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.

PROMOTION OF NRI INVESTMENTS IN

INDIA

Investments in Capital Market

40 % Scheme• 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 priority industries and in Indian Companies primarily engaged in export trading activity, with full repatriation benefits upto 100% of the new issue of shares.

What did Sodhani Committee recommend ?Merge both schemes and allow 100 % repatriation to companies eligiblefor 40 % scheme and no prior permission required

RBI Obliged :: Amendments to Sections 19(1) and 29(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 Permission RBI obliged::amendment in Section 10C.11Investment with Repatriation Benefits dated 3rd June 2006

Real estate• lock-in period of 3 years and ceiling of 16% on

profits from investments in housing and real estate

What did Sodhani Committee recommend ?• Investments with no holds bar.RBI Obliged::Press Note 2 of 2005 dated March 3, 2005

As an extension investments in townships, 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 years

What did Sodhani Committee recommend ?That such power be granted

RBI Obliged: Amendments in section10C.11 to 10C.19,Investment with Repatriationbenefits in Exchange Control Manual.

Educational Institutions

What did Sodhani Committee recommend ?• Investments by NRIs in educational institutions in

medical, management and technical areas were to be on non-repatriation basis

RBI Obliged:: RBI Notification No- FERA 113 and FERA 114

Power to banks• No power for banks to grant housing loans to NRIs

What did Sodhani Committee recommend ?That such power be granted

RBI Obliged: Amendments in sections 10D.2, 10D.3, 10D.4 , Loans in India to non residents was made in exchange control manual by a notice dated 03Jun 2005

EXPANSION OF FOREIGN EXCHANGE

MARKET

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? Market participants 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? Market intervention by RBI should beselective and discreet.

AcceptedThe RBI no longer quotes two way prices on a daily basis. It intervenes in both Spot and Forward markets.

Market intervention by RBI should be selective rather than continuous. Forex swaps may be used as a tool by RBI to control the forward margins.

Bank lendingWhat did Sodhani Committee recommend? Banks should be allowed to borrow and lendupto six months in overseas markets

Accepted vide Credit Policy dated April 3, 1996

What did Sodhani Committee recommend? The removal of the limit of Rs.15 crores for open 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 removed on 1st Jan, 1996. Currently, banks decide their own Overnight Open Position limits according to the capital base, volume of merchant transactions, dealing expertise and infrastructure. They have to earmark their capital to the extent of 5% of the open position limit to cover market risk. While the Limits are decided by the banks, these have to be approved by the RBI.

New Clearing SystemWhat did Sodhani Committee recommend? Setting up a clearing system for foreign exchange market.

AcceptedForex Clearing House operations are under trial in Bombay.

Thank you