Assignment

On

Regulations of foreign exchange and money market by

RBI

NATIONAL LAW UNIVERSITY, JODHPUR

SUMMER SEMESTER [JULY 2015-NOVEMBER 2015]

Submitted to: Submitted by:

DR. RITUPARNA DAS Charul Jangid(452)

(Associate Professor) Megha Choudhary(457)

Shashank Ojha (460)

1

Index

Introduction 3

Regulation of foreign exchange by RBI with respect to borrowing and lending in foreign

exchange10

Regulation of foreign exchange by RBI with respect to insurance 17

Regulations for money market by RBI 21

Conclusio

n 35

2

INTRODUCTION

Foreign exchange and money market plays an important role in every economy. An economy of

each and every country has an influence of it. Ultimately it has an impact on society as well.

Regulating foreign exchange and money market is important otherwise it will lead to a chaos and

benefits of it will not reach to everybody. Everyone will work according to it’s own will and

freedom ultimately exploiting the poor and the vulnerable. It would be disastrous for the nation

and the globe. With respect to India which still has to rise economically regulating money

market and foreign exchange is an important component .So let us look at the regulations framed

by reserve bank of India for foreign exchange and money market.

RESERVE BANK OF INDIA

The Reserve Bank of India is India's Central Banking Institution, which controls the Monetary

Policy of the Indian Rupee. It commenced its operations on 1 April 1935 during the British Rule

in accordance with the provisions of the reserve bank of India act 1934. It’s headquartered in

Mumbai. Present governor of reserve bank of India in Raghuram Rajan.

The RBI plays an important part in the Development Strategy of the Government of India. It is a

member bank of the Asian Clearing Union.

INSURANCE

Insurance is the equitable transfer of the risk of a loss, from one entity to another in exchange

for payment. It is a form of risk management primarily used to hedge against the risk of a

contingent, uncertain loss. An insurer, or insurance carrier, is a company selling the insurance;

the insured, or policyholder, is the person or entity buying the insurance policy. The amount

of money to be charged for a certain amount of insurance coverage is called the premium. Risk

management, the practice of appraising and controlling risk, has evolved as a discrete field of

study and practice.

The transaction involves the insured assuming a guaranteed and known relatively small loss in

the form of payment to the insurer in exchange for the insurer's promise to compensate

(indemnify) the insured in the case of a financial (personal) loss. The insured receives a contract,

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called the insurance policy, which details the conditions and circumstances under which the

insured will be financially compensated.

FOREIGN EXCHANGE

Foreign exchange is the exchange of one currency for another or the conversion of one currency

into another currency. Foreign exchange also refers to the global market where currencies are

traded virtually around-the-clock. The term foreign exchange is usually abbreviated as "forex"

and occasionally as "FX."

Foreign exchange transactions encompass everything from the conversion of currencies by a

traveler at an airport kiosk to billion-dollar payments made by corporate giants and governments

for goods and services purchased overseas. Increasing globalization has led to a massive increase

in the number of foreign exchange transactions in recent decades. The global foreign exchange

market is by far the largest financial market, with average daily volumes in the trillions of

dollars.

The foreign exchange market works through financial institutions, and it operates on several

levels. Behind the scenes banks turn to a smaller number of financial firms known as “dealers,”

who are actively involved in large quantities of foreign exchange trading. Most foreign exchange

dealers are banks, so this behind-the-scenes market is sometimes called the “interbank market”,

although a few insurance companies and other kinds of financial firms are involved. Trades

between foreign exchange dealers can be very large, involving hundreds of millions of dollars.

Because of the sovereignty issue when involving two currencies, Forex has little (if any)

supervisory entity regulating its actions. The foreign exchange market assists international trade

and investments by enabling currency conversion. It also supports direct speculation and

evaluation relative to the value of currencies, and the carry trade, speculation based on the

interest rate differential between two currencies. In a typical foreign exchange transaction, a

party purchases some quantity of one currency by paying for some quantity of another currency.

The modern foreign exchange market began forming during the 1970s after three decades of

government restrictions on foreign exchange transactions. The foreign exchange market is

unique because of the following characteristics:

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its huge trading volume representing the largest asset class in the world leading to

high liquidity;

its geographical dispersion;

its continuous operation: 24 hours a day except weekends, i.e., trading from 22:00 GMT on

Sunday (Sydney) until 22:00 GMT Friday (New York);

the variety of factors that affect exchange rates;

the low margins of relative profit compared with other markets of fixed income; and

The use of leverage to enhance profit and loss margins and with respect to account size.

FOREIGN EXCHANGE AND INSURANCE

Foreign exchange and risk related to foreign exchange exposure to foreign currencies can have a

marked impact on your domestic and international transactions. By using effective strategies to

manage foreign exchange, you can help mitigate risks and expand opportunities. Foreign

exchange specialists can discuss risk factors and hedging strategies to meet your international

needs. Risk mitigation by insurance also plays a major role here. We know insurance is risk

management. This will reduce risk impact as the risk is shared between insurers and

individuals/firms.

MONEY MARKETS

As money became a commodity, the money market became a component of the financial

markets for assets involved in short-term borrowing, lending, buying and selling with original

maturities of one year or less. Trading in money markets is done countermand is wholesale.

There are several money market instruments, including Treasury bills, commercial

paper, bankers' acceptances, deposits, certificates, bills of exchange, repurchase agreements,

federal funds, and short-lived mortgage-, and asset-backed securities. The instruments bear

differing maturities, currencies, credit risks, and structure and thus may be used to distribute

exposure.

Money markets, which provide liquidity for the global financial system, and capital

markets make up the financial market.

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The money market consists of financial institutions and dealers in money or credit who wish to

either borrow or lend. Participants borrow and lend for short periods, typically up to thirteen

months. Money market trades in short-term financial instruments commonly called "paper". This

contrasts with the capital market for longer-term funding, which is supplied by bonds and equity.

The core of the money market consists of interbank lending—banks borrowing and lending to

each other using commercial paper, repurchase agreements and similar instruments. These

instruments are often benchmarked to (i.e., priced by reference to) the London Interbank Offered

Rate (LIBOR) for the appropriate term and currency.

Finance companies typically fund themselves by issuing large amounts of asset-backed

commercial paper (ABCP) which is secured by the pledge of eligible assets into an ABCP

conduit. Examples of eligible assets include auto loans, credit card receivables,

residential/commercial mortgage loans, mortgage-backed securities and similar financial assets.

Some large corporations with strong credit ratings, such as General Electric, issue commercial

paper on their own credit. Other large corporations arrange for banks to issue commercial paper

on their behalf.

In the United States, federal, state and local governments all issue paper to meet funding needs.

States and local governments issue municipal paper, while the U.S. Treasury issues Treasury

bills to fund the U.S. public debt:

Functions of the money market:

Money markets serve five functions—to finance trade, finance industry, invest profitably,

enhance commercial banks' self-sufficiency, and lubricate central bank policies.

Financing trade

The money market plays crucial role in financing domestic and international trade. Commercial

finance is made available to the traders through bills of exchange, which are discounted by the

bill market. The acceptance houses and discount markets help in financing foreign trade.

Financing industry

The money market contributes to the growth of industries in two ways:

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They help industries secure short-term loans to meet their working capital requirements

through the system of finance bills, commercial papers, etc.

Industries generally need long-term loans, which are provided in the capital market.

However, the capital market depends upon the nature of and the conditions in the money

market. The short-term interest rates of the money market influence the long-term interest

rates of the capital market. Thus, money market indirectly helps the industries through its

link with and influence on long-term capital market.

Profitable investment

The money market enables the commercial banks to use their excess reserves in profitable

investment. The main objective of the commercial banks is to earn income from its reserves as

well as maintain liquidity to meet the uncertain cash demand of the depositors. In the money

market, the excess reserves of the commercial banks are invested in near-money assets (e.g.,

short-term bills of exchange) which are highly liquid and can be easily converted into cash.

Thus, the commercial banks earn profits without sacrificing liquidity.

Self-sufficiency of commercial bank

Developed money markets help the commercial banks to become self-sufficient. In the situation

of emergency, when the commercial banks have scarcity of funds, they need not approach the

central bank and borrow at a higher interest rate. On the other hand, they can meet their

requirements by recalling their old short-run loans from the money market.

Help to central bank

Though the central bank can function and influence the banking system in the absence of a

money market, the existence of a developed money market smoothens the functioning and

increases the efficiency of the central bank.

Money markets help central banks in two ways:

Short-run interest rates serve as an indicator of the monetary and banking conditions in the

country and, in this way, guide the central bank to adopt an appropriate banking policy,

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Sensitive and integrated money markets help the central bank secure quick and widespread

influence on the sub-markets, thus facilitating effective policy implementation

MONEY MARKET IN INDIA

The Indian money market prior to the 1980s was characterized by paucity of instruments,

lack of depth and dichotomy in the market structure. The money market consisted of the

inter-bank call market, Treasury Bills, commercial bills and participation certificates.

Historically, the call money market has constituted the core of the money market structure in

India due to lack of other instruments and strict regulations on interest rates and

participation.

In the call/notice money market, overnight money and money at short notice (up to a period

of 14 days) are lent and borrowed without collateral. This market enables banks to bridge

their short-term liquidity mismatches arising out of their day-to-day operations. The call

money market in India was purely an inter-bank market until 1971 when the erstwhile Unit

Trust of India (UTI) and Life Insurance Corporation (LIC) of India were allowed to

participate as lenders. The interest rate in the call money market was freely determined by

the market till December 1973. However, as call money rates increased sharply to touch 25-

30 per cent, the Indian Banks’ Association (IBA) instituted an administered system of

interest rates by imposing a ceiling interest rate of 15 per cent in December 1973 so as to

maintain systemic stability and quell any abnormal rise in the call rates. The ceiling was

subject to several revisions but there were several instances of violation of the ceiling rates

through other means (like buy-back arrangements) during phases of tight liquidity.

Treasury Bills constituted the main instrument of short-term borrowing by the Government

and served as a convenient gilt-edged security for the money market. The characteristics of

high liquidity, absence of default risk and negligible capital depreciation of Treasury Bills

made them another attractive instrument for short-term investment by banks and other

financial institutions

The Reserve Bank, being the banker to the Government, issued Treasury Bills at a discount.

The issuance system of Treasury Bills migrated from an auction to tap basis in July 1965

8

with the rate of discount administratively fixed at 3.5 per cent per annum, which was raised

to 4.6 per cent by July 1974 and remained at that level in respect of 91-day Treasury Bills till

1991. There was also a system of ad hoc Treasury Bills from 1955, which were created by

the Central Government in favor of the Reserve Bank to automatically restore its cash

balances to the minimum stipulated level, whenever there was excess drawdown of cash

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REGULATION OF FOREIGN EXCHANGE BY RBI WITH RESPECT TO

BORROWING AND LENDING IN FOREIGN EXCHANGE

In exercise of the powers conferred by clause (d) of Sub-Section (3) of Section 6, subsection

(2) Of Section 47 of the Foreign Exchange Management Act, 1999 (42 of 1999), the

Reserve Bank makes the following regulations for borrowing or lending in foreign exchange by a

Person resident in India; namely:

1. Short Title and Commencement:-

(i) These Regulations may be called the Foreign Exchange Management (Borrowing

Or Lending in Foreign Exchange) Regulations, 2000.

(ii) They shall come into force on 1st day of June, 2000.

2. Definitions:-

In these regulations, unless the context otherwise requires -

a) `Act’ means the Foreign Exchange Management Act, 1999 (42 of 1999);.

b) ‘Authorized dealer’ means a person authorized as an authorized dealer under subsection

(1) Of section 10 of the Act;

c) ‘EEFC account’, ‘RFC account’ means the accounts referred to in the Foreign

Exchange Management (Foreign currency accounts by a person resident in India)

Regulations, 2000;

d) ‘FCNR (B) account’, ‘NRE account’ means the accounts referred to in the Foreign

Exchange Management (Deposit) Regulations, 2000;

e) ‘Indian entity’ means a company or a body corporate or a firm in India; 2

f) ‘Joint Venture abroad’ means a foreign concern formed, registered or incorporated in

A foreign country in accordance with the laws and regulations of that country and in

Which investment has been made by an Indian entity?

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g) ‘Schedule’ means the Schedule to these Regulations;

h) ‘Wholly owned subsidiary abroad’ means a foreign concern formed, registered or

Incorporated in a foreign country in accordance with the laws and regulations of that

Country and whose entire capital is owned by an Indian entity;

i) The words and expressions used but not defined in these Regulations shall have the

Same meaning respectively assigned to them in the Act.

3. Prohibition to Borrow or Lend in Foreign Exchange:-

Save as otherwise provided in the Act, Rules or Regulations made there under, no person

Resident in India shall borrow or lend in foreign exchange from or to a person resident in or

Outside India:

Provided that the Reserve Bank may, for sufficient reasons, permit a person to borrow or

lend in foreign exchange from or to a person resident outside India.

4. Borrowing and Lending in Foreign Exchange by an Authorized dealer:-

(1) An authorized dealer in India or his branch outside India may lend in foreign currency

in the circumstances and subject to the conditions mentioned below, namely:

i) A branch outside India of an authorized dealer being a bank incorporated or

Constituted in India, may extend foreign currency loans in the normal course of its banking

Business outside India;

ii) An authorized dealer may grant loans to his constituents in India for meeting

their foreign exchange requirements or for their rupee working capital requirements or

capital expenditure subject to compliance with prudential norms, interest rate directives

and guidelines, if any, issued by Reserve Bank in this regard;

iii) An authorized dealer may extend credit facilities to a wholly owned subsidiary

abroad or a joint venture abroad of an Indian entity;

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Provided that not less than 51 per cent of equity in such subsidiary or joint venture

is held by the Indian entity subject to compliance with the Foreign Exchange Management

(Transfer and Issue of Foreign Security) Regulations, 2000;3

iv) An authorized dealer may, in his commercial judgment and in compliance with

the prudential norms, grant loans in foreign exchange to his constituent maintaining EEFC

Account or RFC Account, against the security of funds held in such account.

v) A branch outside India of an authorized dealer may extend foreign currency

loans against the security of funds held in NRE/FCNR deposit accounts maintained in

accordance with the Foreign Exchange Management (Deposit) Regulations, 2000.

vi) Subject to the directions or guidelines issued by the Reserve Bank from time to

time, an authorized dealer in India may extend foreign currency loans to another

authorized dealer in India.

2) An authorized dealer in India may borrow in foreign currency in the circumstances and

subject to the conditions mentioned below, namely:

i) An authorized dealer may borrow from his Head Office or branch or correspondent

outside India up to fifteen per cent of his unimpaired Tier I capital or US$ 10 million,

whichever is more, subject to such conditions as the Reserve Bank may direct.

Explanation:

For the purpose of clause (i), the aggregate loans availed of by all branches in India

of the authorized dealer from his Head Office, all branches and correspondents

outside India, shall be reckoned.

ii) An authorized dealer may borrow in foreign currency without limit from his head

Office or branch or correspondent outside India for the purpose of replenishing his

rupee resources, provided that -

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a) the funds borrowed are utilized for his own business operations

and are not invested in call money or similar other markets;

b) no repayment of the loan is made without the prior approval of Reserve

Bank, which may be granted only if the authorized dealer has no borrowings

outstanding either from Reserve Bank or other bank or financial institution in India

and is clear of all money market borrowings for a period of at least four weeks

prior to the week in which the repayment is made.

iii) A branch outside India of an authorized dealer being a bank incorporated or

constituted in India, may borrow in foreign currency in the normal course of its banking

business outside India, subject to the directions or guidelines issued by the Reserve Bank4

from time to time, and the Regulatory Authority of the country where the branch is

located.

iv) An authorized dealer may borrow in foreign currency from a bank or a financial

institution outside India, for the purpose of granting pre-shipment or post-shipment credit

in foreign currency to his exporter constituent, subject to compliance with the guidelines

issued by the Reserve Bank in this regard.

5. Borrowing and Lending in Foreign Exchange by

persons other than authorized dealer:-

(1) An Indian entity may lend in foreign exchange to its wholly owned subsidiary or joint

venture abroad constituted in accordance with the provisions of Foreign Exchange Management

(Transfer or issue of foreign security) Regulations, 2000.

(2) A person resident in India may borrow, whether by way of loan or overdraft or any

other credit facility, from a bank situated outside India, for execution outside India of a turnkey

project or civil construction contract or in connection with exports on deferred payment terms,

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provided the terms and conditions stipulated by the authority which has granted the approval to

the project or contract or export in accordance with the Foreign Exchange Management (Export

of goods and services) Regulations, 2000.

(3) An importer in India may, for import of goods into India, avail of foreign currency

credit for a period not exceeding six months extended by the overseas supplier of goods,

provided

the import is in compliance with the Export Import Policy of the Government of India in force.

(4) A person resident in India may lend in foreign currency out of funds held in his EEFC

account, for trade related purposes to his overseas importer customer:

Provided that,-

a) the aggregate amount of such loans outstanding at any point of time does not

exceed US$ 3 million; and

b) where the amount of loan exceeds US$ 25,000, a guarantee of a bank of

international repute situated outside India is provided by the overseas borrower in favour

of the lender.

(5) Foreign currency loans may be extended by Export Import Bank of India, Industrial

Development Bank of India, Industrial Finance Corporation of India, Industrial Credit and

Investment Corporation of India Limited, Small Industries Development Bank of India Limited.

or

any other institution in India to their constituents in India out of foreign currency borrowings

raised by them with the approval of the Central Government for the purpose of onward lending.5

6. Other borrowings in foreign exchange with prior approval of

Reserve Bank or Government of India:-

(1) A person resident in India who desires to raise foreign currency loans of the nature or for

the purposes specified in the Schedule and who satisfies the eligibility and other conditions

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specified in that Schedule, may apply to the Reserve Bank for approval to raise such loans.

(2) The Reserve Bank may grant its approval subject to such terms and conditions as it may

consider necessary;

Provided that while considering the grant of approval, the Reserve Bank shall take into

account the overall limit stipulated by it, in consultation with the Central Government, for

availment of such loans by the persons resident in India.

(3) Any other foreign currency loan proposed to be raised by a person resident in India,

which falls outside the scope of the Schedule, shall require the prior approval of the Central

REGULATION OF FOREIGN EXCHANGE BY RBI WITH RESPECT TO

INSURANCE

Foreign Exchange Management (Insurance) Regulations, 2000

RESERVE BANK OF INDIA

In exercise of the powers conferred by sub-section (2) of Section 47 of the Foreign Exchange

Management Act, 1999 (42 of 1999), the Reserve Bank makes the following regulations with

respect to the holding by a person resident in India of a general or life insurance policy issued by

an insurer outside India, namely:

1. Short title and commencement :-

i) These Regulations may be called the Foreign Exchange Management (Insurance)

Regulations, 2000.

ii) They shall come into force on 1st day of June, 2000.

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2. Definitions :-

In these Regulations, unless the context otherwise requires, -

i) 'Act' means the Foreign Exchange Management Act, 1999 (42 of 1999);

ii) the words and expressions used but not defined in these Regulations shall have the

same meaning respectively assigned to them in the Act.

3. Prohibition on taking general or life insurance

policy issued by an insurer outside India :-

Save as otherwise provided in the Act, rules or regulations made or orders or directions

issued under the Act, no person resident in India shall take any general or life insurance

policy issued by an insurer outside India.

Provided that the Reserve Bank may, for sufficient reasons, permit a person resident in India

to take any life insurance policy issued by an insurer outside India.

4. Permission to continue to hold a policy taken :-

1) A person resident in India but not permanently resident therein may continue to hold

any insurance policy issued to him by an insurer outside India, if the premium on such

policy is paid out of foreign currency resources outside India.

Explanation:

For the purpose of this clause, 'not permanently resident' means a person resident in

India for employment of a specified duration (irrespective of length thereof) or for a

specific job or assignment, the duration of which does not exceed three years.

2) A person resident in India may take or continue to hold a general insurance policy

issued by an insurer outside India, provided that, before taking the policy in either case,

he had obtained a no objection certificate from the Central Government.

3) (i) A person resident in India may continue to hold any insurance policy issued by an

insurer outside India when such person was resident outside India:

Provided that the premium on the policy is paid out of his foreign currency account

maintained with a bank outside India or out of funds held in his Resident Foreign

Currency account maintained with an authorized dealer;

Provided further that where the policy is a life insurance policy in force for a period of

not less than three years prior to the policyholder's return to India, the premium due on

the policy may also be paid by making remittance from India.

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(ii) The maturity proceeds/ amount of claim received in respect of the policy referred

to in sub-clause (i), may be credited to the policy-holder's foreign currency

account maintained with a bank outside India or, as the case may be, to his

Resident Foreign Currency account maintained with an authorized dealer in India;

Provided that where the premium due on a life insurance policy has been paid by

making remittance from India, the policy holder shall repatriate to India through

normal banking channels, the maturity proceeds or amount of any claim due on the

policy, within a period of seven days from the receipt thereof.

3. Permission to take or hold a general insurance policy issued by an insurer outside India

i) A person resident in India may take or continue to hold a general insurance policy issued by an

insurer outside India, provided that, the policy is held, under a specific or general permission of

the Central Government.

ii) A person resident in India may continue to hold any general insurance policy issued by an

insurer outside India when such person was resident outside India.

Provided further that where the premium due on a general insurance policy has been paid by

making remittance from India, the policy holder shall repatriate to India through normal banking

channels, the maturity proceeds or amount of any claim due on the policy, within a period of

seven days from the receipt thereof.

4. Permission to take or hold a life insurance policy issued by an insurer outside India

i) A person resident in India may take or continue to hold a life insurance policy issued by an

insurer outside India, provided that, the policy is held, under a specific or general permission of

the Reserve Bank of India.

ii) A person resident in India may continue to hold any life insurance policy issued by an insurer

outside India when such person was resident outside India.

Provided further that where the premium due on a life insurance policy has been paid by making

remittance from India, the policy holder shall repatriate to India through normal banking

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channels, the maturity proceeds or amount of any claim due on the policy, within a period of

seven days from the receipt thereof.

REGULATIONS REQUIRED

The Indian government and insurance regulatory and development authority can offer

companies insurance for both export transactions and for the political risk associated with

overseas investments.

Insure Export Transactions with the Export-Import Bank

Ex-In Bank’s export credit insurance policies enables enables Indian exporters to both finance

their export activities and mitigate the risk of non-payment. The policies below given enable you

to offer credit to your international buyers and access working capital funds. These policies have

been in used by other countries of world

The Express Insurance Program is a "named buyer" policy that simplifies small business

access to export credit risk insurance on their foreign accounts receivable. It also has a

streamlined online application provides a policy quote and credit decisions up to

$300,000 on foreign buyers within five workdays buyer credit requests exceeding

$300,000 will require additional processing time

The Small Business Export Credit Insurance Policy is specifically designed for small,

financially viable businesses that are new to exporting, or have only occasionally

exported. It can help increase an exporter's international sales by extending competitive

credit terms while minimizing risks.

The Multi-Buyer Export Credit Insurance Policy enables U.S. exporters to reduce their

risk of selling on credit terms by insuring their export accounts receivable against

default or non-payment. The policy can help increase international sales by extending

competitive credit terms to foreign buyers while minimizing risks.

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The Short-Term Single-Buyer Export Credit Insurance Policy allows exporters to insure

specific, short-term foreign receivables against loss due to commercial and specified

political risks on a selective basis.

Ex-Im Bank offers U.S. leasers the opportunity to expand their overseas leasing programs

by providing comprehensive insurance for both the stream of lease payments and the fair

market value of the leased products.

Insure Investment Transactions with OPIC

Political risk insurance is available to U.S. investors, contractors, exporters and financial

institutions involved in international transactions. Political risk insurance can cover currency

inconvertibility, expropriation and political violence, and is available for investments in new

ventures, expansions of existing enterprises, privatizations and acquisitions with positive

developmental benefits.

REGULATIONS FOR MONEY MARKET BY RBI

1. FOR COMMERCIAL PAPERS

1. Introduction

Commercial Paper (CP) is an unsecured money market instrument issued in the form of a

promissory note. CP, as a privately placed instrument, was introduced in India in 1990 with a

view to enable highly rated corporate borrowers to diversify their sources of short-term

borrowings and to provide an additional instrument to investors. Subsequently, primary dealers

(PDs) and all-India financial institutions (FIs) were also permitted to issue CP to enable them to

meet their short-term funding requirements. The guidelines for issue of CP, incorporating all the

amendments issued till date, are given below for ready reference.

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2. Eligibility for Issue of CP:

a. Companies, PDs and FIs are permitted to raise short term resources through CP.

b. A company would be eligible to issue CP provided:

i.  the tangible net worth of the company, as per the latest audited balance sheet, is not less

than Rs.4 crore;

ii. the company has been sanctioned working capital limit by bank/s or FIs; and

iii. the borrowed account of the company is classified as a Standard Asset by the financing

bank/institution.

3. Issue of CP –Credit enhancement, limits, etc.

a. CP shall be issued as a ‘stand alone’ product. Further, it would not be obligatory in any

manner on the part of the banks and FIs to provide stand-by facility to the issuers of CP.

b. Banks and FIs may, based on their commercial judgment, subject to the prudential norms as

applicable to them, with the specific approval of their respective Boards, choose to provide

stand-by assistance/credit, back-stop facility etc. by way of credit enhancement for a CP issue.

c. Non-bank entities (including corporate) may provide unconditional and irrevocable guarantee

for credit enhancement for CP issue provided:

i. The issuer fulfils the eligibility criteria prescribed for issuance of CP;

ii. The guarantor has a credit rating at least one notch higher than the issuer given by an

approved CRA; and

iii. The offer document for CP properly discloses the net worth of the guarantor company,

the names of the companies to which the guarantor has issued similar guarantees, the

extent of the guarantees offered by the guarantor company, and the conditions under

which the guarantee will be invoked.

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d. The aggregate amount of CP that can be issued by an issuer shall at all times be within the

limit as approved by its Board of Directors or the quantum indicated by the CRA for the

specified rating, whichever is lower.

e. Banks and FIs shall have the flexibility to fix working capital limits, duly taking into account

the resource pattern of company’s financing, including CP.

f. An issue of CP by an FI shall be  within the overall umbrella limit prescribed in the Master

Circular on Resource Raising Norms for FIs, issued by the Reserve Bank of India, Department of

Banking Operations and Development, as  prescribed/ updated from time-to-time.

g. The total amount of CP proposed to be issued should be raised within a period of two weeks

from the date on which the issuer opens the issue for subscription. CP may be issued on a single

date or in parts on different dates provided that in the latter case, each CP shall have the same

maturity date.

h. Every issue of CP, and every renewal of a CP, shall be treated as a fresh issue.

4. Eligibility for investment in CP

a. Individuals, banks, other corporate bodies (registered or incorporated in India) and

unincorporated bodies, Non-Resident Indians and Foreign Institutional Investors (FIIs)

shall be eligible to invest in CP.

b. FIIs shall be eligible to invest in CPs subject to (i) such conditions as may be set for them

by Securities Exchange Board of India (SEBI) and (ii) compliance with the provisions of

the Foreign Exchange Management Act, 1999, the Foreign Exchange (Deposit)

Regulations, 2000 and the Foreign Exchange Management (Transfer or Issue of Security

by a Person Resident Outside India) Regulations, 2000, as amended from time to time.

5. Form of the Instrument, mode of issuance and redemption

5.1 Form

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a. CP shall be issued in the form of a promissory note (as specified in Schedule I to these

Guidelines) and held in physical form or in a dematerialized form through any of the

depositories approved by and registered with SEBI, provided that all RBI regulated

entities can  deal in and hold CP only in dematerialized form through such depositories.

b. Fresh investment by all RBI-regulated entities shall be only in dematerialized form.

c. CP shall be issued in denominations of 5 lakh and multiples thereof. The amount invested

by single investors should not be less than 5 lakh (face value).

d. CP shall be issued at a discount to face value as may be determined by the issuer.

e. No issuer shall have the issue of CP underwritten or co-accepted.

f. Options (call/put) are not permitted on CP.

5.2 Tenor

a. CP shall be issued for maturities between a minimum of 7 days and a maximum of up to

one year from the date of issue.

b. The maturity date of the CP shall not go beyond the date up to which the credit rating of

the issuer is valid.

5.3. Procedure for Issuance

a. Every issuer must appoint an IPA for issuance of CP.

b. The issuer should disclose to the potential investors, its latest financial position as per the

standard market practice.

c. After the exchange of confirmation of the deal between the investor and the issuer, the

issuer shall arrange for crediting the CP to the Demat account of the investor with the

depository through the IPA.

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d. The issuer shall give to the investor a copy of IPA certificate to the effect that the issuer

has a valid agreement with the IPA and documents are in order (Schedule II).

5.4 Rating Requirement

Eligible participants/issuers shall obtain credit rating for issuance of CP from any one of the

SEBI registered CRAs. The minimum credit rating shall be ‘a3’ as per rating symbol and

definition prescribed by SEBI. The issuers shall ensure at the time of issuance of the CP that the

rating so obtained is current and has not fallen due for review.

5.5. Investment / Redemption

a. The investor in CP (primary subscriber) shall pay the discounted value of the CP to the

account of the issuer through the IPA.

b. The investor holding the CP in physical form shall, on maturity, present the instrument

for payment to the issuer through the IPA.

c. The holder of a CP in dematerialized form shall get the CP redeemed and receive

payment through the IPA.

5.6 Documentation Procedures

a. Standardized procedures and documentation for CPs are prescribed in consultation with

Fixed Income Money Market and Derivatives Association of India (FIMMDA) in

consonance with international best practices.

b. Issuers /IPAs shall follow the operational guidelines issued by FIMMDA, from time to

time, with the approval of RBI.

6. Trading and Settlement of CP

a. All OTC trades in CP shall be reported within 15 minutes of the trade to the reporting

platform of Clearcorp Dealing System (India) Ltd.(CDSIL).

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b. OTC trades in CP shall be settled through the clearing house of the National Stock

Exchange (NSE), i.e., the National Securities Clearing Corporation Limited (NSCCL),

the clearing house of the Bombay Stock Exchange (BSE), i.e., Indian Clearing

Corporation Limited (ICCL), and the clearing house of the MCX-Stock Exchange, i.e.,

MCX-SX Clearing Corporation Limited (CCL), as per the norms specified by NSCCL,

ICCL and CCL from time to time.

c. The settlement cycle for OTC trades in CP shall either be T+0 or T+1.

7. Buyback of CP

a. Issuers may buyback the CP, issued by them to the investors, before maturity.

b. Buyback of CP shall be through the secondary market and at prevailing market price.

c. The CP shall not be bought back before a minimum period of 7 days from the date of

issue.

d. Issuer shall intimate the IPA of the buyback undertaken.

e. Buyback of CPs should be undertaken after taking approval from the Board of Directors.

8. Duties and Obligations

The duties and obligations of the Issuer, IPA and CRA are set out below:

I. Issuer

The issuer shall ensure that the guidelines and procedures laid down for the issuance of CP are

strictly adhered to.

II. IPA

a. The IPA shall ensure that the issuer has the minimum credit rating as stipulated by RBI

and the amount mobilized through issuance of CP is within the quantum indicated by

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CRA for the specified rating or as approved by its Board of Directors, whichever is

lower.

b. The IPA shall certify that it has a valid agreement with the issuer (Schedule II).

c. The IPA shall verify that all the documents submitted by the issuer, viz., copy of board

resolution, signatures of authorized executants (when CP is issued in physical form) are

in order and shall issue a certificate to this effect.

d. Certified copies of original documents, verified by the IPA, shall be held in the custody

of IPA.

e. All scheduled banks, acting as IPAs, shall report the details of issuance of CP on the

Online Returns Filing System (ORFS) module of the RBI within two days from the date

of issuance of the CP.

f. IPAs, shall immediately report, on occurrence, full particulars of defaults in repayment of

CP to the Chief General Manager, Financial Markets Department, Reserve Bank of India,

Central Office, Fort, Mumbai-400001 (email) in the format as given in Schedule III of

these guidelines.

g. IPAs shall also report all instances of buyback of CPs undertaken by the issuer to the

Chief General Manager, Financial Markets Department, Reserve Bank of India, Central

Office, Fort, Mumbai–400001 (email) in the format as given in Schedule IV of these

guidelines.

III. CRA

a. CRAs shall abide by the Code of Conduct prescribed by the SEBI for CRAs for

undertaking rating of capital market instruments, which shall be applicable for rating

CPs.

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b. The CRAs shall have the discretion to determine the validity period of the rating

depending upon their perception about the strength of the issuer; and they shall, at the

time of rating, clearly indicate the date when the rating is due for review.

c. The CRAs shall closely monitor the rating assigned to issuer’s vis-à-vis their track record

at regular intervals and shall make their revision in the ratings public through their

publications and website.

9. Non-applicability of Certain Other Directions

Nothing contained in the Non-Banking Financial Companies Acceptance of Public Deposits

(Reserve Bank) Directions, 1998 shall apply to the acceptance of deposit by issuance of CP,

by any NBFC in accordance with these guidelines.

2. FOR CERTIFICATE OF DEPOSIT

1. Introduction

Certificate of Deposit (CD) is a negotiable money market instrument and issued in

dematerialized form or as a Usance Promissory Note against funds deposited at a bank or other

eligible financial institution for a specified time period. Guidelines for issue of CDs are presently

governed by various directives / guidelines issued by the Reserve Bank of India (RBI), as

amended from time to time. The guidelines for issue of CDs, incorporating all the amendments

issued till date, are given below for ready reference.

2. Eligibility

CDs can be issued by (i) scheduled commercial banks {excluding Regional Rural Banks and

Local Area Banks}; and (ii) select All-India Financial Institutions (FIs) that have been permitted

by RBI to raise short-term resources within the umbrella limit fixed by RBI.

3. Aggregate Amount

3.1 Banks have the freedom to issue CDs depending on their funding requirements.

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3.2 An FI can issue CDs within the overall umbrella limit prescribed in the Master Circular on

Resource Raising Norms for FIs, issued by DBOD and updated from time-to-time.

4. Minimum Size of Issue and Denominations

Minimum amount of a CD should be Rs.1 lakh, i.e., the minimum deposit that could be accepted

from a single subscriber should not be less than Rs.1 lakh, and in multiples of Rs. 1 lakh

thereafter.

5. Investors

CDs can be issued to individuals, corporations, companies (including banks and PDs), trusts,

funds, associations, etc. Non-Resident Indians (NRIs) may also subscribe to CDs, but only on

non-repatriable basis, which should be clearly stated on the Certificate. Such CDs cannot be

endorsed to another NRI in the secondary market.

6. Maturity

6.1 The maturity period of CDs issued by banks should not be less than 7 days and not more than

one year, from the date of issue.

6.2 FIs can issue CDs for a period not less than 1 year and not exceeding 3 years from the date of

issue.

7. Discount / Coupon Rate

CDs may be issued at a discount on face value. Banks / FIs are also allowed to issue CDs on

floating rate basis provided the methodology of compiling the floating rate is objective,

transparent and market-based. The issuing bank / FI is free to determine the discount / coupon

rate. The interest rate on floating rate CDs would have to be reset periodically in accordance with

a pre-determined formula that indicates the spread over a transparent benchmark. The investors

should be clearly informed of the same.

8. Reserve Requirements

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Banks have to maintain appropriate reserve requirements, i.e., cash reserve ratio (CRR) and

statutory liquidity ratio (SLR), on the issue price of the CDs.

9. Transferability

CDs in physical form are freely transferable by endorsement and delivery. CDs in demat form

can be transferred as per the procedure applicable to other demat securities. There is no lock-in

period for the CDs.

10. Trades in CDs

All OTC trades in CDs shall be reported within 15 minutes of the trade on the reporting platform

of Clearcorp Dealing Systems (India) Ltd. (CDSIL).

11. Settlement

All OTC trades in CDs shall necessarily be cleared and settled under DVP I mechanism through

the authorized clearing houses {National Securities Clearing Corporation Limited (NSCCL),

Indian Clearing Corporation Limited (ICCL) and MCX Stock Exchange Clearing Corporation

Limited (CCL)} of the stock exchanges.

12. Loans / Buy-backs

Banks / FIs cannot grant loans against CDs. Furthermore, they cannot buy-back their own CDs

before maturity. However, the RBI may relax these restrictions for temporary periods through a

separate notification.

13. Format of CDs

Banks / FIs should issue CDs only in dematerialized form. However, according to the

Depositories Act, 1996, investors have the option to seek certificate in physical form.

Accordingly, if an investor insists on physical certificate, the bank / FI may inform the Principal

Chief General Manager, Financial Markets Department, Reserve Bank of India, Central Office,

Fort, Mumbai - 400 001 about such instances separately. Further, issuance of CDs will attract

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stamp duty. A format (Annex I) is enclosed for adoption by banks / FIs. There will be no grace

period for repayment of CDs. If the maturity date happens to be a holiday, the issuing bank/FI

should make payment on the immediate preceding working day. Banks / FIs, therefore, should

fix the period of deposit in such a manner that the maturity date does not coincide with a holiday

to avoid loss of discount / interest rate.

14. Security Aspect

Since CDs in physical form are freely transferable by endorsement and delivery, it will be

necessary for banks/FIs to see that the certificates are printed on good quality security paper and

necessary precautions are taken to guard against tampering with the document. They should be

signed by two or more authorized signatories.

15. Payment of Certificate

15.1 Since CDs are transferable, the physical certificates may be presented for payment by the

last holder. The question of liability on account of any defect in the chain of endorsements may

arise. It is, therefore, desirable that banks take necessary precautions and make payment only by

a crossed cheque. Those who deal in these CDs may also be suitably cautioned.

15.2 The holders of dematted CDs will approach their respective depository participants (DPs)

and give transfer / delivery instructions to transfer the security represented by the specific

International Securities Identification Number (ISIN) to the 'CD Redemption Account'

maintained by the issuer. The holders should also communicate to the issuer by a letter / fax

enclosing the copy of the delivery instruction they had given to their respective DP and intimate

the place at which the payment is requested to facilitate prompt payment. Upon receipt of the

demat credit of CDs in the "CD Redemption Account", the issuer, on maturity date, would

arrange to repay to holders / transferors by way of Banker's cheque / high value cheque, etc.

16. Issue of Duplicate Certificates

16.1 In case of loss of physical certificates, duplicate certificates can be issued after compliance

with the following:

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a. Notice is required to be given in at least one local newspaper;

b. Lapse of a reasonable period (say 15 days) from the date of the notice in the newspaper;

and

c. Execution of an indemnity bond by the investor to the satisfaction of the issuer of CDs.

16.2 The duplicate certificate should be issued only in physical form. No fresh stamping is

required as a duplicate certificate is issued against the original lost CD. The duplicate CD should

clearly state that the CD is a Duplicate one stating the original value date, due date, and the date

of issue

17. Accounting

Banks / FIs may account the issue price under the Head "CDs issued" and show it under deposits.

Accounting entries towards discount will be made as in the case of "Cash Certificates". Banks /

FIs should maintain a register of CDs issued with complete particulars.

18. Standardized Market Practices and Documentation

Fixed Income Money Market and Derivatives Association of India (FIMMDA) may prescribe, in

consultation with the RBI, for operational flexibility and smooth functioning of the CD market,

any standardized procedure and documentation that are to be followed by the participants, in

consonance with the international best practices. Banks / FIs may refer to the detailed guidelines

issued by FIMMDA in this regard on June 20, 2002 and as amended from time to time.

19. Reporting

19.1 Banks should include the amount of CDs in the fortnightly return under Section 42 of the

RBI Act, 1934 and also separately indicate the amount so included by way of a footnote in the

return.

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19.2 Further, banks / FIs should report the data on issuance of CDs on the web-based module

under the Online Returns Filing System (ORFS) within 10 days from the end of the fortnight to

which it pertains.

3. FOR CALL/NOTICE MONEY MARKET OPERATIONS

1.  Introduction

The money market is a market for short-term financial assets that are close substitutes of money.

The most important feature of a money market instrument is that it is liquid and can be turned

into money quickly at low cost and provides an avenue for equilibrating the short-term surplus

funds of lenders and the requirements of borrowers. The call/notice money market forms an

important segment of the Indian Money Market. Under call money market, funds are transacted

on an overnight basis and under notice money market; funds are transacted for a period between

2 days and 14 days.

2. Participants

Scheduled commercial banks (excluding RRBs), co-operative banks (other than Land

Development Banks) and Primary Dealers (PDs), are permitted to participate in call/notice

money market both as borrowers and lenders

3. Prudential Limits

3.1 The  prudential limits in respect of both outstanding borrowing and lending transactions in

call/notice money market for scheduled commercial banks, co-operative banks and PDs are as

follows:-

Table: Prudential Limits for Transactions in Call / Notice Money Market

Sr.

No.Participant Borrowing Lending

1 Scheduled On a fortnightly average basis, borrowing On a fortnightly average

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Commercial

Banks

outstanding should not exceed 100 per

cent of capital funds (i.e., sum of Tier I

and Tier II capital) of latest audited

balance sheet. However, banks are

allowed to borrow a maximum of 125 per

cent of their capital funds on any day,

during a fortnight.

basis, lending outstanding

should not exceed 25 per

cent of their capital funds.

However, banks are allowed

to lend a maximum of 50

per cent of their capital

funds on any day, during a

fortnight.

2Co-operative

Banks

Outstanding borrowings of State Co-

operative Banks / District Central Co-

operative Banks / Urban Co-operative

Banks in call / notice money market, on a

daily basis should not exceed 2.0 per cent

of their aggregate deposits as at end

March of the previous financial year.

No limit.

3 PDs

PDs are allowed to borrow, on average in

a reporting fortnight, up to 225 per cent

of their net owned funds (NOF) as at end-

March of the previous financial year.

PDs are allowed to lend in

call/notice money market,

on average in a reporting

fortnight, up to 25 per cent

of their NOF.

3.2 Banks/PDs/ Co-operative banks may, with the approval of their Boards, arrive at the

prudential limits for borrowing/lending in Call/Notice Money Market in terms of

guidelines given in paragraph 3.1 above. The limits so arrived at may be conveyed to the

Clearing Corporation of India Ltd. (CCIL) for setting of limits in NDS-CALL System,

under advice to Financial Markets Department (FMD), Reserve Bank of India.

3.3 Non-bank institutions (other than PDs) are not permitted in the call/notice money market.

4. Interest Rate

4.1 Eligible participants are free to decide on interest rates in call/notice money market.

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4.2 Calculation of interest payable would be based on the methodology given in the Handbook of

Market Practices brought out by the Fixed Income Money Market and Derivatives Association of

India (FIMMDA).

5. Dealing Session

Deals in the Call/Notice/Term money market can be done from 9:00 am to 5:00 pm on weekdays

and from 9:00 am to 2:00 pm on Saturdays or as specified by RBI from time to time.

6. Documentation

Eligible participants may adopt the documentation suggested by FIMMDA from time to time.

7. Reporting Requirement

7.1 With the implementation of the core banking solution, the Negotiated Dealing System (NDS)

has been discontinued for reporting of OTC Call/Notice/Term Money transactions.

7.2 All dealings in Call/Notice/Term money executed on the Negotiated Dealing System-Call,

i.e. NDS-Call (a screen –based, negotiated, quote-driven system), do not require separate

reporting.

7.3 It is mandatory that all the OTC Call/Notice/Term money deals be reported over the

reporting platform of NDS-Call by the parties who are having NDS-Call membership.

7.4 Such OTC deals should be reported within 15 minutes on NDS-Call reporting platform,

irrespective of the size of the deal or whether the counterparty is a member of the NDS-Call or

not.

7.5 Parties who are not having NDS-Call membership are advised to report the deals to Financial

Markets Department, RBI in the reporting format given in Annex I of this master circular.

7.6 The reporting time for all OTC Call/Notice/Term money deals on NDS-Call is up to 5:00 pm

on weekdays and 2:00 pm on Saturdays or as decided by RBI from time to time.

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7.7 In case of any misreporting or repeated reporting of OTC deals by a party, the same should

be immediately brought to the notice of FMD either through e-mail or through fax.

7.8 In case the situation so warrants, the Reserve Bank may call for information in respect of

money market transactions of eligible participants.

Conclusion

Foreign exchange has traditionally been regarded as the exclusive domain of the biggest banks

and corporations, recent trends have dispelled this notion, making it increasingly important for

foreign exchange to come under the ambit of regulation.

The developments of money market and refinements in operating procedures of monetary policy

have moved in tandem. Financial sector reforms along with Reserve Bank’s emphasis on

development of various segments of financial market enabled shifts in operating procedures

based on direct quantity-based instruments to indirect interest rate-based instruments. The

Reserve Bank has been able to better transmit monetary policy signals in the money market

through a single policy repo rate. Evidence so far suggests a significant improvement in

monetary policy transmission under the new operating framework

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