The High-Level Coordination Committee (HLCC) on Financial Markets is meeting tomorrow to chart a road map for the government’s reforms agenda for the sector.
The government has already sent a note to HLCC members highlighting recommendations by committees led by Percy Mistry and Raghuram Rajan.
Among the points highlighted by the government are consideration of a bond, currency derivative market (BCD) nexus so that these markets can function seamlessly. A well-functioning BCD nexus is an integrated market featuring government bonds, corporate bonds and currencies — across both exchange-traded and OTC markets and across spot and derivatives markets.
HLCC comprises officials from the Reserve Bank of India (RBI), the Securities and Exchange Board of India (Sebi), Insurance Regulatory and Development Authority and the Pension Fund Regulatory and Development Authority (PFRDA).
The other point to be discussed include conversion of the Securities Appellate Tribunal into a Financial Services Appellate Tribunal that will hear complaints and cases against all regulators and not only from Sebi.
The committee will also consider the development of the government securities market along with the segregation of the debt management office and human resource initiatives for financial market development.
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Officials said banking sector reforms will be an important part of the discussions because decisions need to be taken fast on branch authorisation, the holding company model, cross border supervision norms and opening up of the banking sector in line with India's WTO commitments.
On the first issue, foreign banks have been demanding a relaxation in the norms for opening branches. Many of them also wanted to set up subsidiaries in the country but were deterred by tax hurdles and other disclosure requirements. Also, according to the RBI roadmap for foreign banks in 2004, these banks will be required to list their wholly-owned subsidiaries in India.
The holding company model for banks will also be revisited, though the RBI has opposed the proposal. Banks like ICICI Bank and State Bank of India have been asking for permission to set up a holding company, which in turn can set up banks or other financial services companies. RBI, however, felt that this would dilute supervision and also make it difficult to monitor fund diversion from banks to other entities.
The other agenda is cross-border supervision norms and opening the banking sector as per WTO commitments. Monitoring overseas operations of Indian banks has become significant after the sizeable exposure of overseas operations of Indian banks in derivative instruments like credit-linked notes and credit default swaps, which resulted in huge mark-to-market losses and capital provisioning.
The HLCC will also take into account the views of RBI, which has not favoured the Percy Mistry Committee and Raghuram Rajan Committee recommendations since most of these would entail full capital account convertibility. RBI has brought out its own report on financial sector reforms.
The committee headed by Percy Mistry, a former World Banker, submitted its report on making Mumbai an international financial centre to the finance ministry in April 2007. The Planning Commission then appointed another panel on financial sector reforms, headed by Raghuram Rajan, former chief economist at the International Monetary Fund.
The panel, which submitted its report in April 2008, recommended, among other things, that the government sell its stake in public sector banks, allow more foreign flows into the bond markets and rework the regulatory landscape.
The RBI's six-volume report — a comprehensive review of the country's financial system — was prepared by a committee formed in 2006 by the government and RBI. The committee, headed by Deputy Governor Rakesh Mohan, submitted its report in March 2009.
Meanwhile, RBI had already sent a status report on market reforms to the finance ministry after the new government took charge. The report has highlighted relaxed entry norms for foreign investors into India debt and capital markets, and the introduction of financial products like interest rate futures, interest rate options, currency options and exotic products in currencies other than rupee dollar.
Sebi is likely to present a status report on the capital markets and will present its views on furthering a proposal on trading corporate bonds in the stock exchange. The limit for foreign institutional investors in debt (government securities and corporate bonds) may be raised, while FIIs may be allowed to participate in Indian Depository Receipts (IDRs).