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Gilts Scam Underscores Need For Rbi-Sebi Coordination

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BUSINESS STANDARD
Last Updated : Jan 28 2013 | 12:45 AM IST

In 1992, a banking scam spilled over to the capital markets. And in 2001, it was the other way round.

The distinctions between various financial intermediaries and markets are becoming blurred and the barriers are being pulled down but the regulatory approach still remains a fragmented one. The confusion over regulations in certain segments of the markets such as private placement of corporate paper continues. This is in spite of both the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (Sebi) trying hard to plug the loopholes.

Sebi regulates the equity market while the RBI regulates the debt market including those for government bonds, money market instruments, interest rate futures and swaps. Corporate debt, however, is regulated by Sebi.

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The latest scam in gilts market where a string of cooperative banks lost money once again has turned the spotlight to the RBI-Sebi coordination lacuna once again. Some of the brokers have found to have taken the banks for a ride but the RBI cannot take them to task as these brokers are regulated by the Sebi and not the RBI. The apex bank has been taking measures to ensure liquidity in the capital market.

For instance, last year, it allowed margin trading whereby brokers can leverage bank funds for trading in the equity markets. The guidelines specify rules for ensuring end-use of the funds lent, while prohibiting development of any nexus between banks and their client brokers. This has made banks wary of lending to the brokers.

Other capital market related announcements during the year included banning overseas corporate bodies (OCBs) from portfolio investments and allowing foreign institutional investors (FIIs) to trade in the entire gamut of derivative products. Margin trading, however, never took off for various reasons.

The ban on OCB portfolio investments was triggered by the findings that OCBs floated by corporates and brokers were used to manipulate the market by taking huge positions and jacking up prices while funds were siphoned out of the country.

The OCBs, however, can still participate in initial public offerings and private equity placements.

In February this year, the RBI allowed FIIs to trade in index options, individual stock options and futures as well. It also raised foreign institutional investor (FII) exposure limit in such products.

Earlier, FII exposure to the derivatives markets was restricted to the limit of their exposure in the cash market. This is expected to have an impact in coming months especially from June when physical delivery in the derivatives segment will take place.

A greater coordination between the two regulators is important as the stock market has already entered into a new phase of rolling settlement. The exchanges have moved from T+5 to T+3 settlement and the transition can succeed if it is backed by an efficient stock lending and borrowing mechanism. This is possible only when the electronic fund transfer (EFT) system is in place.

The EFT facility is now available at 13 centres covering more than 8,000 bank branches and it will be available at 40 centres by the end of the year after integration with State Bank of India managed Clearing Corporation of India Ltd covering almost 75 per cent of the transactions.

The real time gross settlement system (RTGS) is expected to be operationalised soon, thereby facilitating real-time fund settlement on a gross basis, which will ensure finality of settlement. Since margin trading has not taken off, the RBI can permit stock exchanges to borrow funds from banks and onlend them to brokers.

In this scenario, the SEs will bear the risk of the borrowed funds. The modalities of this can be worked out between Sebi and RBI. The retailing of debt in the secondary market is still in the preliminary stages.

The plan is to trade government securities on the exchanges the way equities are traded. Hundred per cent dematerialisation and screen-based trading in gilts will deepen the debt market which is the need of the hour.

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First Published: Apr 26 2002 | 12:00 AM IST

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