Regulations of Foreign Exchange and Money Market by RBI
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Transcript of Regulations of Foreign Exchange and Money Market by RBI
Assignment
On
Regulations of foreign exchange and money market by
RBI
NATIONAL LAW UNIVERSITY, JODHPUR
SUMMER SEMESTER [JULY 2015-NOVEMBER 2015]
Submitted to: Submitted by:
DR. RITUPARNA DAS Charul Jangid(452)
(Associate Professor) Megha Choudhary(457)
Shashank Ojha (460)
1
Index
Introduction 3
Regulation of foreign exchange by RBI with respect to borrowing and lending in foreign
exchange10
Regulation of foreign exchange by RBI with respect to insurance 17
Regulations for money market by RBI 21
Conclusio
n 35
2
INTRODUCTION
Foreign exchange and money market plays an important role in every economy. An economy of
each and every country has an influence of it. Ultimately it has an impact on society as well.
Regulating foreign exchange and money market is important otherwise it will lead to a chaos and
benefits of it will not reach to everybody. Everyone will work according to it’s own will and
freedom ultimately exploiting the poor and the vulnerable. It would be disastrous for the nation
and the globe. With respect to India which still has to rise economically regulating money
market and foreign exchange is an important component .So let us look at the regulations framed
by reserve bank of India for foreign exchange and money market.
RESERVE BANK OF INDIA
The Reserve Bank of India is India's Central Banking Institution, which controls the Monetary
Policy of the Indian Rupee. It commenced its operations on 1 April 1935 during the British Rule
in accordance with the provisions of the reserve bank of India act 1934. It’s headquartered in
Mumbai. Present governor of reserve bank of India in Raghuram Rajan.
The RBI plays an important part in the Development Strategy of the Government of India. It is a
member bank of the Asian Clearing Union.
INSURANCE
Insurance is the equitable transfer of the risk of a loss, from one entity to another in exchange
for payment. It is a form of risk management primarily used to hedge against the risk of a
contingent, uncertain loss. An insurer, or insurance carrier, is a company selling the insurance;
the insured, or policyholder, is the person or entity buying the insurance policy. The amount
of money to be charged for a certain amount of insurance coverage is called the premium. Risk
management, the practice of appraising and controlling risk, has evolved as a discrete field of
study and practice.
The transaction involves the insured assuming a guaranteed and known relatively small loss in
the form of payment to the insurer in exchange for the insurer's promise to compensate
(indemnify) the insured in the case of a financial (personal) loss. The insured receives a contract,
3
called the insurance policy, which details the conditions and circumstances under which the
insured will be financially compensated.
FOREIGN EXCHANGE
Foreign exchange is the exchange of one currency for another or the conversion of one currency
into another currency. Foreign exchange also refers to the global market where currencies are
traded virtually around-the-clock. The term foreign exchange is usually abbreviated as "forex"
and occasionally as "FX."
Foreign exchange transactions encompass everything from the conversion of currencies by a
traveler at an airport kiosk to billion-dollar payments made by corporate giants and governments
for goods and services purchased overseas. Increasing globalization has led to a massive increase
in the number of foreign exchange transactions in recent decades. The global foreign exchange
market is by far the largest financial market, with average daily volumes in the trillions of
dollars.
The foreign exchange market works through financial institutions, and it operates on several
levels. Behind the scenes banks turn to a smaller number of financial firms known as “dealers,”
who are actively involved in large quantities of foreign exchange trading. Most foreign exchange
dealers are banks, so this behind-the-scenes market is sometimes called the “interbank market”,
although a few insurance companies and other kinds of financial firms are involved. Trades
between foreign exchange dealers can be very large, involving hundreds of millions of dollars.
Because of the sovereignty issue when involving two currencies, Forex has little (if any)
supervisory entity regulating its actions. The foreign exchange market assists international trade
and investments by enabling currency conversion. It also supports direct speculation and
evaluation relative to the value of currencies, and the carry trade, speculation based on the
interest rate differential between two currencies. In a typical foreign exchange transaction, a
party purchases some quantity of one currency by paying for some quantity of another currency.
The modern foreign exchange market began forming during the 1970s after three decades of
government restrictions on foreign exchange transactions. The foreign exchange market is
unique because of the following characteristics:
4
its huge trading volume representing the largest asset class in the world leading to
high liquidity;
its geographical dispersion;
its continuous operation: 24 hours a day except weekends, i.e., trading from 22:00 GMT on
Sunday (Sydney) until 22:00 GMT Friday (New York);
the variety of factors that affect exchange rates;
the low margins of relative profit compared with other markets of fixed income; and
The use of leverage to enhance profit and loss margins and with respect to account size.
FOREIGN EXCHANGE AND INSURANCE
Foreign exchange and risk related to foreign exchange exposure to foreign currencies can have a
marked impact on your domestic and international transactions. By using effective strategies to
manage foreign exchange, you can help mitigate risks and expand opportunities. Foreign
exchange specialists can discuss risk factors and hedging strategies to meet your international
needs. Risk mitigation by insurance also plays a major role here. We know insurance is risk
management. This will reduce risk impact as the risk is shared between insurers and
individuals/firms.
MONEY MARKETS
As money became a commodity, the money market became a component of the financial
markets for assets involved in short-term borrowing, lending, buying and selling with original
maturities of one year or less. Trading in money markets is done countermand is wholesale.
There are several money market instruments, including Treasury bills, commercial
paper, bankers' acceptances, deposits, certificates, bills of exchange, repurchase agreements,
federal funds, and short-lived mortgage-, and asset-backed securities. The instruments bear
differing maturities, currencies, credit risks, and structure and thus may be used to distribute
exposure.
Money markets, which provide liquidity for the global financial system, and capital
markets make up the financial market.
5
The money market consists of financial institutions and dealers in money or credit who wish to
either borrow or lend. Participants borrow and lend for short periods, typically up to thirteen
months. Money market trades in short-term financial instruments commonly called "paper". This
contrasts with the capital market for longer-term funding, which is supplied by bonds and equity.
The core of the money market consists of interbank lending—banks borrowing and lending to
each other using commercial paper, repurchase agreements and similar instruments. These
instruments are often benchmarked to (i.e., priced by reference to) the London Interbank Offered
Rate (LIBOR) for the appropriate term and currency.
Finance companies typically fund themselves by issuing large amounts of asset-backed
commercial paper (ABCP) which is secured by the pledge of eligible assets into an ABCP
conduit. Examples of eligible assets include auto loans, credit card receivables,
residential/commercial mortgage loans, mortgage-backed securities and similar financial assets.
Some large corporations with strong credit ratings, such as General Electric, issue commercial
paper on their own credit. Other large corporations arrange for banks to issue commercial paper
on their behalf.
In the United States, federal, state and local governments all issue paper to meet funding needs.
States and local governments issue municipal paper, while the U.S. Treasury issues Treasury
bills to fund the U.S. public debt:
Functions of the money market:
Money markets serve five functions—to finance trade, finance industry, invest profitably,
enhance commercial banks' self-sufficiency, and lubricate central bank policies.
Financing trade
The money market plays crucial role in financing domestic and international trade. Commercial
finance is made available to the traders through bills of exchange, which are discounted by the
bill market. The acceptance houses and discount markets help in financing foreign trade.
Financing industry
The money market contributes to the growth of industries in two ways:
6
They help industries secure short-term loans to meet their working capital requirements
through the system of finance bills, commercial papers, etc.
Industries generally need long-term loans, which are provided in the capital market.
However, the capital market depends upon the nature of and the conditions in the money
market. The short-term interest rates of the money market influence the long-term interest
rates of the capital market. Thus, money market indirectly helps the industries through its
link with and influence on long-term capital market.
Profitable investment
The money market enables the commercial banks to use their excess reserves in profitable
investment. The main objective of the commercial banks is to earn income from its reserves as
well as maintain liquidity to meet the uncertain cash demand of the depositors. In the money
market, the excess reserves of the commercial banks are invested in near-money assets (e.g.,
short-term bills of exchange) which are highly liquid and can be easily converted into cash.
Thus, the commercial banks earn profits without sacrificing liquidity.
Self-sufficiency of commercial bank
Developed money markets help the commercial banks to become self-sufficient. In the situation
of emergency, when the commercial banks have scarcity of funds, they need not approach the
central bank and borrow at a higher interest rate. On the other hand, they can meet their
requirements by recalling their old short-run loans from the money market.
Help to central bank
Though the central bank can function and influence the banking system in the absence of a
money market, the existence of a developed money market smoothens the functioning and
increases the efficiency of the central bank.
Money markets help central banks in two ways:
Short-run interest rates serve as an indicator of the monetary and banking conditions in the
country and, in this way, guide the central bank to adopt an appropriate banking policy,
7
Sensitive and integrated money markets help the central bank secure quick and widespread
influence on the sub-markets, thus facilitating effective policy implementation
MONEY MARKET IN INDIA
The Indian money market prior to the 1980s was characterized by paucity of instruments,
lack of depth and dichotomy in the market structure. The money market consisted of the
inter-bank call market, Treasury Bills, commercial bills and participation certificates.
Historically, the call money market has constituted the core of the money market structure in
India due to lack of other instruments and strict regulations on interest rates and
participation.
In the call/notice money market, overnight money and money at short notice (up to a period
of 14 days) are lent and borrowed without collateral. This market enables banks to bridge
their short-term liquidity mismatches arising out of their day-to-day operations. The call
money market in India was purely an inter-bank market until 1971 when the erstwhile Unit
Trust of India (UTI) and Life Insurance Corporation (LIC) of India were allowed to
participate as lenders. The interest rate in the call money market was freely determined by
the market till December 1973. However, as call money rates increased sharply to touch 25-
30 per cent, the Indian Banks’ Association (IBA) instituted an administered system of
interest rates by imposing a ceiling interest rate of 15 per cent in December 1973 so as to
maintain systemic stability and quell any abnormal rise in the call rates. The ceiling was
subject to several revisions but there were several instances of violation of the ceiling rates
through other means (like buy-back arrangements) during phases of tight liquidity.
Treasury Bills constituted the main instrument of short-term borrowing by the Government
and served as a convenient gilt-edged security for the money market. The characteristics of
high liquidity, absence of default risk and negligible capital depreciation of Treasury Bills
made them another attractive instrument for short-term investment by banks and other
financial institutions
The Reserve Bank, being the banker to the Government, issued Treasury Bills at a discount.
The issuance system of Treasury Bills migrated from an auction to tap basis in July 1965
8
with the rate of discount administratively fixed at 3.5 per cent per annum, which was raised
to 4.6 per cent by July 1974 and remained at that level in respect of 91-day Treasury Bills till
1991. There was also a system of ad hoc Treasury Bills from 1955, which were created by
the Central Government in favor of the Reserve Bank to automatically restore its cash
balances to the minimum stipulated level, whenever there was excess drawdown of cash
9
REGULATION OF FOREIGN EXCHANGE BY RBI WITH RESPECT TO
BORROWING AND LENDING IN FOREIGN EXCHANGE
In exercise of the powers conferred by clause (d) of Sub-Section (3) of Section 6, subsection
(2) Of Section 47 of the Foreign Exchange Management Act, 1999 (42 of 1999), the
Reserve Bank makes the following regulations for borrowing or lending in foreign exchange by a
Person resident in India; namely:
1. Short Title and Commencement:-
(i) These Regulations may be called the Foreign Exchange Management (Borrowing
Or Lending in Foreign Exchange) Regulations, 2000.
(ii) They shall come into force on 1st day of June, 2000.
2. Definitions:-
In these regulations, unless the context otherwise requires -
a) `Act’ means the Foreign Exchange Management Act, 1999 (42 of 1999);.
b) ‘Authorized dealer’ means a person authorized as an authorized dealer under subsection
(1) Of section 10 of the Act;
c) ‘EEFC account’, ‘RFC account’ means the accounts referred to in the Foreign
Exchange Management (Foreign currency accounts by a person resident in India)
Regulations, 2000;
d) ‘FCNR (B) account’, ‘NRE account’ means the accounts referred to in the Foreign
Exchange Management (Deposit) Regulations, 2000;
e) ‘Indian entity’ means a company or a body corporate or a firm in India; 2
f) ‘Joint Venture abroad’ means a foreign concern formed, registered or incorporated in
A foreign country in accordance with the laws and regulations of that country and in
Which investment has been made by an Indian entity?
10
g) ‘Schedule’ means the Schedule to these Regulations;
h) ‘Wholly owned subsidiary abroad’ means a foreign concern formed, registered or
Incorporated in a foreign country in accordance with the laws and regulations of that
Country and whose entire capital is owned by an Indian entity;
i) The words and expressions used but not defined in these Regulations shall have the
Same meaning respectively assigned to them in the Act.
3. Prohibition to Borrow or Lend in Foreign Exchange:-
Save as otherwise provided in the Act, Rules or Regulations made there under, no person
Resident in India shall borrow or lend in foreign exchange from or to a person resident in or
Outside India:
Provided that the Reserve Bank may, for sufficient reasons, permit a person to borrow or
lend in foreign exchange from or to a person resident outside India.
4. Borrowing and Lending in Foreign Exchange by an Authorized dealer:-
(1) An authorized dealer in India or his branch outside India may lend in foreign currency
in the circumstances and subject to the conditions mentioned below, namely:
i) A branch outside India of an authorized dealer being a bank incorporated or
Constituted in India, may extend foreign currency loans in the normal course of its banking
Business outside India;
ii) An authorized dealer may grant loans to his constituents in India for meeting
their foreign exchange requirements or for their rupee working capital requirements or
capital expenditure subject to compliance with prudential norms, interest rate directives
and guidelines, if any, issued by Reserve Bank in this regard;
iii) An authorized dealer may extend credit facilities to a wholly owned subsidiary
abroad or a joint venture abroad of an Indian entity;
11
Provided that not less than 51 per cent of equity in such subsidiary or joint venture
is held by the Indian entity subject to compliance with the Foreign Exchange Management
(Transfer and Issue of Foreign Security) Regulations, 2000;3
iv) An authorized dealer may, in his commercial judgment and in compliance with
the prudential norms, grant loans in foreign exchange to his constituent maintaining EEFC
Account or RFC Account, against the security of funds held in such account.
v) A branch outside India of an authorized dealer may extend foreign currency
loans against the security of funds held in NRE/FCNR deposit accounts maintained in
accordance with the Foreign Exchange Management (Deposit) Regulations, 2000.
vi) Subject to the directions or guidelines issued by the Reserve Bank from time to
time, an authorized dealer in India may extend foreign currency loans to another
authorized dealer in India.
2) An authorized dealer in India may borrow in foreign currency in the circumstances and
subject to the conditions mentioned below, namely:
i) An authorized dealer may borrow from his Head Office or branch or correspondent
outside India up to fifteen per cent of his unimpaired Tier I capital or US$ 10 million,
whichever is more, subject to such conditions as the Reserve Bank may direct.
Explanation:
For the purpose of clause (i), the aggregate loans availed of by all branches in India
of the authorized dealer from his Head Office, all branches and correspondents
outside India, shall be reckoned.
ii) An authorized dealer may borrow in foreign currency without limit from his head
Office or branch or correspondent outside India for the purpose of replenishing his
rupee resources, provided that -
12
a) the funds borrowed are utilized for his own business operations
and are not invested in call money or similar other markets;
b) no repayment of the loan is made without the prior approval of Reserve
Bank, which may be granted only if the authorized dealer has no borrowings
outstanding either from Reserve Bank or other bank or financial institution in India
and is clear of all money market borrowings for a period of at least four weeks
prior to the week in which the repayment is made.
iii) A branch outside India of an authorized dealer being a bank incorporated or
constituted in India, may borrow in foreign currency in the normal course of its banking
business outside India, subject to the directions or guidelines issued by the Reserve Bank4
from time to time, and the Regulatory Authority of the country where the branch is
located.
iv) An authorized dealer may borrow in foreign currency from a bank or a financial
institution outside India, for the purpose of granting pre-shipment or post-shipment credit
in foreign currency to his exporter constituent, subject to compliance with the guidelines
issued by the Reserve Bank in this regard.
5. Borrowing and Lending in Foreign Exchange by
persons other than authorized dealer:-
(1) An Indian entity may lend in foreign exchange to its wholly owned subsidiary or joint
venture abroad constituted in accordance with the provisions of Foreign Exchange Management
(Transfer or issue of foreign security) Regulations, 2000.
(2) A person resident in India may borrow, whether by way of loan or overdraft or any
other credit facility, from a bank situated outside India, for execution outside India of a turnkey
project or civil construction contract or in connection with exports on deferred payment terms,
13
provided the terms and conditions stipulated by the authority which has granted the approval to
the project or contract or export in accordance with the Foreign Exchange Management (Export
of goods and services) Regulations, 2000.
(3) An importer in India may, for import of goods into India, avail of foreign currency
credit for a period not exceeding six months extended by the overseas supplier of goods,
provided
the import is in compliance with the Export Import Policy of the Government of India in force.
(4) A person resident in India may lend in foreign currency out of funds held in his EEFC
account, for trade related purposes to his overseas importer customer:
Provided that,-
a) the aggregate amount of such loans outstanding at any point of time does not
exceed US$ 3 million; and
b) where the amount of loan exceeds US$ 25,000, a guarantee of a bank of
international repute situated outside India is provided by the overseas borrower in favour
of the lender.
(5) Foreign currency loans may be extended by Export Import Bank of India, Industrial
Development Bank of India, Industrial Finance Corporation of India, Industrial Credit and
Investment Corporation of India Limited, Small Industries Development Bank of India Limited.
or
any other institution in India to their constituents in India out of foreign currency borrowings
raised by them with the approval of the Central Government for the purpose of onward lending.5
6. Other borrowings in foreign exchange with prior approval of
Reserve Bank or Government of India:-
(1) A person resident in India who desires to raise foreign currency loans of the nature or for
the purposes specified in the Schedule and who satisfies the eligibility and other conditions
14
specified in that Schedule, may apply to the Reserve Bank for approval to raise such loans.
(2) The Reserve Bank may grant its approval subject to such terms and conditions as it may
consider necessary;
Provided that while considering the grant of approval, the Reserve Bank shall take into
account the overall limit stipulated by it, in consultation with the Central Government, for
availment of such loans by the persons resident in India.
(3) Any other foreign currency loan proposed to be raised by a person resident in India,
which falls outside the scope of the Schedule, shall require the prior approval of the Central
REGULATION OF FOREIGN EXCHANGE BY RBI WITH RESPECT TO
INSURANCE
Foreign Exchange Management (Insurance) Regulations, 2000
RESERVE BANK OF INDIA
In exercise of the powers conferred by sub-section (2) of Section 47 of the Foreign Exchange
Management Act, 1999 (42 of 1999), the Reserve Bank makes the following regulations with
respect to the holding by a person resident in India of a general or life insurance policy issued by
an insurer outside India, namely:
1. Short title and commencement :-
i) These Regulations may be called the Foreign Exchange Management (Insurance)
Regulations, 2000.
ii) They shall come into force on 1st day of June, 2000.
15
2. Definitions :-
In these Regulations, unless the context otherwise requires, -
i) 'Act' means the Foreign Exchange Management Act, 1999 (42 of 1999);
ii) the words and expressions used but not defined in these Regulations shall have the
same meaning respectively assigned to them in the Act.
3. Prohibition on taking general or life insurance
policy issued by an insurer outside India :-
Save as otherwise provided in the Act, rules or regulations made or orders or directions
issued under the Act, no person resident in India shall take any general or life insurance
policy issued by an insurer outside India.
Provided that the Reserve Bank may, for sufficient reasons, permit a person resident in India
to take any life insurance policy issued by an insurer outside India.
4. Permission to continue to hold a policy taken :-
1) A person resident in India but not permanently resident therein may continue to hold
any insurance policy issued to him by an insurer outside India, if the premium on such
policy is paid out of foreign currency resources outside India.
Explanation:
For the purpose of this clause, 'not permanently resident' means a person resident in
India for employment of a specified duration (irrespective of length thereof) or for a
specific job or assignment, the duration of which does not exceed three years.
2) A person resident in India may take or continue to hold a general insurance policy
issued by an insurer outside India, provided that, before taking the policy in either case,
he had obtained a no objection certificate from the Central Government.
3) (i) A person resident in India may continue to hold any insurance policy issued by an
insurer outside India when such person was resident outside India:
Provided that the premium on the policy is paid out of his foreign currency account
maintained with a bank outside India or out of funds held in his Resident Foreign
Currency account maintained with an authorized dealer;
Provided further that where the policy is a life insurance policy in force for a period of
not less than three years prior to the policyholder's return to India, the premium due on
the policy may also be paid by making remittance from India.
16
(ii) The maturity proceeds/ amount of claim received in respect of the policy referred
to in sub-clause (i), may be credited to the policy-holder's foreign currency
account maintained with a bank outside India or, as the case may be, to his
Resident Foreign Currency account maintained with an authorized dealer in India;
Provided that where the premium due on a life insurance policy has been paid by
making remittance from India, the policy holder shall repatriate to India through
normal banking channels, the maturity proceeds or amount of any claim due on the
policy, within a period of seven days from the receipt thereof.
3. Permission to take or hold a general insurance policy issued by an insurer outside India
i) A person resident in India may take or continue to hold a general insurance policy issued by an
insurer outside India, provided that, the policy is held, under a specific or general permission of
the Central Government.
ii) A person resident in India may continue to hold any general insurance policy issued by an
insurer outside India when such person was resident outside India.
Provided further that where the premium due on a general insurance policy has been paid by
making remittance from India, the policy holder shall repatriate to India through normal banking
channels, the maturity proceeds or amount of any claim due on the policy, within a period of
seven days from the receipt thereof.
4. Permission to take or hold a life insurance policy issued by an insurer outside India
i) A person resident in India may take or continue to hold a life insurance policy issued by an
insurer outside India, provided that, the policy is held, under a specific or general permission of
the Reserve Bank of India.
ii) A person resident in India may continue to hold any life insurance policy issued by an insurer
outside India when such person was resident outside India.
Provided further that where the premium due on a life insurance policy has been paid by making
remittance from India, the policy holder shall repatriate to India through normal banking
17
channels, the maturity proceeds or amount of any claim due on the policy, within a period of
seven days from the receipt thereof.
REGULATIONS REQUIRED
The Indian government and insurance regulatory and development authority can offer
companies insurance for both export transactions and for the political risk associated with
overseas investments.
Insure Export Transactions with the Export-Import Bank
Ex-In Bank’s export credit insurance policies enables enables Indian exporters to both finance
their export activities and mitigate the risk of non-payment. The policies below given enable you
to offer credit to your international buyers and access working capital funds. These policies have
been in used by other countries of world
The Express Insurance Program is a "named buyer" policy that simplifies small business
access to export credit risk insurance on their foreign accounts receivable. It also has a
streamlined online application provides a policy quote and credit decisions up to
$300,000 on foreign buyers within five workdays buyer credit requests exceeding
$300,000 will require additional processing time
The Small Business Export Credit Insurance Policy is specifically designed for small,
financially viable businesses that are new to exporting, or have only occasionally
exported. It can help increase an exporter's international sales by extending competitive
credit terms while minimizing risks.
The Multi-Buyer Export Credit Insurance Policy enables U.S. exporters to reduce their
risk of selling on credit terms by insuring their export accounts receivable against
default or non-payment. The policy can help increase international sales by extending
competitive credit terms to foreign buyers while minimizing risks.
18
The Short-Term Single-Buyer Export Credit Insurance Policy allows exporters to insure
specific, short-term foreign receivables against loss due to commercial and specified
political risks on a selective basis.
Ex-Im Bank offers U.S. leasers the opportunity to expand their overseas leasing programs
by providing comprehensive insurance for both the stream of lease payments and the fair
market value of the leased products.
Insure Investment Transactions with OPIC
Political risk insurance is available to U.S. investors, contractors, exporters and financial
institutions involved in international transactions. Political risk insurance can cover currency
inconvertibility, expropriation and political violence, and is available for investments in new
ventures, expansions of existing enterprises, privatizations and acquisitions with positive
developmental benefits.
REGULATIONS FOR MONEY MARKET BY RBI
1. FOR COMMERCIAL PAPERS
1. Introduction
Commercial Paper (CP) is an unsecured money market instrument issued in the form of a
promissory note. CP, as a privately placed instrument, was introduced in India in 1990 with a
view to enable highly rated corporate borrowers to diversify their sources of short-term
borrowings and to provide an additional instrument to investors. Subsequently, primary dealers
(PDs) and all-India financial institutions (FIs) were also permitted to issue CP to enable them to
meet their short-term funding requirements. The guidelines for issue of CP, incorporating all the
amendments issued till date, are given below for ready reference.
19
2. Eligibility for Issue of CP:
a. Companies, PDs and FIs are permitted to raise short term resources through CP.
b. A company would be eligible to issue CP provided:
i. the tangible net worth of the company, as per the latest audited balance sheet, is not less
than Rs.4 crore;
ii. the company has been sanctioned working capital limit by bank/s or FIs; and
iii. the borrowed account of the company is classified as a Standard Asset by the financing
bank/institution.
3. Issue of CP –Credit enhancement, limits, etc.
a. CP shall be issued as a ‘stand alone’ product. Further, it would not be obligatory in any
manner on the part of the banks and FIs to provide stand-by facility to the issuers of CP.
b. Banks and FIs may, based on their commercial judgment, subject to the prudential norms as
applicable to them, with the specific approval of their respective Boards, choose to provide
stand-by assistance/credit, back-stop facility etc. by way of credit enhancement for a CP issue.
c. Non-bank entities (including corporate) may provide unconditional and irrevocable guarantee
for credit enhancement for CP issue provided:
i. The issuer fulfils the eligibility criteria prescribed for issuance of CP;
ii. The guarantor has a credit rating at least one notch higher than the issuer given by an
approved CRA; and
iii. The offer document for CP properly discloses the net worth of the guarantor company,
the names of the companies to which the guarantor has issued similar guarantees, the
extent of the guarantees offered by the guarantor company, and the conditions under
which the guarantee will be invoked.
20
d. The aggregate amount of CP that can be issued by an issuer shall at all times be within the
limit as approved by its Board of Directors or the quantum indicated by the CRA for the
specified rating, whichever is lower.
e. Banks and FIs shall have the flexibility to fix working capital limits, duly taking into account
the resource pattern of company’s financing, including CP.
f. An issue of CP by an FI shall be within the overall umbrella limit prescribed in the Master
Circular on Resource Raising Norms for FIs, issued by the Reserve Bank of India, Department of
Banking Operations and Development, as prescribed/ updated from time-to-time.
g. The total amount of CP proposed to be issued should be raised within a period of two weeks
from the date on which the issuer opens the issue for subscription. CP may be issued on a single
date or in parts on different dates provided that in the latter case, each CP shall have the same
maturity date.
h. Every issue of CP, and every renewal of a CP, shall be treated as a fresh issue.
4. Eligibility for investment in CP
a. Individuals, banks, other corporate bodies (registered or incorporated in India) and
unincorporated bodies, Non-Resident Indians and Foreign Institutional Investors (FIIs)
shall be eligible to invest in CP.
b. FIIs shall be eligible to invest in CPs subject to (i) such conditions as may be set for them
by Securities Exchange Board of India (SEBI) and (ii) compliance with the provisions of
the Foreign Exchange Management Act, 1999, the Foreign Exchange (Deposit)
Regulations, 2000 and the Foreign Exchange Management (Transfer or Issue of Security
by a Person Resident Outside India) Regulations, 2000, as amended from time to time.
5. Form of the Instrument, mode of issuance and redemption
5.1 Form
21
a. CP shall be issued in the form of a promissory note (as specified in Schedule I to these
Guidelines) and held in physical form or in a dematerialized form through any of the
depositories approved by and registered with SEBI, provided that all RBI regulated
entities can deal in and hold CP only in dematerialized form through such depositories.
b. Fresh investment by all RBI-regulated entities shall be only in dematerialized form.
c. CP shall be issued in denominations of 5 lakh and multiples thereof. The amount invested
by single investors should not be less than 5 lakh (face value).
d. CP shall be issued at a discount to face value as may be determined by the issuer.
e. No issuer shall have the issue of CP underwritten or co-accepted.
f. Options (call/put) are not permitted on CP.
5.2 Tenor
a. CP shall be issued for maturities between a minimum of 7 days and a maximum of up to
one year from the date of issue.
b. The maturity date of the CP shall not go beyond the date up to which the credit rating of
the issuer is valid.
5.3. Procedure for Issuance
a. Every issuer must appoint an IPA for issuance of CP.
b. The issuer should disclose to the potential investors, its latest financial position as per the
standard market practice.
c. After the exchange of confirmation of the deal between the investor and the issuer, the
issuer shall arrange for crediting the CP to the Demat account of the investor with the
depository through the IPA.
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d. The issuer shall give to the investor a copy of IPA certificate to the effect that the issuer
has a valid agreement with the IPA and documents are in order (Schedule II).
5.4 Rating Requirement
Eligible participants/issuers shall obtain credit rating for issuance of CP from any one of the
SEBI registered CRAs. The minimum credit rating shall be ‘a3’ as per rating symbol and
definition prescribed by SEBI. The issuers shall ensure at the time of issuance of the CP that the
rating so obtained is current and has not fallen due for review.
5.5. Investment / Redemption
a. The investor in CP (primary subscriber) shall pay the discounted value of the CP to the
account of the issuer through the IPA.
b. The investor holding the CP in physical form shall, on maturity, present the instrument
for payment to the issuer through the IPA.
c. The holder of a CP in dematerialized form shall get the CP redeemed and receive
payment through the IPA.
5.6 Documentation Procedures
a. Standardized procedures and documentation for CPs are prescribed in consultation with
Fixed Income Money Market and Derivatives Association of India (FIMMDA) in
consonance with international best practices.
b. Issuers /IPAs shall follow the operational guidelines issued by FIMMDA, from time to
time, with the approval of RBI.
6. Trading and Settlement of CP
a. All OTC trades in CP shall be reported within 15 minutes of the trade to the reporting
platform of Clearcorp Dealing System (India) Ltd.(CDSIL).
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b. OTC trades in CP shall be settled through the clearing house of the National Stock
Exchange (NSE), i.e., the National Securities Clearing Corporation Limited (NSCCL),
the clearing house of the Bombay Stock Exchange (BSE), i.e., Indian Clearing
Corporation Limited (ICCL), and the clearing house of the MCX-Stock Exchange, i.e.,
MCX-SX Clearing Corporation Limited (CCL), as per the norms specified by NSCCL,
ICCL and CCL from time to time.
c. The settlement cycle for OTC trades in CP shall either be T+0 or T+1.
7. Buyback of CP
a. Issuers may buyback the CP, issued by them to the investors, before maturity.
b. Buyback of CP shall be through the secondary market and at prevailing market price.
c. The CP shall not be bought back before a minimum period of 7 days from the date of
issue.
d. Issuer shall intimate the IPA of the buyback undertaken.
e. Buyback of CPs should be undertaken after taking approval from the Board of Directors.
8. Duties and Obligations
The duties and obligations of the Issuer, IPA and CRA are set out below:
I. Issuer
The issuer shall ensure that the guidelines and procedures laid down for the issuance of CP are
strictly adhered to.
II. IPA
a. The IPA shall ensure that the issuer has the minimum credit rating as stipulated by RBI
and the amount mobilized through issuance of CP is within the quantum indicated by
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CRA for the specified rating or as approved by its Board of Directors, whichever is
lower.
b. The IPA shall certify that it has a valid agreement with the issuer (Schedule II).
c. The IPA shall verify that all the documents submitted by the issuer, viz., copy of board
resolution, signatures of authorized executants (when CP is issued in physical form) are
in order and shall issue a certificate to this effect.
d. Certified copies of original documents, verified by the IPA, shall be held in the custody
of IPA.
e. All scheduled banks, acting as IPAs, shall report the details of issuance of CP on the
Online Returns Filing System (ORFS) module of the RBI within two days from the date
of issuance of the CP.
f. IPAs, shall immediately report, on occurrence, full particulars of defaults in repayment of
CP to the Chief General Manager, Financial Markets Department, Reserve Bank of India,
Central Office, Fort, Mumbai-400001 (email) in the format as given in Schedule III of
these guidelines.
g. IPAs shall also report all instances of buyback of CPs undertaken by the issuer to the
Chief General Manager, Financial Markets Department, Reserve Bank of India, Central
Office, Fort, Mumbai–400001 (email) in the format as given in Schedule IV of these
guidelines.
III. CRA
a. CRAs shall abide by the Code of Conduct prescribed by the SEBI for CRAs for
undertaking rating of capital market instruments, which shall be applicable for rating
CPs.
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b. The CRAs shall have the discretion to determine the validity period of the rating
depending upon their perception about the strength of the issuer; and they shall, at the
time of rating, clearly indicate the date when the rating is due for review.
c. The CRAs shall closely monitor the rating assigned to issuer’s vis-à-vis their track record
at regular intervals and shall make their revision in the ratings public through their
publications and website.
9. Non-applicability of Certain Other Directions
Nothing contained in the Non-Banking Financial Companies Acceptance of Public Deposits
(Reserve Bank) Directions, 1998 shall apply to the acceptance of deposit by issuance of CP,
by any NBFC in accordance with these guidelines.
2. FOR CERTIFICATE OF DEPOSIT
1. Introduction
Certificate of Deposit (CD) is a negotiable money market instrument and issued in
dematerialized form or as a Usance Promissory Note against funds deposited at a bank or other
eligible financial institution for a specified time period. Guidelines for issue of CDs are presently
governed by various directives / guidelines issued by the Reserve Bank of India (RBI), as
amended from time to time. The guidelines for issue of CDs, incorporating all the amendments
issued till date, are given below for ready reference.
2. Eligibility
CDs can be issued by (i) scheduled commercial banks {excluding Regional Rural Banks and
Local Area Banks}; and (ii) select All-India Financial Institutions (FIs) that have been permitted
by RBI to raise short-term resources within the umbrella limit fixed by RBI.
3. Aggregate Amount
3.1 Banks have the freedom to issue CDs depending on their funding requirements.
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3.2 An FI can issue CDs within the overall umbrella limit prescribed in the Master Circular on
Resource Raising Norms for FIs, issued by DBOD and updated from time-to-time.
4. Minimum Size of Issue and Denominations
Minimum amount of a CD should be Rs.1 lakh, i.e., the minimum deposit that could be accepted
from a single subscriber should not be less than Rs.1 lakh, and in multiples of Rs. 1 lakh
thereafter.
5. Investors
CDs can be issued to individuals, corporations, companies (including banks and PDs), trusts,
funds, associations, etc. Non-Resident Indians (NRIs) may also subscribe to CDs, but only on
non-repatriable basis, which should be clearly stated on the Certificate. Such CDs cannot be
endorsed to another NRI in the secondary market.
6. Maturity
6.1 The maturity period of CDs issued by banks should not be less than 7 days and not more than
one year, from the date of issue.
6.2 FIs can issue CDs for a period not less than 1 year and not exceeding 3 years from the date of
issue.
7. Discount / Coupon Rate
CDs may be issued at a discount on face value. Banks / FIs are also allowed to issue CDs on
floating rate basis provided the methodology of compiling the floating rate is objective,
transparent and market-based. The issuing bank / FI is free to determine the discount / coupon
rate. The interest rate on floating rate CDs would have to be reset periodically in accordance with
a pre-determined formula that indicates the spread over a transparent benchmark. The investors
should be clearly informed of the same.
8. Reserve Requirements
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Banks have to maintain appropriate reserve requirements, i.e., cash reserve ratio (CRR) and
statutory liquidity ratio (SLR), on the issue price of the CDs.
9. Transferability
CDs in physical form are freely transferable by endorsement and delivery. CDs in demat form
can be transferred as per the procedure applicable to other demat securities. There is no lock-in
period for the CDs.
10. Trades in CDs
All OTC trades in CDs shall be reported within 15 minutes of the trade on the reporting platform
of Clearcorp Dealing Systems (India) Ltd. (CDSIL).
11. Settlement
All OTC trades in CDs shall necessarily be cleared and settled under DVP I mechanism through
the authorized clearing houses {National Securities Clearing Corporation Limited (NSCCL),
Indian Clearing Corporation Limited (ICCL) and MCX Stock Exchange Clearing Corporation
Limited (CCL)} of the stock exchanges.
12. Loans / Buy-backs
Banks / FIs cannot grant loans against CDs. Furthermore, they cannot buy-back their own CDs
before maturity. However, the RBI may relax these restrictions for temporary periods through a
separate notification.
13. Format of CDs
Banks / FIs should issue CDs only in dematerialized form. However, according to the
Depositories Act, 1996, investors have the option to seek certificate in physical form.
Accordingly, if an investor insists on physical certificate, the bank / FI may inform the Principal
Chief General Manager, Financial Markets Department, Reserve Bank of India, Central Office,
Fort, Mumbai - 400 001 about such instances separately. Further, issuance of CDs will attract
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stamp duty. A format (Annex I) is enclosed for adoption by banks / FIs. There will be no grace
period for repayment of CDs. If the maturity date happens to be a holiday, the issuing bank/FI
should make payment on the immediate preceding working day. Banks / FIs, therefore, should
fix the period of deposit in such a manner that the maturity date does not coincide with a holiday
to avoid loss of discount / interest rate.
14. Security Aspect
Since CDs in physical form are freely transferable by endorsement and delivery, it will be
necessary for banks/FIs to see that the certificates are printed on good quality security paper and
necessary precautions are taken to guard against tampering with the document. They should be
signed by two or more authorized signatories.
15. Payment of Certificate
15.1 Since CDs are transferable, the physical certificates may be presented for payment by the
last holder. The question of liability on account of any defect in the chain of endorsements may
arise. It is, therefore, desirable that banks take necessary precautions and make payment only by
a crossed cheque. Those who deal in these CDs may also be suitably cautioned.
15.2 The holders of dematted CDs will approach their respective depository participants (DPs)
and give transfer / delivery instructions to transfer the security represented by the specific
International Securities Identification Number (ISIN) to the 'CD Redemption Account'
maintained by the issuer. The holders should also communicate to the issuer by a letter / fax
enclosing the copy of the delivery instruction they had given to their respective DP and intimate
the place at which the payment is requested to facilitate prompt payment. Upon receipt of the
demat credit of CDs in the "CD Redemption Account", the issuer, on maturity date, would
arrange to repay to holders / transferors by way of Banker's cheque / high value cheque, etc.
16. Issue of Duplicate Certificates
16.1 In case of loss of physical certificates, duplicate certificates can be issued after compliance
with the following:
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a. Notice is required to be given in at least one local newspaper;
b. Lapse of a reasonable period (say 15 days) from the date of the notice in the newspaper;
and
c. Execution of an indemnity bond by the investor to the satisfaction of the issuer of CDs.
16.2 The duplicate certificate should be issued only in physical form. No fresh stamping is
required as a duplicate certificate is issued against the original lost CD. The duplicate CD should
clearly state that the CD is a Duplicate one stating the original value date, due date, and the date
of issue
17. Accounting
Banks / FIs may account the issue price under the Head "CDs issued" and show it under deposits.
Accounting entries towards discount will be made as in the case of "Cash Certificates". Banks /
FIs should maintain a register of CDs issued with complete particulars.
18. Standardized Market Practices and Documentation
Fixed Income Money Market and Derivatives Association of India (FIMMDA) may prescribe, in
consultation with the RBI, for operational flexibility and smooth functioning of the CD market,
any standardized procedure and documentation that are to be followed by the participants, in
consonance with the international best practices. Banks / FIs may refer to the detailed guidelines
issued by FIMMDA in this regard on June 20, 2002 and as amended from time to time.
19. Reporting
19.1 Banks should include the amount of CDs in the fortnightly return under Section 42 of the
RBI Act, 1934 and also separately indicate the amount so included by way of a footnote in the
return.
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19.2 Further, banks / FIs should report the data on issuance of CDs on the web-based module
under the Online Returns Filing System (ORFS) within 10 days from the end of the fortnight to
which it pertains.
3. FOR CALL/NOTICE MONEY MARKET OPERATIONS
1. Introduction
The money market is a market for short-term financial assets that are close substitutes of money.
The most important feature of a money market instrument is that it is liquid and can be turned
into money quickly at low cost and provides an avenue for equilibrating the short-term surplus
funds of lenders and the requirements of borrowers. The call/notice money market forms an
important segment of the Indian Money Market. Under call money market, funds are transacted
on an overnight basis and under notice money market; funds are transacted for a period between
2 days and 14 days.
2. Participants
Scheduled commercial banks (excluding RRBs), co-operative banks (other than Land
Development Banks) and Primary Dealers (PDs), are permitted to participate in call/notice
money market both as borrowers and lenders
3. Prudential Limits
3.1 The prudential limits in respect of both outstanding borrowing and lending transactions in
call/notice money market for scheduled commercial banks, co-operative banks and PDs are as
follows:-
Table: Prudential Limits for Transactions in Call / Notice Money Market
Sr.
No.Participant Borrowing Lending
1 Scheduled On a fortnightly average basis, borrowing On a fortnightly average
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Commercial
Banks
outstanding should not exceed 100 per
cent of capital funds (i.e., sum of Tier I
and Tier II capital) of latest audited
balance sheet. However, banks are
allowed to borrow a maximum of 125 per
cent of their capital funds on any day,
during a fortnight.
basis, lending outstanding
should not exceed 25 per
cent of their capital funds.
However, banks are allowed
to lend a maximum of 50
per cent of their capital
funds on any day, during a
fortnight.
2Co-operative
Banks
Outstanding borrowings of State Co-
operative Banks / District Central Co-
operative Banks / Urban Co-operative
Banks in call / notice money market, on a
daily basis should not exceed 2.0 per cent
of their aggregate deposits as at end
March of the previous financial year.
No limit.
3 PDs
PDs are allowed to borrow, on average in
a reporting fortnight, up to 225 per cent
of their net owned funds (NOF) as at end-
March of the previous financial year.
PDs are allowed to lend in
call/notice money market,
on average in a reporting
fortnight, up to 25 per cent
of their NOF.
3.2 Banks/PDs/ Co-operative banks may, with the approval of their Boards, arrive at the
prudential limits for borrowing/lending in Call/Notice Money Market in terms of
guidelines given in paragraph 3.1 above. The limits so arrived at may be conveyed to the
Clearing Corporation of India Ltd. (CCIL) for setting of limits in NDS-CALL System,
under advice to Financial Markets Department (FMD), Reserve Bank of India.
3.3 Non-bank institutions (other than PDs) are not permitted in the call/notice money market.
4. Interest Rate
4.1 Eligible participants are free to decide on interest rates in call/notice money market.
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4.2 Calculation of interest payable would be based on the methodology given in the Handbook of
Market Practices brought out by the Fixed Income Money Market and Derivatives Association of
India (FIMMDA).
5. Dealing Session
Deals in the Call/Notice/Term money market can be done from 9:00 am to 5:00 pm on weekdays
and from 9:00 am to 2:00 pm on Saturdays or as specified by RBI from time to time.
6. Documentation
Eligible participants may adopt the documentation suggested by FIMMDA from time to time.
7. Reporting Requirement
7.1 With the implementation of the core banking solution, the Negotiated Dealing System (NDS)
has been discontinued for reporting of OTC Call/Notice/Term Money transactions.
7.2 All dealings in Call/Notice/Term money executed on the Negotiated Dealing System-Call,
i.e. NDS-Call (a screen –based, negotiated, quote-driven system), do not require separate
reporting.
7.3 It is mandatory that all the OTC Call/Notice/Term money deals be reported over the
reporting platform of NDS-Call by the parties who are having NDS-Call membership.
7.4 Such OTC deals should be reported within 15 minutes on NDS-Call reporting platform,
irrespective of the size of the deal or whether the counterparty is a member of the NDS-Call or
not.
7.5 Parties who are not having NDS-Call membership are advised to report the deals to Financial
Markets Department, RBI in the reporting format given in Annex I of this master circular.
7.6 The reporting time for all OTC Call/Notice/Term money deals on NDS-Call is up to 5:00 pm
on weekdays and 2:00 pm on Saturdays or as decided by RBI from time to time.
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7.7 In case of any misreporting or repeated reporting of OTC deals by a party, the same should
be immediately brought to the notice of FMD either through e-mail or through fax.
7.8 In case the situation so warrants, the Reserve Bank may call for information in respect of
money market transactions of eligible participants.
Conclusion
Foreign exchange has traditionally been regarded as the exclusive domain of the biggest banks
and corporations, recent trends have dispelled this notion, making it increasingly important for
foreign exchange to come under the ambit of regulation.
The developments of money market and refinements in operating procedures of monetary policy
have moved in tandem. Financial sector reforms along with Reserve Bank’s emphasis on
development of various segments of financial market enabled shifts in operating procedures
based on direct quantity-based instruments to indirect interest rate-based instruments. The
Reserve Bank has been able to better transmit monetary policy signals in the money market
through a single policy repo rate. Evidence so far suggests a significant improvement in
monetary policy transmission under the new operating framework
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