FII inflows into Indian market set to cross $10 billion

The hefty FII inflows have not resulted into a upward movement in the broader market with the Sensex down about 200 points, or 1.2% so far in the month


New Delhi: The investment by overseas investors into Indian stock market since the beginning of 2012 is set to cross the $10 billion level, out of which more than $1 billion were pumped in the first two weeks of July, reports PTI.

The total investment so far in 2012 by foreign institutional investors (FIIs) in to the Indian equity market to $9.82 billion (Rs49,349 crore), according to data available with capital market regulator, the Securities and Exchange Board of India (SEBI).

It seems foreign investors are reversing their bets on Indian equity market as after pulling out funds for the past three consecutive months, they have again infused $1.3 billion (about Rs7,356 crore) so far in July so far.

However, the hefty inflows have not resulted into a upward movement in the broader market with the Sensex down about 200 points, or 1.2% so far in the month to close at 17,430 points on Friday.

FIIs had pulled out Rs1,957 crore from equities in April-June quarter this year, in contrast to a whopping Rs44,000 crore investment in stocks in the previous quarter.

The nearly Rs2,000 crore outflow was mainly due to concerns of economic growth and depreciating rupee, say analysts.

They attributed the change of guard at Finance Ministry having prompted foreign investors to re-consider Indian equity market for investment purposes.

With the Prime Minister Manmohan Singh taking additional charge of the finance portfolio, investors are hopeful that the Prime Minster would take steps to revive the economy.

"The FII movement is partly because of fundamental factors and some optimism generated as the PM taking over as Finance Minister. Besides, potential implications of GAAR are also being seen as a very big positive. This inflow would sustain when all the policy talk translates into action," a stock broker said.

During 3rd July to 13th July, FIIs were gross buyers of shares worth Rs24,626 crore, while they sold equities amounting to Rs17,270 crore, translating into a net investment of Rs7,356 crore ($1.3 billion).

The foreign fund houses also infused Rs1,724 crore ($309 million) in the debt market so far this month. This takes the overall net investments by FIIs into debt markets to Rs22,585 crore ($4.32 billion) so far this year.

FIIs had mostly stayed away from Indian equities in 2011.

They flocked towards the debt market last year with a net investment of Rs20,293 crore, while pulling out Rs2,812 crore from equities.

As on 13th July, the number of registered FIIs in the country stood at 1,754 and total number of sub-accounts were 6,358 during the same period.


Agalega or Andaman Islands? Develop both as strategically important

While Andaman Islands is India’s territory, the government should discuss the development of the Agalega Islands with Mauritius at the DTAA review next month which would be mutually beneficial to both countries

In his recent visit to India, Dr Arvin Boolell, foreign affairs minister of Mauritius recalled the close relations with India for more than three decades now and expressed willingness to go for a review of the Double Taxation Accordance Agreement (DTAA) next month.  
Capital gains tax is almost nil in Mauritius and 40% of foreign investments into India come through this country. The DTAA will come up for renegotiation in August and the minister took the pains to explain that Mauritius is not a tax haven but has a low tax jurisdiction.
Under the Article 13 of DTAA, a company registered in Mauritius can get the benefits of the treaty and pay capital gains tax only in that country.  But, if they do not charge capital gains levy, the company can escape payment of tax on this gain! Such a loophole needs to be covered.
India wants to renegotiate the treaty because it feels round-tripping can and should be checked, which actually refers to the movement of money out a country to another and getting it back under the guise of foreign capital taking advantage of the tax breaks. This issue is likely to be one of prime concern during the August deliberations.
Also, it appears, several years ago, in 2006, Mauritius had offered two islands to India—Agalega Islands, some 70 sq km with a very small population—for what is known as the “Blue Development”. This was to focus in setting up hotels, resorts and building a new modern airport which would increase the tourist potential.  Such a foothold in the Islands would add to India's strategic advantage in battling Somali piracy which has now become rampant and attacks are made with impunity.

It is likely that this issue of Agalega Islands may also come up for discussions in the ensuing DTAA meeting. It is imperative that India and Mauritius discuss this issue for mutual benefit.
While India ponders over the Agalega Islands Development (AID), a walk down the memory lane on a similar issue would be appropriate.
In the late 1980s, the hottest topic for discussion, in the Middle East and in India, was on the development of Andaman Islands (or any one of the islands in that archipelago) as India's free Zone. It is difficult to pin-point where this idea germinated with businessmen from UK, Hong Kong and UAE (Dubai) claiming credit for such an innovative proposal.
The idea was to declare one of the islands as the free zone and let NRIs (non-resident Indians) develop it into a modern Hong Kong for India, free from too much bureaucracy, red-tapism and political interference. All kinds of petitions and proposals flashed around for a few months and eventually, as it normally happens in projects of such dynamic nature, slowly sank into the Andaman Sea, for reasons unknown!
Why, then, raise it now?
Strategic importance of the Andaman Islands does not require any elucidation. These are on the “India plate” and were subject to the tsunami a few years back, with its epicentre in Indonesia and where it caused havoc. Though there was some loss, the Andaman Islands overcame the tragedy, thanks to timely assistance from the central government.
In the meantime and in the background, China made deep inroads into Myanmar, not without a reason. With Pakistani support, when the Gwadar port is completed with Chinese help, it would help them to almost encircle India!
 Hence these islands need full protection of the Indian defence forces and it is highly debateable if the present ‘preparedness’ of our forces are adequate?
China’s expansionist policy in Far East is well known. Almost every island in the region is subject to claim by China which is in dispute with all its neighbours. That China is a bully need not be emphasised.
India needs to wake up and develop Andaman Islands a little more seriously. Economic importance in terms of oil/gas strikes cannot be ruled out. But the past feelings of Chini-Hindi-Bhai-Bhai would not get us anywhere in dealing with this giant and now, economically a very strong neighbour, who wants to treat Arunachal Pradesh as its backyard and calls it a ‘disputed’ area.
All said and done, this does not and should not prevent us from moving forward in discussing the issue of these Agalega Islands, which will be mutually beneficial. However, what needs to be made clear is whether it is just going to be a venture for development or one of a long-term lease of the islands so that India can plan a workable strategy? Can we have our naval presence and raise the Indian flag?

(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce and was associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts. From being the advisor to exporters, he took over the mantle of a trader, travelled far and wide, and switched over to setting up garment factories and then worked in the US. He can be contacted at [email protected].)


Indian banks & NPAs – IV: SARFAESI Act and its impact

Public sector banks themselves must handle their NPAs by strengthening their recovery departments to minimize the role of borrowers and their cohorts masquerading as experts who derive undue benefits from a well intentioned scheme. This is the concluding part of a four-part series

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, (SARFAESI Act) was born out of the Narasimham Committee-II recommendations after some modifications. Asset reconstruction companies are set up, and registered with the Reserve bank of India (RBI) as a securitisation company (SC) and reconstruction company (RC) to acquire distressed secured financial assets (both moveable and immovables).  

The banks which transfer the assets are paid off by way of security receipts (SRs), debentures, bonds, etc as stipulated in the Act, which are subscribed to by only Qualified Institutional Investors and redeemed in due course of time, some of which would mature soon. These are treated as non-SLR securities and their valuations, provisions against fall in value, etc, are to be done as per the rules applicable to any other non-SLR security.

ARCs are deemed to be the lenders and have all the rights of the original lending banks. There are 14 ARCs in India, some of them promoted by some banks coming together; the first one was ARCIL, sponsored by SBI, ICICI Bank, IDBI Bank and PNB.  

The underlying idea of bringing into fruition ARCs under SARFAESI Act is to enable banks to clean up their balance sheets, pass on the burden of recovery to an agency which could give full-time attention  to realize a higher amount than what the borrower is willing to offer and thus generally help faster resolution of NPA.

Where the assets are charged to several banks under multiple banking arrangements, ARCs endeavour to aggregate them to help better realisation from the eventual buyers which individual banks might not be able to get. In the case of security charged to a consortium of banks, once 75% of lenders (by value) agree to sell the assets to ARCs, other members do not have option to differ.

Despite the apparent advantages of transfer of assets to ARCs, banks, after the initial period now seem reluctant to pass on the NPAs to them for various reasons. There is a feeling that ARCs’ offer price is low and worse still that the assets are sold by them eventually to original promoters of the companies or their relatives in some “sweet heart deal” as they know the value of the assets especially of the land and buildings. Besides, bank officials have a fear that if the realisation of NPAs is low, they could be questioned on the deals struck with ARCs.

In a meeting called by the Central Vigilance Commission (CVC) in May 2010, and attended by CMDs of some banks, the Indian Banks Association (IBA) and CBI officials expressed the opinion that “some ARCs were found to be directly helping the defaulter in getting back the properties by paying very low amounts to banks and thereafter mark up and sell the property back to the borrower”.

It is well-known that sale of land involves considerable portion of consideration being in paid by way of unaccounted money. Yet another reason for the luke-warm relationship with ARCs is that banks which are mostly working capital lenders do not always have a charge on fixed assets and the ARCs have not been enthusiastic about selling off current assets.  

What is more, the banks have found that when they issue notices to borrowers under SARFAESI Act, the response is much better. The amount of recoveries done under the Act has been significantly higher comparatively speaking than under BIFR, and faster.

The one major problem the banks experience in pursuing SARFAESI permitted action is that an aggrieved party, generally the borrower, can make an application to a DRT and get a stay order on sale which is not difficult to obtain. Nevertheless, the banks have felt use of SARFAESI has been more effective than other legal provisions.

The bank officials feel that by strengthening the recovery department, they can show greater success than by handing over NPAs to ARCs. All said and done, the loyal bank officials definitely have greater commitment to the health of their bank than the ARCs.

The imperceptible trust deficit between the banks and the ARCs could be inferred from the fact that the SBI referred just six cases with claims of Rs40 crore to an ARC during 2010-11 though its bad loans were about Rs40,000 crore. (Source: The Economic Times, 13 March 2012). SBI is one of the sponsors of the first and the largest ARC viz. ARCIL.  

Officials of various banks in the recovery departments state that the ARCs, with their high profile directors, have become a strong lobby to advocate larger flow of business to them from the banks. Coincidentally perhaps, in May 2012, the ministry of finance (Department of Financial Services) directed all public sector banks to designate one or more ARCs as their “authorised officer to take up recovery of loss assets on behalf of banks on commission basis”.

It would have been appropriate, say, for the RBI  to have studied/ audited the financials and methods of operations of the ARCs and the reasons for the existing trust deficit between banks and ARCs before the ministry issued this direction. Besides, the definition of authorised officer given in the SARFAESI Act does not include ARC, though it can be an agent.

The distinction between the two seems to have been made purposefully in the Act and therefore it seems a bit odd that the ministry directed the banks to designate the ARCs as authorised person instead of as agents. This confusion needs to be cleared.

The role of an agent is governed by Contract Act; banks being the principal become liable for acts of omission and commission of the agent as such. There is no reason for banks to undertake such an onerous responsibility. It is difficult to escape the feeling that ARCs are perpetuating their existence with some help from the finance ministry.

Even as the government was planning to introduce a bill in 2001-02 to assign the BIFR responsibilities to the National Company Law Tribunal, the RBI took a proactive measure of introducing in August 2001 “Corporate Debt Restructuring (CDR)” scheme. The objectives are, “to ensure timely and transparent mechanism for restructuring of corporate debts of viable entities through an orderly and coordinated restructuring programme outside the purview of BIFR, DRT and other legal proceedings”.

CDR is a well known mechanism to tackle incipient sickness/possible delinquency of a loan and restore viability of operations adversely affected by external and internal factors in the least disruptive manner by minimizing the losses to the creditors, the concerned corporate and other stakeholders. In India this is applicable to corporates with loan exposure of Rs10 crore or more to the banks.

CDR is not a part of any statute. However legal strength is provided by certain prescribed agreements between creditors and between borrowers and the lenders. The CDR scheme has laid down pretty elaborate system for appraisal, monitoring and reporting to various levels of authorities.

A CDR package envisages certain sacrifices and concessions to be given by lenders to the corporate concerned which could be also obligated to bring in additional equity and bind itself to the terms of the package and covenants. The package needs the approval of a majority (called ‘super majority’) of at least 75% (by value) of the lenders in which case the minority of lenders has to fall in line. In contrast, under the BIFR dispensation, the minority cannot be forced to follow the majority.  

CDR is a ‘success’ if one were to judge it by the statistics of progress: As at March 2012, the CDR cell approved 292 cases and another 41 are in advanced stage of approval, involving an aggregate amount of Rs1.86 lakh crore of debt. The number of cases referred each year has been moving up and in 2011-12 it reached the highest figure of 87 cases with a debt of Rs68,000 crore.

Yet lenders are not celebrating this record and perhaps the RBI may be feeling the “Winner’s curse”. Reasons are not far to seek. In practice, it appears that some lenders in league with ARCs or the promoters have referred the cases to CDR cell to avoid immediate classification of the loans as non-standard in their books.

The promoters of large corporations being influential prefer the CDR route to salvation than facing SARFAESI action by the lenders. Considering the large amount of debt sought to be restructured with not inconsiderable sacrifices by lenders, one would have demanded a more careful approach in referring the cases under CDR scheme.  

One quick action to remedy the current situation of handling NPAs will be to divest DRTs of all company cases and hand them over to the National Company Law Tribunal (the relative Act was passed in 2002 but some amendments are yet to be approved) to be set up in replacement of BIFR to deal with not only sick undertakings but also such of those cases which now are dealt with by CDR mechanism beyond a certain debt level of say, Rs100 crore.

CDR as a non–statutory and voluntary method can remain open for smaller corporates. Given freedom of action and without the fear of vigilance enquiries imbued with hindsight, public sector banks themselves must be able to handle substantially their NPAs by strengthening their recovery departments. That could minimize the role of the borrowers and their cohorts masquerading as experts in tackling NPA problem and deriving undue benefits from a well intentioned scheme at the cost of lenders, just as they wore down the BIFR and the DRTs.

(A Banker is the pseudonym for a very senior banker who retired at the highest level in the profession.)



AV Bagur

4 years ago

It is unfortunate that even today the author, being such a senior banker, does not have the guts and spine to call a spade a spade under his own name. Is he awaiting some big ticket assignment from the Government or the politicians or the bureaucratic?

If he is afraid to reveal his name even today and speak for the the common man what kind of banker he might have been?

If he is aggrieved by "some help being extended by the Ministry of Finance to ARCs" has he met members of the Parliamentary Consultative Committee of the Ministry of Finance and briefed them on the subject?

Has he ever thought of, or conducted any case study on why accounts become NPAs?

Has be ever analysed who are all going to CDR?

Has he seen the plight of small time MSME borrowers who were kept waiting on that tantalizingly allusive funds for months and years together by Babudom like attitude of bank officers?

At least now the 'A banker' will shed his mask and come out in the open and face the "borrowers and their cohorts masquerading as experts in tackling NPA"

He has lots of answer, provided he sheds his fear to reveal his true identity.

Ankit Goyal

4 years ago

excellent Article :)

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