February 2014

RBI in Mid-Quarter Monetary Policy Review

Reserve Bank of India (RBI) in its mid-quarter Monetary Policy Review, announced on 18 December 2013, has kept the policy rate unchanged at 7.75%. The move was unexpected in light of the recent spike in inflation, especially food inflation. This has come as welcome relief for the industry which already is battling gloomy economic environment as indicated 1.8% growth in industrial output in November 2013. The RBI’s policy decision to keep the policy rate unchanged is based on the assessment that there exists great deal of uncertainty with respect to the short-term path of inflation from its high current levels. Besides, given the weak state of the economy, RBI felt that it would be unwise to adopt an overtly reactive policy action. It would be more prudent to determine the lag-effect of monetary policy.

Thus, on the basis of an assessment of the current and evolving macroeconomic situation, the RBI decided to:

• Keep the policy Repo Rate under the Liquidity Adjustment Facility (LAF) unchanged at 7.75%, and

• Keep the Cash Reserve Ratio (CRR) of scheduled banks unchanged at 4.0% of the Net Demand and Time Liability (NDTL).As a result, the reverse repo rate under the LAF will remain unchanged at 6.75%, and the Marginal Standing Facility (MSF) rate and the Bank Rate at 8.75%

About Policy Rates

Basis points: It is the increase in interest rates in percentage terms. For instance, if the interest rate increases by 50 basis points (bsp), then it means that interest rate has been increase by 50%. One percentage point is broken down into 100 basis points. Therefore, an increase from 2% to 3% is an increase of one percentage point or 100 basis points.

Repo rate: Repo rate is the policy rate and is part of RBI’s Liquidity Adjustment Facility (LAF). It is the rate at which commercial banks borrow from the RBI by selling their securities or financial assets to the RBI for a short-period of time. It comes with an agreement that the sold securities will be repurchased by the commercial banks from the RBI at a future date at predetermined price. The repo rate is used by the central bank to increase liquidity in the system.

Reverse repo rate: Reverse Repo Rate is also a part of LAF. It is the rate of interest at which the central bank borrows funds from other banks for a short duration. The banks deposit their short term excess funds with the central bank and earn interest on it. This rate is used by the central bank to absorb liquidity from the economy. Generally it is one percentage less than the Repo rate. Bank rate: The only way the bank rate is different from the repo rate is that the bank rate is the rate at which banks borrow money from the central bank without any sale of securities. It is generally for a longer period of time.

Cash reserve ratio: CRR is the minimum percentage of cash deposits that banks must keep with the central bank. The current rate is 4%, which means for a cash deposit of Rs. 100, the bank has to park 4 rupee with the central bank. Marginal Standing Facility: The Reserve Bank of India in its monetary policy for 2011-12 introduced the marginal standing facility under which banks could borrow funds from RBI when there is a considerable shortfall of liquidity. This measure has been introduce by RBI to regulate short-term asset liability mismatches more effectively. Under this facility, banks can borrow up to 1% of their net demand. Liquidity Adjustment Facility: Under this facility, banks borrow from the central bank by pledging government securities.

Statutory Liquidity Ratio: This is the percentage of deposits that banks must mandatorily hold in the form of government bonds. SLR bonds are liquid assets that can be sold at a short notice to meet any unexpected demand from depositors

PPPAC appraised five Port Projects

The Public Private Partnership Appraisal Committee (PPPAC-a high level committee of the Government of India) on 30 December 2013 appraised five proposals in the Port Sector. These projects will now be recommended for grant of final approval by the Cabinet Committee on Economic Affairs (CCEA). For this purpose of approval of the CCEA, a Cabinet Note will be submitted by the Ministry of Shipping. The five projects are

• Development of 4th Container Terminal at Jawaharlal Nehru  Port Trust (JNPT) on DBFOTDesign, Build, Finance,Operate and Transfer basis

• Development of Container Terminal at Ennore Port Limited (EPL) on DBFOT

• Development of Multipurpose Cargo at Mumbai Port Trust (MPT) on DBFOT

• Development of Mega Container Terminal at Tuna Tekra at Kandla Port (KPT) on BOT

• Development of Container Terminal at Diamond Harbour at Kolkata Port Trust (KoPT) on BOT

These projects are proposed to be awarded in the current financial year by various Major Ports for implementation under Public Private Partnership (PPP) mode. The proposed projects are to create an additional capacity of 150 MMTPA with an investment of about 17630 Crores rupees. In the year 2013, the Ministry of Shipping has so far conveyed approval for 16 projects against a target of 30 and the major ports have already awarded these projects. Of the 16 projects that has been granted an approval includes six under PPP and 10 projects are under non-PPP mode. It is expected that these projects will add a capacity of 89 MMTPA with an investment of 4200 crore rupees.

PSB’s to Act as Insurance Brokers

The Union Finance Ministry on 23 December 2013 directed public sector banks (PSBs) to act as insurance brokers from 15 January 2014. In the Budget speech 2013- 14, the Finance Ministry remarked that banks will be permitted to act as insurance brokers to increase insurance penetration and mis-selling of insurance products

The Guidelines are as follows:

• At present the banks are allowed to sell products of one life, one nonlife and one health insurance Company.

• There is an arbitrage available for private sector banks since it is not made mandatory for them to sell multiple companies products.

• Recently Reserve Bank of India (RBI) released the guidelines for banks to become brokers with stringent capital requirements

• Banks with large bad loans, low capital and losses may not qualify to start insurance broking firms. The Insurance Regulator and Development Authority (IRDA) on August 2013 released the final guidelines of bancassurance that the companies must not have more than a 50% exposure to any one client. For the life insurance sector, the bancassurance (corporate agencybank) channel accounts for 30% of total new business premium collection.

About Bancassurance

• Bancassurance is the bank insurance model (BIM).

• Banacassurance is the partnership between a bank and an insurance company

Financial sector regulators asked to implement FSLRC proposals

Union Finance Minister P Chidambaram told the regulators must implement proposals of the Finance Sector Legislative Reforms Commission (FSLRC).The Finance Sector Legislative Reforms Commission (FSLRC) report contains 12 key proposals and these do not require legislative changes. According FSLRC report’s proposal, financial sector regulators likely to take serious action with higher penalties on violators and time bound
investigations that would act as deterrents and improve consumer protection. The report included a draft Indian Financial Code that is expected to replace the current financial sector legislations but is unlikely to be tabled in Parliament soon. The Financial Stability and Development Council on October 2013 had decided to finalize an action plan for implementation of all FSLRC principles on regulatory governance, transparency and improved operational efficiency that do not require legislative action. The FSLRC proposals that called for penalties discourage the future violations as a multiple of the illegitimate gain of violations. Regulators should also put in place internal manuals on conducting investigations. The investigating officer would be kept different from the officer who would decide the penalty for the crime.

India’s trade deficit with China surges to 29.5 billion dollar

According to the data released by the China’s General Administration of Customs on 13 December, India’s trade deficit with China reached a record $29.5 billion in the period January-November 2013. The trade deficit with China in 2013 was higher than the trade deficit in 2012. The numbers underline the sharp decline in once-burgeoning trade, which reached 74 billion dollar in 2011  when China became India’s biggest trading partner. In 2012, India’s the  trade deficit with China registered a10% decline to reach 66.50 billion dollar, even as both the countries announced an ambitious 100 billion trade target to be achieved by 2015. The decline was partly the result of 20% slump in India’s exports, largely on account of iron ore mining bans by China and partly on account of global slowdown. The latest figures have casted doubt on whether that target may be achieved. During the period January-November 2013, even as China’s trade with the rest of Asia as well as with its major Western trading partners has picked up, trade with India has remained in a slump. This suggests that causes were more structural rather than a reflection of global trends. After 11 months of this year, India’s exports to China reached only 14.87 billion dollar out of total bilateral trade of 59.24 billion dollar. Trade between the two countries was down by 2.7% year-on-year, even as China’s overall global trade rose 7.7%. This was driven by an export sector that has continued to show signs of revival, growing 12.7% and marking the second straight month of rising  exports. Trade has grown more than 50 times since 2006, when the Nathu La pass between Sikkim and the Shigatse prefecture in Tibet was reopened. Most of the trade is made up of imports of Indian goods into Tibet, which reached 12 million dollar in 2012. Authorities said the border market is open for only six months of the year — opening on May 1 and closing on November 30.

Cabinet approved FTA with ASEAN

The Cabinet approved free trade agreement between India and the Association of South East Asian Nations (ASEAN) on 19 December 2013. The Agreement of Trade in Services and Agreement was signed under the Comprehensive Economic Cooperation (CECA) between and the ASEAN. The CECA between India and ASEAN was signed in  2003. The Cabinet approved theAgreement on Trade Goods under the CECA with the ASEAN in 2009. The agreement will help to boost the movement of Indian professionals in the ASEAN region and also facilitate more investments in the services sector. In 2011, the implementation of the free trade pact in goods, made both sides engaged in widening the base of the pact by including services and investment sectors. Trade between India and ASEAN countries was of about 76 billion dollar in 2012- 13. Both the sides aim to increase it to 100 billion by 2015.

About ASEAN

• The Association of South East Asian (ASEAN) was established in 1967 in Bangkok, Thailand.

• The member of ASEAN countries are Brunei Darussalam, Burma, Cambodia, Indonesia, Laos, Malaysia, Philippines, Singapore, Thailand and Vietnam.

Business Confidence Index

Business Confidence Index (BCI) was released by the Confederation of Indian Industry (CII) for the period October- December 2013-14 on 29 December 2013. The Index indicated pick-up in the economic activity in the Quarter 4 of 2013-14. BCI rose sharply to 54.9 during the Q4 of 2013 -14 from 45.7 in the Q3 of 2013-14 indicating that there are signs of economic turnaround in the fiscal year 2013- 14.This improvement in BCI
happened because of improvement in export performance, said the CII Director-General Chandrajit Banerjee. The growth in BCI for the Q4 came as a major relief for the Indian economy which has braved the onslaught of the slowdown for the last several quarters and been awaiting the return of growth. However, the BCI also revealed downside risks to the economy. These include: domestic economic and political instability, slackening
consumer demand, high level of corruption, persistent high inflation and risk from exchange rate volatility.

HSBC Business Confidence Index

HSBC Bank Middle East Limited has teamed up with Middle East Economic Digest and YouGov to create a unique index of business sentiment in the Middle East. The first edition of the HSBC - MEED Middle East Business Confidence Index was published in the Middle East Economic Digest magazine on 18 June. HSBC Trade Confidence Index for India stood at the highest — 142 points, followed by UAE (132 points) and Indonesia (127 points).

Currency swap agreement between RBI and Bank of Japan

Reserve Bank of India (RBI) and Japan’s Central bank, Bank of Japan, decided on 18 December 2013 to enhance the bilateral currency swap arrangement from 15 billion dollars to 50 billion dollars. The agreement would help bring stability in the financial markets in both the countries. The deal is basically aimed at lifting sentiments and allaying any fears that India has insufficient cushion to finance its current account deficit (CAD) if the situation worsens drastically. The arrangement implies that, the Bank of Japan will accept rupees and give dollars to the Reserve Bank of India (RBI). Similarly, India’s central bank will take yen and send dollars to the Bank of Japan. The arrangement will help stabilise the currencies of the two nations in time of contingencies. It can be put into operation whenever there is depletion of foreign exchange reserves or speculators hammer the
currencies. Further, this will help reduce the demand for dollars in the short-term and boost exports and could be effective hedge against the volatility in the foreign exchange market. India should only enter into such agreements with countries with which it does not have a big trade imbalance. The currency swap arrangement was first signed in 2008 and was limited to 3 billion dollars. In 2011, the deal was renewed and the size was increased to 15 billion dollars.

What is Currency Swap ?

A currency swap is defined as the exchange of principal and interest in one currency for the same in another currency. It is considered to be a foreign exchange transaction and is not required by law to be shown on a company’s balance sheet. For example, suppose a U.S.-based company needs to acquire Swiss francs and a Swiss-based company needs to acquire U.S. dollars. These two companies could arrange to swap currencies by establishing an interest rate, an agreed upon amount and a common maturity date for the exchange. Currency swap maturities are negotiable for at least 10 years, making them a very flexible method of foreign exchange.

Fiscal deficit to touch 5.2%

Ratings agency CRISIL (Credit Rating Information Services of India Limited) on 24 december 2013 said government’s fiscal deficit would touch 5.2% during current Fiscal , above the target by 0.40%. In the Union Budget 2013-14 , government had set the target to curb the fiscal deficit by 4.8%. The Centre can reduce its fiscal deficit by as much as 20000 crore rupees this fiscal by using cash reserves of public sector units. The top 20 public sector undertakings will have a cash reserve of 160000 crore rupees by March 2014 and are comfortably placed to pay a special dividend.

The public sector undertakings considered for this report include Bharat Electronics, Bharat Heavy Electronics, Bharat Petroleum Corp, Coal India, Container Corporation, Engineers India, Gail, MMTC, MOIL, Nalco, Neyveli Lignite Corp, NHPC, NMDC, NTPC Ltd, Oil India, Oil and Natural Gas Corporation, Power Grid Corporation, Shipping Corporation, SJVNL, and Sail.

About Crisil

CRISIL - Credit Rating Information Services of India Limited.CRISIL is a global analytical company providing ratings, research, and risk and policy advisory services. CRISIL’s majority shareholder is Standard & Poor’s, a division of McGraw-Hill Financial and provider of financial market intelligence. Its rating capabilities span the entire range of debt instruments and it has worked across the corporate strata, from large corporates in the country to the SMEs.

What is fiscal deficit

Fiscal deficit is the difference between the government’s expenditures and its revenues (excluding the money it’s borrowed). A country’s fiscal deficit is usually communicated as a percentage of its gross domestic product (GDP). What are the causes of fiscal deficit

• Government spending • inflation

• lower revenue

• Slow economic growth

• Sluggish economic activities How fiscal deficit can be bad for India a large fiscal deficit is an indication that the economy is in trouble and will have reasons to worry. A high fiscal deficit could pose an inflation risk, minimize the growth of the economy, doubt the government’s abilities; it could affect the country’s sovereign rating, which in turn will limit foreign investors from looking at India as one of the investment hubs

CIL allowed to pump gas from CBM mines

The Cabinet Committee on Economic Affairs (CCEA) allowed state-owned Coal India Ltd (CIL) to pump methane gas trapped in coal seams of its existing mines. The decision by the CCEA would open a new revenue stream for the world’s largest coal miner CIL. Further it would help unlock several mines that have remained out of bounds because of the presence of the explosive gas that make mining unsafe.

Currently, rules and regulations prohibit mining firms from extracting CBM during mining as the policy does not allow for simultaneous extraction of methane (CBM) and coal. CBM extracted by CIL will be priced and
marketed as per the government’s gas pricing and utilization policy. At present, only those companies that successfully bid for mines with CBM are allowed to explore and produce such gas.

The government has auctioned 33 CBM blocks since 2001. CIL holds at least 20% of the estimated 60 billion tonnes of coal resources in India. It has several coal mines in eight States, which are estimated to have
CBM reserves of 3.5-4 trillion cubic feet.

Coalbed methane

Coal bed methane (CBM), coalbed gas, or coal mine methane (CMM) is a form of natural gas extracted from coal beds. It is an unconventional source of energy because methane gas is contained in the coal and does not migrate to other rock strata. In recent decades it has become an important source of energy in United States, Canada, and other countries. Australia has rich deposits where it is known as coal seam gas.

Coal Bed Methane Policy in India

CBM Policy was the Government of India on 19 July 1997 with an aim to offer the block for the exploration of CBM through open competitive bidding system. It provides infrastructure status to the exploration and exploitation of CBM It asks the contractor to pay royalty at a flat rate of 10% ad valorem as is applicable to natural gas. These amounts will accrue to the State Governments concerned.

The duration of the CBM contract will be for 38 years for blocks located in a normal area and 40 years for blocks in a frontier area. Government will not have any participating interest. Foreign/Indian companies could have 100% participating interest

Inflation Indexed Saving Bonds

The Reserve Bank of India (RBI) launched an inflation indexed saving bonds on 23 December 2013. The newly launched indexed savings bonds offer protection to retail investors from price rise. It will be open for subscription between 23 to 31 December. These securities were launched in the backdrop of announcement made in the Union Budget 2013-14 to introduce instruments that will protect savings from inflation, especially the savings of the poor and middle classes. The minimum limit for investment on the indexed saving bonds is 5000 rupees and maximum is 5 lakh rupees per annum. Interest rate on these securities would be linked to final
combined Consumer Price Index (CPI) Interest rate would comprise two parts - fixed rate (1.5%) and inflation rate based on CPI and the same will be compounded in the principal on half-yearly basis and paid at the time of maturity. Early redemptions would be allowed after one year from the date of issue for senior citizens (i.e. above 65 years of age) and 3 years for all others, subject to penalty charges at the rate of 50% of the last coupon payable for early redemption. Early redemptions, however, will be made only on coupon dates.

These securities will be issued in the form of Bond to be held in the Bond Ledger Account (BLA) and all the provisions of Government Securities Act, 2006 shall be applicable. The eligible investors for these bonds would include individuals, Hindu Undivided Family (HUF), charitable institutions registered under section 25 of the Indian Companies Act and Universities incorporated by Central, State or Provincial Act or declared to be a university under section 3 of the University Grants Commission Act, 1956 (3 of 1956). The eligible investors can approach three private sector banks — HDFC Bank, ICICI Bank and Axis Bank — and Stock
Holding Corporation of India.

The Ragarajan Panel Recommendation for Highway sector

The C Rangarajan panel recommended the guidelines prescribing bailout packages for developers of highway projects and the task of implementation lie with the National Highway Authority of India (NHAI. The panel
recommended that 75% of the premium amount payable to the government will be restricted in the first three years of the contract. Further it recommended that the road developers should submit the entire premium amount three years before the completion of full contract.

At present companies pay some amount of premium to the government in the first year of the project which keeps increasing in the subsequent years. The panel’s recommendations, if accepted, will lead to huge reduction in the premium payment in the first years. As a result, it will provide relief to the developers like GMR Infrastructure Ltd and GVK Power and Infrastructure Ltd and 23 other road developers.

February 2014

Sugar Industry got 6600 crore rupees free loan

The Cabinet Committee on Economic Affairs (CCEA) approved 6600 crore rupees interest-free loans to cash starved sugar industry on 19 December 2013. The loans will be provided by banks to sugar mills exclusively for making payments to sugarcane farmers, including arrears. The loans are equivalent to the excise duty paid by the mills in the past three years. The Interest subvention will be 12 percent which will be borne by the Centre and Sugar Development Fund. Mills have to repay the loans in five years and can avail of a moratorium on repayment for the first two years. The loans will help the industry reduce around 500 crore rupees annually of interest burden in the next 5 years. The informal Group of Ministers (GoM) set up by the Prime Minister under the chairmanship of Union Agriculture Minister Sharad Pawar recommended the proposal to address the cash crunch of the sugar industry. The sugar industry is facing financial problems due to higher cost of production and lower sugar prices in the wake of surplus production in the last few years.

FDI Policy for unlisted Companies modified

The Government of India on 6 December 2013 modified the FDI policy allowing unlisted companies to directly list on stock exchanges abroad. The move will facilitate raising of funds for acquisitions or clearing overseas debts. It may help India in containing its high Current Account Deficit (CAD).

Presently, unlisted companies are not allowed to directly list in overseas markets without prior or subsequent listing in the Indian market.

According to the Revised FDI Policy;

1. Unlisted companies shall be allowed to raise capital abroad without the requirement of prior or subsequent listing in India initially for a period of two years.

2. The capital raised abroad may be utilised for retiring outstanding overseas debt or for operations abroad including for acquisitions.

3. In case the funds raised are not utilised abroad, the company should repatriate the funds to India within 15 days and park it with a scheduled bank and “may be used domestically”.

4. While raising funds abroad, the  listing companies would have to be fully compliant with the FDI policy.

5. The listing company would also have to comply with the instructions on downstream investment and the criteria of eligibility of who can raise funds through American depositary receipts (ADR) or global depository receipts (GDR) would be as prescribed by the government.

6. The new scheme will be implemented on a pilot basis for a period of two years

Unlisted Company: a company whose shares are not traded on a stock exchange. Its shares are therefore not available for trade to the general public.

Listed company: a company whose shares are bought and sold on a particular stock market. The share price of a listed company is quoted and traded on a stock exchange.

Justice Sodhi Committee submitted report

The High Level Committee to Review the SEBI (Prohibition of Insider Trading) Regulations, 1992 constituted under the Chairmanship of Justice N.K. Sodhi on 7 December 2013 submitted its report to SEBI Chairman, UK Sinha at Chandigarh. Justice N.K. Sodhi has been the former chief justice of Karnataka and Kerala High Courts and has been the former presiding officer of the Securities Appellate Tribunal. The Committee has made many recommendations to the legal framework for prohibition of insider trading in India. It has also focused on making this area of regulation more predictable, precise and clear by suggesting a combination of principles-based regulations and rules that are backed by principles. The Committee has also suggested that each regulatory provision may be backed by a note on legislative intent.

Some features of the proposed regulations are:

• While enlarging the definition of “insider”, the term “connected person” has been defined more clearly and immediate relatives are presumed to be connected persons, with a right to rebut the presumption. The term “immediate relative” would cover close relatives, who are either financially dependent or consult an insider in connection with trading in securities.

• Insiders would be prohibited from communicating, providing or allowing access to UPSI unless required for discharge of duties or for compliance with law.

• The regulations would bring greater clarity on what constitutes unpublished price sensitive information (UPSI) by defining what constitutes generally available information (essentially, information to which non- is criminatory public access would be available). A list of types of information that may ordinarily be regarded as price sensitive information has also been provided.

• Trading in listed securities when in possession of UPSI would be prohibited except in certain situations provided in the regulations.

• Insiders who are liable to possess UPSI all round the year would have the option to formulate pre-scheduled trading plans. In such cases, the new UPSI that may come into their possession without having been with them when formulating the plan would not impede their ability to trade. Trading plans would, however, be required to be disclosed to the stock exchanges and have to be strictly adhered to.

• Conducting due diligence on listed companies would be permissible for purposes of transactions entailing an obligation to make an open offer under the Takeover Regulations. In all other cases, due diligence would be permissible subject to making the diligence findings that constitute UPSI generally available prior to the proposed trading. In all cases, the board of directors would need to opine that permitting the conduct of due diligence is in the best interests of the company, and would also have to ensure execution of nondisclosure and non-dealing agreements.

• Trades by promoters, employees, directors and their immediate relatives would need to be disclosed internally to the company. Trades within a calendar quarter of a value beyond 10 lakh rupees or such other amount as SEBI may specify, would be required to be disclosed to the stock exchanges.

• Every entity that has issued securities, which are listed on a stock exchange or which are intended to be so listed would be required to formulate and publish a Code of Fair Disclosure governing disclosure of events and circumstances that would impact price discovery of its securities.

• Every listed company and market intermediary is required to formulate a Code of Conduct to regulate, monitor and report trading in securities by its employees and other connected persons. All other persons such as auditors, law firms, accountancy firms, analysts, consultants etc, who handle UPSI in the course of business operations may formulate a code of conduct and the existence of such a code would evidence the seriousness with which the organization treats compliance requirements.

• Companies would be entitled to require third-party connected persons who are not employees to disclose their  trading and holdings in securities of the company

Merger and Acquisition Guidelines for Telecom Sector approved

The Empowered Group of Ministers (EGoM) headed by Finance Minister P Chidambaram, approved the guidelines on telecom merger and acquisition on 3 December 2013. In addition to this EGoM cleared the sale of over 400 MHz of 2G spectrum (1800 MHz band), which are to be auctioned in January 2014. EGoM also approved payment of market rates for spectrum above 4.4 MHz allotted to the acquired entity. The EGoM also cleared the sale of 403 MHz of 2G spectrum, which is valued at about 36000 crore Rupees, as per the reserve price recommended by the Telecom Commission.

The Telecom Commission has already approved the draft M&A guidelines, which says that the market share of a merged entity should not exceed 50 per cent of the subscriber base.

The much-awaited mergers and acquisitions guidelines would pave way for consolidation of mobile market which presently has 12 mobile operators. All these decision would now be forwarded to the Union Cabinet for final approval.

8TH Financial Stability Report

Reserve Bank of India (RBI) released its 8th Financial Stability Report (FSR) on 30 December 2013. The FSR was released against the backdrop of a mild positive market reaction to the announcement of tapering in the US Federal Reserve bond purchase plan from January 2014.

Major Highlights of the report are:

• India’s external sector has improved with reduction in Current Account Deficit (CAD). CAD is expected to be less than 3 per cent of the GDP during the current financial year 2013-14.

• Report revealed that the banking system is facing rising tide of bad loans. The gross non-performing assets (NPAs) in the system will rise to 4.6 per cent by September 2014 from 4.2 per cent in September 2013.

• The amount of recast loans touched an all-time high of 10.2 per cent of the overall advances as of September 2013.

• The state-run banks will be the worst-affected, the report said, pegging the gross NPAs for public sector banks at 4.9 per cent by March 2015. It projected the gross NPAs for private banks at 2.7 per cent in the same period.

• Asset quality continues to be a major concern for Scheduled Commercial Banks (SCBs). The Gross Non-performing Assets ratio of SCBs as well as their restructured standard advances ratio has increased.

• Five sectors — infrastructure, iron & steel, textiles, aviation and mining — have a high level of stressed advances. At system level, these five sectors together account for around 24 per cent of total advances of commercial banks and around 51 per cent of their total stressed advances.

• Due to the interconnectedness with banks, liquidity pressure is felt by the money market mutual funds (MMMFs) whenever redemption requirements of banks are large and simultaneous. Regulatory measures are taken to reduce the degree of interconnectedness seem to have been successful in reducing the liquidity risk in the system.

• However, macro-economic adjustment is far from complete, with persistence of high inflation amidst growth slowdown. Fall in domestic savings and high fiscal deficit are other major concerns for India.

• Macro stress tests on credit risk suggest that if the adverse macroeconomic conditions persist, the credit quality of commercial banks could deteriorate further. However, under improved conditions, the present trend in credit quality may reverse during the second half of 2014.

RIL allowed to sell gas at higher price with bank guarantee

The Cabinet Committee on Economic Affairs (CCEA) resolved the issue of Reliance Industries (RIL) to sell KG-D6 block gas at a higher price with effect from April 2014. RIL has been asked to provide bank guarantees that would be in force till an international court of arbitration gives its final ruling on whether RIL has willfully violated contractual obligations on 80 per cent of committed gas output or resorted to hoarding. The government said that details of the bank guarantee including its periodicity would be worked out by January 2014, taking into account the law ministry’s views. According to the government, the short-supply of gas at KG-D6 so far has been around 1 trillion cubic feet. About New pricing Formula The new pricing is based on the Rangarajan committee formula. The new formula will be valid for five years and applies only to new contracts or renewals when existing ones expire. It does not apply to contracts which contain a specific formula for natural gas price indexation or fixing. As per the Rangarajan formula, beginning 1 April 2014, all domestic gas will be priced at an average of international hub prices and the cost of LNG imported into India. The increased domestically produced gas price in the country would hover around 7-8/mmBtu dollar at the current rate. This would be almost double that of the current rate. This would also result in higher subsidy outgo, as the input costs for fertiliser and gas-based power plants will go up.

Benchmarks

There are two broad elements which are used for an average which will be used as an unbiased arm’s length price. These are

1. A price obtained by taking the cost of liquefied natural gas (LNG) imports into India under
long-term contracts and removing charges such as transportation to obtain a theoretical price at the point of production in exporting countries. This is known as the netback price. The government decided not to include spot import costs. It will be a weighted average.

 2. The weighted average of prices at three major gas trading points - the hub price at Henry Hub in the United States, the price at the National Balancing Point of the UK and the netback price at sources of supply for Japan.

Mauritius-India agreement on revised Tax Treaty

Mauritius and India agreed on 9 December 2013 to include Limitation of Benefit (LoB) clause in the revised tax treaty. This was revealed by the Mauritius Financial Services Commission (FSC) Chairman Marc Hein. He was in Mumbai to participate in an international taxation conference. While details of this clause in the India-Mauritius tax treaty are being worked out, LoB clauses aim to prevent treaty shopping or inappropriate use of
tax agreements by third-country investors. Treaty benefits are limited by this clause to those who meet certain conditions, including those concerned with business, residency and investment commitments of anyone seeking benefit of a Double Taxation Avoidance Agreement (DTAA).

Financial Services Commission (FSC) The FSC is Mauritius’ integrated regulator for global business companies and non-banking financial services sector. Marc Hein is its present chairman.

Double Taxation Avoidance Agreement (DTAA)

It is a tax agreement that India has with 65 nations. It means those Non-resident Indians (NRIs) who are the residents of the country in which they stay and pay income taxes in that country are eligible to pay a lower tax on their incomes earned in India in the same financial year. For example many Indian companies have offices in Mauritius and they route their investments to India through that country because the general taxation rates are  lower than compared to India. This means India gets to lose tax revenue as DTAA ensures that these investments are taxed at much lower rates than investments of the same quantity but not routed through Mauritius or any
other nation with which India has a DTAA. This is called Round tripping.

This also leads to conditions conducive to money laundering. Money laundering i s when the sources of money are not known. So it may be money earned through corrupt means and money meant for funding terrorist activities. Such money is called dirty money.

Direct transfer of Cash subsidy soon on kerosene

The government of India puts a way ahead to launched Cash subsidy on kerosene after the successful implementation of cash subsidy on LPG for BPL (below poverty line) families. The scheme would be known as DTCK (direct transfer of cash subsidy on PDS kerosene).

This would be on the lines of DBTL( direct benefit transfer of subsidy on LPG (cooking gas). The mode of implementation would be covered under two phases , In the first phase seven districts of three states would be covered under the subsidy. In Maharashtra , the scheme would be lunched in Nandurbar , Wardha and Amrawati . while in Rajasthan , Alwar , Ajmer and Udaipur would be covered. Similarly, the initiative would be covered in north Goa. So far , Centre had grant a subsidy of around 1700 crore rupees for DBTL , but now the exchequer would be expected to face a subsidy bill of 30000 crore rupees for providing fuel to BPL families. A pilot DTCK scheme has been running in Kotkasim tehsil of Rajasthan’s Alwar district since December 2011. The results have been encouraging.

What is direct transfer of cash subsidy :

The price of the commodity remain same as that of the market price , government itself decide the subsidized price and pay the difference between market price and subsidized price directly to the family of the BPL in their account. Instead of paying subsidy to the manufacturer , government directly pay cash to the poor people.

The change in the subsidy policy able to tackle the  following shortcomings of the system :

• Dual – pricing

• Black Marketing

• Unresponsiveness to customer needs

• Poor targeting of BPL population

• Diversion and leakages

• Under recoveries for Oil Manufacturing companies (OMCs)

Bolsa Família Program (BFP):

The largest and the most successful conditional cash transfer program is the Bolsa Família Program (BFP) in Brazil that covered close to 100 percent of Brazil’s poor in 2007. Under the programme, the government transfers cash straight to a family subject to conditions such as school attendance, nutritional monitoring, pre-natal and post-natal tests. The entire system is managed through efficient targeting, disbursement and regular monitoring of the disbursed funds.

Impact on government

• The new system is expected to reduce this cost and subsidy bill through better targeting

• In the Union Budget 2012-13, target is to keep 2012-13 subsidies under 2 percent of GDP and under 1.75 percent of GDP in the next 3 years .

Companies’ Foreign Funding Norms for Infra Projects eased

The Reserve Bank of India on 3 December 2013 eased norms for companies raising foreign funds for infrastructure projects. The new norms will help Companies to raise funds through the External Commercial Borrowing (ECB) route for their infrastructure projects through their holding firms or core investment firms. This will enable them to arrange finances for their projects faster and strengthen the flow of resources in the sector. The RBI also stated that such funds should be used in special purpose vehicles (SPVs) for a specific project. Presently, the SPVs are allowed to bring in ECB funds for infrastructure projects, while there were restrictions for parent firms in doing so. The Reserve bank, however, has listed a series of conditions to avail this facility.

What is External Commercial Borrowing?

External Commercial Borrowing is an instrument used in India to facilitate the access to foreign money by Indian corporations and PSUs. External Commercial Borrowings (ECB) refers to commercial loans in the form of bank loans, buyers’ credit, suppliers’ credit, securitized instruments (e.g. floating rate notes and fixed rate bonds, nonconvertible, optionally convertible or partially convertible preference shares) availed of from non-resident lenders with a minimum average maturity of 3 years.

Union Cabinet approved Reserve price for Spectrum Auction

The Union Cabinet on 9 December 2013 approved the finalization of the reserve price for the auction of spectrum in 1800 MHz band for all service areas. It also finalized the reserve price for auction of spectrum for 900 MHz band in metro in service areas of Delhi, Mumbai and Kolkata. The cabinet has approved the following points on the recommendation of the Empowered Group of Ministers: (i) The reserve price for 1800 MHz  band of 1765 crore rupees per MHz Pan India, which works out to be 8825 crore rupees for 5 MHz Pan India (ii) The reserve price for 900 MHz band of 360 crore rupees, 328 crore rupees and 125 crore rupees per MHz in Metro service areas of Delhi, Mumbai and Kolkata respectively. The decisions will help in further efficient utilization of the scarce natural resource of spectrum facilitating expansion of telecom
services in the country.

Deposit Requirements for members of the Debt Segment

Securities and Exchange Board of India (SEBI) on 19 December 2013 laid out the minimum deposit requirements for members in debt segment of the stock exchanges. SEBI on 20 January 2013 announced a separate debt segment on bourses and had amended norms to enable registration of the stock broker, proprietary trading member, clearing member and the self clearing member on platform.

In the newly issued circular, SEBI has said that the minimum capital requirements as per the norms for stock brokers and proprietary trading members will be applicable for the debt segment as well. As per the market regulator, SEBI for a member seeking registration in the debt segment, no deposit will be required if they are already member if some another segment on the stock exchange. It also said that the Clearing Member (CM)/Self Clearing Member (SCM) will have to deposit 10 lacks rupees. No exposure shall be granted against such deposit requirement of the Clearing Member/ Self Clearing Member. The circular also said that no deposit shall be payable in case a CM/SCM clears and settles trades only on gross basis for both securities and funds, and where no settlement guarantee is provided by the clearing corporation. This circular was issued in exercise of powers conferred under Section 11 (1) of the Securities and Exchange Board of India Act, 1992 to protect the interests of investors in securities and to promote the development of and to regulate the securities market.

CCEA noded to provide aid to sugar industry

The Cabinet Committee on Economic Affairs (CCEA) on 26 December 2013 approved the guidelines for providing financial assistance to the sugar industry for payment of cane price arrears. The expenditure for the scheme will be met fully from the Sugar Development Fund (SDF). The Central Government will provide an interest subvention up to 12 percent at a simple rate of interest for the additional working capital loans to the sugar undertakings. Banks will provide the additional working capital loan that is equal to last three sugar seasons excise duty, cess and surcharge on sugar. Sugar undertakings with loan classified Non Performing Assests (NPA) by the banks are also eligible for the loans only if the concerned state government will give a guarantee for their new loans. The interest subvention on the total loan has been provided for five year, which includes moratorium period of two years. In the principal repayments, no interest subvention will be provided for the period of defaults. The loans would be meant exclusively for effecting cane price payments by the sugar mills.

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