| Repo rate cut may not happen even in Jan | |
The chances of a cut in the repo rate continues to be dim in a situation where inflation is expected to remain high.
Many economists do not expect a repo rate (the rate at which the central bank lends to banks) cut by the Reserve Bank of India (RBI) in the midquarter review of monetary policy scheduled on December 18 or even in the thirdquarter review on January 29. Of nine economists Business Standard spoke to, only three felt sure about a repo rate cut on January 29. "Wholesale price index (WPI) inflation will be higher than what RBI is projecting and even in the interim, it would be more than RBI's projections. That might not give RBI the confidence to cut the repo rate in January," said A Prasanna, chief economist, ICICI Securities Primary Dealership. RBI believes WPI could breach eight per cent but not well above this; however, Prasanna feels before WPI peaks in December-January, it could be above 8.5 per cent. "Probably by March, RBI will get the comfort to cut the repo rate 25 basis points (bps)," he said. In today's second quarter review of monetary policy, RBI raised the baseline projection for headline WPI inflation to 7.5 per cent from the seven per cent indicated in July. "Persistent supply constraints may aggravate as demand revives, resulting in price pressures. Global financial instability could put downward pressure on the rupee and that will add to imported inflation. Also, the upsurge in both rural and urban wages will exert costpush pressures on inflation. Finally, as under-pricing in several products is corrected as part of the fiscal consolidation process, suppressed inflation is being brought into the open. This correction is necessary and important. Nevertheless, it will result in higher inflation readings," said RBI Governor D Subbarao. In the January 2013 review, RBI will have the WPI's December reading. According to Shubhada Rao, chief economist, YES Bank, the December inflation will be higher, essentially due to the unfavourable base effect. "It may be the peak but considering it will be in the range of 8.25-8.5 per cent, I see lesser probability of a repo rate cut," she said. Economists also note the risks that could push inflation upwards. "In the next few months, we will see the full impact of the fuel price hike in inflation. Beyond that, it could be uncertainty in global commodity prices. The pressure on food prices will continue but that will be less than expected earlier," said D K Joshi, senior director and chief economist at CRISIL. In the mid-quarter review on December 18, RBI might cut banks' cash reserve ratio (CRR) further. "We expect RBI to cut CRR 25 bps again on December 18, to improve bank liquidity and to pull down lending rates," said Indranil Sengupta, India economist, Bank of AmericaMerrill Lynch, in a report today. CRR is the proportion of total deposits a bank has to keep with RBI as cash. Today, this was cut by 25 bps. After the cut, the CRR is 4.25 per cent of net demand and time liabilities, effective the fortnight beginning November 3. Economists point to WPI inflation trend; many think RBI unlikely to move on this before March EXPECTATIONS Yes Expectation ofrepo Probabilityofa Organisation rate cutin Jan repo rate cutin Jan Nomura (25 bps) 100% ICICI Securities PrimaryDealership (25 bps) 40% KotakMahindra Bank (25 bps) 50% CARERatings (25 bps) 50% State BankofIndia (50 bps) 100% CRISIL (25 bps) 80% YESBank (25 bps) 40% BankofAmerica Merrill Lynch (25 bps) 100% BankofBaroda (25 bps)50% | | 2013 deadline for bank info sharing | |
Even as more banks prefer consortium lending, which improves access to information, the Reserve Bank of India (RBI) today made information sharing among banks compulsory, with effect from 2013. In consortium lending, two or more banks come together to finance big projects that require huge amount of money.
"NPAs (non-performing assets) and restructured loans of banks have been increasing significantly. A major reason for deterioration in the asset quality of banks is the lack of effective information sharing among them, despite specific instructions issued in September and December 2008 regarding sharing of information on credit, derivatives and unhedged foreign currency exposure," the central bank said in its second quarter review of monetary policy. RBI said the banks should strictly adhere to the instructions regarding sharing of information relating to credit among themselves, and put in place an effective mechanism for information sharing by December 2012. The central bank warned that banks would face action, including penalties, if they did not adhere to the norms. "Any sanction of fresh loans/ad hoc loans/renewal of loans to new/existing borrowers with effect from January 1, 2013 should be done only after obtaining/sharing necessary information," said the central bank. For full report, visit www.business-standard.com | | Anand Sharma hopes IKEA would secure approval soon | |
BS REPORTER
New Delhi, 30 October Commerce and Industry Minister Anand Sharma today told Swedish counterpart Annie Loof (Minister for Enterprise, Government of the Kingdom of Sweden) he hoped IKEA would soon secure approval to commence operations in India. This follows the finance ministry reviewing the Swedish home furnishing major's plans to invest ~10,500 crore to set up singlebrand retail stores in the country. The proposal is being examined by the Department of Industrial Policy and Promotion. Ministry officials said the proposal would soon be forwarded to the Foreign Investment Promotion Board (FIPB), scheduled to take a decision on the issue next month. After FIPB clearance, the proposal would have to be approved by the Cabinet Committee on Economic Affairs, as FIPB can only clear investment applications worth up to ~1,200 crore. The IKEA Group proposes to invest in India's singlebrand retail segment through awholly-owned subsidiary. According to IKEA's proposal, it would invest ^600 million (~4,200 crore) to open 10 stores in the first stage. The remaining ^900 million (~6,300 crore) would later used to open 15 additional stores. Earlier, the company had expressed concern on the mandatory 30 per cent sourcing clause in the single-brand retail segment. However, after the government relaxed the norm, IKEA had filed its application earlier this month. Recently, FIPB had cleared foreign investment proposals of three single-brand retailers, including British footwear retailer Pavers England, to open-fully-owned stores. It has also approved a 51 per cent joint venture of American luxury clothing retailer Brooks Brothers and Italian jewellery maker Damiani's plan to form aventure with Mehta's Pvt Ltd. | | DEBATE
Should the private sectorcome underthe corruption law? | |
The simple answer is yes. But is mere inclusion enough? No. It is only a necessary, but not a sufficient condition, unless accompanied by strong enforcement that is fair, effective, speedy, transparent and non-vindictive. In India, the tendency is to focus more on the one who accepts bribe than on the one who gives it. Empirical literature also has till recently focused on the demand side of corruption. Effectively, this implies that the bribe-givers tend to continue their practices unabashedly, as they know that they can get away easily. Daniel Triesman's Cross National Study on Corruption ( Journal of Public Economics, 2000) focusing on the demand side of corruption has provided a rather bleak outlook on the global anti-corruption campaign, but analysis based on the demand and supply sides of corruption gives reasons for optimism. Corruption cannot be dealt with by attacking public officials alone. The prime minister's proposal to amend the Prevention of Corruption Act (PCA), 1988 to explicitly include the private sector, thus, squarely addresses this issue. It may not address the "harassment bribes" that Kaushik Basu, the former chief economic advisor, talked about.
In India, PCA 1988 is the primary law concerning bribery. The 1988 amendment to its colonial predecessor, attached criminal liability under the Indian Penal Code to the acts of both public and private sectors' corruption and defined the term "public servant". Though the principal focus of the Act has been the "public servant", through Section 8, the Act can theoretically reach all Indian citizens. Abetting in the crime of bribery, both giving and taking, is a punishable offence under Section 12. However, Section 24 carves out an exception for consensual bribery — creating an ambiguity of which the bribe-giver takes advantage of to get away easily. The proposed broadening of the ambit of PCA and removing this ambiguity should correct the problem. Corruption cannot be viewed narrowly as a "business transaction". At first glance, it may appear that corruption is a cost-effective "high return, low risk activity" in India. But its pernicious effects measured by the long-term hidden costs and risks, are often ignored or at least underestimated. It is recognised internationally that private sector corruption takes various forms. Insider trading, for example, is viewed as a form of corruption in the private sector. The European Commission had launched a policy package on the protection of the licit economy, which covers "Financial Market Integrity and Private Sector Corruption", along with a directive on criminal sanctions for insider dealing and market manipulation. There is a vicious cycle of bribery and corruption, and corporate governance can be a critical ingredient to break it. Not recognised by the private corporate sector, it needs some serious introspection. The private sector needs to be aware that coming under PCA would cast considerable onus on boards of companies to strengthen their internal controls, and on auditors and audit committees to be more vigilant because transparent accounting, which helps identify related-party transactions and offbalance sheet transactions, is a prerequisite to detect and prevent corruption. At present, not all companies and their boards have their bounden duty to install and seriously implement controls or procedures to prevent corruption, though many have wonderfully worded codes of ethics and good governance. It is not enough to merely include the private sector in PCA. In the UK, the new antibribery law as of July 1, 2011 prescribes sanction for failure by commercial organisations to prevent bribery. This is expected to create incentives for companies "to design and implement controls that help address the supply side of bribery, set up appropriate procedures, regularly monitor and review their policies, conduct due diligence and train their employees". Including the corporate sector explicitly under the ambit of corruption and amending PCA is undoubtedly very well intended. But will the translation of these intentions into an effective law and enforced and when? That remains to be seen. The writer is also Consultant and Member, Advisory Council, Global Corporate Governance Forum, International Finance Corporation Doing so may enforce good corporate governance but the danger of exposure to harassment remains Corruption has existed possibly as long as the businesses have existed. The roots of corruption by corporate sector in India have historically been linked to the system of numerous approvals required by organisations to set up and carry on businesses. Substantial discretion in the hands of government officials led to common practices of corrupt payments to obtain and expedite licences. The reform exercise of the 1990s included efforts to reduce the number of approvals, which resulted in reducing the touch points of businesses with government officials, and ultimately, reduced many corrupt practices. The recently reported large scams have brought to the forefront newer and specialised form of corruption involving the corporate sector. Prime Minister Manmohan Singh in a recent speech at the 19th conference of the Central Bureau of Investigation and state anti-corruption bureaus talking about proposed amendments in the Prevention of Corruption Act (PCA), said, "...in a vast majority of cases, it is difficult to tackle consensual bribery and the supplier of the bribe goes scot-free by taking recourse to the provisions of the Act. This would be taken care of in the proposed amendments." We have a stringent anti-corruption legislation in the form of PCA, 1988 to prevent corruption by public servants. Lack of enforcement and speedy action has drawn fear away from this Act over the years. However, the enforcement agencies recently demonstrated that no one is above the law, by putting senior politicians behind bars in a few cases. Most importantly, there was a clear message that PCA covers the supply side of bribery also — shown by pressing charges for abatement of offence under the Act against corporate bigwigs in the 2G spectrum scam. Stringent enforcement actions along with a broader strategy are needed to combat corruption rather than just covering the corporate sector under the corruption laws by legislative changes. Corruption emanates from absolute control over limited resources and the discretion to provide/distribute those resources. The controller of the resources in public bribery is sitting on the receipt side of corruption. So, corruption largely flourishes from the government side. It is also very important to protect bribe-givers, so that instances of bribe-giving are reported and all on the supply side of corruption become potential whistle-blowers, as Former Chief Economic Adviser Kaushik Basu had suggested. One of the harsh realities of corruption is that in most parts of the world, a company has to pay the bribe for keeping the business alive or face the consequent loss of revenue and profits. It is difficult to understand how only a change in the legislation would help the corporate sector or society as a whole to combat corruption. There have been many new corporate governance measures initiated for the corporate sector in India in recent years. Effective implementation and monitoring of these measures is key to enhancing integrity and accountability in the corporate sector. There is a need for monitoring implementation of good governance measures by the regulators and enforcing actions against defaulting organisations. Such measures when applied consistently across all types of organisations will ensure a level-playing field. Another question is whether bribery in the private sector should also be covered under the anti-corruption legislation, like it does in the UK Bribery Act. The UK Bribery Act, considered the most stringent anti-corruption legislation, is also not free from criticism. Second, the level of stringent enforcement of this far-reaching legislation is yet to be seen. Even the current PCA suffers from delays in prosecution and a large number of pending cases — making it a weak legislation. The corporate sector, in many situations, is forced to give bribes even for legitimate services. In the absence of a holistic approach to eradicate corruption from society, we might be exposing the corporate sector – already ailing from aglobal slowdown – to potential harassment under the garb of investigating whistle-blowing complaints. This aspect was also emphasised by the prime minister in his speech when he said, "We need to ensure that even while the corrupt are relentlessly pursued and brought to book, the innocent are not harassed." (These views are personal) PRATIP KAR Former Executive Director, Securities and Exchange Board of India SUMIT MAKHIJA Senior Director, Deloitte Touche Tohmatsu India < > | | | | | | | | | Sovereign, pension funds likely to get special treatment | |
SAMIE MODAK
Mumbai, 30 October To encourage sovereign wealth funds (SWFs) and pension funds to invest in the Indian debt market, the Securities and Exchange Board of India (Sebi) is working on a framework to give these preferential treatment. Currently, these investors, who typically invest for the long term, do not have significant investments in the Indian debt market. Sebi has given in-principle approval to suggestions by market entities that preferential treatment be given to longterm investors, such as SWFs and pension funds while allocating debt limits. China gives preferential allotment to SWFs in debt limits for foreign institutional investors (FIIs). According to people privy to the development, Sebi is working on an administrative framework to allow discretionary allotment to these investors. The regulator might consider a separate limit within the current FII debt limit. It might also have to set up a separate dispensation framework to differentiate these investors and provide them greater flexibility. SWFs are government-controlled special purpose investment funds investing in a variety of assets. SWFs from select countries are given more flexibility while investing in listed companies. They have an investment cap of 20 per cent, against 10 per cent for other investors. Experts said the move would encourage such funds to invest in high-yielding Indian paper. The domestic debt market would benefit, as these investors typically make large-size investments for relatively longer terms. "It is necessary to attract real long-term money into the country. Currently, only a small block of the investment limit is available to foreign investors. If SWFs and pension funds are to be attracted, a larger limit and greater flexibility would be needed," said Hitendra Dave, managing director and head of global markets (India), HSBC. "Sovereign funds are still not making any significant investment in the debt market. Preferential treatment would be good encouragement to ensure their participation," said Ajay Manglunia, senior vice-president of Edelweiss Financial Services. Currently, FIIs can invest $65 billion in the Indian debt market. Turn to TSI, Page 2 >DEBT LIMIT ALLOCATION Move aimed at attracting big chunk of long-term money 10 10 20 25 65 Govt Govt Corporate Corporate Total debt debt debt debt (long-term) (infra) FOREIGN HAND FII debtinvestmentlimitnow stands atabout$65 billion FII investmentlimit($ bn) CHOSEN FEW |Sebi working on devising framework |SWFs and pension funds don't have significant investments in Indian debt market, at present |
Click here to read more...Turn to TSI, Page 2 | | Click: Article continued from…Sovereign, pension
| | Sovereign, pension funds ... | |
This includes government securities, corporate bonds and infrastructure debt. Earlier, debt limits were allocated to FIIs on a first-come-firstserved basis. This was later changed to a competitive bidding process.
Some, however, believe preferential treatment to SWFs and pension funds wouldn't add significant value, unless these funds don't invest in infrastructure debt or papers other than those with the highest grade. "There is enough demand for short-term paper from FIIs. To deepen the market, we need investors who would invest in long-term infra paper, or 20-year paper. I doubt SWFs would be interested in such instruments," Dave said. >FROM TSI, PAGE 1 | | | Wadia succession plan puts Jeh in driver's seat | |
DEV CHATTERJEE
Mumbai, 30 October Nusli Wadia, chairman of the Wadia group of companies, has drawn up a succession plan under which Nowrosjee Wadia & Sons will become the group's holding company and his younger son Jeh Wadia, 38, will steer the group in future. While most of the group companies such as Bombay Dyeing, Britannia, Bombay Realty and Bombay Burmah will be run by professionals, all of them will report to Jeh apart from the board. "Jeh is being rewarded for his competence," said a source close to the transition. "But as far as equity is concerned, Nusli Wadia is not making any distinction between his two sons," the source said. Ness, 40, will be on the board of all group companies apart from being managing director of the plantation company, Bombay Burmah Trading Corporation. At present, Nusli Wadia is chairman and MD of Nowrosjee Wadia & Sons while Jeh is on the board. Emails sent to the Wadia group yesterday did not yield any response. Jeh's elevation as the head of the group has already been communicated to the boards of all group companies and to company insiders. Apart from giving a free hand to professionals to run group companies, one of the first steps Jeh has already undertaken is to charge a marginal brand and share services fee of 0.25 per cent from all group companies. This money will be used by Nowrosjee Wadia &Sons to promote the Wadia group brand in future. The group companies had been asked to use the "Wadia group" brand in their own promotions, the source said. Jeh set up GoAir in the most tumultuous time in the aviation sector when other airlines where shutting shop. Today, GoAir is one of the profitable airlines in the country, with a significant expansion plan for the future. Set up in 1738, the Wadia group is one of India's oldest business houses. Its first venture was in the marine construction industry. It later set up plantation company Bombay Burmah in 1863, which is listed on stock exchanges. It was Nowrosjee Wadia who set up Bombay Dyeing in 1879 in a red-brick shed in central Mumbai. Bombay Dyeing is now planning to set up two 80-storey towers at its earlier textile mill site to take advantage of a booming real estate industry in Mumbai. The lack of proper succession planning had led to one of corporate India's most famous wars, between the Ambani siblings over the Reliance empire set up by the late Dhirubhai Ambani. Last year, the Tatas announced Cyrus Mistry, the younger son of billionaire Pallonji Mistry, would take over as chairman of the Tata group once current chairman Ratan Tata retired. Jeh's elevation as the head of the group has alreadybeen communicated to the boards of all group companies and to company insiders Most group firm MDs will report to Nusli Wadia's younger son Vinita Bali, Geordio De | | In rare rebellion, 97% institutional votes against JSPL pay revision | |
NSUNDARESHASUBRAMANIAN
New Delhi, 30 October In a rare display of resentment against rising executive pay in corporate India, institutional shareholders of Jindal Steel and Power Limited (JSPL) have voted against a resolution authorising the chairman and managing director to revise the remuneration of wholetime directors. Naveen Jindal, chairman and managing director, was the country's highest-paid executive with a package of ~73.42 crore for the year ended March 31, 2012. In the 33rd annual general meeting held in Hisar, Haryana, on September 26, 101.41 million or 97 per cent of the institutional votes polled were against the resolution, an exchange filing by the company showed. HSBC Global Investment Funds, ICICI Prudential Life insurance and Lazard are the institutions which hold over one per cent in the company. Institutional shareholders own 262 million shares in the company according to the filing accounting for 28 per cent in the company. Of these, only around 40 per cent of the shareholders exercised their vote, with 104.56 million votes polled. Of these, 101.41 million votes were against the resolution, while the remaining three million voted in favour. Of the non-institutional shareholders who participated in the poll, 132,355 or 99 per cent voted in favour of the resolution. Though the resolution was passed because the promoter shareholders held 65 per cent equity and voted in favour, the results showed there is a case for interested parties to recuse themselves from such resolutions, say proxy advisory groups. "In my opinion, such a move by institutional shareholders had not been seen before," said J N Gupta, founder of Stakeholders Empowerment services, a Mumbai-based advisory firm. Advisory firm SES had published an advisory against the resolution in September. "The entire remuneration policy of the company is opaque...The resolution can lead to a conflict of interest situation," it had said in a client note. Though some institutions seemed to have heeded this call as the poll results showed, promoter group shareholders, who hold 530 million shares, voted in favour of the resolution, taking it through. "Although the resolution was carried through as the owners had majority, it shows that efforts can work," Gupta added. Total Votes Votes Votes % shares polled against for against Institutional 262.59 104.56 101.41 3.15 96.99 Non-institutional 120.47 0.13 0 0.13 0.52 Promoters 551.76 524.34 0 524.34 0 Numbers in million Source: Company filings UNWILLING TO PLAYBALL Voting in JSPL's AGM on a resolution to authorise CMD to revise directors pay | | RESTRUCTURED STANDARD LOAN
Higherprovisioning to dentbanks' profits | |
Ahigher provisioning requirement for restructured standard loan accounts is likely to dent banks' profit further in the current quarter. This would give them little scope to pare lending rates.
The Reserve Bank of India (RBI) today said banks would have to maintain 2.75 per cent of restructured standard loan accounts as provisions instead of the current two per cent, to ensure financial stability and mirror the international best practices. The move appears to have dwarfed the central bank's decision to cut banks' cash reserve ratio (CRR) by 25 basis points (bps) and infuse ~17,500 crore of primary liquidity in the system. "Part A (on CRR cut) is welcome. But in Part B (on higher provisioning), we had an unpleasant surprise. In fact, we were looking for some relief on the restructured front... Though we very much intended to give all of you good news, the path that has been taken will limit us to a great extent," K R Kamath, chairman and managing director of Punjab National Bank, told reporters after his meeting with the RBI brass. He added: "The impact of a 75-bps additional provision is estimated around three per cent on the net profit of banks. Idon't think we are in a position to earn three per cent of the profit by the CRR cut. So, to that extent, we are in deficit now." Earlier, the banking regulator had constituted a working group chaired by its executive director, B Mahapatra, to review the guidelines on restructured loans. In its report given in July, the group had suggested the provision on restructured advances be raised to five per cent, in a phased manner over two years. Anand Sinha, deputy governor at RBI, said, "We are going to bring it into operation from March 2013 balance sheet." He was referring to new norms on restructuring assets. Analysts say the recent rise in loan restructuring cases is likely to have persuaded RBI to mandate the stringent norms. The number of cases referred to the corporate debt restructuring (CDR) cell increased to 392 at end-March 2012 from 225 as of March 2009. The total debt considered for restructuring was estimated at ~206,493 crore at the end of March 2012. Bankers, however, claim the record shows only 15 per cent of restructured assets have turned non-performing and a higher provisioning on restructured loans was not a necessity. They said RBI would come out with the final guidelines on loan restructuring and provisioning requirements by March 2013. State-run banks are expected to be more affected than their private sector rivals. "We expect this to impact our 2012-13 profit before tax estimates by 0.1 to 4.5 per cent, across various banks. Worst hit will be public sector banks like Bank of India, Allahabad Bank, Corporation Bank and Canara Bank," said Dhananjay Sinha, economist at Emkay Global Financial Services. After the announcement, the National Stock Exchange's 12-share Bank Nifty shed 2.4 per cent in today's trade. The central bank order offsets CRR cut benefit, reduces scope for lending rate reduction, say banks AT THE RECEIVING END Impactofhigher provisioning on banks' profits Bank Impacton FY13 profitbefore tax(in %) BankofIndia 4.5 Allahabad Bank 3.4 Corporation Bank 3.3 Punjab National Bank 2.9 Andhra Bank 2.8 Canara Bank 2.8 United BankofIndia 2.5 State BankofIndia 1.5 ICICI Bank 0.3 Axis Bank 0.4 HDFCBank 0.1 Source: Emkay Global Financial Services | | Banks must monitor unhedged forex exposures, says RBI | |
The Reserve Bank of India (RBI) today directed banks to put in place a mechanism to evaluate the risks from unhedged foreign currency exposure of companies.
Banks will also be allowed to charge a premium on the credit offered to companies that not have taken cover for currency fluctuation risks. The move is aimed to protect banks' credit quality, under stress in the uncertain macroeconomic environment. "Banks are also being advised to consider stipulating a limit on the unhedged position of companies, on the basis of board-approved policy," the central bank said in its second quarter monetary policy statement today. Banks will also need to create a system ensuring sharing of information on unhedged foreign currency exposures. This has to be in place by the end of December. Bankers said they needed more clarity from RBI before setting up the new systems. "It is not clear what will be the credit risk premium and how to calculate it. We need to discuss this with RBI before taking any steps," said the chief risk officer of a large foreign bank. However, most bankers agreed that lenders would support the move, since it would reduce the risk of a rise in non-performing assets. "We are increasingly seeing that companies are becoming more conservative because of the uncertain economic conditions. Many companies are now willing to take hedges, as the currency markets are volatile. Banks will support the move and work with RBI in putting in place the monitoring mechanism," said the chief financial officer of a Mumbai-based private sector lender. In May, a media report claimed about half of India Inc's foreign currency exposures were unhedged. Also advises imposing a limit on these, beside mandating a system within two months to share information in this regard | | | | | | | | | | | |
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