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SODHANI COMMITTEE (on Forex Markets) Prepared By- Bhargav Dudugadapa - 11020241008 Eshant Gaur - 11020241040 Kushagra Pandey - 11020241047
Introduction • The Sodhani Committee was set up to look into:: • promotion of NRI investments in India • widening and deepening of foreign exchange market. • Report was submitted to the RBI in June 1995 • The Sodhani committee has made 33 recommendations and of these 25 reco- mmendations called in action on part of RBI.
Investments in Capital Market % Scheme 40• NRIs/ OCBs are permitted to subscribe to new issues of shares (equity & preference) or convertible debentures of any new or existing company with the right of repatriation• Restriction that aggregate issue to non-residents does not exceed 40 % of the face value of the new issue.• RBI permission needed.• Such investment can be made only in private or public limited companies raising capital for setting up new industrial/ manufacturing activities.• Investment under this scheme can also be made in new or existing companies engaged in the following areas of activity:• Hospitals ( including diagnostic centres)• Hotels with 3,4 and 5 start rating• Shipping• Development of computer software• Oil exploration services
100 % Scheme NRIs./ OCBs are permitted to invest in priorityindustries and in Indian Companies primarily engagedin export trading activity, with full repatriation benefitsupto 100% of the new issue of shares.What did Sodhani Committee recommend ?Merge both schemes and allow 100 % repatriation tocompanies eligiblefor 40 % scheme and no prior permission requiredRBI Obliged :: Amendments to Sections 19(1) and29(1)(b) of FERA
Capital Markets Contd.• Indian companies are required to obtain permission from RBI to issue shares/debentures to NRIs/OCBs.• Thereafter NRIs/OCBs are required to come to RBI for approval for making investments in shares/debentures, and again at the time of disinvestment.What did Sodhani Committee recommend ?One general PermissionRBI obliged::amendment in Section 10C.11 Investment with Repatriation Benefits dated3rd June 2006
Real estate• lock-in period of 3 years and ceiling of 16% on profits from investments in housing and real estateWhat did Sodhani Committee recommend ?• Investments with no holds bar.RBI Obliged::Press Note 2 of 2005 dated March 3, 2005As an extension investments intownships, housing, infrastructure and construction/development projects was also allowed
Sick Units• The restrictions on investment by NRIs in sick units with a lock-in period of five years• the eligibility criteria that the shares of the company should have been quoted below par for two yearsWhat did Sodhani Committee recommend ?That such power be grantedRBI Obliged: Amendments in section 10C.11 to10C.19, Investment with Repatriationbenefits in Exchange Control Manual.
Educational InstitutionsWhat did Sodhani Committee recommend ?• Investments by NRIs in educational institutions in medical, management and technical areas were to be on non-repatriation basisRBI Obliged::RBI Notification No- FERA 113 and FERA114
Power to banks• No power for banks to grant housing loans to NRIsWhat did Sodhani Committee recommend ?That such power be grantedRBI Obliged: Amendments in sections10D.2, 10D.3, 10D.4 , Loans in India to non residentswas made in exchange control manual by a noticedated 03Jun 2005
Need for changes in the Forex Regulations• Market players in forex became active in the seventies, consequent upon the collapse of Bretton Woods Agreement.• India was somewhat insulated since stringent exchange controls prevailed and banks were required to undertake only cover operations• In 1978, the RBI allowed banks to undertake intra- day trading in foreign exchange
• The exchange rate of the rupee, which was pegged to an undisclosed basket of currencies, was partially floated in March, 1992 and fully in March, 1993.• The unification of the exchange rate was instrumental in developing a market-determined exchange rate of the rupee, based on demand and supply in the forex market.• It was also an important step in the progress towards current account convertibility, which was achieved in August, 1994 when India accepted obligations under Article VIII of IMF’s Articles of Agreement .
Wider MarketWhat did Sodhani Committee recommend? Marketparticipants in the foreign exchangemarket be enlarged by including IDBI, ICICI,etc.Accepted vide Credit Policy dated April 15, 1997
Market InterventionWhat did Sodhani Committee recommend? Marketintervention by RBI should beselective and discreet.Accepted The RBI no longer quotes two way priceson a daily basis. It intervenes in both Spot and Forwardmarkets.Market intervention by RBI should be selective ratherthan continuous. Forex swaps may be used as a toolby RBI to control the forward margins.
Bank lendingWhat did Sodhani Committee recommend?Banks should be allowed to borrow and lendupto six months in overseas marketsAccepted vide Credit Policy dated April 3, 1996
What did Sodhani Committee recommend?The removal of the limit of Rs.15 crores foropen position was recommended. This limithas since been replaced by the limitsspecific to the size of the bank.Accepted The ceiling of Rs 15 Crores was removedon 1st Jan, 1996. Currently, banks decide their ownOvernight Open Position limits according to thecapital base, volume of merchanttransactions, dealing expertise and infrastructure. Theyhave to earmark their capital to the extent of 5% ofthe open position limit to cover market risk. While theLimits are decided by the banks, these have to beapproved by the RBI.
New Clearing SystemWhat did Sodhani Committee recommend? Setting upa clearing system for foreign exchange market.Accepted Forex Clearing House operations are under trial inBombay.