SCRA amendment move ruffles feathers

While the Reserve Bank of India (RBI) is concerned that the amendment will deal a blow to the over the counter (OTC) derivatives and swaps market, the brokers' lobby is opposing it since the Act seeks to corporatise and demutualise the stock exchanges.

The RBI does not favour the government move of amending the Securities Contract Regulation Act (SCRA) ahead of the RBI Act amendment.

The SCRA Amendment Bill 2003 will deal a body blow to the OTC derivatives and swaps market as Section 18A of the bill seeks to declare all "contract for differences" which are not traded on exchanges as illegal. It will also affect the commodity futures trade as these are all OTC derivatives.

"The bill seeks to prohibit all OTC derivatives. This will affect the money market as well as the commodity market to a large extent. Only the exchange-traded derivatives will be allowed," said a banking source.

"Contract for differences" refers to those contracts where the settlement is based on netting out of the price differential.

Money and foreign exchange market instruments such as interest rate swaps (IRS) and forward rate agreements (FRAs) are such contracts.

The central bank wants the government to amend the RBI Act ahead of the SCRA as the amended RBI Act will empower the banking sector regulator to oversee the legal aspects of the money market trades.

While the Sebi Act gives the capital market watchdog the power to regulate the equity market and the Forward Contract Regulation Act (FCRA) outlines the legal implications of the commodity trades, the RBI Act does not focus on the legal aspects of the money market trades.

"There is no separate Act for the money market. Once the RBI Act is amended, the banking regulator will have the absolute power to regulate the derivatives market and all OTC derivatives will come under its control," said a source.

The SCRA amendment will also pave the path for demutulisation and corporatisation of stock exchanges. As a result, the brokers who run the exchanges now will lose their say on the vast real estates of the exchanges.

The amended SCRA will give wide powers to the Securities and Exchange Board of India (Sebi) which will be in a position to impose up to Rs 25 crore penalty on brokers for furnishing false statements. The penal measures will also include imprisonment up to 10 years.