After the Budget 2012-13 disappointments, foreign investors are expected to be relieved by some of the steps taken by the government to relax the FDI norms
The Department of Industrial Policy and Promotion (DIPP) on Tuesday issued the revised Consolidated Policy for Foreign Direct Investment (FDI) into India. After the Budget 2012-13 disappointments, foreign investors are expected to be relieved by some of the steps taken by the government to relax the FDI norms. Here are some of the key changes made in the new FDI policy.
1. Clarification on ‘leasing’ activity of NBFCs
The government has clarified that one of the 18 permitted activities of a non-banking finance company (NBFC), viz. leasing and finance, in which FDI is permitted under automatic route, pertains only to financial leases and not operating leases. This makes it clear that an NBFC classification will only be required if a company is undertaking financial leasing and not when it is undertaking operating leasing.
2. Pharmaceutical sector
A new sector limitation has been added under the new FDI policy for the pharmaceutical sector. Earlier, 100% FDI was permitted under the automatic route with no classification or differentiation based on greenfield or brownfield investment. Now, though the government has retained that 100% FDI in pharmaceutical sector is permissible, it has restricted investment under the automatic route only to the greenfield investments. Brownfield investment in the pharmaceutical sector is differentiated and is made permissible only pursuant to the Foreign Investment Promotion Board (FIPB) approval (i.e. the government route).
The amendment seems to have risen from the concern of the government that foreign entities, instead of investment in greenfield ventures were choosing to take over existing pharmaceutical companies in India. As was also reported by The Hindu in September 2011, between 2006 and 2010, six major Indian companies, including Matrix Lab by Mylan, Dabur Pharma by Fresenius Kabi, Ranbaxy Labs (which was India’s largest pharmaceutical company) by Daiichi Sankyo, Shanta Biotech (Sanofi Aventis), Orchid Chemicals (Hospira) and Piramal Healthcare (Abbott), have been taken over by MNCs and only 10% of FDI has gone to greenfield ventures. This had ignited concerns on India’s healthcare scenario, one of the most important being pricing of drugs. In view of the same, this seems to be a positive change as the approval route gives an opportunity to the government to review the investment on a case-by-case basis and impose restrictions and conditions, as may be appropriate.
3. Foreign Venture Capital Investors permitted to do secondary purchases
Recently, Foreign Venture Capital Investors (FVCIs) were permitted to undertake secondary purchases, which earlier was not permissible and FVCIs could only make primary purchases in accordance with the Securities and Exchange Board of India (FVCI) Regulations, 2000. The same has now been incorporated in the new FDI policy. This is a welcome change as there have been concerns with the FVCIs for not being able to make secondary purchases.
However, since SEBI’s Regulations on the Alternative Investment Funds (AIF) has not been released as of now, the new FDI policy states that FVCI can investment 100% of its corpus in Indian Venture Capital Undertaking (IVCU) and Venture Capital Funds (VCFs). However, the same is likely to change once the SEBI (VCF) Regulations, 1996 are repealed with the notification of the AIF Regulations.
4. Provision on Qualified Financial Investor (QFI) inserted
A new type of a foreign investor—not being a SEBI-registered FII and FVCI—has been inserted in the new FDI policy called a Qualified Financial Investors (QFI) who would meet SEBI requirements for making investment into India. Such QFIs are permitted to make primary as well as secondary investments of listed companies (i.e. invest in equity shares of listed Indian companies as well as in equity shares of Indian companies which are offered to public in India). QFls have also been permitted to acquire equity shares by way of right shares, bonus shares or equity shares, on account of stock split/consolidation or equity shares on account of amalgamation, demerger or such corporate actions. The individual and aggregate investment limit for QFIs is 5% and 10%, respectively, of the paid up capital of a company.
This opens additional doors for foreign investors for making investments into India. Currently, investment could be made under the FDI route, as a SEBI registered FII (or an FII sub-account) or as a SEBI registered FVCI. One positive point from a foreign investor perspective is that no separate registration is required for investment as a QFI. We have to wait and watch to see if SEBI would like to issue guidelines for operation of QFIs.
5. Relaxation in approvals for investment in commodity exchanges
While the sectoral limit for FDI in commodity exchanges remains unchanged, the government has removed the requirement to obtain FIPB approval for investments by FIIs and has only retained the requirement to obtain FIPB approval for the FDI component of the investment. As stated by the government, this change aligns the policy for FDI in commodity exchanges, with that of other infrastructure companies in the securities markets, such as stock exchanges, depositories and clearing corporations.
6. Single-brand retailing
Earlier, investment under the government route in single brand retailing was permissible to the extent of 51% only. Though the government has continued to monitor investments in the single brand retail sector by keeping it under the government route, it has enhanced the sector limit to 100%.
This surely is a step forward to further incentivise the foreign investment in the retail sector by continuing to act as a watchdog at the same time.
7. Investment by Foreign Institutional Investors
At present, FIIs may invest in the capital of an Indian company under the Portfolio Investment Scheme which limits the individual holding of an FII to 10% of the capital of the company and the aggregate limit for FII investment to 24% of the capital of the company. This aggregate limit of 24% can be increased to the sectoral cap/statutory ceiling, as applicable, by the Indian company concerned, through a resolution by its board of directors, followed by a special resolution to that effect.
With a view to make this increase in the sectoral limit more stringent, prior intimation to the Reserve Bank of India (RBI) is now required if the investment is made exceeding the aggregate limit of 25%, but within the specified sectoral caps. It is to be noted that while only intimation is required, approval has not been mandated. This does not additionally burden the FII with approval requirements but at the same time keeps the government informed of the FII investments.
8. Import of capital goods/machinery/equipment—conversion to equity
Presently, conversion to equity is permitted for import of capital goods/machinery/equipment including second-hand machinery. With a view to incentivizing machinery embodying state-of-the-art technology, compliant with international standards, in terms of being green, clean and energy efficient, second-hand machinery has now been excluded from the purview of this provision.
Overall, the changes brought in by the government are to balance the interest of the foreign investors to bring them in line with the economic goals of the government.
For the detailed FDI policy click here
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The major frauds in the banking industry during the last two decades were mainly because of the failure of the audit profession in identifying the signals in advance
The appointment of statutory central auditors for public sector banks (PSBs) was the prerogative of the Reserve Bank of India (RBI) till a few years back, and the banks had practically no say in this matter. This system ensured the independence of auditors, who were not obligated to the banks for their appointment and hence could report their findings without fear or favour. The independence of auditors is widely considered as the cornerstone of the public accounting profession.
However, from the year 2008-2009, the government in its wisdom granted managerial autonomy to the public sector banks to appoint their statutory auditors, by directly sourcing the names of auditors from the panel maintained by Controller & Auditor General of India (CAG) and getting it approved by the RBI, which in effect is a mere formality. However, the RBI has informed the banks that though the autonomy is given to PSBs, the norms for empanelment and remuneration of auditors shall continue to be as prescribed by it. Further, RBI has advised all PSBs to frame their own policy for appointment of statutory central/branch auditors.
This revised practice has been followed for the last four years and it is time for RBI to reflect on this practice. To pre-empt any misuse, it is desirable to make the following changes in the present system to make the auditors’ appointment above board.
If you analyze the reasons for the major frauds in the banking industry during the last two decades, it is evident that it is mainly because of the failure of the audit profession in identifying the signals in advance, many times relying too much on the statements made by the managements of banks. The Harshad Mehta scam, Ketan Mehta scam, the GTB scam, CRB scam, Satyam Computers scam and many others have the auditors squarely to blame for their inability to smell a rat, even when the regulators have found something amiss in their operations with the banks. And in most of these cases, it is the media who finds out skeletons in the cupboards of banks, rather than the auditors, whose job it is to do.
Therefore, when you give autonomy to the banks, it should be coupled with checks and balances to ensure that such autonomy is not misused. As per the media reports, the credit rating of most of the large public sector banks has been recently downgraded, which calls for urgent steps to improve the functioning of banks and their corporate governance standards. As the saying goes “prevention is better than cure”. Hence it is advisable to continuously improve the systems when the going is good rather than take corrective steps after the happening of a scam. The steps suggested above will help in ensuring the independence of the auditors and will go a go a long way in strengthening both the banking institutions and the audit profession in our country.
(The author is a banking analyst and he writes for Moneylife under a pen-name ‘Gurpur’.)
In the US, domestic political compulsions prevent hiking taxes on their super rich, despite people like Warren Buffet offering to pay higher taxes. On the other hand, our poverty-stricken rural poor, designated Below Poverty Liners, are driven to suicides
We, in India, are not the only nation to suffer the likes of finance minister Pranab Mukherjee’s seventh disappointing Union Budget. There is stringent criticism of the US Budget, too.
Today, both India and the USA stand at the cusp of economic downturn, but for varied reasons. The US, like all the major western economies, is trying to steady itself. But domestic political compulsions prevent hiking taxes on their super rich, despite people like Warren Buffet offering to pay higher taxes. President Obama is digging his heels on health insurance reforms and stepping up on local job creation.
Here, in India, we have a very wide income disparity—with the numbers of the super-rich also termed ultra-high networth individuals going up many times and also appearing in the international top rich listing, and on the other hand, our poverty-stricken essentially rural poor, designated BPL (Below Poverty Liners) are driven to suicides. The Planning Commission estimates the poverty ratio at 29.8% in 2009-10 based on calorific consumption patterns linked to the Consumer Price Index.
Taking the American budget first. Paul Krugman, writing for the New York Times News Service headline—Pink slime economics on the US Budget, levels a serious charges—“Republicans in the House of Representatives passed what was surely the most fraudulent budget in US history... isn’t just its cruel priorities, the way it slashes taxes for corporations and the rich while drastically cutting food and medical aid to the needy... (It) purports to reduce the deficit—but the alleged deficit reduction depends on completely unsupported assertion that trillions of dollars in revenue can be found in closing tax loopholes... Representative Paul Ryan the chairman of the House Budget Committee, however, has categorically ruled out any move to close the major loophole that benefit the rich, namely the ultra-low tax rates on income from capital, pay lower tax rate than that faced by many middle-class families... a kind of throwback to the 19th century, where unregulated corporations bulked out their bread with plaster of Paris and flavoured their beer with sulphuric acid... would actually make the deficit bigger even as it inflicted huge pain.
“We’ve had irresponsible and/or deceptive budgets in the past. Ronald Reagan’s budgets relied on voodoo, on the claim that cutting taxes on the rich would somehow lead to an explosion of economic growth. George W Bush’s budget officials liked to play bait-and-switch, low-balling the cost of tax cuts by pretending that they are temporary, then demanding that they be made permanent... The House Republican budget isn’t about to become a law as long as president Barack Obama is sitting in the White House.” Krugman ends with a scatting indictment—“For a lasting budget deal can only work if both the parties can be counted on to be responsible and honest—and the House Republicans have just demonstrated, as clearly as anyone could wish, that they are neither.”
Our Budget for 2012-13, too, has been an uninspiring exercise, inasmuch as it seeks to bring about meaningless cosmetic changes—the basic threshold hiked by just a trifling Rs20,000 to Rs2,00,000 when the Parliamentary Committee had suggested Rs3,00,000. The proposed new deduction of Rs5,000 for preventive health check is begging a lot of questions. The Rajiv Gandhi Equity Scheme has many conditionalities like restricting its availability only to first-time investors, maximum of Rs50,000, three-year lock-in. Restricting the non deduction of taxes at source only on savings bank accounts where the balances maintained by an average Indian are so very low; instead it should have been applicable to all bank deposits (the old Section 80L permitted this)—savings, term and recurring—to be really meaningful.
Adding to the miseries of the aam admi this budget further proposes a major shift in taxing services consequently affecting the poor more than the rich. It has pushed up prices of necessities across the board. Sushil Kumar Modi, the deputy chief minister of Bihar and chairman of the Empowered Committee of State Finance Ministers on GST (Goods and Services Tax) rightly points out that the Centre, by taxing activities listed in the State List, has kicked in constitutional impropriety that lies in the heart of Centre-state jurisdiction as it tantamounts to encroachment on the territory reserved for the states. It transgresses the Lakshman Rekha laid out by the Constitution and also runs the risk of failing to meet judicial scrutiny.
The concept of service taxation initially brought in by the Finance Act of 1994 began with taxing just three services, has today swelled to tax 119 under Entry 97 of List 1 to the Seventh Schedule of the Constitution. It was expected to yield Rs95,000 crore revenue during 2011-12. With the introduction of the Negative List approach, the expanded tax base is expected to bring in increased revenues of Rs1,24,000 crore in the current fiscal.
Perhaps, it is for the first time this budget contains measures to tackle the menace of black money, anti-cross border tax avoidance, benami transactions, inclusion of more tax payers and a more transparent tax network between states, PAN-based GST-N network for facilitating subsidy deliveries, taxing gold purchases and sale of agricultural land, widening corporate taxation, re-opening I-T assessments, flat taxation for incomes generated out of deemed credit, investments and expenditure, tracing and taxing the flow of hot money, bringing transparency in market transactions.
While the direct taxes are reduced by Rs4,500 crore, the indirect taxes increased by Rs40,000 crore. The budgetary allocation for education is a measly 0.73% of the GDP (gross domestic product), an increase from 0.69% earlier, when the international norms for spend on education is 6% of the GDP. Allocation for rural development declined from Rs74,100 crore to Rs73,175 crore, with the actual expenditure last year only Rs 67,138 crore. The allocation for defence is 2% of national income. Both education and defence do not seem to be on the government’s high priority list.
The Indian Union Budget has not brought about any substantive measures to reignite the slowing down Indian economy that is primarily a result policy paralysis arising of the government’s inability to address concerns on vital issues, bringing down GDP growth of 9% in the past two-and-half years to 6.1% in the quarter ending December 2012. Even a fall of 1% brings about almost 15 lakh jobs and a lot of pain.
Economist SS Tarapore, a former deputy governor of the RBI, writing on Inflation will hurt the common person presents a grim warning—macro-economic scenario is fraught with dangers. After two years of close to double digit inflation, it has come down to 7%... created money will provide for growth and common person will suffer inconvenience of a little more inflation... This implies providing incentives to the upper income groups while inflation is to be borne by the lower income groups. The balance of payments Current Account Deficit (CAD) in 2011-12 is expected to be close to 4% of GDP which is even higher than that in 1990-91. The present levels of reserves of $294 billion now cover only five months of imports and one year debt repayment have been stagnant and are now declining. Earlier the reserve cover was as high as 12 months. An unsustainable exchange rate invites external shocks, which could degenerate into a crisis like 1990-91 with an inevitable upsurge in inflation.
There is a crumbling of the rule of law with the neta-babus violating laws with impunity. They have given Raj Dharma, higher than the king, a go-bye. We Indians always held a rule of law expressed as dharma that provided coherence to our lives, reduced uncertainty and assured self-restraint. Bharat Ratna PV Kane rightly called our Constitution a Dharma text. The amendment, in the Budget, going back 50 years to counteract the Supreme Court ruling in the Vodafone tax case is bad enough, though all right thinking people don’t necessarily condone the tax avoidance strategy resorted to by them. The predatory taxation of Cairn to pay $90 a tonne, as against $18 to others. The reopening of environmental clearance to Maharashtra Hybrid Seeds Company, which had carried out 25 environmental bio-safety studies by independent agencies, rigorous field trials by two agricultural universities and complied with all protocols to the government’s satisfaction for the Bt Brinjal. The cancellation of Norway’s Telenor licence initially given out corruptly. These are many of the UPA-2 government’s flip-flops of policy paralysis when it seems to be tying itself in knots because of Coalition Dharma compulsions and not the traditional Raj Dharma that has stood the test of time over the millennia.
(Nagesh Kini is a Mumbai based chartered accountant turned activist).
Credits for inputs