Regulations
The non-deliverable futures market cannot influence the onshore market
The NDF market cannot influence the on-shore USD INR market and to that extent the RBI and government must agonise only over effectively enforcing the FEMA regulations
 
There is quite some compulsive feel, rather than any grounding in logic, to the current hype and hoopla over Non-Deliverable Forward (NDF) market influencing the on-shore USD-INR market. And, no less, a high degree of interlinkage / correlation between the two is confused with causality. This is because the whole debate lacks clarity on how arbitrage actually happens both, in theory, and practice. Only through the organic connect of arbitrage is it possible for information in one market to be seamlessly transmitted to, and influence, the other market. Arbitrage between two discrepant prices of an asset in two different markets requires taking simultaneous long and short positions to benefit from, and eventually align, the discrepant prices. 
 
This arbitrage is risk free in that loss on one position is offset by a matching gain on the other.  But restrictions on who, and how one, can take positions in the on-shore and NDF USD-INR market come in the way of anyone engaging in risk-free arbitrage for NDF market to influence exchange rate in the on-shore market. 
 
More specifically, domestic entities, whether banks or businesses / individuals, are not permitted to engage in any transactions in NDF market. But banks are permitted to take open positions in the on-shore OTC (Over the counter) forward market subject to RBI monitored, and supervised, limits and businesses/ individuals are permitted to engage in on-shore OTC forward market subject strictly to actual underlying - exposure requirement and not otherwise. 
 
In other words, a forward seller (exporter) has to have actual underlying export and a forward buyer (importer/ foreign currency borrower) has to have actual underlying import/ foreign currency loan. Therefore, if FEMA (Foreign Exchange Management Act) regulations are not breached / violated, arbitrage between the two markets is impossible because the net position will always be open and not zero which is the hallmark of any arbitrage. 
If forward premium is higher in the NDF market relative to the one in the on-shore forward market, an arbitrageur will sell forward in the NDF market and buy forward in the on-shore market. But a domestic entity cannot do this because of FEMA regulations which require an actual underlying exposure i.e. either an import order or foreign currency loan. 
 
If there indeed is such an actual underlying exposure then the net position is not zero- a 'sine qua non' for a typical arbitrage - but actually net short because the actual underlying short position of import/ foreign currency loan is offset by the on-shore long forward position, leaving the NDF short position open and thus  exposing the entity to the risk that the US dollar may appreciate which may potentially more than wipe out the entire arbitrage profit ! 
 
Of course, if only there is no underlying actual exposure in the way of import, or foreign currency loan, will a typical arbitrage be possible with the on-shore long forward position exactly offsetting the NDF short forward position, locking in the benefit of discrepant premium ! But this will not be possible if FEMA regulations are strictly monitored and actually enforced. In other words,  only in breach and violation alone of FEMA regulations will the much-hyped arbitrage be possible and in no other way! 
 
The same holds when the opposite is the case viz; the forward premium is higher in the domestic on-shore market relative to the one in the NDF market in which case an arbitrageur will typically sell forward in the domestic on-shore market and buy forward in the NDF market. But, again, a domestic entity cannot do this because of FEMA regulations which require an actual underlying exposure i.e. export order. And, therefore, as before, if there indeed is such an actual underlying exposure then the net position is not zero - a 'sine qua non' for a typical arbitrage - but actually net long. This is because the actual long position of export is offset by the on-shore short forward position, leaving the NDF long position open and thus exposing the entity to the risk that the US dollar may depreciate. This, as stated before, may potentially more than wipe out the entire arbitrage profit! 
 
Of course, if only there is no actual underlying exposure in the way of export will a typical arbitrage be possible with the on-shore short forward position exactly offsetting the NDF long forward position, locking in the benefit of discrepant premium! But again, as before, this will not be possible if FEMA regulations are strictly monitored and actually enforced. 
 
In other words, again, as before, only in breach and violation alone of FEMA regulations will the much hyped arbitrage be possible and in no other way! The foregoing, thus, conclusively proves and establishes that the NDF market influencing the on-shore USD INR  market is illogical and to that extent RBI and Government must agonize only over effectively, decisively, credibly and inviolably enforcing extant FEMA regulations! 
While still on the subject, as regards statistically establishing causality, this can be credibly and effectively done by recourse to the so-called Granger Causality Test. But it is very important that the USD-INR data points must be taken as frequently as feasible for the Granger causality conclusions to be robust and reliable. 
 
Ideally, such data points can be taken at 5 to 1 minute intervals when both the markets are active . Since NDF market is almost a 24- hour market, the data points can overlap the market timings of the on-shore market. Significantly, under no circumstances should Granger Causality Test be applied to closing data points!
 
(VK Sharma is a former Executive Director, Reserve Bank of India)

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Is UP-based Kalpataru group again collecting money from investors, illegally?
Mathura-based Kalpataru group's two companies were barred by SEBI for raising money illegally from investors. Yet, the group has floated another similarly named company and is collecting money under its real estate scheme
 
Uttar Pradesh-based Kalptaru group is again collecting money from investors through its real estate schemes using a new company. Last year, market regulator Securities and Exchange Board of India (SEBI), barred KBCL India Ltd, a unit of Kalpataru group, and its directors from raising money and directed them not to launch any new scheme. However, according to sources, the group is collecting money using its another unit, 
Kalptaru Buildtech Corp Ltd (KBCL) in Uttar Pradesh and Rajasthan by promising huge returns upon investing in a plot of land. 
 
“The protection of the interest of the investors is the first and foremost mandate and therefore steps have been taken to ensure that the Kalptaru group does not collect further funds under its scheme. However, the mastermind of Kalptaru Group is intentionally switching its illegal collective investment scheme (CIS) business under KBCL India to Kalptaru Buildtech Corp (CIN: U45400UP2009PLC038016) or KBCL. They are using the similarity between the names of KBCL India (which is barred by SEBI) and KBCL and collecting money by creating confusion,” the sources pointed out.
 
The sources said, “Kalptaru Buildtech Corp is inviting contributions to invest in equated monthly instalments (EMIs) in land. The investors are being given an option to withdraw from the delivery of land and take their money with promised returns. In other words, this company is conducting CIS activities under the garb of real estate operations. This company raises deposits in the disguise of advances for unknown real estate projects. The weirdest fact in this case is, the investors are not even aware of the location of the plot and are not sure whether the land has been purchased or not by the company. As land is a physical asset, there should always be clear holding to prove ownership. A person can only own the land once physical possession is taken. Promoters of KBCL are allegedly siphoning the monies collected and are using a sales network comprising local persons who are offered hefty commissions. The agents of these companies recruit more agents and they in turn recruit more agents.” 
 
Kalptaru group, however, had denied running a CIS without taking permission from SEBI. It states that KBCL India is a public limited, listed company and the group is engaged in construction, development and management of agricultural land, townships, shopping malls and group housing society in various states in India and did not run any collective investment scheme. 
 
Last year, SEBI in its order barring KBCL India and the company directors, Rakesh Kumar, Vishvnath Pratap Singh and Shashi Kant Mishra, had said, “KBCL is  prima facie engaged in fund mobilizing activity from the public, by floating/ sponsoring/ launching 'collective investment scheme' as defined in Section 11AA of the SEBI Act without obtaining a certificate of registration from SEBI as required under Section 12(1B) of the SEBI Act and the CIS Regulations.”
 
“I find that the instant 'Scheme' offered by KBCL under the guise of 'business of real estate/ sale-purchase' is nothing but a smokescreen for its fund mobilizing activity. I find that such fund mobilizing activity falls within the ambit of 'collective investment scheme' as defined under Section 11AA of the SEBI Act and the same has been carried on by KBCL without due registration from SEBI. In this context, I note that protecting the interests of investors is the first and foremost mandate for SEBI and therefore, steps have to be taken in the instant matter to ensure only legitimate investment activities are carried on by KBCL and no investors are defrauded,” S Raman, Whole Time Member of SEBI said in his order issued on 12 September 2013.  
 
SEBI had also asked KBCL India and its directors not to dispose of properties and assets acquired through its CIS and also not to divert the funds raised from such schemes. The company has also been restrained from launching any new schemes.
 
However, this was not the first time, the Mathura-based Kalpataru group  faced the wrath of the market regulator. Earlier in 2003, SEBI  debarred  Kalptaru Agro India Ltd (KAIL) and its concerned officials from operating in the capital market for five years for failing to return money to investors as per regulators orders.
 
Few months ago, the Bombay High Court restrained Kalptaru Buildtech Corporation from directly or indirectly using the name or mark 'Kalptaru' or any other deceptively similar mark as part of its corporate or trading name. Mumbai-based real estate company, Kalpataru Properties Pvt Ltd  had dragged Kalptaru Buildtech Corp to court for violating its intellectual property rights over its trademark and name. “Kalpataru Properties came across the other company using the name Kalptaru Buildtech Cor Ltd in 2013 and asked it to cease using the name. But since the defendant continued with the use of the same name, the matter landed in court and the court is satisfied that ...the mark is solely and exclusively associated with the Plaintiff (Kalpataru Properties),'' the HC had said in its order.
Sensex, Nifty give up gains : Wednesday closing report
Nifty will move sideways for Modi government's thinking to become clear
 
On Wednesday the BSE 30-share Sensex opened at 24,404 while the NSE 50-share Nifty opened at 7,275. Both the indices edged higher in the positive only for few minutes when it hit the day’s high and then started heading lower. Sensex hit a high of 24,420 while Nifty hit a high of 7,287. The indices hit a low of 24,156 and 7,207. Sensex closed at 24,298 (down 79 points or 0.32%), while Nifty closed at 7,253 (down 23 points or 0.31%). The NSE recorded lower volume of 169.84 crore shares. India VIX fell 6.88% to close at 17.9100.
 
The top five gainers among the other indices on the NSE were Realty (2.14%), Smallcap (1.65%), Media (1.36%), Auto (0.93%) and IT (0.83%) while the top five losers were PSU Bank (1.51%), Infra (1.36%), Bank Nifty (1.05%), Finance (0.79%) and Pharma (0.65%).
 
Of the 50 stocks on the Nifty, 15 ended in the green. The top five gainers were DLF (5.56%), Bajaj Auto (5.12%), United Spirits (4.99%), Asian Paints (3.78%) and NTPC (2.85%). The top five losers were UltraTech Cement (3.56%), Bhel (3.06%), Bharti Airtel (3.04%), Grasim (2.89%) and SBI (2.50%).
 
Of the 1,583 companies on the NSE, 1,093 companies closed in the green, 448 companies closed in the red and 42 closed flat.
 
The BJP Parliamentary party on Tuesday elected Narendra Modi as its leader, officially making him the Prime Minister-in-making. Modi will be sworn in as India's next Prime Minister on Monday evening at the Rashtrapati Bhawan.
 
The Reserve Bank of India Governor Raghuram Rajan on Tuesday said that the privatisation of state-run banks isn't necessary but how the government-backed lenders are managed, needs to change to allow them the flexibility to remain competitive. Rajan said that a healthy public-sector banking system should be free from too much government influence but not from fulfilling the public's needs.
 
With the news making rounds that the Bajaj Auto management foresees a good growth for the motorcycle industry over the next two years, the stock was the top gainer (4.69%) among the Sensex 30 pack. 
 
All the banking stock in the Sensex 30 stock today closed in the negative. SBI (2.61%), Axis Bank (2.18%), HDFC Bank (0.71%) and ICICI Bank (0.69%).
 
Improved results from Essar Oil made it the top gainer (15.34%) in ‘A’ group of BSE.
The Adani group, which was alleged to have been favoured by the Narendra Modi government, was recently given Rs 5,500 crore show cause notice in a case of alleged "over-valuation" of capital equipment for power projects. Adani Ports (4.20%) and Adani Enterprises (3.28%) were among the top five losers in the ‘A’ group on the BSE.
 
US indices closed in the negative on Tuesday. Except for Shanghai Composite (0.84%), Hang Seng (0.01%) and Jakarta Composite (0.29%) all the other Asian indices closed in the negative. NZSE 50 (0.51%) was the top loser.
 
Japan posted a trade deficit of 808.9 billion yen ($8 billion) for April, data showed today. Exports gained 5.1% year on year, while imports increased 3.4%. European indices were showing mixed performance, while US Futures were trading in the green.

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