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Return to Main Page of Budget 2005-2006

Indian Budget 2005-06
Full Text of P. Chidambaram, Minister of Finance, Budget Speech(Feb 28, 2005)


81. The incipient investment boom in infrastructure, industry (including housing), and services needs to be nurtured through further reforms in the financial sector including reforms in bank finance and debt and equity markets.


82. The banking sector presents a picture of paradoxes. There are many banks in India but none among the top twenty in the world. Our largest bank, the State Bank of India, ranks 82 in terms of business. It is universally acknowledged that the key drivers of the banking sector in the future will be Competition, Consolidation and Convergence. RBI has prepared a road map for banking sector reforms and will unveil the same. While most proposals will be implemented by the RBI on its own authority, some legislative changes would be required to be made.

83. I had promised that a comprehensive Bill to amend the Banking Regulation Act, 1949 will be introduced in the Budget Session. In consultation with the RBI, I propose to introduce amendments to the Act

– • to remove the lower and upper bounds to the statutory liquidity ratio (SLR) and provide flexibility to RBI to prescribe prudential norms;

• to allow banking companies to issue preference shares, since preference share capital can be treated as regulatory capital under specified circumstances as per Basel norms;

• to introduce specific provisions to enable the consolidated supervision of banks and their subsidiaries by RBI in consonance with the international best practices in this regard;

I also propose to introduce amendments to the Reserve Bank of India Act, 1934-

• to remove the limits of the cash reserve ratio (CRR) to facilitate more flexible conduct of monetary policy; and

• to enable RBI to lend or borrow securities by way of repo, reverse repo or otherwise.


84. With increasing longevity, the problem of old-age income security can no longer be ignored. Government had announced a defined contribution pension scheme for newly recruited Central Government employees which would also be extended to the unorganized sector. I am happy to inform the House that seven State Governments – Andhra Pradesh, Chhattisgarh, Himachal Pradesh, Jharkhand, Manipur, Rajasthan and Tamil Nadu – have introduced similar schemes for their employees. Other States have also evinced interest. An Ordinance was promulgated on December 29, 2004 to set up a Pension Fund Regulatory and Development Authority (PFRDA). I propose to introduce a Bill to replace the Ordinance during this session.

85. Through the new scheme, it is proposed to offer a menu of investment choices to the subscriber and to provide a strong regulatory mechanism to ensure that the interests of subscribers are protected. I appeal to workers all over the country to join the new pension system.

Capital Market

86. The capital market has emerged as a major vehicle for converting savings into investment. It is also the preferred investment destination of foreign savings. The steps announced by me last July, and implemented, have strengthened the capital market. It is time for more measures and, hence, I propose to –

• authorize Securities and Exchange Board of India (SEBI) to set up a National Institute of Securities Markets for teaching and training intermediaries in the securities markets and promoting research; and

• permit FIIs to submit appropriate collateral, in cash or otherwise, as prescribed by SEBI, when trading in derivatives on the domestic market.

While India’s equity market has made progress, the corporate bond market still lags behind. In order to address this gap, I propose to

— • amend the definition of ‘securities’ under the Securities Contracts (Regulation) Act, 1956 so as to provide a legal framework for trading of securitized debt including mortgage backed debt; and

• appoint a high level Expert Committee on corporate bonds and securitization to look into the legal, regulatory, tax and market design issues in the development of the corporate bond market.

Over the Counter (OTC) Derivatives

87. Over the counter (OTC) derivatives play a crucial role in mitigating the risks of corporates, banks and other financial entities. There is, however, some ambiguity regarding the legality of OTC derivative contracts which has inhibited their growth. I, therefore, propose to take measures to provide for clear legal validity of such contracts.

Stamp duty on Stock Exchange Corporatization

88. The Securities Contracts (Regulation) Act, 1956, as amended recently, requires all stock exchanges to be corporatized and de-mutualized. Three stock exchanges are not yet corporatized. In order to facilitate their corporatization, I propose to grant a one-time exemption to them from stamp duty on the notional transfer of assets.

Stamp Duty on Commercial Paper

89. In order to create a level playing field for banks and non-bank entities to issue commercial paper, and to bring the Indian commercial paper market closer to international standard, I propose to rationalize the stamp duty so that it applies uniformly regardless of the issuing entity.

Mumbai – A Regional Financial Centre

90. When I look at the map of the world, I am struck by the strategic location of Mumbai. It lies almost midway between London and Tokyo, two nerve centres of world finance. Mumbai is also home to the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) which now rank no.3 and no.5 among the stock exchanges of the world by the number of trades per year. In the last decade, we have built world class institutions on the securities markets and we now compare with the best in terms of technological sophistication, risk management and sound governance. I believe the time has come to begin work on making Mumbai a regional hub for finance. In consultation with the RBI, I propose to appoint a high powered Expert Committee to advise the Government on how to make Mumbai a regional financial centre.

Gold Units

91. Ten years ago we embarked on the process of ensuring that gold inflows are through the official channels alone. I believe that we are now in a position to introduce ‘gold units’ and create a market for such units. I propose to ask SEBI to permit, in consultation with RBI, mutual funds to introduce Gold Exchange Traded Funds (GETFs) with gold as the underlying asset, in order to enable any household to buy and sell gold in units for as little as Rs.100. Such units could be traded in the same manner as units of mutual funds.

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