Capital Markets: Challenges and Developments

Sep, 25, 2018

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

Note4students

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


Context

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
Aug, 16, 2018

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

Note4students

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


Context

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
Aug, 01, 2018

Banning of Unregulated Deposit Schemes Bill, 2018

Note4students

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


News

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

Definitions

  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
Jun, 15, 2018

The rising risks to financing India’s current account deficit

Note4students

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.


News

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.
Jun, 13, 2018

SEBI panel to study option of direct overseas listings

Note4students

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


News

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.

Back2Basics

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
Jun, 08, 2018

[op-ed snap] Averting Ponzi schemes

Note4students

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


News

Context

  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.
Apr, 21, 2018

SEBI proposes reducing debt issuance timeline to six days

Note4students

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


News

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
Apr, 18, 2018

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

Note4students

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


News

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

Back2Basics

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
Apr, 04, 2018

What rising bond yields tell us about the economy

Note4students

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


News

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
Apr, 02, 2018

FBIL will now do the valuation of G-Secs

Note4students

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


News

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

Back2Basics

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
Mar, 13, 2018

Bill on chit funds sector introduced in Lok Sabha

Note4students

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


News

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%

Background

  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%
Feb, 21, 2018

Cabinet nod to amend Chit Funds Act

Note4students

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


News

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

Back2Basics

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

Feb, 05, 2018

SEBI gets teeth to act against exchanges, new market outfits

Note4students

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


News

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

Back2Basics

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
Jan, 04, 2018

Sebi planning a ‘riskometer’ for stock market investments

Note4students

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


News

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
Oct, 30, 2017

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

Image source

Note4students

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


Context

  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
May, 01, 2017

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.
Sep, 29, 2016

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

Aug, 26, 2016

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)
Aug, 20, 2016

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
May, 02, 2016

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
Apr, 14, 2016

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
Mar, 30, 2016

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
Mar, 30, 2016

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
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