India: Major Changes In The Financial Market Budget 2015-16

INTRODUCTION

Announcing the Union Budget in the Lok Sabha for the year 2015-16, Finance Minister has proposed various changes in order to boost the Indian Financial Market. The various reforms as brought up by the Finance bill have been discussed below:

PROPOSAL TO MERGE FMC WITH SEBI

With a view to strengthen the regulation of commodity forward markets and to reduce wild speculation, Finance Minister has proposed to merge the commodity market regulator Forwards Markets Commission (FMC) with the capital market regulator Securities and Exchange Board of India (SEBI).

FMC, a statutory body set up in 1953 under the Forward Contracts (Regulation) Act, 1952 (FCRA) is a regulatory authority overseen by the Ministry of Finance, Government of India. The Hitherto, the Commission is a chief regulator of commodity futures markets in India and allows commodity trading in 22 exchanges in India.

Established in the year 1988, SEBI is a regulator for the securities market in India and had been given statutory powers through the SEBI Act, 1992.

However, with the said merger taking into place, there will be a single integrated financial sector regulator SEBI, which will regulate the commodity futures trading apart from the regulating the capital market.

The government has proposed to insert a new section 28A in FCRA, which shall allow the recognized associations to be recognized as stock exchanges under the Securities Contract (Regulation) Act (SCRA). The government has also proposed to insert new sections 29A and 29B, which shall deal in repealing the FCRA and transfer of FMC to SEBI, respectively. All legal actions initiated by FMC would be continued and enforced by SEBI.1

Behind the said merger is the unspoken intention of government is to recuperate the lost market confidence after the NSEL payment crisis which occurred in 2013 and affected the market including the small investors.

It was also in the September 2013 that the FMC was shifted from the Consumer Affairs Ministry to the Finance Ministry for better monitoring of the NSEL crises.

The merger will prevent the illicit off-market trades which is prevalent in many parts of the country. Such off-market trade involves trading in commodities and stocks which runs into thousands of crores. While the efforts have been constantly made by various regulators and enforcement agencies to restrain such practice, the proposed merger will definitely help in curbing such practice with SEBI being given the jurisdiction to regulate the commodity market in addition to its well managed capital market with a good experience with investigation, search, seizure and taking strict actions.

The entire transition, shall take place over a period of six months to one year under the guidance of a government appointed officer on special duty. Initially, the FCRA (Forward Contracts Regulation Act) would be repealed and the definition of securities under the Securities Contracts (Regulation) Act and the SEBI Act would be amended to include commodity derivatives.

II. PROPOSAL TO SET UP PUBLIC DEBT MANAGEMENT AGENCY

Considering the fast developing Indian equity market, the need of an hour requires to a well developed Bond market to serve the funding needs of infrastructure sectors. With intent to promote investment in India and deepening the Indian Bond market, the Budget has come up with a proposal to set up a Public Debt Management Agency (PDMA) to bring India's external borrowing and domestic debt under one roof. However, all eyes will be on the functioning of this Agency along with the impact which it might likely have on the bond market.

The move to set up a separate PDMA to manage market government borrowings and public debt may cause reduction in the powers of the Central Bank, the same is in line with the trend which most of the Countries follow.

Setting up a separate PDMA will definitely help the RBI focusing on its core functions along with deepening the bond market and facilitating better planning and management of domestic and foreign market borrowings. All in all it will be a win win situation for both the authorities.

III. TO ESTABLISH FINANCIAL REDRESSAL AGENCY

It has been proposed to set up a Task Force to establish a 'sector-neutral' Financial Redressal Agency (FRA) with a view to address grievances against all financial service providers. While making this announcement, it has been further informed that work assigned to the Task Forces on the Financial Data Management Centre, the Financial Sector Appellate Tribunal, the Resolution Corporation, and the Public Debt Management Agency is progressing satisfactorily.

A unified grievance redressal agency has been proposed as a one-stop shop for addressing the financial service providers' grievances which will definitely go a long way in inculcating confidence in ordinary consumers.

Also, the Indian Financial Code is likely to be introduced in the Parliament soon, which is currently being reviewed by the Justice Srikrishna Committee.

Once single complaints resolution agency becomes a reality, any aggrieved consumer can just knock on the doors of this single-point grievance-resolution agency. An independent agency would command greater trust among consumers and create a sense of responsibility among sellers. More important, it could clean up the financial services field, and usher in healthy practices.4

IV. PROPOSED OPTIONS TO EMPLOYEES FOR EPF

The budget has come up with something called employee-friendly since Finance Minister has proposed changes under Employees Provident Fund (EPF) and Employees State Insurance (ESI). Under the EPF, it has been proposed to make the employees share contribution towards the Provident Fund an option for the employees having monthly income below certain threshold although the employer will continue to contribute his share of the PF irrespective of the employee opting not to pay his contribution. Furthermore, employees will be given an option to choose between EPF and the New Pension Scheme (NPS).

Under the current structure, all employees are mandatorily required to contribute 12 % of their basic wages including basic salary and DA as contribution towards PF. The employers also make contribution at the same rate, with 8.33% going towards pension, 0.5% towards Employees Deposit Linked Insurance (EDLI) scheme and remaining towards PF.

With respect to ESI, it has been proposed that the employee should be given an option of choosing between ESI and Health Insurance product as recognized by the Insurance Regulatory Development Authority (IRDA).

The above mentioned step is surely a welcome step and will be beneficial for the low paid workers who suffer deductions greater than high paid workers.

CONCLUSION

Needless to mention that although the Budget always comes with great expectations and prospects, the overall aim is to progress and to contribute towards the economic growth of the country by taking an incremental approach. The government proposal of merger of FMC with SEBI is a welcome step which would help in regaining the investors' confidence which was lost due to NSEL crises, will restraint the wrongdoers and may well lead to the entry of strong institutional investors in the commodity market. Moreover, steps have been taken to strengthen the bonds market by setting up Public Debt Management Agency. Lastly, the changes in the EPF and ESI have created incentives for our youth to join the formal sector and curb the decade old trend of growing informal workforce.5

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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