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Insights Daily Current Events, 31 December 2014

Insights Daily Current Events, 31 December 2014

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Excise concessions for auto sector to go

Government is planning to end the excise duty concessions given in February.

Expected outcomes:

  • The decision could help the government raise additional revenue of up to Rs. 1,000 crore in the remaining three months of the current financial year in a bid to achieve the fiscal deficit target of 4.1 per cent of GDP. But the additional yield will depend on the auto and white goods sales in those three months.
  • Prices of cars and durable goods like TV and fridge will go up.

Why was the concession given?

  • To give a boost to auto and white goods sectors during the economic downturn, the previous government had cut excise duty on cars, SUVs, two-wheelers and consumer durables in the February interim budget.
  • In June, the new government extended the excise duty concessions by 6 months to December 31, which is now not being further extended.

Excise Duty is an indirect tax levied and collected on the goods manufactured in India. Generally, manufacturer of goods is responsible to pay duty to the Government.

Sources: The Hindu, exciseduty.gov.in.

Ordinance to amend law on arbitration

The government has decided to promulgate an Ordinance to amend the Arbitration and Conciliation Act, 1996.

Why?

  • To send out a signal to foreign investors that settling commercial disputes in India will no longer be a time-consuming affair.
  • The government had to take the Ordinance route as it wanted the reforms to be put in place at the earliest.

Aim: The Ordinance is aimed at making it mandatory for commercial disputes to be settled within nine months and also putting a cap on fee of arbitrator.

Details:

  • The proposed amendments stipulate that the presiding officer of a commercial dispute will have to clear the case within nine months.
  • The arbitrator will be free to seek an extension from the High Court. But in case of further delays, the High Court will be free to debar the arbitrator from taking up fresh cases for a certain period.

Expected outcomes:

  • The move would make India a more investor-friendly destination and help promote institutional arbitration.
  • Capping arbitrators’ fee and introducing timelines for giving final awards would make dispute-resolution less expensive and give a push to commercial activity.

Arbitration and Conciliation Act, 1996

The Arbitration and Conciliation Act, 1996 is the prime legislation relating to domestic arbitration, international commercial arbitration and enforcement of foreign arbitral awards and also to define the law relating to conciliation and for matters connected therewith or incidental thereto.

It repealed the three statutory provisions for arbitration:-

  • the Arbitration Act, 1940;
  • the Arbitration (Protocol and Convention) Act, 1937; and
  • the Foreign Awards (Recognition and Enforcement) Act, 1961.

The Arbitration and Conciliation Act provides statutory recognition to conciliation as a distinct mode of dispute settlement. Conciliation is defined as the process of amicable settlement of disputes by the parties with the assistance of a conciliator. It differs from arbitration in the sense that in arbitration the award is the decision of the third party or the arbitral tribunal, while in the case of conciliation the decision is of the parties which is arrived at with the mediation of the conciliator.

For further reference: http://business.gov.in/legal_aspects/arbitration_conciliation.php.

Sources: The Hindu.

SEBI moots new norms for issue of municipal bonds

To help in the Government’s ‘smart cities’ programme, the Securities and Exchange Board of India (SEBI) has proposed a new set of norms for listing and trading of municipal bonds on stock exchanges, while channelising household investments for urban infrastructure development.

New norm:

  • Issuing authorities would need to contribute at least 20 per cent of the total project cost for which they wish to raise funds. These municipal authorities would need to have a strong financial track record and such bonds should have a minimum tenure of three years.
  • The municipal bonds would add to instruments where provident funds, pension funds and insurance companies can put in their money.
  • Municipal authorities having negative net worth and those which have defaulted on payments to financial institutions would be barred from issuing the bonds. Corporate municipal entity or its directors restrained or prohibited by SEBI would also be ineligible.
  • The minimum subscription limit should not be less than 75 per cent of the issue size. In the event of non-receipt of minimum subscription, all application money received in the public issue should be refunded to the applicants, within 12 days from the date of the closure of the issue.
  • When there is a delay by the issuer in making the refund, then it has to give back the subscription amount along with interest at 10 per cent rate per annum for the delayed period.
  • The issuer’s contribution for each project should be at least 20 per cent of the project costs, which shall be contributed from their internal resources or grants. An issuer, proposing to issue debt securities shall maintain 100 per cent asset cover sufficient to discharge the principal amount at all times for the debt securities issued.

How these bonds will help?

Conservative Indian investor mainly invests in fixed deposits, small saving schemes or gold. Bonds issued by municipalities having good financial track record would be an good alternative investment opportunity for such conservative investors, as it provides reasonable return with less risk, which in turn may accelerate the capital markets.

About Municipal Bonds:

A municipal bond is a bond issued by a local government, or their agencies.

  • ‘Muni bonds’ are very popular among investors in many developed nations, especially in the U.S., where these have attracted investments totalling over $500 billion and are among preferred avenues for household savings.
  • The Bangalore Municipal Corporation was the first municipal corporation to issue a municipal bond of Rs.125 crore with a State guarantee in 1997. However, the access to capital market commenced in January 1998, when the Ahmedabad Municipal Corporation (AMC) issued the first municipal bonds in the country without State government guarantee for financing infrastructure projects in the city. AMC raised Rs.100 crore through its public issue.
  • Among others, Hyderabad, Nashik, Visakhapatnam, Chennai and Nagpur municipal authorities have issued such bonds, however, there is no provision as yet for listing and subsequent trading of muni bonds on stock exchanges in India.

As per guidelines of the Urban Development Ministry, only bonds carrying interest rate up to maximum 8 per cent per annum shall be eligible for being notified as tax-free bonds.

There is massive capital investment need in municipal infrastructure and funds from programmes such as Jawaharlal Nehru National Urban Renewal Mission (JNNURM) can only partly meet the requirement. Therefore, to meet their financing needs, the municipalities have to seek recourse to other means including issuance of municipal bonds.

Sources: The Hindu, Wiki.

Experts predict rupee will remain steady

While Indian rupee witnessed a highly volatile year in 2013, the currency stabilised in the current calendar year. Market participants believe that the Reserve Bank of India (RBI) would be able able to maintain the exchange rate in a steady band.

Indian rupee has shown significant amount of resilience as compared to its other Asian peers, and has depreciated marginally by around three per cent against the dollar in the year 2014.

Factors which helped Indian rupee maintain its steady state:

  • The softening oil prices from $115 per barrel to below $60 as well as the fall in commodity prices have held the rupee to a great extent from depreciating.
  • When compared to other emerging market currencies, the rupee has not fallen much, mainly due to a strong and positive Government with higher GDP expectation and the opening up of various sectors for foreign direct investments (FDIs).
  • The rupee’s out-performance against its peers has largely been on the back of reform optimism and improving macro-economic fundamentals.
  • The predominant factor governing the currency landscape would be the broad-based strength in dollar against all major currencies that might lead to some depreciation of the domestic unit.

The expected monetary tightening by the U.S. Federal Reserve and the beginning of the rate cut cycle in India would be key factors driving the direction of rupee.

Sources: The Hindu.

New mechanism to allow one-time registration for DPs

Making procedural requirements simpler for brokers, the Securities and Exchange Board of India (SEBI) has put in place a new mechanism to allow one-time single registration for the depository participants (DPs).

Current situation:

  • So far, DPs had to apply for separate registration certificate to operate on the two depositories — Central Depository Services India Ltd. (CDSL) and National Securities Depository Ltd. (NSDL).

SEBI has said that:

  • The existing requirement of obtaining certificate of initial registration to act as a participant and subsequently permanent registration to continue to act as a participant for each depository has been done away with.
  • Henceforth, one certificate of initial registration and subsequently permanent registration through any depository shall be required after commencement of the SEBI (Depositories and Participants) (Amendment) Regulations, 2014.
  • As per the new guidelines, DPs would have to apply to SEBI for “permanent registration” through any of the depositories in which it is acting as a participant.
  • A new entity seeking to act as a participant would have to apply for “initial registration” with SEBI through the concerned depository.

The new norms would help ensure cost efficiency, avoidance of multiple due-diligence process and prevent duplication of registration process.

Depository participants: A Depository Participant (DP) is described as an agent of the depository. They are the intermediaries between the depository and the investors. The relationship between the DPs and the depository is governed by an agreement made between the two under the Depositories Act. In a strictly legal sense, a DP is an entity who is registered as such with SEBI. A DP can offer depository-related services only after obtaining a certificate of registration from SEBI.

Sources: The Hindu, Wiki.

Centre plans common clearing house for commodity bourses

The Finance Ministry has sought public comments on a proposal to set up a common ‘Clearing Corporation’ for national commodity bourses.

Why? In order to reduce transaction cost of market participants as well as strengthen risk management systems.

At present:

  • National commodity exchanges have integrated online facilities for trading, clearing and settlement of futures contracts.
  • Only one exchange — NCDEX— has set up a Clearing Corporation, which is a 100 per cent subsidiary of the exchange, for clearing and settlement of trades executed on the exchange.
  • All other national bourses have clearing and settlement functions as a division of the exchanges. The contracts are cash settled or settled by physical delivery at expiration.

The report, submitted to the Finance Ministry by working group, suggests that:

  • An independent CC with a minimum net worth of Rs.100 crore to begin with should be set up, which should be reassessed after one year.
  • The clearing and settlement of trades within the CC should be across commodity exchanges, for benefits of reduced collateral, cross margining, multilateral netting etc to flow to the participants.
  • Since the commodity bourses have expressed apprehensions of the impact on their profitability if the clearing functions are performed by another entity, the CC may allow the exchanges to retain their contribution to the ‘Settlement Guarantee Fund’ with them, for a pre-defined period, after creating a suitable exposure mitigation vehicle.
  • Since warehousing is an integral part of the settlement process of commodity futures contracts, the CC should coordinate with the Warehousing Development Regulatory Authority and state governments.

Sources: The Hindu.