Dr. Prashant Desai, Assistant Professor, National Law School of India University (NLSIU)Part of course material of Banking Law at NLSIU
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Understanding Finance Sector in
India
Dr. Prashant S. Desai
Assistant Professor in Law,
National Law School of India University,
Bangalore‐560 072.
Module contents
• Understanding the architecture of finance
sector in India
• Brief background of ‘regulation’ pertaining to
finance sector in India
• Flagging‐up of few ‘challenges’ and ‘grey
areas’ of finance sector
• Contextualizing the future discourse
What is finance sector?
• Interestingly the term ‘finance sector’ is
not ‘technically’ or ‘legally’ defined
• There are few explanations
OECD’s explanation
• “financial sector is the set of institutions,
instruments and the regulatory
framework that permit transactions to be
made by incurring and settling debts;
that is by extending credit”
Another explanation
• “the term ‘financial system’, implied a set of
complex and closely connected or interlinked
institutions, agents, practices, markets,
transactions, claims and liabilities in the
economy. The financial system is concerned
about money, credit and finance – the three
terms are intimately related yet are somewhat
different from each other”
Yet another explanation
• “financial institutions are business
organizations that act as mobilizers and
depositories of savings and as purveyors
of credit or finance. They also provide
various financial services to the
community”
Few more observations
• The financial institutions differ from non‐
financial (industrial and commercial) business
organizations in respect of their dealings;
• While the former deal in financial assets such
as deposits loans securities and so on
• The latter deal in equipment, stocks of goods,
real estate etc.,
Indian finance sector
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Banking institutions
Non Banking Finance Companies
Investment/Merchant banks
Mutual Funds
Insurance Companies
Factoring and Factoring Companies
Venture Capital Companies
Housing Finance Companies
Portfolio Managers
Micro Finance Companies
Banking institutions
• The institutions doing ‘banking’ business
– Acceptance of deposits and extension of credit
facilities
– Recognized as banking companies by the relevant
law (i.e., either their respective dedicated statute
or The Banking Regulation Act, 1949)
• Roughly the Indian Banks can be classified as
– Scheduled and
– Non‐Scheduled banks
Non‐banking finance companies
• Popularly known as NBFCs
• These are regulated by RBI and allowed
to raise deposits from the public
• They offer financial services such leasing,
hire purchasing, vehicle financing etc.,
• NBFC is a company registered under the
Companies Act, 1956, engaged in the business
of loans and advances, acquisition of shares,
stock, bond, hire‐purchase, insurance
business, or chit business: but does not
include any institution whose principal
business is that of agriculture activity,
industrial activity, sale/purchase/construction
of immovable property.
• As per the RBI Act, a 'non‐banking financial
company' is defined as:‐
(i)a financial institution which is a company;
(ii)a non banking institution which is a company and
which has as its principal business the receiving of
deposits, under any scheme or arrangement or in
any other manner, or lending in any manner;
(iii)such other non‐banking institution or class of
such institutions, as the bank may, with the
previous approval of the Central Government and
by notification in the Official Gazette, specify.
• For regulatory purposes, NBFCs have been
classified into 3 categories:
a) Those accepting public deposits,
b) Those not accepting public deposits but
engaged in financial business and
c) Core investment companies with 90% of their
total assets as investments in the securities
of their group/ holding/ subsidiary
companies.
• Depending upon the nature and type of service
provided, they are categorized into:
Asset finance companies
Housing finance companies
Venture capital funds
Merchant banking organizations
Credit rating agencies
Factoring and forfaiting organizations
Housing finance companies
Stock brokering firms
Depositories
• “Notwithstanding their diversity, NBFCs are characterised
by their ability to provide niche financial services in the
Indian economy. Because of their relative organisational
flexibility leading to a better response mechanism, they
are often able to provide tailor‐made services relatively
faster than banks and financial institutions. This enables
them to build up a clientele that ranges from small
borrowers to establish corporate. While NBFCs have
often been leaders in financial innovations, which are
capable of enhancing the functional efficiency of the
financial system, instances of unsustainability, often on
account of high rates of interest on their deposits and
periodic bankruptcies, underscore the need for
reinforcing their financial viability.”
‐ Report on trends on progress of banking in India 2002‐03
Investment banks
• Cater to the long term investment requirements
of the markets
• Generally participate in equity capital of the
company or extension of long term capital
• A financial intermediary that performs a variety
of services. This includes underwriting, acting as
an intermediary between an issuer of securities
and the investing public, facilitating mergers
and other corporate reorganizations, and also
acting as a broker for institutional clients.
Mutual funds
• A mutual fund is a company that pools money
from many investors and invests in well
diversified portfolio of sound investment.
• issues securities (units) to the investors (unit
holders) in accordance with the quantum of
money invested by them.
• profit shared by the investors in proportion to
their investments.
• set up in the form of trust and has a sponsor,
trustee, asset management company and
custodian
• advantages in terms of convenience, lower risk,
expert management and reduced transaction
cost.
• Very critical in today’s financial services market
• The funds are invested in various instruments
and managed by the Asset Management
Companies, which act as Investment Manager
of the Mutual Fund
• They give small investors access to professionally
managed, diversified portfolios of equities, bonds
and other securities, which would be quite
difficult to create with a small amount of capital.
• Each shareholder participates proportionally in
the gain or loss of the fund.
• Mutual Fund Regulations, 1996 of Securities
Exchange Board of India
• Mutual Fund is also registered as Trust under the
Indian Trust Act, 1882
Mutual Fund Operation Flow Chart
Insurance companies
• Commenced playing a dominant role in the
financial markets especially after privatization
• Competition in the insurance sector has
created many attractive insurance products of
different nature to investors at affordable
rates
• Regulated by Insurance Regulator Authority of
India
Factoring Companies
• Involves the sale of receivables by a company
to a financial intermediary who will undertake
the activity of maintenance of accounts,
collection of debts and financing against
receivables
• Not very much picked up in India as of now
– Insufficient credit information,
– Lack of data to evaluate the debtors and
– Clear assessment of risks factors
– Absence of clear statute to support the activity
Venture capital
• Is the extension of capital assistance or
participation by a company or high net worth
investor to assist a start up and untested
project
• This is to encourage upcoming entrepreneurs
to take up new business initiatives
• Venture Capitalists are regulated by SEBI
under the Venture Capital Regulations
1.The institutions such as IDBI played a key role as
Venture Capitalists in the country.
2.However, with the introduction of Cess of Five
Percent on technology import payments, in the
budget of 1987‐88, the Government of India
created a pool of funds to assist the venture
capital undertakings.
3.Today the country has venture capital funds
owned by the banks, development Finance
Companies and Private Sector companies owned
by high net worth individuals.
4.Today the majority of the start up projects are
financed by the private sector companies.
Housing finance companies
• Provide funding to the construction or
purchase of houses by individuals, companies
etc.,
• Establishment of Housing & Urban
Development Corporation (1970)
• National Housing Bank (as subsidiary of RBI)
• Housing Development Finance Company
• The National Housing Bank has been set up as an
apex institution under the National Housing Bank
Act, 1987 on July 9, 1988.
• The objective of the Bank is to operate as a
principal agency to promote housing finance
institutions both at local and regional levels and
to provide financial and other support to such
institutions.
• The GoI has adopted a comprehensive National
Housing Policy which envisages development of a
viable and accessible institutional system for the
provision of housing finance. The Banks have set
up specialized housing finance institutions.
Portfolio managers
• Financial service (either by stock broker or
NBFC) to invest on behalf of investors in
shares and stocks
• Especially where – investors do not directly
want to invest but are interested in high
returns from the stock markets
• Portfolio Management services are regulated
under SEBI (Portfolio) Management
Regulations
Micro finance companies
• Microfinance is the provision of financial services
to low‐income clients or solidarity lending groups
including consumers and the self‐employed, who
traditionally lack access to banking and related
services.”
– Provide self financial assistance to the poor
women in rural areas for the development of
tiny or small industrial growth
• In India it has grown multifold in recent years
• These companies avail credit facilities from
the bank to extend these loan facilities
• Till recently there was no ceiling of loan by
these companies nor these companies were
regulated.
• However, it is proposed to bring a separate
legislation to regulate these companies and
also proposes to cap the ceiling of lending by
these companies.
The regulatory environment
• Points for Discussion
• Principles related to Regulators
• Why regulate finance sector?
• The fundamental underpinning of policies
a) Protection of investors
b) Ensuring that markets are clear, efficient &
transparent
c) Reduction of systemic risk
• The new emerging challenge
• Salient features
• Regulatory principles
• Various Regulatory Bodies
• Financial Sector Legislative Reforms Commission
• Analysis of Financial Sector Reforms
a) Reforms in Banking Sector
b) Reforms in the Government Securities Market
c) Reforms in the Foreign Exchange Market
• Regulation refers to controlling human or societal
behavior by rules or regulations or alternatively a
rule or order issued by an executive authority or
regulatory agency of a government and having
the force of law.
• Financial regulation deals with directing the
financial institutions like banks, insurance
companies, mortgage loan companies, etc.to
fulfill certain requirements, imposing certain
restrictions and setting out guidelines so as to
keep up the integrity of the entire financial
system.
Principles related to Regulators
• The regulators should have clearly & objectively
stated responsibilities;
• they should have operational independence &
accountability in the exercise of its powers &
functions;
• they should adopt clear & consistent regulatory
processes;
• they should observe the highest professional
standards including appropriate standards of
confidentiality.
Why regulate finance sector?
• Obvious answer…
– That every human conduct has to be regulated
from the societal point of view
• Specific answer…
– Regulation to encompass all activities/institution
of finance sector in order to ensure equity in their
conduct, so that end users are given a fair deal
and any unscrupulous players dealt with firm hand
The fundamental underpinning of
policies
1. the economic stability
a. Reduction of ‘systemic risks’
b. Maintenance of ‘customer confidence’ (by prevention
of market abuse and fraudulent activities)
2. Necessary support for overall equitable
economic development
3. Investor interest protection
4. Of course … the better protection of the
financial sector operators themselves
Protection of investors
• Investors are required to be protected from being
mislead or manipulated from fraudulent practices
including insider trading and misuse of client
assets.
• It is the task of the regulator to set minimum
standard for market participants in order to
achieve a level of investor protection.
• The market intermediaries should be able to refer
to rules of business conduct that ensure that
investors will be treated in a just and equitable
manner.
Ensuring that markets are clear,
efficient & transparent
• It is the task of the regulator to ensure that
there are regulations for the protection of the
investor and to ensure fairness while at the
same time ensuring that there is efficient and
transparent dissemination of information.
Reduction of systemic risk
• No amount of regulation or oversight can
guarantee against the possibility of financial
failure of a market intermediary.
• However, regulation can and should aim to
reduce the risk of failure. Where such failure
does occur, it is the role of the regulator to
seek to reduce the impact of that failure and
to attempt to isolate the risk solely to the
failing institution.
The new emerging challenge
• Globalizing trend (reduction of
geographical boundaries) has further
added to the complexity of the
regulation of financial sector
Salient features
• The counter trend (compared to generic trend
of liberalization) from lesser to more
‘stringent’ regulation
• Emerging global consciousness
• Broad ‘sustentative’ legislation: and plethora
of ‘subordinate’ legislation
Regulatory principles
RULE BASED
REGULATION
Less discretionary & regulator is
guided by the ‘letter of law’
PRINCIPLE
BASED
REGULATION
Greater latitude to the market
players – fosters a culture of mutual
trust and faith in the regulator,
DISCRETION
BASED
REGULATION
More discretion with the regulator
making him more powerful
Various Regulatory Bodies
• RBI – it is the central banking regulatory that
governs the monetary policy of the Indian Rupee.
• The Regulation & supervision of banks are key
elements of a financial safety net as banks are
often found at the center of systemic financial
crisis.
• The Reserve Bank regulates & supervises the
major part of the financial system. The
supervisory role of the Reserve Bank covers
commercial banks, urban cooperative banks,
some FIs & NBFCs.
• Some of the FIs, in turn, regulates and/or supervise
other institutions in the financial sector, viz., RRB &
central and state cooperative banks are supervised
by NABARD, and housing finance companies by
National Housing Bank (NHB).
• Its objectives are to maintain public confidence in
the system, protect depositor’s interest and provide
cost‐effective banking services to the public.
• The Banking Ombudsman Scheme has been
formulated by the RBI for effective addressing of
complaints by bank customers.
• The RBI controls the monetary supply, monitors
economic indicators like the gross domestic
product and has to decide the design of the
rupee banknotes as well as coins. In accordance
with provisions of the RBI Act, 1934 its main
functions are:
i. Operating monetary policy with the aim of
maintaining economic and financial stability and
ensuring adequate financial resources for
development purposes;
ii. Meeting the currency requirement of the
public;
iii. Promotion of an efficient financial system;
iv. Foreign exchange reserve management;
v. The conduct of banking and financial
operations of the government.
• “To regulate the issue of Bank Notes and
keeping of reserves with a view to securing
monetary stability in India and generally to
operate the currency and credit system of the
country to its advantage.”
• SEBI – it is a statutory body that governs the
securities market of India with a view of
protecting the interest of investors.
• This body lays down regulations in order to
ensure orderly growth and smooth
functioning of the Indian Capital market.
• The overall objectives of SEBI are to protect
the interest of investors and to promote the
development of stock exchanges and to
regulate the activities of stock market.
Protective Functions of SEBI
• This function is performed by SEBI to protect
the interest of investor and provide safety of
investment.
• SEBI checks price rigging, prohibits insider
trading, prohibits fraudulent and unfair trade
practices in which it does not allow the
companies to make misleading statements
which are likely to induce the sale and
purchase of securities by any other person.
Developmental Functions of SEBI
• These functions are performed by SEBI to
promote and develop activities in stock
exchange and increase the business in stock
exchange.
• SEBI promotes training of intermediaries of
the securities market, tries to promote
activities of the stock exchange by adopting
flexible and adoptable approach.
Regulatory Functions of SEBI
• It has framed rules & regulations and a code of
conduct to regulate the intermediaries such as
merchant bankers, brokers, under writers, etc.
• It registers and regulates the working of stock
brokers, sub brokers, share transfer agents, and
all those who are associated with stock exchange
in any manner.
• It registers and regulates the working of mutual
funds etc.
• It regulates takeover of companies.
• It conducts inquiries and audit of stock exchanges
Forward Markets Commission (FMC)
• It is the chief regulator of forwards and futures market
in India.
• It is a statutory body set up under the Forward
Contracts (Regulation) Act, 1952
• It regulates the commodity derivative markets and
brokers.
• It provides regulatory oversight in order to ensure
financial integrity (i.e. to prevent systemic risk of
default by one major operator or group of operators),
market integrity (i.e. to ensure that future prices are
truly aligned with the prospective demand and supply
conditions) and to protect & promote interests of
consumers/ non‐members.
• The forward market commission performs the
role of a market regulator. After assessing the
market situation and taking into account the
recommendations made by the Board of
Directors of the Commodity Exchange, the
Commission approves the rules and
regulations of the Exchange in accordance
with which trading is to be conducted.
Insurance Regulatory and Development
Authority
• It is an autonomous apex statutory body which
regulates and develops the insurance industry in India.
• It is responsible to protect the rights of policyholders.
• Its role and responsibilities involves providing
certificate of registration to a life insurance company,
to frame regulations on protection of policyholder’s
interests, specifying the requisite qualifications, code
of conduct and practical training for intermediaries or
insurance intermediaries and agents.
• It also aims to promote and regulate activities of
professional organizations connected with life
insurance, to adjudicate disputes between insurers and
intermediaries or insurance intermediaries etc.
Pension fund Regulatory and Development
Authority
• PFRDA‐ it is an agency which promotes old age
income security by regulating and developing
pension funds.
• The National Pension System Trust is composed
of members representing diverse fields and
brings wide range of talent to the regulatory
framework.
• It also intends to intensify its effort towards
financial education and awareness as a part of its
strategy to protect the interest of the subscribers.
• Ministry of Finance – it is concerned with
taxation, union budgets, capital markets and
finances for the Centre and State.
• High Level Coordination Committee – it
maintains coordination between the
regulators.
Financial Sector Legislative Reforms
Commission
• The Union Ministry of Finance constituted the FSLRC in
March 2011, with a mandate to review and suggest
changes to existing laws & regulatory institutions in the
financial sector to bring them up to speed with globally
prevalent standards.
• Two years later, a report was released which advocated
a comprehensive overhaul of the existing regulatory
framework, including the replacement of a substantial
body of existing laws with the Indian Financial Code
drafted by FSLRC.
• FSLRC has its responsibility of reviewing, simplifying
and modernizing the legislations affecting the financial
markets.
• FSLRC has endorsed a transition to a more
scientific regulatory architecture recommended
by government reports such as Raghuram Rajan
Committee report and Percy Mistry Committee
report.
• The lesson learnt from the global economic
downturn pressed FSLRC to propose a new
regulatory framework.
• The three elements in FSLRC approach are:‐
1. Modes of independence
2. Accountability
3. Rule making process of regulators.
• The regulatory objectives should be clearly defined.
• The regulator should be empowered with respective
instruments that do not prevent innovation.
• At times the regulator might have to choose between
innovation and reducing risk, but eliminating risk
altogether is not a good option as it will restrict finance
from reaching out to new customers, products and
markets, thus restricting the power of the regulator.
• With a vision to protect public interest FSLRC
emphasizes on governance of regulation. Regulators
will be independent but should be accountable. It
discourages the idea of bringing too many innovations
in the financial system and echoes to keep it simple but
powerful.
• The FSLRC has suggested the creation of the
Unified Financial Agency (UFA), a new body which
would be entrusted with micro‐prudential
regulation and consumer protection for all
financial sectors other than banking and payment
systems.
• This body would subsume the existing regulators
for capital markets (SEBI), forward markets
(Forward Market Commission), insurance (IRDA)
and pension (Pension Fund Regulatory and
Development Authority).
• RBI would continue in the new setup as the
regulator for banking and payment systems
and frame monetary policy.
• RBI would also be responsible for capital
outflows from the country, a change from the
present model where the RBI makes rules for
capital account transactions in consultation
with the government and vice‐versa for
current account transactions.
• The FSLRC also envisages the creation of the
Public Debt Management Agency (PDMA), an
independent body which will take over the task of
handling governmental market borrowings from
the RBI, and will additionally manage the cash
and contingent liabilities of the government.
• The Financial Stability and Development Council,
which currently comprises various sectoral
regulators and officials of the Ministry of Finance,
will be granted the status of a statutory body &
will be responsible for managing systemic risks
and coordinating between different regulatory
agencies.
• The FSLRC has suggested the creation of a
Resolution Corporation in place of the Deposit
Insurance and Credit Guarantee Corporation
to assist in the speedy resolution and closure
of all systematically important financial
institutions or those having strong linkages to
consumers such as banks, insurance
companies or pension funds.
• Financial Redressal Agency (FRA) would be
operating as a consumer grievance redressal
mechanism across the financial sector.
• Appeals from the FRA and decisions in respect of
certain functions of the UFA, the RBI and the
Resolution Corporation, will be heard by the
Financial Sector Appellate Tribunal (FSAT), within
which the Securities Appellate Tribunal will be
subsumed.
• Additionally, the FSAT will be empowered to
review regulations on grounds like procedural
defects, the regulator exceeding its mandate, or
the regulations being in violation of the Code.
Analysis of Financial Sector Reforms
• Remove financial repression that existed
earlier;
• Create an efficient, productive and profitable
financial sector industry;
• Enable price discovery, particularly, by the
market determination of interest rates that
then helps efficient allocation of resources;
• Provide operational and functional autonomy
to institutions;
• Prepare the financial system for increasing
international competition;
• Open the external sector in a calibrated fashion;
• Promote the maintenance of financial stability
even in the face of domestic and external shocks.
• The main aim of the reforms in the early phase of
reforms, known as first generation of reforms,
was to create an efficient, productive and
profitable financial service industry operating
within the environment of operating flexibility
and functional autonomy.
Panchasutra or five principles
• Cautious and appropriate sequencing of
reform measures.
• Introduction of norms that are mutually
reinforcing.
• Introduction of complementary reforms across
sectors.
• Development of financial institutions.
• Development of financial markets.
Reforms in Banking Sector
• Prudential Measures
1) Introduction & phased implementation of
international best practices and norms on risk‐
weighted capital adequacy requirement, accounting,
income recognition, provisioning and exposure.
2) Measures to strengthen risk management through
recognition of different components of risk,
assignment of risk‐weights to various asset classes,
norms on connected lending, risk concentration,
application of market‐to‐market principle for
investment portfolio & limits on deployment of fund
in sensitive activities.
• Competition Enhancing Measures
1) Granting of operational autonomy to public
sector banks, reduction of public ownership in
public sector banks by allowing them to raise
capital from equity market up to 49% of paid‐up
capital.
2) Transparent norms for entry of Indian Private
sector, foreign & joint‐venture banks &
insurance companies, permission for foreign
investment in the financial sector in the form of
FDI as well as portfolio investment, permission
to banks to diversify product portfolio &
business activities.
• Measures Enhancing Role of Market Forces
1) Sharp reduction of pre‐emption through reserve
requirement, market determined pricing for
government securities, disbanding of
administered interest rates with a few
exceptions & enhanced transparency &
disclosure norms to facilitate market discipline.
2) Introduction of pure inter‐bank call money
market, auction‐based repos‐reverse repos for
short‐term liquidity management, facilitation of
improved payments and settlement mechanism.
• Institutional & Legal measures
1) Setting up of Lok Adalats, DRTs, ARCs, Settlement
advisory committees, corporate debt restructuring
mechanism, etc. for quicker recovery/restructuring.
Promulgation of SARFAESI Act & its subsequent
amendment to ensure creditor rights.
2) Setting up of Credit Information Bureau for
information sharing on defaulters as also other
borrowers.
3) Setting up of Clearing Corporation of India Ltd. (CCIL)
to act as central counter party for facilitating
payments & settlement system relating to fixed
income securities & money market instruments.
• Supervisory Measures
1) Establishment of the Board for Financial
Supervision as the apex supervisory authority
for commercial banks, financial institutions and
NBFCs.
2) Introduction of CAMELS ( Capital Adequacy,
Assets, Management Capability, Earnings,
Liquidity, Sensitivity) supervisory rating system,
move towards risk‐based supervision,
consolidated supervision of financial
conglomerates, strengthening of off‐site
surveillance through control returns.
3) Recasting of the role of statutory auditors,
increased internal control through strengthening
of internal audit.
• Strengthening corporate governance, enhanced
due diligence on important shareholders, fit and
proper tests for directors.
• Technology Related Measures
• Setting up of INFINET as the communication
backbone for the financial sector, introduction of
Negotiated Dealing System (NDS) for screen‐
based trading in government securities and Real
Time Settlement (RTGS) System.
Reforms in the Government Securities
Market
• Institutional Measures
• Administered interest rates on govt. securities
were replaced by an auction system for price
discovery.
• Automatic monetization of fiscal deficit trough
the issue of ad hoc Treasury Bills was phased
out.
• Primary Dealers were introduced as market
makers in the government securities market.
• For ensuring transparency in the trading of govt.
securities, Delivery versus Payment settlement system
was introduced.
• Repurchase agreement (repo) was introduced as a tool
of short‐term liquidity adjustment. Subsequently, the
Liquidity Adjustment Facility (LAF) was introduced. LAF
operates through repo and reverse repo auctions to set
up a corridor for short‐term interest rate. LAF has
emerged as the tool for both liquidity management
and also signaling device for interest rates in the
overnight market.
• Market Stabilization Scheme (MSS) has been
introduced, which has expanded the instruments
available to the Reserve Bank for managing the surplus
liquidity in the system.
• Enabling Measures
• Foreign Institutional Investors (FIIs) were allowed to
invest in government securities subject to certain
limits.
• Introduction of automated screen‐based trading in
government securities through Negotiated Dealing
System(NDS). Setting up of risk‐free payments and
settlement system in govt. securities through Clearing
Corporation of India Ltd (CCIL). Phased introduction of
Real Time Gross Settlement System (RTGS).
• Introduction of trading of government securities on
stock exchanges for promoting retailing in such
securities, permitting non‐banks to participate in repo
market.
Reforms in the Foreign Exchange
Market
• Exchange Rate Regime
• Evolution of exchange rate regime from a single‐
currency fixed‐exchange rate system to fixing the value
of rupee against a basket of currencies & further to
market‐determined floating exchange rate regime.
• Adoption of convertibility of rupee for current account
transactions with acceptance of Article VIII of the
Articles of Agreement of the IMF. De facto full capital
account convertibility for non residents and calibrated
liberalization of transactions undertaken for capital
account purposes in the case of residents.
• Institutional Framework
• Replacement of the earlier FERA, 1973 by the
market friendly FEMA, 1999. delegation of
considerable powers by RBI to Authorized
Dealers to release foreign exchange for a
variety of purposes.
• Increase in Instruments in the Foreign Exchange
Market
• Development of rupee‐foreign currency swap
market.
• Introduction of additional hedging instruments,
such as, foreign currency‐rupee options.
Authorized dealers permitted to use innovative
products like cross‐currency options, interest rate
and currency swaps, caps/collars and forward
rate agreements (FRAs) in the international forex
market.
• Liberalization Measures
• Authorized dealers permitted to initiate trading
positions, borrow and invest in overseas market
subject to certain specifications and ratification
by respective Banks’ Boards. Banks are also
permitted to fix interest rates on non‐resident
deposits, subject to certain specifications, use
derivative products for asset‐liability
management and fix overnight open position
limits and gap limits in the foreign exchange
market, subject to ratification by RBI.
• Permission to various participants in the foreign
exchange market, including exporters, Indians
investing abroad, Foreign Institutional Investors
(FIIs), to avail forward cover and enter into swap
transactions without any limit subject to genuine
underlying exposure.
• FIIs and NRIs permitted to trade in exchange‐
traded derivative contracts subject to certain
conditions.
• Foreign exchange earners permitted to maintain
foreign currency accounts. Residents are
permitted to open such accounts within the
general limit of US $ 25,000 per year.