1. Snapshot of Tarapore Committee Report on
CAPITAL ACCOUNT CONVERTIBILITY
Presented by:
Apoorva Soni 11020241071
Pankaj Baid 11020241121
Rashmi Sonare 11020241124
Swapnil Rathi 11020241134
1

2. Introduction
 Tarapore Committee was constituted by the RBI
under the Chairmanship of Dr. S.S.Tarapore to
prepare a roadmap towards Full Capital Account
Convertibility (FCAC).
 The Committee submitted its report in May 1997.
 Result of “no clear definition of CAC “ in India.
Source: RBI appointed Tarapore
11/10/2012 Committee Report 2006 2

3. Capital account Convertibility
(CAC)
 “Freedom of currency conversion in relation to
capital transactions in terms of inflows and
outflows”
 Committee’s version of CAC:
‘ CAC refers to the freedom to convert local financial assets
into foreign financial assets and vice versa. It is associated
with changes of ownership in foreign/domestic financial
assets and liabilities and embodies the creation and
liquidation of claims on, or by, the rest of the world. CAC can
be, and is, coexistent with restrictions other than on external
payments.’
Source: RBI appointed Tarapore
11/10/2012 Committee Report 2006 3

4. Need for 1997 Committee..
 Tarapore committee observed that the capital
controls can be useful in insulating the economy of
the country from the volatile capital flows during the
transitional periods.
 It recommended the implementation of CAC for a 3
year period i.e. 1997-1998,1998-1999 and 1999-
2000 and had set out detailed pre-conditions for
moving towards CAC
Source: RBI appointed Tarapore
11/10/2012 Committee Report 2006 4

5. Signposts for moving towards
CAC
 Gross Fiscal Deficit of the Centre as a percentage of GDP
should be 3.5% for 1999-2000 (4.1% in 2005-2006)
 Inflation rate should remain between an average 3-5% for 3
years (1997-2000) (4.6% in 2005-2006)
 In Financing sector, the Gross NPA’s as a percentage of total
advances of the public sector public banking system should
be 5% by 2000 (5.2% in 2004-2005)
 Average effective CRR for the banking system should be 3 %
for 1999-2000 (5% in 2004-2005)
 A consolidated sinking fund set up to ensure smooth
repayment of borrowings.
 Monitoring Exchange Rate band of +/-5.0 % around the
neutral Real Effective Exchange Rate (REER) with no
intervene of RBI.
 Designing external sector policies to increase current
receipts to GDP ratio such that DSR comes down to 20%
from 25%.
Source: RBI appointed Tarapore
11/10/2012 Committee Report 2006 5

6. Source: RBI appointed Tarapore
11/10/2012 Committee Report 2006 6

7. Move towards FCAC
 The report of this committee was
made public by RBI on 1st September
2006.
Three phased adoption of CAC
scheme:
 2006-07 (Phase I)
 2007-08 and 2008-09 (Phase II)
 2009-10 and 2010-11 (Phase III)
Source: RBI appointed Tarapore
11/10/2012 Committee Report 2006 7

8. Objectives of FCAC
 To facilitate the economic growth through higher investment
by minimising the cost of both equity and debt capital.
 To improve the efficiency of the financial sector through
greater competition.
 To provide opportunities for diversification of investments by
residents.
Source: RBI appointed Tarapore
11/10/2012 Committee Report 2006 8

9. Recommendations…
RBI didn’t implement all the recommendations and
took a number of additional measures like:
 Removal of tax benefits to NRIs.
 Greater autonomy to RBI.
 Complete cheek on fiscal deficit.
 Disallowing investment channel led through a particular
country (like Mauritius).
 Reduction of government stake in banks from 51 per
cent to 33 per cent.
 Allowing industrial houses a stake in existing banks or
allowing them to open a new banks.
 Allowing enhanced presence of foreign banks.
 10 per cent voting limit for investment in banks should
be scrapped.
 Non-resident corporates should be allowed to invest in
Indian markets.
Source: RBI appointed Tarapore
11/10/2012 Committee Report 2006 9

10. Continued…
All individual NRIs should also be allowed to invest in
Indian Market.
Revenue deficit of both central and states should be
eliminated by 2008-09 and building a revenue surplus
of 1 percent by Financial Year 2011.
Raising the ceiling on External Commercial
Borrowing (ECB).
Banning Participatory Notes (PNs) and phasing out
the existing PNs within one year.
Enhancing the ceiling on government debt from $2
billion to 10 percent of issuance and $1-5 billion to 25
per cent of new issuances in a year of corporate debt.
Building adequate reserve and limiting the current
account deficit to under 3% of GDP.
All banks should be brought under Companies Act.
Source: RBI appointed Tarapore
11/10/2012 Committee Report 2006 10

11.  The committee has suggested for
providing greater financial freedom for
all the three key stakeholders:
◦ resident individuals,
◦ domestic companies and
◦ foreign investors.
Source: RBI appointed Tarapore
11/10/2012 Committee Report 2006 11

12. Proposed Changes by Tarapore Committee
Investment Phase-I Phase-II Phase-III
Relaxation 2006-07 2007-09 2009-11
Gradual increase, Gradual increase, but
External commercial Status quo on ECB but automatic limit limit to be raised to
borrowing limit of $18 billion to be raised from $1 billion per
$500 million to financial year
Resident individual’s $25,000 limit should $750 million
overseas be hiked to $50,000 Raised to $2,00,000
investment per calendar year
Raised to $1,00,000
$2 billion investment
MFs overseas Further raised to $5
limit to be raised to billion
investment $3 billion Further raised to $4
billion
Fresh participatory
FII investment notes should be Ban to continue
banned Ban to continue
G-Sec investment
FIIs’ debt limit of $2 billion to 10 per cent of gross
investment be modified as 6 per 8 per cent of total borrowing
cent of gross gross borrowing
borrowing
JVs / Wholly-owned 200 per cent of net
Further raised to 300 Further raised to 400
subsidiary abroad worth limit should be per cent
investment raised to 250 per cent of net worth
percent Source: RBI appointed Tarapore
11/10/2012 Committee Report 2006 12
Source: RBI appointed Tarapore Committee Report 2006

13. INTERACTION OF MONETARY
POLICY
AND
EXCHANGE RATE POLICY
Source: RBI appointed Tarapore
11/10/2012 Committee Report 2006 14

14.  There has been upsurge of capital inflows
with the relaxation of capital accounts
controls
 Impossible trinity – independent
monetary policy, open capital
account, and a managed exchange rate
cannot be attained, but Indian authorities
have been trying to find out intermediate
solutions.
Source: RBI appointed Tarapore
11/10/2012 Committee Report 2006 15

15. Monetary Policy Instruments and
Operations
 Indian real interest rates needs to be better aligned with
international interest rates
 OMOs should be used to for modulating liquidity conditions,
correct any serious misalignments between short term and
long term rates
 RBI needs to control the interest rate changes during the
capital inflows and outflows to contain the inflationary
expectations
 SLR to be altered to below 25% when felt necessary
 Liquidity Adjustment facility should be used as an instrument
of equilibrating very short term liquidity
 RBI should operate variable rate repo/reverse repo auctions.
 1997 committee recommended that, RBI should have a
monitoring exchange rate band of +/- 5% around NEER.
 If Current Account Deficit moves beyond 3% of GDP, the
exchange rate policy should be reviewed.
Source: RBI appointed Tarapore
11/10/2012 Committee Report 2006 16

16. REGULATORY AND
SUPERVISORY ISSUES IN
BANKING
Source: RBI appointed Tarapore
11/10/2012 Committee Report 2006 17

17.  Banking system needs to be strengthened with
appropriate regulatory measures in place since
capital inflows and outflows bring risks along with
them.
 Strong & Resilient banking system, efficient
clearing and settlement arrangement, appropriate
accounting, public disclosure standards, auditing
standards.
 Banks be able to manage multidimensional risk (
their risk as well as the company’s risk)
 Resident and non-resident banks to undertake
transactions in multiple currencies which exposes
the economy to risks such as
currency, counterparty Source: RBI appointed Tarapore
credit, transfer, legal, arbitrage, derivatives
11/10/2012 Committee Report 2006 18

18. Prudential Regulation
 Improvements in financial institutions liquidity
management and disclosures practices, corporate
governance in PSBs.
 Issuing restricted banking licenses rather than whole
banking licenses to enable banks to exploit core
competencies.
 Introduce higher core capital ratio, pricing risks
efficiently, keeping high capital requirements(currently
9%).
 Differential treatment of complex banks.
 RBI to allow banks to undertake market making, deal
with derivatives, large cross border borrowing &
lending.
Source: RBI appointed Tarapore
11/10/2012 Committee Report 2006 19

19. Measures for Strengthening Regulation and
Supervision
Proposed Measures
Liquidity Risk Monitored at Head/Corporate office level
Monitor liquidity position at granular level, at territory level.
Examine the need for limit on short term borrowings of banks
Interest Rate Risk(IRR) Fix appropriate internal limits for IRR
Banks adopt Duration gap analysis to measure IRR in their
Balance Sheet.
Compute volatility of equity and earnings under various IRR
scenarios
Forex Open Position Review the open position limits for banks in Forex.
Asset Concentration To ensure diversification, fix internal limits for exposure to
Particular industry, country, region, counterparty category etc.
Income Recognition To make provisions for non fund based commitments in NPA
Asset accounts. Banks should make a higher level of provisions for
Classification and the contingent liabilities. Introduce Uniform asset
Provisioning classification.
Source: RBI appointed Tarapore
(IRAC) Norms
11/10/2012 Committee Report 2006 20

20. Proposed Measures
Capital Adequacy To keep differential CRAR for different banks
Increase core capital ratio to 66%
RBI should decide on the methodology for
setting off the losses against capital funds.
Risk Mitigants Use and monitor Interest Rate Futures and
options, Credit Derivatives, Commodity
Derivatives, Equity Derivatives
Level of Computerisation Online connectivity to all major branches, MIS
and Branch content should support the risk management
Interconnectivity requirements
Off-balance sheet Ensure strict norms are in place for issuing
Exposures – comfort comfort letters and also to plan to meet
Letters demands of the same
Accounting Standards Full Compliance with AS-11
Type of Supervision the Capital Adequacy, Asset Quality,
Management, Earnings and Liquidity System
(CAMELS) approach should be adjusted to
accommodate the proposed focus and become
Capital Adequacy, Source: RBI appointedRisk
Asset Quality, Tarapore
Management, Earnings and Liquidity System 21
11/10/2012 Committee Report 2006

21. Proposed Measures
Types of Supervision Put in framework to ensure adherence to Anti
Money laundering/ KYC requirements. Introduce
the concept of Central point of contact(CPOC) in
RBI for a dedicated official tracking developments
in alloted bank.
Financial Soundness To reduce the compilation of FSI from 6 months to
Indicators(FSI) 2 months
Source: RBI appointed Tarapore
11/10/2012 Committee Report 2006 22

22. TIMING AND SEQUENCING OF
MEASURES FOR FULLER
CAPITAL ACCOUNT
CONVERTIBILITY
Source: RBI appointed Tarapore
11/10/2012 Committee Report 2006 23

23.  The Approval limit for ECB should be raised gradually over the
`
span of 5 yrs and ECBs over maturity of 10 yrs and 7 yrs should be
kept outside the ECB ceiling.
 Firms investing overseas: Increase the limit from 200 to 400% ( of
net worth) gradually
 The EEFC limit should be raised from 50% to 100%
 The FDI norms should be liberalized.
 Disinvestments procedures to be simplified to provide symmetry
between investments and disinvestments.
 Authorized Dealers limit of borrowing from overseas banks should
be raised from 25% to 100% of the paid of capital + free reserves
with a sub-limit of 1/3rd for short term.
 Aggregate ceiling on investment overseas by mutual funds should
be raised from 2 billion to 5 billion $
 FII should be allowed to invest in upto 10% of the Govt Securities
issued and 25% of the Corporate Bonds issued
 Residents individuals limit to freely remit $ abroad should be
increased from 25000$ to 2,00,000 $ Source: RBI appointed Tarapore
11/10/2012 Committee Report 2006 24

24.  RFC account holders to be allowed to
move foreign currency balances to
overseas banks
 Repatriation of proceeds from the sale
of inheritance of assets upto a limit of
1 million should be allowed from the
balances held out in NRO accounts.
Source: RBI appointed Tarapore
11/10/2012 Committee Report 2006 25

25. Development of Financial Markets
 Any country intending to introduce FCAC needs to ensure
that different market segments are not only well developed
but also that they are well integrated so that the entire
financial system is able to absorb the shocks with minimal
damage.
 Three main dimensions of a well developed financial
system
 Vibrancy and strength of the physical infrastructure of
markets as reflected by the IT systems, communication
networks
 Skill and competency levels of people who man the offices of
financial intermediaries like commercial and investment
banks
 Quality of regulatory and supervisory arrangements.
Source: RBI appointed Tarapore
11/10/2012 Committee Report 2006 26

26. Recommendations on developing
Money Market
 Policy initiatives should be taken to facilitate development of
different financial markets to encourage capital inflows.
 Prudential regulations on inflows of foreign capital, segment-wise
would be desirable.
 Suitable regulatory changes need to be progressively introduced
to
enable more players to have access to the repo market.
 There is a need to set up a dedicated cell within the RBI for
tighter monitoring of all derivatives. This would be specially
important as demand for derivatives could increase manifold to
meet larger hedging requirements
 Efforts may be made to activate the market in interest rate
futures to all participants including foreign investors. Permitted
derivatives should include interest rate options, initially OTC and
subsequently exchange traded.
Source: RBI appointed Tarapore
11/10/2012 Committee Report 2006 27

27. Recommendations on developing
Govt. Securities Market
 Promoting a two-way market movement would require permitting
participants to freely undertake short-selling.
 To stimulate retail investments in gilts, either directly or through gilt
mutual funds, the gilt funds should be exempted from the dividend
distribution tax and income up to a limit from direct investment in
gilts could be exempted from tax.
 Expanding investor base would be strengthened by allowing, inter
alia, entry to non-resident investors, especially longer term
investors like foreign central banks, endowment funds, retirement
funds, etc.
 To impart liquidity to government stocks, the class of holders of G-
secs needs to be widened and repo facility allowed to all market
players without any restrictions on the minimum duration of the
repo
Source: RBI appointed Tarapore
11/10/2012 Committee Report 2006 28

28. Recommendations on developing Corporate
Bond and Securitized Debt Market
 GOI, RBI and SEBI should be able to evolve a concerted
approach to deal with the complex issues identified by the
High Level Committee on Corporate Bond Market.
 Stamp duty at the time of bond issues as also on securitized
debt should be abolished by all the state governments.
 Corporate bonds may be permitted as eligible securities for repo
transactions subject to strengthening of regulatory policies.
 The limitations on FIIs to invest in securities issued by Asset
Reconstruction Companies should be on par with their
investments in listed debt securities.
Source: RBI appointed Tarapore
11/10/2012 Committee Report 2006 29

29. Recommendations on developing Forex Markets
 Authorities need to be concerned about bank margins on Forex
transactions of smaller customers. The best way to reduce margins
would be first to separate Forex business from lending transactions
 Introducing an electronic trading platform on which Forex
transactions could take place, the customer having the choice of
trading with the bank quoting the best price.
 Allow more flexibility for banks to borrow and lend overseas both
on short-term and long-term and increase the limits that are
prescribed now to promote more interest parity with international
markets.
 Banking should be allowed to hedge currency swaps by buying and
selling without any monetary limits.
Source: RBI appointed Tarapore
11/10/2012 Committee Report 2006 30

30. CURRENT STATUS AS PER THE BENCHMARKS
SET UP BY THE COMMITTEE (2012):
 GDP Growth Rate :6.9%
 Debt Service Ratio: 5.6%
 External Debt:20%of GDP
 CRR:4.5%
 Inflation Rate:6.87%
 Forex Reserves:290 Bn $
Source: RBI appointed Tarapore
11/10/2012 Committee Report 2006 31

31. Sources
 http://www.rbi.org.in/scripts/NotificationUser.a
spx?Mode=0&Id=7136
 http://www.rbi.org.in/scripts/BS_FiiUSer.aspx
 http://www.rbi.org.in/commonman/English/scri
pts/pressreleases.aspx?id=111
 http://www.rbi.org.in/scripts/NotificationUser.a
spx?Id=7537&Mode=0
 http://www.google.com/url?sa=t&rct=j&q=&es
rc=s&source=web&cd=1&ved=0CB4QFjAA&
url=http%3A%2F%2Frbidocs.rbi.org.in%2Fr
docs%2FPublicationReport%2FPdfs%2F86
253.pdf&ei=Ez9nUJ3LI4TprAfSvYHYCQ&usg
=AFQjCNF_J9JBuL9soSYPryZOFzCGlgXaa
g
Source: RBI appointed Tarapore
11/10/2012 Committee Report 2006 32