- A new term in India's financial market, introduced in the Union Budget 2013 - 14 which announced that SEBI will so on prescribe the provisions by which the angel investor can be recognised as Category IAIF venture capital funds.
- Angel investor is an investor who provides financial backing to entrepreneurs for 'starting their business'.
- Angel investors are usually found among an entrepreneur's family and friends but they may be from outside also.
- The capital they provide can be a one-time injection of seed money or ongoing support to carry the company through difficult times— in exchange they may like owning share in the business or provide capital as loan (in case of a loan they lend at more favourable terms than other lenders, as they are usually investing in the person rather than the viability of the business).
- In the Budget 2011-12, the government, for the first time, permitted qualified foreign investors (QFIs), who meet the know-your-customer (KYC) norms, to invest directly in Indian mutual funds.
- In January 2012, the government expanded this scheme to allow QFIs to directly invest in Indian equity markets. Taking the scheme forward , as announced in Budget 2012-13, QFIs have also been permitted to invest in corporate debt securities (CDSs) and MF debt schemes subject to a total overall ceiling of US $ 1 billion.
- In May 2012, QFIs were allowed to open individual non-interest-bearing rupee bank accounts with authorised dealer banks in India for receiving funds and making payment for transactions in securities they are eligible to invest in.
- In June 2012, the definition of QFI was expanded to include residents of the member countries of the Gulf Cooperation Council (GCC) and European Commission (EC) as the GCC and EC are members of the Financial Action Task Force (FATF).
- In March 2 0 1 4 , the RBI simplified foreign portfolio investment norms by putting in place an easier registration process and operating framework with an aim to attract inflows.
- From now onwards, the portfolio investor registered in accordance with the SEBI guidelines shall be called Registered Foreign Portfolio Investor (RFPI)— the existing portfolio investor class, namely, Foreign Institutional Investor (FII) and Qualified Foreign Investor (QFI) registered with SEBI shall be subsumed under it.
- All investments made by that FIIs/QFIs in accordance with the regulations prior to registration as RFPI shall continue to be valid and taken into account for computation of aggregate limit.
PARTICIPATORY NOTES (PNS)
- A Participatory Note (PN or P-Note) in the Indian context, in essence, is a derivative instrument issued in foreign jurisdictions, by a SEBI registered FII, against Indian securities—the Indian security instrument may be equity, debt, derivatives or may even be an index.
- PNs are also known as Overseas Derivative Instruments, Equity Linked Notes, Capped Return Notes, and Participating Return Notes, etc.
- The investor in PN does not own the underlying Indian security, which is held by the FII who issues the PN.
- Thus, the investors in PNs derive the economic benefits of investing in the security without actually holding it.
- They benefit from fluctuations in the price of the underlying security since the value of the PN is linked with the value of the underlying Indian security.
- The PN holder also does not enjoy any voting rights in relation to security/shares referenced by the PN.
Regulation of PNs
- PNs can be issued only to those entities which are regulated by the relevant regulatory authority in countries of their incorporation and are subject to compliance of ‘know your client' (KYC) norms.
- Down-stream issuance or transfer of the instruments can also be made only to a regulated entity.
- Further, the Fils who issue PNs against underlying Indian securities are required to report the issued and outstanding PNs to SEBI in a prescribed format.
- In addition, SEBI can call for any information from Fils concerning off-shore derivative instruments (ODIs) issued by it.
- In order to monitor the investment through these instruments, SEBI on 31 October, 2001, advised Fils to submit information regarding issuance of derivative instruments by them, on a monthly basis. These reports require the communication of details such as name and constitution of the subscribers to PNs, their location, nature of Indian underlying securities, etc.
- Fils cannot issue PNs to non-resident Indians (NRIs) and those issuing PNs are required to give an undertaking to the effect.
- SEBI has also mandated that QFIs (qualified foreign investors), the recently allowed foreign investor class, shall not issue PNs.
- PN like products are not necessarily used to invest in restricted markets, but also reported to be available in the open developed/advanced economies like Japan, Hong Kong, Singapore, Australia, the USA and UK.
- In response to market manipulation concerns, in December 1999, Taiwan Securities and Futures Commission had amended its FII regulations to require periodic disclosure by Fils of all offshore derivative activities linked to local shares, but this requirement was subsequently removed in June 2000 (as the Ashok Lahiri Committee Report says).
- China's Securities Regulatory Commission requires entities to file reports related to these products with minimal 'reporting requirements that emphasize only on the quota utilised by them'.
This term has come up from another term hedging, a process by which businesses insulate themselves from the risk of price changes. Hedge funds are the lot of investible (free floating capital) capital which move very swiftly towards the more profitable sectors of an economy. At present, such funds easily move from the stock market of one economy to the other—away from the low profit fetching to high profit fetching ones.
A prospective borrower can access external commercial borrowings (ECBs) under two routes, namely the 'automatic route' and the 'approval route'.
ECBs not covered under the automatic route are considered on case-by-case basis by the RBI under the approval route.
- The High Level Committee on ECB took a number of decisions in September 2011 to expand the scope of ECBs which include :
- High networth individuals (HNIs) who fulfil the criteria prescribed by SEBI can invest in IDFs.
- IFCs have been included as eligible issuers for FII investment in the corporate bonds long-term infra category.
- ECB would be permitted for refinancing of rupee loans of infrastructure projects on the condition that at least 25 per cent of such ECBs shall be used for repayment of the said rupee loan and 75 per cent invested in new projects in the infrastructure sector.
- Refinancing of buyer's/supplier's credit through ECBs for the purchase of capital goods by companies in the infrastructure sector was approved. This would also be permitted only under the approval route.
CREDIT DEFAULT SWAP (CDS)
- CDS is in operation in India since October 2011 - launched in only corporate bonds. The eligible participants are commercial banks, primary dealers, NBFCs, insurance companies and mutual funds.
- CDS is a credit derivative transaction in which two parties enter into an agreement, whereby one party (called as the 'protection buyer') pays the other party (called as the 'protection seller') periodic payments for the specified life of the agreement.
- The protection seller makes no payment unless a credit event relating to a pre-determined reference asset occurs.
- If such an event occurs, it triggers the Protection Seller's settlement obligation, which can be either cash or physical.
- CDS offers the buyer a chance to transfer the credit risk of financial assets to the seller without actually transferring ownership of the assets themselves.
- CDS contract are dangerous because they can be manipulated for mischief. It's all about the insurable interest which is never there as it is used for speculation.
- The most damaging aspect of CDS is that the cred it risk of one country/region gets exported to another country/region very smoothly and silently.
- This is the process of issuing 'marketable securities' backed by a pool of existing assets such as auto or home loans.
- After an asset is converted into a marketable security, it is sold to an investor who then receives interest and principal out of the cash flow generated from servicing of the loan.
- Financial institutions such as NBFCs and micro finance companies convert their loans into marketable securities and sell them to investors.
- This helps them get liquid cash out of assets that otherwise would be stuck on their balance sheets.
- Global experience shows that if the value of the underlying asset falls then securitised assets lose value as it had happened during the US 'sub-prime crisis'— home loans against which securitised assets were sold to insurance companies and banks lost value, which in turn resulted in a crisis.
CORPORATE BOND IN INDIA
- Economic vibrancy coupled with sophisticated state-of-the-art financial infrastructure has contributed to rapid growth in the equity market in India. In terms of market features and depth, the Indian equity market ranks among the best in the world.
- In parallel, the government securities market has also evolved over the years and expanded, given the increasing borrowing requirements of the government. In contrast, the corporate bond market has languished both interms of market participation and structure.
- NBCs are the main issuers and very small amounts of finance are raised b y companies directly.
- Till March 2020, the RBI had taken a number of measures to strengthen the corporate bond market in India. It accepted many of the recommendations of the Khan Committee (August 2016) to boost investor participation and market liquidity in the corporate bond market.
- The new measures as announced by the RB I include :
(i) Commercial banks are permitted to issue rupee-denominated bonds over seas (masala bonds) for their capital requirements and for financing infrastructure and afford able housing.
(ii) Brokers registered with the Securities and Exchange Board of India (SEBI) and authorized as market makers in corporate bond market permitted to undertake repo / reverse repo contracts in corporate debt securities. This move will make corporate bonds fungible and thus boost turnover in the secondary market.
(iii) Banks allowed to increase the partial credit enhancement they provide for corporate bonds to 50 per cent from 20 percent. This move will help lower-rated corporates to access the bond market.
(iv) Permitting primary dealers to act as market makers for government bonds, to give further boost to government securities by making them more accessible to retail investors.
(v) To ease access to the foreign exchange market for hedging in 'over the counter' (OTC) and exchange - traded currency derivatives, the entities exposed to exchange rate risk allowed to undertake hedge transactions with simplified procedures, up to a limit of US$30 million at any given time.
(vi) Pension and provident fund together with insurance companies have been allowed to invest in the corporate bonds.
(vii) Corporate bonds rated 'BBB' or equivalent declared as investment grade— till now only 'AA' rated corporate bonds were entertained as investment grade.
(vii) Introduction of an electronic platform for repos operation incorporate bonds.
(viii) Inclusion of them in the RBI liquidity adjustment facility (LAF).
(ix) Fils allowed to invest in the corporate bonds through stock exchanges and primary issuance — overall ceiling of US$51 billion (with US$ 25 billion ceiling for G-Secs).
INFLATION- INDEXED BONDS
- To protect the returns of investors from the vagaries of inflation, the Reserve Bank of India plans to introduce inflation-indexed bonds (IIBs)— it was proposed by the Union Budget 2013-14. The government hopes this will help increase financial savings instead of buying gold. In the recent years, the rate of return on debt investments has often been below inflation, which effectively means that inflation was eroding savings. Inflation indexed bonds provide returns that are always in excess of inflation, ensuring that price rise does not erode the value of savings.
- In 2013 - 14, RBI launched two such bonds — the first one in June 2013 linked with the WPI which had a very weak retail response and second one in December 2013 linked with CPI. The latter one is called as Inflation Indexed National Savings Securities-Cumulative (IINSS-C).
- It was in 1997 that the IIBs were issued for the first time in India— named as the Capital Indexed Bonds (CIBs). But there remains a difference between these two bonds. While the CIBs provided inflation protection only to principal the new product IIBs provides inflation protection to both the components— principal and interest payments.
GOLD EXCHANGE TRADED FUNDS
Gold Exchange Traded Funds (ETFs) are open-ended mutual fund schemes that closely track the price of physical gold. Each unit represents one gram of gold having 0.995 purity, and the ETF is listed on stock exchanges.
e - Gold
e-Gold is another purchase option, involving investments in units traded on the National Stock Exchange (NSEL). Here, the investor is required to have a demat account with an affiliate of NSEL. e-Gold's brokerage and transaction charges are lower than gold ETFs as there are no fund management charges. One can take delivery of gold or sell it in the exchange.
- e Central Public Sector Enterprises Exchange Traded Fund (CPSE ETF) comprising the shares of 10 blue chip PSUs was listed on the BSE and NSE platforms on 41 April, 2014.
- This scheme is conceived by the Government of India as a means to disinvest a part of its holding in Public Sector Units (PSUs) and would be managed by Goldman Sachs Asset Management (India) Pvt. Ltd., a mutual fund company that specialises in managing exchange traded funds.
- ETF is a security that tracks an index, a commodity or a basket of assets such as an index fund, but trades like a stock on an exchange - the CPSE ETF tracks the CPSE Index.
- CPSE ETF will invest the corpus in the above-given companies as per the given weightage. Hence, subject to the tracking error and expenses, CPSE ETF's returns will closely correspond to the CPSE Index returns.
- The Government has announced (Union Budget 2017 - 18) to launch a new ETF with diversified CPSE stocks and other Government holdings in the fiscal 2017 - 18.
PENSION SECTOR REFORMS
- Pension has been the integral part of government jobs in India. Pension serves two important socio-economic objectives—
(i) It facilitates the flow of long-term savings for development, i.e., nation -building.
(ii) Also helps establish a credible and sustain able social security system in the country.
- National Pension System (NPS) was introduced by the Government on December 22, 2003 and it was made mandatory for Central Government employees (except armed forces) who join service w.e.f. January 1, 2004.
- A customised version of the core NPS model, known as the NPS Corporate Sector Model was introduced from December 2011 to enable 'organised - sector' entities to move their existing and prospective employees to the NPS under its Corporate Model.
Financial Stability Development Council (FSDC)
An apex level body, the FSDC, was set up by the Gol in December 2010. It was in line with the G-20 initiative which came in wake of the financial crises among the western economies triggered by the 2007-08 'sub-prime' crisis of the USA. The Council has the following objectives :
(i) To strengthen and institutionalise the mechanism for maintaining financial stability ,
(ii) To enhance inter-regulatory coordination,
(iii) To promote financial-sector development.
Financial Sector Assessment Programme (FSAP)
- The IMF Board decided in September 2010, to include 25 systemically important economies, including India, under the Financial Stability Assessment Programme (FSAP) for members with systemically important financial sectors.
- The joint IMF-World Bank Financial Stability Assessment Programme (FSAP) was conducted for India in January 2013 which assessed Indian financial system in relation to the highest international standards.
- The assessment recognises that the Indian financial system remained largely stable on account of a sound regulatory and supervisory regime. However, the assessment identifies some gaps in —
(i) International and domestic supervisory information sharing and co-operation;
(ii) Consolidated supervision of financial conglomerates.
(iii) Some limits on the de jure independence of the regulators (RBI and IRDA).
Financial Action Task Force (FATF)
The FATF is an inter-governmental policy making body that has a ministerial mandate to establish international standards for combating money laundering and terrorist financing. India joined the FATF as its 34th member in June 2010. At present, the FATF has 36 members comprising 34 countries and two organisations.