Why Elephant Bonds Are Not Worth Going for
The proposal of the high level advisory group (HLAG), set up by the minister of commerce, for an amnesty scheme to bring black money back into India via the issuance of elephant bonds has drawn very few responses. This is not the first time such an effort has been made; but this proposal needs closer scrutiny because it has important macroeconomic implications.
 
To start with, the proposal is to bring the Indian monies parked in offshore financial centres or in the tax havens, in foreign currency. The proposal involves amnesty from persecution. However, for every $100 declared, the declarant will pay $15 as tax and invest $40 in a 20-year to 30-year bond. 
 
The nature of these bonds, as discussed in the HLAG report, can be of two types—London Inter Bank Offered Rate (LIBOR) + 500bps (basis points) coupon bonds (Para 7.2.4) or a 5% fixed coupon bond. The coupon payment earned will be taxed at 75%. 
 
What appears from a plain reading is that the bonds can be foreign currency denominated. The remaining $45 now becomes legitimate asset of the declarant which can/has to be invested in India. The money will be routed through the National Infrastructure Investment Fund (NIIF). 
 
It is claimed that if a sizable mobilisation happens, say to the tune of $500 billion or more, the real interest rates will fall, rupee will strengthen and savings investment gap will be narrowed. 
 
The proposal must be evaluated on two dimensions, namely, its impact on the external situation of India and the domestic impact on interest rates and public finances.  
 
On the external front, a convenient staring point will be to gauge how India’s international investment position (IIP) which records changes in financial assets and liabilities vis-à-vis rest of the world, will be impacted, assuming that, say, $100 billion is mobilised. 
 
One of the main implications of incorporating foreign parked monies in standard IIP accounts is the insight that the assets recorded under IIP are grossly understated. 
 
Thus, depending upon the estimate of the foreign parked monies—which is in the range of $500 billion to $1 trillion—India’s IIP position can change from being net borrower to a net lender to the rest of the world.    
 
If one plugs the figures from the proposed scheme, $15 billion (or Rs1.06 lakh crore @ Rs71 per US dollar) will add to the FX reserves directly; $40 billion (Rs2.84 lakh crore) will add to other liabilities under the assumption that elephant bonds are FX denominated and $45 will be placed under other assets. These changes are depicted in the table below with March 2019 IIP figures as the baseline. 
 
 
Is this good or bad? It is better to evaluate the post-mobilisation outcome through the lens of the Bimal Jalan Committee Report on the economic capital framework of the Reserve Bank of India. 
 
The Committee had noted that “… given the expanding net negative… IIP of India, the magnitude of foreign exchange reserves provides confidence in international financial markets. At present, the foreign exchange reserves (more than $400 billion) are significantly lower than the country’s total external liabilities ($1 trillion) and even lower than total external debt ($500 billion). This position is in contrast to that in 2008 when India’s foreign exchange reserves, at $310 billion, exceeded the then total external debt of about US$224 billion and provided a much larger coverage of total external liabilities that amounted to about $426 billion. This needs to be taken into account in assessing the external risk being faced by the country …”
 
With due respects, the proposal fails to address the external risk mentioned in the RBI report. 
 
The improvement achieved in net IIP is just $10 billion for a mobilisation of $100 billion. The very design that foreign money will be brought in by issuing debt should be a point of concern. 
 
National security advisor (NSA) Ajit Doval had estimated in 2011 that 60% of the foreign money originates from bribes, 15%-20% from business malpractices, 10%-12% from mafia and the rest 8%-9% simply parked abroad to avoid taxes in India. 
 
So, a maximum of 10% of foreign money is from legitimate activity but not repatriated to avoid taxation. For such money, amnesty may be justified. For the rest, the ethics and morality of creating an external (public) liability out of such money needs to be revisited.    
 
How will the domestic debt be impacted? The proposed scheme will lead to one-time net revenue of Rs1.06 lakh crore which is around one-third of gross primary deficit as of March 2019. When the NIIF issues elephant bonds, public borrowing will increase by Rs2.84 lakh crore via off balance sheet route in foreign currency.  
 
By combining the two facets discussed above the proposal, by itself, does not appear to address the twin deficit problem, i.e., simultaneous current account deficit (CAD) and fiscal deficit. 
 
The changes in IIP reflect in finance account of the balance of payment and have no bearing on the CAD (=savings investment gap). Likewise, increase in the public debt via NIIF does not resolve the structural aspects of the fiscal position. 
 
The presumption that mobilisation through the scheme will reduce interest rate is premature. The appreciation in rupee will shrink the existing tax base even after the one-time windfall. 
 
Similarly, reckoning of uncounted foreign assets under finance account does not lead to structural adjustments in CAD in which case it is farfetched to assume that the rupee will reverse its present course in the long-run.    
 
Then some other issues, which are mentioned but not elaborated, include the choice of LIBOR as a benchmark for the coupon when it is certain that LIBOR will be discontinued after 2021. 
 
What the impact of this scheme will be on sovereign rating and domestic asset markets and domestic bank credit, needs to be thought out.  
 
It would have been better if the flow of foreign money was through the UN Convention route in which case the IIP will be impacted only on the asset side. 
 
The government must stake its claim on unclaimed deposits in the Swiss Bank before they are confiscated by the Swiss government.  It is advisable to issue elephant bonds in rupee only so that no corresponding external liability is created.
 
(The author is an economist in the banking sector. Views are personal)
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    PMC Bank: Administrator Should Initiate Auction of Seized Assets, Says Mumbai Police
    The administrator appointed to look after scam-hit Punjab and Maharashtra Cooperative Bank (PMC Bank) should initiate the process to auction assets seized under provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act, and, in next two days, we will provide them the necessary no-objection certificate (NOC) from the court, says Sanjay Barve, commissioner of Mumbai police.
     
     On Monday, the commissioner had called a meeting of PMC Bank depositors at his office. Mr Barve, told depositors, "According to our investigations, under statutory liquidity ratio (SLR) requirement PMC Bank has investment Rs3,000 crore, and properties worth over Rs4,000 crore have been seized so far. In addition, there is jewellery worth Rs90 crore, and luxury cars belonging to several accused in this case. During the next hearing on 13th November, we will request the court to issue the NOC for selling the seized properties. The administrator of the Bank should now initiate auction for the assets seized in this matter."
     
    Rakesh and Sarang Wadhawan, promoters of Housing Development Infrastructure Ltd (HDIL) had given their consent to the auction, and the police would release all provisionally attached movable and immovable property, estimated to be worth over Rs3,500 crore. 
     
    "We are also probing auditors and directors of PMC Bank," Mr Barve, the police commissioner told the bank depositors.  A forensic audit of PMC Bank has been commissioned by the Reserve Bank of India (RBI) through Grant Thornton, a leading global firm.  Mr Barve said that the audit will be completed in the next 20 days and, based on its findings, the police will take necessary action. 
     
     
    The Mumbai police had already given in-principle NOC to the PMC Bank administrator. The administrator could carry out the planned auction after receiving NOC from the court, under provisions of the SARFAESI Act. The Act allows banks and financial institutions to sell properties of defaulters to recover loans. 
     
    On 23 September 2019, the RBI appointed JB Bhoria as the administrator of the scam-hit bank. 
     
    So far, the EOW (economic offences wing) had arrested five persons, including promoters of HDIL and bank's top management. 
     
    Meanwhile, according to The Tribune, Daljit Singh Bal, an absconding director of fraud-hit PMC Bank, has been located in Amritsar in Punjab. Quoting sources, the report says, Mr Bal obtained anticipatory bail from a court in Amritsar on learning that a team from the EOW was on his way to nab him from the holy town. The local court granted him bail after Mr Bal gave an undertaking that he would surrender before the Mumbai police in a fortnight’s time. Mr Bal was on the loans committee at PMC Bank.
     
    The EOW is still trying to locate another director, Gurnam Singh Hoti, who too is believed to be holed up in Punjab. Mr Hoti is also trustee of several Sikh institutions in Mumbai and supposedly helped collect deposits for the Bank from them. 
     
    The report says that the EOW is also looking to extradite one director Dr Parmeet Sodhi, who is in Canada. Dr Sodhi too was on the loans and recovery committees of PMC Bank. In its application before the magistrate in Chandigarh, last week, the EOW had said Dr Sodhi was responsible for sanctioning loans and was one of the directors responsible for the Bank’s operations.
     
    Last month, the Enforcement Directorate (ED) had seized and identified movable and immovable assets worth more than Rs3,830 crore owned by HDIL, the company directors and promoters, as well as official of PMC Bank and others related entities in the fraud case.
     
    So far, the ED has seized several movable and immovable assets in the PMC Bank fraud case. From HDIL promoters and directors, the ED has seized 10 cars, including a Rolls Royce, Bentley and Range Rover, of Rakesh Kumar Wadhawan.
     
    It seized jewellery worth Rs66 crore from several residential premises, including that of Meena Rohra, who is business associate of Rakesh Kumar Wadhawan.
     
    From the Alibag-based farmhouse of Wadhawans, the ED seized four vehicles, including an Audi,Toyota Fortuner, Innova and Mahindra Scorpio, three buggies, two Quadros (all terrain bikes) and a speed boat.
     
    ED also froze fixed deposits (FDs) worth Rs1.50 crore belonging to the Wadhawans from several banks.
     
    The agency identified two aircrafts, Bombardier Challenger 300 VT and Falcon 200 VT HDL, owned by Privilege Airways Pvt Ltd, where both Rakesh Kumar and Sarang Wadhawan are directors. These aircrafts have been kept in custody of Mumbai International Airport, the ED says.
     
    Taking cognizance of the FIR filed into the matter by Mumbai Police's EOW, the ED had filed a money laundering case against HDIL promoters in the PMC Bank fraud case.
     
    The agency also raided the premises of PMC Bank's former chairman Waryam Singh and former managing director Joy Thomas. The directors of the HDIL were arrested on 3 October 2019 by the Mumbai Police after they were found not cooperating with the sleuths.
     
    It is alleged that HDIL, which is facing bankruptcy proceedings, and its group companies had taken huge loans from the PMC Bank. As many as 21,049 fictitious bank accounts were allegedly created to hide the loans which were disbursed in violation of RBI norms.
     
    It has also been alleged that HDIL accounted for nearly 73% of the bank's total loans. Out of the Rs4,355 crore loans under the scanner, around Rs2,146 crore were transferred to accounts held by the Wadhawans. An account belonging to the Wadhawans had a balance of Rs2,009 crore on 31 August 2019, according to the FIR.
     
    During the probe by the RBI, it was found that directors of PMC Bank had replaced 44 suspicious loan accounts with 20,149 fictitious bank accounts with low individual balances by tampering with bank software. The PMC Bank's former Managing Director (MD), Joy Thomas was allegedly behind the masking of the borrowers' accounts.
     
    Meanwhile, according to reports, about 1,950 Sikhs from Maharashtra could not go to Gurudwara Darbar Sahib in Pakistan after opening of the Kartarpur Corridor due to financial crunch caused by the scam at PMC Bank. 
     
    According to a report from The Week, Nearly 2,000 Sikhs from Mumbai, Nashik, Nanded, Navi Mumbai and Thane, most of whom have accounts in the PMC Bank, wanted to go on to the Gurdwara Darbar Sahib as part of the trip organised by local body Nirmaan Sevak Jattha. Hardev Singh Saini, member of a gurudwara committee in Kurla, was quoted in the report as saying, "We were in the process of submitting their details online on the required website, but suddenly due to the PMC Bank crisis many opted out. Of these 2,000 people, only about 50 could finally manage to go. All others dropped out due to lack of money because of the PMC Bank scam."
     
    The PMC Bank has been put under restrictions by the RBI since September after an alleged Rs4,355 crore scam came to light, following which the deposit withdrawal was initially capped at Rs1,000, causing panic and distress among depositors. The withdrawal limit has been raised in a staggered manner to Rs50,000.
     
    Founded in 1984 by S Gurcharan Singh Kochhar, in a small room in Mumbai, the bank had now grown to a network of 137 branches in six states and ranked among the top 10 cooperative banks in the country.
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    COMMENTS

    kd.paranjpe

    4 weeks ago

    There is a very thin line between investment lost as normal business risk and investment lost by fraud and theft. In the second case the criminal intent has to be established. The criminal intent intent seems to be present because, the Bank has given 73% of its loans to the HDIL and its entities, the masking of accounts is another act where the criminal intent is established, the fact that loans were given to an entity that was declared bankrupt is another such act.
    No application of due diligence procedures and bending to the diktat of directors with the vested interests in the debtor company are also indicative of intent to defraud. In such a case, the EoW of the Police should and must be included. The restitution of the defrauded amounts to the rightful owners and punishment to the culprits is well served by a diligent law enforcement.
    In such instances as multiple offences commited by a party,eg PMLA violation and IT evasion. The right of the Bank should get the first priority over the rights of the State.

    Sunil Reejhsinghani

    1 month ago

    Are there working and non working directors Tara singh in one interview said director has no portfolios leave alone sanctioning loan they dont even know whats happening in the bank this article clearly states otherwise

    REPLY

    Sandeep More

    In Reply to Sunil Reejhsinghani 1 month ago

    When cornered, act dumb... Goes an ancient Chinese proverb.

    PMC Bank Update: Will Depositors’ Woes Worsen?
    Inter-Creditor Agreements: Will Problems Worsen?
     
    On 7th November 2019, the Business Standard reported that PMC Bank’s woes might worsen as urban co-operative banks have not been made part of inter-creditor agreements (ICA). This might lead to questions as to where PMC Bank stands in the pecking order for recovery of its dues from HDIL, worth Rs 6,500 crore, Housing Development Infrastructure (HDIL).
     
    Under the Reserve Bank of India’s (RBI) June 7 guidelines on resolution of stressed assets, all bank groups except urban cooperative banks (UCBs) have to mandatorily sign the ICA. The signatories include scheduled commercial banks (not regional rural banks or RRBs),National Bank for Agriculture and Rural Development, National Housing Bank, Exim Bank, SIDBI, small finance banks, as well as systemically important deposit taking and non-deposit taking non-banking financial companies. 
     
    Effectively PMC Bank is now sharing space with a select group comprising high-street mutual funds, private equity firms, alternate investments funds, and off-shore lenders that have no seat at the ICA table. 
     
    ED: HDIL Diverted Rs160 crore of PMC Bank loans
     
    On 6th November 2019, Firspost reported that the Enforcement Directorate's (ED) investigation found that the promoters of Housing Development Infrastructure (HDIL), Rakesh Wadhawan and Sarang Wadhawan, has allegedly diverted a Rs 160 crore, PMC Bank loan to three Delhi-based hotels (called Libra Hotels) in which Rakesh Kumar Wadhawan is a director and shareholder.
     
    An ED official identified these as 3-star hotels named Hotel Conclave Executive, Hotel Conclave and Hotel Conclave Comfort. TheWadhawans are accused of having siphoned funds from PMC Bank using overdraft facilities “disguised” as loan accounts, in collusion with bank officials.
     
    RBI Monitoring Situation
     
    Governor Shaktikanta Das told the media that RBI is closely monitoring the situation at the scam-hit bank. He added that an appointed agency was assessing the market value of the bank's assets (which are spread over various parts of Maharashtra and other states) and they would also check if the assets were encumbered to any other entity. Based on that, the Reserve Bank will take further decisions with regard to PMC Bank.  
     
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