The collective voices of senior citizen through Moneylife Foundation and many others has finally been heard. The government has announced that reverse mortgage annuity would be tax-free. However, there is lot more that needs to be done, including regulation, to make senior citizens live a dignified life
A sign that India is waking up to the needs of its aging population is the sudden boost to reverse mortgage (RM) products through a change in tax treatment. RM allows senior citizens, who are short of money, to mortgage their property to a bank and get monthly payments in the form of annuities (through an arrangement a bank has with an insurance company). Annuities are taxable but those from RM will be tax-free as per the new thinking. The government has also allowed payments to be made for the lifetime of the borrower by removing the absurd cap of 20 years laid down earlier. It has taken more than three years for the government to accede to requests from industry and NGOs, including Moneylife Foundation, to make annuities tax-free. Why is this so important? Because, in times of galloping inflation and healthcare costs, senior citizens are able to draw down the value of their homes to generate spending money while continuing to live there for their lifetime.
A few months ago, Moneylife collated published data on the net worth of young couples across the country. It showed that over 75%-85% of their wealth is in illiquid real estate, mainly for the roof over their head. We expect the data to be similar for senior citizens. While India has an old-age pension scheme that pays a pittance to destitute seniors, there is no protection for middle-class elders facing a financial crunch. Also, unlike developed countries, the Indian government offers no social security for those who have paid their taxes throughout their working lives; nor does it provide any guarantee or subsidy on RM products. Consequently, India has the first market-based RM product where the mortality and interest risk is borne by two separate entities—a bank and an insurer.
Despite this, ever since it was launched in 2008, reverse mortgage, as a concept, has struggled to become viable and understood by the tax authorities. The initial RM products were structured as loans leading to harassment when tax authorities treated the payments from banks as taxable income. Then the government issued an official clarification, making income from RMs tax-free. The new changes in RM products structured as annuities will hopefully lead to the launch of more attractive RM options.
Of course, some cultural issues remain. Banks that have launched RM products say that children, who cannot provide for parents, still resent their going in for RM, since they see it as an erosion of their legacy. India also has a class of elders who took a home loan rather late in life and are repaying a mortgage after retirement with no new income to support them. Although RM products have failed to take off so far, this market is estimated at upwards of Rs20,000 crore and can see robust growth if banks invest in creating awareness about the product and market it without exploitative or extortionate charges.
After all, there is a growing number of middle-to-affluent-class parents who do not want to depend on their children nor do they need to protect their homes as inheritance.
But well thought-out regulations required
An unprecedented economic boom since 2003 has created a new set of needs and expectations among economically independent senior citizens. Many of them have children living abroad or in other cities, creating a market for retirement communities where they can live with people of their own age and similar interests. In ideal situations, retirement communities provide secure and serene living without the drudgery of housekeeping, maintenance of infrastructure and cooking, for a price, as well recreation and companionship. As seniors grow older and need skilled nursing and healthcare, there is a big market for assisted living facilities. In most developed countries, these are highly regulated services, with stringent rules and liabilities for failure to deliver the promised care, service or infrastructure.
But while the government slumbers, the market has been quick to recognise the implications of changing demographics and launch products for senior citizens in different economic segments. According to Jones LaSalle, the current demand for senior housing is 300,000 units. Its report says we already have around 30 retirement home projects in Pune, Chennai, Bengaluru, Goa, Coimbatore and other cities. Most of these are priced between Rs25 lakh to Rs1 crore, says the firm. Apart from the deposit/purchase cost, the monthly cost of living (covering food, transport, amenities such as libraries, recreation, healthcare, concierge, etc) is estimated at Rs5,000 to Rs15,000 per couple going to as high as Rs35,000 to Rs45,000 in the luxury category. Some also offer a deposit-model to rent space in a retirement community rather than buy it outright.
Maintaining retirement homes and assisted living facilities requires trained and technical manpower and high level of discipline. The nature of the business indicates the need for strict regulation and enforcement to ensure that service-providers deliver the promised services. While there are extremely well-run retirement homes, there are also rising complaints about bad maintenance, false promises, staff issues, vanishing cooks and, worse, a sense of being trapped in a situation which has no easy exit or re-sale value. Unfortunately, as far as public policy is concerned, the government is still in the last century and the current generation of seniors will be the guinea pigs whose travails and experiences may lead to new legislation, but only if they come together and make their voice heard.
Elder-care market is growing without any oversight
India will have the second largest population of senior citizens in the world in a few decades from now, but there is little public discussion on planning for an aging population. The Global Age Watch Index ranks India 73rd in senior-care and an article in The Economist shows that we are among the worst countries to die in. The National Policy for Older Persons (NPOP), framed in 1999, has not yet been implemented and it is already outdated. It does not take into account the huge economic surge between 2003 and 2013. How does this affect the Moneylife reader? Well, galloping healthcare costs, an acute shortage of specialised training facilities for geriatric care-givers, especially for homecare, no push to create and regulate assisted living facilities which are becoming crucial in urban areas for elderly persons battling Alzheimer’s, Parkinson’s, strokes or dementia, are just some issues. How important is this? In the US, there are 31,000 highly regulated assisted living facilities that cater to 750,000 people. Yet, even in this regulated environment, ProPublica (a not-for-profit, independent web journal) published a huge exposé on how Emerald Hills, a much touted, fast-growing chain of publicly listed assisted living facilities was cutting corners on staff and care-giving in order to extract higher profits. Imagine the kind of horrors and exploitation that would occur in India if unregulated business were allowed to grab a clearly growing market segment just because the government does not care and there is already an acute shortage of trained manpower.
Infosys is expected to be slapped a fine of $35 million by the US Justice Department for allegedly violating visa norms
The US Justice Department is expected to resolve a visa fraud investigation against Infosys Ltd, according to a report in The Wall Street Journal.
The report said, Infosys is expected to be slapped a fine of $35 million, the largest immigration fine ever, by the Justice Department for allegedly violating visa norms.
In a report, quoting unnamed officials of the Department of Justice, the newspaper said the fine is expected to be announced on Wednesday.
This is a culmination of the joint investigation carried out by the Department of Justice and the Department of Homeland Security.
Earlier, Infosys itself had said that it has set aside $35 million for a potential settlement tied to the probe and that it was “engaged in discussions” to resolve the matter.
In a media advisory, the Office of US Attorney John M Bales for the Eastern District of Texas said DHS and the State Department would on Wednesday “announce the settlement of systemic visa fraud and immigration abuse allegations with an international corporation.”
“The probe comes amid a debate over whether foreign workers, particularly in the software sector, are displacing qualified Americans because they are cheaper.
“The investigation spurred the Government to say it intends to tighten regulations that critics say allow employers to abuse the immigration system,” The Wall Street Journal said.
“This complaint and large settlement should be a wake-up call to all employers that the Government is serious about enforcing the H—1B visa regulations,” Stephen Yale-Loehr, a Cornell University immigration-law professor, was quoted as saying by the daily.
MCA’s latest draft rules for public deposits, once enacted, will mean end of the bond markets in India, particularly for non-banking non-financial companies. Almost every possible reason and avenue for companies to issue bonds has been killed
The regulatory framework for companies is undergoing an overhaul with the Companies Act, 1956 being replaced by Companies Act, 2013 and new rules thereon. The lawmakers have been mindful of the present regulatory scenario while drafting the new laws. One of the issues of key concern to the law makers has been deposit acceptance by non-banking non-financial companies. In the past, hundreds of companies have defaulted in payment of deposits to depositors, many of whom lost their life’s savings. In this pretext, in 2009, draft of the Companies Bill, there was proposed a blanket bar on deposit-taking by non-banking non-financial companies.
The new regulatory regime for acceptance of deposits makes a distinction between member deposits, and public deposits. On 22nd October, the Ministry of Corporate Affairs (MCA) placed the draft rules on Acceptance of Deposits by Companies on its website and is currently open for public comments. Under the proposed rules corporates will have scanty options for raising funds by issuance of securities yet falling out of the definition of public deposits. It will not be an understatement to say that the MCA’s latest draft rules for public deposits, once enacted, will mean end of the bond markets in India, particularly for non-banking non-financial companies (NBNCs). Almost every possible reason and avenue for companies to issue bonds has been killed.
Below the author discusses each of the options that could have been available and have been possibly clogged by regulators:
Funding sources for companies: Debt capital
Some of the exclusions to the definition of public deposits which corporates could tap on for raising funds include:
Issuance of bonds/ debentures secured by a first charge or a charge ranking pari passu with the first charge on any assets excluding intangible assets has been excluded from the definition of deposits. Further, the value of the security shall be for the amount remaining unsecured after creating insurance on deposit.
There is a huge regulatory disincentive for any company to issue bonds. Mandatorily, bonds have to be secured by first charge. It is trite knowledge that most corporate assets are already subject to first charge of bankers/ lenders, and none of them will be willing to cede a pari passu first charge in favour of bondholders.
Some one has to convey to our regulators that world over, bonds are unsecured; if companies had assets to collateralise bonds, they would rather go for traditional lending methods than look at capital markets.
Further the debenture redemption reserve requirements also act as a disincentive for corporates from compliance perspective to raise funds through debenture issuances.
Compulsorily convertible debentures (CCDs)
Issue of bonds/ debentures that will be compulsorily convertible into shares of the company within five years also fall out of the scanner of deposits.
This again does not seem lucrative as the shareholding of the company get diluted. The company and its shareholders do not have an incentive in raising funds by this mode of security.
Optionally convertible debentures (OCDs) have completely been barred. This exactly is a sample of reactive lawmaking. If Sahara misused OCDs, let us not have OCDs at all! After all, OCDs are an interesting instrument for a company to raise money cheaper than non-convertible debentures (NCDs), and the prospect of appreciation may easily drive retail investors to feel interested in OCDs. Other than the Sahara episode, one fails to understand what could have been the problem with OCDs. Interestingly, both the Reserve Bank of India (RBI) for NBFCs, and the MCA for NBNCs have blocked OCDs as an instrument.
Commercial paper & NCDs
Issue of commercial paper or any other instrument issued in accordance with the guidelines or notification issued by the Reserve Bank of India are exempted from the definition of deposits.
The language of the draft rules exempting “any other instrument issued in accordance with the guidelines/ notifications issued by RBI” includes NCDs issued for tenure of not more than a year.
Both commercial paper and NCDs are short term instruments and does not address the long-term and/ or medium term fund requirements of a company. Surely these cannot be depended on for scaling up or expansion type activities. Also, obviously, NCDs can be used only for short term requirements and does not help companies to meet their long term requirements in any way.
Other securities that a corporate can issue for fund raising are as follows:
Preference shares are not any innovative instrument, but have been used for raising funds in a company. In the pretext of the proposed rules one had to scout for options on fund raising, preference shares would be another option available in hand.
However, tax dis-incentives on dividend distribution tax with regard to preference shares do not make them any popular mode of raising funds with corporate entities.
Subordinated debt is also a way of raising funds, but is typical for non-banking financial companies to issue sub-debt as sub-debt qualifies as Tier II capital. No such motivation/ incentive are available for corporates to explore this option.
The current choices to fall out of the scanner of public deposits are very limited and do not incentivise the corporates to issue securities to facilitate the growth of the bond market.
It seems the law making is working with the motivation of plugging the loopholes in the existing regulatory regime. The mood seems as if the law makers do not want corporates to take action at all as there is a lurking fear that something may go wrong. In an attempt to regulate the corporate sector, the law makers have ended up tightening the regulatory noose for the corporates.
As a nation, we need to realise that exceptions cannot drive the rule. Sahara was an exception, an outright scam. Not because of lack of law, but because for years, no one bothered to check the implementation of the law. And in any case, if scams become the reason for lawmaking, and the objective is a scam-free system, then we have to think of a system that does not move at all, because that is the only scenario which has no risk of scams. It is so unfortunately that a spate of reactive law making.
The very fact that law making should not be impulsive was rightly brought to the forefront in the Damodaran Committee report recommendations as well1.
(Nidhi Bothra is executive vice president at Vinod Kothari Consultants Pvt Ltd.)
1 Read our views on the Damodaran Committee report recommendations – “Will we see policies that are not impulsive law making” here https://india-financing.com/will_we_see_policies_that_are_not_impulsive_law_making_damodaran_committee_recommendations.pdf