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-VINAY KUMAR THAMMI
DEFINITION: it’s a system by which corporations are direscted and controlled.
The system of rules, practices and processes by which a company is directed
and controlled. Corporate governance essentially involves balancing the
interests of the many stakeholders in a company - these include its
shareholders, management, customers, suppliers, financiers, government
and the community.
THE ROLE OF CORPORATES IN INDIA:
1. Economic growth and development.
2. Government services and schemes implemnted via the publivate partnership(PPP) mode and
hence has a mjor hand in the shaping of india’s future
3. Role in improvement of social indicators like education, health, water, basic services.
4. Role in imports and exports and fortifying the ties with our major trading partners
5. Role of corporates in disaster risk managemnet and post disater relief managemnet.
6. Corporate social responsibility to remove the inequalities and develop those areas not being
concentrated by the government.
7. With the uhering in of LPG, corporates have undeniable role in trade and commerce and basic
8. With the governmnet moving away from its role in service providing by the way of
disinvestments , corporates have a greater role to play.
9. Bridges the gender justice and encourages the merit and skill development.
10. Dividents of demography can be fructified with active intervention of corporates.
11. Helps in inclusive growth and financial inclusion, this being reflected in PC emphasizing its role in
12th five year plan.
12. Helps the economies in coping up with the financial crisis
The governance structure specifies the distribution of rights and responsibilities among
different participants in the corporation (such as the board of directors, managers,
shareholders, creditors, auditors, regulators, and other stakeholders) and specifies the rules
and procedures for making decisions in corporate affairs.
PRINCIPLES OF CORPORATE GOVERNANCE: The Cadbury Report (UK, 1992), the
Principles of Corporate Governance (OECD, 1998 and 2004), the Sarbanes-Oxley Act of
2002 (US, 2002) has speicified following principles;
Rights and equitable treatment of shareholders
Interests of other stakeholders
Role and responsibilities of the board
Integrity and ethical behavior
Disclosure and transparency
NEED FOR CORPORATE GOVERNANCE:
The presence of an active group of independent directors on the board
contributes a great deal towards ensuring confidence in the market.
Corporate governance is known to be one of the criteria that foreign
institutional investors are increasingly depending on when deciding on which
companies to invest in.
It is also known to have a positive influence on the share price of the company.
Having a clean image on the corporate governance front could also make it
easier for companies to source capital at more reasonable costs.
It matters for both the clients (in the form of Improving access to
capital, Improving performance) and the corporate (for value
addition, Reducing investment risk, Avoiding reputational
risk, Developing capital markets )
Dynamic changing structure of ownership
Importance of social responsibility
Proliferation and ubiquitous corporate scams in corroboration with state and
Regulate acquisition, mergers, takeovers.
Liberalization and its associated developments, i.e. deregulation, privatization
and extensive financial liberalization has made it important.
Greater role of corporate in the presnt world effecting wider array of public.
Hence their regulation and control takes primacy over all others.
EVOLUTION OF CORPORATE GOVERNANCE FRAMEWORK IN INDIA:
Companies act of 1956 provided for basic framework for regulation of all the
companies in india.
Securities Contract Regulations Act, 1956 provided for rules and provisions to
be complied by the companies.
SEBI Act, 1992 empowered it to control the corporate in listings and
recognitions and enforce discipline in the share markets.
A separate ministry of corporate affairs has been set up in the government to
look into such issues.
A committee set up under the chairman ship of rahul bajaj by CII , the CII
released the code called “Desirable Corporate Governance”. It looked
intovarious aspects of Corporate Governance and was first to criticize nominee
directors and suggested dilution of government stake in companies.
SEBI had set up a Commission under Kumarmanlagam Birla. This committee
covered issues relating to protection of investor interest, promotion
oftransparency, building international standards in terms of disclosure of
The Department of Companies Affairs (DCA) modified the Companies Act,
1956. It undertakes periodic review and brings about amendments in the
Companies Act, 1956. In 1999, the Act introduced the provision relating to
nomination facilities for shareholders and share buybacks and for formation of
Investor education and protection fund.
The Department of Corporate Affairs constituted Naresh Chandra Committee
in 2002. The committee talks extensively about the statuary auditor-company
relationship, rotation of statutory audit firms/partners, procedure for
appointment of auditors and determination of audit fees, true and fair statement
of financial affairs of companies.
SEBI appointed Narayan Murthy Committee in 2002. Its report mainly
focuses on and makes mandatory recommendations regarding responsibilities of
audit committee, quality of financial disclosure, requiring boards to assess and
disclose business risks in the company’s annual reports.
Clause 49 of the Listing Agreement : has enlisted following requirements for
the corporate governance;
Independence of board
Independence of directors
Duties and remuneration of board and directors
Role of audit committee and auditors.
Appointments and powers of independent directors.
In December 2009, Ministry of Corporate Affairs specified Voluntary
Guidelines on Corporate Governance. These guidelines provide for a set of
good practices, which will 8help the companies to strengthen their internal
governance processes and may be voluntarily adopted by the Indian Public
In March 2012, Ministry of Corporate Affairs constituted a committee under
the Chairmanship of Mr. Adi Godrej, Chairman, Godrej Industries Limited,
to formulate policy document on Corporate Governance. In September, 2012
the Committee submitted its document, specifying seventeen guiding
principles on corporate governance.
The Companies bill waiting to become companies act 2013, mandates the
novel CORPORATE SOCIAL RESPONSIBILITY principle. This would
enhance the corporate governance.
ISSUES IN CORPORATE GOVERNANCE:
Value based corporate culture
Compliance with laws
Disclosure, transparency, & accountability
Corporate governance and human resource management
Necessity of judicial reforms
Globalization helping Indian companies to become global giants based on
good corporate governance
Lessons from Corporate failure
Inclusion of ethics in corporate governance is the important aspect in the improvement of
ETHICAL CORPORATE GOVERNANCE
1. shortest - definitions is, to quote Lord Moulton, "obedience to the unenforceable".
2. Business ethics (also corporate ethics) is a form of applied ethics or professional
ethics that examines ethical principles and moral or ethical problems that arise in a
business environment. It applies to all aspects of business conduct and is relevant to the
conduct of individuals and entire organizations.
NEED FOR ETHICS IN BUSINESS:
Ethics help make relationships mutually pleasant and productive- imbibes a
sense of community among members- a sense of belongingness to society.
Ethics are the guiding principles for any endeavour.
To stop business malpractices
Improve customers confidence
Survival of business
Safeguarding customer rights
Protecting the interest of employees and shareholders
Develop good relations
Healthy competition and consumer satisfaction.
RECENT INITIATIVES TO ENHANCE CORPORATE GOVERNANCE IN
1. Green Initiatives in the Corporate Governance : The Ministry of corporate affairs has
allowed paperless compliances by the companies and Registrar of Companies under the
provisions of the Companies Act, 1956 .
2. Simplification in Procedures and Process under Companies Act, 1956
3. e-Payments in the Ministry: The payment of filing fee by the companies has been
made completely online
4. adoption of International Financial Reporting Standards (IFRS)
5. Investor awareness programmes
6. The Companies Bill, 2012
7. Reorganisation of field offices.
8. Easy Exit Scheme, 2011
9. Setting up of Indian Institute of Corporate Affairs (IICA)
10. Limited Liability Partnership Act
11. National Company Law Tribunal (NCLT)
12. New Bills on Multi State Societies and Multi State Partnerships
13. Various orientation programmes for Directors throughCentres of Excellence, seminars
and conferences topropagate propagate the need for following following good corporate
corporategovernance practices are being organized.
14. Setting up of NFCG in partnership withstakeholders – CII, ICAI, ICSI & FICCI.
15. Setting up of Investor Education and Protection Fund.
16. Amendments to the Acts governing three professional institutes(ICAI/ICSI/ICWAI)
(ICAI/ICSI/ICWAI) with a view to strengthen strengthen the disciplinary
disciplinarymechanism and bring transparency in their working.
17. Empowering SEBI under the SEBI – Clause 49 for greater regulation and monitoring of
18. Mandatory corporate social responsibility (CSR) under the companies act 2013.
THE ULTIMATE AIM OF CORPORATE GOVERNANCE IS FOR A
Voluntary Guidelines on Corporate Governance, The Ministry of Corporate Affairs, December
Vinay kumar thammi,
Infrastructure: Energy, Ports, Roads, Airports, Railways etc.
Infrastructure is the basic facilities needed for the functioning of a community or society. In other words, it is the
basic physical or organizational structures needed for the operation of a society or enterprises. The 12th 5YP
envisaged the investment requirement in infrastructure to the tune of $1trillion, with 47% of this fund coming from
the private sector.
1. Physical infrastructure:
Energy: coal, oil and natural gas, hydro, nuclear and renewable.
Transport: roadway, railway, airway and waterway.
Communication: telecom and postal services.
Urban: transport housing and civic amenities.
2. Social infrastructure: (I will not cover this part)
Energy: India will produce 71% of its energy needs domestically by 2016-17, and 69% by 2021-22. The
remaining will be met through import.
Integrated energy policy (IEP) 2031-32
Coal: India’s reserve as on March, 2012 was 293.5billion tones (40% proven and some 40bn tons proven) &
Domestic production-540million tons in 2011-12 (import-100mn tons) need to increased to 795mn tons by 201617; even then there will be import need of 185mn tons.
IEP says present potential to last for 40years.
Mines & Mineral (development and regulation) bill 2011 for simple and transparent mechanism for
granting of mining lease or prospecting license through competitive bidding; Coal forecasting, private
participation and captive mining for merchant uses.
Pricing change from useful heat value (UHV) to Gross Calorific Value (GCV) in 20012 (grade I-VII: 15%
ash & moisture content) - mainly Bituminous coal. Need to invest in super-critical boiler technology.
Liquefaction of coal: gasification to liquefaction (Sasol process in S. Africa and Fischer Tropsch process in
Oil & Natural Gas: 73% import dependent, 90% import by 2031-32. India’s Refining Capacity – 215mmt in
2013, exporting 60.84mmt of petroleum products worth $50bn (20 refineries: 17 public & 3 Pvt.).
Steps taken by the govt.:
New Exploration Licensing Policy (NELP), 1999- 177 oil & N. Gas discoveries in 39 NELP blocks.
Deregulation of prices: petrol, diesel-dual pricing, L.P.G- 9 cylinders/year, kerosene-direct cash transfer
through ADHAAR, underway; import parity pricing system underway.
Pipeline Network (16 crude pipelines- 106MMT).
Vision 2015: Piped Natural Gas by re-gasification of Liquefied Natural Gas to 200 cities.
Rajiv Gandhi Gramin LPG Vitaran Yojana, 2009- 75% population by 2015 -5.5cr new connections
Rangarajan formula on gas pricing: KG-D6 gas price to go up to $8.4mbtu from $4.2mbtu by April 2014.
International effort: India-Oman (1100km) undersea pipeline, Turkmenistan-Afghanistan-PakistanIndia (TAPI-1700km) pipeline to transport 3billion cubic feet of natural gas per day.
Lost opportunities: Iran-Pakistan-India (IPI) pipeline and India-Bangladesh-Myanmar natural gas
(Sweden has declared that they will have nothing to do with oil by 2050).
Hydro: potential of around 1, 45,000MW: environmental, and relief and rehabilitation issues. (157 projects57,672MW, 38-mega dam with 320MW capacity, 12% free to Arunachal Pradesh).
Nuclear: 20 power plant running – 4780MW, two at Kudankulam (2000MW) yet to connect to grid, five under
Target-20,000MW by 2022 and 63,000MW by 2032.
Signed Civil Nuclear Energy Treaty with 9 countries (US, Canada, Russia, France, Kazakhstan, Mongolia,
S. Korea, Argentina and Namibia).
Major Issue: Safety and Environment (Sweden, Germany and Japan will discard Nuclear Energy by 2040).
Coal Bed Methane (CBM): 4th largest proven reserved. 33 exploration block- Assam, Gujarat, Andhra Pradesh,
Chhattisgarh, M.P, T.N, Odisha, Rajasthan… Production started – 0.28mmscmd (million metric standard cubic
meters per day).
Gas/Chathrate Hydrates: Methane Gas trapped inside ice in coastal sea, ocean sediments, polar seabed, and
permafrost (around 300mt deep in temperate region and nearer in polar region).
Shale Gas: 2012 – draft policy for the exploration and exploitation: “Shale Gas in India: look before you leap”. It
is being considered by a group of ministers. India is believed to have technically recoverable resources of 96
trillion cubic feet (tcf) of wet shale gas.
Ministry of Petroleum and Natural Gas (MoPNG) has identified 6 basins as potentially shale gas bearing:
Cambay, Assam-Arakan, Gondwana, Krishna-Godavaari, Kaveri and the Indo-Gangetic basin. MoPNG has
signed a MoU with the Deptt.of states USA.
US geological survey: India has recoverable resources of 6.1 trillion cubic feet (tcf) in 3 of the 26
ONGC: 34 tcf in Damodar basin alone with 8tcf recoverable (47tcf- total conventional reserves)
Procedure: hydro-fraction or fracking- horizontal drilling by injecting a mixture of water, chemicals (guar
gum…), and sand into the well at very high pressures (8000psi-pounds per square inch) to create a no. of
fissures in the rock to release the gas. It requires minimum land area of 80-160 acres and 3-4 million
gallons per well (11,000 – 15, 000 cubic mts of water).
TERI- india will be a water stressed country by 2030, so the result might not be as dynamic as in the US.
India-waterportal.org: next 15-20 years, consumption of water will increase by 50%, supply by 5-10%;
resulting in to the scarcity of water.
Possibility of contamination of aquifer (both surface and sub-surface) from hydro-fracturing fluid disposal.
Nuclear Fusion: ITER-international thermonuclear experimental reactor, Cadarache, France; started in 2005-07 to
be completed by 2018. It has 7 member countries: Japan, China, India, S. Korea, US, Russia and EU. 50MW input
power to produce 500MW output.
Renewable Energy: Potential – 89,760MW, present installed capacity-28,000MW & plan to double renewable
energy generation by 2017.
Small Hydro: less than 25MW, 3496MW installed with potential of 15,000MW.
1. Bio-fuel: 5% (earlier 10%) blending target, Brazil-25%.
Bio-diesel (mono alkyl esters of long chain fatty acid): jatropha, karanj, Mahua, Soyabean oil…
Ethanol (water soluble alcohol–30% oxygen): Bagasse (2239/5000MW), Corn, Sorghum, Potatoes, Wheat,
2. Solar: Photo Voltaic (363MW) and thermal (800MW) - 1000MW by 2013
JN National Solar Mission – 20,000MW grid connection by 2022.
Major issue: Gallium, Arsenic, Selenium, Indium and Tellurium getting depleted.
Wind: more than 18,000MW in operation, and total capacity of 49,130MW.
Rare Earth Elements (REE) use in magnets in Wind Mills is available mainly in China.
Tidal and Wave Energy: ocean currents are the store house of infinite energy. West coast of India is the most
favorable region for harnessing this energy.
Geothermal Energy: when the Magma from the interior of earth comes out on the surface, tremendous heat is
released. This heat energy can successfully be tapped and converted to electrical energy. Also the hot water that
gushes out through the geyser wells is used in the generation of thermal energy. Himalayan region has major
Bio-energy/ Biomass: energy derived from biological products which include agricultural residues, municipal,
industrial and other wastes (1200MW/17,000MW).
Waste to Energy (WtE) incineration – Okhla – 16MW has taken off but yet to connect to Grid, Ghazipur10MW, Narela-Bawana – 36MW
Ministry of New and Renewable Energy’s (MNRE) flagship program on ‘energy recovery from urban and
industrial waste’, announced in May 2011 aimed to generate 84MW of power from waste by providing subsidies
upto Rs 10cr to developers.
Negative effect of WtE incineration:
1. WHO: Dioxins are one of the “dirty Dozen” – a group of dangerous chemicals known as persistent organic
pollutants (POPs) - potential of causing cancer.
Central Pollution Control Board and Chennai based Non-profit org. Global Alliance for Incinerator
Alternatives (GAIA) revealed life threatening levels of particulates and toxic chemicals including Dioxins
which is 30-40 times above permissible level in Okhla, Delhi. Those who live close to incinerator since
2009 are experiencing incidences of cancer and low birth weight.
2. The United States environmental protection agency (USEPA) recognizes incinerators emit 2.5 times more
carbon dioxide per MW than coal fired power plants.
3. Cost twice the cost of Nuclear Energy, and incinerator relies heavily on govt. fiscal and financial
4. US largest WtE company, Covanta, recently announced its plan to conclude operations in the U.K.,
whereas, the Municipal Corporation of Hyderabad announced its plan to construct India’s largest
incinerator using Covanta’s technology. Europe is committed to ending the land-filling and incineration of
recyclable waste by 2020. Aiming instead to implement a resource-efficiency strategy that will boost a
circular economy; where, all waste is treated as a resource rather than requiring expensive infrastructure to
dispose of it.
(Sustainable waste management option; prevent, reuse and recycle).
Alternative: Plasma Gasification of municipal waste.
Yoshii, Japan – 24tonne per day – running for decade released less than 1% to that of incineration plants.
200 municipal solid waste gasification plants under construction or in operation globally.
India: Pune & Nagpur, 68 tons each/day commercial plants employing this technology have been disposing
of medical and other hazardous wastes.
British Airway partner Solena (US based bio-fuel co.) to set up plants that will gasify 1300 tons/day of
London’s solid waste to use as ATF.
Challenges in power sector: total installed capacity-2, 14, 000MW; Industrial sector-45%, domestic-22%,
agriculture-17% and commercial-8.9%); Transmission & Distribution Loss (India-24%, world average-15%, US &
EU-4%, China-7%), Power theft (20,000cr annual loss), under pricing and subsidies. The overall power shortage8.6% and peak shortage of -9%.
Power sector reform:
Power discipline: unbundle by amending states electricity act (central electricity act, 2003 amended)
Merchant sale of electricity
Integrated energy policy 2031-32
1% cut in consumption – Rs1000cr saving in the economy.
Initiatives taken in Power Sector:
4UMPP, coal-based of 4000MW: Sasan-MP, Mundra-Gujarat: three units of 800MW commissioned in
2012, Krishnapatnam-A.P, Tilaiya—Jharkhand.
Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY), 2005: rural electrification program to provide free
connection (202lakh achieved by 2012) to BPL household.
National Grid: inter-regional transmission capacity of 27,750MW connected to Northern, western, eastern
and NE region in a synchronous mode operating at the same frequency and same mode with southern
Open Access: buyer to choose supplier & vice-versa at the interstate level is now fully functional,
facilitative framework created through the central electricity regulatory commission (CERC), 2008.
Bachat Lamp Yojana (BLY) Scheme: Replacement of incandescent bulb by CFL (in the long run by LED).
11th plan target-62,374MW, achievement: 54,964MW. 12th plan target: 88,537MW.
Other initiatives in energy sector:
National Energy Fund: 0.1% Cess of turnover in energy products for companies worth Rs100cr.
National Mission for Enhanced Energy Emission (NMEEE): to save 23 million ton oil equivalent in 5
Energy Conservation building Code
Energy Security: it means having access to the requisite volumes of energy at affordable prices, i.e.,
supply must be impervious to disruptions and sufficient quantity must be available in time from variety of
1. Telecom: 2nd largest telephone network after China.
National Telecom Policy 2012:
To secure affordable, reliable and high quality telecom and broadband services across the country.
One nation-one license across services area.
One-nation full mobile no. portability and work towards free roaming
Rural Tele-density from 39- 70% by 2017 and 100% by 2020 (total telephone in 2012-951 connections
with 96.7% wireless, urban tele-density-169%, overall- 78.66%)
Telecom, broadband connectivity as basic necessity and work towards ‘right to broadband’.
Affordable and reliable broadband on demand by 2015 (175mn-2017, 600mn-2020 from 2mbps to
Present status: TRAI begged the total no. of internet subscribers in India as of March 31, 2013 at 164.81
million and broadband penetration-1%; 12mn, 7/8 access internet through mobile, expected to cross 165mn by
March 2014. However, comScore put the no. of internet users in India at 74 million. Net users spend the most
time on Facebook, followed by LinkedIn and twitter. While the most unique visitors sites is Google, and the
most popular site for news is Yahoo.
Broadband policy 2004: 22.8mn internet subscribers including 13.7mn broadband by 2012.
Substantial transition to new IPv6 by 2020
National Optic Fiber Network (NOFN)-2.5lakh broadband connections to gram panchayat for e-health, eeducation, e-governance, funded under universal service obligation fund (USOF)-7310 towers set up by 2012.
USOF has also signed an agreement with the BSNL to provide rural wire-line broadband connectivity with a speed
Village Public Telephones Scheme has covered 97% of villages.
Two years after the Department of Telecom (DoT) decided to set up a telecom equipment testing lab at the Indian
Institute of Science (IISc), Bangalore to address security issues, foreign vendors have now refused to share their
design details with the premier academic institute as it could hurt their business interests. This sudden turn of
events will now further delay the setting up of a full-fledged ‘Telecom Testing and Security Certification Centre’
(TTSCC), which should have become fully operational by April 2013. It will also hurt India’s preparedness
towards creating the ‘Telecom Security Directorate’ as mandated by the National Security Council. TTSCC could
be established under the DoT.
2. Postal Services: Amongst the largest network in the world in terms of area covered and people served. It
has broadly 4 service areas:
1. Communication services – letters, post cards…
2. Transportation: Parcel logistic post…
3. Financial: saving banks, life insurance…
4. Premium value added services: speed post, business post, retail post…
Project Arrow launched in 2008: IT driven project to modernize the Post Offices to become part of core banking
solution and real time banking services, better mail delivery, remittances, insurance, saving, Speed Post-One India
One Rate Scheme for just Rs.39 for any consignment weighing up to 50gms (Leasing out land, develop shopping
complexes in postal departmental land, etc. are the other initiatives).
Transport: Road, Railways, Waterways and Airways.
Civil Aviation: 15 international airports out of the total 187 airports (manage by the Airport Authority of India, set
up in 1994). Construction of airports through PPP: IGI T3 – Delhi, Hyderabad, Bangalore and Greater Mumbai
and Completely Pvt.-Kolkata & Chennai.
Operators: 15 scheduled operators including 2 regional and 2 cargos, around 419 aircrafts (Directorate
General of Civil Aviation).
9th largest in the world with 18% CAGR: 142 million passengers (14mn international) - 5% of travelling
population, 1.6 million tons of air cargo.
Worldwide Revenue-$671bn in 2012, just 1% profit, 2013-1.6% (10.6bn), need 7 to 8% profit to cover
1st flight: Allahabad to Naini, 1947 – four service providers
Nationalized: Domestic-Indian Airlines & Air India International: merged in 2007-70%
Open Sky Policy for Cargo
Kingfisher (operation operation from 2005-2012: loss making)
Jet Airways-Air Sahara; KFA- Air Deccan; merged.
Issues: Aviation Industry - $20bn debt.
Strict Entry Rules: At least 5 fleet- Rs 50cr, next 2 fleet-2cr paid up capital, International Route: 5years
experienced plus 20 fleet, 10% capacity in route II to be employed in route I (need to fly non-profitable
route), Route preferences to national carrier (Paris-exclusive for Air India).
High Excise duty on ATF: 4-40%, costing 45% operating cost (33% world average). Monopolies of the 4
state own suppliers. Import will save 25-30% of the ATF cost.
Forged Pilot license: 14, and substandard pilot training schools.
Air India Problems: Rs 5000-7000cr annual losses and 42,000cr since 2006. Retirement age 60years;
large expatriate pilots recruited with 40% higher salary. Ordered 50 Boeing (27 Dreamliner 787) & 40
Airbus aircrafts; 6 Boeing 787 delivered on Jan2013 which constitute 4% of AI’s total capacity (DelhiParis, Frankfurt, 3 domestic and 1 Standby). Indian Pilot’s Guild-AI employees’ (440)-Boeing; Indian
Commercial Pilots Association-IA employees’ (700)-Airbus; strike for parity of pay.
Dreamliner Boeing 787: 210-290 passengers, 16,000km non-stop, 20% more fuel efficient. But due to
overheating of brakes, A/C problems, electrical fires, cracked cockpit window, battery malfunction…50
dreamliners were grounded globally.
Air India: Rs 30,000cr ($6bn) debt restructuring plan.
DGCA: to phase out Expatriate pilots in 9 months.
Direct import of ATF & FDI up to 49%: (Jet Airways-Etihad (24%), Air Asia India, Spice Jet- Emirates/
Tiger Airways, Indigo- Qatar Airways).
Unbundled services: check-in baggage above 15Kg, preferential seats, meals/snacks, carriage of sporting
equipment and musical instruments will bear extra charges.
Railways: Introduced in 1853 between Bombay & Thane: 34Km.
Freight: 1.025billion metric tons in 2012-13 (china, US & Russia), 2011-12: 969mmt. Earnings: 30%
passenger tickets and 70% freight.
Budget 2013-14: Rs 63,363cr (Revenue-Rs.57, 863cr, 2.3% of GDP): 16 zones.
Cross-subsidy: Garibh rath/student concession/pass…and freight charges & upper class ticket set high.
Competition from other modes of transport: Road-4-6 lane, expressway & golden quadrilateral &
waterway- coastal shipping, pipelines, and cheap airplanes.
Doubling of existing single lanes
1. Dedicated Freight Corridor (DFC):
Eastern DFC 1839 Km: Dankuni, Kolkata-Ludhiana, Punjab (target-2017, WB-66% funding)
Western DFC 1499Km: JNPT Mumbai- Dadri/Rewari, Delhi-UP (target-2016, Japan International
Cooperation Agency-77% funding).
2. Adarsh Station: drinking ware, waiting rooms, dormitories (60/980 stations)
3. Anbhumati Coaches: Latest modern milieu
4. Computerized unreserved ticketing system
5. Kisan Vision Project: Cold storage, temperature controlled perishable cargo centers through PPP
6. Linke Holfmann Bush (LHB): Better riding comfort, speed, longer life, amenities, controlled discharge
toilet: implemented in 14 Rajdhanis, 12 Shadabdis, and 11 AC Duranto Coaches.
7. Bio-toilets: 8 trains running with 436 bio-toilets, DRDO to complete it by 2016-17.
8. GPS system & RFID (radio frequency identification device) technology for tracking railway trains.
9. Onboard fire-detection & fire fighting equiptment.
Feasibility study underway:
1. DFC: East-West (Kolkata-Mumbai), North-South (Delhi-Chennai), East Corridor (KharagpurVijayawada), South Corridor (Goa-Chennai), and Chennai-Bangalore freight corridor.
2. High Speed Rail Corridors: 160-200Km/hr; High Speed National Rail Authority (NHSRA) Constituted.
3. Biometric VCD: Driver’s Vigilance Telemetry Control System.
Small wrist-watch like device to monitor driver’s posture, pulse, etc. constantly. If the driver consumed
alcohol and is half asleep in the cabin, station manager would get alarmed and automatically stop the train.
Russia has been using for Loco-pilots (train pilots)
4. Train Collision Avoidance System (TCAS): Combination of GPS & Radio Frequency
Applies brakes without pilots and avoid collision of human errors, rain, fog, sabotage…
(Anti-Collision Device-Raksha Kavach was invented by Rajaram Bojji and patented by Konkan Railway
IR requires Rs.16, 000cr to implement all these steps.
Kakodkar Committee Railway Safety – 1lakhcr
Sam Pitroda Committee on modernization of IR – 5.6lakhcr
IR Vision 2020: Annual outlay of Rs 1.4lakhcr is required over a decade with estimated annual gross
budgetary support of Rs.50, 000cr by the central govt. need to fix the 15,000 unmanned level crossings
which is responsible for 40% of the accident in 2011, in the next 5yrs.
Water Ways: Shipping-95% of India’s trade volume and 68% in terms of value.
Seaports: 13 major ports accounted for 74% of the cargo transport (12 govt. & 1 corporate owned-Ennore port),
187 notified intermediate and minor ports. Two new major port being proposed: Sagar in W.B & in A.P to add
100million tones of capacity.
Commodity transport in terms of volume: POL (petroleum, oil & lubricants)> Container Cargo> Other Cargo>
NW1: Allahabad-Haldia: 1620Km, 1986
NW2: Sadiya- Dhubri: 891Km, 1988
NW3: Kottapuram-Kollam: 205Km, 1991
NW4: Kakinada-Pondicherry: 1095Km, nov.2008
NW5: Talcher-Dhamra(Brahmani river): 623Km, nov.2008
NW6: Lakhipur-Bhanga (River Barak)-target; 1st phase 2016-17 & 2nd phase 2018-19: 121Km, 2013
Road: NH-2% of the total roads NH/Expressways-70,000Km, State Highway-1,54,522Km: National Highway
Authority of India (NHAI)
National Highway Development Project (NHDP);
1. Golden quadrilateral: 5846 completed
2. NS-EW: 7142/6053
3. NHDP phase III-VII: 39809/5959
4. Port connectivity: 380/368
5. SARDP-NE: 388/49
6. Other NHs: 1390/964
7. NH34: 5.5/
Total – 55,460/19,239 completed till
Engineering Procurement & Construction (EPC): contact for far flung areas not viable under BOT (toll).
100% govt. funding-to reduces cost and time overrun.
Introduction of Radio Frequency Identification (FRID)
Less than 5hectare areas not to insist on environment clearance by MoEF.
Select highway projects to private players under Operate, Maintain and Transfer (OMT).
JNNURM (65mission cities) was launched for 7yrs, but it has been extended till April 2014. Its sub-components
under the Unban Infrastructure and Governance (UIG) include: Urban renewal, water supply, sanitation, sewerage
and solid waste management, urban transport, development of heritage areas, and preservation of water bodies. It
has also emphasized on 3 key mandatory pro-poor to enhance the capacity of urban local bodies:
1. Internal earmarking within local body budgets for basic services to the urban poor.
2. Earmarking at least 20-25% of developed land in all housing projects (both pvt. & public) for the
economically weaker sections/low income groups.
3. Implementation of seven-point charter for provisioning of 7 basic entitlements/services.
The Urban Infrastructure Development Scheme for Small and Medium Towns (UIDSSMT): a sub-component of
the JNNURM for development of infrastructure facilities in all towns and cities other than the 65 Mission Cities
covered under its UIG sub-mission. So far it has covered 672 towns and cities under UIDSSMT.
Urban Transport: under JNNURM, proposal for Bus Rapid Transit System (BRTS) have been approved in
Ahmedabad, Bhopal, Indore, Jaipur, Pune-Pimpri-Chinchwad, Rajkot, Kolkata, Surat, Vijayawada and
Vishakapatnam. Purchase of 15,260 bus have been approved and till nov.2012, more than 12,620 modern
intelligent transport system (ITS)-enables low-floor and semi-low-floor buses have been delivered to the
Metro Rail Projects: NCR-3rd phase 103.5Km started, Bangalore-42.3Km by dec.2013, Kolkata-14.67Km by
2015, Chennai-46.5Km by 2015, Kochi-25.6Km, Mumbai-42.94Km, Hyderabad-71.16Km and Jaipur-7Km.
Achievements of the govt. in Infrastructure sector in the last few years:
1. Special purpose Vehicle (SPV)
India Infrastructure Finance Company (IIFCL) set up in 2006 for long term projects by providing up to
20% of the project cost both through direct lending to project companies and by refinancing banks and
financial institutions. It raised fund both from domestic and international market on the strength of govt.’s
guarantees. At the end of 12th plan it will become a catalyst for mobilizing resources for financing
infrastructure by providing guarantees for bonds issued by private infrastructure companies rather than
expanding its direct lending operations. This would enable mobilization of insurance and pension funds,
external debt, and household savings.
Infrastructure Debt Fund (IDF): tax free bonds up to Rs.50, 000cr- 1st IDF NBFC set up by ICICI, BoB,
CITI, and LIC.
Rural Infrastructure Development Fund (RIDF): RIDF-XIX in 2013-14 to Rs.20, 000cr for warehouse,
god-own, cold storage, silos…
Viability Gap Funding (VGF): 20% cost to be borne by the govt. with a corpus of Rs.2000cr; 13 new
projects qualified under VGF-cold chains and post harvest storage, education, health, and skill
development, NIMZ, oil/gas/LNG storage facility, irrigation, telecom, infrastructure in agri. Market…
PPP: toll, annuity, VGF, Negative grant…BOT-expressway, BOO-Mobile tower, BOOT- highway, DBOT
(design built operate transfer), DBFO (design built fund operate), BLT (built lease transfer)
WB report- India received almost half of Pvt. Participation in Infrastructure (PPI) since 2006, in
developing countries, and 98% of the total regional investment with a total investment of $20.7 billion in
2011. By end dec.-2012, there were 900 PPP projects in infrastructure sector.
Resources requirement: 47% pvt.; FDI- decline in inflow in the last few years due to regulatory
uncertainties, slower growth, and delays in acquisition of land; Long term resources-Banking, Insurance,
Pricing: subsidy, under-pricing, cross-subsidization…
PPP model: sufficient?
Govt. inefficient spender
Dovetailing- Planning Commission
## ONGC acquisition of Crude oil asset abroad: (Indian companies investment commitment to date in overseas
market-$100billion, actual investment-$25billion)
Overseas oil assets don’t constitute energy security-neither ONGC Videsh Limited (OVL) nor its Chinese
counterpart actually brings any significant quantities of oil from any of its overseas assets. Most of OVL’s
overseas oil production is sold in the local or international markets and the company is compensated in cash
payments. Gazprom was nominated the sole export agency for gas exports from Sakhalin. As for gas, OVL does
not bring to India even a molecule of gas produced in its own fields in Sakhalin, Vietnam or Myanmar. China fares
better in this regard, primarily because it has had the foresight to build transnational gas pipelines. Even in the case
of producing fields, equity participation is subject to certain contractual terms with the host government. Sharing
equity with other partners as in a consortium or joint venture is also subjected to the terms of the consortium or
joint venture agreement or the operating agreement between parties.
August: OVL acquired 10% stake in Mozambique gas field from Anadarko Petroleum Corp of US. It also
acquired in June, along with OIL, 10% stake in the same block from Videocon Group, and 2 blocks each in
Columbia and Bangladesh.
Types of participation:
Production sharing agreements-usually has an express provision with the host government wherein the
foreign investor can take his share of production in kind (ownership of the mineral vests with the host
government, except in the U.S. impose Domestic Market Obligations where the operator is required to sell
part or all the production to the local market). Sometimes, the domestic market has prior claim and only
surpluses can be exported. Certainly OVL can exercise its option to take its profit share ex ante and bring
the oil or gas to India wherever it is able to do so.
Service contracts- envisage only a pre-determined fee, not a share in production,
If the circumstances allow it, OVL can swap its equity oil with other buyers, for example; it can swap
Sakhalin/Venezuelan oil with Japan and divert oil bound for Japan from the Persian Gulf region to our
When international prices of crude/gas reign high, a risk-free asset whose production/development costs
are reasonable can make an excellent investment option, provided we have not paid a higher-thancompetitive price for acquiring the asset.
References: Indian Economy by Dutt & Sundaram and Ramesh Singh, India year book, Economic Survey, The
Hindu, Times of India, Yojan and, Union Budget.
Manufacturing Revolution: Need of the Hour
“The root of wealth is economic activity
and lack of it brings material distress. In
the absence of fruitful activity, both
current prosperity and future growth are
in danger of destruction.”
The manufacturing sector is crucial for
employment generation and development of
an economy. Historically, the development
processes have witnessed a trend of people
shifting from agriculture to non-farm
activities such as manufacturing and
services. This renders manufacturing crucial
for India’s development and employment
objectives. However, the current share of
manufacturing in GDP has halted at 15%,
much below its potential, thwarting India
from fully leveraging the opportunities of
globalisation. Recognising this, Government
of India (GoI) has announced the National
Manufacturing Policy, 2011 which inter alia
envisages the rise of manufacturing’s share
in India’s GDP to 25% by 2022 and creation
of an additional 100 million jobs in this
sector by the same time.
Let us juxtapose the following two aspects:
Agriculture accounts for a disproportionately
large share in employment
Input (workforce) - Output disequilibrium
* Figures as per Economic Survey 2012-13
Need to Boost Manufacturing
The above imbalance resulting into
diminishing returns can only be cured by
diverging the extra workforce to remaining
sectors i.e. secondary and tertiary. Since the
service sector requires more educated and
skilled manpower as compared to other
sectors, therefore, manufacturing sector can
only play vital role in seizing our
demographic dividend. And above all,
service sector in India has already played its
part by giving a handsome
contribution of 64.8% of GDP (including
Known economist A.G.B. Fisher has
remarked, “In every progressive economy,
there has been a steady shift of employment
and investment from the essential primary
activities……… to secondary activities of
all kinds and to a still greater extent into
manufacturing has a multiplier or ripple
effect through indirect creation of two to
three jobs in the industries/ sectors that
supply (primary sector) and service (tertiary
sector) the manufacturing activity. For
China, South Korea, Taiwan and for most of
our more successful Asian neighbours, it
was the manufacturing expansion that
ameliorated the lives of millions of workers
and delivered growth dividends, lifting
entire economies into a new hemisphere.
The Current Signs of Distress
A. Burgeoning Current Account Deficit
(CAD): India’s CAD widened to a record
5% of GDP in 2012-13 fiscal, mainly due to
sluggish exports. In the quarter ending
December 2012, it reached an all time high
level of $33bn i.e. 6.7% of GDP.
B. Abysmal Performance: India’s GDP
growth has hit a decade low of 5% with
HSBC manufacturing Purchase Mangers’
Index (PMI) at a 50- month low in May
2013, indicating that India’s industrial
recovery is moving sharply into reverse.
C. Mediocre Rankings: World Bank in its
‘Doing Business 2013’ Report has ranked
India on 173rd position out of 185 countries
in starting a business and 132nd in case of
doing a business. On Goldman Sachs’
Growth Environment Score (GES) 2012,
India with a meager score of 3.92/10 is
ranked 151 out of 183 countries.
D. Inordinate Delays in Land Acquisition:
Following long delay in land acquisition,
two steel majors- POSCO and ArcelorMittal
have scrapped their 6 million and 12 million
tonnes steel plant respectively, leaving
behind the impression of unconducive
economic climate in the country.
E. Depressing Index of Industrial
Production (IIP): IIP contains 682 items
clubbed in 399 groups: 1 in mining sector, 1
in electricity sector and 397 in
manufacturing sector and their respective
sectoral weightage stand at 14%, 11% and
On account of flop show by manufacturing
sector, IIP contracted by 1.6% in May 2013,
lowest in the past 11 months, indicating the
urgency of manufacturing reforms.
It’s the time to address the issues
India seriously needs to look on the
following aspects to uplift overall business
sentiments and to give fillip to investment in
1. World Class Physical Infrastructure
In World Competitiveness Report 2013, India
finds a dismal 40th rank out of 60 nations,
mainly due to red-tapism involved in getting
environmental and forest clearances, land
acquisition and other hurdles faced by India
Inc and foreign entrepreneurs. Recently
Investment (CCI) for speedy clearances of
big ticket projects involving investments of
`1000 crores or more in sectors such as
infrastructure, manufacturing, etc. and the
success stories of Public Private Partnership
(PPP) projects in various backward states
are a step forward in this direction.
2. Flexibility in Labour Laws
India’s archaic and rigid labour laws are a
big hurdle, with 45 laws and 16 associated
rules at the national level and close to its
four times at the state level to monitor the
functioning of the labour market. The
possible solution lies in harmonizing these
various rules so as to make them flexible
and create greater private sector demand for
growing surplus of unskilled
particularly in BIMARU states.
3. Attracting Foreign Direct Investments
5. Diversification of Export Markets
In 2012-13, FDI inflows in India amounted
to $22.4bn, almost 5 times less than China.
Aren’t we suffering from ‘Policy
Paralysis’? Because even after lot of
hullabaloo, cap on FDI in multi brand retail
sector was raised to 51% in Sept. 2012, but
any encouraging response is yet to be seen.
Japanese companies which invested heavily
in China during last 3 decades are now
feeling overexposed. India needs to ensure
that it emerges as an alternative destination
for such companies.
If the manufacturing sector has to grow in
the range of 12-14% over the medium term,
exports have to register a growth rate of 2025% in real terms. Our main export
destinations are Western Europe and the US.
However, growth centers in the coming
decades are expected to be economies of
Africa and Latin America. It is pertinent for
Indian manufacturing companies to grab the
first mover’s advantage and look at tapping
4. Development of Micro, Small and
Medium Enterprises (MSMEs)
MSMEs have been defined in MSMEs
Development Act, 2006 based on the
investment limit in plant and machinery or
equipment as under:
Up to 25 lacs Up to 10 lacs
Up to 5 crores Up to 2 crores
Up to 10 crores Up to 5 crores
(Amount showing investment in`)
MSMEs account for 8% of GDP, 45% of
manufacturing output and 40% of exports.
Albeit MSME sector falls in the category of
Priority Sector Lending, only 8% of total
bank credit, find its way into this sector.
Thus, there is a dire need of ‘financial
inclusion’ in form of microfinance, venture
capital funding, etc. Being labour intensive,
MSMEs have the potential to absorb the
6. Development of Business Clusters
India needs to really focus on development
of business clusters to create an eco-system
of supply-chain responsiveness and lower
logistics cost. These clusters will converge
the advantages of higher innovation and
employment generation for smaller firms
with scale and cost advantage of larger
organisations and can potentially help in
eliminating the Bullwhip effect to some
extent. Their advantages are clearly visible
in pharma clusters in Andhra Pradesh and
knitwear clusters in Ludhiana.
7. Harnessing the power of Information
and Communication Technology (ICT)
Productivity is a function of innovation and
technology. But due to India’s miniscule
spending in R&D i.e. 0.9% of our trillion
dollar GDP, we have failed in culminating
the global best business practices. To add
fuel to the fire, researches reveal that our
thinking power has been hijacked. India is
on 66th position in Global Innovation Index,
2013. The best fit solution is to make hi-tech
applications affordable. Learning from the
Development Finance which offers 75%
financing at 3% interest over 5 years for
SMEs to buy ICT applications, we have to
incentivize any action in this direction.
8. Stay Hungry, Stay Foolish
We need to explore all the plausible ways to
ensure that our unexplored core strengths
won’t turn out to be the Achilles’ Heel.
Hand-in-hand, unorganised manufacturing
sector should also be given priority with
regard to its development and recognition.
Appropriate tax holidays, more SEZs,
enhancing single window clearance facility,
etc. can also attract mega investments.
Highlights of some recent Government
Since the crisis is systemic and, therefore,
it needs a systemic response. Following is
the gist of some recent responses from GoI:
i) National Manufacturing Policy (NMP),
2011: As mentioned earlier, its prime
objective is to enhance the share of
manufacturing in GDP to 25% and to create
additional 100 million jobs over a decade or
so. It also lays emphasis on promotion of
clusters and aggregation, especially through
the creation of 12 National Investment and
Manufacturing Zones (NIMZs).
recommendation of Mayaram Panel, FDI
norms in 13 sectors have been liberalised,
indicating that reforms are underway. 100%
FDI is allowed in single brand retail trading,
49% of it can come through automatic route
and the balance through approval of Foreign
Investment Promotion Board (FIPB).
Currently, 51% FDI is allowed in multi
brand retail trading subject to certain
iii). E- Biz Project: It is a mission mode
project under the National e-Governance
Plan (NeGP) for promoting an online single
window for business users.
iv) Invest India: It is a joint venture
company between the DIPP and FICCI. It
will act as a structured mechanism to attract
investment by providing inputs on all
aspects of doing business in India to
prospective overseas investors.
The Way Ahead….
As wages rise and China evolves into a
high-cost economy, India need to fill the
vacuum to become the global centre of
manufacturing. A Boston Consultancy
Group (BCG) report reveals that India may
become 5th largest manufacturing nation if it
can accomplish the targets set out by NMP,
2011. We are still the beacons of light and
not the temples of doom since our
demographic dividend is our biggest asset.
Showing concerns over the economic
growth of the nation, Hon’ble President Shri
Pranab Mukherjee has recently said
“....Indian economy has resilience to
overcome the problems.” We arose, we
arise and we will arise, provided we must“Think Global, Act Local”.
1. Article on ‘For a manufacturing
Revolution’ by Amitabh Kant in Times of
India dated July 11, 2013
2. Economic Survey 2012-13
3. Indian Economy 67th Revised Edition by
Gaurav Datt and Ashwani Mahajan
4. Book entitled ‘Chanakya’s New
Manifesto: To Resolve the Crisis within
India’, authored by Pavan K. Verma
5. Mrunal’s Analysis of Chapter- 9 of
Economic Survey 2012-13:
Name: Prateek Loonkar
Quantitative easing and its effect on World Economy
Ben Bernanke introduced a first round of quantitative easing during the worst of the financial
crisis, as global markets tumbled and liquidity was sucked out of the system. Quantitative easing
is an unorthodox application of monetary policy by which a central bank, in this case the Federal
Reserve, loosens monetary policy further after having dropped the Federal Funds rate to the zero
range. This is done by purchasing longer-term assets, such as 10 year Treasury bonds, in order to
push down interest rates further down the yield curve. Quantitative easing, or QE, came into
prominence after Japan attempted to prop up its economy after a massive financial and economic
crash during the 1990s. Japan entered what is commonly referred to as the "Lost Decade," where
not even QE managed to boost output substantially.
How QE affects the world economy.
For understanding this we need to understand the long term bond structure (Govt Bond).
A bond has 3 things:
3-Maturity period :
In the market if any financial institution purchases the bonds it will purchase in Market price.
Market price may be more than Face value or equal to face value or less than face value. For
clearly understood this let take a look on this example:
Suppose a bond has: face value-100 Rs or USD, Coupon Rate -10% and maturity period
is 5 year.
If any Financial institute or person buy this bond at market price let say 105 Rs than the
yield will be (110-105)/105 = 4.8%
And If any Financial institute or person buy this bond at market price let say 95 Rs than
the yield will be (110-95)/95 = 16%
So it is clear from this example that lowers the market price higher the yield and more the fund
will go to for buying bond. But What fed Bank did that it buy the bonds of 80 Billion USD per
month so Supply of bond reduced in the market which leads to higher market value and financial
institute or person may decide not invest on bond, invest in other things like share market. So the
double fund (fund of financial institute and fund by Central Bank) is channelized in different
share market in the world. And growth rate increases which was not sustainable.
Recently US fed bank decide for tapering of QE, so supply of bond in the market is increases and
yield will also increase. So the persons or financial institutions started to invest on bonds so it
leads to capital flight from different share market in the world. This leads to depreciate of
currency now a days happening in many developing countries.
This is a single country analysis which affects the global economy. When more developed
countries involved in QE than the picture is more worse.
When zero rates of interest have failed to stimulate developed economies (mainly G-4 economy:
Japan, USA, Eurozone, UK) , the developed countries have resorted to large-scale asset
purchases by their central banks, such as corporate bonds or mortgage backed securities, to pump
more money into the banking system.The aim is to extend credit to business and industry
and encourage consumption.
In the immediate aftermath of the global financial and economic crisis in 2008, when there was a
danger of financial collapse, both advanced as well as emerging economies adopted stimulus
packages, to revive demand, maintain trade flows and avoid large-scale unemployment. During
the crisis phase of 2008/09, QE played an important role in crisis management, helping advanced
and emerging economies alike.
However, while emerging economies have weathered the crisis and seen a revival of growth, the
G4 continue to experience economic stagnation, depressed markets and large-scale
unemployment. Their response has been to persist with even larger doses of QE as a means of
propping up demand, encouraging banks to expand and boosting stock valuations.
Before the crisis, the U.S. held 700 to 800 billion dollars of Treasury notes. The current
level is 2.054 trillion dollars. In the latest round, QE-3, the U.S. Federal Bank is
committed to the purchase of 40 billion dollars of mortgage-backed securities per month
as long as unemployment remains above 6.5 percent.
The European Central Bank (ECB) has pumped 489 billion euros of liquidity into the
eurozone since the crisis, while in the United Kingdom QE has reached the level of 375
Most recently, the Bank of Japan has decided to pump 1.4 trillion dollars in the next two
years into its economy, aiming at a two-percent inflation rate by doubling the money
The assets of the G4 central banks have expanded from a figure of 11-12 percent of their gross
domestic product (GDP) to the current unprecedented level of 23 percent. These assets were 3.5
trillion dollars in 2007 before the crisis. They are now nine trillion dollars and rising. This is the
scale of liquidity expansion we are dealing with.
Since interest rates in the G4 remain at zero and their economies remain stagnant, it is inevitable
that there will be significant capital outflows to emerging and other developing economies, in
quest of higher risk-adjusted returns.This massive and continuing surge of capital outflows to
emerging and other developing economies is having a major impact. Corporations, which
have a sound credit rating, are taking on more debt, and increasing their foreign exchange
exposure, attracted by low borrowing costs.
Their vulnerability to future interest rate changes in the developed world and exchange rate
volatility will increase. Such inflows put upward pressure on exchange rates, stimulate credit
expansion, and cause inflationary pressures, which pose a major challenge to policy-makers in
the developing world.
Most of the capital inflows are in the nature of portfolio investments, which are prone to sudden
and volatile movement and puts emerging economies at greater risk. The volatility one has
witnessed in the Indian stock market is a case in point. In general, we may conclude that the
overall impact of these capital flows is expansionary and distortionary.
There has been considerable criticism of the G4’s unconventional monetary policies from the
emerging economies, including the BRICS (Brazil, Russia, India, China and South Africa).
The magnitude of QE has had unintended consequences beyond the borders of the G4, especially
because their currencies are not only fully convertible but, together, constitute the pillars of the
global financial system.
The U.S. dollar is the world’s leading reserve currency, and the euro, the British pound and the
Japanese yen together constitute the basket of currencies the International Monetary Fund (IMF)
uses to value its Special Drawing Rights. Thus, the nature of the G4 currencies and their
significant role in the global financial market ensures that QE undertaken by them has a global
impact on economies across our globalised and interconnected world.
It is necessary, therefore, for the G4 to act with great responsibility and to work together with the
emerging economies, to minimise the adverse effects of their QE policies. It would be
particularly important to forge a consensus on how to handle the potential financial turmoil and
disruption that may afflict developing economies once the QE is sought to be retired and interest
rates once again become positive in the G4. The sudden and large-scale reversal of capital flows
is a likely scenario that would need to be anticipated and managed.
The Asian financial crisis of 1997/98 was, in part, triggered by an earlier version of QE pursued
by Japan in the aftermath of the bursting of its property and asset bubble in the early 1990s.
Then, too, the large inflow of low-cost yen loans led to the asset price bubbles, inflationary
pressures and currency instability in the Asian economies. They paid a heavy price in the
A larger, more pervasive crisis may await the emerging and developing economies unless there
is a much more coordinated and careful handling of the risks that are already building up. The
G20 had also this issue at the top of its agenda.
Sandeep Kumar Omre
Commercial Banks: Commercial Bank may be defined as the financial institutions that deals
with deposit and advances of a business organization [RBI is not a commercial bank]. These are
of three type:
A) Public Sector Bank ( 19 GoI undertaking + 1 IDBI + 1 SBI + 5 SBI Associate)
B) Private Sector Bank (ICICI,YES,AXIS etc whose head office is in India)
C) Foreign Banks (HSBC,BANK OF AMERICA etc whose head office is overseas)
Assets and Liabilities: for a bank asset is advances (loans) and liabilities is deposits.
Types of deposit: Term Deposit (That is open for a particular time period e.g. FD)
Demand Deposit (Current Account Saving Account)
Repo Rate: Repo rate is a measure to control the flow of money supply in the market. It is a rate
at which Central Bank (RBI) lends funds to commercial banks. Regulated by RBI. (Currently
Reverse Repo Rate: it is a rate at which banks parks their access money with RBI. Regulated by
RBI. (Repo Rate -1) % currently 6.25%)
CRR( Cash Reserve Ration): The portion of the bank’s net time and demand liabilities that is
to be maintained with RBI is CRR. Regulated by RBI. (Currently 4.00%)
SLR (Statuary Liquidity Ration): The portion of the bank’s net time and demand liabilities
that is to be maintained with Bank in the form of liquid (that is easily encashable like gold or
government bond or securities) is SLR. Regulated by RBI. (Currently 23.00%)
How much a bank can lend for advances: Suppose total income =100. Than SLR =23 CRR =4
to be reserved. Rest 73 can be given as advances.
Note1: Reducing any rate means flowing the money in the market. Increasing any is vice
Note2: Repo and Reverse repo are also called as liquidity adjustment facility (absorption
and infusion of money; repo is infusion and reverse repo is absorption) If repo is increased
bank will borrow money at high rate and also bank will lend the money to customer at
higher rate and vice versa.
Supply of money:
RBI lends money to banks banks lends to customer, customer invests in market.
If supply of money is in access purchasing power will increase for customer (Because if you
have money you will invest it somewhere or you will purchase any goods). Purchasing power
increases means inflation increases. So RBI increases the rate. And vice versa.
Priority Sector Lending: (Source : RBI http://rbi.org.in/scripts/FAQView.aspx?Id=87)
Priority sector refers to those sectors of the economy which may not get timely and adequate
credit in the absence of this special dispensation. Typically, these are small value loans to
farmers for agriculture and allied activities, micro and small enterprises, poor people for housing,
students for education and other low income groups and weaker sections.
Priority Sector includes the following categories:
(ii) Micro and Small Enterprises
(v) Export Credit
Total Priority Sector
Advances to Weaker Sections
Domestic commercial banks /
Foreign banks with 20 and
(As percent of ANBC or
Credit Equivalent of OffBalance Sheet Exposure,
whichever is higher)
Foreign banks with less than
(As percent of ANBC or
Credit Equivalent of OffBalance Sheet Exposure,
whichever is higher)
No specific target.
No specific target.
Nostro and Vostro Account: Nostro account is account maintained in a foreign bank by
domestic bank. Vostro account is account maintained in domestic bank of a foreign bank.
Non Performing Assets (NPA): Any bank asset(advance or loans) of which principal and
interest amount is not repaid for a certain period of time is called Non Performing Assets.
Generally if principal of an asset is not repaid in 90 days or interest is not repaid in 180 days the
asset is classified as non performing asset (NPA).
Real time Gross Settlement(RTGS): The acronym 'RTGS' stands for Real Time Gross
Settlement, which can be defined as the continuous (real-time) settlement of funds transfers
individually on an order by order basis (without netting). 'Real Time' means the processing of
instructions at the time they are received rather than at some later time; 'Gross Settlement' means
the settlement of funds transfer instructions occurs individually (on an instruction by instruction
basis). Considering that the funds settlement takes place in the books of the Reserve Bank of
National Electronic Fund Transfer: National Electronic Funds Transfer (NEFT) is a nationwide payment system facilitating one-to-one funds transfer. Under this Scheme, individuals,
firms and corporates can electronically transfer funds from any bank branch to any individual,
firm or corporate having an account with any other bank branch in the country participating in
the Scheme. (source RBI http://rbi.org.in/scripts/FAQView.aspx?Id=60)
Note: For transferring the funds through RTGS and NEFT the bank branches should be
RTGS and NEFT enabled as the case may be.
Note2: Limit for NEFT: no minimum or maximum limit however PAN card is mendatory
for NEFT remittance for more than 50,000). For RTGS minimum limit is 2,00,000 but
there is no upper limit.
Base Rate: It is a minimum interest rate below which bank can not lend [advances/loans] to
customer. It is determined by banks themselves.
SWIFT: Society for Worldwide Inter-bank Financial Telecommunication is a messaging system
through which financial messages pass from one financial institute to other financial institute. It
is a internationally acceptable financial messaging system. For ant messaging through SWIFT a
bank must have a SWIFT code. It is helpful in forex transaction.
IFSC : IFSC or Indian Financial System Code is an alpha-numeric code that uniquely identifies
a bank-branch participating in the NEFT system. This is an 11 digit code with the first 4 alpha
characters representing the bank, and the last 6 characters representing the branch. The 5th
character is 0 (zero). IFSC is used by the NEFT system to identify the originating / destination
banks / branches and also to route the messages appropriately to the concerned banks / branches.
(source RBI http://rbi.org.in/scripts/FAQView.aspx?Id=60). It is used for domestic
transaction in India.
Electronic Clearing System (ECS): ECS is an electronic mode of payment / receipt for
transactions that are repetitive and periodic in nature. ECS is used by institutions for making bulk
payment of amounts towards distribution of dividend, interest, salary, pension, etc., or for bulk
collection of amounts towards telephone / electricity / water dues, cess / tax collections, loan
installment repayments, periodic investments in mutual funds, insurance premium etc.
Essentially, ECS facilitates bulk transfer of monies from one bank account to many bank
accounts or vice versa.
ECS Credit is used by an institution for affording credit to a large number of beneficiaries (for
instance, employees, investors etc.) having accounts with bank branches at various locations
within the jurisdiction of a ECS Centre by raising a single debit to the bank account of the user
institution. ECS Credit enables payment of amounts towards distribution of dividend, interest,
salary, pension, etc., of the user institution.
ECS Debit is used by an institution for raising debits to a large number of accounts (for instance,
consumers of utility services, borrowers, investors in mutual funds etc.) maintained with bank
branches at various locations within the jurisdiction of a ECS Centre for single credit to the bank
account of the user institution. ECS Debit is useful for payment of telephone / electricity / water
bills, cess / tax collections, loan installment repayments, periodic investments in mutual funds,
insurance premium etc., that are periodic or repetitive in nature and payable to the user
institution by large number of customers etc.
Formulates, implements and monitors the monetary policy.
Objective: maintaining price stability and ensuring adequate flow of credit to productive
Regulator and supervisor of the financial system:
Prescribes broad parameters of banking operations within which the country''s banking
and financial system functions.
Objective: maintain public confidence in the system, protect depositors'' interest and
provide cost-effective banking services to the public.
Regulator and supervisor of the payment systems
o Authorises setting up of payment systems
o Lays down standards for operation of the payment system
o Issues direction, calls for returns/information from payment system operators.
Manager of Foreign Exchange
Manages the Foreign Exchange Management Act, 1999.
Objective: to facilitate external trade and payment and promote orderly development and
maintenance of foreign exchange market in India.
Issuer of currency:
Issues and exchanges or destroys currency and coins not fit for circulation.
Objective: to give the public adequate quantity of supplies of currency notes and coins
and in good quality.
Performs a wide range of promotional functions to support national objectives.
Banker to the Government: performs merchant banking function for the central and the
state governments; also acts as their banker.
Banker to banks: maintains banking accounts of all scheduled banks.
Other Name of RBI:
1. Banker’s Bank
2. Government’s bank
3. Lender of the last Resort
4. Central Bank
5. Manager of foreign exchange
RBI Guidelines for Issuing Licence to Nw banks in private sectors:
Following are the highlights of the Reserve Bank of India's guidelines for licensing of new banks
in the private sector:
Corporates, PSUs and NBFCs can set up a bank.
No bar on entities in sectors like brokerage, realty Minimum paid-up equity capital to be
Rs. 500 crore.
New banks to get listed within 3 years of business.
Foreign shareholding limited to per cent for first 5 years.
RBI to seek feedback on applicants' background from other regulators, Income Tax, CBI
Licence seeker should have 10 years of successful financial track record, sound
credentials and integrity.
To comply with priority sector lending targets; open at least 25 per cent branches in
unbanked rural areas.
Boards to have majority of independent directors.
Business plan should be realistic, viable and address financial inclusion.
Name: Bipin Chandra Upadhyay
List of references: http://www.rbi.org.in
different sources of news papers regarding the definitions.
White label ATMs and Islamic Banking
What are white label ATMs?
White labeled ATMs are those that do not have label of any Bank.
These machines are owned and operated by non-bank entities providing services to
all bank customers it is already there in Canada and some European countries.
Why in news?
In 2012 RBI had allowed corporate to set up white label ATMs to increase the
penetration of ATMs in several areas of the country (tier3-tier6cities)
Tata’s have rolled out the first ever white label ATMs network under the brand name
The first INDICASH ATM was inaugurated in chandrapada a village in Thane district
Tata communications payment solutions (TCPS) has got license from RBI to launch
white labeled ATMs under scheme B.
In Scheme B WLA licensee has to setup a minimum of 5000/- ATMs per year for 3
years. Two for tier III to tier VI cities and one for tier I- tier II cities.
Sponsor Bank is the Bank which will supply money to the WLA licensee.
Muthoot finance a gold loan company has also received in principal approved from
RBI to setup the WLAs.
Rural people and small town people get benefited.
More penetration in ATM services is possible.
What is Islamic Banking?
Financial institution following the principles of Islamic finance it is also known as
Sharia based NBFC (Non Banking Financial Corporation)
Why in News?
Recently the Kerala Government has got a RBI nod for Islamic Banking.
What exactly is Islamic Banking?
Under Islamic Banking norms depositors do not get interest on deposits similarly.
The Banks cannot charge interest to its borrowers.
Banks can invest the money but keep off taboo areas like liquor, tobacco and
gambling or speculation.
Similarly Islamic Banks also cannot invest in bonds treasury bills and commercial
papers or lend to finance inventory or projects for interest
The RBI has clarified that the permission is not for commercial Banking but only
for a NBFC
Kerala a remittance- driven economy has been requesting the RBI to allow
Islamic Banking for nearly a decade
It now becomes the first state to start a Sharia based NBFC
It has been reported that close to Rs 50,000 crore of interest money is lying
unclaimed with Kerala Banks most of which is remittance from Kerala muslims
working in the gulf and other foreign countries, as under Sharia they cannot claim
interest from Banks.
Financing of these Banks are restricted to useful goods and services and refrain
from financing alcoholic beverages and tobacco or morally unacceptable services.
In Islamic banks do not consider only the credit worthiness and interest rate as
standards instead they apply Islamic moral/ethical criteria in provision of
They deal with their customers on investment grounds rather than predetermined
fixed interest rates.
Islamic Banks eliminate the barrier between those who save and those who invest
and bring them closer to the real market.
Lack of Islamic Banking professionals
Lack of shariah scholars who have specialized in Islamic economics
For this process to be successful the Shariah boards of our Islamic Banks should absorb
Islamic scholars based on their technical expertise rather than their popularity.
He is not the Nettur Damodaran who was the member of 1stloksabha
Chairman: M Damodaran (Ex SEBI chairman – From Feb 2005-2008, presently Advisor and
Chief Representative in India for the ING Group of Netherlands)
The committee, headed by former Sebi Chairman M Damodaran, has submitted its
report to the Ministry of Corporate Affairs which would take appropriate steps after
studying the recommendations.
WHY COMMITTEE FORMED:
India ranked very low i.e. 132nd position in World Bank's ease of doing business
list among total of 183 countries globally. The panel set-up in August last year to
suggest ways for improving business climate in India.
Also India ranked below most of the SAARC countries (South Asian Association for
Regional Cooperation-organisation of South Asian nations, established on 8 December
1985 ; Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka,
Afghanistan; headquartered in Kathmandu, Nepal) and was last among BRICS countries
(Brazil,Russia,India,China and South Africa).
Recommendations titled 'Reforming the Regulatory Environment for doing Business in
retrospective taxation as a big obstacle to attracting investment –ALREADY an
example of British telecom Vodafone in India(explained in mrunal sir’s article)
Regulatory body should be more autonomous with transparent in selecting the heads.
Faster resolution of dispute through consent settlement and arbitration.
Easier set of regulation for MSME (Micro Small and Medium Enterprises)
The Committee constituted in June last year to review the
existing system of customer service and grievance redressal in
the banking system
The key focus of the Committee, to review the functioning of the Banking Ombudsman
The Banking Ombudsman (BO) Scheme was established by the Reserve Bank of India (RBI)
in 1995 to provide speedy solutions to grievances faced by bank customers. Although the
number of complaints received has increased in recent times, the lack of awareness among
the customers was a big concern.
The name 'ombudsman' is not easily understood by the common man and hence, it was
suggested that it be changed to a more suitable name, 'lokpal'.(ANNA HAZARE)
To have more offices of the Ombudsman apart from the ones in Maharashtra and Goa, to
make it more accessible to the masses.
another recommendation made by the unions was to have separate counters for senior
citizens installed at bank branches between the 1st and 10th of every month, to make it easier
for pensioners to collect their money.
to enhance consumer protection
The Committee expected to undertake a strict review of the existing system of attending
to customer service in banks, including the approach, attitude and fair treatment to customers
from retail, small and pensioners segment. The Committee asked to evaluate the existing
system of grievance redressal system going in banks, its structure and recommend measures
for fast resolution of complaints.
SENIOR CITIZENS HAVE LITTLE TO CHEER:
Recommendations on the subject of pensioners and senior citizens reads
" prioritised service should be given to senior citizens, physically handicapped persons by
effective crowd/people management available at all bank branches.
"Banks should maintain and fine-tune the functioning of their Centralised Pension Processing
Centres to ensure timely disbursal of pension, commencement of family pension on time and
error-free calculation of pension."
1. Each branch of a bank should have a separate count for attending to senior
citizens/physically challenged customers, who should be given priority over other customers
at that special counter.
2. Senior citizens and physically challenged customers should be provided with
singlewindow service, without their having to move from counter to counter to complete all
their banking transactions.
3. All the requests/requirements of senior citizens and physically challenged customers
must be attended to then and there,without telling them kal aayiye fir kal...., as is the practice
in most bank branches.As, their request for cheque books, updating of pass books, pension
payments, issue of deposit receipts, issue of interest/TDS (tax deduction at source)
4. Senior citizens at present offered an additional interest of up to 1% on all fixed deposits.
The same benefit of additional interest should be offered to them on their savings
deposits also, as there is no reason to exempt savings accounts from the given interest rates
offered to them.
5. The penalty, if levied on withdrawal of deposits before maturity, should not be applied
to senior citizens/physically-challenged customers, who should be given the normal rate of
interest applicable for the period for which the deposit has run, without any deductions. This
is based on the assumption that in most cases, their medical requirements might force them to
encash their deposits before maturity.
6. A certain percentage of safe deposits lockers, say 10%, may be reserved for senior
citizens and physically challenged customers, so that they are have a reasonable chance of
getting a locker facility in the same branch where they maintain their savings accounts.
7. In case the payment of pension to the customer is delayed due to the fault or mistake of
the bank, the pensioner should be properly compensated by giving appropriate savings bank
interest on the amount for the delayed period. If the delay beyond a reasonable period, say
seven days, the bank should be asked to pay a penalty of Rs100 per day of delay, as is the
system followed in failed ATM transactions.
8. At present, pensions disbursed only through - public sector banks, many pensioners have
to travel long distances to get their monthly pension, causing strain on the pensioners. To
prevent this problem, the RBI should arrange with both Central and state governments to
disburse pensions through all banks in the private sector also, so that the pensioners have the
option of getting pension from any commercial bank, public or private bank, nearer their
place of residence.
9.Biggest problem faced by pensioners variation in their signatures due to passage of time
and their old age. Banks should be asked to update the signatures of all senior citizens in the
their records periodically, say once in two years or as often as required, so that banks do not
have to dishonour their cheques due to variation in their signatures.
The other committees formed earlier for the same purpose:
Talwar Committee of 1975, the Goiporia Committee of 1990 and the
Tarapore Committee of 2004.
3.INDIAN EXPRESS N HINDU
by KARAN RAJPAL
In this era of globalization, it is natural that MNCs operate across the world. They came in india as
well. As economic activity in post LPG era grew, so did their complexity, and thus disputes. However,
no country can ignore foreign investment, despite their ill-effects.
MNCs have operations in many countries, and apart from dealing with market, they do transactions
within themselves too – sometimes because of necessity and sometimes to maximize profit.
Consider this - company A purchases goods for 100 rupees and sells it to its associated company B in
another country for 200 rupees, who in turn sells in the open market for 400 rupees. Had A sold it
direct, it would have made a profit of 300 rupees. But by routing it through B, it restricted it to 100
rupees, permitting B to appropriate the balance. The transaction between A and B is arranged and not
governed by market forces. The profit of 200 rupees is, thereby, shifted to the country of B. The goods
is transferred on a price (transfer price) which is arbitrary or dictated (200 hundred rupees), but not on
the market price (400 rupees).
Drawbacks of such a mechanism:
loss of taxation revenue to govt,
loss of foreign exchange and
unethical corporate governance.
To avoid this kind of scenario, it is necessary that transactions between subsidiaries of a MNC
operating in various countries is properly regulated.
The Finance Act, 2001 introduced law of transfer pricing in India through sections 92A to 92F of the
Indian Income tax Act, 1961 which guides computation of the transfer price and suggests detailed
Commercial transactions between the different parts of the MNCs may not be subject to the
same market forces shaping relations between the two independent firms.
One party transfers to another goods or services, for a price. That price is known as “transfer
This may be arbitrary and dictated, with no relation to cost and added value, diverge from the
refers to prices of transactions between associated enterprises which may take place under conditions
differing from those taking place between independent enterprises. It refers to the value attached to
transfers of goods, services and technology between related entities.
Transfer Pricing Regulations (TPR) are applicable to the all enterprises that enter into an 'International
Transaction' with an 'Associated Enterprise'. Therefore, generally it applies to all cross border
transactions entered into between associated enterprises.
Aim of Transfer Pricing Regulation
to arrive at the comparable price as available to any unrelated party in open market conditions and is
known as the Arm's Length Price (ALP).
Arm’s length price
the price that would be charged in the transaction if it had been entered into by unrelated parties in
The ALP is to be determined by any one or more of the following methods :
(a) Comparable Uncontrolled Price Method
(b) Resale Price Method
(c) Cost plus method
(d) Profit Split Method
(e) Transactional Net Margin Method
The primary onus is on the taxpayer to determine an ALP in accordance with the TPR and to
substantiate the same with the prescribed documentation.
The tax officer may reject the ALP adopted by the assessee and determine the ALP in accordance with
the TPR. For this purpose, he would then refer the matter to a Transfer Pricing Officer - a special post
created for valuation of ALP - who would determine the ALP after hearing the arguments of the
In case the ALP determined by the TPO indicates understatement of income by the taxpayer, it could
result into levy of penalty.
It is here that the tax disputes come into picture. Taxpayer tries to reduce his tax burden by
manipulating accounts, the tax officials try to maximize tax buoyancy by imposing higher prices of
Many MNCs, including Nokia, Royal Dutch Shell and Vodafone are stuck in tax disputes in india.
India is seen as a combative tax administration.
Discourages overseas investors.
Makes india as an unwelcoming and troublesome investment destination.
Need is to be seen as a stable and non-adversarial tax regime.
Increase tax litigation – causing valuable expenditure.
Today when we need foreign investment, and that too in the form of long term, stable FDI, such a
condition is highly undesirable.
We did bring Transfer pricing regulations in 2001, but it could not bring clarity on the issue and tax
disputes did not reduce.
Finance minister in his 2013 budget announcement pledges to bring clarity on the issue so as to revive
Govt sets up N. Rangachary panel in 2013. It comes with recommendations on Safe Harbour Rules.
Safe Harbour Rules (SHR)
Section 92CB of Income Tax Act provides for it.
Determination of Arm’s Length Price is subject to these SHR.
It means circumstances under which the IT authorities shall accept the transfer price declared by
Govt accepts most of the recommendations of Rangachary panel and notifies new rules in sept 2013.
Salient features of new SHR:
More liberal than the draft rules.
Begins from assessment year 2013 – 14.
Applicable for 5 years. (draft rules said 2 years).
Does not cover pre-existing disputes, but are likely to curb future litigations.
Brings clarity on the determination of ALP.
Ceiling of Rs 100 crore on IT and ITES activities removed – helping technology companies like
Microsoft and Google.
For transactions upto Rs 500 crore – safe harbor margin of 20%
For transactions more than Rs 500 crore – safe harbor margin of 22%.
Ceiling of Rs 100 crore on corporate gurantees removed.
Definition of Knowledge Process Outsourcing rationalized.
How will they help?
Expected to bring down transfer pricing litigation.
Charges of excessive and aggressive tax demands on MNCs will get reversed.
In line to make india’s tax regime stable and non-adversarial.
First real concrete step towards increasing investor confidence and sentiments.
Hopes to improve india’s position of 132 in the Doing Business 2013 index compiled by the
Word of caution
Internation business, taxation, avoidance methods are very dynamic.
It’d be naïve to assume that one set of guidelines will make the most attractive destination for
Or they can curb all disputes. Corporate will seek to maximize profit and thus litigation will
Tax officials need to be trained in how to deal with such issues.
Domestic conditions, political climate, infrastructure, other aspects of business climate need to be
looked into as well.
SHR vs APA (Advance Pricing Agreement)
Both are meant to determine the tax liability of an MNC.
If MNCs go for SHR route, then Under certain conditions, their liability is not questioned by the
Alternatively, companies can go for APAs as well to know their liability in advance
In APAs, the margin is generally 15-17 per cent
In SHR – margin varies from 20% to 30% depending upon the nature of activity of the company.
Thus the liability of MNCs will vary under the two methods and they are free to choose among the
MNCs would consider this difference with APA and the hassles in case it goes for litigation if it
adopts SHR method.
the parent company gets tax deduction in the case of APA but not in the case of safe-harbour rules
SHR margins are already set by tax officials, while an APA is a negotiation between these
companies and tax authorities.
while the SHR still entice small companies, larger players might not opt for these. They might
prefer APA for upfront resolution.
To judge whether a company is KPO, IT/ITeS or contract research and development company is
on the discretion of tax officer. The distinction between them is narrow. Hence disputes can
So the whole purpose of bringing more companies under the SHR structure, to bring down tax
litigation, may get defeated, as they may choose APA route.
Will India go back to 1991 situation? Suggest some measure to rescue the economy from its
current state of economic turmoil (To increase the rupee value)
India's present situation of rapid fall in rupee value is caused by
Persistent inflation of past few years
High current account deficit of about $85billion (4.5% of GDP)
Western economies were stronger and looking forward to deepen the process of
Big bang reforms like LPG worked for India
Major OECD economies are looking much more inward to stabilize their economy
Negative impact of global financial crisis began to affect the emerging nations like India.
After 2010,excess liquidity flowing from west caused the
High international oil prices and commodity
India's mismanage of supply of key resources such as Land, Coal, Iron ore, Critical
All these problems had created India to face the
Key difference between 1991 & 2013 are
Availabilty of global financial inflows to India during 1991 and 2013
US federal reserve withdrawl of liquidity
India needs to understand:
Cheap financial capital inflowing from the west is double edged weapon if not used
judiciously to enhance productivity of domestic economy it leads to external debt trap.
As said before, present situation of the India's economy is different from 1991 situation. So India
will never go back to 1991 situation because India’s fundamentals of economy are stronger.
Measures to revive Indian economy (To increase the rupee value)
1. To contain CAD:
By discouraging imports and supporting exports.
Large amount of CAD is caused by import of coal ($15 billion) - It can be reduced by
increasing domestic coal production because India is having largest coal reserves in Asia.
2. Reducing subsidies:
Reduction in the government consumption / subsidies and a loosening of monetary policy
to increase government saving
3. Import oil from Iran:
Increase oil imports from Iran as we can pay in rupees.
4. Dollar Swap facility to oil companies:
RBI has to give direct access to large dollar buying oil companies -to bypass the spot
5. Correcting non-oil trade deficit:
India's biggest trading partner China accounts for half of the non-oil trade deficit.
This can be offset by capital inflows from China into India's infrastructure, such as metro
or road projects.
6. Encouraging Capital Inflows
RBI has removed administrative restrictions on investment schemes offered by banks to
non-resident Indians, and removed ceiling on interest rates on deposit accounts held by
RBI increased the current overseas borrowing limit for banks from 50% to 100%, and
allowed it to be converted into rupees and hedged with the RBI at concessional rate.
RBI also allowed banks to swap fresh NRI dollar deposits with a minimum duration of 3
years with the RBI.
7. Strong push to exports:
Widening the focus market and focus product scheme.
India's iron ore export can be restored to more than $10 billion annually.
8. Selling of gold bonds
Sell a gold bond with a five year maturity, which can act as a gold
substitute just like Kisan Vikas Patras
9. International Cooperation
Government increased its currency swap limit with Japan from
USD15 billion to USD50 billion.
10. National manufacturing policy
To increase the sectoral share of manufacturing in GOP to at least 25% by 2022
To increase the rate of job creation so as to create 100 million
additional jobs by 2022;
Industrial townships called National Investment and Manufacturing
Effective and rapid implementation of NMP is necessary at this stage to
enhance the economic situation.
by SUTHAN S.P
The Hindu editorial
These models try to find out factors that determine investment by firms through creation of new
infrastructure (machinery, factories)
Investors are unpredictable . There are lot of reasons of changing investment pattern. Mainly
guided by performance and speculations.
These models are different from growth models and must be understood with respect to both
National and International perspective .
**** Some BASICS over investment ****
HARROD DOMAR MODEL :
Saving = National Income – Expenditure
High Saving Rate = High Investment = High growth rate
COR (capital output ratio) = Capital required to make 1 unit of product
More efficient investment
High growth rate
KEYNES MODEL OF BUSSINESS CYCLE
Boom Investment increase Peak (stagnation)
INVESTMENT MODELS :
1. CORE AND BASIC INVESTMENT :
Industrialize and self reliance
Environment for industrial growth
Govt. Play a decisive role through PSUs.
1. USSR after WW1
2. India after independence (trickle down)
1. Deficit increases (borrowing )
2. Capital deepening (sarkari) more spending then required with more delay
(Railway in J&K started after delay of 38 year (1985-2013)
Greater Private sector role in all sectors
Ensure Industrial Growth (not development)
Efficient capital output
Example : India after LPG 1991. ( Rao mohan model)
Problems : Competition among Giants and SMEs + all we are facing today
3. LEVERAGED INVESTMENT
PPP models - Tap benefits of both (govt. and pvt.)
Faster execution and more reliable.
Security to both public and private enterprise increases.
India - Recent projects of Urban development
SEZ- still amateur( why?)
Problems (Only look good , Poor in execution)
M.C.A.(Model concessionaire agreement) – Between govt. and private partner
Responsibility not clear
Government made not consensus based
(It lead to frustation and delays) and time = money (cost also increase)
MCA through consensus
Cooling period (Withdrawl period) should be proper.
Resolution mechanism - separate and unbiased (Not SC)
4. INDUCED INVESTMENT MODEL
Investment through FDI
Very lucrative but high risk game
Today - packaged deal of Resources , Tech , R&D , Management in progress.
Augment domestic investment and overall growth.
1. China : Investment (major FDI) driven economy.
2. India : On the way (but policy uncertainity reduce interest)
1. Local Players must compete else again Wealth Drain Model.
2. Cong- BJP war - Wall mart not invested even 1 penny.
INVESTMENT MODELS IN TODAY’s SCENARIO
COR =Capital Input required for 1 unit of output.
For constant COR (including current and past changes) , More output leads to more investment.
So, for developing countries (COR high = less efficient) , small increase in output leads to quick
increase in investment.
TOBIN’s “q” MODEL
“q” = Present value of installed capital / replacement cost of capital
if q > 1 present value < replacement (Profit) High investment
if q < 1 present value < replacement (loss) Low investment
At last there are many other models which are preferred by different countries for rapid growth
or any other particular purpose (like sector specific investment)
Also , one country can follow more than 1 model simultaneously (most countries do the same)
allowing one to have more importance.
NATIONAL SPOT EXCHANGE LIMITED- CRISIS
It’s a commodity exchange that is regulated by the state to allow sellers and buyers to
trade in specified commodities like grains, oils, metals and livestock.
The exchanges enable traders to formalize written standard contracts in a manner that the
buyer need not inspect a specimen of the commodity before making a purchase.
It is not as popular as the stock market, yet commodities market provides opportunities of
making profit for its investors.
2 types of transaction generally used in commodity market:
Spot transaction:refers to the transaction that takes place on the spot, meaning prices are
negotiated and money paid for commodity without delay.
Futures contract: A purchaser makes payment from the seller as per price agreed on the
date of the contract to offer goods at a specified date in future. Futures contracts enable
trades to secure low prices for ensured delivery of necessary items, thus circumventing
crop failures or any connected problems.
Example:I buy future contract for oil on August 2013 to be delivered on 30th Oct, 2013.
This contract ensures that any variation in the cost of the oil, shortage of supply, etc; will
not cause any hindrance to the delivery of oil on 30th Oct 2013.
Difference between Stock market and Commodity Market
Deals in owningshares of a company.
Share of the stock represents an actual
percentage of ownership in the company.
It is essentially a paper.
Deals in actual items or contracts to
provide or receive a shipment
Future market contracts are paper like
stocks but they do not provide ownership
Spot transactions deals with commodities
which are food grains, pigs, cows etc.
Regulatory body isSecurities and
Exchange Board of India (SEBI)
Regulatory body is Forward Markets
National Spot Exchange (NSEL)
It’s a Commodities exchange in India. Started its operation in 2008
It’s a joint venture of Financial Technologies (India) Ltd. (FTIL) and National
Agricultural Cooperative Marketing Federation of India (NAFED).
Regulated by Forward Market Commission (FMC)
Mission: is to develop a common Indian market by setting up a nation-wide electronic
spot market and providing state of the art trading, delivery, and settlement facilities in
various commodities including agricultural commodities.
Process followed: Sellers and producers can dump their produce in any of the company
warehouses and buyers can bid for a commodity, settle and take delivery on the same
Forward Markets Commission (FMC)
It is a statutory body set up in 1953 under the Forward Contracts (Regulation) Act, 1952.
A regulatory authority which was overseen by the Ministry of Consumer Affairs, Food
and Public Distribution, Govt. of India. From September 2013, it comes under the
Ministry of Finance.
The Commission allows commodity trading in 22 exchanges in India, of which six are
It’s a unique market segment, which functions like the cash segment in equities, but
offers commodities in the de-mat form in smaller denominations.
NSEL offers e-series contracts in gold, silver, copper, zinc, lead, nickel and platinum.
What led to the crisis in NSEL?
Having failed to attract customers and market participants, the NSEL started exploiting
the rules and regulations by offering new products.
Spot exchange was quietly converted into futures trading platform without having
to abide by the rules and regulations of futures market.
From spot settlement, the company started offering settlement period of 10 days that
could be rolled over to anywhere between 25 to 45 days.
Offer of such products brought more punters, speculators and brokerage houses to
It was promoted to the investment community with a promised “risk free” return of 15
per cent to 18 per cent.
Investors who had no idea of commodities trading started to venture into this high risk
business. That a low margin was required made it even more appealing.
High net worth individuals borrowed money from their brokers at 11 per cent and started
to trade with a guaranteed expected return of 15 per cent.
NSEL was able to achieve a turnover of more than Rs 600 crore last fiscal.
Despite warnings of irregularities and suspicion at the exchange, Government did not
In February 2012, it designated the FMC to look into the operations at NSEL. The FMC
found glaring violations that was reported back to the Ministry.
After many communication exchanges between the government and NSEL for over a
year,in Julythis year, the Government asked NSEL not issue any new contract and settle
all existing contracts by their due dates. This order crashed the ponzi scheme and led to
the current payment crisis
NSEL suspended trading of all contracts, other than e-Series and deferred the settlement,
sparking fears of cash crunch and default of payment in the Financial Technologies.
The exchange has blamed the government for the structural changes it has instructed a
few weeks back for creating market disequilibrium.
NSEL was required to deliver commodity physically; instead the exchange facilitated use
of electronic warehouse receipts, enabling investors to avail of the arbitrage, without
taking physical possession of goods.
The flaws in contracts and insufficient underlying stocks to cover liabilities led to the
After few days NSEL suspended the trading of E-series leading to the complete shutdown
of the exchange.
Government has entrusted the FMC to probe the matter.
SEBI has launched its own investigation of the brokers involved with NSEL and the
listed parent company of NSEL - Financial Technologies Limited.
The Income Tax department has launched an investigation on companies registered with
NSEL and have conducted raids on some of them.
The Prime Minister’s Office is planning to set up a special team headed by the Economic
Affairs Secretary to look into the issue.
The Finance Ministry is taking over regulation of commodity futures markets from
the Consumers Affairs Ministry. A notification to bring commodity markets regulator
FMC under the ambit of the Finance Ministry was issued by the Government.
Government has banned trading in e-series contracts at the NSEL as it wants the
exchange to first settle about Rs 5,600 crore due to investors
The commodities which are lying in warehouses under the control of NSEL are being
auctioned. Pay-out is being made of these proceeds. Auction of other stocks are in
NSEL announced a seven-month plan to settle dues.
NSEL is actively pursuing recovery of outstanding dues from the members with pay-in
NSEL has appointed Grant Thornton as forensic auditors and, additionally, internal
investigation has also been initiated against the management team of the exchange
Pros, Cons and scope for improvement of Corporate Social Responsibility CSR clause- As
per the Companies Act, 2012
The recently passed Companies Bill, 2012 has a separate clause on CSR which makes it
mandatory for certain specific companies to spend 2% of the average net profit made in
preceding 3 financial years on Corporate Social Responsibility. The 2% CSR provision will have
ripple effects in the economy of India.
Following are its pros:
Mahatma Gandhi once said, ‘Industry should consider themselves as trustee and servants
of the poor. CSR, as a concept, upholds Gandhiji’s views. (Pro-Gandhian)
CSR is very popular in countries like Japan, South Korea and growing economies like
Brazil where companies are actively involved in various activities to demonstrate
themselves as socially responsible corporate citizens. (widely accepted)
India became the first country to make CSR mandatory, which would help shaping
communities and improving the national economy. (India- first country)
Huge scope for the corporate sector to contribute to employment, health, education and
poverty. (Scope for corporate)
Enhances the possibility of cooperation between business, society and government.
Enhances the competitiveness of the company, while simultaneously advancing economic
and social well-being in the communities, thereby increasing the long term sustainability
of the company. (competitiveness)
If a company does not conduct its own CSR it can give the required amount to the
government’s socio-economic welfare programs such as “Prime Minister’s National
Relief Fund”. (diversion of funds) (imp. For MCQ)
With the 2% CSR provision there will be an immediate doubling of social program
money in India i.e. additional $5 billion poured into social welfare sector. (more money)
Via 2% CSR there will be more human capital developed (education, healthcare, training,
etc) in the economy which will have long term ripple effect on Indian economy to
accelerate production of goods and services. (human capital)
Moreover, through CSR spending in energy, environment and R&D other factors of
production will be more efficiently utilized. This will in turn boost capital generation and
thereby boost the economy in the long run. (capital generation)
Occasionally the government re-distributes resources, mostly taxed money, very
inefficiently. Plus the government agencies are often restrained by regulations and
requirements in their attempt to implement social programs. Businesses do not have to
face such restrains. They can spend money and minimize externalities that come with
undertaking social good. (less restrains)
Following are its cons:
No other country in the world has made CSR mandatory.
Mandatory CSR increases the inefficiency which can be equivalent to government
‘taxing’ its investors which deprives them of mobilizing the economy. (inefficiency)
Might create reluctance within the international business community about investing in
One of the basic aspects of corporate commerce this clause tends to ignore is the interests
of the shareholders of a company. The shareholders have invested their money in a
company and expect a return. It would be irresponsible for the company to indulge in
activities that diminish shareholder value over the long run. And if the company is
successful it is obviously generating enough tax revenues to address the government’s
social spending needs. And, assuming shareholders get a return from their investment, it
is their call to spend their individual earnings the way they like it to be. (shareholders’
There is already a series of cascading taxes charged on companies, in addition to the
expenditure incurred on buying materials from suppliers, employee benefits and so on,
hence an extra mandatory expenditure would become burdensome. (cascading taxes)
Also the percentage of expenditure fixed i.e. 2% is high; ideally it should have been
around 1% of profit after tax. (high percentage)
Any company operating in a market is bound to have constant interactions with the
society around it. It might be with the people it employs, lenders who lend it, exchequer
which collects taxes. Therefore, if a company is fair in its dealings there is hardly any
need for imposing CSR on it. (socio-economic interactions)
The last couple of years have seen quite a few episodes of industrial unrest erupt at
manufacturing facilities managed by leading companies. These have brought to light
several murky practices employed by some manufacturing companies to keep their
production lines chugging, even as they cannot manage the costs. Unfair practices such as
keeping legitimate workers off the payroll, paying them salaries that blatantly violate
minimum wage rules and using loopholes that deny them of basic legal rights. If a
company acquits itself badly on the above counts, it doesn’t really help the social cause if
it then goes on to build schools or sanitary facilities in the rural hinterland. (unethical
Another set of problems that plague SMEs is inordinate delays in payments of dues for
supply of goods or services, wafer-thin margins and one-sided, contracts that barely allow
survival. Such problems surface mainly when smaller industries have to deal with more
powerful corporate buyers. This is the chief reason why listed companies were earlier
mandated to make explicit disclosures, in their annual reports of large outstanding dues to
SMEs. These disclosures have now been waived. This can be counted as a black mark
against social responsibility. (problems of SMEs)
Take evasion is another bottle-neck faced by the government in increasing its tax-GDP
ratio. It has become quite commonplace in recent years to see large firms lead their
lenders on a merry dance to recover their dues. Taking recourse to innovative ‘structures’
that help escape one’s legitimate share of taxes has become a daily affair now. Therefore,
there doesn’t seem much substance in cheating the exchequer out of a 30% share of
profits by evading taxes and then shelling out a paltry 2% as CSR. (tax-evasion)
Finally the problems of the poor and needy in our country are real and need addressing.
The government is supposed to address these problems. The CSR tax is a diversion. The
government would be better served by improving its execution capabilities. (govt. shirking
A company’s failure to conduct CSR will lead to its penalization. (penalty)
Scope for improvement:
The main point on which the law makers should focus before making an effort to
implement the CSR clause is the willingness of the corporate world to integrate the same
into its business strategy. CSR makes sense only when the business requires it and not the
government. For example a business that depletes resources such as water, can and
should put in place initiatives that replenish these resources to restore environmental
There should be an arrangement made by which the shareholders are aware of the fact
that the company is going to spend a specific part of its profits in CSR, as ultimately it is
the shareholders who contribute significantly to the corpus. (shareholders’ interests)
It is also suggested to actively consider a system of ‘CSR credits’ that evaluates a
company’s social responsibility in its entirety. While awarding ‘credits’ to companies that
do deploy 2% of their profits on CSR, it should also incorporate negative marks for being
in an undesirable business or sharp practices in dealing with suppliers, employees and the
exchequer. (CSR credits)
Establishing a disclosure framework for all this may not be too difficult, as the top listed
companies are already required to address many of these issues in the new Business
Responsibility Report. A report card on these lines may prompt the leading corporate to
take their social responsibilities more seriously. It may also help silence the cynics who
ask if a profit-oriented enterprise can really do well, if it expends it profits on doing good.
(Business Responsibility Report)
To a layman CSR looks like an innovative solution to remove certain inefficiencies set in
government’s service delivery system, but a lot depends upon how the corporate sector perceives
it and the amount of willingness it shows to perform the duties as mandated to it. 2% might look
very petty to a huge multinational company like Reliance or Walmart, but the kind of impact that
it can create on the society is immense. Many large corporates across the country are conducting
laudable CSR programs that have far-reaching benefits. Very few of these corporates actually
invest into impact assessment even though an assessment could help them plug gaps and move
ahead. Impact assessment could actually be the “collateral benefit” from the 2% CSR provision
that corporate India was reluctant about.
by Lloyd D’Souza
The Hindu Business Line: Dated 12th August, 14th September and 16th September 2013
What is GAAR?
GAAR refers to General Anti-Avoidance Rules. These rules target any transaction or business arrangement that is
entered into with the objective of avoiding tax. The objective is to check aggressive tax planning.
What is meaning of Tax Avoidance?
Avoidance means an attempt to reduce tax liability through legal means, i.e. to regulate your affairs in such a way that you
the minimum tax imposed by the Act as opposed to the maximum. For example, Suresh makes a company XYZ to sell some
product. The company XYZ pays 25% tax, but if Suresh himself sold the products he would pay 30%. Suresh has formed
company only to save 5% tax.
Difference between Tax Avoidance and Tax Evasion?
Tax Evasion and Tax avoidance are two different things. While Avoidance is legal management to avoid tax, evasion is
means to reduce tax liabilities, i.e. falsification of books, suppression of income, overstatement of deductions, etc.
Tax planning, as opposed to tax evasion which is illegal, is an accepted practice whereby the tax-payer uses provisions of
or loopholes to minimise his tax liability.
Some countries, in addition to GAAR, have Specific Anti-Avoidance Rules (SAAR) to plug particular loopholes in the law or
some types of transactions that result in loss to Revenue. GAAR has been a part of the tax code of Canada since 1988,
since 1981, South Africa from 2006 and China from 2008. Australia and China also have SAAR in place to check abuse of
treaties and transfer pricing.
Implication of GAAR implementation
• The implication of GAAR is that the Income-tax department will have powers to deny tax benefit if a transaction was
carried out exclusively for the purpose of avoiding tax.
• For example, if an entity is set up in Mauritius with the sole intention of claiming exemption from capital gains tax, the tax
authorities have the right to deny the claim for exemption provided under the India-Mauritius tax treaty.
How would it work?
The Income Tax Commissioner will be empowered to declare an arrangement as an Impermissible Avoidance
• The whole, a step or a part of the arrangement has been entered with the objective of obtaining tax benefit, and
• The arrangement creates rights and an obligation not normally created in arm’s length transactions or results in direct
or indirect misuse or abuse of the provisions of the code or lack commercial substance in whole or part, or is not
This is so far reaching in nature that almost each and every transaction, which results in saving tax could be regarded as
This means that GAAR enables tax authorities to declare any arrangement entered into by a taxpayer as an IAA. If it is so
then the tax authorities can disregard, combine or re-characterize any step of such arrangement or the entire
disregard any accommodating party involved in such arrangement, treat the transaction as if it had not been entered into
carried out, reallocate any income or expenditure, look through any arrangement by disregarding any corporate
debt as equity or vice-versa and so on.
In effect, for tax purposes, any transaction can be treated in a manner different from the manner in which it is carried out
if it is
regarded as an IAA.
Parthasarathy Shome Panel
The Parthasarathy Shome panel was formed by PM of India in 2012, for drawing up the final guidelines on GAAR and
bring about tax clarity and address the concerns of foreign investors. Instead of only FIIs, the panel was asked also to look
issues pertaining to all non-resident tax payers.
With various recommendations to revive the inflow of foreign capital, the panel has advocated postponement of the
tax provision by three years till 2016-17 along with abolition of capital gains tax on transfer of securities.
Further, it has suggested that the GAAR provisions should not be invoked to examine the genuineness of the foreign
entities’ residency in the island nation of Mauritius. Other major recommendations are –
Defer implementation of GAAR:
• The implementation of GAAR shall be deferred by three years on administrative grounds for which intensive training of
tax officers, who would specialise in the finer aspects of international taxation, is needed. The deferral of GAAR by three
years on the basis of economic conditions and administrative realities would help mature the thinking in respect of
GAAR and accelerate the decision on investment in foreign direct investment (FDI). It identifies the need for training of
tax officers and a time-bound disposal of the proceedings to ensure effective implementation.
Threshold of tax benefit:
• GAAR should be made applicable only if the monetary threshold of tax benefit is Rs.3 crore and more with changes in
Income Tax Rules 1962. The committee recommendation of a monetary threshold of tax benefit would filter the smaller
tax conflicts out and on the other hand would suggest the need of continued responsive legislation on specific taxavoidance
practices to ensure that the legitimate revenue is raised through voluntary compliance. It clearly highlights
that the GAAR is not recommended to be used as revenue raising measure
• GAAR should not be invoked to examine the genuineness of the residency FII from Mauritius and the govt should retain the
provisions of the CBDT circular issued in the Year 2000 on acceptance of Tax Residence Certificate (TRC)
issued by Mauritius. Over 44 per cent of foreign investment in India comes through Mauritius and Singapore. For
investments from Singapore and elsewhere, the benefits offered by India through bilateral treaties should supersede
domestic tax laws and it is a constructive step in this regard.
GAAR should apply “only in cases of abusive, contrived and artificial arrangements”, the Shome panel suggested that the
I-T Act may be amended to provide that only arrangements which have the main purpose (and not one of the main
purposes) of obtaining tax benefit should be covered under GAAR. The report has recognized the business needs in
difficult times of undertaking the corporate restructuring and clearly recommends that in a court-approved corporate
restructuring, GAAR would not be invoked. Even the intra-group transactions with no effect on overall tax revenue have
been recommended to be insulated from the GAAR. This clearly shows the pragmatic approach to the recommendations
Increase Securities Transaction Tax (STT):
• The Shome Committee has proposed to do away with short-term capital gains tax by increasing the transaction tax. It
asked the government should abolish the tax on gains arising from transfer of listed securities, whether in the nature of
capital gains or business income, to both residents as well as non-residents. In order to make the proposal tax neutral,
the government may consider increasing the rate of Securities Transaction Tax (STT) appropriately. The proposition
seems to be that what the tax which India collects on account of short-term capital gains is, domestically as well as cross
border. That number does not seem to be particularly a large number. The thought of the committee seems to say, why
not abolish the short-term capital gains tax and if at all there is a deficit, why not tweak the securities transactions tax a
Panel of GAAR:
• The Approving Panel (AP) for purposes of invoking GAAR provisions should consist of five members, including Chairman,
who should be a retired judge of the High Court. Besides, two members should be from outside government and persons
of eminence drawn from the fields of accountancy, economics or business, with knowledge of matters of income- tax, and
two members should be chief commissioners of income-tax or one Chief Commissioner and one Commissioner. It also
suggested that GAAR can be invoked only with the approval of the Commissioner.
When will GAAR be invoked:
• The rules will be invoked when the purpose of an arrangement is to obtain a tax benefit. Earlier it was as “One of the
• It will apply only to investments made after August 30, 2010. (This means retrospective from August 2010 onwards)
Position of Residents
• GAAR will not apply to non-resident investors in FIIs. This clarifies that the tax authorities will not go behind the FIIs
applies GAAR to those who invest in India through them.
Position of Foreign Institutional Investors
• GAAR will not apply to FIIs that do not claim any double taxation avoidance treaty benefit. Similarly, FIIs that pay
appropriate tax will not be subject to GAAR.
Position of India's tax treaties?
• GAAR Will be Invoked If any arrangement is found to be impermissible under GAAR, it will be denied treaty benefits.
This essentially means treaty benefits will be available to residents of the country and not those who use to route to save
tax. GAAR can over-ride bilateral tax treaties, but genuine residents can claim treaty benefits. Government's decision on
GAAR is silent on if a Mauritius investors with a tax residency certificate will be treated as a Mauritius resident. So
investors routing their investments through Mauritius to avail tax benefit will face uncertainity in new GAAR regime.
How taxpayers will be saved from harassment?
• Assessing officer will be required to issue a show cause notice stating reasons for invoking GAAR
• Taxpayer will have an opportunity to put its case before the officer
• The three member panel that will finally approve GAAR will have only one income tax official
• There will be a mechanism of obtaining advance ruling whether an arrangement is permissible or not
• Time limits will be prescribed for various authorities under GAAR
• GAAR will apply only when tax benefit exceeds Rs 3 crore
• Same income will not be taxed twice by invoking GAAR
• Where SAAR and GAAR both apply, only one will be invoked Where only a part of an arrangement impermissible GAAR
will apply to only that part..
I referred The Hindu, economic times,business standard and firstpost,wordpress websites..
Causes and effect of free fall of rupee against dollar
1) Anticipation of Tapering of quantitative easing from US federal bank.
2) During recession US Federal bank decided to give stimulus to economy thus infusing truck
load of cash in market at very low interest rate,this cheap money found it's way in emerging
markets like India(because intrest rates in US were low investors were not getting enough
return on their investment) where it got good returns.
3) But now prospects of return on investment has become better in US so all the cheap
money(dollars) which came in India during recession is going back to US because now they
can fetch better returns there.(Demand of dollar increases and it's value goes up)
4) Syrian crisis has been an addon to this situation ,but how?
If US plans to attack Syria than it would be requiring truck load of money to carry out it's
operations,what will the government do?..it will issue bonds with higher return rates so
people will start buying these bonds instead of investing in markets like India,inflow of
dollar in India will again take a hit and rupee will decline more.Moreover US will demand
more oil to carry out it's operations and supply will take marginal hit (Syria is marginal
exporter of oil) so prices of crude oil in world market will sore(demand increases sharply
and suppply takes a hit).
5) Policy bottlenecks -: time and again we hear that govt has increased FDI cap in this
sector and that sector but merely increasing the cap will not result in coming of actual
FDI,and we rank deep in list of nations in respect of ease of doing business.A reason
why investors are not investing there dollars in India.
6) Huge demand of crude oil and gold , the demand of dollar rises to buy them and rupee
takes a hit subsequently widening the Current Account Deficit.
7) Export of Iron ore from the mines of Goa and Karnataka has been stopped because of
Supreme court order to stop mining in these areas.(Dollar inflow takes a hit)
Effects of sinking rupee against dollar
1) Imports (major oil) becomes costly ->transportation cost of products increases >commodities price increases specially of food.
2) A major setback for import dependent industries,subsidy burden on govt will increase (like
urea will come costlier and govt will still provide it at same rates).
3) Our most power plants are coal based and thanks to inefficiency of coal India and
environment regulations we have to import a significant amount of coal from countries like
Australia => coal price will shot up=>power generation willl become costlier.
4) Foreign investments(mainly FII) will be effected (is explained in detail later)
5) Worsen the already unsustainable Current Account Deficit.
Few pros of sinking rupee.
1) Good for exporting companies like software firms ,BPOs etc(but that too in short term
because for bidding new projects there will be high uncertainty if rupee is volatile which
will harm in long run)
2) It will incentivise export orianted manufacturing companies encouraging them to
3) FDI will be more luring as profit margin will increase.(How?...explained below)
Effect of all this on Foreign Investments.
Foreign investments are of 2 types -: a)FII and b)FDI
If A foreign investor has done an investment on which he gets a fixed return in fixed time
periods(most FIIs are like this) than the value of his return will decrease (suppose on 10th
september 1$=1re and on 11th september 1$=2rs then if return on his investment was 1re than on
1st september he was getting 1$ but next day after depreciation he gets 0.5$ because the return in
rupee term is same that is 1re but it's value with respect to dollar has declined)
If a foreign investor invest in FDI or in broad terms if he sets up a plant in India and start
manufacturing something, or take the classic case of Walmart ...before rupee depreciation Walmart
had to spend more dollars in it's operations but after depreciation it has to spend lesser dollars but
one should keep in mind that if Walmart is taking it's profit back to US then it will not give it any
benfit because of the same reason that it's profit vaue will also depreciate but if instead of taking
back it's profit to US,Walmart invests in it's operations going on some other country says
Singapore,Malayasia or any other nation whose currency has not appreciated against rupee as dollar
then this transaction will accrue profit to Walmart.
Investment Models for Civil Services Main GS 3.
In civil services main syllabus, we have four papers of GS. In GS 3, Economy section there is a topic
titled Investment models.
So, here is an attempt from my side to collect info. related to the same and arrange this in a manner
which will suit the aspirants' study.
As this is my first such attempt, if there are some mistakes, then try to ignore them and make
maximum possible use of the write-up.
Ok, now end of formalities and all unnecessary stuff and start of the article.
Here is an image which gives us a fair idea about the prevailing
DEFINITION OF 'BOTTOM-UP INVESTING'
An investment approach that de-emphasizes the
significance of economic and market cycles.
This approach focuses on the analysis of
individual stocks. In bottom-up investing,
therefore, the investor focuses his or her
attention on a specific company rather than on
the industry in which that company operates or
on the economy as a whole.
The bottom-up approach assumes that
individual companies can do well even in an
industry that is not performing very well. This
is the opposite of "top-down investing".
Making sound decisions based on a bottom-up
investing strategy entails a thorough review of
the company in question. This includes
becoming familiar with the company's
products and services, its financial stability
and its research reports.
High deployment coverage in early
Earlier return on investment
High visibility of organizational
Higher impact to organization
Tactical, limited coverage
Delayed return on investment
Lower impact to overall organization
Higher deployment costs
User and business awareness of the
product. Benefits are realized in the early
You can replace many manual
processes with early automation.
You can implement password
management for a large number of users.
You do not have to develop custom
adapters in the early phases.
Your organization broadens identity
management skills and understanding during
the first phase.
Tivoli Identity Manager is introduced to
your business with less intrusion to your
Your organization realizes a focused use
of resources from the individual managed
The first implementation becomes a
showcase for the identity management solution.
When the phases are completed for the
managed application, you have implemented a
deeper, more mature implementation of the
identity management solution.
Operation and maintenance resources are
not initially impacted as severely as with the
The solution provides limited coverage
The organizational structure you
in the first phases.
establish might have to be changed in a later
A minimal percentage of user accounts
are managed in the first phases.
Because of the immediate changes to
You might have to develop custom
repository owners and the user population, the
adapters at an early stage.
roll-out will have a higher impact earlier and
The support and overall business will not
require greater cooperation.
realize the benefit of the solution as rapidly.
This strategy is driven by the existing
The implementation cost is likely to be
infrastructure instead of the business processes.
BOT (Build Operate Transfer)
The Build--Operate--Transfer (BOT) was first coined by Ex--Prime Minister of Turkey, Turgut Ozal
in 1984. Essentially in a BOT project delivery method, a private entity, usually a consortium is
responsible for financing, construction,operation and maintenance of the facility for agreed duration
known as Concession period and at the end of the period, transfers the ownership of the facility to the
government.A BOT mechanism is a complex structure comprising multiple, inter-dependent
agreements among various participants. The concession agreement is between the government and
the concessionaire. The concession agreement is regarded as the ““heart””of a BOT project.
BOT Basic Forms
• BOT is a general term and has 3 basic forms
and dozen of variant forms
• The 3 basic forms:
– BOT (Build-Operate-Transfer): no ownership
– BOOT (Build-Own-Operate-Transfer): the Project
Company has the ownership & BOT right -> lower
price/tariff & longer concession period
– BOO (Build-Own-Operate): no transfer, lowest
price/tariff & longest concession period
• BOT is with a kind of Concessionary (authorization):
– Best applicable to infrastructure/resource projects
– Government authorizes the private/foreign developers
– Government owns the ultimate ownership
– Concession period 10 to 30 years after which the facility
transferred to government usually free of charge
• BOT is typical Project Financing (“finance through a
project” instead of “finance for a project”)
– Financing a project based on the project’s future income
– Limited/little recourse or even no recourse to developers
– Project’s income is the only source for debt (P+I) payment
• BOT is a kind of Privatization
• Financing based on project’s financial viability
instead of the developer’s credit & asset
• Higher debt/equity ratio (usually debt>70%)
• Middle to long term debt
• Complex project/contract structure
• Huge investment (equity and debt)
• Higher financing cost
• Project Company instead of the developer is the direct
borrower – separate the proj. company from developer
• Many risks involved
• Many insurances/guarantees needed
Comparison of Traditional & BOT
• Traditional Financing
– Contract awarded based
– Contractor’s main risks
– Financing risk and
revenue risk are
allocated to government
– Financing is eventually
covered by government
• Project Financing (BOT)
– Contract is awarded base on lowest
cost & shortest time of transfer to
– Contractor/developer’s main risks
includes financing, revenue and
political risks + operational cost
– Contractor would gain benefit of an
additional project that would have
not been forthcoming under
– It is user-based fee that is more
– Helps government undertake more
• Argument for Privatization (Pros):
– Rationalization of limited financial resources of
– User-based fee makes it more equitable from social
point of view
– Profit-motive makes it more efficient in construction
– Facilitate (hard/soft) technology transfer
• Draw Backs (Cons):
– Issue of role of government in providing social over
– Maintenance and up-keep during operational level
may not be adequate
– Since investment in infrastructure projects are
lumpy, they may require concessions. That in turn
may lead to development of monopoly
• Need for Government Oversight:
– Price and fees (tariff)
– Quality of service
– Adequacy of service
Outsourcing: Pros and Cons
Unlike the popular belief that outsourcing is a recent phenomenon, it actually has been in
existence as long time. To understand the growing debate on outsourcing, it is pertinent to
understand the pros and cons of outsourcing.
Outsourcing refers to the process wherein a business contracts with a third party service provider to
provide services that might otherwise be performed by in-house employees of the business.
Unlike the popular belief that outsourcing is a recent phenomenon, it actually has been in existence
as long as work specialization has existed. In fact, companies have been known to have used
outsourcing in some form or the other since a long long time. Typically, companies have been known
to outsource those functions that are considered non-core to the business or such functions which
needed specialized skills unavailable in the open market.
Of late, outsourcing has been attracting a lot of debates. And the main reason for the ongoing debate
is the emergence of service providers from various countries trying to provide services in foreign
locations. To understand the growing debate on outsourcing, it is pertinent to understand the pros and
cons of outsourcing.
The main advantages for business to opt for outsourcing are:
1. Cost Savings:- The costs associated with an in-house employee is always higher than the cost of an
outside service provider and this is the primary reason for most of businesses to opt for outsourcing
2. Quality services:- Since most of the third party service providers excel at the services they provide,
businesses are guaranteed of better quality than an in-house employee would give. Additionally, any
service provider will always look to give the best of services since their reputation is at stake.
3. Access to specialized skills:- Any third party service provider will be expert at the service that it
provides. In fact, to beat competition, it would have to keep honing the skills of its employees. Also,
the service provider would build up specialized skills in it's niche area of operation. By outsourcing
to such a service provider, business gets access to such specialized skills, which may be of use in
some other field of operation of the business.
4. Contractual Obligation:- The liability of a service provider is higher than that of an in-house
employee. This makes working with them a safer bet for businesses.
5. Staffing issues:- By outsourcing a non-core function, a business avoids all the headache associated
with recruiting and hiring staff for such non-core function.
6. Risk Mitigation:- Many a times, non-core functions may become critical and would need skilled
intervention, which the business may be lacking. At such times, if the same function is outsourced
and becomes critical in the hands of the service provider, because of the talent pool available at the
service provider's end and because of all the experiences it would have gained by way of servicing
other clients, it would be in a much better position to counter any kind of risks.
7. Capacity Management:- There may be times when the non-core function may need additional
hands to meet deadline. In such times, it would become difficult for an in-house employee to tackle
the pressure. However, if the function is outsourced, the headache of meeting the deadline is of the
service provider. Besides, since the service provider would have a significantly large talent pool at
it's disposal, it can easily tide over such issues.
Those are some of the benefits associated with outsourcing. Let's now examine the flip side of
1. Linguistic barriers:- When a function that needs handling of calls is outsourced to a foreign
location and the first language of that nation is different from the nation which outsources the
function, it may lead to low quality call handling. This concern is evidently higher in call centre
functions that are off shored. People find the the linguistic features such as accent, word use and
phrases that might be very different and hence in-understandable.
2. Social Responsibility:- When off shoring is resorted to, which means outsourcing of a process to a
foreign location, it results in reduction of employment avenues in the nation from where the function
is outsourced. This goes against the social behavior of the business outsourcing the process.
3. Company knowledge:- An in-house employee will always have a better understanding of the
nuances of a function since he/she would always have a better knowledge of the company and its
business as compared to a third party.
4. Staff Turnover:- Many people debate that quality of a service provider is as good as its people and
as and when there is a staff turnover, the quality of services will definitely suffer. In outsourcing
processes, the jobs are highly monotonous and this makes people loathe the job after a while. This is
a big factor contributing to higher turnover.
So, what do businesses do? Do they outsource or not? Is there anything that contradicts the negative
points raised against outsourcing? The answer is "YES".
Let's go by the negative points one by one.
1. Linguistic barriers:- It is correct to say that linguistic barriers do pose a threat. However, there are
number of countries which actually promote their people to learn foreign languages which help
outsourcing processes a lot. One of these countries is India, where, there are numerous institutions
that excel in teaching foreign languages. In fact, all the call centres in India have compulsory accent
training for the agents before they go "live".
2. Social Responsibility:- It is true that off shoring of processes result in growth of unemployment in
the country from where the processes are being outsourced. However, that's only one part of the
story! Outsourcing results in a higher profitability for the businesses which are then ploughed back
into the economy. This definitely has far better impact than the negative impact of growth in
unemployment. In fact the negative aspect is broadly nullified by the positive impact of profit getting
ploughed inside the economy.
3.Company Knowledge:- It's true that an employee would have a better knowledge of the business.
However, that knowledge is not built overtime. Any service provider can build the same kind of
knowledge provided there is a structured knowledge transfer from the business to the service
4. Staff Turnover:- Staff turnover is something that even a business has to handle with in-house
employee. This is something which is a common problem and hence cannot be used against
Pros and Cons of Joint Venture
A joint venture is a type of business arrangement.
A joint venture is an organization in which two or more individuals or companies join
together in a limited, temporary partnership. These groups will then combine their resources
in the hopes of accomplishing a specific, profitable goal. For example, two oil companies
might form a joint venture to drill a new well. Because of their many benefits, joint ventures
are very common. However, there are also a number of drawbacks.
Pro: Different Skill Sets
Joint ventures allow different parties to bring different skills to the table. Many companies
enter into joint
partnerships to gain access to new technology, capital and skills, as well
as critical business knowledge.
For example, a clothing company may want to sell
shoes to a new market. While the company may be
well-capitalized, they may be
inexperienced in the needs of the new market's consumers. By launching a joint-venture
with a knowledgeable local show company, the clothing company gains the experience
necessary to penetrate the market.
PRO: ACCESS TO NEW MARKETS
Often national governments will forbid foreign companies from selling
products to its citizens so as not to take away sales from local industry. However,
some countries, such as China, will allow foreign companies to enter local markets
by making joint ventures with local businesses. This allows the country to provide
new products and services to its citizens and for the foreign companies to reach new
PRO: DIVERSIFICATION OF RISK
As companies are combining their resources in a joint venture, they also
share risk. This makes joint ventures a wise move for particularly risky transactions,
allowing companies to essentially hedge their bet.
CON: SLOWER DECISION-MAKING
Joint ventures are often structured so that all members of the venture have a
hand in making decisions. This ensures that no action is taken contrary to the wishes
of any of the partners. However, this requirement for consensus can mean that
decision making takes far longer than in other instances, as each issue must be
negotiated until all parties are in agreement.
CON: SHARED REWARDS
The flip side to sharing risks is that rewards must also be divided. In a joint
venture in which two parties have equal stakes, each party can take home only half
of the venture's profits. This presents a severe downside to forming joint ventures for
companies that believe they can conduct a successful transaction on their own.
CON: POTENTIAL FOR DISAGREEMENT
Each company has its own culture, philosophy and management style.
Unless all parties in a joint venture agree about the venture's objectives and its
leadership structure, the partnership can become mired in poor cooperation and
integration, defeating its chances for success.
by Rakesh Singh Rajput
Bilateral Investment Protection Agreement
As with all the new reforms , the foreign investment policy of govt of India was also liberalised
in 1991 .
Negotiations undertaken with a number of countries to enter into Bilateral Investment Promotion
& Protection Agreement (BIPAs) in order to promote and protect on reciprocal basis investment
of the investors. Government of India have, so far, (as on July 2012) signed BIPAs with 82
countries out of which 72 BIPAs have already come into force and the remaining agreements are
in the process of being enforced.
BIPA applies to the “investment” made by an “investor” of one contracting party (the signing
country) in the territory of the other. BIPA benefits can be claimed by an “investor” who could be
a national of a signing country, or a legal person incorporated in that country. Further,
“investments” is widely defined to include everything that one expects in a multinational’s
business — movable or immovable property, shares and other securities, contractual rights,
intellectual property rights, concessions for prospecting, research and exploitation of natural
resources, and so on.
The agreement provides that each contracting party shall promote in its territory investments by
an investor of the other contracting party. Further, equitable treatment shall be provided to such
investments. BIPA provides for National and Most Favoured Nation (MFN) treatment. Thus a
contracting party should treat investors of the other party as favourably as it would treat its own,
or investors of any other country. Similar treatment is required for the “returns” on the
investments. This does not apply to benefits under certain obligations arising from other
international agreements or regional cooperation agreements. Similarly, matters pertaining to
taxation are excluded from National and MFN treatment
A detailed mechanism is available for settlement of disputes — the Arbitral Tribunal for disputes
between the contracting parties; and the International Arbitration for disputes between an investor
and a contracting party. Recently, Vodafone considered arbitration under BIPA for its tax dispute
with Indian revenue authorities.
FDI Vs BIPA Vs CEPA
BIPA – post establishment investment whereas FDI – pre establishment investment agreement
Therefore FDI not covered under BIPA.
CEPA – Pre and Post establishment commitments
As a result of a volatile economic or political environment or other reasons, investments by an
investor of one country in another may be adversely affected. Recent instances include GMR
losing an airport contract in Maldives, freezing bank accounts in Cyprus, and scrapping of
telecom licences among others. It may be possible to get some protection in some cases and,
accordingly, BIPA becomes relevant when investing in another country and thereafter. It is
understood that recently Etihad’s investment in Jet Airways was kept on hold as BIPA between
India and UAE was insisted upon.
( Now in mrunal bhai ’s style the boring part ,,,,,,,,,,,,,,,,,,,,,,,,,,, )
LIST OF COUNTRIES WITH WHOM BILATERAL INVESTMENT PROMOTION AND
PROTECTION AGREEMENTS (BIPA) HAS BEEN SIGNED (AS ON JULY, 2012)
Date of Agreement
Date of Enforcement
14th March 1994
6th January 1995
23rd December 1994
5th August 1996
10th July 1995
13th July 1998
3rd August 1995
12th April 1997
6th September 1995
28th August 1996
20th September 1995
27th February 2006
6th November 1995
1st December 1996
23rd November 1995
26th March 1998
13th December 1995
23rd November 2003
29th January 1996
18th February 1997
26th February 1996
7th May 1996
7th October 1996
31st December 1997
11th October 1996
6th February 1998
9th December 1996
26th July 2001
22nd January 1997
13th February 1998
8th March 1997
1st December 1999
2nd April 1997
13th October 2000
4th April 1997
16th February 2000
9th April 1997
22nd November 2000
by Aruna S.
For an extended list visit http://finmin.nic.in/bipa/bipa_index.asp
I would like to say http://pib.nic.in ,but it involves tedious search , @ pib information is
scattered here and there , like all govt websites.
Quantitative Easing by the US Federal Reserve: Its effect on India
What is Quantitative Easing?
QE or Quantitative easing was a unconventional policy introduced by the US Federal Reserve
(Simply called Fed) which is the Central Bank of USA, like RBI is for India.
Essentially QE implies the policy of the Fed to buy bonds in the open market to essentially
ease out liquidity that is to push more money into the market and system. At its latest version
i.e. QE3 the Fed was pushing nearly $85 Billion into the market every month through these
How does QE help? Or what is its main purpose?
QE was a result of the great depression of 2008, by which investor sentiment was much
muted globally and especially in the US. Due to the bust (depression) investor sentiment was
very low as well as people were not investing in markets, nor taking loans for housing, as
well as unemployment was spreading.
To counter this initially the Fed lowered all sorts of rates to bring interest rates down (similar
to RBI reducing CRR, SLR, Repo rate etc to reduce interest rate of loans in India). However
even after reducing these to the minimum the Fed felt that the investor sentiment was not
pushing up and loans were still expensive. So it decided to push money into the hands of the
market for use. So basically the Fed hoped to drive up the supply of money available for
loans, driving down long-term interest rates so more people would buy and build homes and
invest in businesses.
Wouldn’t that extra money result in Inflation?
Technically yes. But practically no. It is true that now there is way more money in the system
chasing the same products and so would technically lead to inflation. But we also have to
consider the fact that the USD (US Dollar) is a hard currency and freely convertible around
the world, and in much demand as it is considered as a stable investment (US is the world’s
biggest economy after all). But, instead of all the money staying in the US and in the US
market, most of it made its way around the globe to the other economies and countries, one
of which was also India.
The people with all the money in US realised that they could not earn much by keeping their
money in US Banks or stock market since returns are very low, so why not invest this around
the globe in different emerging market stock markets to earn better returns. This resulted in
free flow of all the extra money to global markets one of which was India. India’s Sensex and
Nifty had been giving very good returns for quite some time and so we saw an influx of FII
investment. This helped us not only sustain a larger Current Account Deficit but also made
the INR (Indian Rupee) appreciate w.r.t . the USD. A similar event was occurring in nearly
all emerging economies around the globe. This appreciation made exports uncompetitive,
thus leading to what is termed as Currency Wars.
What was Currency Wars?
It was a term given by Brazilian Finance Minister Guido Mantega, who made headlines when
he raised the alarm about a Currency War in September 2010. He claimed that competitive
devaluation was being done by various countries, whereby countries who were competing
against each other to achieve a relatively low exchange rate for their own currency, to help
exports from their domestic industries.
Thus he said that countries were not playing fair, but were cunningly using a pegged
exchange rate mechanism rather than market determined exchange rate mechanism.
It must be mentioned that India was not a part of this Currency War and was a vocal critic of
the same in the G-20 Meet.
Why all the alarm about QE now?
Some time back the Fed saw that the US economy has finally begun to pick up, and that
unemployment is going down with more jobs being added every month, thus it saw its QE
programme beginning to have effect.
Since the Fed is the Central Bank of the US and not of the world, it concentrates only on the
US economy. Thus ignoring the fact that the US economy in a way dictates global economy.
It (Fed Chairman Ben Barnanke) announced the slow reduction in QE soon in the future
seeing the recovery of US economy.
How does that impact India?
Since a lot of the funds of QE were flowing into India, the news of the QE being phased out
drove investors to think that since the Indian Economy is slowly failing it would be safer to
invest in the rising interest rates and stock market back home. Thus they started withdrawing
from the Indian stock markets. Since most of this money was in form of FII’s, we can’t make
it stay (hence called Hot Money) and it exited Indian Stock Market, resulting in Stock
Further since now there are less dollars available in the country due to all the FII’s taking
back their investments in USD, a dearth of dollars is felt, thus resulting in depreciation of
INR w.r.t. USD. Hence it suddenly went from $1=Rs. 55 to 69.
Also since India’s Imports are much greater than our Exports, we were dependent on this FII
investment to cover our import deficit, that is our Current Account Deficit, however since FII
are not coming easily now, or are still leaving the government is concerned about how it will
make Balance of Payments = 0 (Zero) that is finance Current Account Deficit.
Thus the government is trying to curb imports of unimportant items. However the coming of
Raghuram Rajan has been seen by the market as a positive for the failing Indian growth story
and hence as per reports there is once again a slow influx of FII.
On September 18th the Fed announced that it would not be tapering off the QE yet, this
further gave impetus to FII and market sentiment.
The future states that sooner or later Fed will erase off QE and we must be prepared now to
see a depreciation in rupee once again. To counter this we need to strengthen India’s
economic fundamentals further, push for big-ticket reforms, and revive investor and
entrepreneur confidence in the economy and the government apparatus.
We cannot be dependent on FII’s forever, rather we need to focus on turning FII into FDI
which is more stable. Also we need to drive up our exports especially manufacturing based
exports to not be at the mercy of FII for our CAD, rather aim to turn it to CAS (Current
Account Surplus) like that of Germany and China, which is based on manufacturing exports.
1.) The Hindu + Indian Express daily reading