Big-ticket reform Bills on Cabinet agenda today
Insurance, PFRDA, FCRA, companies Bills likely to be taken up
SANJEEB MUKHERJEE New Delhi, 3 October
The UPA government is likely to take up a slew of big-ticket reform
bills in a Cabinet meeting slated tomorrow. Apart from the Companies
Bill, the Bills relate to raising the FDI (foreign direct investment)
cap in private insurance companies from 26 per cent to 49 per cent,
giving statutory powers to the interim pension regulator and more
teeth to the forwards market watchdog.
The Cabinet is also expected to discuss the final draft of the 12th
Five Year Plan, following which it will be placed before a meeting of
the National Development Council later this month. It is also likely
to clear the creation of a National Investment Board to be headed by
the Prime Minister for clearing mega projects.
Having dithered on an FDI rise in the insurance sector for long, the
government has made up its mind to deliberate on the Bill in the
Cabinet tomorrow, according to those in the know.
In fact, the insurance sector regulator, Irda, today batted for an
increase in the FDI cap to 49 per cent, saying the sector required
greater investment for growth.
"Absolutely (I am in favour of 49 per cent). I do think unless we go
for 49 per cent we will not have the kind of capital required to
underpin the growth of the insurance industry," Irda Chairman J Hari
Narayan said on the sidelines of a CII event here.
"Look at it. In banks it is 74 per cent, in asset management
companies, it is 100 per cent... I do not see why in insurance
companies it should be 26 per cent. We should increase that," he said.
Parliaments standing committee on finance had recommended retaining
the FDI cap in the insurance sector at 26 per cent.
As such, it might not be easy for the government to get the Bill
passed, at least in the Rajya Sabha where the ruling coalition does
not have a majority. Recognising this, Human Resources Development
Minister Kapil Sibal recently said the ruling coalition would persuade
the Opposition to support the Bill.
The Cabinet will also deliberate on the Pension Fund Regulatory and
Development Authority (PFRDA) Bill. It seeks to give statutory power
to the interim pension regulator, PFRDA.
To buy peace with the Opposition, the government had earlier agreed to
specify the FDI component in the Bill itself. However, the Bill,
brought to the Cabinet earlier, said the FDI cap would be 26 per cent
or in line with the insurance sector, whichever was higher. The main
Opposition, BJP, had earlier agreed to support the Bill, but the UPA's
then ally, Trinamool Congress, had opposed it. The Trinamool Congress
had also not allowed deliberations on the Forward Contract
(Regulation) Amendment Bill.
BACKON THE TABLE
|Rise in FDI cap in insurance sector to 49%; PFRDA, FCRA& companies Bills
|Parliaments standing committee on finance in favour of26% insurance FDI cap
|UPAs lackofmajorityin Upper House could make itdifficultto get the
insurance Bill passed
Raise key tariffs: Parekh panel
BS REPORTER
New Delhi, 3 October
To attract investment in the beleaguered infrastructure sector, a
highlevel committee headed by HDFC Chairman Deepak Parekh has asked
the government and regulators to take tough decisions: raise railway
passenger fares, and electricity, natural gas and port tarrifs.
In its interim report given to Prime Minister Manmohan Singh today,
the panel advocated bringing in legislation to reform regulatory
structures in the infrastructure sector.
It wants the government to remove delays in land acquisition and
environmental The favoured redefining the role of the India
Infrastructure Finance Corporation Ltd (IIFCL) by integrating its
direct lending operations with guarantee operations. It wants the
IIFCL to lend directly to infrastructure companies in case it is
lending for 20 years, or rely on funding by others such as commercial
banks.
The panel is also comprised of Irda Chairman J Hari Narayan, PFRDA
Chairman Yogesh Agarwal, ICICI Bank MD Chanda Kochhar, State Bank of
India Chairman Pratip Chaudhury, GMR Group Chairman GM Rao, GVK Group
MD Sanjay Reddy and others. "The government has to bite the bullet on
some issues like raising railway passenger fares," Parekh told
reporters. SECTOR-WISE SUGGESTIONS
Gas
Rationalise gas allocation and pricing within two months
Ports
Deregulate tariffs; follow international best practices |Accelerate
the pace of capital dredging
IIFCL
Guarantee operations to enable the flow of non-bank long-term credit
for infra projects, especially insurance and pension funds |Lend only
for tenures of 20 yrs or more
Railways
Raise passenger fares
Power
Set electricity distribution tariffs at sustainable levels |Import
coal through STC/MMTC or directly via power producers
Telecom
Increase FDI limit to 100 per cent, remove regulatory uncertainties
related to allocation, pricing and sharing of spectrum
FM seeks industry support to resolve reform logjam
BS REPORTER & AGENCIES
New Delhi, 3 October
Finance Minister PChidambaram today appealed to India Inc to persuade
the Opposition to help pass crucial reform Bills in Parliament. The
Opposition has been protesting against allowing foreign direct
investment in the retail sector, as well as the rise in fuel prices.
In his first meeting with industry chambers after taking charge as
finance minister, Chidambaram assured them the National Investment
Board would be set up within two weeks to expedite infrastructure
projects, chambers said. Tomorrow, the Cabinet is slated to take up
several reform Bills. The Bills would need Opposition's support in the
Rajya Sabha.
Another reform Bill, the Constitution amendment Bill to roll out the
Goods and Services Tax, would also require the Opposition's support.
Also, at least half the states would have to ratify the Bill.
Currently, the Bill is being vetted by Parliament's standing committee
on finance.
Responding to the finance minister's request, Ficci President R V
Kanoria said the chamber would continue to raise the matter with
states, as well the Opposition.
At the meeting, Ficci, CII and Assocham pitched for lower interest
rates to boost consumer spending in the festive season. Kanoria said
for energy security, competition in the commercial coal mining sector
was vital. For this, denationalisation of Coal India was essential, he
said. Assocham, too, sought "scrapping of the mine nationalisation
Act." CII stated ~4 lakh crore was stuck in taxation disputes. It
urged the finance minister to resolve these issues.
The industry delegations also urged the finance minister to address
issues in land acquisition and unlock assets with sick PSUs, as well
as cashrich PSUs.
For full report, visit www.business-standard.com
"There is a lot to be done forthe economy and industryat the this moment"
ADI GODREJ
President, CII
"The finance minister would like to see the keyeconomic reforms
happen... He is looking forall us to worktogether"
NAINALALKIDWAI
Senior Vice-President, Ficci
"Industrywill support implementation of Shome and Kelkar panels' suggestions"
KRISGOPALAKRISHNAN
President-designate, CII
"Festive season is the time when Indians spend the most... this is the
time to cut rate by100 bps"
RVKANORIA
President, Ficci
Gokarn sees subsidy barrier for growth, inflation control
BS REPORTER
Chennai, 3 October
The Reserve Bank of India (RBI) said the rising subsidy bill would be
a hindrance to controlling inflation and fuelling growth.
Speaking at the 102nd annual general meeting of the South Indian
Chamber of Commerce and Industry, RBI Deputy Governor Subir Gokarn
said, "No solution will effectively work unless the issue of subsidy
bill is addressed, because it is by far the largest single burden on
government finances." The rising subsidy bill is shifting resources
from investment to consumption. Not dealing with subsidies is going to
provide the country imperfect, incomplete solutions, he said.
The central bank would take various developments of the past few
months into consideration, while coming up with its half yearly review
by the end of this month, Gokarn said. "Tackling the subsidy bill is
going to be the central part of the strategy. A low fiscal deficit
logically feeds into high growth process." Gokarn welcomed the policy
changes that have happened in the past weeks as these address some of
the growth-related and inflation-related risks. But eventually, the
judgement has to be on how these actions influence growth and
inflation trajectory. "Ultimately, that balance is what the RBI's
decision would be based on," he added.
Allowing foreign direct investment in multibrand retail would be an
enabler in increasing productivity and distribution. The country has
low productivity issues and distribution problems, which add to
inflation issues, he said.
Correcting fuel prices would have a bearing on balance of payments as
well. "This, in turn, feeds positively into currency dynamics and have
a bearing on inflationary process," he said. Increased fuel prices
might have a short-term impact. But it would help address fiscal
deficit, which is apositive aspect of price increase, he added.
"Managing inflation is a part of the central bank's thinking and
actions. The RBI recognises that there is a short-term price to be
paid in terms of growth, while taking a strong anti-inflationary
stance. But it also feels that eventually, long-term growth does not
suffer ...." At present, there is no steadiness or robustness of
capital flows into India, something the country witnessed during the
high-growth period. Current account deficit has widened from less than
3 per cent of GDP to 4.2 per cent in 2011-12.
There may be a beginning of some stabilisation in the current account
deficit, as it has come down to 3.9 per cent in the first quarter of
this year, but it is still outside the desired range of below three
per cent of GDP, said the RBI deputy governor.
RBI Deputy Governor Subir Gokarn
Vanguard shiftwill resultin more FII inflows into India
BS REPORTERS
Mumbai, 3 October
Indian stock markets are set to record additional inflows of up to
$1.5 billion from global exchangetraded funds (ETFs), owing to the
decision of Vanguard Group, America's largest fund company, to change
its benchmark from MSCI to FTSE for six of its international index
funds from 2013.
Currently, about 70 per cent of the flows from foreign institutional
investors into India are from ETFs, said stock market analysts. ETFs
are listed on stock exchanges and entail the same stocks and the same
proportion as the underlying index. So far this year, the Indian stock
market has received net inflows of ~83,780 crore ($16.33 billion).
India would be a beneficiary of the movement from MSCI to FTSE, as it
is considered an emerging market by Vanguard. Vinod Sharma, head of
business (private broking and wealth management), HDFC Securities,
said, "This will mean higher weight for India, as South Korea is
considered a developed market by FTSE, and will not find a place in
the allocations." A number of other emerging markets would also
benefit from this exercise. India would be the third-highest
beneficiary, after Brazil and South Africa, which would gain $2
billion and $1.55 billion, respectively, according to a report by JP
Morgan. South Korea and China stand to lose the most — $9 billion and
$370 million, respectively.
While Vanguard's decision was aimed at reducing investment costs by
bringing down the key expense of investing—the fee paid to firms that
license benchmarks like MSCI and FTSE. This would help Vanguard
investors save about $500 billion.
In a press release issued yesterday, Vanguard Chief Investment Officer
Gus Sauter stated, "With our clients' best interests in mind, we
negotiated licensing agreements for these benchmarks that we expect
would enable us to deliver significant value to our index fund and ETF
shareholders, as well as lower expense ratios over time." UR Bhat,
managing director, Dalton Capital, said, "This is an important move,
which could trigger others' decision as well." A senior investment
banker said, "Given the fact that ETFs work on very low expenses,
Vanguard's move may encourage others like Barclays Global Investors to
shift to cheaper benchmarks, and this would benefit India." The JP
Morgan report stated stocks expected to benefit the most from this
move included ITC ($344 million), Infosys ($146 million), ONGC ($122
million), RIL ($100 million) and Bharti ($86 million).
"In an environment in which index licensing fees, in general, have
represented a growing portion of the expenses investors pay to own
index funds and ETFs, the long-term agreements with FTSE and CRSP will
provide cost certainty with these two index providers," Sauter said.
Vanguard has shifted another 16 US stock and balanced index funds to
new benchmarks developed by the University of Chicago's Center for
Research in Security Prices.
Country EM weight Index (in %) flows ($M)
Brazil
12.67 2,022.85 16.16
South Africa
7.82 1,553.76 10.50 India 7.05 1,501.68 9.64
Taiwan
11.01 1,204.14 13.09
Malaysia
3.60 722.07 4.85
Mexico
4.97 574.02 5.96
Russia
6.20 431.87 6.94
Chile
1.89 331.61 2.46
Indonesia
2.69 297.94 3.20
Thailand
2.21 231.95 2.61
Source: JPMorgan FUND FLOWS
India would be a beneficiaryofthe movementfrom MSCI to FTSE, as itis
considered an emerging marketbyVanguard
MSCI EM weight FTSEEM weight
With expected additional inflow of $1.5 billion, India to be
third-highest beneficiary of the move; experts say others may follow
Vanguard move
ETF rules stump bidders
>NSUNDARESHASUBRAMANIAN &SAMIE MODAK
New Delhi/MUMBAI, 3 OCTOBER
Steep eligibility conditions and conflict of interest provisions have
kept fund houses and merchant banks from bidding for the mandate to
advise the proposed Exchange-Traded Funds (ETFs) of public sector
undertakings (PSUs).
The Department of Disinvestment (DoD) has now diluted one of the
conditions and has extended the deadline for submission of bids to
October 19 from 8, hoping to get bidders.
Last month, DoD had floated request for proposals (RFP) "towards
engagement of an advisor for creation and launch of a central public
sector enterprise (CPSE) exchange-traded fund".
Under the RFP,"bidders should have advised or have been involved in a
relevant capacity or have launched an equity ETF/equity MF/similar
transaction during April 1, 2009 to June 30, 2012 of the size of
~1,000 crore or more." This condition was simply impossible to comply
with, say fund houses.
Only one new fund offer (Reliance Infrastructure NFO in May-June,
2009, raised ~2,350 crore) meets this condition during this three-year
window. Due to the market downturn and entry load ban in August 2009,
NFOs have become few and far apart. Even the ones that hit the market
were happy if they managed to collect a few hundred crores. Even fund
houses that specialised in ETFs, such as equity Goldman Sachs
(erstwhile Benchmark) and Motilal Oswal, would not have satisfied this
condition.
After realising this, the ministry has now extended the eligibility
period by seven years to April 2002. Thus, a bidder who has launched a
fund during "the period April 1, 2009 to June 30, 2012, whose size at
the time of launch was at least ~1,000 crore or its average AUM in any
quarter subsequent to its launch have/had reached ~1,000 crore or
more" would be eligible. This move will expand the number of eligible
fund houses.
According to Valueresearch data, there were 48 equity schemes with AUM
(assets under management) of ~1,000 crore or more as of June 30. None
of these were ETFs. Thirteen fund houses, including Reliance, UTI,
Birla Sun Life, DSP Blackrock, ICICI and HDFC managed these schemes.
But, the conflict of interest provision is a key irritant, say fund houses.
The department has laid out a twostage process to get the ETF up and
running. Accordingly, the department would first select an advisor
through competitive bidding. This advisor would then give inputs on
the favourable course of action. If the formation of an asset
management company (AMC) is preferred at the end of this process, then
the second stage kicks in.
Under the conflict of interest provisions, the advisor will not be
eligible for participation in the second stage. "The entity appointed
as advisor, or its sister concern or an arm thereof, will not be
eligible to participate for selection as the AMC or ETF provider, so
as to avoid any situation of conflict of interest," the RFP said.
Under the existing industry practice, afund house launching an ETF or
an equity fund does not hire an external advisor such as merchant
bankers or consultants. Structuring, marketing and distribution of a
new fund offer is done in-house by fund houses. Therefore, there are
not many consultants who can claim to have advised a fund launch of
"~1000 crore or more" like the DoD wants.
While this leaves out most of the merchant banks and consultants, a
fund house which might have launched or managed NFOs of ~1,000 crore
or more, as prescribed by DoD, does not have any incentive to become
an advisor if it will be disqualified from bidding in the second
stage.
Quantum Asset Management Company chief executive Jimmy A Patel said,
"The conditions put out by the government like separate role for
advisors and management, are difficult to implement." Patel also added
the post-launch market making is another difficult requirement. "AMCs
themselves dont do market-making but have to depend on third-parties
like brokers." Amar Ranu, associate vice presidentresearch and
advisory, Motilal Oswal Wealth Management, said "It will be very
difficult to sell this ETF. PSU stocks typically dont move in tandem
with the market due to regulatory hurdles and other governance-related
issues. A few PSU schemes that are there in the market havent done
well. Therefore, it will be difficult to convince the investor to
invest in such a fund."
Ministry relaxes a key eligibility norm, extends deadline after
lukewarm response
|Finance ministry calls for advisors to launch ETF on PSUs |Says
advisors should have handled a ~1,000-crore fund launch |Not many
~1,000-crore funds launched in past three years |Ministry relaxes norm
to include MFs that launched schemes that later grew to ~1,000 crore
|Conflict of interest provisions continue to be irritants
AN UNACCEPTABLE OFFER
Govt proposes national centre to regulate chemical industry
ANINDITADEY
Mumbai, 3 October
The ministry of chemicals and fertilisers had proposed to set up
anational chemical centre to formulate environment and human-friendly
policies and contain risks posed by chemicals.
This is aimed at streamlining legislation governing the industry and
making entities concerned responsible for their acts. The industry, at
present, is governed by multiple legislations under several ministries
— the Environment Protection Act, 1986; Factories Act, 1948; Motor
Vehicles Act, 1988; Explosives Act, 1884; Disaster Management Act,
2005; CWC Act, 2000 and Land Acquisition Act, 1894.
"What we need is a REACH (registration, evaluation, authorisation and
restriction of chemicals) legislation enacted in the European Union
for protecting human health and environment. The Sustainable Policy
and Chemical Act could replace 40 different environment-related
legislations. Besides, there are no specific legislations for
registration, ban and classification of substances," said an official
source.
For this, the proposed centre would provide necessary regulatory
framework, trade practices, duty structure and maintain an inventory
of the chemical sector containing data on production, consumption,
imports, exports and toxicological properties.
It also envisages setting up of the Chemical Standard Development
Organisation under its jurisdiction to facilitate the industry to
comply with international standards. The objective of these changes
are primarily to increase exports and position India as the research
and development hub for the sub-continent.
Exports have been affected by different guidelines across countries,
specifically in Europe. Though chemical exports (drug and pharma,
dye/intermediates/inorganic/organic and cosmetic/toiletries) grew by
34 per cent year over the year, much of the increase in CY12 has been
due to rupee depreciation rather than actual volume because
quantity-wise there has been only marginal increase in exports across
categories. Also, there is need to diversify into speciality chemicals
rather than focus on organic chemicals to exploit export
opportunities.
.
-
CS A RENGARAJAN,, B.Com ,FCS, LLB, PGDBM
Company Secretary, Chennai
email csarengarajan@gmail.com
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