Budget 2015: Financial Markets

The Budget makes some proposals to
boost the financial markets in India, both in the debt and equity segments, but
arguably the reforms are only incremental and many not necessary result in
drastic expansion of the markets.
Corporate Bonds
The first proposal is to give a
fillip to the bond markets. As a co-author and I have observed in an earlier paper,
the equity markets in India have developed much faster and wider than the bond
markets, which are lagging far behind. While the equity markets have received
substantial support from the Securities and Exchange Board of India (SEBI) as
the market regulator, its reforms pertaining to the bond markets have been far
from being as successful. This is despite the need for deep bond markets to
service the funding needs of specific sectors such as infrastructure. The
previous incremental efforts to boost that market did not elicit the
anticipated results. Hence, the Budget makes a proposal that the Government
will set up a Public Debt Management Agency (PDMA) to bring India’s external
borrowing and domestic debt under one roof. More details are awaited on the
functioning of this Agency and as to what impact that might likely have on
India’s bond markets.
In the aforesaid paper, we argued
that mere incremental reforms in the bond markets are insufficient, and
wholesale changes are necessary to the legal system, especially when it comes
to contract enforcement and an efficient bankruptcy regime, which are necessary
to invigorate bond markets. These concerns have been addressed, at least
tangentially, given that the Budget considers contract enforcement (dispute
resolution) and bankruptcy, as discussed in the post
relating to the ease of doing business
Commodities and Securities Markets
The second set of proposals deals
with the regulation of certain aspects of the financial markets and more
specifically on investor protection measures. The Budget seeks to merge the
Forward Markets Commission (FMC) with SEBI so as to strengthen the regulation
of the commodity forward markets and reduce wild speculation. This will result
in regulatory consolidation of the forward markets and derivatives trading in
both the commodities as well as securities markets. This move is perhaps attributable
to the issues faced in the commodities markets due to recent episodes.
Capital Controls
A related proposal pertains to the
allocation of regulatory domain over capital controls. Hitherto, the RBI has
been exercising primary power over capital controls by virtue of section 6 of
the Foreign Exchange Management Act, 1999 (FEMA). Now, the Budget proposes to
amend that provision to reallocate the powers between the RBI and the Central
Government. Under the new dispensation, RBI will have primary regulatory
control over capital account transactions in respect of debt instruments. In
case of all other capital account transactions (including equity), the
regulatory domain will shift to the Central Government, which will exercise its
powers in consultation with the RBI.
This would affect the existing role
of the RBI in matters relating to foreign investment on the equity side.
Currently, the Government of India lays down the overall policy on foreign
investment, while the RBI regulates the foreign exchange flows in connection
with such investments. Now that the entire domain over foreign investment and
foreign exchange are to be located in the Central Government, the RBI would
cease to exercise control over foreign investments in equity. While this will
affect the exercise of powers of RBI as an independent regulator, at a
practical level it might end up streamlining the foreign investment process. As
observed in an analysis
on this change
, currently there are often mismatches in the regulatory supervision
because often the Central Government announces changes in foreign investment
policies, but they are not followed up by the RBI through a change in its
regulations until much later, which leads to incongruities in the interim. Going
forward, these issues are likely to be settled as the Central Government will
be the single regulator for capital account transactions (except for debt
As for debt instruments, the RBI
would continue to exercise domain over those. The types of instruments that
would constitute debt will be determined by the Central Government consultation
with the RBI, but one may surmise that it would include instruments such as
corporate bonds and other forms of external commercial borrowings (ECBs).
Other Matters
The Budget proposes the
establishment of a Financial Redressal Agency that will address the grievances
of consumers of all financial services providers.  More details are awaited.
Finally, the Indian Financial Code
is likely to be introduced in the Parliament soon, which is pursuant to the
recommendations of the Justice Srikrishna Committee.
Overall, the Budget proposals
relating to the financial markets are incremental in nature, which would help
to boost the markets. However, there appear to be no radical reforms as such.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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