Goods to be taxed at 6-10 percent, Services at 8 percent

Finance Minister Pranab Mukherjee Wednesday said the country can have two goods and services tax (GST) effective from April 1, 2011.He proposed a dual rate structure during the first year of introduction of the new indirect tax regime under which the central government will keep the lower central goods and services tax (CGST) at 6 percent and the standard rate at 10 percent. Services will be charged at 8 percent.
The two structures would be merged eventually, he added. "We are agreeable to the adoption of a dual rate structure for goods at the inception of GST. In the year of introduction (April 1, 2011), the government proposes to keep the CGST (central goods and services tax) lower rate for goods at 6 percent and standard rate at 10 percent," said Mukherjee. "The services will be charged at 8 percent," the finance minister added, addressing the empowered committee of state financial ministers, which has been the key deliberating forum on the issue. India Inc has been clamouring for uniformity in the central and state tax regimes, which taken together can be as high as 30 percent, and results in rampant evasion. As per the initial understanding between the states and the centre, the state goods and services tax (SGST) will also be kept at the same levels resulting in a single rate for CGST and SGST in the range of 10-12 percent. "The peak effective rate will be about 15 percent which will be quite acceptable to the trade and industry. Eventually, it will settle down to a level of 16 to 18 percent for both CGST and SGST which will mean an effective rate of 12 percent," said Mukherjee. In the second year of implementation of GST, the standard rate for SGST and CGST may be reduced to 9 percent retaining the lower rate at 6 percent. And during the third year of its existence, the GST rates will be standardised at 8 percent for both goods and services both at the central and state level. "Thus, in a phased manner, we will be able to achieve a single CGST and SGST rate for both goods and services," said Mukherjee. The list of 99 items exempted under the present tax regime will continue to enjoy exemptions under the CGST and SGST. The finance minister also said that states would be compensated as per the recommendations of the 14th finance commission for any revenue loss. All central and state taxes like excise, value added tax (VAT) and service tax will be rolled into GST once the new regime comes into effect.

EU banks stress test

The announcement:
The Committee of European Banking Supervisors (CEBS) announcement showed that the EU banking sector is in much better shape than the market had expected. The committee announced that the stress test found that 91 banks in the 20 EU economies could face around EUR 566 billion in total potential losses in a deteriorating economic and financial environment over a two year period. However, only seven banks were deemed to have failed the test, coming up short by a combined EUR 3.5 billion in capital. Out of the seven banks, five were Spanish, one was a German bank and one a Greek bank.
Both the amount of capital shortfall and number of banks deemed to have failed the test were significantly lower than market expectations. With market expectations that close to 20 banks could fail the test and that could result in a net cumulative capital shortfall of around EUR 30 to EUR 90 billion. While the figures announced were significantly better than market expectations, questions are being asked over the toughness and inconsistencies in the testing methodology. It took sometime for the market to interpret the results and reaction was fairly muted reflecting that the worst hopes were not realized.

Discussion Paper on Foreign Direct Investment in multi-brand retail trading

The Department of Industrial Policy and Promotion (DIPP) has recently commenced issuing discussion papers on some important subjects on Foreign Direct Investment (FDI), inviting public comments. In this regard, a discussion paper on FDI in the defence sector was released in May 2010. The DIPP has now released (on July 6, 2010) a discussion paper on FDI in multi-brand retail trading. This special edition briefly discusses the present policy on FDI in trading and thereafter summarizes the aforesaid discussion paper on multi-brand retail trading. Present FDI policy on trading The present policy allows 100 percent FDI in cash and carry wholesale trading under the automatic route, subject to certain conditions. ‘Cash and carry wholesale trading’ means sale to retailers, industrial, commercial, institutional or other professional business users or to other wholesalers and related subordinated service providers. With regard to retail trading, FDI up to 51 percent is allowed with prior approval of the Government in single brand retail trading of products, subject to the following conditions: ·
Products to be sold should be of a ‘Single Brand’ only. ·
Products should be sold under the same brand internationally ie products should be sold under the same brand in one or more countries other than India. ·
‘Single Brand’ product-retailing would cover only products which are branded during manufacturing. The extant policy prohibits FDI in multi-brand retail trading. Discussion paper on multi-brand retail trading Present scenario The Discussion Paper summarizes the present policy on retail trading and provides statistics with respect to retail trading in India. It notes the following major concerns which have been expressed with regard to opening of the retail sector for FDI: ·
It would lead to unfair competition and ultimately result in large-scale exit of domestic retailers, especially the small family managed outlets, leading to large scale displacement of persons employed in the retail sector, which presently is the second largest employer after agriculture.
The Indian retail sector, particularly organized retail, is still underdeveloped and in a nascent stage and therefore it is important that the domestic retail sector is allowed to grow and consolidate first, before opening this sector to foreign investors. Recommendations of various studies The Discussion Paper discusses the recommendations of various reports / studies in relation to FDI in retail sector. Most of these reports (reports prepared by FICCI and ICICI Property Services, Centre for Policy Alternatives, Mid Term Appraisal of Tenth Plan, ICRIER and Economic Survey 2008-09) recommend opening of FDI in retail trading on a gradual basis. As per these studies, opening of FDI in retail trading would lead to several benefits such as supply chain improvement, investment in technology, manpower and skill development and greater GDP and employment generation. The Parliamentary Standing Committee on Commerce, in its 90th Report on ‘Foreign and Domestic Investment in Retail Sector’ has identified a number of issues related to FDI in the retail sector, including labour displacement, disintegration of established supply chains by establishment of monopolies of global retail chains, etc. Accordingly, the Committee made various recommendations for regulation and development of the retail sector. FDI policy in retail trading in other comparable countries The Discussion Paper mentions that FDI is permitted in the retail sector in Brazil, Argentina, Singapore, Indonesia, China and Thailand without limits on equity participation, while Malaysia has equity caps in this regard. The Discussion Paper thereafter discusses the experiences of countries that allow FDI in the retail sector. In most of these countries, the Discussion Paper notes that opening of the FDI has led to the development of a large organized retail industry and entry of major players in the market. Rationale for FDI in retail trading The Discussion Paper rationalizes the entry of FDI in retail sector on a calibrated basis, citing various benefits for the country, such as: ·
Improvement in the supply chain infrastructure by bringing in technical know-how and capital ·
Improvement in farmer income through removal of structural inefficiencies ·
Benefits to customers in the form of better quality of products and lower prices Issues for resolution
The Discussion Paper finally lists out certain issues for resolution in respect of which comments are invited from the public. These issues, in brief, are as follows: ·
Whether FDI should be allowed and, if yes, to what extent, in multi-brand retail trading? · Whether it should be mandated that a percentage of FDI coming in should be spent towards building up of back end infrastructure, logistics or agro processing? ·
Should a minimum threshold limit for investment in backend infrastructure logistics be fixed? If so, what should this financial threshold be? ·
Should FDI be permitted with conditions for employment generation in rural areas, for example, a condition that at least 50 percent of the jobs in the retail outlets should be reserved for the rural youth? ·
Similarly, to develop the Small and Medium Enterprises (SME) sector through local sourcing, should it be stipulated that a minimum percentage of manufactured products be sourced from the SME sector in India? ·
How can the small retailers be integrated into the upgraded value chain? For example, should it be stipulated that a minimum percentage of sales of the FDI funded retailers should be made to other retailers through special wholesale windows? ·
Should FDI in retail trading be initially allowed only in cities with population of more than 1 million and nearby areas? ·
Will any of the conditionalities mentioned above be inconsistent with India’s commitments under the WTO agreement? If not, can such conditionalities be extended to all retail chains in India above a certain size?
Will such extended conditionalities be consistent with Article 301 of the Indian Constitution? ·
What additional steps should be taken to protect small retailers (for example, an exclusive legal and regulatory framework or a Shopping Mall Regulation Act)? Does this require intervention at national level or should this be left to the States? ·
Whether the Government should reserve the right of first procurement for the public distribution system (PDS) for a part of the season or put in place a mechanism to collect a certain amount of levy from private traders in case the level of buffer stock falls below a certain level?
Whether there should be a centralised agency, to be nominated by the State Governments, to grant permissions and monitor compliance with the above stipulations?
Whether such agency should also be empowered to monitor compliance of the present cash and carry outlets? ·
In case of non-compliance, apart from the penalty of cancellation of approvals as well as denial of future permissions for such activities, whether additional civil and / or criminal penalties should be imposed?

ARTICLE BY : CA MOHAN CHAND

The RMB Appreciation: Who does it favor?

Taken From: Fibre2fashion.com

China has achieved an 8% GDP growth in 2009, and is further predicted to accomplish a 9.6% GDP growth in 2010. Simultaneously, the countrys inflation rates are also shooting up. In February, the consumer price index and producer price index experienced an increase of 2.7%, and 5.4% respectively, which was higher than the previous month. Along with the economic growth, the RMB also seems to have a rapid escalation.

Impact of the Appreciation:

Effects of the appreciation have been felt in both domestic, and abroad, becoming more and more significant with the time. Increase in the RMB exchange rates will help to minimize import costs of China, and help to reduce domestic inflationary pressure. Simultaneously, with the increase in RMB exchange rates, US will have to pay more cash while importing Chinese products. This will not be appreciated by US, especially for its domestic demand. The appreciation will have an impact on the Chinese stock markets, and the profitability of the Taiwan owned companies based in China, especially the export oriented. Authorities prefer a two-way movement in the RMB value, but that would be difficult due to the large amount of current account surplus, and high net capital inflows.

Does the appreciation favor China?

In a short term, the appreciation is likely to have less desirable effects on the countrys economic growth. The export market of China depends heavily on the availability of cheap labor. Escalating currency value will affect the exports of China, and resultantly, the overall national economy. If the Yuan appreciates against the dollar, it would bring financial instability, and is anticipated to endanger Chinas financial security.

On the contrary, some industry analysts predict that, in the long term RMB appreciation will result in a three-fold benefit for the country.
It will generate more development opportunities. It will augment the status on the country in the global forefront, people will feel richer, and will influence the commodity structure and the flow of investment. It will also maneuver the structure of domestic production resources.
The soaring currency value is likely to promote technical innovation, as the same relies on the market mechanism of the country, using price as a lever. Labor cost in China is cheap, while production and energy costs are expensive. The appreciation will encourage a demand for land and labor, and ultimately the demand for innovation. Export products depend more on technological innovation so as to remain competitive in the international market.
Finally, it will benefit the people as well. It makes imported products cheaper. It will motivate the market price of domestic financial assets, changing the financial market structure. Chinese people will see their money growing.

The appreciation of Chinese currency will simultaneously put pressure on other Asian countries, forcing them to increase their currencies as well. Taiwan currency is being predicted by industry experts to go up. A notable proportion of Asian exports to China are intermediate goods for re-export. This could keep the final export prices unchanged if the RMB appreciation is offset by low import prices.

Economic analysts foresee a further appreciation during the course of the current year and also during 2011. China should embrace new opportunities that have opened due to its currency appreciation, and allow growth for its national economy.

Economic Outlook 2010-11

Growth Prospects
The performance of the Indian economy in 2009/10 greatly
exceeded expectations. The farm sector which was expected to
contract showed resilience, growing by 0.2 per cent despite the weak
South West monsoon.The non farm sector also did well. It is the
assessment of the Council that the Indian economy would grow at
8.5 per cent in 2010/11 and 9.0 per cent in 2011/12.In the current fiscal
year,agriculture will grow at 4.5 per cent,industry at 9.7 per cent and
Global Prospects
The global economic and financial situation is recovering
slowly.The large fiscal deficits and high debt ratios coupled with
slow economic growth have created unsettling conditions for
business and have potential for causing great volatility in financial
markets.It is hard to visualize strong economic growth in the advanced
economies in 2010 and to a large extent in 2011. The implications of
this,for India ’s strategy to return to the 9.0 per cent growth
trajectory,are that public policy must promote business confidence
and facilitate increased
Structural Factors
In 2008/09 the investment rate fell on account of the drawdown
of inventories. This trend has reversed and the Council expects the
investment rate to be higher at 36 per cent (of GDP)in 2009/10,rising
to 37 per cent in 2010/11 and 38.4 per cent in 2011/12.Similarly we
expect the domestic savings rate to pick up and reach 33.4 per cent in
2009/10,34.3 per cent in 2010/11 and 35.5 per cent in 2011/12. These
rates should enable the economy to grow in a sustained manner
Private corporate investment and total investment in fixed
assets is expected to recover strongly but will not reach the previous
high levels. Government Final Consumption Expenditure to GDP
which hit a peak of 12.3 per cent in 2009/10 is expected to fall to 10.33
per cent in 2011/12. On the contrary, Private Final Consumption
Expenditure which declined in 2008/09 and 2009/10 is expected to
increase in the current and next fiscal year.Since 2001-02 the
progressive decline in the Private Final Consumption Expenditure
has been accompanied by a matching increase in the investment
expenditure component of GDP.
Sectoral Growth Projections
In the backdrop of a weak South West (SW)monsoon in
2009,the Council had expected the farm sector GDP to decline by 2
per cent. However, the actual loss in farm sector output was less.
The strength in horticulture, animal husbandry as well as higher
cotton output,helped farm sector GDP to ultimately register a
marginally positive growth of 0.2 per cent.
On the basis of a normal SW monsoon forecast by the
Meteorological Department, one may reasonably expect a strong
rebound in crop output in Kharif and Rabi in 2010/11.The better seed
and fertilizer availability and the construction of a large number of
water harvesting structures through the MNREGA lend strength to
these expectations. Moreover, the expansion in horticulture and
animal husbandry and a low base effect should generate a farm
sector GDP growth of around 4.5 per cent in the current fiscal.
Industrial sector recovery became evident in June 2009 and by
August 2009 the General Index of Industrial Production (IIIP)
registered double digit growth rate driven by similar growth rates
in output in the manufacturing and mining sector.
Overall,we expect GDP arising in the industrial sector to expand
9.6 per cent in 2010/11 rising to 10.33 per cent in 2011/12. The
expansion in the services sector is expected to approach 9 per cent
in 2010/11 and inch up to 9.6 per cent in 2011/12.Over all,the nonfarm
sector is expected to grow by 9.2 per cent in 2010/11 and 9.8 per
cent in 2011/12.
Trade & External Sector
According to the DGCI&SS report the merchandise trade
exports touched $176.6 billion in 2009/10 which was 4.7 per cent less
than 2008/09.Engineering and electronic goods were the hardest
hit declining by more than 20 per cent. Because of currency
fluctuations,the rupee value of exports showed practically no decline
in 2009/10.The value of merchandise imports in 2009/10 in doller
terms was 8.2 per cent lower at $2278.7 billion and 4 per cent
lower in rupee terms.
In 2010/11 we expect the value of crude oil imports to be high
due to increase in crude prices by almost 15 per cent and an
increase in the quantities imported. The oil import bill is expected to
rise to $1103 billion in 2010/11 $1120 billion in 2011/12.
Amongst the non oil imports we expect a comparatively slower
growth in the case of gold, silver imports and a stronger growth in
the remaining segments. The overall merchandise imports on
balance-of-ppayments basis are expected to rise to nearly $3354 billion
(uup 18 per cent) in 2010/11 $4414 billion (uup 17 per cent) in 2011/
12.
On the export side, the Council is projecting that in 2010/11
growth of petroleum products would be slightly higher than that of
imports at 24 and 16 per cent in 2010/11 and 2011/12 respectively.
The value of exports of gems & jewellery would show growth of 25
per cent.
Export of non-oil, non-jewellery products would rise by 20 per
cent in 2010/11 and moderate slightly in 2011/12. Our projections for
exports on balance-of-ppayments basis for 2010/11 amounts to
$2216 billion and for 2011/12 to $2254 billion.
Overall,the merchandise trade deficit on balance-of-payments
(BoP)basis in 2010/11 estimated at $1138 billion which is 18 per cent
more than the previous year.The projected trade deficit in 2011/12 is
$160 billion,an increase of 16 per cent over the 2010/11 In both
years, we are expecting the merchandise trade deficit to be around
9 per cent of GDP.
In 2009/10 the net FDI inflow at $20 billion was 11 per cent
more in 2009/10 compared to the previous year.Portfolio capital inflows
at $32 billion marked a big turnaround from (–)$14 billion in 2008/
09,reflecting the growth in domestic and world asset markets.The
portfolio inflows were primarily in the form of investments by Foreign
Institutional Investors (FFIIs) while the overseas equity issuance
(GGDR & ADR) by Indian corporates was quite subdued. Loan
capital inflows stood at $12 billion.
In 2010/11 and 2011/12 we see a continued expansion of net
FDI to $330 billion in both years,portfolio capital inflows of $25
billion and $35 billion and a steady increase in net loan capital inflows
to $17 and $25 billion respectively. Overall,our estimates for capital
inflows are $73 billion in 2010/11 and $91 billion in 2011/12.This would
be adequate to finance the large current account deficit in the two
years and leave a modest $31 and $41 billion (2.0 and 2.4 per cent of
GDP) to be absorbed in the foreign exchange reserves.
Prices and Inflationary Pressure
Since October 2008,the Indian economy has been experiencing
very high inflation in food prices.Initially this high inflation was
confined to only food articles – both primary and manufactured.
However as economic recovery began to stabilize it has,not
unexpectedly,manifested itself in the prices of manufactured goods.
The headline inflation rate which was 1 per cent in September
2009 has been rising since then reaching double digits in February
2010. Even in June the provisional headline rate was over 10 per
cent.Inflation in manufactured goods also jumped from less than 1
per cent in September 2009 to a high level of 6-8 per cent in April-
June 2010.
Inflation reflected in Consumer Price Indices has been running
in double digits.In July 2009,both CPI-IW (Industrial Workers)and
CPI -UNME (Urban Non-Manual Employees)surged from 9 per cent
to 12 and 13 per cent respectively. By December 2009,both indices
were reporting inflation of around 15 per cent, which increased further
to 16 per cent in January 2010. There has been a slight easing
thereafter,with both indices reporting inflation of less than 15 per
cent in March 2010.The CPI-IW inflation rate for May 2010 was less
than 14 per cent.
Inflation has remained a major source of concern in the economy
for more than a year.The overall WPI inflation rate has remained at
double digit levels for the past five months and the consumer price
inflation for much longer.Inflationary expectations,particularly food
inflation expectations,will be moderated because of the projected
normal monsoon. Food prices have already begun to soften.
Combined with the base effect,we expect inflation rate to fall to around
6.5 per cent by March 2011.
The available food stock must be released in a manner that
they have a dampening effect on prices.The behaviour of inflation
will also be a major concern for monetary authorities.Against the
background of inflation rates that are more than twice the comfort
level, monetary policy has to operate with a bias towards tightening.
This is essential to promote conditions for sustainable growth in the
medium term.
Monetary Conditions and The Financial Sector
In the October 2009 Economic Outlook,the Council had noted
that financial conditions had improved sharply across the world and
risk perceptions had turned more favourable. However the pace of
improvement has slowed down due to the heightened risk
perceptions on the sovereign debt,especially after the Greece episode.
In January 2010 as the Euro-zone initiative to support Greek
sovereign debt began to run into a range of obstacles,a generalised
lack of confidence developed with respect to sovereign governments
in general and weaker members of the Euro-zone in particular.
The Credit Default Swap (CDS) spreads increased not only
for public and corporate debt issued by Greece and the other
European economies perceived to be relatively weak but also for all
emerging and developing economies. However, currency exchange
rates did not show much movement till later.
Except for the Japanese Yen which strengthened against the
US dollar almost all other currencies declined – though the declines
were of varying orders.China had linked the Renminbi,to the US
dollar at the onset of the crisis.There was no change in the exchange
rate till the third week of June 2010, when Chinese authorities
announced that they were removing this peg. Since then the currency
has gained from a level of 6.83 to the dollar to 6.77.
While the monetary easing and the fiscal measures during the
crisis effectively limited the damage caused by the contagion, it was
always clear that these would have to be rolled back as the economies
gradually recovered.The European Union and the US continue to
face unsettled recovery conditions, with the possibility of recurrent
crisis being particularly pronounced in the Euro-zone.
In view of this exit from the accommodative monetary policy
and the reduction in fiscal deficit is only likely to materialize in
2011,perhaps in the middle of that year. 25 In those economies where
the effects of the crisis have clearly worn off and the recovery is
strong,an early exit from both the monetary and the fiscal stimulus is
called for.Australia,India,China,Brazil and Singapore have been
tightening their monetary policy by raising policy interest rates
and/or rolling back specific liquidity measures that were adopted at
the time of the crisis.
In India, the excess liquidity conditions created by an easy
monetary policy during the crisis, continued to prevail till May
2010, despite the tightening by RBI since October 2009.The situation
changed in June when banks at the margin began borrowing at the
repo window from the RBI. With the reversal in liquidity conditions,
overnight interest rates also reverted to levels that have approached
and even exceeded the upper end of the interest rate corridor i.e.,
the repo rate.

Japan's DoCoMo to buy 26 pc stake in Tata Teleservices

Japan's leading mobile
telecom operator NTT DoCoMo will pick up a 26-per cent stake in Tata Teleservices for $2.7 billion (Rs.13,070
crore/Rs.130.7 billion), it was announced Wednesday. DoCoMo will also make an open offer to acquire at least 20 pAercent of the outstanding equity shares
of Tata Teleservices Maharashtra, part of the $62-billion Tata group, India's largest industrial house. The open offer will be made along with Tata Sons, the holding arm of the Indian company, as per guidelines issued by the market watchdog, Securities and Exchange Board of India (Sebi), the two companies said in a statement. "As a result of the capital alliance, the partners expect to expand mobile communication operations in the fast-growing Indian mobile market, aiming to increase operating revenue and achieve steady business growth," the statement added.

RUPEE CONTINUED TO SHOW WEAKNESS

The rupee continued its slide on Wednesday, as it registered its worst single day performance in more than 12 years. This takes the rupee
back to levels of beyond 49 against the dollar
and dealers say that its just a matter of time before it breaches the 50 mark again. The liquidity situation remained under slight pressure, even as the overnight lending rates were in the range of 7-8%. However, bonds rallied because of the fall in global oil prices with the 10-year sovereign paper’s yield falling from 7.68 to 7.60. “Stocks were negative and even the RBI was not seen selling dollars as was expected,” said a dealer at a private bank. The rupee ended at 49.30 against the dollar, 2.4% weaker than Tuesday’s close of 48.12. On October 27, it fell to a record low of 50.29. It was the local currency’s biggest single-day percentage fall since February 5, 1996. However dealers say that there is feeling in certain quarters that RBI will be intervening soon to stem the fall any further. The BSE’s benchmark share index, Sensex closed down 3.08%, at its lowest close in November after bad news from corporate America added to the grim global economic outlook. Foreign funds continued to repatriate funds, a key factor for the rupee’s weakness in recent months. They have so far sold a net $12.7 billion worth of shares after buying a record $17.4 billion last year. Indian overnight call money rates ended little changed on Wednesday as demand for funds prevailed in the banking system ahead of treasury bill auction outflows and bond sale due on Friday. Call rates closed at 7.30%, lower than 7.40 levels on Tuesday. Dealers say that the rates are holding steady since there was a treasury bills’ auction on Wednesday (Rs 7,000 crore raised), and the bond auction on Friday for raising more than Rs 10,000 crore. A buyback of Rs 10,000 crore worth MSS bonds is also scheduled for Wednesday. The 6.65% 2009 bond was bought back at a YTM of 6.78% and the 5.78% 2010 paper was bought back at a yield of 6.87%. RBI barely absorbed any major sum via its reverse repo auction, while it pumped in a total of close to Rs 11,000 crore in to the system through the repo auctions, indicating some tightness in available cash.

GOLD PRICES SURGE

Tracking strong global cues gold prices today surged by Rs 560 to close at Rs 12,570 per ten gram on the bullion market here on brisk buying by retail customers for the ongoing festival and marriage season. Standard gold rose by Rs 320 at Rs 12,570 per ten gram while Jewellery, which opened after two day's break met with a rush of buyers for jewellery, quoted higher by Rs 560 at Rs 12,420 per ten gram. Sovereign gained Rs 100 at Rs 10,500 per piece of eight gram. Marketmen said, the precious metal which had remained in demand during recent festivals was boosted by customers buying jewellery for marriages. The market also received support as all buying shifted to the national capital following closure of main bullion markets in Mumbai, they added. The bullion prices spiralled after commodity prices posted biggest surge in five decades on speculation reduced borrowing costs in US and China may help spur recovery in raw material demand. Also, the U.S. cutting borrowing rate pushed up the demand for the yellow metal.

RBI relaxes forex derivatives accounting norms

The Reserve Bank relaxed the accounting guidelines for valuing derivatives, a move that will help the Indian banks with overseas
branches to post better financial results. "It has now been decided to confine the applicability of the principle of borrower-wise asset classification to only the overdues arising from forward contracts and plain vanilla swap and options", the central bank said, while modifying its earlier notification for off-balance sheet exposures of banks. Under the borrower-wise classification norms, all other funded facilities given to a defaulting clients are required to be shown as non-performing assets (NPAs) Earlier, the RBI had said borrower-wise classification norms will apply to all funded facilities of a client if the receivables representing mark-to-market value of a derivative contract remains unpaid for over 90 days. With the modification of the earlier circular, the unpaid amount towards foreign exchange derivatives contract entered between April 2007 and June 2008 will have to be parked in a separate account in the same of client. RBI further said that amount overdue for more than 90 days will not make other funded facilities provided to the client as NPA as per the borrower-wise asset classification principle. "The relaxation will also be applicable to the foreign branches of Indian banks

Will fuel prices be cut?

SOURCE:UTV

The global financial crisis has helped oil prices slump nearly half from its peak July prices of $145 a barrel. But are PSU oil companies smiling? Not really.
The PSU oil companies are still not seeing the light because the gloom of the depreciating rupee has clouded their gains.
For instance if we consider the oil prices and the corresponding losses then, for the last 15 day at an average of $82 a barrel for Indian crude basket, the per litre losses for BPCL and IOC are hardest hit for LPG. Thats followed by kerosene, then diesel and lastly petrol.
Bleeding PSUs per litre losseS (Rs/Litre) BPCL IOC Diesel 6.40 12.95Petrol 2.40 5.57Kerosene 24.60 29.19
Bleeding PSUs Rs/CylinderLPG 316.80 335.03
Absolute losses of oil companies have shrunk from Rs 2, 80,000 crore to Rs 1, 68,000 crore but this gain of about 42 percent has been offset by the weakening rupee.
In the last 3 months, the rupee has fallen by over 10% and for every one rupee that depreciates, the IOC loses Rs 300 crore.
Add to this the oil companies continue to face liquidity crunch. The fight for liquidity has made banks cagey. Industry officials say oil companies are squeezed to negotiate the interest rates. Also, the government has not yet issued bonds, which are awaited for Q4 of last year, Q1 and Q2 this year. But with parliamentary session begining on Monday, the companies expect the bonds to be issued soon.
Alas, fuel price cut may not happen anytime soon..

GOPINATH PLANS OFFER TO BUYBACK DECCAN

GR Gopinath, vice-chairman of Kingfisher Airlines, is believed to be considering an offer to buy back Air Deccan as he is reportedly unhappy over the alliance Kingfisher has struck with Jet Airways. Some sources said he might even offer to buy Kingfisher itself at a meeting of the airline board on Wednesday. Some overseas investors are reportedly backing him in this effort. That, however, is not easily possible. For starters, UB Group chairman Vijay Mallya has 65% share in Kingfisher, making it impossible for anyone to make a bid unless he is willing to sell out. He is not. “I spoke to Capt (Gopinath) out of courtesy about the alliance with Jet. He was in Andamans. He said he was happy with the arrangement (with Jet) and the synergistic benefits,” he said. “I hold 65% stake in the airline. If there is a so-called bid, we will see it off when it is made,” Mr Mallya told ET. According to the latest stock exchange filings, Mr Gopinath has 5.58% stake, and may control about 9-10% shareholding along with his associates.

Weak rupee takes its toll on cos with huge foreign DEBT

The global economic crisis is beginning to weigh heavily on India Inc’s balance sheet, courtesy the depreciating rupee. While a weakening rupee might bring cheer to export-oriented sectors such as IT and textiles, it has pushed up the foreign exchange liabilities of Indian companies. Accounting rules, called AS-11 provisions, make it mandatory for companies to make mark-to-market provisions in their profit & loss accounts for any changes in foreign currency loans. The worst hit have been those companies that predominantly serve the domestic market and opted for foreign currency loans to finance their growth plans. According to an analysis by ETIG, the profitability of companies will be dented by mark to market (MTM) losses. Tata Steel may report a forex loss of around Rs 344 crore, whereas Tata Motors could take a hit of Rs 311 crore. Tata Chemicals, which took a foreign currency loan of $475 million to fund its overseas acquisitions, is estimated to report a forex loss of Rs 187 crore. Ranbaxy, JSW Steel and Firstsource Solutions will lose Rs 100 crore and Rs 400 crore each. The list of companies is not exhaustive as an estimated dozen companies raised forex debt last year. Thankfully, this is only an accounting entry and does not affect the cash flows. However, it is likely to be read negatively by the stock market. Market participants actively track companies’ net profits and any adverse development does affect valuations. The rupee had positively impacted most of the above companies till last year, but it has depreciated by over 9% in the quarter ended September 2008. When the rupee depreciates, the value of foreign currency liability denominated in rupee terms increases and vice versa. According to AS-11 stipulations, an increase in liability should be reflected in the quarterly profit and loss statement and will translate into lower corporate profits. Most companies are focused on the domestic market and are therefore unlikely to benefit from a weakening rupee. The falling rupee will severely affect the small companies, whereas the big ones will be impacted only moderately. Firstsource Solutions may report a net loss, while Tata Steel might see a 100 basis points decline in net profit margin on account of forex losses. To put things in perspective, most companies will experience a 10-50% hit on their operating profits. Companies such as Reliance Communication, Reliance Industries and Bharti Airtel follow schedule-VI of the Companies Act, instead of AS-11 and are therefore unlikely to see an impact on their quarterly profit and loss statements. The operating profits of the two Reliance companies would have been lower by around Rs 800-900 crore if they had subscribed to the AS11 norms.

India, France sign civil nuclear pact

SOURCE: UTV NEWS
Scripting a new era in bilateral ties, India and France today signed a landmark agreement on civil nuclear cooperation that covers supply of reactors and atomic fuel in the first concrete step to bring New Delhi back into the nuclear mainstream after 34 years of isolation.
"We expect to finalise agreements with other European partners too" on civil nuclear cooperation, Prime Minister Manmohan Singh said after holding talks with President Nicolas Sarkozy at the Elysee Palace here.
France is the first country to open nuclear commerce with India after the 45-member Nuclear Suppliers Group (NSG) granted a waiver to New Delhi on September six. The Indo-US nuclear deal is awaiting Congressional nod and an agreement on it between the two countries is expected to be inked soon.
"Today we have added a new dimension to our strategic partnership by signing an inter-governmental agreement on civil nuclear cooperation," Singh said after the Indo-France Civil Nuclear Cooperation Agreement was signed in the presence of the two leaders by Atomic Energy Commission Chairman Anil
Kakodkar and French Foreign Minister Bernard Kouchner. The agreement will form the basis of wide ranging bilateral cooperation from basic and applied research to full civil nuclear cooperation including reactors, fuel supplies, nuclear safety, radiation and environment protection and nuclear fuel cycle management.
The atomic pact is one of the three agreements signed during Singh's two-day visit to Paris. The other two relates to social security matters which will benefit Indian and French nationals staying in each others countries on short duration up to five years and a Long Term Agreement on utilisation of the Indian Polar Satellite Launch Vehicle (PSLV) launch services.
"France is the first country with whom we have entered into such an agreement after the lifting of international restrictions on civil nuclear cooperation with India by the NSG. I conveyed to President Sarkozy our gratitude for France's consistent support to our civil nuclear initiative," Singh said.
The two countries decided to give a new impetus to their cooperation for the development of nuclear energy for peaceful purposes as an expression of their strategic partnership.
A statement on the agreement said both sides recognise nuclear energy as a reliable source of sustainable and non-polluting energy, it could make a significant contribution to meeting the global challenge of achieving energy security. It also noted that both the countries share common concerns and objectives in the field of non-proliferation of weapons of mass destruction and their means of delivery including in view of possible linkages to terrorism.
As responsible states with advanced nuclear technologies, including in the fuel cycle, the two countries are interested to promote nuclear energy with the highest standards of safety and security, the statement said. Wrapping up his 10-day visit to the US and France, Singh addressed India-EU Business Summit, during which he said New Delhi expects to finalise agreements on civil nuclear cooperation with other European countries.
Under the social security agreement inked today, workers on short term contract up to five years, do not have to make any social security contribution provided they continue to make social security payment in India and France respectively. For Indians working in France, these benefits shall be available even when the Indian company sends its employees to the French Republic from a third country.

FM, RBI come to ICICI Bank's aid

The Reserve Bank of India (RBI), Finance Minister P Chidambaram and the ICICI Bank top management had to step in today to cool the country's second largest bank's depositors' nerves thus helping the bank stock rebound smartly to gain 8% from 52-week lows. This comes on the back of rumours about customer withdrawals at some of its ATMs, prompting the bank management to issue yet another clarification.
It all started with a buzz of a run on some ICICI Bank ATMs resulted in a quick fall for the stock price. The bank's shares fell to a year's low of Rs 458.
But then, the RBI stepped in, dismissing rumours of a financial cruch at the bank.The central bank said ICICI Bank and its overseas units are well capitalised and have sufficient liquidity to meet the requirements of depositors.The RBI added it is monitoring developments and has arranged to provide adequate cash to ICICI Bank to meet the the demands of its customers at its branches/ATMs.This and a recovery in the market helped the stock rebound to Rs 534.Top officials of ICICI Bank also launched a damage control exercise, with Managing Director & CEO KV Kamath calling the rumours baseless and malicious.
He emphasised the banks fundamentals were strong, with profits of over Rs 4,000 crore in the last financial year. He also said the bank was comfortably leveraged and its investment portfolio will be able to absorb any fallout from the current volatile market conditions. ICICI Bank Joint MD Chanda Kochhar reiterated that the bank's capital base was strong to meet any contingencies.
Amid rumours about the financial health of ICICI Bank, the FM asked people not to give in to unfounded apprehensions as all Indian banks are well-capitalised and regulated.
"I think that some people are giving credence to rumours and unfounded apprehensions. I maintain and I repeat all our banks are well-capitalised and well regulated. No Indian depositor need be apprehensive," Chidambaram said.
The finance minister said ICICI Bank has come out with a statement that should reassure every depositor.
Time and again in recent days the ICICI Bank management has had to reiterate the bank's strengths. It recently issued clarifications on its exposure to the US sub-prime credit crisis. But with assurance coming from RBI itself, depositors can breathe easy about the bank's financial position.

INDIA INSULATED FROM GLOBAL TURMOIL

SOURCE: ECONOMIC TIMES
CENTRAL government will infuse adequate liquidity in the system to tackle the tightening credit supply problem due to recent financial turmoil in US, finance minister P Chidambaram said. Speaking to reporters after the CCEA meeting, he added that there was no reason to worry and the country’s banks and financial institutions were properly insulated from the present crisis.

US court approves Lehman, BARCLAYS SALE PACT

LEHMAN Brothers Holdings Inc, the US investment bank that filed the largest bankruptcy in history, won federal court approval to sell its North American business to London-based Barclays Plc for $1.75 billion.
US bankruptcy judge James Peck in Manhattan overruled objections from Lehman creditors who said the sale was moving too quickly, setting the stage for Barclays, the UK’s third-biggest bank, to close the deal over the weekend. Peck said it was clear no other purchaser would emerge if he delayed the sale, and that the deal would help stabilise global financial markets.
“I need to approve this transaction, because it’s the only available transaction,” Peck said. “Lehman Brothers became a victim — in effect the only true icon — to fall in the tsunami that has befallen the credit markets, and it saddens me.”
Barclays president Robert Diamond called it the deal of a “lifetime” when the bank acquiredLehman’sNorthAmericaninvestment banking arm on September 17, two days after Lehman collapsed. Barclays may add other parts of the failed investment bank to help it boost equity and advisory units in Europe and Asia, Diamond told analysts at the time. The courtroom broke into applause when the hearing closed at 12:41 am New York time.
“This week, more than any other week, I have felt the awesome power of this job,” Peck said. “This is the most momentous bankruptcy hearing I’ve ever sat through — either as a lawyer or a judge.” Lehman attorney Harvey Miller of Weil Gotshal & Manges said a rejection of the deal would have caused a “major shock to the financial system.” Miller previously said there were accounts with a total value of about $138 billion dependent on the sale.
Lehman is selling off pieces that weren’t included in the New York-based holding company’s bankruptcy filing. The Securities Investor Protection Corp. began a liquidation proceeding for the brokerage and appointed a trustee who must also approve the sale. The SIPC is an insurance fund created under federal law and financed by brokerages.
Hedge fund Harbinger Capital Partners had asked the judge to block the sale unless Lehman immediately disclosed cash transfers it made just prior to its bankruptcy, including an alleged $5 billion transfer of cash from Lehman’s London office. Another two hedge funds, Bay Harbour Management LC and Amber Capital, filed papers alleging $8 billion was moved.
Regulators including the US Securities and Exchange Commission and the Federal Reserve Bank of New York favoured the deal. Some creditors argued the sale should have been delayed to seek a better deal for Lehman’s assets amid a government plan to purge banks of bad assets and crack down on speculators who drove down shares of financial companies. “This is Friday; the case was filed on Monday. What we’re doing is unheard of,” Peck said when approving the sale. “It’s an extraordinary example of the flexibility that bankruptcy affords.”

SOURCE: ECONOMIC TIMES

Oil drops below $100

Crude oil futures retreated on Friday and briefly dipped below $100 a barrel for the first time since April 2 despite Hurricane Ike's threat to the Texas Gulf Coast and the region’s energy infrastructure. Brokers and analysts said concerns about a slowing economy and curbed oil demand and expectations that Ike will not be quite as strong as it was feared helped limit the impact of Ike on oil markets. US light crude delivery for October crude was down 60 cents, or 0.6%, at $100.27 per barrel, trading from $99.99 to $102.89. Crude futures fell to $99.84 on April 2. London Brent was quoted at $97.

Govt against merger of Indian firms with companies abroad

THE government has decided not to allow the merger of Indian companies with foreign companies, a proposal it deliberated on extensively while formulating the new company law.
Although this is an international best practice in the laws relating to mergers and acquisitions, the government has concluded that merger of an Indian company with a foreign company would lead to a situation where shareholders of the Indian company hold shares or other tradable securities in the foreign company. Allowing this would amount to the migration of Indian companies to the acquirer’s soil, which the government is not comfortable with. Therefore, an overseas company acquiring an Indian firm will have to keep the acquired company as a subsidiary.
The government, however, is okay with the reverse — that is, foreign companies getting merged with Indian companies and its foreign shareholders owning shares in the merged company which is registered under Indian laws. Sources said that if a foreign company indeed wants to merge an Indian company with itself, it can first set up a subsidiary in India and then merge the acquired Indian company with the subsidiary. This would ensure that Indian businesses would be owned by entities regulated under Indian corporate law.
The J J Irani committee, which advised the government on the new Companies Bill 2008 that was cleared by the Cabinet recently, had told the government that a forward looking law on mergers and amalgamations needs to recognize that an Indian company ought to be permitted to merge with a foreign company. This should be allowed in both the types of mergers — court-guided ones and contractbased ones. Contract mergers are those where there is no involvement of the judiciary.
The panel had also suggested that Indian shareholders should be permitted to receive Indian Depository Receipts (IDR) or foreign securities in lieu of Indian shares so that they become members of the foreign company or holders of security with a trading right in India. Such liberalisation would require the government to make changes in the Income-Tax Act, Foreign Exchange Management Act and provisions relating to IDR.

source: ECONOMIC TIMES

Exports up 31%, imports up 48% in July

Reuters
Exports increased 31.2% in July from a year earlier to $16.35 billion but the trade deficit widened from June to $10.80 billion as higher oil imports weighed, data showed on Monday.
Imports were up 48.1% to $27.14 billion in July, while oil imports rose 69.3% during the month to $9.48 billion.
Exports during April to July were up 24.6% at $59.19 billion from a year earlier, while the trade deficit during the period widened to $41.23 billion from $27.35 billion in the same period the previous year.

Preventing corporate fraud

Can early alert systems equipped with artificial intelligence forestall corporate frauds? India’s company regulators—read the ministry of corporate affairs and the registrars of companies under it—will gather the strength and resources to use such systems for many things including prevention of corporate malpractices if the plan of the ministry to unleash the second-generation e-governance programme comes through. According to secretary-corporate affairs, Anurag Goel, MCA-21, the e-governance system that is currently functional would be further buttressed so that regulators could take pre-emptive action, rather than act after malfeasance was writ large on the body corporate and caused practically irredeemable losses to shareholders. He told ET that the idea was to give companies the option to put their financial/business information in the Extensible Business Reporting Language or XBRL that would, apart from greatly facilitating analysis of the information for the companies’ own benefit, also make the job of the regulators easier. This is feasible because XBRL information can be exchanged between computers. Once the company is XBRL-compliant, it will be in a position to make information relating to its corporate social responsibility, compliance with anti-child-labour and environmental norms etc. verifiable and get the Green Company tag that would improve its image before the shareholders, creditors, business partners, customers and other stakeholders, Mr Goel said. “This (XBRL adoption) would be voluntary,” he clarified. (XBRL is defined as dictionary of data definitions which involves a mechanism for describing, naming and classifying items of business information). Recently, the country’s accounting standard setter, the Institute of Chartered Accountants of India (ICAI), has said that it will come out with the first part of XBRL in September. The proposed upgrading of MCA21—a comprehensive e-governance programme that has already made the interaction between companies and regulators much more efficient—would make India the twelfth country in the world to put corporate financial information in the user-friendly XBRL. It will allow hassle-free data mining and effective utilisation of data for research.