Business standard news updates 5-9-2013

Bill to give pension sector regulator statutory powers gets House okay

BS REPORTER New Delhi, 4 September The Lok Sabha on Wednesday passed the Pension Fund Regulatory & Development Authority ( PFRDA) Bill, which seeks to give statutory powers to the interim regulator constituted by an executive order in 2003. The pension reforms Bill has fixed the ceiling on foreign direct investment ( FDI) in the sector at 26 per cent — to move in sync with that for the insurance sector. The Bill passed by the lower house on Wednesday carried some amendments to the one tabled in 2011. The earlier version had kept the option of FDI cap outside the purview of the legislation, as it was believed the FDI cap could be raised through an executive order. However, the revised Bill included it as part of the legislation, following objection from Parliament’s standing committee on finance. Other amendments include providing subscribers the option of investing in the schemes that provide minimum assured returns. On this, during the debate in the Lok Sabha, Bhratruhari Mahtab of the Biju Janata Dal sought amendments to provide that the government give minimum assured returns equivalent to at least the interest rate offered by the Employees’ Provident Fund Organisation ( EPFO). Finance Minister P Chidambaram said it was not possible to give an undertaking that assured returns would be higher (or lower) than the EPFO rates but added the money could be invested in government securities. The proposed pension fund in some cases. These cases and the number of withdrawals will be decided by PFRDA. The proposed law will give statutory powers to PFRDA, which has been regulating the New Pension Scheme ( NPS) since January 1, 2004, and had 5.28 million subscribers and a corpus of ₹ 34,965 crore as on August 14, 2013. NPS is different from the earlier pension system in that it has defined contributions, while the earlier one had defined benefits. All central government employees, except armed forces, who joined the services since January 1, 2004, are part of NPS. Turn to Page 22 > “The New Pension System (regulated by PFRDA) is the only genuine plan. Pension products of insurance companies are already there. Going forward, NPS will be the only pure pension programme” YOGESH AGARWAL Chairman, PFRDA >The FDI cap for the pension sector, which has been fixed at 26%, will move in sync with that for the insurance sector >The insurance Bill, which seeks to raise FDI cap from 26% to 49%, will be taken up in Parliament’s winter session, says FM >Pension fund subscribers will get the option to invest their money in schemes with minimum assured returns >At least one of the managers for the proposed pension fund will have to mandatorily be from the public sector >At least 40 per cent of subscribers’ money under the proposed pension fund will have to be mandatorily annuitised SPECIAL Coverage ECONOMY P4 > >10 things you wanted to know >What the passage of the Bill means >Enactment brings optimism

RBI validates e- KYC through Aadhaar SURABHI AGARWAL New Delhi, 4 September The Reserve Bank of India has accepted an electronic KYC, based on the Aadhaar or Unique Identification ( UID) number, as a valid way to open abank account. This could reduce the risk of identity fraud and document forgery, paving the way for a paperless way of fulfilling the know- your- customer (KYC) norms. In a notification on Monday, the central bank said an e- KYC was acceptable under the Prevention of Money Laundering ( Maintenance of Records) Rules, 2005. Banks may open a new account by taking aperson’s Aadhaar number and biometrics. Once matched, the demographic data, including identity and address proof stored with the UID’s central registry, can be accessed by the bank concerned to complete the verification. A bank will need to take “explicit consent” of the person concerned to “ release her or his identity/ address through biometric authentication to the bank branches/ business correspondents,” RBI said. A P Singh, deputy director general of the Unique Identification Authority of India ( UIDAI) said the move would help the banking and telecom sectors the most. These would save on the huge cost of storing and verifying the documents in question, along with the obvious advantages of establishing an audit trail and reducing document fraud. The department of telecom would also have to, first, notify an e- KYC as a valid verification process for new telecom connections. “Since RBI has approved it, we’re hoping other regulators such as the Securities and Exchange Board of India (Sebi) also allow e- KYC for other financial transactions,” said Singh. Business Standard had reported in July on a division regarding whether e- KYC was allowed under current law. The matter was referred to the law ministry. Last month, the ministry had approved, as it felt the Information Technology Act considered electronic documents at par with physical ones. The finance ministry had then written to RBI and to other regulators such as Sebi to issue directives for financial companies to start accepting e- KYC. According to the RBI notification, banks will have to sign an agreement with UIDAI to access the e- KYC service, deploy hardware and software, develop a software application and define a procedure for obtaining customer authorisation fot UIDAI to share the data with the bank. PEs lobby for directors’ parity in Cos Bill REGHU BALAKRISHNAN MUMBAI, 4 September Private equity ( PE) investors in India are coming out against certain clauses in the new Companies Bill that create a disparity between PE nominee directors and other directors on company boards. According to PE experts, the nominee directors of banks and other financial institutions enjoy certain immunity for the wrongdoing of promoters, while nominee directors of PE firms are held responsible for these. The Indian Private Equity and Venture Capital Association ( IVCA), the premier body of PE and venture capital firms in India, plans to approach the corporate affairs ministry to demand removal of the contentious clauses in the Bill and treat PE directors on par with directors of banks and financial institutions. Mahendra Swarup, president of IVCA, said: “ This discriminates against the nominee directors of PE, as they are held responsible and considered just like any other director, including the promoter directors. Whereas both nominee directors of the banks or financial Institutions and PE should have same treatment as both are investors or lenders and not involved in the day- to- day operations of the company.” The board members of a limited or a private limited company are liable for prosecution under various statutes for any default by the company management, including independent directors and nominees of PE Funds. “The investors or limited partners ( LPs) such as global Insurance companies or large pension funds insist on a very high level of governance and transparency, which the Indian promoters and their boards are not familiar with. This creates a lot of reputational risk for both fund managers, LPs and personal risk for the nominee directors of the PE funds,” said a fund manager on condition of anonymity. BS REPORTER Mumbai, 4 September It was easily the most substantive speech by a Reserve Bank of India (RBI) governor on his first day in office. Just two hours after the formal signing- in ceremony and a warm hug from his predecessor, Raghuram Rajan got down to business in a manner that surprised all. In his first media conference as governor, Rajan unveiled a slew of reforms, many of those focused on “ protecting the value of money”. His opening remarks set the tone for the new order at the central bank: “ To the existing traditions of RBI, we will emphasise two others: Transparency and predictability. That is not to say we will never surprise markets with actions.” The new governor removed uncertainties over the new bank licence process by setting a timeframe. An expert panel under former RBI governor Bimal Jalan will scrutinise the applications and licences will be issued before or soon after Deputy Governor Anand Sinha leaves office in January. Rajan postponed the midquarter review of its monetary policy by a couple of days to September 20. The US Federal Open Market Committee ( FOMC) meeting, scheduled on September 1718, is expected to indicate when the US Fed might start tapering its stimulus programme — an event crucial for the fate of currencies of emerging markets, including India. Rajan also announced four committees —one under RBI Deputy Governor Urjit Patel to revisit the structure of monetary policy; two on bad and restructured loans and their recovery; and one on financial inclusion to be headed by Nachiket Mor, a former board member of ICICI Bank who is now on the RBI board. Earlier in the day, the rupee recovered 0.94 per cent from its previous close to 67.09 a dollar. Stock markets also gained, with the BSE Sensex rising 1.83 per cent, or 333 points, to close at 18,567.55. Freeing up branch licensing is another key reform Rajan announced on Wednesday. At present, banks need to take prior approval of RBI for opening branches in Tier- I centres ( with population of more than 100,000, except in the Northeast and Sikkim). For Tier- II to Tier- VI towns, banks can open branches, subject to reporting. However, banks are required to ensure they open 25 per cent of their branches in unbanked rural areas ( Tier- V and - VI). In a move to ensure flow of credit to productive sectors and curb ‘ lazy banking’, Rajan proposed reduction of banks’ requirement to invest in government securities. As of now, banks need to hold at least 23 per cent of their net demand and time liabilities in government securities. |BIMAL JALAN TO HEAD PANEL ON NEW BANK LICENCES |BRANCH LICENSING FOR DOMESTIC BANKS FREED |INFLATION- SAVINGS CERTIFICATES BASED ON CONSUMER PRICE INDEX |RBI TO GRADUALLYREDUCE BANKS’ G- SEC INVESTMENT REQUIREMENT MARKETS GREET RAJAN New RBI Governor Raghuram Rajan ( left) greeted by his predecessor DSubbarao, at the RBI headquarters in Mumbai on Wednesday “Governorship of central bank is not to win votes or Facebook likes but to do what is right” RAGHURAM RAJAN RUPEE GAINS 0.94% Close: 67.09/$ Close: 18,567.55 SENSEX RISES 1.83% SETTING THE STAGE >Committees set up |BIMAL JALAN to head external committee to vet bank licences to be announced around January 2014 |URJIT PATEL, deputy RBI governor, to head committee on improving monetary policy framework |NACHIKET MOR to head committee to take financial inclusion forward |K C CHAKRABARTY, deputy RBI governor, to take a look at banks’ rising NPAs and the restructuring/ recovery process |ANAND SINHA, deputy RBI governor, to examine issues related to debt recovery tribunals and asset reconstruction companies |TECHNICAL COMMITTEE to study feasibility of using encrypted SMS- based fund transfers >Several steps announced |Mid- quarter monetary policy review postponed to September 20 *Banks won’t need RBI approval for opening new branches (subject to certain conditions) |Banks’ minimum G- sec investment requirement to be reduced gradually |Limit for exporters to rebook cancelled forward contracts raised to 50% ( from 25%) |Importers allowed to rebook up to 25% cancelled forward contracts |Introduction of interest rate futures of 10- year tenure |Interest rate futures on overnight interest rates under study |Special concessional window for swapping FCNR ( B) deposits |Banks’ overseas borrowing limit raised to 100% of unimpaired Tier- I capital ( from 50%) |Inflation- savings certificates based on Consumer Price Index SPECIAL Coverage >~ to gain as Rajan comforts sentiment >Capital outflow curbs partially eased >Action aplenty at RBI head office RAJAN TAKES CHARGE P7 > D- Stmay cheer today With Raghuram Rajan’s maiden speech as RBI governor raising hopes of more aggressive steps to support the rupee and clean up the banking system mess, the stock market, led by banking stocks, is likely to open higher on Thursday. Bakshi to take up McDonald’s row with CLB SURAJEET DAS GUPTA New Delhi, 4 September Vikram Bakshi, the estranged partner of fast- food chain McDonald’s, will seek reinstatement as managing director of the 50: 50 joint venture Connaught Plaza Restaurants, with a plea to the Company Law Board seeking the “ deadlock” in the August 6 board meeting be resolved. Connaught Plaza Restaurants controls the franchise to run McDonald’s stores in north and east India. At the August 6 meeting, two members of the board ( Vikram and wife Madhurima) had supported his continuation as managing director, while two (McDonald’s officials) had opposed it. Bakshi’s term as managing director had lapsed on July 17. Earlier, the process of nominating the managing director was virtually automatic, with Bakshi being re- elected in the normal course. Bakshi would appeal in the Company Law Board against a notice by McDonald’s publicly stating he wasn’t the managing director, as, according to him, the issue hadn’t been resolved yet. He would also challenge the “ differential treatment” by McDonald’s towards its two partners in the country and putting undue restrictions on Bakshi. McDonald’s also has a tie- up with B L Jatia Group’s Hardcastle Restaurants ( a subsidiary of Westlife Development), which has the franchise to run stores in west and south India. In 2011, the Jatias bought McDonald’s stake in the company and secured a development licence to run the chain. According to sources, the estrangement started in 2008 when McDonald’s offered Bakshi $10 million for his stake in the joint venture, based on valuations by agencies. However, after an independent valuation by Grant Thornton, Bakshi didn’t agree to the price. The second bone of contention was the cap on the debt Bakshi could take. Between 2008 and 2012, he couldn’t increase his debt beyond ₹ 134 crore; only after prolonged was he allowed to increase this limit to ₹ 161 crore. When the debt limit was raised, Bakshi’s business grew, but his profits fell. Third, while the royalty Bakshi continued to pay was five per cent, McDonald’s reduced the royalty payment of Hardcastle Restaurants to two per cent. When contacted, Bakshi declined to comment on the issue. The joint venture between Bakshi and McDonald’s runs about 150 outlets under nonexclusive licences from McDonald’s India. In a circular to its suppliers in India, the head of McDonald’s global supply chain said the daytoday operations would be run by the board “ till a new managing director is appointed”. It added “ it is business as usual” for the company and it had plans it was committed to follow. Bakshi clarified he wouldn’t sell his stake to the US partner or to the second Indian franchisee, Hardcastle Restaurants. “We are not negotiating with anyone to sell our 50 per cent equity in the joint venture,” he said. A McDonald’s Corporation spokesperson said the matter was internal. “We are not negotiating with anyone to sell our 50 per cent equity in the joint venture” VIKRAM BAKSHI Former managing director, Connaught Plaza Restaurants ( the joint venture that has the franchise for McDonald’s in north and east India)