[aaykarbhavan] Business standard updates

RBI wants govt to pare stakes in banks

MANOJIT SAHA Mumbai, 31 March The Reserve Bank of India (RBI) has recommended the Centre reduce its holdings in public sector banks. This, it says, is essential for robust corporate governance practices, considering these lenders’ deteriorating asset quality and rating downgrades. The recommendation is part of a detailed blueprint for sweeping reforms in public sector banks, prepared by the central bank. The recommendations are being discussed with the finance ministry and will be taken up with the next government on a priority basis. Stressing the importance of granting complete autonomy in the day- to- day operations of public sector banks so that these could effectively compete with their private sector peers, RBI said such autonomy was contingent upon the government reducing its stake, especially at a time when the Centre was resorting to borrowing for capital infusion in these banks. The banking regulator has identified two areas which it terms the cause of all problems facing public sector banks — government ownership, which creates a constraint in efficient operations of banks, and successive regulatory and supervisory forbearance to government banks, a factor behind their poor performance. Under the Banking Regulation Act, the government has to hold at least 51 per cent stake in public sector banks. However, in several cases, the stake is as much as 80 per cent. RBI has also suggested the government and the regulator don’t involve themselves in the process of appointing the senior management at these banks, and also withdraw from the boards of public sector banks. It feels the posts of chairmen and managing directors should be split, as a chairman and managing director has absolute power and often dominates the board. It also says the chief executive should have a fixed term of five years. The regulator has suggested ahost of reforms for various issues — from accountability in loan sanctioning to human resource management and board accountability. It has said lateral movement of staff at public sector banks should start at an early stage — at the level of deputy general manager and general manager. This would ensure a candidate was made aware of the bank he or she might head in the future, it said, adding lateral movement should also be considered for State Bank of India ( SBI). It said the SBI group was more vulnerable in that the bank’s senior management was selected internally, which inhibited new thinking. The RBI paper also raised the issue of auditors’ accountability, saying chartered accountant director should not be part of the management committee of the board that took decisions on loan sanctioning, as this led to conflict of interest. The existing committee method of sanctioning loans should be done away with, as this didn’t hold any single individual accountable, the central bank said. In case of frauds, banks’ boards and senior managements should be held accountable and abranch- level official should not be made scapegoat, it added. Blueprint for sweeping reforms suggests govt, RBI nominees be withdrawn from the boards of public sector banks REFORM AREAS |Governance issue: Splitting chairman & managing directors’ post |Corporate governance: RBI & govt to dissociate from selection of top management |Public sector bank board: RBI & govt should withdraw from boards |Auditors: CA director should not be a part of management committee |Fixed period: Chief executives should be given 5- year terms |Remuneration: Market- based remuneration, accompanied with stringer accountability, including clawback clauses |Incentive structure: Incentives/ bonuses should be paid over few years and not immediately |HR issues: Need to reassess number of EDs/ general managers in each bank |HR appraisal policy: Performance linked remuneration |Holding company: To begin with, such structure could be experimented with slammer PSBs

 

Tax dept inks advance pricing pacts with 5 MNCs BS REPORTER New Delhi, 31 March In a step towards giving certainty to taxpayers in international transactions and bringing down litigation on transfer pricing disputes, the government on Monday signed the first batch of Advance Pricing Agreements (APA) with five multinationals in the field of pharmaceuticals, telecom, exploration and financial services. As the country is going to have a new government after the elections in May, the agreements, covering five years from assessment year 2014- 15 to 2018- 19, provide comfort to India units of multinationals by specifying in advance the arms length price for the international transactions entered into by them. "The agreements provide complete certainty to the taxpayers for five years with regard to the covered international transactions. The whole scheme of APA has been designed with the intention of creating a taxpayer- friendly environment in transfer pricing matters and to minimise transfer pricing disputes," the Central Board of Direct Taxes said on Monday. The unilateral pacts include a range of international transactions, including interest payments, corporate guarantees, non- binding investment advisory services and contract manufacturing. The government withheld the identity of the taxpayers for confidentiality reasons. It is embroiled in transfer pricing rows with Vodafone and Shell, but the APAs would not include past cases. The department also did not reveal the profit margins agreed upon by them, fearing other taxpayers might make it the benchmark for their APA negotiation. The industry welcomed the signing of APAs saying it would lend credibility to the governments efforts to provide certainty to taxpayers, particularly when safe harbour rules failed to attract taxpayers. It will be signing more APAs in the next few months since the process and methodology has been ironed out. "This could have a positive impact on reducing transfer pricing litigation in India, with more taxpayers choosing this for managing dispute resolution," said Rohan K Phatarphekar, partner and national head, global transfer pricing services, KPMG. Vijay Iyer, partner with EY, said in some concluded cases, the APA team had shown they were willing to deviate from safe harbour norms if the circumstances so deemed. The APA programme came in effect on July 1, 2012, and at the end of the financial year in March 2013, the government had got 146 applications -the largest received by any country in the first year of APA. This year 250 applications have been filed. For a department which has got flak for tax uncertainty and being unfriendly towards taxpayers, the conclusion of the first set of agreements in a year of its introduction is a feat. Applications received this year would be taken up the next financial year. Internationally, it takes two years to conclude an APA as the tax department does fact- finding on the foreign transactions of the Indian company with its related company. "The APA team has 400 applications pending. This may go up the next year, unless safe harbour rules are made reasonable or the approach of the transfer pricing authorities becomes reasonable during audits," said SP Singh, senior director, Deloitte. PwC, lead advisor in two of five APAs signed on Monday, said the professional and open approach of the authorities had been an enabler in the early success of the programme. Before filing APA applications, taxpayers are given the opportunity to share their expectations from the APA process during the pre- filing consultations and the APA team shares a broader understanding of the coming APA procedure. Move to provide certainty and bring down litigation

 

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CS A Rengarajan

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