Business standard updates

RBI seeks powerto regulate all subsidiaries of banks

MANOJIT SAHA
Mumbai, 25 January
The Reserve Bank of India (RBI) wants to have the power to regulate bank subsidiaries as well.
The present regulation does not give the banking regulator power to supervise bank subsidiaries, as the central bank can only monitor them. To enable this, RBI has written to the finance ministry to amend laws pertaining to the RBI Act, so that it can supervise such entities.
Supervisory powers will allow RBI to inspect the books of the subsidiaries, give directives and issue norms based on its own regulation.
“Banks have forayed into insurance, broking, mutual funds, private equity, and have become complex and large financial conglomerates. If the subsidiary fails, it can dent banks’ profitability and erode capital. To avoid such a situation, RBI wants to have supervisory powers,” said a source in the central bank.
The source also said the issue came to the fore when RBI wanted to inspect a broking arm of a bank but was not allowed by the market regulator, the Securities and Exchange Board of India.
In its letter to the government, RBI has said while it will supervise subsidiaries involved in non-banking activities, the sector regulator’s advice will also be sought.
Turn to Page 16 >Writes to govt for legal amendment, proposes committee that’ll consult other sector regulators Banks empowered on ECBs’ end-use
The Reserve Bankof India has empowered banks to make changes in the end-use of money raised via external commercial borrowings (ECBs) withoutrouting the requestthrough the regulator. Banks can nowapprove afirm’s requestto change the final use of offshore commercial borrowings underthe automatic route. 6 >
________________________________________
Click here to read more...>

We will request for representatives from the insurance, market and pension regulators while forming the committee, which will supervise the subsidiaries,” said the source.
In the recently released financial stability report, RBI had raised a red flag on the interconnectedness between a bank and its subsidiaries. “Inter-linkages between the insurance and banking sector are a matter of concern, with many insurance companies being part of financial conglomerates. Any financial stability issue regarding the bank in the conglomerate may have an amplifying effect on the insurer. The contagion between the banking and insurance sector will also depend on the insurance companies overall exposure to banks,” RBI had said.
Citing the example of insurance companies promoted by banks, RBI said though the life insurance sector was well capitalised with solvency ratio exceeding the regulatory requirements, there had been a recent concern over non-life insurance companies. That was because the liability requirement and associated capital requirement for the mandatory motor third-party pool had increased and so had the underwriting losses in the non-life sector, it said.
“Reinsurance shares allow diversification of exposure and provide stability to the industry. Currently, the reinsurance capacity is readily available for most of the risks written in India and can support the activity of the insurance business. Even, in case of the failure of the reinsurance industry, it would only increase the price for getting reinsurance cover,” the report said.
>FROM PAGE
DTC only in 2013, key parts in this Budget

BS REPORTER
New Delhi, 25 January
The new Direct Taxes Code (DTC) is to be now introduced only from April 2013, a year later than planned. Hence, the government will introduce some of its key provisions, such as General Anti-Avoidance Rules (GAAR), in Budget 2012-13 itself, finance ministry officials said today.
An official said Parliament’s standing committee on finance was expected to give its report on the DTC Bill in the Budget session of Parliament, likely to commence from mid-March. After this, the ministry would table the revised Bill in the monsoon session of Parliament, usually convened around July.
“The standing committee will give its report in a month. After that, we will also need six months (to consider the recommendations) and table the revised Bill,” said the official.
Tax evasion and mitigation are two of three ways to reduce payment liability. The former, using illegal means to dodge tax, is illegal. Mitigation is the use of expressly legal means to pay less, such as diverting money from a bank deposit to a provident fund. Tax avoidance is the category in between, where the law isn’t clear and courts are called in to decide. DTC had proposed GAAR to ensure this was minimised; it has become more significant for the government after the the recent Supreme Court verdict in the Vodafone tax dispute.
The ruling was in favour of the company and was a big financial blow to the tax department. Wary of a revenue loss from similar deals in future, the finance ministry is expected to tweak the laws without more delay to make income from such cross-border deals taxable under domestic laws.
Officials say GAAR will be put to use only if an entity, apart from obtaining tax benefit, undertakes a transaction which is not at “arm’s length”. Alternatively, if it is found that there has been a misuse or abuse of the DTC provisions or a transaction lacks commercial substance. GAAR is to be invoked only where tax avoidance is beyond a specified threshold.
Keyprovisions such as the General Anti-Avoidance Rules will be introduced in Budget this year

RBI empowers banks on end-use of ECB funds

BS REPORTER
Mumbai, 25 January
Banks will now have greater say with respect to Indian companies raising external commercial borrowings (ECBs). The Reserve Bank of India (RBI) has empowered banks to make changes in the end-use of money raised through ECBs, without routing the request through the regulator.
Banks can now approve a firm’s request to change the final use of offshore commercial borrowings under the automatic route. Banks are viewing it as streamlining of the foreign fund-raising procedure and aremoval of administrative flaws.
“The step shows RBI is now more comfortable in delegating powers to the authorised dealers (banks). The action by the regulator will help in fine-tuning the operational procedure for ECBs," said Moses Harding, head of global research, IndusInd Bank.
Currently, companies can raise up to $750 million under the automatic route.
Earlier, their requests had to be referred by the authorised dealers to RBI. Funds raised under the approval route will still have to be referred to RBI’s department of foreign exchange. ECBs beyond $750 million are approved by RBI case by case.
The regulator has allowed banks to directly approach it for the cancellation of the loan registration number (LRN) used to avail overseas borrowings, both under the automatic and approval routes.
The LRN can be cancelled by banks only if there has been no draw-down on it.
Bankers said it was a continuation of delegation of authority by the central bank, which would save time and make the procedure simpler. "Banks are managing long-term risks. ECBs are of a much shorter duration, which can be managed by the lenders efficiently," said Harding.
Economists feel the step has been taken to enhance dollar liquidity and ease downward pressure
Sebi alone can’trelaxKYC norms forforeign investors

Chairman U K Sinha says this needs to be done in consultation with govt
BS REPORTER Mumbai, 25 January
The Securities and Exchange Board of India (Sebi) alone cannot decide to relax Know Your Client (KYC) norms for qualified foreign investors (QFIs), who now have direct access to Indian stock market and mutual funds, chairman U K Sinha said today.
“It needs to be done in consultation with the government. There are certain requirements with regard to tax. The tax authorities should not feel that tax paid by QFIs is being suppressed or not captured,” he said, adding, consultation exercise with the government was on. Sinha was speaking on the sidelines of an event to inaugurate a KYC Registration Agency (KRA) by a unit of National Securities Depository Limited (NSDL).
In August 2011, Sebi had issued detailed guidelines to allow KYCcompliant foreign investors, termed QFIs, to invest in equity and debt schemes of Indian mutual fund houses. Early this month, the government allowed QFIs to directly invest in the secondary market in India.
However, stringent KYC norms such as mandatory permanent account number and tax filing details have acted as a dampener, say mutual fund executives. In a meeting with Sinha last month, MF executives had requested the regulator to relax the KYC norms for QFIs.
More KRA Agencies in offing
NSDL became the second organisation to start a KRA agency after Central Depository Services Ltd (CDSL). According to Sinha, Sebi has received two more inquires for setting up of KRAs. “I believe there will be more competition. We already have a few inquiries. However, as there will be inter-operatibility among KRAs, the clients will not face any extra difficulty,” he said.
Sinha also said Sebi was in talks with other regulators to use the uniform KYC platform for all financial products. “We are in a dialogue with them. If this system proves to be robust, then maybe other regulators can have a look at it,” he said.
“There are certain requirements with regards to tax. The tax authorities


BS PRIMER
Use your LTA to save tax

TANIAKISHORE JALEEL
Not claiming your leave travel allowance (LTA) can add to higher tax outgo at this time of the year. LTA is simply an allowance granted to you, as an employee, for travelling anywhere within the country when on leave from work.
When you dont claim it, the unclaimed amount is taxed according to the slab. If you are entitled to ~22,000 as LTA in a year, but claim only ~9,000, the remaining ~13,000 gets taxed.
"Companies urge employees to claim the entire LTA to avoid getting taxed. LTA is a good tax-saving instrument," says Sangeeta Lala, vice-president, TeamLease. Under Section 10 of the Income Tax Act, an employee is allowed an income tax exemption when he is travelling, along with his family members, on a holiday for a period of more than five days.
Human resource personnel advise employees, in this case, to claim tickets of immediate family members as well, to avoid getting taxed. LTA covers travel for you and your family. Family, in this case, includes yourself, parents, siblings dependent on you, spouse (even if he/she is working) and up to two children.
But remember: If your family travels without you, no LTA can be claimed for them. So, you have to make the trip either alone or, if claiming for your family, you should travel with them.
Domestic flight tickets can be claimed if you furnish the boarding pass. Train tickets are acknowledged, too. Road travel should be by government bus only. "LTA is not applicable for foreign travel. And, the tax benefit one can enjoy depends on the LTA component itself," adds Mistry. However, if you get an LTA of ~1 lakh and travel with spouse and two children, even on taking round trip flight tickets you will not be able to avail the entire allowance.
If both you and spouse have travelled together and want to claim LTA at respective companies, can you do so? If you claim, your spouse cant. His/her LTA will be taxed. Unless, of course, you go for another holiday. In case of a job change, the LTA can be availed from the both the new and former employers, provided it is unutilised.
A small problem with LTA is that you can claim only twice in four years, says Homi Mistry, tax partner at Deloitte, Haskins and Sells. January 2012 falls under the 2010-2013 four-year period. Importantly, you can claim only once in a year. Both journeys cannot be claimed in a single year.
If you do not make the claim on time, you can do so when filing returns and avail a refund.
IN HOLIDAYSPIRIT Leave travel allowance applies for both you and your family. PHOTO:THINKSTOCK