Draft Report of the High Level Group on Services Sector

Financial Markets

The number of participants in the capital markets, whether directly or through the mutual fund route, is still small relative to the earning population of the country. An active and coordinated programme of investor education and spreading financial literacy is recommended. Some of the steps that can be undertaken to start the programme could be:

- using the unclaimed dividends and redemption amounts of mutual funds for the investor education campaign, amending the SEBI Act to provide that all fines and penalties levied by SEBI remain with SEBI for investor education, mutual fund industry setting apart a portion of their asset management fee annually for the campaign, mutual fund distributors contributing a certain percentage of their commission income and the Ministry of Finance making a budgetary provision for investor awareness and placing the funds at the disposal of SEBI.
The bond market in India remains limited whether in terms of instrument types and maturities, issuer diversity, investor participation and liquidity. The key recommendations of committee chaired by Dr. R. H. Patil, 2006 such as rationalization and uniformity in stamp duties levied by various states on debt instruments, freedom to banks to issue bonds of various maturities including long-term bonds to finance long-term assets, market making in corporate bonds etc. still remain largely unimplemented.
It is recommended that the securitization market be developed through affordable and uniform rates and levels of stamp duty, listing of securitization paper and pass through tax treatment to securitization SPVs similar to mutual funds. Further, securitization SPVs should also be permitted to act as counterparties in derivative transactions.
The currency and interest rate derivative market is, along with a deep and liquid bond market, the key “missing market” in India. Besides, there are no exchange traded derivatives (ETDs). In view of this, it is recommended that steps should be taken for trading of vanilla derivative products on existing exchanges, to enhance the liquidity and depth of the derivative market, while structured and exotic products may continue to be transacted on an OTC basis. Banks and other market participants should be permitted to trade in interest rate futures to impart liquidity to the market.

Currently, banks are not permitted to participate in equity derivatives. This may be considered as it would permit banks to better manage risks in their equity portfolios and would also enhance market liquidity. Similarly, banks are not permitted to participate in the commodity derivatives market. This is essential to bring depth and liquidity to the commodity derivatives market.