Exchange traded currency futures to finally hit India

The RBI after month of deliberation finally unveiled norms for trading in currency futures. Banks will need RBI nod to participate in forex futures. It also stipulated that banks should have a minimum net worth of Rs 500 cr, a capital adequacy ratio of at least 10%. They should have made a net profit for the last three years to qualify for trading in currency futures on exchanges. Banks will also be required to get the approval of their board of directors in case they qualify. The RBI has further clarified that banks which do not meet these requirements (including urban co-operative banks) can participate only as clients, and that too after securing a regulatory nod. The currency futures market will be allowed in stock exchanges or new exchanges recognised by SEBI and would be bound by the guidelines issued by the RBI and SEBI.

To start with, RBI has allowed only resident Indians or locals to participate in currency futures, thus effectively keeping out foreign investors such as portfolio investors and hedge funds besides NRI’s for now. Initially, trading contracts denominated in the US dollar and the Indian rupee will only be allowed. The size of the contract has been set at $1000 and the tenure at 12 months. The central bank has also specified that the contracts will be quoted and settled only in rupees. The trading of currency futures shall be subject to maintaining initial, extreme loss and calendar spread margins and the clearing houses of the exchanges will ensure maintenance of such margins as per capital market regulator’s guidelines issued from time to time. Trading members have been prescribed a position limit of $ 25 mn across all contracts. However, the gross open position of a trading member that is a bank, across all contracts, shall not exceed 15% of the total open interest or $100 mn, whichever is higher.

The RBI may from time to time modify the eligibility criteria for the participants, modify participant-wise position limits, prescribe margins and/or impose specific margins for identified participants, fix or modify any other prudential limits, or take such other actions as deemed necessary in public interest, in the interest of financial stability and orderly development and maintenance of foreign exchange market in India.
The norms have kept in mind that that excess speculation in the Indian currency is curbed as the norms are similar to the norms followed by banks in other segments. Rumors have it that BSE, NSE and MCX have already submitted a proposal to launch a platform for currency futures, and more entities are expected to submit applications to the regulators. On the banking front, most banks would be attracted to become members as it means captive business for them, but banks may prefer setting up a subsidiary for this business, as it is a relatively new activity.

What are currency futures?

Currency futures are standardised foreign exchange derivative contracts traded on a stock exchange to buy or sell one currency against another on a specified future date, at a price specified on the date of contract, but does not include a forward contract.

Finance Ministry mulls changes in ADR, GDR pricing formula

In a bid to aid Indian companies to raise money overseas, especially in the present falling market, the finance ministry has proposed changes in the pricing formula for global depository receipts (GDRs) and American depositary receipts (ADRs). In falling markets, the current pricing norm effectively results in the overseas issue being priced farther from, and higher than, the prevailing domestic market price. Companies wishing to tap the overseas market may not do so as the offer price is not right. The ministry has proposed to reduce the time period for calculating the minimum offer price for overseas issues to two months from six months earlier.

The government move comes after representations from companies and intermediaries that the pricing formula effectively shuts out the fund raising avenue. Companies have struggled to find takers for these issues as the shares are available cheaper on the bourses.

Currently, the ADR/GDR issue price is determined on the basis of the higher of the last six months’ average price or last 15 days’ average price. The idea to keep six months average price was to avoid promoters from doing bulk allotment at a discounted price. The logic was that the promoter or interested parties cannot artificially depress prices for such a long period. The finance ministry has now proposed to reduce it to the higher of the two months’ average price or the last 15 days average price. The new pricing rules are expected to reflect accurate and more realistic prices of the ADR/GDR issues.

Experts in the industry have come out with mixed opinion for the move as some feel that the timing of the issue is more critical, whether two months or six months, especially in the present volatile markets. These are the companies which are in desperate need of alternative financing routes as debt becomes scarce and expensive in the local market as the Reserve Bank unleashes anti inflationary measures. It is more important to give companies a free hand on pricing, they feel. However, many experts also feel that the reduction in time period will help companies come out with far better realistic pricing than the previous waiting period helping them raise money.

RBI increases Non-deposit taking NBFCs’ CRAR to 12%

The Reserve Bank of India (RBI) on August1 in a move to tighten regulation on Non Banking Financial Companies (NBFCs), with asset size of Rs 100 crore and above, has increased the capital to Risk Weighted to Assets Ratio (CRAR), from the current 10% to 12% by March 31, 2009, and to 15% by March 31, 2010.

Earlier non-deposit taking NBFCs were subjected to minimal regulation. But, in the light of the evolution and integration of the financial sector, the RBI felt that all systemically relevant entities offering financial services ought to be brought under a suitable regulatory framework to contain systemic risk. Systemically, important non-deposit taking NBFCs will also have to make additional disclosures in their balance sheets from the year ending March 31, 2009. These disclosures relate to CRAR, exposure to real estate sector, both direct and indirect and maturity pattern of assets and liabilities. The RBI’s move might be aimed at discouraging the practice of corporates to divert funds to real estate through their NBFCs.
Earlier on July 31, the RBI had said that NBFCs could not include the balance in their deferred tax liabilities within their tier-I or tier-II capital base. The RBI also stressed that deferred tax assets would be treated as a non-physical asset and this, too, would be excluded from NBFCs’ tier-I capital. Recognising that certain NBFCs may be unable to comply with the required CRAR requirements, RBI has given these players an appropriate transition period.