CBI set to probe NSEL crisis

With Finance Minister P Chidambaram on Thursday saying the Central Bureau of Investigation (CBI), the Forward Markets Commission (FMC) and the Ministry of Corporate Affairs (MCA) will look into the payment crisis at National Spot Exchange Ltd (NSEL), the probe net on the exchange looks set to widen.

Chidambaram said the three would look into different aspects of the troubles at NSEL, “which flouted rules from Day-1”, and take action under their respective jurisdictions. He added the income tax department was also checking the financial details of NSEL investors to see if any black money was involved.

A committee headed by Economic Affairs Secretary Arvind Mayaram had on Monday given its report on NSEL to the finance minister.

“The Mayaram panel report has suggested CBI, FMC and MCA must take appropriate action. They have listed the irregularities... They will take action,” Chidambaram said at a press conference here.

FMC might file its report in a couple of days, after which the three bodies would decide on the action, he said.

A CBI official said the agency was in the process of verifying the NSEL complaint. It was looking into the aspect of criminal offence to find out if there was an instance of fraud or cheating.

The government had received a complaint from investors but not referred the matter to CBI yet. The agency, therefore, was also trying to establish whether the probe in this matter came under its jurisdiction, a senior CBI official said.

Ruling out similarities between the crises at Satyam and NSEL, Chidambaram dropped hints that the government might not bail out the people that had put their money in the exchange, saying they invested with open eyes, knowing full well they were investing in an unregulated entity. “The government does not come into the picture at all,” he added.

Chidambaram said NSEL was not a registered or recognised association under FMC; it got exemption even before it started its business.

“In the way NSEL started business, there’s much more than meets the eye. People seem to have given money to NSEL promoters, knowing fully well that it is not a regulated entity... Many of them made money in initial stages and some lost money now... I have seen the exemption order. Now, whether it is valid or not has to be examined.” he said. o f the 17,000 investors who put their money in NSEL — which is now grappling with a Rs 5,600-crore payment crisis — 9,000 traded through eight top brokers, including Anand Rathi, Motilal Oswal, India Infoline and Systematix. According to the finance minister, the investors would definitely move court, as it is a matter between them and the company.

The government had in 2007 exempted NSEL from provisions of the Forward Contracts Regulation Act (FCRA) to operate one-day forward commodity contracts.

The exemption was given on some conditions, including delivery of commodities within 11 days and a bar on short-selling by members of the exchange. “From Day-1, NSEL was violating the very conditions under which it claimed it could do business,” he said.

The Mayaram panel had suggested NSEL’s troubles had no systemic risk of an impact on other markets. However, Chidambaram said he had asked both the Securities and Exchange Board of India (Sebi) and FMC to keep a careful watch. NSEL, part of the Jignesh Shah-led Financial Technologies group, had to suspend trading on July 31 after a government directive. It had committed itself to clearing its dues to investors in tranches through weekly payments. But it has so far defaulted on its weekly obligations for six weeks in a row.

Two other trading platforms — Multi Commodity Exchange and MCX-Stock Exchange — are also Financial Technologies-promoted entities. On whether the government was looking at changing the management of other entities with the same promoters, Chidambaram said: “Let us wait for the regulator’s report.”


Supreme Court order on tainted MPs: FM accuses BJP of changing stand
Under attack from the Opposition for bringing an ordinance to protect lawmakers from immediate disqualification, the Centre on Thursday hit back, accusing BJP of changing its stand on overturning a Supreme Court judgment on the issue. Finance Minister P Chidambaram had said in an all-party meeting on August 13 that there was a “unanimous demand” that something be done in relation with the Supreme Court judgment on Sections 62(5) and 8(4) of the Representation of People Act. “They are entitled to change their mind but they should not ask everybody to do so,” he said on Thursday.

Barack Obama asked to address India's discriminatory trade practices

Washington: Hours before the arrival of Prime Minister Manmohan Singh here, as many as 18 influential American groups asked President Barack Obama to address India's alleged discriminatory trade practices when he meets the Indian leader at the White House.

"India's discriminatory trade policies put American businesses at a disadvantage, place manufacturing jobs at risk, and jeopardize India's ability to grow its economy," said Alliance for Fair Trade with India (AFTI) co-chair and National Association of Manufacturers vice president of International Economic Affairs Linda Dempsey.

"The business community, elected officials, and the administration are united in their concern with these protectionist policies. We urge President Obama to seek immediate and concrete solutions that can lead to growth in the American and Indian economies alike," she said.

In the letter sent to Obama Thursday, the organisations highlighted the alleged harmful trade policies of India which include a failure to protect IP rights, forced local production of certain information technology and clean energy equipment, and revocations of patents and compulsory licenses for innovative medicines.

These unfair policies are designed to benefit a few Indian corporations at the expense of manufacturing and jobs in the United States and other countries around the world, they said in the letter.
 "In the last 18 months, India has consistently failed to recognise international intellectual property rights, hindering India's path to an innovative and knowledge-based economy," said Mark Elliot, co-chair of AFTI and executive vice president of the US Chamber of Commerce's Global Intellectual Property Centre.

"During his meeting with Prime Minister Singh, President Obama has the opportunity to promote a trade environment that fosters innovation and creativity, creates high-quality jobs, and advances global economic development," he said.

The letter to Obama by 18 business organisations adds to the growing anti-India campaign here.

This week, a bipartisan group of governors highlighted the impact India's unfair trade practices have on jobs in states across the US in a letter to Obama.

Additionally, more than 170 US Representatives and 40 Senators expressed concern over the trade environment in India that puts American jobs and industries at risk in letters to the administration earlier this year.

GAAR to come into effect from April 1, 2016

New Delhi: The controversial GAAR provision, which seeks to check tax avoidance by investors routing their funds through tax havens, will come into effect from April 1, 2016, a government notification said.

The provision of General Anti Avoidance Rules (GAAR) will apply to entities availing tax benefit of at least Rs 3 crore, according to the notification dated September 23.

It will apply to foreign institutional investors (FIIs) that have claimed benefits under any Double Tax Avoidance Agreement (DTAA).

Investments made by a non-resident by way of offshore derivative instruments or P-Notes through FIIs, will not be covered by the GAAR provisions.

Investments made before August 30, 2010, will not be scrutinised under GAAR, it said, adding the provisions will apply to assessees that obtain tax benefits on or after April 1, 2015.

"Stock markets will have a lot to cheer as FIIs which do not seek to avail of treaty benefits will not be subjected to GAAR. Investment in Participatory Notes will not be subject to GAAR," Deloitte Haskins & Sells Partner N C Hegde said.

The GAAR provisions were introduced in the 2012-13 Budget by then Finance Minister Pranab Mukherjee to check tax avoidance and were to have come into effect from April 1, 2014. The proposal generated controversy, with investors getting apprehensive about harassment by tax authorities.

To soothe the nerves of jittery investors, Finance Minister P Chidambaram in January announced the postponement of the implementation of Chapter X-A of the I-T Act (dealing with GAAR) by two years to April 1, 2016.

A business arrangement can be termed 'impermissible' if its main purpose is to obtain tax benefit. Under the original GAAR proposals, the anti-tax avoidance provisions could be invoked "if one of the purposes" was to obtain tax benefit.

"Where a part of an arrangement is declared to be an impermissible avoidance arrangement, the consequences in relation to tax shall be determined with reference to such part only," the notification said.

The assessing officer has to issue a show-cause notice, with reasons, to invoke GAAR provisions and also has to give an opportunity to an assessee to explain whether an arrangement was 'impermissible.'

The government's decision to amend the provisions was in response to fears by investors that the tax department, armed with discretionary powers, would crack the whip even in cases where tax avoidance was not the intent.

The notification is broadly in line with recommendations of the Parthasarathi Shome Committee, which was set up by Prime Minister Manmohan Singh in July last year to address the concerns of investors.

"From the notification, it is apparent that many recommendations of the Shome Committee have been accepted. However, the benefit of grandfathering has been limited - firstly, to investments made before August 1, 2010, and secondly, only for benefit up to March 31, 2015," said Rahul Garg, Direct Tax Leader at PwC India.

FCNR golden goose: Great returns on borrowed capital

Foreign banks are scrambling to raise dollar deposits from non-resident Indians — even tempting them with loans — to open their foreign currency non-resident (bank), or FCNR (B), deposit accounts in India.

The move comes after the Reserve Bank of India (RBI), as part of its efforts to stem the rupee’s depreciation, opened a special window for swapping FCNR (B) dollar funds of three years or more at a concessional rate and offered various other incentives, including cheap dollar-rupee swap rates.

Observers say this has offered Indians residing abroad an opportunity to increase their income manifold using borrowed capital.

The process, as bankers and market participants explains, begins with a foreign bank requesting a non-resident to open a FCNR (B) deposit account with its India unit. The bank immediately offers the customer a loan against this deposit. The customer uses the loan to create another FCNR (B) deposit account, against which he is again given a loan. The process is repeated eight to 10 times. The customer benefits as he earns more interest on FCNR (B) deposits than he pays on loans against those.

Some of the Indian banks with foreign branches have also approached their non-resident customers to raise FCNR (B) deposits, but observers say these lenders are not as aggressive as their foreign rivals.

Industry analysts say, using this mechanism, non-resident Indians (NRIs) can make a net return that is significantly higher than the interest rates offered on deposits in developed markets like the US. The returns would easily lure NRIs. According to some estimates, by putting up just 10 per cent of the deposits, the client effectively makes between 18 and 21 per cent on the dollars.
On September 4, 2013, in an almost desperate move to arrest the slide the rupee, RBI had announced a window for swapping FCNR (B) dollar funds, mobilised for a period of at least three years, at a fixed rate of 3.5 per cent a year for the duration of the deposit. The scheme, the central bank had said, would remain operational until November 30, 2013.

In other words, the banking regulator is now permitting lenders to convert three-year FCNR (B) dollar deposits into rupees at 3.5 per cent, even though the swap cost, considering the recent rupee-dollar forward rates, is estimated to be more than six per cent. This has encouraged banks to mobilise FCNR (B) dollar deposits, as they can reduce their cost of fund by at least 250 basis points using this window.

“It is a win-win situation for all. The interest rates offered to non-residents on three-year FCNR (B) deposits in India are significantly more than the current dollar swap rate of 80 basis points a year for a comparable tenure. Banks will benefit, as they will have access to low-cost funds. And, ultimately, this will increase dollar flows into India,” Param Sarma, director and chief executive of NSP Treasury Risk Management Services, says.

Market participants expect banks to bring in over $10 billion through this route which will probably avoid the need for an immediate sovereign bond issue by the government.

“The swap window was necessitated by a sharp depreciation in the rupee and need to bridge the current account gap. There was a need for one large chunk of dollar inflow, which probably led to the introduction of this scheme. However, it is a subsidy, assuming the rupee-dollar swap cost is currently over six per cent. This subsidy will have to be borne by the country,” says Mecklai Financial Deputy CEO Partha Bhattacharyya.

Some industry analysts believe the subsidy burden on Indian taxpayers because of this move might be as high as Rs 2,000 crore a year, assuming banks bring in $10 billion of FCNR (B) deposits.

“We discontinued FCNR (A) deposits since we did not want to bear the entire currency risk, and these deposits also violated IMF (International Monetary Fund) conditions. But by allowing swap at a concessional rate of 3.5 per cent for FCNR (B), we are going back to the FCNR (A) regime, at least partly. I believe, we should be explicit in saying what would be the estimated cost of this subsidy, since the deposits might run up to five years,” Ranade adds.
The process, however, has raised concerns of systemic risk.

“The 2008-09 crisis was triggered by over-leveraging. We are again seeing foreign banks encouraging leveraging. There are reports that lenders are offering NRIs upfront loans against FCNR (B) deposits and repeating the process. Such leveraged money can leave as abruptly as it comes in, thereby increasing systemic risk,” Ajit Ranade, chief economist of Aditya Birla Group, says.

Chidambaram and Modi are sparring over growth figures. Who is correct?

The finance minister says the BJP Prime Ministerial nominee's claim that economic growth rate during the tenure of the Atal Behari Vajpayee government was 8.4% a year on average. Calling Modi's claim a 'fake encounter' with facts, Chidambaram says the average annual growth for the six-year NDA period stood at 6% and that for the last five years at 5.9%. Obviously one of the two is wrong. Is it Chidambaram or Modi? Do share your views with us.

Oberoi Realty share sale begins, stock falls 3%

Oberoi Realty is trading lower by 3% at Rs 164 on NSE after the real estate firm’s share sale programme for diluting 3.49% of the promoter’s stake commenced today at bourses.

The company’s CMD and promoter Vikas Oberoi will sell 11.4 million shares at Rs 158 per share through stock exchanges to meet market regulator Sebi's guidelines on minimum public share holding norm, Oberoi Realty said in a regulatory filing.

As on June 30, 2013, the promoters had 78.49% in the company and they need to pare their stake to 75% for meeting Sebi guideline on minimum 25% public shareholding for private sector listed companies.

The stock hit high of Rs 165 and low of Rs 163 so far. A combined around 20,000 shares change hands on the counter in early morning deals on NSE and BSE.

RBI assures Street on liquidity management

The Reserve Bank of India (RBI) on Wednesday assured the market it was closely monitoring liquidity conditions. It added it would take appropriate action, including open market operations, to ensure adequate liquidity was available to support the flow of credit to productive sectors of the economy.

Experts said the statement would result in government bond yields falling further on Thursday.

Beginning with the mid-quarter review of monetary policy on Friday, RBI began a calibrated unwinding of the exceptional measures announced since July to restore normalcy to financial flows. Currently, RBI is injecting about Rs 1.5 lakh crore into the system on a daily basis, through the liquidity adjustment facility, the export credit refinance facility and the marginal standing facility.

However, despite this, liquidity conditions have been tightening, as shown by the hardening of yields in the government securities market, owing to uncertainty on the government’s borrowing programme for the second half of 2013-14 and the prospective effects of banks’ half-yearly account closure. The seasonal pick-up in credit demand, the festive-season-related demand for currency and the sluggish deposit growth have also contributed to the tight liquidity.

On Wednesday, the yield on the 10-year 7.16 per cent benchmark government bond closed at 8.79 per cent, compared with its previous close of 8.84 per cent. Experts said the RBI’s assurance was necessary, as two government bond auctions were scheduled for this week.

On Monday, a government bond auction for a notified Rs 15,000 crore devolved partially on primary dealers to the tune of Rs 4,030 crore. On Friday, RBI would auction government bonds for a notified Rs 14,000 crore.