Following its draft report released in August 2010, the Reserve Bank of India (RBI) has issued draft guidelines on credit default swaps (CDSs) for corporate bonds. One of the principal objectives of this effort is to boost the corporate bond market. As RBI notes: The objective of introducing Credit Default Swaps (CDS) on corporate bonds is to provide market participants a tool to transfer and...
Barclays Order: ODI Restrictions Lifted by SEBI
In December 2009, we had discussed SEBI’s order whereby Barclays was found to have failed in complying with certain disclosure norms while issuing offshore derivative instruments (ODIs) under the SEBI (Foreign Institutional Investors) Regulations, 1995. For this, SEBI had prohibited Barclays from issuing, subscribing or otherwise transacting in any ODIs until reporting systems are put in place to...
Further Measures to Boost Infrastructure Financing
In continuation of previous measures, the Reserve Bank of India (RBI) has taken additional steps to enable financing in the infrastructure sector. First, the proposed introduction of credit default swaps on corporate bonds (discussed here) covers corporate bonds issued by Special Purpose Vehicles (SPV) of rated infrastructure companies “keeping in view the need for development of the...
RBI Proposes Credit Default Swaps on Corporate Bonds
The Reserve Bank of India (RBI) has issued a draft report that proposes the introduction of credit default swaps (CDS) for corporate bonds. Comments are due on the proposal by October 4, 2010. The move to create a market for CDS in India has been delayed for the last few years due to a lack of adequate risk management systems and lessons learned from the financial crisis (where CDS is alleged to...
Physical Settlement in Derivatives Trading
Over a decade ago, when trading in derivatives was commenced on Indian stock exchanges, it was decided that such instruments must be introduced in a phased manner. This was following the recommendations in the L.C. Gupta Committee report. Consequently, various types of derivatives were introduced at different points in time – index futures, futures in specific securities, options and so on...
More Controversy over Forex Derivatives
Over the past two years, forex derivatives have generated substantial legal controversy in India, perhaps because of the relatively recent rise in the use of these instruments in India. We have discussed the challenge to the legality of derivatives as wagering agreements, their regulation, taxability and other related issues. The latest addition to this chapter of uncertainty is a report that the...
Taxation of Derivative Transactions by FIIs
(The following post has been contributed by Ravichandra S. Hegde of J. Sagar Associates) Profits earned from derivative transactions are business income, not liable to be taxed in India at the hands of the FII: AARThe Authority for Advance Rulings (“AAR”), Income Tax, in its recent decision dated March 22, 2010 has held that the special provision in the Income Tax Act, 1961 (“the Act”) cannot be...
SEBI Decisions on Public Offers and Derivatives
SEBI has made some regulatory pronouncements at its board meeting yesterday that concern public offerings of securities and the derivatives markets. As regards public offerings: (i) SEBI has decided that all investors in public offerings (including retail investors) “would be required to bring in 100% of the application money as margin along with the application for securities”. This creates a...
Expansion of Currency Futures Trading
Currently, only US Dollar-Indian Rupee (INR) currency futures contracts can be traded on Indian stock exchanges. It has been decided to expand the market by introducing trading on currency futures in 3 other currencies: Euro-INR, Japanese Yen (JPY)-INR and Pound Sterling (GBP)-INR. Both SEBI as well as RBI have issued notifications to that effect. OTC Derivatives: On the OTC side, there have been...
Regulating Derivatives
According to one school of thought, the excessive use of derivatives, particularly credit default swaps (CDSs) was a key cause of the global financial crisis. Related to this is the argument that progressive liberalisation of rules governing derivatives accelerated their downfall. In an interesting debate titled Regulate OTC Derivatives by Deregulating Them, Professor Lynn Stout traces the...
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