Citizens' Issues
RBI Governor Subbarao to appear before JPC on 2G

Subbarao has been called to appear before the Parliamentary Committee as witness. He was Finance Secretary when licences for the 2G spectrum were allocated

New Delhi: Reserve Bank of India (RBI) Governor D Subbarao, who was the Finance Secretary when 2G licences were allocated, will appear before the Joint Parliamentary Committee (JPC) examining the issue as a witness on 18th September, reports PTI.


He was the Finance Secretary between April 2007 and September 2008. The controversial 2G radio wave licences were allocated in January 2008.


Sources said the meeting of the committee slated for 14th September, in which former Cabinet Secretary KM Chandrasekhar was to appear, has been rescheduled. A fresh date will be decided to call Chandrasekhar, who was the top bureaucrat between June 2007 and June 2011.


The JPC meeting on 18th September is taking place after a gap of nearly a month. Bharatiya Janata Party (BPP) members had stormed out of the proceedings on 22nd August insisting on calling Indian Prime Minister Manmohan Singh and Finance Minister P Chidambaram as witnesses before the panel.


Sources said besides the former Cabinet Secretary, the other "essential witnesses" the committee seeks to examine before drafting the report are the Telecom and Finance Secretaries, former Law Secretary, the present incumbent and the Attorney General.


It is not yet clear whether the six BJP members on the panel will attend the next meeting.


Amid growing bitterness between ruling and opposition sides in the 30-member JPC, five out of the six BJP members present at the meeting had walked out, claiming that Congress members had used foul language when they pressed for calling Singh and Chidambaram. Congress had refuted the allegation.


SEBI probes brokers under money laundering, terror fund rules

About 35 brokers have been probed for their compliance to know your client (KYC) rules, their due diligence procedures and their compliance to various anti-money laundering and combating financing of terrorism related regulations

Mumbai: As many as 35 stock brokers have been probed by capital market regulator Securities and Exchange Board of India (SEBI) for possible lapses in controls related to money laundering and terror financing, and further action may be taken soon in these cases, reports PTI.


The inspections by SEBI follow actions taken by stock exchanges and depositories against more than 300 market entities for violations and discrepancies related to Anti-Money Laundering and Combating Financing of Terrorism (AML and CFT) regulations in the 2011-12 fiscal.


The brokers have been probed for their compliance to know your client (KYC) rules, their due diligence procedures and their compliance to various AML and CFT related regulations, while actions have been taken by exchanges and depositories after similar inspections of various market entities.


In its latest annual report for 2011-12, SEBI said that it conducted "35 specific purpose inspections of stock brokers to check their KYC process, the extent of due-diligence and compliance level with current regulatory and statutory framework in this regard.


"Action with regard to these cases is in progress."


The regulator said money laundering has been globally recognised as one of the largest threats posed to the financial system of a country, while "fight against terrorist financing is another such emerging threat with grave consequences for both the political and economic standing of a jurisdiction".


It added: "Rapid developments and greater integration of the financial markets together with improvements in technology and communication channels continue to pose serious challenges to the authorities, and institutions dealing with AML and CFT."


SEBI said it is also in touch with the global bodies and other Indian regulators in its attempt to keep regulatory framework for AML robust in the country's securities markets.


As part of efforts to keep the Indian capital market free of money laundering and terrorist financing activities, leading bourses (NSE and BSE) as also depositories (Central Depository Services Ltd-CDSL and National Securities Depository Ltd-NSDL) have taken action against a total of 322 members for violations or discrepancies related to AML/CFT regulations.


Of these, 45 entities have been fined a total of Rs2.5 lakh, while directions were issued to other entities without levying any monetary penalty, SEBI said.


Individually, the BSE observed discrepancies regarding AML framework against 110 members and took actions such as imposing a monetary penalty and issuing advice to them, while NSE found violations by 68 members.


Further, NSE and BSE imposed a fine of Rs1.75 lakh and Rs62,000 respectively.


In case of depositories, NSDL and CDSL have taken action against 102 and 42 members respectively.


Besides, NSDL charged a penalty of Rs11,850, while CDSL did not impose any monetary penalty and only issued advice to the members.


That apart, stock exchanges and depositories conducted trainings and seminars for their members to sensitise them with the significance of AML and CFT framework and the need to ensure continuous compliance with it.


Strengthen RBI's balance sheet

To ensure that temptations of the government emanating from external compulsions do not to dilute the strength of RBI’s balance sheet, the government should take measures to augment the share capital of the RBI after amending the RBI Act

The building up of the contingency reserve is particularly important as the government is in no position to pick up the losses once the contingency reserve is wiped out. One of the saddest events that can occur is the death of a central bank. This has happened in some countries and the RBI can never be too careful.
—S S Tarapore, former deputy governor, RBI and economist.


The Reserve Bank of India (RBI) has published its Annual Report 2011-12 on 23 August 2012. The accounts presented in the report shows that RBI’s income increased during 2011-12 by about 43% as compared to the previous year (from Rs37,070 crore to Rs53,176 crore). Transfer of surplus profit to the Government of India (GOI) was Rs16,010 crore which as percentage to gross income is lower by around 10.4% as compared to 2010-11. Obviously, the transfer of “surplus income” to the government in a routine manner when the reserves position of the central bank shows a declining trend needs a review. Considering the size of RBI’s balance sheet, recouping the reserves position to healthier levels will be a Herculean task.


Considering the size of its balance sheet and the internal and external pressures on its income generating capabilities, as also the nature of shocks RBI has to absorb from time to time, GOI should support the central bank’s efforts to augment its reserves at least on par with the 12% norm of capital adequacy RBI expects from banks it supervises.


RBI, on its part, should think in terms of generating reasonable income from deployment of captive funds it is mandated to manage, without any compromise on safety of investments. In this context, the addition of about 200 tonnes to holdings in gold three years back was a welcome move. The central bank should further augment the gold component in reserves by tapping domestic gold stock with policy and legislative support from GOI.


Earnings from Foreign Sources

 The RBI’s rate of earnings on Foreign Currency Assets and gold was lower at 1.47% in 2011- 12 compared with 1.74% in 2010-11. The report attributes this to the low interest rates prevalent in international markets. The following table gives the details.

It is a fact that our Forex Reserves Management has not been getting the attention it deserved, as RBI’s own priorities hovered more around internal debt management and monetary policy concerns. It is comforting to see that RBI governor Dr D Subbarao is focusing on the components of forex reserves and their vulnerabilities. The return on forex investments has not been encouraging and one gets an impression that there has been some complacency in augmenting the reserves position, resulting in the reserves stagnating around $300 billion for quite some time now. On the part of GOI/RBI, it was a late decision in the last quarter of 2009 to increase the gold component in the country’s forex reserves by about 200 tonnes, by a purchase from the International Monetary Fund. In the context of improving the country's image as one with a decent net-worth, it is important to manage the domestic gold holdings outside the forex portfolio also and make them visible and available as part of the nation’s resources. Let us not forget the 1991 episode when solid gold had to be carried abroad for pledging and borrowing. Such shameful experiences can be avoided in future, if a part of domestic stock of the estimated 18,000 tonnes of gold is made tradable and a decent domestic stock of standard gold acceptable in international market is built up.


RBI’s internal reserves

Contingency Reserve (CR) represents the amount set aside on a year-to-year basis for meeting unexpected and unforeseen contingencies, including depreciation in the value of securities, exchange guarantees and risks arising out of monetary/exchange rate policy operations. In order to meet the needs of internal capital expenditure and make investments in subsidiaries and associate institutions, a further sum is provided and credited to the Asset Development Reserve (ADR). The amount of transfer to the CR and the ADR and the surplus transferred to the government as a percentage of the total income in the last five years is set out in the table below:

The report recalls that “to meet the internal capital expenditure and make investments in its subsidiaries and associate institutions, the RBI had created a separate ADR in 1997-98 with the aim of reaching 1% of the central bank’s total assets within the overall indicative target of 12% of the total assets set for CR and ADR taken together”. But despite a transfer of Rs2,348 crore in 2011-12, from income to ADR raising its level to Rs18,214 crore as on 30 June 2012, the CR and the ADR together constituted only 9.7% of the total assets of the RBI as on 30 June 2012 showing a fall of 0.6% from the level of 10.3% during the previous year, taking the original target of 12% further away. It may be recalled that in 2009 the target was almost in sight when the level reached 11.9%. The ADR now accounts for 0.8% of the total assets of the RBI as against the target of 1%.

The position of CR and ADR during the last five years was asunder:
To ensure that temptations of the government emanating from external compulsions do not to dilute the strength of RBI’s balance sheet, the GOI should take measures to augment the share capital of RBI after carrying out appropriate amendments to the RBI Act. Till such time RBI should be allowed to retain surplus income by transfer to reserves. Considering the size of its balance sheet and the internal and external pressures on its income-generating capabilities, as also the nature of shocks the apex bank has to absorb from time to time, the central bank’s reserves need to be augmented on an ongoing basis.


 (The writer is a former general manager, Reserve Bank of India.)



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