1. Some major scams in Indian Financial
Markets*
2. Indian Financial System a Part of Global Financial System*
Some major scams in Indian
Financial Markets
I.
Securities
market [Harshad Mehta] scam 1992
II.
M S shoes
scam 1995
III.
CRB scam
1996
IV.
Ketan
Parekh [K-10] scam 1999
V.
DSQ
Software scam 2000
VI.
US64 scam
2001
VII.
IPO scam
2006
I.Securities market [Harshad Mehta]
scam 1992:
Modus of Harshad Mehta scam 1992
- Harshad
Mehta [HM] was a broker who used to
extensively deal in the share market. He was also brokers for the bank to
carry out the RF deals between the banks.
- He had the following objectives in mind:
-
Ø Get the RF deal's money into the share market
Ø Create a bull run for some shares in the
market
Ø Sell out at a profit
Ø Return the money of RF deal to the bank
- What is Ready Forward Deal
[RF]?
Ø Ready Forward deal [or repo or RF] is a short term (15 days) loan given by banks
to other banks against G- secs.
Ø Legally the borrower sells
the securities to the lending bank for cash with the stipulation that at the
end of the borrowing term it will buy back the securities
Ø These loans are used to
cover the SLR [statutory liquidity ratio is the portion that banks need to invest in the form of cash,
gold or government approved securities.
The quantum is specified as some percentage of the total demand
and time liabilities of the bank and is set by the RBI] in the bank.
and time liabilities of the bank and is set by the RBI] in the bank.
Ø A bank would go for a RF
deal when it has low SLR
Ø In return for the loan a
Bank receipt [BR] is issued
Ø A BR is a promissory note
that shows that money transaction has happened between the bank and that the
bank would return the money to the lender bank in the stipulated time period.
- HM exploited the loopholes in:
Ø Inter bank RF deal market
Ø The lack of checks, controls
and reconciliation amongst banks
Ø The lack of regulatory
oversight
Ø He got in touch with small
banks like Bank of Karad and asked them to give BR so as to get the money of
the deal.
Ø He then used to go to big
banks like SBI and then would in return of the BR would take out money on the
name of Bank of Karad.
Ø He used to invest this
money in the share market ( the money was of tune of 500 to 600 crores), create
a bull run, book profit and then would return the money to Bank of Karad.
Ø This turned out to be good
in the aftermath 1991 reforms when the market was doing good.
Ø The matter came to light
inter-alia, due to fall in share price and loss in the share market.
Ø At one point of time HM was not able to return
the money and SBI was left with fake BR
of worth 4000 crores.
II. M S Shoes [MSS] Scam
1995
Ø CBI [Central Bureau of
Investigation] investigations have revealed that SEBI permitted M S Shoes to collect 50% of the
application money on subscription, though the minimum stipulated amount was
only 25 %.
Ø SEBI officials did not take
any precaution to prevent this, nor did they
instruct the Delhi Stock Exchange not to release the public issue funds
to the company before the rights issue
was complete.
Ø It was also alleged that
Pavan Sachdeva [MD of MSS], also misled investors and rigged the market to prop
up his share prices.
Ø The CBI sought government
sanction to prosecute certain officials of SBI & SEBI and MD of MSS in the Rs 6.99
billion scam.
Ø The scam had closed down
Bombay Stock Exchange for three days
III. CRB scam 1996
Ø In 1996,C K
Bhansali,Chairman of CRB Capital Markets
Ltd was accused of siphoning off
Rs.12 billion in the CRB scam.
Ø CRB ran fixed deposits and mutual fund schemes
and with licenses which were not adequately scrutinized by SEBI and the RBI due
to supervisory lethargy.
Ø Armed with above and
favorable credit ratings and audit reports, CRB created a pyramid based on high
cost financing which finally collapsed
Ø CRB was accused of using
its State Bank of India's accounts to siphon off the bank funds by encashing
interest warrants and refund warrants.
Ø Millions of investors lost
through investments in fixed deposits and mutual funds of CRB.
Ø The Unit Trust of India and
Gujarat government also incurred heavy losses
Ø The CRB collapse caused a
run on other finance companies causing a huge systemic problem and further
losses to investors.
IV. Ketan Parekh K-10 scam 1999
Ø Companies when raising
money in stock market roped in brokers to ramp up share price
Ø Ketan Parekh [KP] formed a network of brokers from smaller
exchanges like the Allahabad Stock Exchange and the Calcutta Stock
Exchange for the above
Ø KP also used benami or
share purchase in the name of poor people living in the shanty towns of Mumbai.
Ø KP relied primarily on the
shares of ten companies for his dealings (
known infamously as the K-10 scrips namely BPL,
Sterlite,Videocon,GTB,Zee Telefilm, Lupin, Aftek, Padmini Polymer, Global Tele
System, Himachal Futuristic [HFCL]).
Ø KP had large borrowings
from Global Trust Bank [GTB], whose shares he was ramping
up (so that he could get a good deal at the time of its merger with UTI Bank)
Ø He got Rs 250 crore loan
from GTB and his associates got another Rs 1,000 crore from the Madhavpura
Mercantile Co-operative Bank [MMCB] despite the fact that RBI regulations ruled
that the maximum a broker could have got as a loan was Rs 15 crore.
Ø KP’s modus operandi was
clearly to ramp up shares of select firms in collusion with the promoters with
the money provided by company managements – and to get funding from them to do
this
Ø Soon after discovery of this scam, the prices
of these stocks came down to the fraction of the values at which they were
bought
Ø Largely due to this
rigging, innocent investors who bought such shares thinking the market as genuine,
were at loss
Ø When the scam burst and the rigged shares came
down so heavily that quite a few people in India lost their savings.
Ø At this time a group of
traders (known as the bear cartel-Shankar Sharma, Anand Rathi, Nirmal Bang)
relied on the global meltdown of stocks to make their profits. At the time of
the year 2000 Financial Budget this cartel placed sell orders on the K-10
stocks and crushed their inflated prices.
Ø All the borrowing of KPs could not rescue K-10
scrips.
Ø Some banks including Bank
of India lost money heavily. GTB and MMCB went bust because the money they had lent to Ketan had sunk with
his K-10 stocks
Ø Financial institutions namely IDBI & IFCI
had extended loans of Rs 1,400-odd crore to companies known to be close to
broker KP also lost money.
V. DSQ Software Scam 2000
Ø Dinesh Dalmia, Managing
Director of DSQ Software was accused of dubious acquisitions and biased
allotment in the year 2000 and 2001.The amount involved in the Scam was Rs.595 Crores
Ø Dalmia’s group included DSQ
Holdings Ltd, Hulda Properties and Trades Ltd, and Powerflow Holding and Trading Pvt Ltd
Ø Dalmia resorted to illegal
ways to make money through the partly paid shares of DSQ Software Ltd, in the
name of New Vision Investment Ltd, UK, and unallotted shares in the name of
Dinesh Dalmia Technology Trust
Ø Investigation showed that
1.30 crore (13 million) shares of DSQ Software Ltd had not been listed on any
stock exchange.
VI. UTI’s US64 scam 2001: Genesis
Ø In 1998, the situation in
US64 scheme reached crisis point as the reserves of the fund went below par
Ø The negative trend began
earlier (in 1994), but it was only revealed to the public in 1998
Ø During the above period the
scheme was happily paying dividends in
excess of income, and bought back units at a hefty premium to the NAV.
Ø In 1999, after much noise
and public outcry, the government appointed a committee to suggest a way out
Ø Finance Ministry gave
several sops to help out UTI, most significant the one exempting payment of
dividend tax
Ø Subsequently, the
government took Rs. 2700 crores worth of PSU shares off the books of UTI, and
forced promoters like IDBI, LIC, SBI etc. to chip in with more equity capital
Ø The fund managers and other
officials of UTI who goofed up along the years got away scot-free
Ø Notwithstanding the
bail-out the bail-out UTI in a
much-publicized portfolio revamp portfolio, aggressively went after new economy
stocks (unwittingly aiding Ketan Parekh
in his scam)
Ø UTI was to move US64 to an
NAV based system by 2002 which did not happen till the rescue package was
implemented
Ø If the US 64 scheme had
given annual dividend yield of 8-9% (ie dividend rate of 14-15% of the face
value of the units), and lowered the sale and repurchase prices, then there
would have been no problem
Ø Instead, UTI year after
year gave very high dividends and some times dividends exceeding 20% of face
value made possible by drawing down on reserves
with a consequent fall in the
sale and repurchase price
Ø But UTI did not allow the
sale/repurchase to fall and isolated the real returns from the selling and
buying of US 64 units may be on the premise that the stock market would improve
and the problem would vanish. But the sharp fall in the market after the
Pokhran II nuclear tests put paid to this hope
- US64 issue: How this problem was solved
ü The problem was solved by
Government of India [GOI] agreeing to make good the difference between the NAV
and the sale/repurchase price and fund the gap.
ü The GOI was extremely
concerned about the problems of US 64 as any failure would shake the faith of
people in the banking sector and the government.
ü And this in turn could have
led to a run on the UTI and other mutual funds (and perhaps banks also) further
depressing the share market and compounding the problem.
ü Hence, the GOI came out
with open declarations of support and assurances
that investors need not worry about their investments
ü The GOI also appointed a
committee of capital market experts under the chairmanship of financial expert,
Mr. Deepak Parekh, the chairman of HDFC, IL&FS and other bodies.
- The Deepak Parekh committee in
its report presented in 1998 made following recommendations of a
structural nature:
- That the proportion of equities
be reduced and the scheme be made debt oriented in line with the
objectives of the scheme.
- That UTI move towards a system
of NAV based pricing of US 64 so that such problems do not recur again in
the future.
- That dividends be in line with
market forces.
- That the concept of
"assured" returns in any form be done away with, both for US 64
and for any other schemes.
- UTI –I should take charge of US-64 and other
closed ended/assured return Schemes and gradually wind-up all such schemes
- UTI- 11 [UTI Mutual Fund] be
created to take charge of all open ended schemes and manage it like any
other Private Mutual Fund
- The Government worked out a
bailout package for US 64 based on above
VIII. IPO scam 2006
Ø When the SEBI started
scanning an entire spectrum of IPOs launched over 2003-05, it ended discovering
a major IPO scam and in the follow-up probably prevented a larger conspiracy to
hijack the market
Ø The IPO scam involved
manipulation of the primary market by financiers and market players by using
fictitious or benaami demat accounts
Ø While investigating the Yes
Bank scam, Sebi found that certain entities had illegally obtained IPO shares
reserved for retail applicants through thousands of benaami demat accounts
Ø They then transferred the
shares to financiers, who sold on the first day of listing, making windfall
gains from the price difference between the IPO price and the listing price
Ø Roopalben Panchal, of Ahmedabad, had allegedly opened several
fake demat accounts and subsequently raised finances on the shares allotted to
her through Bharat Overseas Bank branch
Ø This time, fraudsters
targeted the primary market to make a quick buck at the expense of the gullible
small investors. Direct Participants (DPs) used retail applicants’ shares for
reaping benefits in the stock market.
- SEBI after proper investigation
disgorged the funds from the unscrupulous players and distributed the
money the affected retail investors
Indian
Financial System a Part of Global Financial
System
§
Foreign
Capital inflow to India
Ø Foreign Collaboration by way of portfolio
investment by FIIs
Ø Foreign direct investment [FDI]
Ø External commercial borrowings (ECBs),Foreign
Currency Convertible Bonds [FCCB] & Foreign Currency Exchangeable Bonds
[FCEB]
Ø Indian investment abroad
§
Issues
affecting Indian Financial System being a part of Global Financial System
Ø Effects of Global Financial Crisis on
India and remedies thereof.
Ø International best practices and preparedness
of Indian Financial System to adopt them
§ Portfolio investments by foreign institutional investors
[FIIs]
Ø India's exceptional growth
story and its booming economy have made the country a favorite destination with FIIs
Ø FII holdings in Indian
markets reached US$ 88 billion in December 2008,
according to the BSE
according to the BSE
Ø India has continued to attract
FIIs investment despite the Satyam non-
governance issue and the global economic contagion impact on Indian markets
governance issue and the global economic contagion impact on Indian markets
Ø FIIs are the largest
institutional investors in India with holdings valued at over
US$ 751.14 billion as on December 31, 2008
US$ 751.14 billion as on December 31, 2008
Ø FIIs determine the
direction of the market and are also the most successful
portfolio investors in India with 102 per cent appreciation since September 30, 2003
portfolio investors in India with 102 per cent appreciation since September 30, 2003
Ø SEBI’s data indicate the
FII investments in equities as on March 17, 2009 stood at US$ 50950 million and in debts, equaled
US$ 6541 million
Ø As per SEBI, number of registered FIIs stood
at 1626 and number of registered sub-accounts stood at 4972 as on March 17,
2009.
Ø Majority of FIIs are from
the US and Europe. some are based out of Mauritius Canada, the UAE, Japan,
Australia, Taiwan and Singapore, etc
Ø FIIs that have registered till 2009,
inter-alia, include pension & insurance funds, mutual funds, investment
trust, university funds, institutional portfolio managers, trustees, banks,
asset management companies, power of attorney holders
Ø The FIIs sub-account which
is not a foreign individual/ corporate can individually invest up to 10%. The
limit for each foreign corporate/ individual is 5%. These limits are within the
overall limit of 24% / 49% or the sectoral caps as the case may be
Ø Subject to operational
guidelines as specified by SEBI/RBI/various regulatory authorities
FII/sub-accounts can trade in derivatives
Ø The government doubled the
ceiling on FIIs’ investment in corporate debt to $6 billion in Oct’08 and
further to $15 bln in Jan’09 & can invest up to $5 bln in government of
India securities to give boost to debt market and also increase forex inflows
Ø SEBI regulation on FIIs
· As per Regulation 6 of SEBI
(FII) Regulations,1995, Foreign Institutional Investors are required to fulfill
the following conditions to qualify for grant of registration:
· Applicant should have track
record, professional competence, financial soundness, experience, general
reputation of fairness and integrity;
· The applicant should be
regulated by an appropriate foreign regulatory authority in the same capacity/category where
registration is sought from SEBI.
· Registration with
authorities, which are responsible for incorporation, is not
adequate to qualify as Foreign Institutional Investor.
adequate to qualify as Foreign Institutional Investor.
· The applicant is required
to have the permission under the provisions of the
Foreign Exchange Management Act, 1999 from the Reserve Bank of India.
Foreign Exchange Management Act, 1999 from the Reserve Bank of India.
· Applicant must be legally
permitted to invest in securities outside the country or its in-corporation / establishment.
· The applicant must be a
"fit and proper" person.
· The applicant has to
appoint a local custodian and enter into an agreement with the custodian. Besides it also has to appoint
a designated bank to route its transactions.
· Payment of registration fee
of US $ 5,000
§ Foreign direct investment
[FDI] in India
Ø FDI
Policy in India-An Overview:
ü FDI
permitted in almost all activities
ü Up-to
100% FDI allowed in manufacturing
ü Most
FDI allowed on the ‘automatic route’- only to inform RBI
within 30 days of remittances
within 30 days of remittances
ü Liberal
policy for foreign technology collaboration
ü Policy
supported by a legal framework
ü National
treatment to investment
ü Ceilings
and routes for investment being constantly reviewed
and liberalized
and liberalized
ü Indian
FDI policy regime assessed independently to be
liberal and progressive
liberal and progressive
Ø FDI
is permitted as under the following forms of investments:
ü Through
financial collaborations
ü Through
joint ventures and technical collaborations
ü Through
capital markets via Euro issues
ü Through
private placements or preferential allotments
§ External commercial borrowings [ECB]
Ø
ECBs
are defined to include:
ü
Commercial
bank loans
ü
Buyer’s
credit
ü
Supplier’s
credit
ü
Securitized
instruments such as floating rate notes, fixed rate bonds etc
ü
Credit
from official export credit agencies
ü
Commercial
borrowings from the private sector window of multilateral financial
institutions such as IFC, ADB, AFIC, CDC etc
ü
Investment
by FIIs in dedicated debt funds
Ø
Applicants
are free to raise ECB from any internationally recognized source like:
ü
Banks
ü
Export
credit agencies
ü
Suppliers
of equipment
ü
Foreign
collaborations
ü
Foreign
equity holders, international capital markets etc
Ø
REGULATOR:
ü
The
department of Economic Affairs, Ministry of Finance, Government of India with
support of Reserve Bank of India,
monitors and regulates Indian firms access to global capital markets.
ü
From time to time, they announce guidelines on
policies and procedures for ECB and Euro- issues
ü
The
important aspect of ECB policy is to provide flexibility in borrowings by
Indian corporate, at the same time maintaining prudent limits for total external borrowings
Ø
The
guiding principles for ECB Policy are to keep:
ü
Maturities
long
ü
Costs
low
ü
Encourage
infrastructure and export sector financing which are crucial for overall growth of the economy
Ø
The
ECB policy focuses on three aspects:
ü
Eligibility
criteria for accessing external markets
ü
The
total volume of borrowings to be raised and their maturity structure
ü
End
use of the funds raised
Ø
Basic
features of ECB
ü
ECB
can be accessed under two routes,
·
Automatic
Route ( for investment in real sector -industrial sector, especially
infrastructure sector-in India),
·
Approval
Route (RBI/Govt approval Route. Latest RBI circular in this regard is dated
January 2,2009)
Ø
Salient
features of ECB guidelines:
ü
Recognized
Lenders under ECB, inter- alia, include Foreign Equity Holders
ü
Under
the “Automatic Route” Foreign Equity holder would require minimum equity
holding in the borrower’s company which
are:
ü
For
ECB up to USD 5 Mln minimum equity of 25% directly held by the lender
ü
For
ECB more than USD 5 Mln - minimum equity of 25% directly held by the lender and debt: equity ratio not
exceeding 4:1
Ø
Amount
and Maturity:
ü
Amount
up to USD 20 Mln with minimum average maturity of 3 yrs
ü
Amount
over USD 20 Mln and up to USD 500 Mln with minimum average maturity of 5 yrs
ü
ECB
up to USD 500 Mln per borrower per financial year permitted for rupee/foreign
currency expenditure for permissible end uses under automatic route
Ø
All
in cost ceilings :
ü
For
3yrs up to 5 yrs – 300 bps over 6 month Libor
ü
More
than 5 yrs – 500 bps over 6 month Libor
ü
The
above ceilings dispensed wef June 2009
§ Foreign currency convertible bonds [FCCB]
Ø A type
of convertible bond issued in a currency different than the issuer's
domestic currency
Ø The money being raised by the issuing company is in the form of
foreign currency
Ø A convertible bond is a mix between a debt and equity instrument
Ø It acts like a bond by making
regular coupon and principal payments, but these
bonds also give the bondholder the option to convert the bond into stock
bonds also give the bondholder the option to convert the bond into stock
Ø These types of bonds are attractive to both investors and issuers
Ø The investors receive the safety of guaranteed payments on the bond and
are also
able to take advantage of any large price appreciation in the company's stock
able to take advantage of any large price appreciation in the company's stock
Ø Bondholders take advantage of this appreciation by means warrants
attached to the bonds, which are
activated when the price of the stock reaches a certain point
Ø Due to the equity side of the bond, which adds value the coupon
payments on the bond are lower for the Company there by reducing its debt
financing costs
§ Foreign Currency Exchange Bonds [FCEB]
Ø RBI announced
the FCEB Scheme, 2008, as “an enabling mechanism to permit Indian companies to
unlock a part of holding in group companies for meeting their financing
requirements.”
requirements.”
Ø The norms are
similar to those extant for FCCBs but there’s a crucial difference: a
holding company can issue bonds tied to
the shares of a smaller company
Ø FCEBs are
financial instruments similar to FCCB in nature and allow corporate to raise
money from overseas markets by issuing bonds
Ø Unlike FCCBs,
where bonds can be converted into equity shares of the issuing company, in the
case of FCEBs, the bonds can be converted into shares of a group company of the
issuer
Ø Indian
corporate looking at raising capital abroad will get one more tool of doing so.
Presently, they have the options of ECBs & FCCBs
Ø The bonds can
be converted into shares after a minimum of five years from the date of issue
Ø The issuer
company should be part of the same group and must own shares of the entity that
is floating bonds to raise cash
Ø FCEB gives companies the
opportunity to use the future upside potential of stocks
Ø The investors can monetize
it within five years but a company can also decide a put and call option which
can be exercised before five years
Ø According to the
government's notification, any Indian company which is not eligible to raise funds from the domestic security
market shall not be eligible to issue FCEBs
Ø The rate of interest
payable on FCEB bonds and the issue expenses incurred in foreign currency shall be within
the cost ceiling as specified by RBI
under the ECB policy
Ø While funds raised
through FCEBs cannot be invested in capital markets and real estates in the
domestic market, corporate will be able to use the funds for their operations
overseas and in joint ventures
- Indian
Investments Abroad [Flows out of India]
- Key Measures of RBI:
ü Rupee made fully
convertible on trade and current accounts and partly convertible on capital accounts thus permitting
free flow out of India for authorized purposes on trade, current and
capital accounts [subject to limits under FEMA and/or RBI regulations from time
to time]
ü Individuals can invest
overseas up to $ 200,000 annually
ü ECB repayment limit raised
to $ 500 mln from $ 400 mln
ü Indian companies can invest
up to 400% of their Net Worth in
overseas joint ventures [overseas investments by Indian corporate thru FDI route is expected to be over $15 bln thus surpassing FDI inflows into India
overseas joint ventures [overseas investments by Indian corporate thru FDI route is expected to be over $15 bln thus surpassing FDI inflows into India
ü Mutual Funds registered
with SEBI can invest overseas up to $ 7 bln
[previous limit $ 5 bln]. Qualified MFs can invest up to $ 1 bln in
overseas ETF subject SEBI guidelines
[previous limit $ 5 bln]. Qualified MFs can invest up to $ 1 bln in
overseas ETF subject SEBI guidelines
§ Effect
of global financial crisis [year 2008] on India
- The contagion effect of global financial
crisis has spread to India through all following channels:
Ø The financial
channel
Ø The real
channel, and
Ø The confidence
channel (importantly this happens in all financial crises)
- Impact on the financial channel:
o India's
financial markets – equity markets, money markets, forex markets and credit
markets came under pressure from a number of directions
o As a
consequence of the global liquidity squeeze, Indian banks and corporate found
their overseas financing drying up, forcing corporate to shift their credit
demand to the domestic banking sector
o In their
frantic search for substitute financing, corporate withdrew their investments
from domestic money market mutual funds putting redemption pressure on the MFs
and down the line on non-banking financial companies (NBFCs) where the MFs had
invested a significant portion of their funds.
o Substitution of
overseas financing by domestic financing brought both money markets and credit
markets under pressure
o The forex
market came under pressure because of reversal of capital flows as part of the global deleveraging process
o Simultaneously,
corporates were converting the funds raised locally into foreign currency to meet their external
obligations.
o The above
factors put downward pressure on the rupee
o The Reserve
Bank's intervention in the forex market to manage the volatility in the rupee further added to liquidity
tightening
- Impact on the real channel:
§ The
transmission of the global crisis to the domestic economy has been quite
straight forward through the slump in demand for exports [especially from the
United States, European Union and the Middle East which account for three quarters of India's goods and
services trade
o Service export growth slowed
in the near term as the recession deepened and financial services firms –
traditionally large users of outsourcing
services – were restructured
o Remittances from NRI
workers too slowed as the Middle East
adjusted to lower crude prices and advanced economies go into a recession.
- Impact on the confidence channel:
Ø Beyond the financial and
real channels of transmission as above, the crisis also spread through the
confidence channel
Ø In sharp contrast to global
financial markets, which went into a seizure on
account of a crisis of confidence, Indian financial markets continued to function in an orderly manner but the confidence in the share market and credit market was badly shaken
account of a crisis of confidence, Indian financial markets continued to function in an orderly manner but the confidence in the share market and credit market was badly shaken
Ø Further the tightened
global liquidity situation since Sep’08 together with a down turn in the credit cycle, increased the risk
aversion of the financial system and made banks cautious about lending thus
impacting confidence of corporate and individuals
Ø Though not being part of
the financial sector problem, India has been affected by the crisis through the pernicious feedback
loops between external shocks and domestic vulnerabilities by way of the
financial, real and confidence channels
§ How
India responded to the challenge?
Ø Both the
Government [GOI] and the Reserve Bank [RBI] of India responded to the challenge
in close coordination and consultation
Ø The main plank
of the GOI’s response was fiscal stimulus while the RBI’s action comprised
monetary accommodation and counter cyclical regulatory forbearance
Ø Monetary
policy response:
ü The RBI’s policy response was aimed at
containing the contagion from the outside
- to keep the domestic money and credit markets functioning normally and
see that the liquidity stress did not trigger solvency cascades
ü In particular
RBI targeted three objectives:
ü To maintain a
comfortable rupee liquidity position
ü To augment
foreign exchange liquidity
ü To maintain a
policy framework that would keep credit delivery on track so as to arrest the
moderation in growth
ü RBI’s measures
to meet the above objectives came in several policy packages starting
mid-September 2008, on occasion in response to unanticipated global
developments and at other times in anticipation of the impact of potential
global developments on the Indian markets
- RBI’s monetary policy response packages included, like in the case of
other central banks, both conventional and unconventional measures
Ø On the
conventional side RBI:
ü Reduced the
policy interest rates aggressively and rapidly [reduction in Repo rates]
ü Reduced the
quantum of bank reserves impounded by the central bank [reduction in CRR &
SLR] and
ü Expanded and
liberalized the refinance facilities for export credit.
ü Measures aimed
at managing forex liquidity included:
·
An upward adjustment of the interest rate ceiling on the foreign currency
deposits by non-resident Indians [FCNR deposits]
·
Substantially relaxing the ECB regime for corporates, and allowing
NBFCs and housing finance companies [HFCs] access to foreign borrowing
Ø
The important unconventional measures taken by
the RBI inter-alia are:
ü A rupee-dollar
swap facility for Indian banks to give them comfort in managing
their short-term foreign funding requirements
their short-term foreign funding requirements
ü An exclusive
refinance window as also a special purpose vehicle for supporting NBFCs and expanding the lendable resources
available to apex finance institutions
for refinancing credit extended to small industries, housing and exports.
- Government's
fiscal stimulus
ü Recognizing
the depth and extraordinary impact of global financial crisis,
the GOI invoked the emergency provisions of the FRBM (fiscal
responsibility management) Act to seek relaxation from the fiscal targets
and launched two fiscal stimulus packages in December 2008 and
January 2009
the GOI invoked the emergency provisions of the FRBM (fiscal
responsibility management) Act to seek relaxation from the fiscal targets
and launched two fiscal stimulus packages in December 2008 and
January 2009
ü These fiscal
stimulus packages, together amounting to about 3 per cent
of GDP, included:
of GDP, included:
§ Additional
public spending particularly capital expenditure
§ Government
guaranteed funds for infrastructure spending
§ Cuts in
indirect taxes [Cenvat]
§ Expanded
guarantee cover for credit to micro and small enterprises,
§ Additional
support to exporters
- Structural
factors that came to the aid of India?
§
There are also several structural factors that
have come to India's aid:
ü Notwithstanding
the severity and multiplicity of the adverse shocks, India's financial markets have shown admirable resilience. This
is in large part because India's banking system remains sound, healthy, well
capitalized and prudently regulated
ü India’s comfortable
reserve position provides confidence to overseas investors
ü Since a large
majority of Indians do not participate in equity and asset markets, the negative impact of the wealth loss effect that
is plaguing the advanced economies should be quite muted. Consequently,
consumption demand should hold up well
ü Because of
India's mandated priority sector lending, institutional credit for agriculture will be unaffected by the credit squeeze
ü The farm loan
waiver package implemented by the Government should further
insulate the agriculture sector from the crisis
insulate the agriculture sector from the crisis
ü Over the
years, India has built an extensive network of social safety-net programmes, including the flagship rural employment
guarantee programme, which should protect the poor and the returning migrant workers
from the extreme impact of the global crisis
§ Positives
Impact of India’s alignment with global financial systems
Ø Banking and financial
sector reforms [inter-alia - prudential norms,
capital adequacy and transparency]
capital adequacy and transparency]
Ø Reforms in the insurance
and pension fund sectors
Ø Increased flow of foreign
currency. There is massive movements of
funds to and fro India
funds to and fro India
Ø Strengthening and
structural changes in composition of forex reserves
[Fx reserves touched $ 315 bln (in 2008) & (in May’10) it is ~ $ 280 bln]
[Fx reserves touched $ 315 bln (in 2008) & (in May’10) it is ~ $ 280 bln]
Ø Implementation of Basel-II
norms and risk management practices
Ø Implementation of best
practices in trading, settlement and payment
systems
systems
Ø Indian stock exchanges NSE
and BSE emerging as best players and
enter into tie-up with foreign counterparts
enter into tie-up with foreign counterparts
Ø Rise of specialized
agencies to provide financial services to borrowers
and lenders across the borders i.e. financial intermediation at the
global level
and lenders across the borders i.e. financial intermediation at the
global level
Ø Inventions of various
methods or techniques of lending and borrowing
across the national borders with minimum risks
across the national borders with minimum risks
Ø Increased stature and
participation of India in IMF and other global
financial forums
financial forums
- Negative impact of alignment with global financial systems
- Increased participation by FIIs, hedge funds and others
leading
to continuous volatility and higher risk taking by local players - Heightened forex flows in and out resulting in higher
volatility in
forex markets with consequent impact on money market, capital
market and credit market - Though not fully integrated contagion impact any
financial crisis
is felt in the financial and real sectors - Indian financial institutions and corporate dealing in unrelated/unwanted
financial derivatives thereby increasing the
risk for all players in the market - Implementation of financial accounting standards [IFRS, IAS,etc] and the Marked to Market
[MtM] provisions resulting in higher costs and higher volatility in the earnings [
at least in the initial years]
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