The MCA has proposed as many as 13 relaxations for private companies, from various provisions of the Companies Act, including acceptance of public deposits, share capital, voting rights, further issuance of shares, appointment of auditor and directors, among others
To ease the regulatory burden for private companies including smaller firms, the Ministry of Corporate Affairs (MCA) on Tuesday proposed relaxing certain provisions of the new Companies Act for such entities.
The proposed relaxations include certain provisions relating to prohibition on acceptance of public deposits, share capital, voting rights, further issuance of shares, appointment of auditor and director, restriction on board powers, loans to directors, related party transactions, as also appointment of top management personnel.
Through a draft notification, the MCA has proposed as many as 13 relaxations for private companies from the various provisions of the Companies Act which came into effect at the beginning of the current fiscal.
While the draft notification would be placed before each house of the Parliament, suggestions and comments are invited from the public till 1st July, the Ministry said in a circular.
The statistics from MCA for 2011, put the number of companies registered in India at 11.63 lakh. About 24,682 or 2.12% out of these have paid up capital between Rs2-Rs5 crore and 23,589 or 2.02% have capital exceeding Rs5 crore, leaving a whopping 95.84% of the companies with capital below Rs5 crore or $1 million; this is far below global standards. In India, stock exchange listed companies constitute only a miniscule 0.6% of the total, leaving 99.4% to be individuals or private companies running businesses essentially with their own capital or borrowings.
Among various proposals, it has been proposed that a private company be exempted from having a share capital of either equity share capital or preference share capital.
The other exemption includes the requirement of every shareholder of a company being given a right to vote on every resolution placed before the company, and this voting right being in proportion to the shareholding.
With regard to further issue of share capital by a private company, it has been proposed that any such offer would need to be made through a notice during a time period 'not less than seven days and not exceeding 15 days'. The existing provision has a similar time period of not less than 15 days and not more than 30 days.
With regard to issue of shares to employees under an ESOP plan, it has been proposed that the same can be done through a 'special resolution' in case of private companies, as against a special resolution for others.
It has also been proposed that certain rules on 'prohibition of acceptance of deposits from public' would not be applicable to small private companies.
Such companies would include those, "having 50 or lesser members if they accept monies from their members not exceeding 25% of the aggregate paid up capital and free reserves of 100% of the paid up capital, whichever is more, and which inform the details of such monies to the Registrar in the prescribed manner".
Also, the provisions for meeting of shareholders with regard to notice, statement to be annexed with such a notice, quorum, appointment of chairman, proxies, voting restriction, voting by show of hands and demand for poll would not apply to a private company if its 'article of association' provides otherwise.
The Modi government needs to cut back on less effective redistributive polices and implement reforms that will boost productive investment and job growth, says Morgan Stanley
The upcoming Union Budget for FY2015 would be presented on 10th July by the Finance Minister, Arun Jaitley. The Budget is being presented in the backdrop of weak growth – driven by both sluggish investment and consumption coupled with high inflation, which makes it pertinent for the new government to come up with a holistic road map to improve the growth outlook. "We believe the government needs to cut back on less effective redistributive polices and implement reforms that will boost productive investment and job growth," said Morgan Stanley.
According to a research note from Morgan Stanley, even though history suggests that the budget's influence on short-term performance is declining, expectations (measured by pre-budget performance) are still important in deciding what the market does after the budget – if the pre-budget returns are positive, there is a 90% chance that the post-budget returns are negative.
“History suggests that the Union Budget's influence on the market's short term performance is declining – but the next budget could still leave a trail of impact. The upcoming budget could be important because of where India is placed cyclically, what the mandate for the government implies and because this is the first non-Congress government in a decade," the report said, quoting Morgan Stanley's India strategist Ridham Desai.
Here are the industry specific expectations of Morgan Stanley:
Positive – for the oil & gas, financials, telecom, metals / mining, and utilities industries
Neutral – for the media, infrastructure, property, cement, auto and consumer industries
The Narendra Modi-led National Democratic Alliance (NDA) government, in its preparation for the FY2015 fiscal accounts, will need to consider adjusting the FY2014 reported fiscal deficit for one-off measures taken in March to make a better assessment of the starting point. "We believe there is limited scope for the government to undertake drastic measures to reduce expenditure to GDP. In this context, we believe the only credible way to reduce spending is by cutting subsidies (mainly oil subsidy). We expect that the government’s approach will be to maintain a moderate pace of expenditure growth at around 9.5% year-on-year (Y-o-Y) even as growth picks up to ensure sustainable fiscal consolidation." Morgan Stanley had said in its earlier research note.
Increase tax to GDP
Morgan Stanley said the trend in receipts, particularly tax revenue, has been very weak, in line with the sluggish growth environment. Indeed, gross tax revenue has declined to 10% of GDP in FY2014 from the peak of 11.9% of GDP in FY2008. Recovery in growth should help increase tax revenues, but since recovery in growth and thus tax revenue will be gradual, Morgan Stanley said it believes the government would also need to initiate additional measures to achieve a 0.5 percentage points reduction in the fiscal deficit.
"We believe that the government will have to roll back the excise duty cuts for the automobile industry and other white goods segments (electronic goods, machinery, mechanical appliances) that were introduced in the interim budget. As such, this excise duty will be reinstated automatically on 1st July, hence the budget does not need to initiate additional measures. In addition, we believe the
government also needs to increase receipts through divestments," the report said.
Managing rural wages in line with productivity
Morgan Stanley said, it believes that managing rural wage growth in line with productivity is one of the most important measures to cut back on redistributive policies and improve the inflation outlook sustainably.
Rapid acceleration in rural farm wages – especially since the implementation of the national rural employment guarantee scheme (NREGS) – has been one of the key factors behind India’s high food inflation and overall inflation. To be sure, wages account for about 50% of operating costs for food production and the weight of the food index in CPI is 46.7%. Moreover, total wages account for around 35% of national domestic product. Indeed, rural farm wage growth accelerated to an average of 17.9% over the last five years, compared with the average growth of 5.8% in the preceding five years.
Though nominal rural wage growth has been gradually decelerating over the last few months, the pace is still about 14% year-on-year (YoY), higher than nominal GDP growth of 12% YoY.
Morgan Stanley said it believes that rural wage growth will continue to decelerate as the one-time catch-up effect to NREGS wages wanes. "We do not expect the government to reduce the allocation to the scheme; however, we expect that it will outline measures with respect to improving the efficacy of the scheme. In this context, we expect the government to take measures to set up a social audit mechanism, increasing supervision and improve vigilance to improve implementation of the scheme. At the same time, we expect the government to take steps to ensure that the scheme is linked to programs that help increase agricultural productivity by creating relevant infrastructure facilities for the rural economy," the report added.
Improvement in the business environment
According to Morgan Stanley, the first area on which the new government will focus will be to improve the business environment, which has remained challenging since the credit crisis. Policy uncertainty, corruption-related investigations and regulatory hurdles had led the business environment to deteriorate. "We believe that policy makers will likely address this by providing a consistent policy framework in key infrastructure and industrial sectors, work on streamlining the approval process for investment projects, facilitate the rehabilitation of corporate balance sheets and provide funds for recapitalizing SOE banks to unclog their balance sheets," it said.
"Moreover," the report said, "ensuring legal certainty and streamlining tax laws will play an important role in giving the corporate sector incentives to invest, thereby boosting growth further."
Poor infrastructure facilities, such as lack of uninterrupted or reliable power supply, last mile rail and road connectivity, are also a big impediment to improving the business environment for corporates. In addition, industry also views the new land acquisition law as increasing the procedural complexities in acquiring land for private projects.
Lastly, one of the critical policy reforms that need to be taken up soon, is the implementation of the Goods and Services Tax (GST) Act. We believe this will help accelerate productivity growth in the manufacturing sector. Implementing the GST is likely to accelerate growth, boost exports and improve tax collections.
Morgan Stanley said, it believes the government is likely to stress the need to improve the business environment and reiterate its stance on good governance. It said, "In this context, we expect the government to provide a framework for its approach to streamlining approval of investment projects. We believe the government would also provide clarity on the retrospective taxation issue, which has dented investor confidence."
How to improve allocation of natural resources through transparent mechanisms
Several supply bottlenecks – including the approval process for environmental impact, mining rights and land acquisition – have hampered the pace of national investment growth. Morgan Stanley said that introducing a transparent mechanism to allocate these natural resources and streamline the approval process can address these structural bottlenecks. Corruption-related investigations have only added to these supply bottlenecks.
Apart from constraining domestic output and pushing productivity growth lower, these bottlenecks also added to the country’s external stability challenges. "Our estimates show that the increase in coal imports and decline in iron ore exports likely added close to 0.8% of GDP to India’s current account deficit between FY2005 and FY2014. Similarly, India’s oil energy dependence on imports has also been rising. We believe the new government will help accelerate the effort to introduce a transparent mechanism to allocate these natural resources and streamline the approval process, thus addressing these structural bottlenecks," Morgan Stanley said.
As long as Nifty manages to stay above 7,515 the trend is expected to remain upwards
We mentioned on Monday, that Nifty may not decline much from current levels. On Tuesday the Indian market recovered losses made in the past three days, breaking four days of negative moves. The benchmarks began with an upward move and continued to rise higher for almost the entire session. Towards the end of the session, it fell suddenly but strong buying reinforced the index immediately.
The level at which the indices opened Tuesday was the same as the day’s low. The S&P BSE Sensex opened at 25,116 while the NSE Nifty opened at 7,515. Sensex hit a high of 25,415 and closed at 25,369 (up 338 points or 1.35%), while the Nifty hit a high at 7,593 and closed at 7,580 (up 87 points or 1.16%). The NSE recorded a volume of 111.11 crore shares. India VIX rose 1.18% to close at 19.1875.
Except for Media (0.43%) and Pharma (0.29%) all the other indices on the NSE closed in the positive. The top five gainers were Realty (3.05%), PSU Banks (2.41%), Nifty Midcap 50 (2.32%), CPSE (2.28%) and PSE (2.22%).
Of the 50 stocks on the Nifty, 39 ended in the green. The top five gainers were GAIL (4.75%), BPCL (4.70%), DLF (4.70%), Bank of Baroda (3.22%) and NMDC (3.20%). The top five losers were Kotak Mahindra Bank (1.74%), Sun Pharma (1.14%), Infosys (0.82%), UltraTech Cement (0.67%) and Tech Mahindra (0.51%).
Of the 1,571 companies on the NSE, 1,107 companies closed in the green, 413 companies closed in the negative while 51 companies closed flat.
National Buildings Construction Corp (NBCC) hit its 52-week high, at Rs 332.00, on the BSE today after the company said it has been granted "Navratna Status" by the Department of Public Enterprises. NBCC rose 4.41% to close at Rs 318.45 on the BSE.
There are reports that the government may soon finalise a hike in natural gas prices and that the price hike will be lower than what was suggested according to the formula adopted by the previous UPA government, which recommended doubling the price. The discussions between the Oil Ministry and Prime Minister's Office over the weekend suggest that gas prices may be jacked up from $4.2 a unit to $5.5-6.8 per unit, reports said. This increase will be almost $2 less than the $8.4 per unit price that was expected on the basis of the formula adopted by the UPA government. Gas utility stocks like the Gujarat State Petronet (7.18%) and Petronet LNG (6.58%) were among the top five gainers in the ‘A’ group of the BSE, while GAIL (4.56%) was the top gainer among the Sensex 30 stocks.
Infosys' newly appointed chief executive Vishal Sikka may set up a corporate venture arm, which will tap into new ideas that can be used by the parent company to bring in more innovation into its work. Infosys (0.64%) was the top two losers among the Sensex 30 stocks.
Financial Technologies India Limited's (FTIL) stake in Multi Commodity Exchange will soon be sold by MCX by an offer for sale. MCX (3.07%) was the top loser in the ‘A’ group on the BSE.
US indices closed Monday flat. Data on Monday showed US sales of existing homes climbed 4.9% to a 4.89 million annualized rate in May, the most since October. A separate report from Markit Economics showed that a measure of US manufacturing growth rose to 57.5 in June from 56.4 in May.
Among the Asian indices, except for NZSE 50 (0.10%), all the other Asian indices closed in the positive. Seoul Composite (0.98%) was the top gainer.
European indices were showing a mixed performance, while US Futures were trading lower.