Lok Sabha clears Finance bill: India will grow faster if monsoon forecasts hold true, says Arun Jaitley

The passage of the Finance Bill will allow formation of the six-member monetary policy committee, which will include the RBI Governor and three government nominees. 

After two consecutive years of drought, finance minister Arun Jaitley said, India can grow faster if forecasts of a better monsoon hold true as that will improve agriculture and raise rural income.

While replying to a debate on the Finance Bill in Parliament, Jaitley said: “Economy, which had been expanding on strength of public investment, highest foreign direct investment (FDI) and urban demand, can grow faster if rural demand is added.”

Even though global economic outlook remains bleak, India remains the fastest growing major economy and has the potential to grow at “an even faster pace”, he added. Indian economy grew by 7.6 per cent in 2015-16 and is projected to grow by 7.5 per cent in the current year. Latest forecasts predict above-average rainfall in India after two years of drought.

After the reply, the House passed the Finance Bill that marks the culmination of the three-stage budgetary process in the Lok Sabha. The Bill will now go to Rajya Sabha.

Jaitley also ruled out rollback of 1 per cent excise on non-silver jewellery saying the levy was not applicable on small traders and artisans and only jewellers with more than Rs 12 crore turnover last year and Rs 6 crore for this year will attract the duty.

“I have not been able to understand the politics of hatred for ‘suit’ but love for gold,” he said, adding that if the Congress has objections to the levy, it can begin by removing the 5 per cent VAT on bullion in Kerala where it is the ruling party.

Jaitley also introduced amendments to the Finance Bill, 2016, for capital gains clarifying that the long-term capital gain period in case of unlisted securities has been reduced to 24 months from 36 months.

Separately, the Central Board of Direct Taxes, in a recent order to field formations, said that income arising from transfer of unlisted shares, irrespective of period of holding, would be taxable under the head capital gain. This has been done to reduce disputes and litigation as the assessing officer could earlier treat these gains as business income.

On black money, he said efforts of government have brought Rs 71,000 crore of undisclosed assets to the books. He, however, ruled out bringing agriculture income under the tax net, saying large farm-based income was rare and people using agriculture as front to hide income from other sources would be dealt with tax authorities.

Jaitley said tax notices have been sent to all the names of those holding offshore accounts that have been disclosed in the Panama papers and action will be taken against those illegally parking money abroad.

Highlighting the problem of non-performing assets (NPAs) of banks, Jaitley said, “NPA issue with banks is an issue of concern. Some loans may have been given wrongly. I am not going into who is responsible for it. But weakened business cycle due to global economy has also impacted bank balance sheets.” He added, “Hiding NPA will not resolve the problem. It should be reflected in balance sheet and addressed via capitalisation.” Jaitley said the government has drafted the amendments to the RBI Act, which will pave the way for creation of monetary policy committee, as was announced in the Budget.

The passage of the Finance Bill will allow formation of the six-member monetary policy committee, which will include the RBI Governor and three government nominees.

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India says will ensure that banks are well-capitalised

India has "good control" over stressed loans at state-owned banks and will ensure lenders are well-capitalised, junior finance minister Jayant Sinha said on Friday.

Speaking as senior officials from the banks, the Reserve Bank of India and the finance ministry held an annual meeting, Sinha said the government would allocate capital based on the banks' capital-adequacy ratios, performance and credit growth.

"We will provide more as necessary to ensure that our banks are well-capitalised," he told reporters.

"As far as the set of stressed assets is concerned, as far as the NPA (non-performing assets) situation is concerned, that we think we now have very good control over and of course (we are) working very closely with the RBI."

Some critics accused the government of skimping on a bailout for the ailing state banks after Finance Minister Arun Jaitley did not announce additional funding in his Feb. 29 budget.

He stuck to plans to provide state banks with 250 billion rupees ($3.7 billion) of new capital in the next financial year towards a sector-wide bailout that the government estimates will cost $26 billion over four years.

Stressed loans -- those that have already turned bad and those seen at risk of doing so -- amount to 8 trillion Indian rupees ($119 billion), or 11.25 percent of total loans, Sinha said on Friday.

A recent surge in bad loans at state-run lenders after their regulator ordered a clean-up has led rating agencies to suggest banks will need more capital support from the government to cover losses and meet Basel III global banking rules.

More than two-dozen state-run lenders account for over two-thirds of India's banking assets and some 85 percent of troubled loans in the financial sector.

($1 = 67.0630 rupees)

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Banks now have room to raise funds via tier 2 bonds: RBI

With the Reserve Bank of India (RBI) tweaking of banks’ core capital to include a part of real estate assets and foreign exchange, lenders will now have additional headroom to raise funds through tier 2 bonds, RBI deputy governor R Gandhi said on Thursday.

He told reporters on the sidelines of Gyan Sangam, a brainstorming session with financial sector players convened by the finance ministry, that Rs 25,000 crore of capital allocated for public sector banks in FY17 should be enough. “Banks can also go to the markets next year, so we believe it will be enough,” he said

On asset quality review, Gandhi said it is unlikely bad loans will spill over from FY16 to the next fiscal. “Spillover of bad loans unlikely in FY17 after the asset quality review,” he said. State-owned banks have been under severe stress arising out of delinquency in loans mostly belonging to infrastructure, power and steel sectors. As of September 2015, the stressed asset ratio — a combination of bad loans and recast assets — of public sector banks stood at 14.1%, versus 4.6% in private sector banks.

As per the RBI’s latest move, which is in sync with the Basel III capital norms, banks can account for 45% of their revalued real estate assets as tier 1 capital subject to riders.

The revised regulations on tier 1 capital include treating revaluation reserves, subject to conditions, as Common Equity Tier 1 (CET1) capital at a discount of 55%, instead of as tier 2 capital; treating foreign currency translation reserves, subject to conditions, as CET1 capital at a discount of 25%; and several directives on how to treat deferred tax assets vis-à-vis CET1 capital. These changes could improve the capital adequacy ratio of major PSBs by up to 100 basis points.

According to estimates, these relaxations, particularly that of treating revaluation reserves as CET1 capital, given the huge amounts of physical assets PSBs are sitting on, will free up capital upwards of Rs 30,000 crore-35,000 crore for them and upwards of Rs 5,000 crore for private sector banks.

Hinting that the RBI is looking at all such possible measures to augment the existing capital of banks, which would reduce the burden on them to raise fresh capital to a certain extent, governor Raghuram Rajan had hinted that the RBI is trying to identify non-recognisable capital, such as undervalued assets, already on bank balance sheets and could allow some of these to count as capital under Basel norms, provided a bank meets minimum common equity standards.

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Piramal Realty plans to invest Rs 16,000 cr in 4 years

Piramal said that the company is looking to increase its commerical portfolio as well in the coming years.

Piramal Realty, the real estate arm of Ajay Piramal-owned Piramal Group, plans to invest Rs 16,000 crore in development of real estate projects and acquisition of land, over the next 4 years.

Anand Piramal, executive director, Piramal Group told FE that while the company already has a roughly 9 million square feet of residential projects pipeline to be executed till 2020, the company is open to acquiring fresh parcels of land and distressed assets.

The company is also in the midst of developing an office project in Kurla, near Bandra Kurla Complex (BKC) ad-measuring 2.5 million square feet.

The company launched a luxury project at Byculla called Piramal Aranya, which will entail an investment of R4,300 crore over the lifecycle of the project.

The sea-facing 70-storey high rise residential project will be spread across 7 acres and is in close proximity to the 60 acre botanical gardens on the west.

In 2015, Goldman Sachs and Waurburg Pincus had invested a total of $434 million in Piramal Realty, giving the company a strong bandwidth to invest in real estate projects.

Piramal said that the company is looking to increase its commerical portfolio as well in the coming years. “As of now we just have one project, but going forward we would like to have a combination of both residential and commercial real estate.

With the expectation of 7%-8% growth in the Indian economy, the focus on commercial real estate will come back and we would like to have a healthy mix of both segments”.

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Budget 2016: Impact on alternative fund industry.

In the backdrop of slow global growth, turbulent financial markets and volatile exchange rates,one may say that expectations from the Union Budget 2016 were overall low. Amid a need to maintain fiscal discipline and with limited avenues to mobilise additional resources (except by increasing taxes), aspects like no substantial increase in service tax, no change in the structure of taxation for listed securities and no change in extension in holding period for an asset to qualify as longterm capital asset, all are signs of relief and indicators of a stable regime.

Having said that, the alternative fund industry, being the source of risk capital for Indian
entrepreneurs, had significant expectations from the Budget. They were hoping that the
government will significantly accept the recommendations of the Alternative Investment Policy Advisory Committee (AIPAC) formed by the Securities and Exchange Board of India (SEBI) under the chairmanship of NR Narayana Murthy. In fact, the report had a chapter dedicated to tax reforms required for the alternative funds industry.

While many of those recommendations could have been accepted, the Budget proposals fell
short of expectations in this regard. However, some proposals relevant to the alternative fund industry made their way and are summarized below: Withholding tax on distributions by Alternative Investment Funds (AIF): It is proposed that distribution of income by AIFs to nonresident investors shall not be subject to 10 per cent withholding tax provided such nonresident investor is eligible for tax treaty benefits.

This proposal will be warmly welcomed by the AIFs, specifically, the fund managers based in India, who were looking to raise capital from offshore investors, to capitalise on the recent FDI liberalisation allowing 100 per cent FDI in AIFs under the automatic route. However, it would have helped if the government had taken distributions to exempt resident investors or distributions of exempt income to residents out of 10 per cent tax withholding.

Applicable longterm capital gains tax rate to foreign funds: The issue of applicability of
reduced rate of 10 per cent tax on longterm capital gains arising on transfer of unlisted
securities for nonresidents is proposed to be resolved. It is proposed that such rate shall be
available on longterm capital gains derived on transfer of unlisted securities or shares of
company in which public is not substantially interested. While taxation of gains arising to most of the foreign funds would be protected under the applicable tax treaty, this amendment should help foreign funds in tax indemnity related discussions on exits.

Reduction in holding period: In another welcome move, the finance minister said that the
holding period of securities of unlisted companies to be treated as longterm capital asset is
proposed to be reduced from three to two years. However, enabling provisions to enact such amendment in the law seems to have been missed out.

Safe harbor rules largely unchanged: Allowing onshore asset management of offshore pool of capital has been a key demand of the alternative fund industry for more than three years. If enacted, the amendment will help the government not only in restricting export of intellectual capital but also raise additional revenues by way of income tax on fund management fees.

While two small amendments have been made (explained below), a lot was expected about
investment diversification, investor diversification and provisions relating to arm’s length
management fees. One hopes that these will be dealt through a separate notification for which the law provides for – though this needs some sense of urgency.

(i) Safe harbor rules were applicable to an eligible investment fund resident of a country /
specified association, with which India has entered into a double taxation avoidance agreement.

This section is proposed to be amended to also include a country which may be notified by the government. Here also instead of a country to be notified, what the industry expects is that the fund could be set up or established or incorporated in the countries with which India has a tax treaty.

(ii) Currently, an eligible investment fund is not permitted to carry on or control and manage,
directly or indirectly, any business in India or from India. This condition is now proposed to be restricted to controlling any business in India and not from India.
Place of Effective Management (POEM) effective from April 1, 2016: In order to provide clarity for implementation of the POEMbased residency test and also to address concerns of the stakeholders, it is proposed to defer the applicability of such rule by a year. However, it is expected that the government will soon finalise the detailed guidelines relating to determination of POEM for effective implementation.

MAT on foreign companies: With a view to provide certainty in taxation of foreign companies, it is proposed that MAT provisions shall not apply to foreign companies if it is from a treaty country and does not have a permanent establishment in India or it is not from a treaty country and is not required to register under the Companies Act.

New asset classes: Probably the last hurdle from tax standpoint for REIT/ InvIT, is proposed to be cleared in this Budget. Once enacted, dividend received by an REIT / InvIT from wholly owned special purpose vehicles (SPV) shall not be taxable in the hands of the trust nor will it be subject to dividend distribution tax (DDT) in the hands of the SPV.

Similarly, a new taxation regime for securitisation trusts and its investors has been provided.
Amongst others, tax passthrough status has been provided to income of securitisation trust
and income from securitisation trust would be taxable in the hands of investors. Further, 100
per cent FDI is proposed to be allowed under the automatic route in asset reconstruction
companies. For foreign portfolio investors regulated by SEBI, it is proposed that they shall also be allowed to invest 100 per cent of security receipts issued by the securitisation trust. Both provisions should help fund managers focusing on these asset classes in short to medium term.

Other important amendments include introduction of the Organization for Economic
Cooperation and Development's (OECD) recommendation on certain action plan of Base Erosion and Profit Shifting (BEPS) project, tax incentives for units located in International Financial Services Center, systematic phase out of tax incentives currently available under the tax laws and replacing it with tax incentive for startups and entities generating employment.

The industry still craves for clarity around characterisation of gains of an AIF to be treated as ‘capital gain’, extension of tax passthrough to all categories of AIFs and allowing retirement and pension funds invest in AIFs – though the circular issued yesterday should address one of the concerns in this regard (regarding characterization).

One would hope the government issues the necessary guidance to provide certainty on the
above issues, as these are a must for better development of the alternative fund industry.
Vikram Bohra is partner and Devang Ambavi is associate director manager, Financial Services Tax and Regulatory Services, PwC India.

RBI releases draft norms for account aggregators

Such NBFCs should have minimum net-owned funds of Rs2 crore and cannot provide any services other than account aggregation

The Reserve Bank of India (RBI) on Thursday released draft guidelines for setting up of non-banking finance companies (NBFC) that would act as account aggregators and provide customers with a single platform view of all their financial holdings across banking, insurance, mutual funds, provident funds and shares.

“At present, persons holding financial assets such as, savings bank deposits, fixed deposits, mutual funds and insurance policies do not get a consolidated view of their financial asset holdings, especially when the entities fall under the purview of different financial sector regulators. Account aggregators would fill this gap by collecting and providing information of customers’ financial assets in a consolidated, organized and retrievable manner to the customer or any other person as per the instructions of the customer,” RBI said in its release.

Such NBFCs should have minimum net-owned funds of Rs.2 crore and cannot provide any services other than account aggregation, the central bank said, adding that the account aggregator cannot support transactions in financial assets. Only NBFCs that have registered with the RBI will be allowed to undertake account aggregation. However, companies that aggregate accounts of only a particular financial sector governed by other regulators can be exempt from seeking RBI approval, the central bank said.

Initially, only financial assets whose records are stored electronically and are under the regulation of the financial sector regulators, namely RBI, Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority (IRDA) and Pension Fund Regulatory and Development Authority (PFRDA) shall be considered for aggregation, the draft norms said.

The NBFCs would provide account aggregation services in response to a specific application by the customer for availing such services and would be backed by appropriate agreements and authorisations, the draft norms said.

“No financial asset-related customer information pulled out by the account aggregator from the financial service providers should reside with the account aggregator,” the central bank said.

Pricing of services would be as per the account aggregator’s board-approved policy, RBI added.

In July 2015, RBI governor Raghuram Rajan had announced the intention of setting up such NBFCs for account aggregation.

The central bank has sought comment and feedback on the draft norms by 18 March.

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Will a new credit rating system for infrastructure projects help?

CARE expects the proposed system could help under-development projects with a rating agency stepping in at the pre-bid level of infrastructure projects

Mumbai: Finance minister Arun Jaitley on Monday announced the formation of a new credit rating system for infrastructure projects in the country for better credit enhancement.

A new credit rating system for infrastructure projects will give “emphasis to various in-built credit enhancement structures… instead of relying upon a standard perception of risk which often result in mispriced loans,” the budget statement said.

The intent seems to be to help infrastructure projects access credit from multiple sources and at better rates. However, it is unclear how the new system would be different from the existing credit rating scale put in place by credit rating agencies. It is also unclear whether the proposed rating system would be for operational projects or under-development projects or both.

“I have not seen the details, but if I draw a comparison with the banking rating system, how will it be different? Has the existing banking rating system helped?” asked a former government official, who has been closely associated to road project financing, but did not want to be named.

There are no clear answers as of now.

D.R. Dogra, managing director and chief executive officer of Credit Analysis and Research Ltd (CARE), expects the proposed credit rating system could help under-development projects with a rating agency stepping in at the pre-bid level of infrastructure projects. “A rating agency can help identify issues which lead to a lower rating at the pre-bid stage, which can then be addressed before private bids are invited,” said Dogra, adding that he is not aware of the details of the proposed credit rating system as it has not been discussed with rating agencies yet.

Not all are of the same view though.

A top official from another rating agency points out the new announcement speaks about credit enhancement. “Credit enhancement measures are taken only once the infrastructure projects are operational. This is the point where a refinancing can happen and bank credit can be replaced with bonds. A better rating makes the bonds market accessible in a better way,” he said. He refused to be identified as the agency is not aware what the actual fine print of the credit rating system would be.

Infrastructure consultant Vinayak Chatterjee, chairman for Feedback Infra Pvt. Ltd, is positive the new credit rating system would help the sector as the traditional rating methods do not fully take into account the risk in an infrastructure project which changes at different stages of the project life-cycle.

Even as the industry waits for details, a former rating agency official, who did not want to be named, said, “Need more clarity (on the details of the system), but mostly it would be inconsequential.”

DCB Bank buys 5.81% stake in Annapurna Microfinance

Deal values the micro lender at Rs 172 crore. 

DCB Bank Ltd has acquired a 5.81 per cent stake in Odisha­based Annapurna Microfinance Pvt Ltd for Rs 9.99 crore (about $1.5 million). 

The move strengthens the business partnership between the two companies, Murli M Natrajan, managing director and CEO at DCB Bank, said in a statement filed to stock exchanges. DCB’s microfinance initiatives help it achieve its financial inclusion goals, he added. 

DCB, formally known as Development Credit Bank, was founded in 1995. It has 176 branches in 17 states and two union territories in India. 

Gobinda Pattnaik, managing director at Annapurna Microfinance, said the transaction will help it strive forward to achieve its goal of serving the financially underserved. “This capital infusion is a mandate for growth,” he said. 

Annapurna focuses on rural locations of Odisha, Chhattisgarh and Madhya Pradesh. It has 14 branches each in Odisha and Madhya Pradesh and six in Chhattisgarh. It has half a million members and assets under management of Rs 720 crore

The latest transaction values Annapurna at Rs 172 crore. The firm had earlier also raised funding. In April last year, it secured Rs 25 crore in a Series C round of funding from Samridhi Fund, which is managed by SIDBI Venture Capital Ltd, a wholly owned subsidiary of state-run SIDBI and an existing investor in the firm. 

In 2014, the microlender raised Rs 30 crore in a Series B round of funding led by Belgian Investment Company for Developing Countries, with participation from the existing investor Incofin Investment Management's Rural Impulse Fund II.

The firm posted total income of Rs 61.61 crore for the six-month period ended September 20, 2015, up from Rs 22.69 crore a year earlier, according to its half-yearly audit report. Net profit jumped to Rs 6.85 crore from Rs 58 lakh.

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RBI allows banks to expand capital base to meet Basel III norms

Sun Capital: RBI allows banks to expand capital base to meet Basel III norms

At a time when public sector banks (PSBs) have been struggling with a low capital base, the Reserve Bank of India (RBI) has allowed banks to beef up its capital adequacy by including certain items such as property value, foreign exchange for calculation of its Tier-I capital.

The new norms revealed by the regulator suggest that banks can now include the value of the property while calculating its Tier-I or core capital base. But not the entire value of the property would be included; instead only 45 per cent of the property value would be counted.

However, this comes with caveats. For instance, the regulator has stated that the property value would be counted only if the bank is able to sell the property readily at its own will and there is no legal impediment in selling the property. Apart from this it also mandates that the valuation should be obtained from two independent valuers, at least once in every three years.

Analysts with a credit rating agency said considering revalued assets (real estate) as part of common equity may only serve the purpose of regulatory capital requirement. That hardly improves the credit profile of banks. The asset has to be ready (available) to absorb loss in times of need.

Foreign exchange, another item that was not included while calculating the capital base, can also be included. “Foreign currency translation reserves arising due to translation of financial statements of a bank’s foreign operations to the reporting currency may be considered as CET1 (common equity tier-1) capital. These will be reckoned at a discount of 25 per cent,” said the regulator.

Apart from these two, gains arising out of setting off the losses at a later date can also be counted as Tier-1 capital, up to 10 per cent. This will be a breather for the lenders, especially PSBs, which have been grappling with the issue of mounting bad loans and depleting capital base.

According to RBI sources, this move would help in unlocking Rs 30,000-35,000 crore of capital for PSBs and up to Rs 5,000 crore for private banks.  

The government estimates that state-run lenders would require Rs 1.8 lakh crore over the next four years. Banks would have the onus to raise the balance Rs 1.1 lakh crore from the market. This is because the finance ministry has promised to pump into PSBs Rs 25,000 crore each in FY16 and FY17 and Rs 10,000 crore each in FY18 and FY19. RBI’s move on Tuesday will serve in meeting the capital requirements.

A PhillipCapital report believes this would be a big positive for PSBs as it would evade the risk of huge dilution of equity. “SBI can gain Rs 20,000 crore from revaluation of property, which can add 50 basis points to Tier-1 on account of revaluation reserves only,” it said.

According to new Basel-III norms, which kick in from March 2019, Indian banks need to maintain a minimum capital adequacy ratio (CAR) of nine per cent, in addition to a capital conservation buffer, which would be in the form of common equity at 2.5 per cent of the risk weighted assets. In other words, banks’ minimum CAR must be 11.5 per cent, which is higher than the 9.62 per cent banks are required to currently maintain.

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DLF pushes ahead with REIT listing plans

Suncapital: Country’s largest real estate firm by market capitalisation is gearing up to launch REITs worth up Rs6,000 crore in two tranches over the next two years

DLF is currently putting together commercial office assets totalling around 25 million square feet of land into the REITs portfolio

Mumbai: Pushing a step closer to launching India’s first Real Estate Investment Trust (REIT), real estate firm DLF Ltd expects to complete forming a special purpose vehicle (SPV) within the next six months, said a top company executive of the Delhi-based company.

“We would be ready with the SPV in the next six months. As we announced earlier, we have signed non-disclosure agreements with 25 global investors. We should be the first one to crack it (REITs),” Rajeev Talwar, chief executive officer (CEO), DLF Ltd, told Mint over the phone.

Country’s largest real estate firm by market capitalisation is gearing up to launch REITs worth up Rs.6,000 crore in two tranches over the next two years.

REITs are listed entities that primarily invest in leased office and retail assets, allowing developers to raise funds by selling completed buildings to investors and listing them on stock exchanges as trust. Investors earn return on investment either through value appreciation or rental income generated from commercial assets.

REITs will also give overseas investors a chance to invest in lease rental generating assets, an asset class otherwise prohibited for foreigners.

DLF is currently putting together commercial office assets totalling around 25 million square feet of land into the REITs portfolio. As part of the process, promoters of DLF have decided to sell around 40% of its stake in DLF Cyber City Developers Ltd (DCCDL), a rental arm of the company to institutional investors. DCCDL earns around Rs.2,200 crore a year from rentals.

“Basically what is going on right now is divestment (of commercial portfolios) and to get foreign investors into the REIT portfolio. They have to come in the fair market valuation. In the first two quarters of the year, we would have brought all the funds and complete with our first stage which is to form an SPV,” Talwar said.

The listing of REITs, which many believe would bring stability and attract funds to the sector, has not been able to take off mainly due to tax hurdles.

Finance minister Arun Jaitley in the Union budget on Monday proposed to exempt REITs from the purview of dividend distribution tax (DDT), removing a significant hurdle to floating it in India.

“Exemption of DDT on REIT along with the FDI (foreign direct investment) policy changes in December last year will help get huge inflows from foreign institutional investors. For foreign institutional investors, the taxation was making it a lower return product for them. Now this (exemption) increases return and thereby attract more inflow of funds,” he said.

Anuj Puri, chairman and country head of JLL India, said with the proposal to remove DDT, REITs would become a realty soon with few listings likely to happen this year either by financial institutions or developers.

“Currently, around 229 million sq. ft of office space can be seen as REIT-compliant. If we assume that even 50% of these get listed, we are looking at a total REITs listing worth $18.5 billion,” Puri said.

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