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Form Sovereign Fund to arrest volatility in capital market, proposes Assocham

November 24, 2009: The Associated Chambers of Commerce and Industry of India (ASSOCHAM) has proposed to the government to create a “Sovereign Fund”, proceeds of which be utilized to rescue and arrest possible volatility in domestic capital market as also encourage it’s orderly growth for a stable and progressive financial system.

According to ASSOCHAM, the suggested proposal if accepted, will be an important landmark in financial sector reform that India intends to usher into and help it achieve stability and growth, besides partly insulating capital market from financial pains.

In a statement, the ASSOCHAM has stated that seed capital for the suggested “Sovereign Fund” can be raised from Security and Transaction Tax (STT), imposed on daily trading of capital markets. Currently STT @ 0.02% is imposed on derivatives trading against 0.1% in deliveries from which the government earns over Rs. 100 crores each day. Indian capital market’s each day trading turnover is estimated around Rs. 90,000 crores.

“It also pointed out, even a 25% of over Rs. 100 crores is initially earmarked for proposed “Sovereign Fund” in about 300 days trading out of 365 in India, an amount of Rs. 7,500 crore can be raised that should go in making of the Fund as it will have a corpus of a good few thousand crores over a period of time, to be used to rescue and arrest possible volatility in stocks, specially when Foreign Institutional Investors (FIIs) decide to exit in doves.”

The proposed fund has become necessary to shield the capital markets from unusual swings or panic conditions since their market direction is determined by entry or exit of the FIIs who play based on their ultimate goal of making profit.

At present, there is hardly any domestic institutional support or prominent market player who has the resources and reach to moderate wild swings in capital markets.

The limited strength of domestic mutual funds and other financial intermediaries including the biggest player like the Life Insurance Corporation (LIC) are no match to answer the growing clout of FIIs. Therefore, a government owned institution with necessary resources needs to be established to match enormous resource power of FIIs to save capital market from unusual distortions.

Worldwide there has been tremendous debate to put in place an institutional mechanism having sovereign back up to strengthen and support the capital market shocks. The recent example is that of sovereign fund of Singapore and China. These funds have come handy during huge panic selling in the domestic market to word off unprecedented loses.

Since Indian capital market has grown tremendously with average turnover scaling to Rs. 90,000 crore per day and contributing about Rs. 108 crore per day to exchequer in the form of STT, a time has come when 1/4th of which can be used for setting up of proposed fund, concluded the ASSOCHAM.

BSE, NSE likely to touch 20,000 and 6,000 marks by 2010




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