Business standard updates 2-10-2012

Final guidelines on GAAR in 20 days

BS REPORTER New Delhi, 1 October The controversial guidelines on the tax General Anti-Avoidance Rules (GAAR) are likely be amended in 20 days, after considering today’s final recommendations by the Parthasarthi Shome panel on the subject. Another report by the panel, on indirect transfer of Indian assets by non-residents, also given today, would be released for public comments shortly. In its recommendations last month, the Shome panel had proposed deferring GAAR for three years, to April 2016. Through this year’s Finance Act, the government had proposed to introduce the anti-avoidance rules from April 2013. A deferment would need amendment to the Income Tax Act. “Stage-1, finalisation of our views on the report, will be completed in the next 10 days. Stage-2, the final GAAR rules, would take another 10 days because that would require vetting by the ministry of law. In stage-3, it will go to the cabinet if the Act has to be amended,” Finance Minister PChidambaram told reporters today. The rules were announced by the government to check tax avoidance by companies routing their investments into India through tax havens. Faced with widespread criticism, the government formed the Shome panel to address the concerns of investors. The panel, deviating majorly from draft guidelines issued by a finance ministry committee in June, had recommended abolition of capital gains tax on transfer of securities. While the Central Board of Direct Taxes had said GAAR would be invoked if “one of the main purposes” was to obtain tax benefit, the Shome panel said only arrangements with the main purpose of obtaining tax benefit should be covered under GAAR. And, that GAAR provisions not be invoked to examine the genuineness of residency of entities in nations with whom we’ve signed a tax avoidance treaty, such as Mauritius or Singapore. Asked about the panel’s report on retrospective taxation, Chidambaram said it would be put up on the ministry’s website for comments once they’d gone through it. The panel is likely to have proposed softening the blow of retrospective amendments on investors. The report might decide the fate of Vodafone’s ~12,000-crore tax case with the Indian government. The minister had earlier said a decision on sending a tax notice to the company would be taken after getting the Shome panel’s report on retrospective amendments and the department wouldn’t act rashly. Vodafone India’s non-executive chairman, Analjit Singh, after meeting finance ministry officials recently, had said the company was willing to discuss the matter with the government. The panel is likelyto have proposed softening the blowof retro amendments on investors Govt to seek public comments on Shome panel views on retrospective tax law amendments

Insurers set to get room to spread wings as investors

BS REPORTER New Delhi, 1 October Finance Minister P Chidambaram today announced arevival package for the life insurance sector. The steps include easing investment norms for insurance companies, faster product clearances and tax incentives to improve insurance penetration in the country. At present, insurance companies are required to put 75 per cent of their debt market investments in AAA-rated instruments. These do not include investments in government securities. The minister said the Insurance Regulatory Development Authority (Irda) would consider relaxing the stipulation, and provide the minimum requirement of 75 per cent in AAA instruments would apply to debt investments including government securities and other investments. “This is expected to release a space of 12.5 per cent for investments in less than AAA-rated debt instruments,” Chidambaram told reporters while announcing a 12-point action plan for the sector. Currently, there are not too many AAA instruments for life insurance companies to invest in. There has been no change in equity investment norms. To address the industry’s concerns on regulatory delays in product approval, guidelines will be issued by the end of November for mandating a 30-day norm for clearance of products. To speed up clearances, the insurance regulator will also introIn the last two years, the industry saw a severe FM announces 12-point action plan to revive sector WHAT’S IN THE 12-POINT PLAN | Automatic approval for products 15 days after intimation to the Irda | Norms to observe 30-day mandated period for product clearance | Norms to reduce arbitrage between ‘units’ and ‘traditional’ products | The Irda to accept banks’ KYC norms to cut ‘onboarding cost’ | Banks to act as brokers selling products of multiple insurers | All banking correspondents to sell micro insurance products | Non employeremployee groups to be allowed for group business | Master policyholder to be compensated in group business | Companies free to manage overall management expenses | Mentors for agents to be appointed on fixed-fee basis | Investments allowed in infra SPV floated by any company |Irda to relax condition of 75% investment in AAA instruments

RBI may askbanks to improve monetary transmission

NEELASRI BARMAN Mumbai, 1 October The Reserve Bank of India (RBI) might ask banks to improve monetary transmission by cutting lending rates in response to the reduction in cash reserve ratio (CRR) it had announced in September. It had cut CRR by 25 basis points to 4.5 per cent of banks Net Demand and Time Liabilities. CRR is the proportion of total deposits a bank has to keep with RBI as cash. RBI will hold pre-policy review meet with bankers on October 5. Its next policy meeting is scheduled for October 30. After the cut, India’s largest lender, State Bank of India, was the only one to cut its base rate (BR), by 25 bps to 9.75 per cent. Other banks say they need a repo rate cut (repo is the rate at which RBI lends to banks) to cut their BR. “The emphasis in the pre-policy (the next RBI review of monetary policy is at the end of this month) meeting will be on the way ahead for repo rate cuts. We need cues from RBI on these. The CRR cut doesn’t help much, as it creates only a minor reduction in interest costs,” said A D M Chavali, executive director, Indian Overseas Bank. RBI has cut the repo rate only once so far this financial year, by 50 bps to eight per cent. After the cut, some banks reduced their BR by 10-25 bps. The Street does expect RBI to cut the repo rate by another 50 bps but the timing is uncertain. Some bankers say a further cut in BR might be needed if there is excess liquidity in the system. “We need to see a downtrend in the 180-365 days’ deposit rate, which is currently high on RBI maintaining deficit system liquidity and a large supply of treasury bills in 91-364 days’ time buckets. We need to see either a rate cut or shift of system liquidity from deficit to surplus to get banks to cut the base rate. Till then, it would be a wait-and-watch stance,” said J Moses Harding, head of the asset liability committee and economic and market research, IndusInd Bank. Today’s borrowings by banks under the daily Liquidity Adjustment Facility was ~60,460 crore. With credit growth sluggish for the first six months of this financial year, a top official of a leading bank recently said RBI’s mandate of a 17 per cent rise in this parameter for 201213 might not be achieved. Economists do expect lending rates to get cut. “We expect lending rates to come off 25-50 bps, atop the 25-75 bps done. Unless lending rates come off, FY13 growth may find it difficult to clock our modest 5.6 per cent, let alone RBI’s 6.5 per cent,” said Indranil Sen Gupta, India economist, Bank of America Merrill Lynch, in a report released on Friday. Arguments to thicken in run-up to pre-policy review meeting on October 5 Credit growth *(April-September) ~crore % (over April) 2011 133,110 3.4 2012 137,840 3.0 *Till Sep 7 POLICYGROUNDWORK Source: RBI/banks Deposit growth *(April-September) ~crore % (over April) 2011 319,570 6.1 2012 411,940 7.0 *Till Sep 7 Banks’ reduction in base rate *Cutby 10-25 (bps) *in 2012; Following 25 bps CRR cut by RBI in September, only SBI has responded by cutting base rate by 25 bps Base rate of leading banks (%) CRR Repo RBI action in 2012 4.5 %Cutby 150 (bps) Cutby 50 (bps) 8.0 %SBI 9.75 ICICI Bank 9.75 HDFC Bank 9.80 PNB 10.5 BoB 10.5 Canara Bank 10.5 Bankof India 10.5 “We expect lending rates to come off 25-50 bps, atop the 25-75 bps done” INDRANILSEN GUPTA India economist, Bank of America Merrill Lynch

Srikrishna panel forunified financial regulator BS REPORTER New Delhi, 1 October A government-appointed panel today proposed a unified regulator for financial sector laws, including those for markets, insurance, commodities and pensions. It, however, proposed to keep banking out of the regulator’s purview. The Financial Sector Legislative Reforms Commission (FSLRC), formed in March 2011 to rewrite and harmonise financial sector laws, has proposed a regulatory structure that will alter the financial landscape. In an approach paper released today, the commission headed by former Supreme Court judge B N Srikrishna said there should be a central bank in charge of monetary policy and enforces the consumer protection law and micro-prudential law in banking and payments. The paper will form the basis of the panel’s final report, likely next year. For other financial sectors, the panel has proposed a unified financial regulatory agency to subsume the Securities and Exchange Board of India, Forward Markets Commission (FMC), Insurance Regulatory and Development Authority and the Pension Fund Regulatory and Development Authority. “The unified agency would yield benefits in terms of economies of scope and scale in the financial system; it would reduce the identification of the regulatory agency with one sector; it would help address the difficulties of finding the appropriate talent in government agencies,” it said. This agency would also take over the work on organised financial trading from the Reserve Bank of India in the areas connected with the bond-currency-derivatives nexus and from FMC for commodity futures, thus unifying all organised financial trading, including equities, government bonds, currencies, commodity futures, corporate bonds. The Securities Appellate Tribunal will be subsumed in a Financial Sector Appellate Tribunal to hear appeals against RBI for its regulatory functions, the unified financial agency, decisions of the Financial Redressal Agency and some elements of the work of the resolution corporation. The other four regulators proposed by the commission are a Resolution Corporation to watch all financial firms that have made intense promises to households and intervene when the net worth of a firm is near zero; A Financial Redressal Agency to address consumer complaints against companies across the financial sector; an independent Debt Management Office and the Financial Stability Development Council. The paper said there was a need to separate the adjudication function from the mainstream activities of a regulator, so as to achieve a greater separation of powers. “This involves enshrining an appointment process for senior regulatory staff, fixed contractual terms, controlling the loss of independence that comes from the possibility of extension of term or promotion, removing the power of government to give directions, bringing transparency to board meetings,” it said. Approach paper proposes subsuming work of Sebi, Irda, FMC and PFRDA; suggests four new bodies PANEL’S PROPOSALS |A unified financial regulatory agency to subsume Sebi, Irda, PFRDA and FMC |A central bank in charge only of monetary policy, consumer protection law and micro-prudential law in banking and payments |Securities Appellate Tribunal be merged with Financial Sector Appellate Tribunal to hear appeals against RBI |Resolution Corporation watch financial firms that have made intense promises to households and intervene when the net worth of a firm is near zero |Financial Redressal Agency address consumer complaints against companies across the financial sector |Independent Debt Management Office and the Financial Stability Development Council The approach paperwill form the basis of the panel’s report, likelynext year October hope for new banking licences SANTOSH TIWARI New Delhi, 1 October The government expects a breakthrough in providing new banking licences, which is part of the renewed reform agenda, in October. “We are moving ahead in this direction. It will take two to three weeks,” said a senior finance ministry official. Despite the central bank issuing draft guidelines after consultations, the new banking licences are stuck because there is no final decision on if the process should be started without amending the Banking Laws Act. RBI wants the Banking Laws (Amendment) Bill to be first cleared by Parliament and then initiate the process of providing new licences. But many in the government, including chairman of the Prime Minister’s Economic Advisory Council C Rangarajan, are of the view that new licences can be issued according to current banking regulations and the law could be modified in due course. In the changed circumstances — with finance minister P Chidambaram at the helm of affairs and government’s resolve to push economic reforms — the chances of the idea moving ahead has increased, officials pointed out. They said that the differences between RBI and the Competition Commission of India (CCI) over powers to review mergers and acquisitions will also have to be resolved if the government decides to go ahead and take Parliament’s nod to the Banking Laws (Amendment) Bill in the winter session even though it is difficult to pass any Bill in the current political situation. The Bill to amend the Banking Regulations Act of 1949 was introduced in the Lok Sabha in March 2011. Among other proposals, it seeks to keep mergers and acquisitions in the sector under the purview of RBI, the sector regulator. In case there are no chances of an early passage of the Bill, RBI can consider issuing new bank licences without amendments in the Banking Regulations Act. RBI has until now stressed that it would be open to issuing new bank licences only when it is given more powers to regulate the sector. The amendment Bill gives RBI the power to supersede bank boards and inspect other arms of banks to avoid systemic risks. The Banking Laws (Amendment) Bill also seeks to allow private banks to raise the voting rights to 26 per cent from a maximum of 10 per cent, as recommended by the parliamentary standing committee. For buying more than five per cent of equity stake, approval of RBI will be mandatory. The parliamentary panel said that M&As should not be kept out of the CCI purview forever and should be considered as a special case. It also proposed an “expedient measure” to be revisited after both the Reserve Bank and the Competition Commission have gained some experience. Positive list in service tax could return VRISHTI BENIWAL New Delhi, 1 October A positive list for taxation of services might be back, though only for accounting purposes. With the introduction of the negative list from July 1, the finance ministry prescribed a new accounting code for tax payment for all services, replacing the earlier 119 codes. Instead of the earlier system of a separate code for each service, all service taxpayers now have to pay under asingle code. The revenue department later realised that because of a single code, it was not getting information on the sectorwise break-up of what was paid. The issue was raised by chief commissioners and directors-general of service tax at a meeting with Finance Minister P Chidambaram last month. They said it was impossible for them to track service tax payments by sector due to the single accounting code, and wanted the earlier codes to be restored in the negative list approach, too, said an official. “The finance minister is seized of the matter. Several options are being considered. One is to issue a circular to restore all the 119 codes, plus one more code for taxation of the remaining services, other than the negative list,” the official told Business Standard . Analysts said service-specific codes helped the revenue department capture the contribution of a particular category — for instance, insurance, advertising or ports. Now, when a taxpayer files returns, he does not have to mention the service for which the tax is being paid. “A unique accounting code for each service was a powerful tool for the government to track growth in various sectors and devise the audit and scrutiny strategy. In the new system, they may find it difficult to collate sectoral data,” said Pratik Jain, partner, KPMG.