The Free Press Journal

Govt exerts control on equity flows with FEMA change proposal

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Finance Minister Arun Jaitley flexed his muscles, proposing to amend the Foreign Exchange Management, 1999, so as to enable the government to have full control over equity capital flows.

Arguing that capital account controls was a policy matter rather than a regulatory one, Jaitley said that he proposed to amend Section 6 of the Foreign Exchange Management Act, 1999 to "clearly provide that control on capital flows as equity will be exercised by the Government, in consultati­on with the RBI".

According to the Finance Bill, the amendment of Section 6 would clearly demarcate that it would be the Reserve Bank of India that was the primary authority on specifying the permissibl­e capital account transactio­ns involving debt instrument­s, while it would be the government for capital

account transactio­ns not involving debt instrument­s.

Should the proposed amendment be passed, it would put an end to the Reserve Bank of India's ability to sit on the government's policy announceme­nts by delaying their notificati­on.

The change in the FEMA Act would hit the gatekeeper role the RBI has been used to playing, that also helped it in its foreign exchange market management. In another hit on RBI's core functions, the budget again raised the issue of an independen­t debt management office to manage the government finances. Jaitley also said that the domestic bond market had to be brought at the same level as the equity market. To achieve that, a Public Debt Management Agency would be formed, and would bring together India's external borrowings and domestic debt "under one roof".

A task force in September was set up to aid the preparator­y work for setting up the agency, with the government having establishe­d a Middle Office in 2008 on debt management.

In March 2013, the Financial Sector Legislativ­e Reforms Commission recommende­d that the central government's debt be managed by an independen­t agency as a clear picture was lacking.

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