A country’s economic health is reflected in the decisions and interventions taken by the government, regulator and the judiciary. India is no exception. In the last 20 years, numerous such financial corrections have been effected that charted the country’s course towards progress. It is not possible to capture all such important decisions, but an attempt has been made to give an insight into some of those critical interventions, corrections and decisions. In fact, many a times, policymakers were highly influenced by intervention of the Securities and Exchange Board of India and adjudication by the Supreme Court. Eventually, each such decision has helped citizens, consumers, institutions, and investors play a constructive role in the economic growth of India. We have also tried to put the historical perspective of each decision, so that readers are able to appreciate it better.
1998 insurance sector is opened up to private players
The Insurance Regulatory Authority was converted into a statutory body. This was to ensure that there is greater availability of wealth for the capital-intensive insurance sector as it would lead to greater distribution reach to under-served areas. It was also believed that the move would result in more innovative products. New laws were announced to protect policyholders’ interest and be better served through provisions like those enabling penalties on intermediaries or insurance companies for misconduct and prohibiting multilevel marketing of insurance products, in order to curtail the practice of mis-selling. It was also aimed at enabling the regulator to create a framework for greater innovation, competition and transparency, to create policies in a more complete and subscriber-friendly manner
1999 Government takes first steps to give full exemption from income tax. all income from Unit Trust of India and other Mutual Funds Exempted
Income distributed by Mutual Funds, where the equity investment is less than 50 per cent, attracted 10 per cent dividend tax. But the exemption still encouraged the return of small investor to the capital market and restored their confidence. The decision was based on a report prepared by the Deepak Parekh Committee, appointed by the Unit Trust of India (UTI). It made wide-ranging recommendations, including a framework to restructure the US-64 scheme and to grant tax incentives. So the government exempted the income of a unit holder received from UTI or from Mutual Funds. This exemption was similar to the exclusion with respect to dividends received from domestic companies. Incomes distributed under the US-64 scheme, and other open-ended equity oriented schemes of UTI and mutual funds were exempted from a new tax at a flat rate of 10 per cent. This tax was applicable for a period of three financial years starting from April 1,1999. This tax was to be paid by the UTI or Mutual Funds.
2003 the Fiscal Responsibility and Budget Management Act Passed
Fiscal Responsibility and Budget Management (FRBM) Act was aimed at reducing fiscal deficits and boost savings in the public sector. It also ensured that the government will review quarterly trends in receipts and expenditure in relation to the budget. It guaranteed that the Central Government will have to take suitable measures for greater transparency in its fiscal operations in public interest and minimize secrecy in the annual financial statement and demands for grants. The act further stated that transparency in particular should be without prejudice. It stipulated that the Central Government shall, at the time of presentation of annual financial statement and demands for grants, make such disclosures and in such form as may be prescribed. However, due to global economic crisis, the implementation of FRBM Act was put on hold till February 2009. The Act was amended in May 2012.
2003 Government announces pension reforms. It allows investments by provident and pension funds in equities through mutual funds.
The Government through this reform, introduced the National Pension System from January 1, 2004 for new entrants to Central Government service, except Armed Forces. The features of the scheme were self-sustainability, scalability, individual choice, low-cost yet efficient, and pension system based on sound regulation. According to the Department of Financial Services, under Ministry of Finance, while pension reforms in most countries were initially driven by the budgetary difficulties of supporting costly public pension systems, the long-term complications of an ageing population, including breakdown of traditional family, support for old-age income security, are equally important factors.
2004 The postal department along with NSDL allowed to offer NSC and KVP in a dematerialised form
Despite the permission, the pilot project was discontinued soon after. However, of late the Department of Posts is re-examining this decision. Investors who held National Savings Certificate or Kisan Vikas Patra in a dematerialised form, continued to hold the same till its maturity or opt for pre-mature encashment, whichever was applicable.
In 1996, National Securities Depositories (NSDL), the lagest depository was founded, which was roped in to manage most of the securities held in dematerialised form.
Although India had a century-old vibrant capital market, the paper-based settlement of trades caused substantial problems like bad delivery, delayed transfer of title and other issues
2005 SEBI allowed investment in Foreign Securities by Mutual Funds
To broaden investment avenues in mutual funds, SEBI permitted investment in foreign debt securities including government ones in countries with fully convertible currencies, short-term as well as long-term debt instruments with highest rating (foreign currency credit rating) by registered credit rating agencies. Mutual funds were also permitted to invest in units or securities issued by overseas mutual funds or unit trusts. Such investments are rated and registered with overseas regulators. SEBI allowed mutual fund firms to raise the investment limit on foreign securities up to 10 per cent of net assets of each mutual fund as on March 31, 2002 with certain, restrictions.
2008 Measures to expand the market for corporate bonds announced
Exchange-traded currency and interest rate futures are launched by the Government. It began a process of transparent credit derivatives market and further develop it with suitable safeguards. Tradability of domestic convertible bonds helped investors to separate the embedded equity option from the convertible bond, and trade it separately.
It provides an alternative to finance and supplements the banking system to meet the requirements of the corporate sector to raise funds for long-term investment
2009 SEBI notified ICDR Regulations, 2009
The Issue of Capital and Disclosure Requirements (ICDR) Regulations were designed to streamline the framework for public issues. It removed a few redundant stipulations and introduced market-driven procedures by simplifying the legal aspects. For example, the exemptions available under the Disclosure and Investor Protection guidelines to certain banking and infrastructure companies from eligibility norms for making Initial Public Offers were done away with this regulation. Further, it also ensured eligibility norms are made applicable uniformly to all types of issuers.
2011 RBI releaseS new norms for classification on NBFCs-MFIs and brings them under its purview
The Reserve Bank of India (RBI) created a new category of Non-banking Financial Companies (NBFC) called NBFC-Micro Finance (NBFC-MFIs). It was done to promote pricing transparency and safeguard against harassment of clients by the field staff. It capped the interest rate at 26 per cent, while providing norms for provisioning and asset classification.
RBI came up with the decision, following massive defaults by the MFIs. Stringent rules and declining profits had pushed many MFIs to move out and diversify. Micro finance services were defined as micro-credit facilities not exceeding `five lakh; this can be exceeded (up to` 10 lakh) for purposes specified by the RBI.
2011 Supreme Court rules that there cannot be a sale or transfer of an immovable property by execution of a general power of attorney, or by execution of a sale agreement or through a Will
The ruling was aimed to curb the evasion of stamp duty and prevent black money from entering the real estate sector. It also helped in providing clear titles to property, thereby safeguarding and protecting the interest of consumers. The decision was announced on the grounds of the ill-effect of property sales and transfers without a registered sale deed. The judgment impacted both freehold and leasehold properties. The judgement was also aimed at preventing another common real estate purpose – to invest in unaccounted money.
2014 The SEBI ushers in reforms in initial public offering and offer for sale
P rimary markets get a boost. Helps companies to raise funds easily. Benefits both the retail investors and sellers. The former received 10 per cent reservation, the latter was given the flexibility to offer discount to retail investors.
SEBI’s decision to share the know your customer (KYC) details with entities regulated by other financial sector watchdogs saved investors from the hassle of getting KYC done again by the intermediaries regulated by other financial sector regulators.
2015 Forward Contracts Regulation Act 1952 repealed. Regulation of Commodity Derivatives Market shifts to SEBI under Securities Contracts Regulation Act 1956
It provided the Forward Markets Commission (FMC) more regulatory powers. This helped in instilling confidence amongst the existing and new commodities investors, both in the institutional and retail segments. FMC was till then functioning under the Ministry of Consumer Affairs. The Act also allowed banks, financial institutions and mutual funds to trade in the commodity markets. This resulted in higher liquidity, as institutional investors trade in high volumes and reap higher values. Commodity option also provided the much-needed protection for investors from price swings. It also ensured that individual investors with little or no knowledge of commodities could invest through the investment portfolio management services under the supervision of FMC.
2016 The Parliament passes Insolvency and Bankruptcy Code
The aim of the act was to consolidate and amend the laws related to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner.
It also aimed at maximisation of value of assets, to promote entrepreneurship, availability of credit and balance the interests of all stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India.
2016 Government rolls out E-assessment across the country
Rolling out of e-assessment, helped government almost eliminate human contact leading to greater efficiency and transparency in direct tax collection. The intention of the Government through this electronic mode of assessment was to bring about transparency and accountability in assessments under the income tax law. It was a positive move that helped individual tax payers.
2016 Presentation of Union Budget changed to the first working day of February
In a shift from the colonial practice of presenting the Union Budget on the last working day of February every year, the government announced advancement of the same by a month. The government also announced that railway budget, earlier announced separately, will get subsumed within the main budget. Putting an end to a 92-year-old British-era practice.
Advancement of Union Budget would help in following ways:
It will enable better planning and execution of schemes from the beginning of the financial year and utilisation of the full working seasons including the first quarter.
Prevent the need to seek adoption of the financial proposals through ‘Vote on Account’. Enabled implementation of the legislative changes in tax law.
2016 New Identity and more flexibility for Insurance Agents
Insurance Regulatory Development Authority of India (IRDAI) allows insurance companies to directly appoint insurance agents. The agents no longer need to secure a license from IRDAI to carry out their business. However, the regulator stipulated that proctors will have to clear the insurance examination to become a certified agent. To ensure that agents are screened properly, they will have to pass two examinations–the Insurance Agency test and the standalone Health Insurance test and become eligible to sell insurance policies. IRDAI has thus put the onus on the insurer to pick quality agents.
2016 Monetary Policy Committee constitution under the RBI Act, 1934 notified
The RBI Act, 1934 was amended by the Parliament in 2016, to provide for a statutory and institutionalised framework for a Monetary Policy Committee (MPC), for maintaining price stability, while keeping in mind the objective of growth.
The MPC was asked to fix the benchmark policy rate (repo rate) required to control inflation within the specified target level. The meetings of the MPC were to be held at least four times a year and it has to publish its decisions after each such meeting. The note not only gives the voting pattern but also the rationale for supporting or opposing a policy rate move.
As per the provisions of the RBI Act, out of the six members of MPC, three members will be from RBI and the other three will be appointed by the Central Government.
2016 Instant Redemption
A move initiated to help retail stakeholders, by instantly redeeming their investments of up to `two lakh in liquid fund categories. This move helped in equating their mutual fund investments to savings accounts. SEBI’s Mutual Fund Advisory Committee had asked the asset management companies to consider redeeming investments. A few asset management companies are already providing investors with a card-linked access to their holding in liquid funds with limits that are much less than that proposed by SEBI. But the market forces are already active and are offering interesting schemes.
2017 IRDA (Protection of policyholder’s interest) Regulations
It defines more stringent timelines for investigation and settlement of claims. The regulation necessitated a board-approved policy for insurers, with minimum disclosure requirements to counter mis-selling to policyholders. Health policies were identified separately, different from life and general insurance policies, with separate regulations for health policies. Insurers need board-approved policy with minimum disclosure requirements.
The timelines for death claims are reduced to 120 days from the date of receipt of claim intimation. In respect of maturity, survival benefit claims and annuities - the life insurer shall pay the claim on or before the due date. In case of delay in settlement of claims, the insurer is required to pay a penal interest at the rate of two per cent above the bank rate. Ambiguity about the duration for which interest is to be paid has also been cleared
2018 Electoral Bonds
The government introduced electoral bonds in the nature of a Promissory Note and an interest free banking instrument; bond(s) would be issued or purchased for any value, in multiples of `1,000, `10,000, `one lakh, `10 lakh and ` one crore from specified branches of the State Bank of India (SBI). The main motive behind launching such bonds was to cleanse the system of political funding. A citizen of India or a body incorporated in India can purchase the bond.
These bonds can be bought if the buyer fulfills the KYC norms and payment has to be made from a bank. The bond will not carry the payee’s name. These would have a life span of only 15 days to make a donation to the political parties. The electoral bond shall be encashed by an eligible political party only through a designated bank account with an authorised bank.