Negotiated Dealing System –Electronic Order Matching (NDS-OM) Launched

On August 1, 2005, RBI launched the electronic order matching system for trading in government securities on its Negotiated Trading System. In the first phase, RBI-regulated entities, banks and primary dealers were allowed to trade on the system. The system was extended to all insurance entities in January.2006. The Union Budget, 2006-07 announced the extension of the NDS-OM module to qualified mutual funds (MFs), provident funds and pension funds. Accordingly, the RBI, in its Credit Policy Statement announced on 18^th April, 2006 has proposed :

      •      to permit MFs, which are NDS members, to access the NDS-OM module with immediate effect. Other MFs would be permitted access by opening temporary current/SGL accounts with the Reserve Bank.

      •      to permit large pension/provident funds like CBOT/Seamens’/Coal Miners’ funds to access the NDS-OM module by opening temporary current/SGL accounts with the Reserve Bank. The smaller funds would be allowed access through the CSGL route.

These arrangements are being made on a temporary basis to enable immediate access to new participants to the NDS-OM module. Meanwhile, software is being developed to shift all entities, other than banks and PDs, which access NDS-OM from current accounts with the Reserve Bank to such accounts with commercial banks. 

Mumbai as a Centre for International Finance 

In his Budget speech the Finance Minister has made the announcement in para 90 regarding appointment of a high powered Expert Committee to advise the Government on how to make Mumbai a regional financial center. This Committee has been constituted in November 2005 under the Chairmanship of Shri Percy S. Mistry, Chairman, Oxford International Group.

Corporate Bond Markets

 A High Level Expert Committee on Corporate Bonds and Securitisation was constituted, under the Chairmanship of Dr. R.H.Patil, following an announcement in the Budget 2005-06, to look in to legal, regulatory, tax and market design issues in the development of the corporate bond market. The Committee submitted its report to the Government on 27 December, 2005. The recommendations of the Committee included enhancing the issuer as well as investor base, simplification of listing and disclosure norms, rationalisation of stamp duty and withholding tax, consolidation of debt, improving trading systems through introduction of an electronic order matching system, efficient clearing and settlement systems, a comprehensive reporting mechanism, developing market conventions and self-regulation and development of the securitised debt market.

 As announced by the FM in his Budget speech 2006-07, steps shall now take steps to create a single, unified exchange-traded market for corporate bonds. In this context, in so far as actions by the Reserve Bank are concerned, the RBI has proposed the constitution of a Working Group to examine the relevant recommendations and suggest a roadmap for implementation.

When issued market for Government Securities

“When issued” trading implies trading in a futures market where positions may be taken and covered before the actual settlement date. Such trading takes place between the time a new issue is announced and a time it is actually issued.

The RBI, in its Credit Policy Statement announced on 18^th April, 2006 has proposed to introduce a ‘when issued’ (WI) market in Government securities in order to further strengthen the debt management framework Guidelines covering permissible categories of securities and participants, surveillance system, limits on positions, internal control and reporting requirements have been prepared in consultation with market participants and are being issued separately by the RBI.

Anti-Money Laundering Guidelines

SEBI has put in place Anti-Money Laundering Guidelines in January, 2006. The Guidelines set out the steps that a registered intermediary and any of its representatives, should implement to discourage and identify any money laundering or terrorist financing activities. These guidelines are meant for use primarily by intermediaries registered with SEBI under the SEBI Act, 1992. The Guidelines have taken into account the requirements of the Prevention of the Money Laundering Act, 2002 as applicable to the SEBI registered entities.

Introduction of Gold Exchange Traded Fund schemes by Mutual Fund 

SEBI has, vide notification dated 12^th January, 2006, allowed MFs to float Gold Exchange Traded Fund schemes which have been are permitted to invest primarily in   Gold and Gold related instruments, which have been defined as such instruments having gold as underlying, as are specified by SEBI from time to time.

Pension Reforms

On 23^rd August 2003, Government decided to introduce a new restructured defined contribution pension system for new entrants to Central Government service, except to Armed Forces, in the first stage, replacing the existing defined benefit system. A press release describing the main features of the New Pension System (NPS) was issued on 27^th August 2003 (see hyperlink below). Subsequently, the NPS was operationalised from 1^st January 2004 through a notification dated 22^nd December 2003 (see hyperlink below).

An interim PFRDA was constituted through a Government resolution dated 10^th October 2003 (see hyperlink below)) as a precursor to a statutory regulator and became operational from January 1^st 2004. A press release to this effect was issued on 1^st January 2004 (see hyperlink below). A Chairperson and two whole-time members were appointed who, however, subsequently resigned. Shri D. Swarup has since been appointed as Chairman PFRDA for a term of 5 years or until the age of 65 or until further orders, whichever is earlier.  He assumed charge on 1^st April 2005.

Till the architecture is fully in place, the Central Pension Accounting Office (CPAO) under the Controller General of Accounts, Department of Expenditure is acting as the interim Central Recordkeeping Agency (CRA). Contributions are currently being credited into the public account earning a return equal to the GPF rate.

In line with an announcement made in Budget 2004-05, the Pension Fund Regulatory and Development Authority Ordinance, 2004 to provide a regulatory framework for the pension sector under the Pension Fund Regulatory and Development Authority was promulgated on 29^th December 2004. The Ordinance lapsed in April 2005.

A Bill replacing the Ordinance was introduced on 21^st March 2005 and was referred to the Standing Committee on Finance. The Committee presented their report in Parliament on 26^th  July 2005. The recommendations of the Committee have been examined and a proposal for amending the PFRDA Bill, 2005, based on the recommendations of the Committee is under the Government’s consideration.

The Bill proposes that the main mandate of PFRDA is to regulate the NPS, as amended from time to time by the Central Government.  Pension schemes already covered under the Employees’ Provident Fund & Miscellaneous Provisions Act, 1952 and other enactments would be specifically excluded from the architecture of the NPS including the Central Recordkeeping Agency (CRA) and pension funds. Further, the Bill provides that PFRDA will frame investment guidelines for pension funds. There are provisions empowering PFRDA to impose stringent penalties for any violation of the law and to create a special fund, to be used for educating and protecting the interests of subscribers to schemes of pension funds.

The New Pension System (NPS) was introduced for newly recruited Central Government employees with effect from 1^st January 2004. Already over 100,000 employees have joined the system. 17 State Governments have notified defined contribution pension systems based on the NPS.

Pension Reforms - Press Releases and Notifications

(1) Press release dated 27^th August 2003 detailing the main features of the New
Pension System (NPS)

(2) Government Resolution dated 10th October 2003

(3) Notification dated 22nd December 2003

(4) Press Release dated 1st January 2004

Investment Guidelines for Non-government Provident Funds, Superannuation Funds an Gratuity Funds

This Division notifies the investment pattern for non-Government provident funds, superannuation funds and gratuity funds. The investment pattern dated 24th January 2005 notified by the Ministry of Finance prescribes that incremental accretions by such funds shall be invested as follows:

• 40% in Central and State Government securities and/or units of gilt funds regulated by SEBI and any other negotiable securities fully and unconditionally guaranteed by the Central/State Government or any State Government, provided that exposure of a trust to any individual gilt fund should not be more than 5% of its total portfolio at any point of time;
• 25% in bonds/securities of public financial institutions and public sector companies including public sector banks provided that these instruments have an investment grade rating from at least two credit rating agencies; and/or term deposit receipts upto three years issued by public sector banks; and Collateral Borrowing and Lending Obligations (CBLOs) issued by Clearing Corporation of India Limited and approved by RBI;
• Another 30% can be invested in any of the above categories as decided by  the Trustees. Upto 10% of this can be invested in private sector debt instruments which have an investment grade rating from at least two credit rating agencies and/or in equity-linked schemes of mutual funds regulated by SEBI;
• Upto 5% can be invested in shares of companies that have an investment grade debt rating from at least two credit rating agencies.

These rules are then notified by CBDT in the Income Tax Rules. Contributions and accumulations into and withdrawals from non-Government provident funds, superannuation funds and gratuity funds are exempt from income tax only if the funds are invested as per the investment guidelines prescribed in the Income Tax Rules.

Investment Guidelines for Non-government Provident Funds, Superannuation Funds and Gratuity Funds

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