuals) receiving or soliciting deposits, except specific entities such as those incorporated by legislation.

Types of Offences

The Bill creates three different types of offences:

  • Running of unregulated deposit schemes,
  • Fraudulent default in regulated deposit schemes, and
  • Wrongful inducement in relation to unregulated deposit schemes.

Capital Markets: Challenges and Developments

[op-ed snap] Account aggregators and e-consent for credit markets


Mains Paper 3: Economic Development| Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

From UPSC perspective, the following things are important:

Prelims level: Basic knowledge of Public credit registry (PCR).

Mains level: The news-card analyses the issues and challenges in the establishment of a public credit registry (PCR), in a brief manner.


  • There has been demand by experts for the establishment of a public credit registry (PCR) in India.
  • According to them, building a robust and centralized credit information system will be able to bring transparency to the credit market that will allow borrowers to build up their “reputational collateral”, reward good borrowers and encourage credit discipline.

Issue with credit information system in India

  • India has a multiplicity of credit information repositories.
  • As a result, it is very difficult for lenders to form a comprehensive view of the indebtedness of potential borrowers as their credit information is dispersed across multiple entities.
  • Additionally, as the formats in which the data is required to be reported to each of these entities varies widely, there is no assurance about the quality of the data, even if it were to be aggregated.

Public Credit registry would remove these inconsistencies

  • A PCR that operates as the single point of mandatory reporting of credit information, would remove these inconsistencies.
  • And leading to improvements in data quality and offering a mechanism by which borrowers of all levels can establish the reputational collateral that is needed.
  • It would additionally allow lenders to distinguish between different types of borrowers, avoiding the pitfall of adverse selection where lenders overcharge low-risk borrowers and undercharge high-risk borrowers simply because they don’t have accurate data.

Establishing PCR: only one part of the solution

  • A registry of credit gives lenders an accurate snapshot of only the indebtedness of a borrower.
  • It provides no information as to that person’s financial assets.
  • In determining whether or not to grant a loan, lenders need to evaluate both the existing debt burden of the individual as well as the details of her financial asset portfolio to assure themselves that she will be able to service the loan.
  • At present, lenders meet this second requirement by asking for copies of bank statements and other financial assets of the borrower and then physically verifying the copies presented to them against original records.
  • The process is time-consuming and runs the risk of fraud.
  • What is required is a trusted, electronic system through which borrowers can provide lenders with verifiable information about their financial assets in an auditable, electronic format that is both accurate and up to date.

RBI’s Account aggregator infrastructure

  • It is with this in mind that the Reserve Bank of India is establishing the account aggregator infrastructure.
  • It is a digital architecture that offers borrowers a mechanism by which potential lenders can view their financial assets without compromising privacy and confidentiality.
  • Central to this construct is the account aggregator, a regulated third-party entity whose sole function will be to maintain and operate a trusted platform on which registered users can link details of their financial accounts, such as bank accounts, mutual funds and insurance accounts.

How this will work?

  • Whenever potential lenders need evidence of the financial assets of a potential borrower, they will have to issue an electronic request setting out details of the data sought and the purpose for which it will be used.
  • To limit the risk of over-consenting, lenders will only be able to request limited information for specified purposes using templates that have been designed keeping in mind principles of data minimization and purpose limitation.
  • Once this request has been received, the borrower can digitally consent to the specific request, thereby authorizing the account aggregator to extract the relevant information from the financial asset portfolio that has been linked.
  • Based on the authority of the digital consent artefact, the account aggregator will instruct the relevant financial institutions to issue digitally signed copies of the required information to the lender.


  • Some experts have aversion to an over-reliance on consent as a mechanism to safeguard privacy.
  • However, the electronic consent artefact contemplated in the account aggregator framework is not the same as the over-broad, confusingly worded terms of service that we most frequently encounter.
  • It is, to the contrary, a specific, one-time request for limited information, intended to be used for a clearly defined purpose.
  • As such, consent deployed in this manner is highly unlikely to be misconstrued and, as only a limited amount of data is provided, the risk of misuse is contained
  • As much as this construct achieves the objective of purpose limitation, there is no way to ensure that once financial data has been provided, the recipients will only use it for the purposes for which it was requested.


  • At present, there is no technological construct by which the data that has been provided using the account aggregator framework will automatically expire once its original purpose has been served.
  • Nothing stops lenders from retaining, and using, data long after its purpose is served.
  • It is for this reason that the account aggregator architecture needs to be firmly ensconced within an extended regulatory framework that imposes restrictions over and above that which is contained within the technological framework of the consent artefact.
  • While technology offers new means by which results can be achieved, it is critically important that we remember to ground these solutions in appropriately robust legal frameworks.

Capital Markets: Challenges and Developments

[op-ed snap] Rethinking the CRA regulatory framework


Mains Paper 3: Economy | Mobilization of resources

From the UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: Need for better regulation of CRAs to maintain investor confidence in Indian markets


New CRA framework by SEBI

  1. The Securities and Exchange Board of India (SEBI), in its continued effort to improve the functioning of credit rating agencies (CRAs), has come up with a fresh set of guidelines for enhanced disclosures on rating rationales
  2. SEBI has been actively trying to enhance regulations pertaining to CRAs, particularly post-2012
  3. The alleged slippage of India CRAs is a more recent phenomenon despite them having been around since 1990

Issuer pays model is the global norm

  1. The general criticism of ‘issuer pays’ model as the crux of CRA performance may be missing the complexity of the matter
  2. Globally, this model goes back to the 1970s
  3. As such, the evaluated-pays-the-evaluator model is not unique to CRAs
  4. Auditors and universities follow the same model

Need of principle-based approach by SEBI

  1. Sebi’s regulatory approach to CRAs has been more inclined to a rule-based approach as opposed to a principle-based approach
  2. Under a principle-based approach, the regulator states the desired outcome, leaving it to the regulated firms to figure out the steps they need to take to achieve the regulator-mandated end-state
  3. In a rule-based approach, the regulator specifies the action to be taken by the firms to be considered compliant

Firms prefer the rule-based approach

  1. Rule-based regulations, despite their appearance of regulatory micro-management, tend to be preferred by firms relative to principle-based regulations
  2. Firms prefer less ambiguity associated with the rule-based approach
  3. Additionally, they are relieved of the burden of proof of being compliant, as may be required in a principle-based approach

Risks from the rule-based approach

  1. Rule-based regulations assume a high degree of technical sophistication on the part of the regulator
  2. Besides, the regulator needs to have a well-articulated end objective
  3. This is different from having rules in response to a specific crisis since there is always a risk that the end objective becomes unclear if not non-existent
  4. It leaves the system exposed to more risks

Some steps that SEBI can take

  • Quantitative disclosure
  1. Rules should be such that they do not commoditize the CRAs’ offerings since the divergence of views/approaches across CRAs is critical for any well-functioning system
  2. The CRA may be required to publish the median values of the critical ratio of their choice, for a specific industry, across various rating levels and for the last five years
  3. This will allow an investor to compare whether the current rating is more or less stringent, and whether, over the period, the CRA’s standards have been consistent
  4. The objectivity and transparency of this numerical disclosure will go a long way towards building confidence in a rating
  • Enhanced transition matrix
  1. The transition matrix should track default rates over multiple years. Investors need to know the default rate of AAA/AA/A ratings over three to five years from issuance, and not just one year
  2. Withdrawn ratings should also be a category, and defaults occurring within one year of the rating being withdrawn should be included in the default study
  3. SEBI may consider independently calculating the default transition matrix by accessing data from a commercial credit bureau or Reserve Bank of India’s central repository of information on large credits database and not depend on the CRAs at all
  • Cursory disclosure of all ratings
  1. CRAs may be required to also summarily refer in the press release to the outstanding ratings of other CRAs for the same borrower and the previously withdrawn rating of the same borrower from other CRAs and the reason for the rating withdrawal
  2. The palpable reputation risk that errant CRAs will face may go a long way towards preventing rating shopping
  • Legal protection for CRAs
  1. Instances of Indian CRAs being sued by the company it rates, in a bid to prevent the rating downgrade, are not unknown
  2. The regulator should consider framing laws that allow CRAs to express their rating opinion without fear of being sued

Way forward

  1. If SEBI adopts a higher dose of principle-based regulations, it may set specific end-objectives
  2. For CRAs, it may be best to act and function in a way that the market’s faith in the quality of ratings is maintained
  3. This faith, in turn, will facilitate the development of the Indian bond market
  4. While SEBI may not suddenly turn to the principle-based approach, it may still achieve the end objective by fine-tuning its latest, well-intentioned guidelines

Capital Markets: Challenges and Developments

[op-ed snap] A much-needed revamp for rating agencies


Mains Paper 3: Economy | Mobilization of resources

From the UPSC perspective, the following things are important:

Prelims level: Credit ratings

Mains level: Problems being faced by the credit rating sector in India & need for revamping the market structure for same


Flaws in credit ratings

  1. The bonds of Infrastructure Leasing & Financial Services Ltd (IL&FS) were rated investment grade as late as July 2018
  2. The firm started defaulting on its debt in September
  3. IL&FS is not unique and it is found that firms that eventually default on their bank loans have an average rating somewhere between BB- and B+ one month before they default

Why does rating matter?

  1. According to Reserve Bank of India’s (RBI’s) capital norms, banks have to set aside more capital to cover for losses only if a firm’s rating goes below B-
  2. So, above B-, banks can allocate less capital to cover losses

Sources of the problems

  • Conflicts of interest from non-rating business
  1. To be effective, rating agencies have to be impartial judges of credit quality
  2. This is not possible if they have other non-rating businesses that they are marketing to the same corporates who they are rating
  • Issuer-pay model
  1. According to current practice, the borrower picks the rating agency that will rate their debt
  2. Thus, instead of an impartial judge, the rating agency is a seller trying to entice the buyer (the borrower) into buying its rating service
  3. Rating agencies will compete with one another to offer the best possible service
  4. Such rating shopping is formalized in some rating agency websites wherein the process of how a company can dispute its rating and obtain redressal is explained
  • Over-reliance on ratings in regulations
  1. The main source of power for the rating agencies are regulations that are tied to ratings
  2. For example, the Basel capital adequacy norms (which India has adopted) allow banks to decide on their capital allocation based on loan ratings
  3. Following India’s adoption of these norms, there has been a multifold increase in the number of firms with credit ratings
  4. Thus, regulators reward rating agencies with more business

Solutions to these problems

  • Rating agencies should be forced to divest from non-rating business
  1. This is an easy solution
  2. The Securities and Exchange Board of India (SEBI) is already trying to implement this
  • The regulator should pick the rating agency or greater disclosure
  1. The drastic solution is for a regulator (say RBI or SEBI) to pick the rating agency
  2. This can be easily automated with the help of a computer programme
  3. The programme will pick the agency randomly while ensuring a target market share for the different agencies
  4. The target market share, in turn, should depend on the accuracy of the ratings in the past
  5. Evaluating rating accuracy is easily done and the agencies do this on an annual basis already
  6. The target market shares should be decided in such a way that it rewards good performance and penalizes bad performance
  7. The less drastic solution is to encourage unsolicited ratings, and also to ensure that the borrowers disclose all ratings and not just the ratings they end up accepting
  8. This will give greater confidence to the rating agencies to tell the truth and not have to cater to the borrower
  • Provide alternatives to ratings
  1. One should try to reduce the reliance on ratings in regulation
  2. For example, banks should have a minimum amount of capital based on the total assets, and not just on risk-weighted assets
  3. This will reduce the importance of ratings for bank capital
  4. The RBI should also insist that bank borrowers obtain multiple ratings with the regulator picking the agency
  5. Competition combined with a reward for good performance will enhance the quality of ratings

SEBI introduces new norms

  1. SEBI has come out with new guidelines to improve the quality of disclosures made by credit rating agencies
  2. According to the new norms, credit rating agencies will have to inform investors about the liquidity situation of the companies they rate through parameters such as their cash balance, liquidity coverage ratio, access to emergency credit lines, asset-liability mismatch, etc
  3. Further, rating agencies will have to disclose their own historical rating track record by informing clients about how often their rating of an entity has changed over a period of time

Way forward

  1. Credit ratings for bank loans in India are a ticking time bomb
  2. With credit ratings threatening to disrupt markets, the systemic issues with rating agencies must be urgently fixed

With inputs from the editorial: Full disclosure: on the credit rating industry

Capital Markets: Challenges and Developments

RBI relaxes ECB norms for infra companies


Mains Paper 3: Economy | Effects of liberalization on the economy

From UPSC perspective, the following things are important:

Prelims level: ECBs, Hedging

Mains level: Factors affecting India’s BoP


  • The RBI has liberalized the norms governing foreign borrowings for infrastructure creation in consultation with the Government.

External Commercial Borrowings

  1. Lack of domestic capital and deficit in the current account compels any government to go after foreign capital.
  2. ECBs are loans in India made by non-resident lenders in foreign currency to Indian borrowers.
  3. They are used widely in India to facilitate access to foreign money by Indian corporations and PSUs.
  4. Most of these loans are provided by foreign commercial banks and other institutions. It is a loan availed of from non-resident lenders with a minimum average maturity of 3 years.
  5. The significance of ECBs their size in India’s balance of payment account. In the post reform period, ECBs have emerged a major form of foreign capital like FDI and FII.
  6. ECBs includes commercial bank loans, buyers’ credit, suppliers’ credit, securitized instruments such as Floating Rate Notes and Fixed Rate Bonds etc., credit from official export credit agencies and commercial borrowings from Multilateral Financial Institutions.

Advantages of ECBs 

  • ECBs provide opportunity to borrow large volume of funds
  • The funds are available for relatively long term
  • Interest rate are also lower compared to domestic funds
  • ECBs are in the form of foreign currencies. Hence, they enable the corporate to have foreign currency to meet the import of machineries etc.
  • Corporate can raise ECBs from internationally recognised sources such as banks, export credit agencies, international capital markets etc.

What’s new in the ECB norms?

  1. The minimum average maturity requirement for ECBs (external commercial borrowings) in the infrastructure space raised by eligible borrowers has been reduced to three years from earlier five years.
  2. Additionally, the average maturity requirement for mandatory hedging (an investment to reduce the risk of adverse price movements in an asset) has been reduced to five years from earlier ten years.

Raising Medium and Long term funds

  1. The move comes amid concerns surrounding the availability of funds following a liquidity squeeze and the difficulties being faced by non-bank lenders.
  2. This is especially for those facing asset liability issues due to heavy reliance on short term funding for long term assets.
  3. This, along with defaults by infra lender IL&FS, has hurt the credit markets.
  4. The relaxations in the ECB norms follow other moves by the RBI, including last week’s permission to banks to use credit enhancement to help NBFCs raise medium to long term funds.

Capital Markets: Challenges and Developments

Seychelles issues world’s 1st ‘Blue Bond’


Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Blue Bonds

Mains level: Viability of such Blue Bonds for India


  • Seychelles has raised 15 million dollars by offering the world’s first ‘Blue Bond,’ raised from investors to finance ocean-based projects, to expand its marine protected areas and boost its fisheries sector.

World’s First Blue Bond

  1. The blue bond was officially issued on October 9, ahead of the first-ever global conference on the blue economy, which will be held at the end of November in Kenya.
  2. It is partially guaranteed by a USD 5 million guarantee from the World Bank (IBRD) and is further supported by a USD 5 million concessional loan from the Global Environment Facility (GEF) which will partially cover interest payments for the bond.
  3. Proceeds from the bond will be utilised for the expansion of marine protected areas, improved governance of priority fisheries and the development of the Seychelles’ blue economy.
  4. Grants will be provided through the Blue Grants Fund and will be managed by the Seychelles’ Conservation and Climate Adaptation Trust (SeyCCAT).

Benefits of the Bond

  1. The Blue Bond is a part of an initiative that combines public and private investment to mobilise resources for empowering local communities and businesses.
  2. It is aimed to assist Seychelles in achieving a transition to sustainable fisheries and safeguarding oceans.

Capital Markets: Challenges and Developments

[op-ed snap] Avoiding the currency basket case


Mains Paper 3: Economy | Effects of liberalization on the economy

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: Need for internationalisation of the rupee


History of Indian currency

  1. The Indian rupee was once a multilateral currency, its usage prevalent across the Indian Ocean in places as varied as Java, Borneo, Macau, Muscat, Basra and Zanzibar
  2. The historic dhow trade ensured that the Gulf had a familiarity with the rupee for over five centuries
  3. The accession of George V to the throne in 1911, enshrining his rule of the British Raj, led to the issuance of a new rupee coin
  4. The colonial rupee leveraged the Mughal rupee’s popularity, facilitated by trading communities, migration and the Raj’s hegemony
  5. Even after Independence, Dubai and other Gulf states were using RBI-minted Gulf rupees until 1966

Why rupee use was discontinued?

  1. The devaluation of the Indian rupee in 1966, after the 1965 war, led to such nations switching to their own currencies
  2. Now, only Nepal and Bhutan regularly conduct bilateral trade with India in rupees

Change in value of the rupee

  1. This decline was precipitated by a variety of factors
  • wars with Pakistan and China
  • the adoption of Five Year Plans requiring foreign loans
  • political instability
  • the Oil Price Shock of 1973

Current trends influencing the value of the rupee

  1. Of late, the rupee has been declining given higher oil prices and FII outflows from stocks and bonds
  2. The ongoing U.S.-China trade war, Iran sanctions and further upward movement in oil prices will continue to test the rupee’s valuation

Options for stabilisation

  1. Overtly intervening in the forex market
  2. Selling non-resident Indian bonds (as last done in 2013)
  3. Conducting a sovereign bond issuance
  4. The rupee’s dependency on the U.S. dollar must be reduced

What can India do?

  1. India should consider formalising the rupee payment mechanism with friendly countries such as Russia, with a focus on reducing its overall current account deficit
  2. We must continue to guard against fiscal profligacy, with any slippage viewed negatively by the currency markets, further encouraging investors to flee Indian markets
  3. Industrial growth should be a priority as without having goods to sell, rupee swaps (say with Iran) will be difficult to institutionalise
  4. The formalisation of the Indian economy, by deterring black money transactions in the rupee, is also much needed

What should be India’s black money strategy?

  1. It should encourage tax rate rationalisation, reform vulnerable sectors, support a cashless economy and create effective and credible deterrence
  2. Administrative agreements with countries like the U.K. and Switzerland which can offer mutual tax sharing should be encouraged
  3. It is important to create a remittance database detailing company transfers out and NGO transfers into India, all reporting to the Financial Intelligence Unit (FIU)
  4. The Direct Tax Administration’s Directorate of Criminal Investigation should be provided the right IT training, infrastructure and funding to become an effective deterrent
  5. The audit cycles for income tax, service tax and excise tax departments should be aligned, helping the Large Taxpayer Unit (LTU) become more effective, increasing the scope of simultaneous scrutiny and examination

Need for internationalisation of the rupee

  1. The rupee is currently not even in the top 10 traded currencies
  2. While the Chinese yuan is increasingly being positioned for an alternative reserve currency through a variety of multilateral trades, institutions (the Belt and Road Initiative, the Asian Infrastructure Investment Bank) and swaps, the Indian rupee remains woefully behind in internalisation
  3. China campaigned hard for the inclusion of its currency in IMF’s benchmark currency basket in 2015, introducing a range of reforms to ensure that the yuan was considered as “freely usable”
  4. The RBI, meanwhile, has adopted a gradualist approach – allowing companies to raise rupee debt offshore, enabling the creation of “masala bonds” and allowing foreigners to invest in rupee debt onshore
  5. By these measures, the rupee has transformed from a largely non-convertible pegged currency before 1991 to a managed float

Way Forward

  1. Institutional resistance against rupee convertibility should be overturned
  2. To restore the rupee’s multilateral nature, we must unshackle its usage

Capital Markets: Challenges and Developments

[op-ed snap] Blended finance for meeting the SDGs


Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: Issues related to public financing and propsects of blended financing


Blended finance model

  1. Blended finance is in fashion in the development finance world
  2. It refers to the merging of public and private funds to maximize development impact
  3. t can be termed as a mechanism to reduce investment risks associated with things such as basic healthcare, energy access and livelihood for the poorest
  4. It is most often called upon in reference to meeting the sustainable development goals (SDGs) that countries valiantly agreed to in 2015

How can blended finance help?

  1. Blended finance can reduce investment risk
  2. It can enhance returns
  3. It can increase financial flows

Issues in the management of public and private capital

  • The way money is managed
  1. Most aid agencies need to spend their commitments in a given calendar/fiscal year as internal accounting systems disallow payables over time
  2. This means that any contract that entails future payments is prohibited
  3. Many agencies are thus unable to enter into forward contracts
  4. In reality, projects get delayed and cost overruns happen—particularly in the typically challenging markets that SDGs are relevant to
  5. By focusing only on spending fast, measuring impact and outcomes become secondary leading to the low development
  • The way money is monitored
  1. Public agencies, aid, in particular, focus on monitoring every dollar spent, whereas private funds monitor outcomes over a pre-agreed period of time and rely on audited financial reports as the benchmark for healthy financial management
  2. This perceived micromanagement distracts from focusing on the real outcomes of the investment and redirects often significant human resources into the production of micro-level financial reporting
  3. Rather than control the process, public agencies should set their ‘public benefits’ criteria upfront, and private entities should make those integral to normal financial reporting
  • The pricing of risk
  1. In commercial finance, the higher the risk, the higher the cost of capital
  2. In an ideally blended structure designed to cater to risky markets or make investments economical, public capital should bear a higher share of the risk—but at lower costs of capital
  3. However, in reality, public capital tends to be risk-averse
  • Handling failures
  1. While every private agency works to minimize failures, some degree of failure is inevitable when investing in new technologies, business models or untested markets
  2. Public monies are intrinsically risk-averse, to the point of zero tolerance when it comes to ‘failure’
  3. Unless some level of failure is permitted, innovative business models of types needed to meet the global goals are unlikely to emerge
  • Ideological difference between governments and businesses
  1. While the landscape is changing, many aid agencies still cannot fathom the idea that public monies will be used to enable private entities to make profits
  2. The longer this ideological difference remains, the harder it will be to develop large-scale solutions where public monies will be needed to mitigate the risk that private entities will not otherwise take

Way Forward

  1. The larger goal of blending is a noble one
  2. It is time that a common understanding was achieved among the blenders of capital so that both sides know what to expect

Capital Markets: Challenges and Developments

[op-ed snap] Capital market challenges of a high growth economy


Mains Paper 3: Economy | Effects of liberalization on the economy

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: Need of deepening capital markets to continue India’s fast growth momentum


Role of capital markets in sustaining growth

  1. The year 2022 will mark 75 years of independence from British rule
  2. If current growth rates sustain, it is expected that India will be the fourth-largest economy in the world by then
  3. Our growth rate depends on infrastructure development, which in turn requires deep capital markets as banks may be averse to the risk or to the funding tenures

Direction for capital markets

In the next four to five years, the direction of the markets will primarily depend on:

  • Structural changes, including consolidation, to existing capital markets participants’ business models
  • Non-traditional players challenging the status quo
  • Innovations including extensive use of big data, artificial intelligence (AI) and machine learning. Participants will seek to reduce cost and create competitive advantages
  • Straight through processing and use of distributed ledger and blockchain technology
  • Pools of capital increasingly looking to reach out directly to consumers of capital, thereby lowering costs and increasing overall liquidity.
  • Crowdsourcing and peer to peer opportunities, real estate investment trusts and infrastructure investment trusts gaining momentum
  • Investment management seeing impetus through robo advice, smart contracts and electronic trading
  • Successful resolution of applications filed under the Insolvency and Bankruptcy Code (IBC)

Role of regulators

  1. Regulators will have to respond to these challenges
  2. In their facilitation role, regulators have to be forward-looking and identify potential areas for market development
  3. An inter-regulatory working group set up by the Reserve Bank of India has recommended that an appropriate framework be introduced for “regulatory sandbox/innovation hub” within a well-defined space and duration
  4. Here financial sector regulators will provide the requisite regulatory support, so as to increase efficiency, manage risks and create new opportunities for consumers in the Indian context similar to other regulatory jurisdiction

Development of fixed income markets

  1. The Securities and Exchange Board of India (Sebi) came out with a proposal to make it mandatory for large borrowers to source 25% of their incremental borrowings from the bond market
  2. This could pose regulatory challenges in implementation because of structural issues including a requirement to maintain a debenture redemption reserve and liquid funds

Product suitability and data privacy to affect regulations

  1. Product suitability entails an entire framework that requires grading of products in accordance with their inherent risk and categorizing clients on the basis of their capacity and ability to carry the risk
  2. Every mature market model must have robust suitability procedures and controls, and regulators are focusing on this
  3. Traditional players and fintech entities are heavily dependent on technology
  4. These entities collect various personal and sensitive information and become the owners/custodians of such data

Measures being taken to ensure data protection

  1. Sebi intends to examine aspects related to data privacy needs and facilitate the necessary ecosystem to encourage the use of new technologies in capital markets
  2. Sebi is planning a full cybersecurity review of market infrastructure institutions (MIIs) that include all its cybersecurity advisories and a full list of threat vectors
  3. A cyber-capability index is being developed to assess the cybersecurity preparedness and resilience of MIIs

Use of technology by regulators

  1. Regulators are responding through ramping up their knowledge and with continued focus on investor protection and investor education
  2. Corporate governance and enhanced disclosures will provide a fillip to their efforts
  3. They have in place a comprehensive surveillance process and will build on this by using enhanced surveillance and investigation techniques, aided by AI and developing machine learning tools
  4. Regulators have begun to use technology drivers and new products to reduce the time for fundraising through public issues

Way Forward

  1. As the markets deepen and develop, regulatory oversight and supervision must develop alongside
  2. Integrating risk and regulation at an enterprise level is a significant challenge and the success of the capital markets and its participants will depend on this

Capital Markets: Challenges and Developments

[op-ed snap] Fear isn’t the key: On regulation of securities markets


Mains Paper 3: Economy | Investment model

From UPSC perspective, the following things are important:

Prelims level: SEBI

Mains level: T.K. Vishvanathan panel recommendations and their impact on the functioning of SEBI as well as investors


Regulating stock markets

  1. A panel headed by T.K. Viswanathan, a former Lok Sabha Secretary General, has now submitted recommendations to curb illegal practices in the markets and ensure fair conduct among investors
  2. Front-running, insider trading, shady accounting practices that are tantamount to window-dressing firms’ performance, and other shenanigans to manipulate share prices continue

Panel’s recommendations

  1. A key recommendation is that the stock market watchdog be granted the power to act directly against “perpetrators of financial statements fraud”
  2. This means SEBI can act not only against listed entities under its extant powers but also against those who aid or abet financial fraud — including accountants and auditors
  3. The panel has suggested that SEBI, rather than the Central government, be given the power to grant immunity to whistle-blowers who help uncover illegal activities
  4. It has mooted new ideas to address market manipulation, from a better scrutiny of price-sensitive information to the creation of processes to expedite the investigation into cases
  5. It goes to the extent of recommending that SEBI be given powers to tap phone calls

Pros & Cons of these recommendations

  • Pros
  1. Greater executive powers can help the regulator take swifter action against offenders instead of relying on government bodies such as the Ministry of Corporate Affairs
  2. This could also free SEBI from various manifestations of political influence
  • Cons
  1. Given that SEBI is now considering a cap on trading by retail investors based on their assessed ‘net worth’, the committee’s suggestion that it may consider any trading by players beyond their known ‘financial resources’ as fraud could lead to undue harassment of investors

Way Forward

  1. Granting more teeth to enable the market regulator to fulfil its primary role of protecting investors is fine
  2. A strong regulator serves as a good deterrent to truants in the market, but banking on fear too much could also scare away genuine investors
  3. It is equally critical to empower it with the right tools so that a sledgehammer is not deployed to crack a nut

Capital Markets: Challenges and Developments

Banning of Unregulated Deposit Schemes Bill, 2018


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, Banning of Unregulated Deposit Schemes Bill, 2018

Mains level: Illicit deposit schemes spreading across the country and measures to curb them

Bill to regulate illicit deposit schemes

  1. The Union government has come up with two bills to tackle the menace of non-regulated deposit schemes
  2. The Chit Funds (Amendment) Bill, 2018 was introduced in the Lok Sabha during the second leg of the Budget Session
  3. The second Bill is Banning of Unregulated Deposit Schemes Bill, 2018

Provisions of the bill

  1. The proposed Bill aims to provide a comprehensive legislation to tackle illicit deposit schemes by completely prohibiting such activities
  2. Nine regulators including the RBI, SEBI, the Ministry of Corporate Affairs, and the State governments regulate financial activities
  3. According to the Bill, all deposit-taking schemes are required to be registered with the relevant regulator, failing which the “Deposit Takers” will be considered “unregulated” and hence be banned
  4. The Bill creates three different types of offences, namely, running of Unregulated Deposit Schemes, fraudulent default in Regulated Deposit Schemes, and wrongful inducement in relation to Unregulated Deposit Schemes
  5. A ‘Competent Authority’ will be appointed which has the powers similar to a civil court, including powers to attach properties of the deposit takers
  6. It also empowers police to search and seize any property believed to be connected with an offence under the Bill, with or without a warrant
  7. The Bill enables the creation of an online central database, for collection and sharing of information on deposit-taking activities in the country


  1. “Deposit Takers” include all possible entities (including individuals) receiving or soliciting deposits, except specific entities such as those incorporated by legislation
  2. “Deposit” is defined in such a manner that deposit takers are restricted from camouflaging public deposits as receipts, and at the same time not to curb or hinder acceptance of money by an establishment in the ordinary course of its business

Capital Markets: Challenges and Developments

The rising risks to financing India’s current account deficit


Mains Paper 3: Economy | Indian Economy

From UPSC perspective, the following things are important:

Prelims level: CAD, BoP

Mains level: Impact of rising crude oil prices on CAD and other vulnerabilities.


Higher oil prices are raising India’s CAD

  1. The higher current account deficit will put downward pressure on the rupee and it may also raise the cost of Indian borrowing abroad.
  2. The stress on BoP is already visible in Q1FY19 with the INR depreciating 4%; the RBI had to intervene to stem the depreciation.
  3. NRI flows too have proved to be volatile, especially if the rupee depreciates.

Financing CAD is risky

  1. It’s not just that the current account deficit is widening—the means of financing it also became riskier in 2017-18.
  2. On the one hand, higher oil prices are raising the current account deficit and on the other, foreign direct investment—the most stable source of financing the deficit—has come down.
  3. This has led to greater reliance on foreign portfolio inflows, particularly volatile debt inflows and also on short-term credit.

Why such Problem?

  1. This is a problem because the US Federal Reserve has been raising interest rates and has signalled more rate hikes to come.
  2. As per RBI governor the US programme of shrinking its balance sheet, coupled with increased US T-Bill issuance to fund a larger government deficit, has already led to dollar liquidity shrinking in international markets, particularly in the debt markets.
  3. This is behind the outflows from emerging market debt.

Cost of Protectionism

  1. The rapid deterioration in the trade environment as a result of protectionist policies is also likely to affect export growth, while rising investment demand will result in more imports.
  2. The UNCTAD, had in its recent World Investment report pointed to a slowdown in global foreign direct investment flows.

Dependence on FPI is dangerous

  1. Relying on portfolio flows to finance this deficit will expose the country to the vulnerabilities of uncertain international capital flows, making funding difficult particularly during risk-off episodes.
  2. Within portfolio flows, the increased reliance on debt inflows carries more risks, as unlike equity, debt has to be repaid.
  3. Earlier this month, credit rating agency Moody’s Indian affiliate, ICRA Ltd, said high global crude oil prices are likely to widen India’s CAD and pointed to slowing foreign portfolio investments as an area of concern.

Capital Markets: Challenges and Developments

SEBI panel to study option of direct overseas listings


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

From UPSC perspective, the following things are important:

Prelims level: SEBI, GDR, ADR

Mains level: Market regulators and their powers


Companies can list abroad now only via depository receipts

  1. The Securities and Exchange Board of India (SEBI) has constituted an expert committee to examine the possibility of allowing unlisted Indian companies to directly list equity overseas while also allowing foreign companies to list directly on the Indian stock markets.
  2. Considering the evolution and internationalisation of the capital markets, it would be worthwhile to consider facilitating companies incorporated in India to directly list their equity share capital abroad and vice versa, SEBI said in a statement.
  3. Currently, Indian firms can only use the depository receipts route — American Depository Receipt (ADR) or Global Depository Receipt (GDR) — to list on overseas exchanges.
  4. For foreign companies wanting to list on Indian exchanges, the Indian Depository Receipt (IDR) is the only option currently.

Masala bonds, IDRs

  1. Companies incorporated in India can today list their debt securities on international exchanges (Masala bonds) but their equity share capital can be listed abroad only through the ADR/GDR route.
  2. Similarly, companies incorporated outside India can access the Indian capital markets only through the IDR route.


Global Depository Receipts

  • Indian companies are allowed to raise equity capital in the international markets through the issue of GDR.
  • GDR are designated in USD / Euros or any other foreign currency.
  • The proceeds of GDR can be utilized for various purposes.

American Depository Receipts

  • These are like shares issued to US retail and institutional investors and are listed in NASDAQ/NYSE
  • They are entitled like share to bonus, stock split and dividend.
  • ADR route is taken as non-USA companies are NOT allowed to list on US stock exchanges by issuing shares

Capital Markets: Challenges and Developments

[op-ed snap] Averting Ponzi schemes


From UPSC perspective, the following things are important :

Prelims level : Ponzi Schemes, Particulars of the Draft

Mains level : The new bill seeks to protect investors from rising instances of scams


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

From UPSC perspective, the following things are important:

Prelims level: Ponzi Schemes, Particulars of the Draft

Mains level: The new bill seeks to protect investors from rising instances of scams



  1. A Ponzi scheme is a fraudulent investing scam promising high rates of return with little risk to investors.
  2. Instances of people losing their hard-earned money to Ponzi schemes keep coming to light.
  3. The Banning of Unregulated Deposit Schemes Bill, 2018 was approved by the Union Cabinet to provide comprehensive legislation to deal with illicit deposit schemes in the country.

Provisions of the draft Bill

  1. The Bill imposes complete prohibition of unregulated deposit taking activity.
  2. Primarily, the Bill defines the “deposit taker” and “deposit” comprehensively.
  3. Some other provisions include:
  • Stringent punishment for fraudulent default in repayment to depositors.
  • Designation of a competent authority by the State government to ensure repayment of deposits in the event of default by a deposit taking establishment
  • Powers and functions of the competent authority including attachment of assets of a defaulting establishment
  • Designation of courts to oversee repayment of depositors and to try offences under the Act, and
  • Listing of Regulated Deposit Schemes in the Bill with a clause enabling the Central government to expand or prune the list.
  1. The Bill contains a substantive banning clause which bans deposit takers from promoting, operating, issuing advertisements or accepting deposits in any Unregulated Deposit Scheme.
  2. The primary responsibility of implementing the provisions lies with the State governments.

Bill recognises 3 types of Offences

The Bill specifies three different types of offences:

  • Running of Unregulated Deposit Schemes,
  • Fraudulent default in Regulated Deposit Schemes, and
  • Wrongful inducement in relation to Unregulated Deposit Schemes.

Prevention better than Cure

  1. The principle of the bill is that it would ban unregulated deposit taking activities altogether, by making them an offence ex-ante, rather than the existing legislative-cum-regulatory framework which only comes into effect ex-post with considerable delays.
  2. It has adequate provisions for repayment of deposits in cases where such schemes nonetheless manage to raise deposits illegally.
  3. The Bill provides for attachment of properties/ assets by the competent authority and subsequent realisation of assets for repayment to depositors in a stipulated time.
  4. The Bill also enables creation of a central online database, for collection and sharing of information on deposit taking activities in the country.

Capital Markets: Challenges and Developments

SEBI proposes reducing debt issuance timeline to six days


Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: SEBI, debt securities, equity offering, ASBA

Mains level: Initiatives taken to make capital markets more accessible

Reducing the timeline

  1. The Securities and Exchange Board of India (SEBI) aims to reduce the time required to make a public issue of debt securities and bring it on par with that of an equity offering
  2. The market regulator wants to reduce the time line from the current 12 days to six days

About the proposal

  1. It is proposed to reduce the time lines for the public issue of debt securities from T+12 to T+6
  2. T refers to the day when the issue closes for subscription

Making ASBA mandatory

  1. In order to reduce the time line, the capital market regulator has proposed making ASBA – Application Supported by Blocked Amount – mandatory for applying in such debt issuances
  2. ASBA refers to an online mechanism wherein the application money is kept blocked in the applicant’s account and is debited only at the time of allotment
  3. This effectively does away with the whole process related to refund of money to investors in instances wherein the issue is oversubscribed

Capital Markets: Challenges and Developments

Bharat-22 ETF offer may worth Rs 10,000 crore


Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Bharat-22 exchange traded fund (ETF)

Mains level: Various efforts to increase revenue base of government & revive infrastructure spending

Special ETF

  1. The Finance Ministry may come out with a ₹10,000-crore follow-on fund offer of the Bharat-22 exchange traded fund (ETF)
  2. The government, in November, introduced Bharat-22 ETF comprising shares of 22 firms, including PSUs, public sector banks, ITC, Axis Bank and L&T


Exchange traded fund (ETF)

  1. Exchange Traded Funds (ETFs) are mutual funds listed and traded on stock exchanges like shares
  2. The ETF simply copies an index and endeavors to accurately reflect its performance
  3. In an ETF, one can buy and sell units at a prevailing market price on a real-time basis during market hours
  4. There are four types of ETFs already available — Equity ETFs, Debt ETFs, Commodity ETFs and Overseas Equity ETFs
  5. The Bharat 22 ETF to be offered now allows the Government to park its holdings in selected PSUs in an ETF and raise disinvestment money from investors at one go
  6. It tracks the specially made S&P BSE Bharat 22 Index, managed by Asia Index Private Limited
  7. This index is made up of 22 PSU stocks and with a few private sector companies

Capital Markets: Challenges and Developments

What rising bond yields tell us about the economy


Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Government securities, Primary and secondary market

Mains level: Effect of NPAs on other sectors of economy

Bond market performance

  1. The bond market is a strong indicator of investor confidence in the government
  2. Government securities or bonds, may not directly affect one’s personal finances, but the yield curve can be telling on the direction in which a country’s economy is headed

What are bonds?

  1. A bond is a debt instrument which acts as an IOU
  2. It can be traded in financial markets like equities and other commodities
  3. It is commonly used by governments to raise capital in order to fund domestic growth and development projects
  4. Government bonds, also known as G-Sec, are issued by governments with maturity terms ranging from medium to long term

How do bonds work?

  1. Investors take on government debt, and in return, are assured a stream of revenue for the duration of the time it takes the bond to mature
  2. Bonds issue coupons, which are interest payments made in part to the repayment of the capital that was borrowed
  3. The final payment is made when the bond attains maturity

Bond market

  1. Till recently, government bonds used to be bought and sold on the secondary market only by institutional investors like provident funds, mutual funds, insurance companies and banks
  2. In 2017, the RBI changed the rules to allow retail investors to buy government bonds in the primary market
  3. The RBI is the institutional entity that has been mandated with selling sovereign debt securities or government bonds

Effect of more bond issuance on the economy

  1. The fiscal deficit is expected to widen if the government issues new bonds to bankroll the populist schemes announced in the Budget
  2. Inflation or expectations of inflation can drive up bond yields since any gains made by securities will be eroded by an increase in prices

Capital Markets: Challenges and Developments

FBIL will now do the valuation of G-Secs


Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Government securities, FBIL, FIMMDA

Mains level: Money market instruments & their effects on economy

Change of roles

  1. Financial Benchmark India Pvt. Ltd. (FBIL) will now be responsible for administering the valuation of Government securities
  2. Fixed Income Money Market and Derivatives Association of India (FIMMDA), an association of commercial banks, financial institutions and primary dealers, has been responsible for administering the valuation of government securities issued by both the Central and State Governments
  3. FBIL will take over this responsibility from March 31

Change in publication methodology

  1. FBIL will commence publication of the G-Sec and SDL valuation benchmarks based on the extant methodology
  2. This is line with the announcement made as part of the sixth bi-monthly monetary policy statement for 2017-18 dated February 7, 2018
  3. The apex bank had announced then that FBIL would assume the responsibility for administering the valuation of Government securities


Government securities

  1. A Government Security (G-Sec) is a tradeable instrument issued by the Central Government or the State Governments
  2. It acknowledges the Government’s debt obligation
  3. Such securities are short term (usually called treasury bills, with original maturities of less than one year) or long term (usually called Government bonds or dated securities with original maturity of one year or more)
  4. In India, the Central Government issues both, treasury bills and bonds or dated securities while the State Governments issue only bonds or dated securities, which are called the State Development Loans (SDLs)
  5. G-Secs carry practically no risk of default and, hence, are called risk-free gilt-edged instruments

Capital Markets: Challenges and Developments

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%

Capital Markets: Challenges and Developments

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

Capital Markets: Challenges and Developments

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

Capital Markets: Challenges and Developments

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

Capital Markets: Challenges and Developments

[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

Capital Markets: Challenges and Developments

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.

Capital Markets: Challenges and Developments

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

Capital Markets: Challenges and Developments

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)

Capital Markets: Challenges and Developments

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

Capital Markets: Challenges and Developments

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
  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

Capital Markets: Challenges and Developments

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
  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

Capital Markets: Challenges and Developments

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
  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

Capital Markets: Challenges and Developments

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
  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
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