CDS recast timing, modalities need to be defined well: RBI

Mumbai, Feb 24 (PTI) Reserve Bank Deputy Governor Shyamala Gopinath today said the timing, definition, and the modalities of debt rescheduling under the proposed credit default swap (CDS) scheme have to be discussed in detail as it is a very complex issue. "We need to look at the entire issue clearly. Since CDS is a tradable product, we have to make it transparent," said Gopinath. Speaking on the sidelines of an Indian Merchant Chamber function here, she said, "Debt rescheduling is a very complex issue globally, and so was here when we discussed it with the industry initially...There are many questions involved in it and the first question is who does the rescheduling?" Gopinath added, "If one company goes to its bank and asks for rescheduling its debt or loan, how do you go about doing it? The point is the whole issue has to be transparent as CDS is a tradable product." Yesterday, RBI issued the draft CDS guidelines, and has sought comments from stakeholders by March 8. The CDS is a swap contract in which the buyer of protection against a bond or loan makes regular premium payments to a counterparty who assumes the risk in the event of a default. It is a risk management product that helps entities guard against possibility of defaults and helps in developing the corporate bond market, which is almost non-existing here as the debt market is nearly 80 per cent dominated by government papers.

Beware of Email Lottery Scam - J.B.Bhoria, Regional Director, RBI

Rural prosperity is fuelling food inflation - Subbarao

Bhubaneswar, Feb 27 (PTI) RBI Governor D Subbarao has said that rising prosperity in rural India is leading to food scarcity, which is driving up food prices. "Since rural incomes are going up, people are eating better by shifting from cereal to protein (rich diet) and it is leading to food scarcity," Subbarao told students of the Indian Institute of Technology (IIT), Bhubaneswar yesterday. Food inflation, which has been hovering in double digit levels for the last few months has been a cause of concern for the government. It rose to 11.49 per cent for the week ended February 12 from 11.05 per cent in the previous period, driven by rising prices of milk, egg, meat and vegetables. "RBI is responsible for management of inflation. But responsibility for food inflation is slightly lower because food inflation arises due to supply side constraints," Subbarao said.

Plastic notes only after satisfying ecological concerns: RBI

The Reserve Bank's ambitious plastic currency note programme runs the risk of falling victim to ecological issues and the roll-out will depend on a study of the project's impact on the environment.  The RBI is in the process of starting a pilot project for issue of plastic currency notes, wherein plastic notes of Rs. 10 denomination would be distributed through the central bank's five regional offices.  The proposed shift to plastic currency notes, instead of the normal paper notes, is primarily aimed at checking the high cost associated with printing of paper currency, as they need early replacement due to soiling and mutilation.  Besides studying the potential cost savings through plastic notes, the pilot project will also look into the environmental impact of the proposed plastic notes.   In an address at a convocation last week at Sambalpur University in Orissa, RBI Governor D Subbarao also said the central bank would need to study the "carbon footprint" of recycling and disposal of plastic notes.  During the pilot phase, we need to study not only the relative costs, but also the carbon footprint associated with the recycling and disposal of plastic notes vis-a-vis paper notes," he added. Subbarao said the RBI would "mainstream the use of plastic currency" only after the success of the pilot project. A detailed mention of environment aspects was also mentioned for the first time in this year's Economic Survey.  At a time when the government is trying to balance the twin challenges posed by climate change and achieving economic growth, the Survey called for steps to ensure that green growth strategies do not result in slow growth.  Terming cost and longevity as important for currency management, Subbarao said that India was the second largest producer and consumer of currency in the world after China. He said that producing such a large amount of currency was expensive and one option to cut the costs was replacement of paper currency with plastic notes.  Some of the countries to have moved to plastic currency notes include Singapore and Australia.  In April, 2010, the RBI floated a tender seeking supply of one billion plastic notes of Rs. 10 denomination.  Later in August, the central bank said in its annual report for 2009-10 that it was exploring methods to increase the life of currency notes, especially those of lower denomination, which have a much shorter life.  "The Reserve Bank, in consultation with the government, has initiated steps to conduct a field trial of plastic notes in the denomination of Rs. 10 in the year 2010-11 to gather valuable lessons," the report added.

LIC's market investments to acquire greater transparency

The Life Insurance Corporation, the country's largest financial sector entity, could soon get a makeover. At stake is clearing up governance roles within the organisation, ensuring more transparency in securities market investments and a possible listing. The finance ministry recently appointed a committee headed by former RBI Deputy Governor Vepa Kamesam with a wide-ranging mandate to suggest reforms in LIC. Both Kamesam and LIC chairman TS Vijayan refused to comment on the development. LIC has often enjoyed a very close relationship with the government especially in its securities market operations.

Firms wary of basic banking licence model

The finance ministry's plan to offer basic banking licences may find few takers because of doubts over the commercial viability of the proposed business model. The Economic Survey released on Friday had proposed two types of licences to set up banks in India: One for basic banking activities and another for full-fledged banking. It said non-banking financial companies (NBFCs) and microfinance institutions should be considered for basic banking licences. This, the Economic Survey stated, would help in financial inclusion. However, prospective entrants have given such a proposal the thumbs down, as they want full-fledged banking licences. Reserve Bank of India (RBI) is formulating draft guidelines for the entry of new players in the banking sector, which are expected to be published shortly. "Banking is a long-term business. Naturally, we will like to be present in all areas. Rural banking is necessary. But one has to evaluate if only rural banking is commercially viable," said Y M Deosthalee, chairman & managing director of L&T Finance, who is also whole-time director and chief financial officer of Larsen & Toubro. L&T Finance, which is engineering giant Larsen & Toubro's NBFC, hopes to set up a bank.  The Economic Survey did not elaborate on the functions of basic banking, but had stated these should be clearly defined. This lack of clarity has also raised doubts among some companies, which say there is no need to create a separate structure for basic services. "I do not subscribe to this idea. NBFCs already provide basic banking functions. So, there is no need for a separate structure. It will only add to the confusion," said Hemant Kanoria, chairman & managing director of SREI Infrastructure Finance. He said SREI will review its decision on a banking foray once RBI releases draft guidelines on new bank licences. The experience of regional rural banks and local area banks, which proved unviable, also weighs on the minds of some who wish to set up a bank. Among them is the Shriram Group, which has evinced interest in applying for a banking licence through one of its subsidiaries.

New chairman UK Sinha plans to revamp Sebi

Within a week of taking charge, U.K. Sinha, the new chairman of capital market regulator Securities and Exchange Board of India (Sebi), has initiated plans to revamp the organization. Sinha circulated a note last Thursday on the review of eight advisory committees that are currently working under Sebi.  The new chairman has sought opinion from all department heads about the scope of the proposed reconstitution, said two persons with direct knowledge of the matter. “He wants to take a fresh look at the issues handled by these committees,” one of them said. “The chairman has asked about the relevance of all the existing members of such committees,” the second person said. Both officials requested anonymity as the matter is yet to be made public. Sinha has proposed to look into the tenure of the members of such committees, their contribution to Sebi’s policies and the relevance of their recommendations. An email sent to Sebi on Friday remained unanswered. A Sebi official, on condition of anonymity, said exploration of the scope of reconstitution of the committees is only part of the new chairman’s plan.  “He wants to take a fresh look at the ways the entire organization has been working. At the second stage, possible changes will be made,” the official said. “One should not view the proposed reconstitution of the committees in isolation.” There are eight Sebi advisory committees on mutual funds, the secondary market, the primary market, corporate bonds and securitization, investor protection and education fund, disclosures and accounting standards, consent orders and compounding of offences, and the takeover panel. Incidentally, Sinha has been a member of at least two such committees—the committees on mutual funds and the secondary market—as chairman of UTI Asset Management Co. Ltd, his previous assignment. “Sometimes, the chairman may have a reform agenda and he may want to bring in new committee members to suggest ways to bring changes,” said one of the members of the committee for disclosures and accounting standards. He declined to be named. The Sebi chairman has the authority to reconstitute committees, form new committees, and close or merge any of them. Under the stewardship of Sinha’s predecessor C.B. Bhave, who stepped down on 17 February, the regulator formed a new statutory committee to review and suggest changes for India’s takeover regulations. During the tenure of M. Damodaran, whom Bhave replaced, the committee on disclosures and accounting standards was formed by merging two panels on disclosures and accounting standards. Typically, a member serves on a committee for three years, but there is no fixed term. “It’s not a statutory requirement to reconstitute advisory committees when the chairman changes. The members of advisory committee could be a continuity from one chairman to another,” said Susan Thomas, member of the secondary market advisory committee, and assistant professor, Indira Gandhi Institute of Development Research. “Mere change in the constitution of committees may not help. Sebi may ensure regularity of meetings of these committees. Sometimes the committees do not meet for several quarters and this prevents continuity in reforms in line with the evolution of markets,” said H.N. Sinor, a member of the advisory committee on mutual funds and chief executive officer, Association of Mutual Funds in India. Bhave went up against companies and other regulators during his tenure as part of efforts to enhance transparency and benefit investors. On Sinha’s agenda are a new framework for mergers and acquisitions for Indian companies (following the recommendations of the takeover regulations advisory committee headed by C. Achuthan, former chief of the Securities Appellate Tribunal), new guidelines for market infrastructure institutions, such as stock exchanges, and depositories and clearing corporations (following recommendations by a panel headed by former Reserve Bank of India governor Bimal Jalan), among others. “Since a new incumbent can’t change senior officials of the organization, he may try to bring in new voices as advisers. It makes sense to bring new members in the advisory committees for a fresh perspectives on critical issues,” said a member of the secondary market advisory committee, requesting anonymity.