Exchange-traded funds (ETFs) are likely to be included in the list of avenues allowed for investments under the Rajiv Gandhi Equity Savings Scheme (RGESS) announced in the Budget.
A senior finance ministry official told Business Standard the final contours of the scheme were slated to be approved in a meeting convened by Economic Affairs Secretary Arvind Mayaram tomorrow. The scheme is likely to be notified next week. "Initial public offerings, follow-on public offerings and ETFs of stocks eligible under the scheme have been listed as avenues to be allowed," he added.
Investments in the top 100 stocks listed on the BSE and the National Stock Exchange (NSE), as well as in Navratna and Maharatna public sector undertakings, would be covered in the RGESS, according to the scheme finalised by the finance ministry. The official said this meant ETFs of stocks allowed for investment under RGESS, listed and traded on the exchanges, would be part of the scheme, which would include such funds floated by mutual funds.
THE FINAL CALL
Plan to notify the scheme next week
IPOs, FPOs and ETFs in list of investments to be covered under the scheme
Top 100 BSE, NSE stocks and specified PSU scrips to be part of it
Sebi suggestion to include mutual fund investments a difficult proposition
50% tax deduction on Rs 50,000-investment by first timers with annual income below Rs 10 lakh under the scheme
He, however, said though the Securities and Exchange Board of India had suggested allowing investments in mutual funds directly under the scheme, so far, no decision had been taken on this. For that, an amendment in the Finance Act would be required, he added.
He said investment in mutual funds did not align with the basic idea of promoting equity culture. On August 17, Finance Minister P Chidambaram had indicated the ministry would soon take a decision on Sebi's recommendation to provide tax benefits to equity mutual fund investors under RGESS.
A final decision in this regard is now expected to be taken by the finance minister, keeping in mind the difficulties associated with the proposal. And, if he decides to bring investments in mutual funds under the scheme's fold, the scheme would have to be reworked accordingly.
RGESS was introduced in Budget 2012-13 to attract retail investment in the stock market and expand the reach of the capital markets. The scheme has been designed to provide income tax deduction of 50 per cent on investments up to Rs 50,000 to first-time retail investors with annual incomes of up to Rs 10 lakh. Initially, the lock-in period for investments in the scheme was three years. However, this might be reduced to a year in the long run.
The official said after the one-year lock-in period, investors may trade among different securities, though the scheme would have a three-year maturity period. He added permitting small investors to purchase shares only in the top 100 stocks traded on the BSE and the NSE would act as safeguards.
A slew of non-banking financial companies (NBFCs) have lined up their non-convertible debenture (NCD) offerings ahead of the Reserve Bank of India (RBI) policy review on September 17. NCD issues worth more than Rs 2,000 crore are likely to hit the market in two weeks.
The Mumbai-based India Infoline Finance Ltd (IIFL) has already announced the launch of its Rs 500 crore NCD issue, while Religare Finvest Ltd, Muthoot Finance Ltd and Shriram City Union Finance Ltd have received the Securities and Exchange Board of India (Sebi) nod to raise Rs 500 crore each through NCD issues. In addition, SREI Infrastructure Finance Ltd, too, has got Sebi nod for a Rs 150-crore issue.
Experts say firms are scrambling to hit the market before the RBI monetary policy meeting to tap the demand from investors who are expecting the central bank to cut interest rates. Fall in interest rates, typically, results in capital appreciation in the value of bonds. Also, favourable response to the Rs 600-crore NCD issue of Shriram Transport Finance last month, has given much confidence to companies and bankers to launch their offerings.
FUND RAISING SPREE NCD issues worth over Rs 2,000 cr are likely to hit the market in the next two weeks
Issue size (in Rs cr)
India Infoline Finance
500
Shriram City Union Finance
500
Muthoot Finance
500
Religare Finvest
500
SREI InfrastructureFinance
150
Source: Sebi
NBFC firms are trying to attract investor interest by offering 150-250 basis points (bps) more than corporate bonds with similar tenures.
IIFL, whose NCD offering opens on September 5, has a coupon rate of 12.75 per cent on six-year bonds, about 135 bps more than the 11.4 per cent offered by Shiram Transport Finance last month. However, experts said IIFL being an unsecured issue yields on offer are higher, while it could be slightly lower for the forthcoming issues as all of these are secured NCDs.
"Typically unsecured bonds carry higher interest rates. Like in our case also, we are offering 12.75 per cent interest rate, which I guess would be typically 100-125 basis points higher then what secured bonds with similar kind of rating would have fetched," said Nirmal Jain, chairman, IIFL.
In the event of liquidation, secured bond holders get preference as they are paid out of realisation of security, while unsecured bond holders get paid before any money is paid to the equity shareholders.
Experts said not-so-favourable prospects of other asset classes will ensure the supply of paper coming into the market get absorbed by investors.
Akhil Mangla, executive vice-president, ECL Finance, said: "Investors are getting out of equities due to the volatility and commodities such as gold seemed to have peaked. Real estate is clearly not for the small investors. Given these circumstances, there is a clear demand for debt instruments with high coupon rates. Firms are keen to tap this demand."
Currently, 'AA-' rated corporate bonds with tenures of three to five years are quoting at yields between 10 and 10.22 per cent.
Mangla added the expectations that RBI would cut interest rates in its next policy was also driving up the demand for such issues.
Funds raised through NCDs help NBFC firms grow their lending book. As such funds qualify for Tier-II capital, it allows companies to boost their capital adequacy ratio.
No-frills demat account suited for irregular users
While depositories will take a hit, volumes might make it up for the loss
Neha Pandey Deoras & Tania Kishore Jaleel / Mumbai Aug 31, 2012, 00:13 IST
Angel Broking Executive Director (Operations) Santanu Syam says for many investors, maintaining a demat account is a pain because of the charges. The costs, such as maintenance and statement charges, make them the most expensive globally.
Obviously, Securities and Exchange Board of India's (Sebi) move to introduce no-frills demat accounts have been greeted with much enthusiasm amid players though it means a higher cost for the depositories. This is because many irregular investors simply chose to close down the account and shifted to less cumbersome instruments such as fixed deposits or physical gold.
This, along with the one page know-your-customer document that was introduced in January for opening of demat accounts, will make investing in stocks and gold exchange-traded easier.
For an individual, the new charges are quite low. There won't be any annual maintenance charge (AMC) for balances of zero to Rs 50,000. The no-frills account will charge Rs 100 for a balance of Rs 50,001-Rs 2 lakh. Presently, depository participants (DPs) such as banks and brokerages charge anywhere between Rs 300 and Rs 500 as AMC regardless of the amount in the account.
The no-frills banking experience
In 2005, the Reserve Bank of India (RBI) also proposed no-frills banking accounts. Account holders could maintain zero balance. In addition, the first cheque book was free and subsequently Rs 5 was levied on every cheque leaf.
However, such accounts have not helped banks to spread reach, neither have too many people entered the banking system through these routes.
According to public sector bankers, the incremental number of accounts through the no-frills option is barely one per cent. In fact, even the apex banker was not-too-happy with the banks as these accounts remained mostly on paper and no transactions took place.
In fact, RBI has told bankers recently to remove the no-frills tag from these accounts since it seemed like a stigma. Instead, they have asked to call it basic savings bank accounts.
While there could be a loss of revenue to depositories, Syam feels depository participants' revenues may not take a hit. "The loss of revenue on losing customers is much more than rationalising of account servicing charges. This way at least customers can be retained," he says.
In fact, many investors may just keep accounts dormant and use them when overall markets or gold ETFs are doing well. Many opted for physical gold because of the cumbersome process and cost factor – something that Sebi has eliminated.
Prithvi Haldea of Prime Database echoes Syam's thoughts. "Most depository participants have other bigger businesses such as banking or brokerage services. Hence, low margins in the demat business may be a negligible hit," he says. Standalone depository participants will certainly be impacted though there aren't many such firms, he says.
However, some disagree that things will improve substantially. Because existing demat accounts holding, with less than Rs 50,000, will get automatically converted into a BSDA (basic service demat account) from October 1. Thus, the business for depository participants will be impacted.
So, if a depository participant earned Rs 300 from your account a year, he will lose that once your account becomes no-frills.
COST OF DEMAT ACCOUNT SERVICES Sebi move on no-frills demat accounts could be good news for retail investors
Name
Account opening*
Annual maintenance charges (Rs)
Additional account statements (Rs)
ICICI Bank
Nil
500 ( 450 for e-statements)
20
SBI
Nil
400 (350 for e-statements)
30
Angel Broking
Nil
300
25
IIFL
Nil
555 (one-time) or Rs 250 a year
Nil
Geojit BNP Paribas
Nil
400
25
No frills accounts
Nil
Up to 50,000 = Nil 50, 001 to 2 lakh = 100
up to 25
*Stamp duty of Rs 20 and stamp paper of Rs 50 for power of attorney. Source: Company websites
K V S Manian, group head, retail liabilities & branch banking at Kotak Mahindra Bank feels it is too early to quantify the impact, but there will certainly be some, as the existing accounts earn much more than three times the charge prescribed for BSDA.
"In the short term, the loss in revenue will impact business, though it will be small," says Ajay Menon, chief operating officer at Motial Oswal Financial Services. Participants are working on possible solutions to the revenue loss.
Sebi has also given possible solutions. For one, it says if the value of holding in BSDA exceeds the prescribed limit, the depository participant may levy charges as applicable to regular accounts. And banks/brokerages shall reassess the eligibility of the demat account holder at the end of every billing cycle and ask eligible account holders to shift to BSDA.
"This apart, banks may opt to send only a half-yearly or yearly account statements to accounts which do not transact often unlike Sebi's suggestion of a quarterly statement. Additionally, there are chances of increasing the charges on non-BSDA. There could also be an additional cap of the number of transactions such accounts can do, beyond which you will be charged like a regular account (Sebi put a cap of holding value of over Rs 2 lakh)," says a public sector banker.
Unfortunately, industry experts do not see this initiative gaining traction. For investors to turn to equities, it takes good market or a good initial public offer, neither of which is happening right now.
The use of cash in financial transactions continues unabated, pointing to the prevalence of the black economy at the higher end of the income spectrum and the absence of financial inclusion at the lower end.
August 30, 2012:
The recent movements engineered by social activists run along two parallel lines. One group steered by Anna Hazare demands a Lok Pal Bill to wipe out corruption in the realm of government, and the other steered by Baba Ramdev, calls for unearthing of black money.
There are two dimensions of the black economy which are talked about -- the money stacked abroad in foreign bank accounts, especially Swiss banks, and the money accumulated or floating around in the internal economy.
Assuming that internally, the black money is accumulated through transactions which are not captured by the organised banking system, such transactions must be cash-based. The other alternative may perhaps be gold.
On the above ground, one of the demands of Baba Ramdev is to ban use of higher denomination currencies of Rs 500 and Rs 1,000. Is there any ground to believe that a large volume of cash transactions in the economy is shifting in favour of high denomination notes? We attempt to examine this point.
High Denomination Notes
On the composition of bank notes, the recently released Annual Report of the Reserve Bank says the following about the trend during the year ending March 2012, which fared badly in terms of economic growth: "At 12.5 per cent, the growth in value of banknotes outpaced the growth in volume terms (7.4 per cent) in 2011-12. Notes of denomination 500 and 1,000 together accounted for 82 per cent of the total value of banknotes in circulation."
During the last three years, the growth in high denomination notes of Rs 500 and Rs.1,000 was 20.5 per cent, 24.1 per cent and 14.9 per cent, respectively. This was much higher than the growth in total bank notes over the same period, viz., 15.7 per cent, 18.7 per cent and 12.5 per cent. Accordingly, the share of high denomination notes to total bank notes increased from 76.4 per cent to 81.6 per cent over the last three years.
Decadal Trend
The trend in the composition and growth of high denomination notes since 2002 shows that the situation in 2011-12 is no exception.
The compositional shift has been a continuous process, indicating that almost the entire value of bank notes at one stage may be held in high denominations (see table).
The growth in high denomination notes was significantly higher every year than the growth of bank notes as a whole.
And the growth in total bank notes also was perhaps larger than the GDP growth, indicating a high elasticity of bank notes to real GDP.
This is perhaps a sign of financial inclusion not succeeding and a larger volume of transactions still being handled in cash.
Between the years ending March 2002 and 2012, the total bank notes in circulation jumped from Rs.2.45 lakh crore to Rs.10.52 lakh crore, growing annually in the range of 12.4 per cent and 18.7 per cent.
On the other hand, the value of high denomination notes galloped from Rs. 0.75 lakh crore to Rs.8.60 lakh crore between the same years, growing annually in the range of 14.9 per cent and as high as 45.0 per cent.
In the very recent past, there has been some softening of growth rates in both total bank notes and that of high denomination notes. The former may be attributed to success of financial inclusion combined with slower economic activity.
Should the latter be attributed to the Anna Hazare or Baba Ramdev effect, or is it a reflection of substitution of currency with gold by hoarders of unaccounted money? It is anyone's guess.
Money Velocity
With increasing financialisation, one would normally expect that currency will be substituted by higher-end assets like bank deposits and other forms of financial assets.
Taking only the transactions demand for money, say, the currency and demand deposits, the ratio of currency to demand deposits should reflect a secular declining trend.
But, the currency to demand deposits ratio, after declining from 2.69 in 1961-62 to 1.00 around 1977-78, increased to 1.58 in 1978-79 and since 2001-02, it is hovering mostly in the range of 1.2 to 1.4.
From another angle, the velocity of currency, measured as a ratio of nominal GDP to currency, should reflect economising of currency in terms of a secular increase.
However, the velocity after increasing from 7.7 in 1955-56 to 12.92 in 1975-76, gradually decreased over the years and in the recent period, ruling in the range of 9.0 and 9.7 (See graph). This is despite the fact that a large volume of transactions has shifted to debit/credit cards in the last decade.
Yet another dimension of the same problem is how far the financial savings are still in the form of currency.
This is reflected in the variation of currency every year as percentage to change in total financial assets, including currency. Instead of decreasing over time, the saving in the form of currency to total financial saving of the household sector remained rather stubborn at around 10 per cent or above over the last decade.
Financial Inclusion
The above trends overall would show that financial inclusion should address both lower and the higher end of the economic spectrum.
At the lower end, it is true that about half the households are excluded from banking, and much more from other financial services like insurance and pensions.
At the higher end, it is not that they are not covered by the banking system, but there seems to be a huge volume of financial activity carried on cash basis which should be brought within the purview of the banking or the organised sector.
The other dimension of the problem is, of course, that of the external wealth hidden by domestic households abroad, which is a hidden reserve of the country not available due to capital flight.
(The author is Director, EPW Research Foundation. The views are personal.)
The jury is still out on who would be more disappointed if Kingfisher Airlines goes belly-up — the airline or State Bank of India (SBI). SBI leads the consortium of unpaid banks and financial institutions that have forked out funds to the airline.
Most of these lenders have already considered their exposure as a non-performing asset (NPA) in accordance with the guidelines of the Reserve Bank of India (RBI).
The SBI chief has called for a re-look at the NPA norms to prescribe standards that are in sync with reality.
In the past, whenever the economic environment has turned bleak, the Government has got going with a slew of measures — the stimulus package a couple of years back, relaxation in FDI norms in certain industries and deviation from accounting standards to permit capitalisation of exchange gains and losses being some examples.
During these times, the RBI has focused on managing interest rates and largely remained silent on tweaking NPA norms. All the glare and attention seems to have been focused on Kingfisher — a bit unfairly one could say — though there are other borrowers who are in a worse shape than the airline, and some who have even defaulted wilfully.
Prudential norms
As per present the RBI guidelines, NPA norms come into effect when an account is not funded for a period of 90 days. Assets are classified depending on how long they stay in the NPA category.
In the present economic environment, 90 days is considered too early to trigger NPA status. Even though other conditions such as collateral security and restructuring proposals would affect the NPA status of an account, there is a view that the RBI can be a bit more liberal in this regard.
Accounting standards are also keeping pace with the times. A change is recommended from the 'incurred loss model' to the 'expected loss model', to recognise impairment conditions existing in financial assets.
The International Accounting Standards Board has issued an exposure draft on the amortised cost measurement and impairment of financial instruments. The exposure draft proposes an expected loss model for recognising impairments on financial assets recorded at amortised cost.
Currently, both US GAAP and IFRS use an incurred loss model for recording impairments on financial assets. Under an incurred loss model, impairments are recognised only after a loss or trigger event is identified. An expected loss model would recognise loss estimates throughout the life of a loan (or portfolios of loans) and other financial assets recorded at amortised cost.
The Basel Committee on Banking Supervision's international accounting standards should be changed to improve how assets are valued when markets are illiquid or malfunctioning.
The International Accounting Standards Board should set standards to gauge "fair value" when the measures are unclear, and banks should record losses expected over the life of a loan portfolio earlier.
India is one of the countries that supports the expected loss model in the global move towards IFRS. Some experts have warned that the expected loss model would accelerate losses at the beginning of a downturn and, consequently, still have a pro-cyclical effect.
The Financial Crisis Advisory Group (FCAG) supports exploring alternatives to the incurred loss model, including the expected loss model and a fair value model.
The financial world sees a lot of merit in banks and financial institutions adopting Spain's system of forcing banks to hoard capital in good times to draw upon in bad. The European Union (EU) is following suit with draft rules.
IFRS in India
After maintaining a stoic silence over an extended period of time, the Government has now stated that it would soon move over to IFRS. Whenever that occurs, the RBI should be prepared with Prudential Norms for Income Recognition and Asset Classification.
Most banks and financial institutions in India are listed and, hence, they would certainly be in the first set of entities that move over to IFRS.
The task for the RBI is certainly cut out, as it has to balance a dark economic environment with aggressive accounting standards. Having done so in the past (for Indian accounting standards), this should not be a too Herculean a task for the RBI.
(The author is Bangalore-based chartered accountant.)
The Securities and Exchange Board of India on Wednesday amended its rules to allow promoters to use rights and bonus issue of shares for dilution of their stake to meet minimum public holding norms. Market regulator also said it would consider any further relaxation in this matter on case by case basis.
SEBI has allowed promoters to use rights and bonus issue routes to achieve minimum public shareholding norms only if they forego their entitlements. This means that promoters will have to necessarily refrain from subscribing to rights and bonus issues.
Foregoing the entitlement would enable promoters of listed companies achieve 25 per cent public shareholding by the stipulated June 2013 deadline. Every shareholder is entitled to subscribe to rights and bonus issues.
These are days when bankers across the world seem to have lost the confidence of the depositing public. They have been pilloried for greed and for awarding themselves fat salaries and golden parachutes.
But every now and then there are some glorious exceptions, who blaze a new trail. Ananthakrishna, Non-executive Chairman of Karnataka Bank, has set an example for bankers.
The occasion was the annual general meeting of the bank and the third item on the agenda was his reappointment as the part-time non-executive director of the bank. Though his appointment was approved by a majority, one of the shareholders opposed the resolution.
After the usual demands for increase in dividends, issue of bonus shares, and so on, all the agenda items came to an end. At the end of the meeting, Ananthakrishna explained the process how he was selected as Non-executive Chairman of the bank in 2009.
Then the board had fixed a salary of Rs 1 lakh a month for him. This was approved not only by the shareholders at the AGM, but also by the RBI and the Central Government. But surprisingly, he has not drawn his salary.
He said: "I have a policy. That is to earn the salary, and not to get the salary. I did not take it. As a non-executive director I get sitting fees, conveyance and halting allowance. I also get my pension. These help me meet my expenses."
There was a thunderous applause by the crowd, as he said: "I need your blessings".
These are days when bankers across the world seem to have lost the confidence of the depositing public. They have been pilloried for greed and for awarding themselves fat salaries and golden parachutes.
But every now and then there are some glorious exceptions, who blaze a new trail. Ananthakrishna, Non-executive Chairman of Karnataka Bank, has set an example for bankers.
The occasion was the annual general meeting of the bank and the third item on the agenda was his reappointment as the part-time non-executive director of the bank. Though his appointment was approved by a majority, one of the shareholders opposed the resolution.
After the usual demands for increase in dividends, issue of bonus shares, and so on, all the agenda items came to an end. At the end of the meeting, Ananthakrishna explained the process how he was selected as Non-executive Chairman of the bank in 2009.
Then the board had fixed a salary of Rs 1 lakh a month for him. This was approved not only by the shareholders at the AGM, but also by the RBI and the Central Government. But surprisingly, he has not drawn his salary.
He said: "I have a policy. That is to earn the salary, and not to get the salary. I did not take it. As a non-executive director I get sitting fees, conveyance and halting allowance. I also get my pension. These help me meet my expenses."
There was a thunderous applause by the crowd, as he said: "I need your blessings".
August 30, 2012:
The jury is still out on who would be more disappointed if Kingfisher Airlines goes belly-up — the airline or State Bank of India (SBI). SBI leads the consortium of unpaid banks and financial institutions that have forked out funds to the airline.
Most of these lenders have already considered their exposure as a non-performing asset (NPA) in accordance with the guidelines of the Reserve Bank of India (RBI).
The SBI chief has called for a re-look at the NPA norms to prescribe standards that are in sync with reality.
In the past, whenever the economic environment has turned bleak, the Government has got going with a slew of measures — the stimulus package a couple of years back, relaxation in FDI norms in certain industries and deviation from accounting standards to permit capitalisation of exchange gains and losses being some examples.
During these times, the RBI has focused on managing interest rates and largely remained silent on tweaking NPA norms. All the glare and attention seems to have been focused on Kingfisher — a bit unfairly one could say — though there are other borrowers who are in a worse shape than the airline, and some who have even defaulted wilfully.
Prudential norms
As per present the RBI guidelines, NPA norms come into effect when an account is not funded for a period of 90 days. Assets are classified depending on how long they stay in the NPA category.
In the present economic environment, 90 days is considered too early to trigger NPA status. Even though other conditions such as collateral security and restructuring proposals would affect the NPA status of an account, there is a view that the RBI can be a bit more liberal in this regard.
Accounting standards are also keeping pace with the times. A change is recommended from the 'incurred loss model' to the 'expected loss model', to recognise impairment conditions existing in financial assets.
The International Accounting Standards Board has issued an exposure draft on the amortised cost measurement and impairment of financial instruments. The exposure draft proposes an expected loss model for recognising impairments on financial assets recorded at amortised cost.
Currently, both US GAAP and IFRS use an incurred loss model for recording impairments on financial assets. Under an incurred loss model, impairments are recognised only after a loss or trigger event is identified. An expected loss model would recognise loss estimates throughout the life of a loan (or portfolios of loans) and other financial assets recorded at amortised cost.
The Basel Committee on Banking Supervision's international accounting standards should be changed to improve how assets are valued when markets are illiquid or malfunctioning.
The International Accounting Standards Board should set standards to gauge "fair value" when the measures are unclear, and banks should record losses expected over the life of a loan portfolio earlier.
India is one of the countries that supports the expected loss model in the global move towards IFRS. Some experts have warned that the expected loss model would accelerate losses at the beginning of a downturn and, consequently, still have a pro-cyclical effect.
The Financial Crisis Advisory Group (FCAG) supports exploring alternatives to the incurred loss model, including the expected loss model and a fair value model.
The financial world sees a lot of merit in banks and financial institutions adopting Spain's system of forcing banks to hoard capital in good times to draw upon in bad. The European Union (EU) is following suit with draft rules.
IFRS in India
After maintaining a stoic silence over an extended period of time, the Government has now stated that it would soon move over to IFRS. Whenever that occurs, the RBI should be prepared with Prudential Norms for Income Recognition and Asset Classification.
Most banks and financial institutions in India are listed and, hence, they would certainly be in the first set of entities that move over to IFRS.
The task for the RBI is certainly cut out, as it has to balance a dark economic environment with aggressive accounting standards. Having done so in the past (for Indian accounting standards), this should not be a too Herculean a task for the RBI.
(The author is Bangalore-based chartered accountant.)
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Exchange-traded funds (ETFs) are likely to be included in the list of avenues allowed for investments under the Rajiv Gandhi Equity Savings Scheme (RGESS) announced in the Budget.
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