Despite conflicting views with RBI, the Finance Ministry has decided to go with his wits and allow 100% FDI in proprietary trading industry of capital market.
Proprietary trading is trading in stocks, derivatives, commodities and such other financial instruments on a company’s own account with own funds. Such firm doesn’t use his clients’ or other money. This trading activity is obviously aimed at making profit out of such trading on own money of the firm.
Presently banks do proprietary trading through saperate subsidiary company, and they have a cap on such exposure as well. While a big number of foreign banks' profits contain huge share of contribution from such proprietary trading; as sources from big two accounting firms tell us.
The main reasons for RBI’s dislike towards foreign firms’ proprietary trading are,
- The 2007-2008 USA financial crisis had many firms doing heavy proprietary trading, which were then went under and all over.
- The overly rise in speculative activity/volatility and following vices of it due to proprietary trading
- The use of proprietary trading firms as front companies
- The malpractice by brokers at disadvantage of retail investors by miss-direction and reverse activity in proprietary accounts.
However, the Finance Ministry is looking at this issue as one more gesture of ‘opening up window’ to Indian Financial markets.
Many international firms mainly from Asian countries are said to be pushing this regulation, mainly due to their (or their hirees/clients) heavy turn overs and trades in businesses other than financial; as insider source suggests.
It will always be hard to believe that there is less risk/possibility that such companies will/are not be used as front firms, as more than one way are available to trade in Indian markets for foreign firms.
However it will also be left to seen if any type of overall turnover and exposure limits are set for such PT firms or not as well as under which category SEBI wants them to register with it, if not under broking firm.
However it will also be left to seen if any type of overall turnover and exposure limits are set for such PT firms or not as well as under which category SEBI wants them to register with it, if not under broking firm.
May be, if the exchanges (both BSE and NSE) starts seriously thinking about rising participation of small traders/investors; we would not have to worry about the impact of PT on stock market gyrations while keeping other possible negative issue to trade, commerce and corporate bureaucracy.
It is incidental to note that Nomura (a Japanese Financial major) approached FIPB (foreign investment promotion board of India) in April-2009 to expand into proprietary trading business.
It is incidental to note that Nomura (a Japanese Financial major) approached FIPB (foreign investment promotion board of India) in April-2009 to expand into proprietary trading business.
