‘FTWZs can boost import-export trade in India’

Arshiya International Ltd will have three free trade warehousing zones operational by the end of 2010. Ajay S Mittal, chairman and managing director, speaks to Moneylife’s Amritha Pillay about the commercial logic behind such zones

Amritha Pillay (ML): Do you think that this is an ideal time to invest in free trade warehousing zones (FTWZs) in India?
Ajay S Mittal (ASM):
Although it is a bit late, I think this is the most appropriate time for FTWZs in India. There is an urgent need for them. Currently, most companies use Singapore and Dubai as FTWZ hubs for product movements in India. These companies assemble or package their products either in Singapore or Dubai FTWZs and send them to India. The moment these products enter India, duty is paid on the entire packed product. These products are then forwarded to the respective channel partners for sale. In case the product remains unsold, then channel partners re-export them to some other country where there is a demand for them and apply for a duty refund from the Indian government. This, however, is a time-consuming process.

So the basic idea behind setting up our own FTWZs in India was to cut down the cost and time. Now with our FTWZ, what will happen is that companies would be able to import their products directly into the zone. As and when required, they can take these products out for sale after paying the duty. And in case the product remains unsold, they would be able to re-export it to some other country, without any tax or duty. So the companies would be able to save on time, as the product would be available to them locally, and their money would not be blocked during the duty refund process.

In a way, our FTWZs would become duty-free import and export hubs that can boost the business of domestic companies.

ML: Out of your three FTWZs at Mumbai, New Delhi and Nagpur, two are located far away from ports. Don’t you think that FTWZs near ports would be more suitable for the kind of business you are planning?
The FTWZ hub, as a concept, is more profitable when located near a port. However, when you are setting up FTWZs in a large country like India, you need to think about location-specific services. So, we think, there would not be any dearth of business at our FTWZ hubs at Nagpur, which is ideally located at the centre of the country and at New Delhi.

ML: What is the role Arshiya would play in this entire process of import and export?
Using our freight forwarding arm, we will import products into our FTWZs. Companies can take them out from the FTWZ for sale after paying necessary duty and other charges. If they have to distribute the product across the country, we can help on that front as well. And if the companies want to re-export the product to some other country, that can also be done at the FTWZs.{break}

ML: Do you think that such FTWZs can boost the import-export trade in India?
FTWZs do have a huge potential to boost the import-export trade in India. For example, Singapore and Dubai are just providing infrastructure for duty-free trade but the main trade or action takes place in India. So if we can have our own FTWZs then the same trade can be routed directly into our country. FTWZs certainly carry big potential for import-export trade, in terms of revenues and volumes.
ML: What kind of labour opportunities would be there in these zones?
The employment opportunities depend on activities of the customer, whether they are labour intensive or not. However, as per our estimates, each FTWZ should be able to provide job opportunities for around 15,000 to 30,000 people, directly or indirectly.

ML: How has been the progress of your three FTWZs in terms of bookings and operations?
We are building all the three FTWZS in a phased manner. The Mumbai FTWZ will be operational by March-April this year. Almost all the space available in the Mumbai FTWZ has been booked. However, for the Nagpur and New Delhi FTWZs, we haven’t sold much space as these hubs are in the initial stages. This doesn’t imply that there is no business or opportunity as both these places offer huge potential. We think that there would be more bookings once we come close to completion. At present, we have signed memorandums of understanding with a number of companies and will sign the final agreements, when we will come close to completion.

ML: What is your revenue-earning model for these FTWZs? What would be the share of rental revenues and allied services revenues?
Even though we would be renting out the space in the FTWZs, we are not looking at it (rental revenues) as the only source. For every rupee we earn from rent, there is a possibility to earn two, three or four rupees from other services like rail transport, freight forwarding, supply-chain distribution, warehouse management and information technology visibility. For Arshiya, the opportunity is not in the zone, but we see more opportunities from the varied service activities. 

ML: What about the competition in the FTWZ business?
At present, I don’t know of any other company which can or is providing the services which we would be offering at one place. There are some multinational companies in the business, but they are investing more in land purchase than developing FTWZs. The smaller domestic companies are not offering any kind of integrated services. So, even though Arshiya is the first to enter this business, we don’t think it would be the sole player. The first mover or player advantage would always be with Arshiya, at least for some time.

ML: Land acquisition has created many problems in India. So how is Arshiya tackling it and would it affect the future of FTWZs?
We as a company did not take help from any government (Union or state) to buy land. We directly negotiated with the farmers and paid them accordingly, besides offering them jobs during the construction period. We may offer them more jobs as the zone becomes operational. I think when there is land available for sale, what you need to do is offer the seller incentives along with the price. But when there are no incentives coupled with price, things may become difficult.

ML: Besides these three FTWZs, Arshiya is also setting up two additional FTWZs. Could you elaborate on your plans?
We will start looking for land for the other two FTWZs from December 2010. By that time, all our three zones at Mumbai, Nagpur and Delhi will be operational. We are looking at various options in the southern region of the country; Chennai and Ennore seem to be the best options. I believe there is a port being developed near Cochin, which is going to act as a transhipment point like Colombo. If that comes up, then I think that (setting up a FTWZ there) makes more sense, rather than anything else.


Five steps to safer banking

It is imperative that policymakers learn the right lessons from the crash, so that the taxpayer is less exposed in the future. Until now, governments have not gone far enough in addressing the risks presented by large banks operating worldwide

The successful undertaking of trade and commerce requires institutions that act as conduits through which capital can be exchanged. A sound banking system is essential to society’s wellbeing, as are both savers and borrowers. Without borrowers, a savings culture could not exist because there would be no point in paying interest on deposits. Equally, companies requiring finance could not function without savers. It is the ultimate symbiotic relationship, and essential to continuous social development and progress.

Banks are the cornerstone of this economic relationship. All banks, irrespective of their size or strategy are, ultimately, identical institutions. They deal in the same markets and with each other. That means that the bankruptcy of any one bank, while serious for its customers and creditors, has a bigger impact still on the wider economy because of the knock-on effect on other banks. It is this systemic risk that presented the greatest danger to the UK economy in 2008, after Lehman Brothers collapsed, and which required the injection of billions of pounds of public money to safeguard the banking system.

The challenge for policymakers now is to take steps to ensure that the economy and the taxpayer are no longer hostage to the fortunes of the banking industry. In this article, we examine the factors behind the 2007-08 financial crisis, and use the lessons learned from it to formulate five steps towards a safer financial system.

Moral hazard and the “Too Big To Fail” bank

The systemic risk of large banks has still not been addressed. The “too-big-to-fail” (TBTF) bank, and its guarantee from the central bank lender-of-last-resort (LoLR), creates significant moral hazard for the economy. There is no doubt that the existence of a safety net creates an unconscious reflex in bank senior management to take on more risk. Perhaps not today, because in a post-crisis recessionary environment banks are risk averse; but as the economy recovers, risk appetite will increase. Due to competitive pressures in banking, a higher risk-reward profile becomes a self-fulfilling prophecy, as banks seek to generate more customer business and attract deposits.

In other words, this problem will not go away unless governments proactively address it. Merely raising bank capital requirements is not sufficient; at the time of its bankruptcy Lehman Brothers had an 11% equity capital ratio, which regulators accepted as adequate up to the day of its demise.

Step 1: to tackle the TBTF problem, regulators must demand the following:

Require the trading arms of banking groups to be set up as separate legal entities, independently capitalised, so that they do not endanger the retail arm. This reduces the chance that the LoLR will have to step in to save a failing bank because its trading arm had taken on unmanageable risk exposure. If it was a separately-capitalised subsidiary, it could be unwound without impacting the retail bank;

Set strict rules to manage funding and liquidity risk at banks. This includes requirements to diversify funding sources, and increasing the average maturity of funds. The FSA has already started the process to implement a stricter liquidity regime for banks;

Reduce leverage, and thereby limit asset growth, through the imposition of leverage limits;

Establish a clearing house for the London interbank market, an “International Money Exchange”, that would work similarly to an exchange clearing house. Such a facility would eliminate bilateral counterparty risk and make the money market safer during times of crisis, because it is at these times that banks withdraw lending lines to each other.

These measures will force banks to adopt a more conservative strategy that maintains focus on secure funding and manageable risk taking. This will make them less likely to fail during the next crisis. {break}

The “Shadow Banking” system

The shadow banking system helped create the crisis. Next to the conventional commercial banking circuit, an unregulated parallel banking model had built up over several years. Unlike the classical banking system, it followed an origination and distribution model, moving loans from bank balance sheets to offshore entities such as structured investment vehicles (SIVs). These SIVs needed alternative funding because they did not have the retail deposit base of the banks. However, when the liquidity crisis broke in 2007, their funding evaporated and banks had to take all this risk back onto their balance sheets.

Step 2: Any entity that engages in mismatched or leveraged finance should be supervised by the regulatory authorities. This would allow the regulator to have a more realistic appreciation of aggregate industry risk. 

The role of central banks

Central banks inadvertently assisted the build-up to the financial crisis. The aggressive monetary intervention practiced by the US Federal Reserve during the 1990s and after 9/11 created the impression that authorities would always come to the rescue of the banks. Furthermore, continued accommodative low interest rates helped sow the seeds of a price bubble in the housing market that central bankers were too late in identifying.

Step 3: Central banks must target asset prices, as well as inflation, and monitor price developments in equity and housing markets, so that price bubbles can be deflated pre-emptively. This will reduce the social damage that arises when a bubbles bursts. 

Improving the regulatory framework

The regulatory framework encourages pro-cyclicality of bank lending. Banks have to hold additional capital against greater anticipated losses as the economic cycle turns downward. This makes an economic recession even deeper when banks are forced to restrict their provision of credit in a contracting environment. Ideally, however, the system would work the other way round, with banks building up capital during a period of growth, so they could take losses and maintain lending in a recession.

Step 4: Regulators must implement “macro-prudential” regulation, requiring banks to operate in less cyclical a manner. This can be enforced by altering bank equity capital and liquidity requirements. At any time when the market is viewed as pursuing ever more risky asset generation, and/or credit is seen as too easily available, the regulator can enforce more stringent requirements.

Bonus culture
The bank bonus culture was only a minor contributor to the financial crash, but attracted the most passionate comment in the media. There is no doubt that the current remuneration structure creates distortions in incentives. The main issue concerns booking profits today for a transaction whose cash flows occur over many years. The solution to this is to modify the remuneration system so that it builds in a long-term view, targets higher quality value-added profits and reduces the “hit-and-run” mentality among bankers.

Step 5: Split the banker’s bonus payment into three parts. The first part would be a standard cash payment. The second part would be paid in stock options that would be held for a minimum time period before they could be realised. The final part of the bonus would be placed in a claw-back account, also monitored for a minimum period. During that period, the bank would have the right to reclaim some or all of this cash if a transaction subsequently created losses.


The events of 2007-08 produced the world’s deepest recession of the post-war period. The banks were key players in this crisis. It is imperative that policymakers learn the right lessons from the crash, so that the taxpayer is less exposed in the future. Until now, governments have not gone far enough in addressing the risks presented by large banks operating worldwide. Further steps are necessary to mitigate this risk, which will benefit both banks and taxpayers in the long term.

Moorad Choudhry is head of treasury at Europe Arab Bank Plc in London, and author of Bank Asset and Liability Management, published by John Wiley & Sons (Asia) Pte Ltd. 


Corporate rivals against Dadri power project, ADAG tells SC

ADAG has alleged in the Supreme Court that their corporate rivals were behind the petitions filed by farmers against the land acquisition for the company's proposed 8,000MW Dadri power project in Uttar Pradesh

Anil Dhirubhai Ambani Group (ADAG) on Monday alleged in the Supreme Court that their corporate rivals were behind the petitions filed by farmers against the land acquisition for the company's proposed 8,000MW Dadri power project in Uttar Pradesh, reports PTI.

"The petitions were motivated. This was a case of corporate rivalry. The rivalry seen in the gas dispute here (before the apex court)," senior advocate Mukul Rohatgi, appearing for Anil Ambani-led Reliance Power Ltd (RPL), said before a Bench headed by Chief Justice KG Balakrishnan.

RPL's submission came during the hearing of its petition challenging the decision of the Allahabad High Court quashing the Uttar Pradesh government's notification to acquire land for the project.

The Bench, also comprising Justices RV Raveendran and Deepak Verma, posted the matter for hearing on 29th January after advocate ML Sharma, appearing for some farmers, said a caveat has already been filed in the matter and no order should be passed without hearing the opposite side.

"We are also not planning for any stay now," the Bench said, while accepting the plea of the farmers that they should be given an opportunity to be heard.

Mr Rohatgi said he had no objection and accepted the suggestion that a copy of RPL's petition be given to the farmers who have filed the caveat.

However, he alleged that at the behest of ADAG's corporate rivals, petitions were filed in the High Court by the farmers against the allocation of land for the project for which the gas was to be supplied from the KG Basin.

RPL assailed the High Court decision saying that it was entertained four years after the allocation of land was made and in many cases farmers have already withdrawn the compensation amount.

Mr Rohatgi said that around 5,827 farmers had consented for the acquisition of their land by the Uttar Pradesh government. “Under such circumstances, how can the High Court pass such an order?” he asked.

"Once you have given consent, you are stopped from filing objections for land acquisition," he said, adding that out of (over) 5,000 persons, only 432 farmers filed the petition in the High Court, so the benefit of the High Court order will go to them only.

The Allahabad High Court had said that the state government had side-stepped a provision inviting objections from land-owners while coming out with the notification for using emergency powers to acquire land for the company.

In its appeal, RPL had contended that the High Court should not have entertained the petitions of the farmers on grounds of delay in filing them.

It said that the company had complied with the provisions of the Land Acquisition Law and the project was in the public interest.

About 2,500 acres of land were acquired by the state government from the farmers for the project.

The High Court judgement had come on several petitions filed by farmers challenging acquisition of the land in 2004, when the Samajwadi Party was in power in the state.


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