Financial sector reforms are just round the bend

The capital markets reform agenda is finally ready. The blueprint for financial sector reforms chalked out by the government-appointed Percy Mistry Committee has called for a series of measures.

The capital markets reform agenda is finally ready. The blueprint for financial sector reforms chalked out by the government-appointed Percy Mistry Committee has called for a series of measures. These include: ushering in capital account convertibility by 2008, allowing foreign investors to buy Government of India bonds, creating immediately a currency spot market for financial entities and unifying all financial trading under the Securities and Exchange Board of India.

The goal of the recommendations made by the committee is to bring the Indian financial markets at par with global markets like New York and London by 2020. If the government implements the report in toto, the rupee could soon become globally accepted like the US dollar, the euro, the UK pound and the Japanese yen.

Finance ministry officials said the government was working on the proposals. These include setting up of a currency spot market for financial firms with a minimum ticket size of Rs 1 crore to impart depth to the markets, now dominated by equities.

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An exchange-traded currency derivatives market could also be developed soon to work as a counter party market. It also wants FIIs to be allowed to buy government bonds just as they buy equities.

The committee’s recommendation for the development of the bond-currency-derivatives (BCD) market addresses what it calls the “missing markets, to attract global capital”. With international credit rating agencies having upgraded India to investment grade, the issue of GoI papers in foreign markets could also be considered, it adds.

On capital account convertibility, the committee’s timetable is faster than that of the Tarapore Committee’s 2009 end deadline. The suggestions also include encouraging the formation of a $500-billion-plus financial sector entity, which would act as a holding company to offer a complete range of financial services.

The recommendations are divided into three parts — market reforms, institutional changes and governance issues.

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The institutional changes suggested — to allow industrial houses to buy banks, allow internal law, accountancy and tax firms to operate in India, reduce government ownership in public sector banks and doing away with the ‘license-permit-raj’ in the financial sector —- are likely to run into political opposition.

The committee has also suggested enabling a new business model — that of wholesale assets management.

The model says all financial entities like mutual funds, hedge funds, banks and insurance companies should be able to outsource their asset management work to specialised agencies.

To achieve all these, the blueprint has suggested drafting an omnibus Act that would bring all regulation governing the financial sector within one book. This would, therefore, supercede Acts like the SCRA, IRDA and also the proposed PFRDA.