FinMin proposes rule to curb impact of paper fluctuations on markets

Such law feasible for equity markets since there is an underlying market for issuance of Indian papers like depository receipts

 

The finance ministry proposes to have a legislative frame work for curbing the impact of overseas market disruptions by Indian entities and securities listed abroad on the Indian market.

According to officials, the legislative framework has to be worked out within the new Companies Bill. The mandate of such rules and regulations should be to grant freedom to the Indian entities to access overseas market to raise funds within the existing legal purview and at the same time stop the export of the financial market by removing basic yet critical loopholes.

However another issue is that the disruptions which an Indian security causes in the overseas markets should not cause abnormal effect on the Indian markets which is not backed by fundamentals, said an official source.

Officials added that such a law is feasible for the equity markets since there is an underlying market for issuance of Indian papers like depository receipts.

However the foreign exchange market which is often battered by fluctuations of the non deliverable forward market (NDF) is currently out of the Indian regulatory purview. This is primarily because NDF is a derivative market where the quotes are based on the underlying of the Indian rupee movements vis- a vis other major global currencies.

Another issue of paramount importance is legal clarity on the issuance of such Indian papers overseas given the new Companies Bill. Incidentally the new Companies Bill has specific provisions for issue of Global depository receipts (GDRs) as a significant change regarding company share capital, added officials.

Currently there are no specific laws to this but many countries have enacted reverse laws to protect their domestic investors from fallout in securities floated by indian companies in their countries. A case in point is the class action suit filed against Satyam in United States when its ADRs (American depository receipts) got affected by its inherent domestic financial problems.

Meanwhile the ministry has released the draft Indian Financial Code (IFC) in collaboration with the Institute of company Secretaries of India (ICSI) which outlines the model set up of the financial regulators in the new regime of unified financial authority.

This is also expected to be one of the agenda for the forthcoming meeting of the Financial Stability Development council (FSDC). The ministry with the help of the ICSI is conducting meetings across the country for completeness and appropriateness of the proposed IFC, implementations of the law when it is implemented and specific things post IFC. This is based on the recommendations of the report of the financial sector legislative reforms commission (FSLRC).