PFs, insurers may get to invest overseas

The committee on financial sector reforms headed by Raghuram Rajan has recommended that provident funds and insurance companies should be allowed to invest abroad, a move that will require legislative changes.

The panel's draft report has also called for the introduction of "true auctions" in securities, reduction in the auction and trading period, unified disclosure norms for multiple securities, use of call options for opening and closing price on exchanges and removal of regulatory restrictions against algorithmic trading.

The committee also suggested the creation of investment avenues, especially in foreign government securities, to relieve the pressure on inflows.

The government and the Reserve Bank of India can always regulate these outflows depending on foreign exchange flows, it pointed out.

In recent times, policymakers have been grappling with the rupee appreciation on account of large dollar inflows into the Indian markets.

The committee has said the central bank should refrain from intervening in the foreign exchange market to modulate the exchange rates.

There was no point in restricting capital flows; the government should instead liberalise the financial markets and make them more open to foreign players, the 10-member committee pointed out.

A large number of foreign investors in the government bond market will result in more liquidity and allow the domestic banks and institutions to focus on other areas.

While arguing that fiscal discipline is essential to financial sector liberalization, the panel has stressed on capital account convertibility and discontinuation of the securities transaction tax.

The committee wants a level-playing field for all players in the financial markets and an end to such position limits and quantitative restrictions as imposed by the mutual funds on overseas investments.

The government and regulators should refrain from imposing a ban on trading. On budget eve last year, futures trading in commodities such as wheat was halted, citing inflation.

"India has a strong equity market in place. But the environment needs to be made more conducive to private equity, venture capital and hedge funds. Mutual funds and pension funds (when they emerge) should play a more active role in governance. The corporate bond market is moribund and will have to be revived. Indian companies and investors need better access to international financial services and the Indian financial firms need to enhance their production of international financial services," the committee observed.

While convertibility will make it easier for foreign players to access the Indian markets, the panel wants a change in rules to enable the poor to participate in the equity and commodities markets as this will help in improving liquidity and depth.

For instance, it talks about allowing systematic investment plans as low as Rs 200 a month by roping in self-help groups and permitting small-ticket size transactions in the commodity futures market.

But these will need a change to norms, including that for permanent account numbers.

The committee said a number of financial sector reform initiatives could be pushed through within the existing legal framework and listed a dozen such initiatives.

With debt markets gaining in importance, particularly due to the large infrastructure financing needs, the committee emphasized on linking the bonds, currency and derivatives (BCD) markets to improve efficiency and finally connecting them with the equity markets.

MARKET-FRIENDLY MEASURES

Exchange-traded currency derivatives in all currencies with rupee settlement to be traded on NSE and BSE

Exchange-traded interest rate derivatives using both cash settlement and physical settlement with trading on NSE and BSE

Improvements in the market design, including 'true auctions' for primary market sale of securities, reduction in period between auction and start of trading

Domestic hedge funds with large minimum investment should be recognised and registered

Three-tier world of financial markets, comprising public and professional exchanges and OTC market. Phasing out of STT

Sebi needs to establish a speedier and new product approval process and introduce new methods of price discovery, clearing and settlement