Generous to foreigners

Generous to foreigners

Source: By Ashwani Mahajan: Deccan Herald

If foreign companies purchase shares from FIIs, most of the Indian companies may go into foreign hands.

The Companies Bill, approved by Parliament last week, was in works for the last two decades. After passage of the Bill on August 8 by Rajya Sabha, the path to the new Companies Act, 2013 is now clear. It is said that the new law was framed in view of the requirements arising out of expansion and development of Indian economy. After a Parliamentary Standing Committee submitted its report in August 2010, the government withdrew the earlier bill and a new Companies Bill was drafted incorporating suggestions from various stakeholders.  This new Companies Bill 2011 was presented in Parliament during the winter session of 2011. It is notable that according to changed circumstances, Companies Act 1956 was amended number of times. However, for the first time, altogether a new Companies Bill was passed in Parliament.

Apart from other things, there are several new provisions in the newly approved bill, which includes provisions with regard to corporate social responsibility, mandatory rotation of auditors, independent directors, one-man company etc. Of course, when a new law is enacted, it is expected that it will help solve the problems with respect to the existing law. In Indian context, obvious expectation from the new law would be that it would facilitate future development of the country and would also end the worries of the commoners exploited and cheated by the corporate world.

If we take cognizance of the problems of the public from the existing laws, we find that several new companies were created, publishing balance sheets and other books of accounts in a fraudulent manner.

These companies siphoned off more than Rs 16,000 crore from the public and vanished. But Department of Company Affairs, Government of India could not dare take any action against promoters of such companies. However, though there are sufficient provisions against fraudulent balance sheets and books of accounts, such promoters and managers have never been subject to any major conviction except small penalties. Satyam’s  Ramalinga Raju is also out on bail after a short spell of 2 years in jail despite a fraud of more than Rs 8,000 crores. Some employees of the auditing company were sent behind the bars.

Generally, we come across the cases of insider trading. Insider trading means trading (buying and selling) of shares by promoters and directors of the company. Insider trading is illegal and causes heavy loss to general investors. Though many cases have been brought to light by enlightened experts, hardly have we found any major conviction in such cases except imposition of fines, that too after a prolonged struggle. Rarely do we find suo motu action by the government, its agencies or regulators.

Lack of will power

In addition to these, many cases of violation of Company Law have been brought to light from time to time. It is not that the existing Indian Company Law lacked provision to deal with these problems. The problem is not in the law as there are enough provisions within the framework of law. The problem is actually that the government lacks the will power to enforce the law.

Though the new law fails to provide any solution for most of the problems of investors, introduction of exit provision seems to be good for small investors. As per this provision, if promoters holding majority shares in the company decide to go for merger with or acquisition of other companies and the minority shareholders are not satisfied with this decision, they will have the right to exit from the company. Such minority shareholders would be compensated and their shares purchased by the promoters at a price as per the formula devised for this purpose. For the first time in independent India’s history, investors will not only have a right to object to a proposal of majority but can also exit the company.

Still, there is a problem in this provision. As per the prevailing law, a promoter cannot hold more than 75 per cent of shares and in case of small investors deciding to exercise exit provision, the holding of a promoter may exceed 75 per cent, which will be in circumvention of the law.

A new provision has been added with regard to acquisition of the companies. As per the existing laws, a foreign company can purchase majority stake in an Indian company but it cannot merge the same with itself. However, this provision is now being amended. A company constituted under a foreign law can acquire an Indian company and merge the same with itself. Similarly, an Indian company can acquire a foreign company and merge the same with itself.

How many Indian companies would be able to acquire foreign companies, only time will tell? However, this provision will definitely clear the roadblocks in the way of acquisition of Indian companies by foreign companies. It is no secret that presently Foreign Institutional Investors (FIIs) own a significant proportion of shares of Indian companies. If foreign companies purchase these shares from FIIs, most of the Indian companies may go into foreign hands. It is in this context that new law seems to be over-generous towards foreign investors.

Though the bill says that rules would be framed to regulate such overseas acquisitions, it is expected that in order to protect national interests, this provision should be done away with.

Courtesy: http://www.ksgindia.com/study-material/today-s-editorial/8776-19-august-2013.html

God lies in the detail

God lies in the detail

Source: By Allwyn Noronha: The Financial Express

With the passage of the Companies Bill, 2012, by Parliament on August 8, 2013, the good news is that finally the country is getting a new company law—something which has been in the making for the past decade or more. The UPA-1 government had initiated steps to overhaul the outdated and complex Companies Act, 1956, way back in its first year in office by constituting an expert committee under the chairmanship of JJ Irani on December 2, 2004. While the eponymous committee undertook its task in earnest in January 2005 and completed its deliberations quickly and submitted its final report to the government on May 31, 2005, it has taken over eight years to translate many of its recommendations into a final legislation. It is probably fitting that the UPA-2 government can claim some credit for getting the new law passed despite several hiccups during the past few years until the Lok Sabha approved the Bill on December 18, 2012.

As most observers and students of law would be aware, the current Company Law dates back to 1956, which, in turn, replaced a much earlier law of 1913. Over the past 60-odd years, though this law has been amended several times, these amendments could at best be considered as minor, sporadic and without a substantive change being made to keep pace with the modern corporate environment within the country and to match the changes on the global level. The recent efforts have been limited to issuance of a plethora of circulars by the government to effectively “amend” certain provisions of the law, which could at best be a backdoor attempt to change the law without bringing about changes in the substantive provisions.

In the current national and international context, there has never been a greater need for a simpler legislation and the mandate of the Irani committee was to review the existing legislation and provide suggestions to simplify the current law, while at the same time bring it abreast with the needs of corporate India. The current new law, though belated, seeks to achieve many of these objectives and a few of the new provisions under the proposed Companies Act, 2013 (new Act) are discussed below. These new provisions seek to break fresh ground and could have a far-reaching impact over the coming years provided they are implemented in the right spirit and intent:

One-person company: This new concept permits an individual to organise his/h 1er business by setting up of a private company with only one shareholder. This form of a company is entirely new to India, though prevalent in other jurisdictions, and would facilitate small entrepreneurs to join the organised sector with such one-person companies.

Subsidiaries: The government intends to specify a class of holding companies which would have limited layers of subsidiaries. This provision could be restrictive for Indian corporates considering that a large number of groups in India have significant number of step-down and special purpose subsidiaries including many outside India.

Transfer of securities: While securities of public companies are to be freely transferable (as in the erstwhile law), the new Act seeks to recognise that a contract or arrangement between two or more persons in respect of transfer of securities shall be enforceable as a contract. This is an extremely welcome provision that seeks to recognise inter se arrangements between shareholders in public companies that have been in vogue for several years in India and would also give considerable comfort to foreign investors, who typically seek rights vis-à-vis their investments.

National Financial Reporting Authority: The new Act proposes to have an apex authority to formulate accounting/auditing policies and standards and their enforcement and also to regulate the relevant accounting professions. This is a welcome provision; however, it is to be seen whether the setting up of such an authority would be effective in enhancing the overall disclosure standards by corporate India.

Governance: The new Act proposes to codify the requirements for appointment of independent directors, much beyond the current requirements stipulated for listed companies. Further, the role of the audit committee has been enlarged and duly codified as has the role of directors in companies. Concepts such as nomination committee (which currently is being done on a voluntary basis by few companies) have been introduced for the first time through this new Act. It is also proposed to permit holding board meetings through electronic means—a long overdue requirement in the current global context. All these new provisions are positive and would help enhance governance standards across India Inc. But, on the flipside, while the government seeks to enhance government standards, it also seeks to restrict compensation payable to independent directors by prohibiting issuance of ESOPs to such independent directors.

Mergers: Greater disclosures have been mandated for schemes of merger/arrangement and the process also requires specified government authorities to be notified of such mergers, etc, with a requirement for a response from such authorities within a specified period. Further, the right to object to such mergers, etc, has been enabled only for stakeholders with a significant stake, thereby reducing the ability of frivolous claims that often seek to arm-twist managements or delay such mergers. There are also separate provisions for fast-track mergers between small companies or for intra-group mergers.

It would now also be possible to effect a merger of an Indian company with a foreign company (currently not permitted under extant law) and vice-versa. Mergers with foreign companies, however, would be permitted only if they are situated in notified jurisdictions and subject to RBI consent. All these new provisions are extremely positive and would enable corporate India to reorganise their structures and companies, including enabling global structuring in a more efficacious manner.

Corporate social responsibility (CSR): This much-debated new provision mandates that companies with a certain size or with a certain minimum profit should constitute a specific committee of the board (with at least one independent director) to undertake CSR activities on a mandatory basis. Local areas where the company operates need to be given preference for such CSR spend. While the rationale of the government to encourage India Inc to increase their CSR activities is laudable, the mandatory requirement for CSR spending would appear to make this provision akin to a tax. Considering that past experience has shown that the government’s own social spending has suggested enormous leakages, it is yet to be seen whether corporate CSR spending will succeed and reach the ultimate intended beneficiaries.

Class-action suits: The new Act seeks to institute a new provision for class-action suits by a specified number of shareholders/depositors against the company/its directors on account of mismanagement, fraud, etc. This is an important provision that would enable such stakeholders to seek suitable protective action against a company/directors and also include claims for damages.

Special courts: It is proposed to now have special courts to deal with all violations under the new Act. This provision could be an effective mechanism to fast-track addressing violations under the new Act provided such special courts are set up in and, importantly, appropriately staffed to decide matters effectively.

As they say the devil is in the detail, and while the new Act has 470 sections as compared to over 650 sections in the erstwhile law, it would seem that there has been an attempt to “shrink wrap” the entire law into fewer provisions. The fact, however, is that in addition to the 470 sections, there is a considerable part of the new law (over 390 provisions), where the government would need to prescribe requirements or notify rules. The full import of the new law, therefore, can only be known once such requirements or rules are published and, after public debate, duly notified by the government.

We will shortly have a new law when the President gives his assent; however, with the process of rulemaking and the process of setting up various bodies including the critical National Company Law Tribunal yet to begin, it may well take a few more months, if not more, for us to truly get our new Act.

Courtesy: http://www.ksgindia.com/study-material/today-s-editorial/8685-12-august-2013.html

No need to continue

No need to continue

Source: By S. L. RAO: The Telegraph

India's orientation to major government involvement in industrial development can be traced back to the committee with the then top industrialists, Purushottam Das Thakurdas, J. R. D. Tata, G. D. Birla, Ardeshir Dalal, Shri Ram, Kasturbhai Lalbhai, A. D. Shroff and John Mathai, formed in 1942. It proposed the ' Bombay Plan' for India's economic development. The industrialists said, " no development... will be feasible except on the basis of a central directing authority". This meant directing investment to desired areas.

The plan proposed doubling per capita income within 15 years. Industrial productivity had to grow by five times, and industrial planning had to be focused on the development of capital goods industries. The Centre was to invest heavily in starting industrial enterprises.

These were basic and key industries — transport, pharmaceuticals, armaments, aircraft, cement, steel, aluminum, machinery, power and the like. ( State governments soon started their own.) Most of the funding would be raised by the government, especially from borrowings abroad. Private investment would be directed into desired directions through industrial licensing.

Professional management in India was not well developed at the time. The only trained cadre was the civil services that administered the country. Civil servants were drafted to set up and run these Stateowned enterprises. A few non- bureaucrats were brought in — D. V. Kaput, V. Krishnamurthi, Prakash Tandon, Yogi Deveshwar and the like. But there were few such, and the bureaucracy developed remote control of the SOEs through rules, procedures and many approvals. Although over time, the enterprises developed their management cadre, the administration continued to exercise great control over them.

With liberalization from 1985 and the abolition of licensing from 1991, private investment entered sectors reserved for government enterprises.

Public sector monopolies were broken. The SOEs faced competition. However, their inflexible mandates limited them to defined sectors. They could not diversify to improve profitability. The detailed controls by administrators in the government over the SOEs, on their expansion, diversification, technology imports and collaborations, royalties, building brand ../images through product quality, service, pricing and advertising, continued. These stunted managerial innovation and corporate growth. A culture of defensiveness, avoiding risk- taking and errors of judgment and losses, developed in the SOEs. The three C's — the CBI, the CVC, the CAG — were deterrents to bold decisionmaking in the SOEs. The private sector is more tolerant of loss- making mistakes ( provided they do not happen too often).

There are many examples of SOEs that fell behind as a result. Air India was prevented from replacing old airplanes for over 10 years while private competitors took over profitable routes. Then it was compelled to buy planes for which Air India had no plans for utilization.

Bharat Heavy Electricals Limited failed to upgrade its product technologies, resulting in loss of much business, especially for more advanced equipment, to foreign producers ( China is a major example).

It has failed to deliver equipment in time. Expansion of power supply and equipment breakdowns among users was the result. Coal India, the most profitable SOE, supplies low quality coal, and misses supply commitments.

The result — damage to expensive turbines; heavy shortfalls in power generation and fertilizer production; imports at much higher costs; consequent higher costs to the economy and the consumer.

Defence enterprises were prevented from or made to postpone acquisition of technology. High imports of defence equipment benefited import agents and their local touts. The country, in spite of its acclaimed engineering and software skills, imports a major part of its defence requirements because of government restraints on indigenous production. Hindustan Machine Tools' inability to keep pace with the modern electronic age made it a sick company. Bharat Electronics survived by supplying the non- government market and technology innovation.

It was a rare exception. National Thermal Power Corporation missed every plan target for new generation capacity mainly because it did not develop EPC ( engineering, project, construction) capability, avoiding possible retribution if it lost out on a project. The NTPC had strong technical skills in power generation because of excellent selection and training schemes.

The NTPC benefited from being government- owned, and almost a monopoly at the national level. Its owner gave it special tariff preferences and accelerated depreciation, which bolstered cash flows. Bharat Sanchar Nigam Limited and Mahanagar Telephone Nigam Limited declined in the face of aggressive private competition and lack of innovative leadership.

State government- owned SOEs are in worse shape. The best examples are the state electricity boards. They will lose Rs 100,000 crores this year. They allow theft of electricity, give it free to farmers, are headed by itinerant bureaucrats, and engineers hold managerial positions with little training.

Many SOEs are major drains on the productivity of the economy, and make frequent large calls on government funds. Central government investment in the SOEs is now Rs 729,228 crores. Capital employed ( paid- up capital+ reserves and surplus+ longterm loans — mostly from the government) in 2011- 12 was Rs 1,328,027 crores. Many SOEs are overstaffed, and labour productivity is low. In 2011- 12, the 225 SOEs owned by the government made a net profit after tax of Rs 97,512 crores. They paid out dividends of Rs 42,627 crores, or 3.21 per cent on capital employed, and 43.71 per cent dividend payout.

Interest payments were 4.9 per cent on long and short term borrowings, mainly from the government, much less than market rates. Loss making SOEs like Air India, Indian Telephone Industries Limited, BSNL, MTNL and others, lost Rs 27,602 crores. There are large fund infusions for them on the anvil. Plan outlay on SOEs in 2011- 12 is estimated at Rs 190,794 crores. Market capitalization of 44 listed SOEs has been declining. Thus, the SOEs contribute little to government finances and make frequent financial demands.

The specious argument is made that the SOEs contribute to the exchequer by way of dividends, various taxes, interest on loans, and the like ( total of Rs 160,801 crores), and by employing 13.98 lakhs. Private enterprises can claim similarly.

The hold of the bureaucracy on the SOEs stifles them in procedures and approvals, destroying initiative, and preventing organic and inorganic growth. The SOEs also encourage bureaucrats and politicians to cheat the country, as has been evidenced by many scams ( last year, in coal mine allocations, spectrum sales and now in giving away the country's entitlements in airlines).

The money invested by the government in the SOEs today would be better spent on building physical and human infrastructure. The private sector has the entrepreneurs and managers, and the capacity to raise funds. It could run the SOEs more efficiently, as is proven by those privatized by the National Democratic Alliance government.

Abuses can be avoided by strict, independent ( not ministerial) regulation, which is fair and consultative, transparent, and up- to date on market developments. Both private owners and government representatives of government owners can be made to perform and to behave.

A spate of ' disinvestments' has seen the government selling small percentages of equity in some SOEs. But they do nothing to improve autonomy, entrepreneurship or transparency in the governance of the SOEs. ' Disinvested' SOEs remain under bureaucratic control. The government representatives, unlike the private owner, have no stake to make the SOE efficient and profitable.

Preventing ministerial and bureaucratic interference in the SOEs, putting them under independent regulatory surveillance, appointing career managers to run them, and paying them well, can make the SOEs perform well even under government ownership. Good ' corporate governance', and independent regulators like the Reserve Bank of India, Securities and Exchange Board of India, Institute of Chartered Accountants of India, Registrar of Companies, Central Electricity Regulatory Commission, Telecom Regulatory Authority of India and others can ensure more autonomy in the SOEs. Experiments to distance the government from the managements of public enterprises have failed. The principal reasons ( apart from the heavy hand of the bureaucracy) for the poorly performing SOEs have been the lack of a holistic management ethos, lack of innovation, poor research and development, and risk tasking.

Some SOEs may need to continue under the State. They must be freed from the bureaucracy. All others must be gradually privatized, not disinvested. Management control should go out of government hands.

Courtesy: http://www.ksgindia.com/study-material/today-s-editorial/8243-10-july-2013.html

Is DTC a good idea?

Is DTC a good idea?

Source: By Dinesh Kanabar: The Financial Express

India Inc wants a modern, stable and simple tax regime; it expects the final version of DTC to meet these criteria. Historically, the Britishers laid down the pillars of the current taxation system in 1860 which was modified in 1918. Subsequently, a comprehensive Income-tax Act was introduced in 1922 which got evolved into the Income-tax Act, 1961, post Independence.

After five decades, the government decided to revamp the Act and introduced DTC for public debate in August 2009. The intention was to improve the efficiency and equity of our tax system by eliminating distortions in the tax structure, introducing moderate levels of taxation and expanding the tax base. The object was to simplify the language, to enable better comprehension and to remove ambiguity and foster voluntary compliance. The finance minister clarified that, while drafting DTC, the ministry adopted the principles that have gained global acceptance and DTC should be read without any preconceived notions and, as far as possible, without comparing the provisions with the corresponding provisions of the Act.

DTC 2009

DTC 2009 had several path-breaking changes as compared to the existing principles under the Act. The corporate tax rate was proposed to be reduced to 25% from the existing 30%. Individual tax rates were moderated and slabs widened. The concept of ‘previous year’ was replaced with that of ‘financial year’. Income was proposed to be classified into two broad groups—from ordinary sources and from special sources. The losses arising from ordinary/special sources would be eligible for carry forward and set-off without any time limit.

The base for computation of minimum alternate tax (MAT) is currently the book profits which was proposed to be changed to gross assets of the company. Further, the profit-linked incentives under the Act were proposed under a scheme wherein any capital expenditure incurred for specified businesses would be allowed as a deductible expenditure and the loss would be allowed to be carried forward till it was absorbed completely.

On international tax front, DTC 2009 provided that the provisions of tax treaties or DTC, whichever are enacted at a later point in time, would prevail. In addition to normal income-tax, the ‘branch profits’ tax was introduced on foreign companies at the rate of 15% of the post tax profits.

In light of the Vodafone controversy, it introduced a set of provisions dealing with indirect transfer of capital asset situated in India. Detailed anti-abuse provisions were introduced under the General Anti-Avoidance Rules (GAAR) in order to curb the use of tax avoidance mechanisms and misuse of tax treaties. On the Transfer Pricing front, DTC 2009 proposed introduction of Advance Pricing Agreement (APA) mechanism.

DTC 2010

The provisions of DTC 2009 evoked widespread criticism on a number of points and representations were made against several of the new proposals. After considering stakeholders’ major concerns, the government revised DTC 2009 and introduced DTC in 2010, and placed it before Parliament and was referred to the Standing Committee for Finance.

New Controlled Foreign Company (CFC) provisions were introduced to tax passive income of overseas subsidiaries of Indian companies. Several of the taxpayers were addressed and accordingly:

It was clarified that as between the domestic law and the relevant tax treaty, the one which is more beneficial to the taxpayer would apply except in cases where GAAR was invoked.

In line with international practices, it was proposed that the residential status of foreign firms will depend on its place of effective management (POEM).

MAT on book profits was restored as against the earlier suggested levy of MAT based on gross assets.

DTC 2010 proposed to grandfather tax holiday for existing SEZ units (in addition to SEZ developers).

An objective test of taxability of offshore transfer of shares in a foreign firm was a welcome proposal.

The government, while accepting many of the representations made, also cautioned that due to the reduction in tax base originally proposed in DTC 2009, the indicative generous tax slabs, rates and other monetary limits for deductions will be reconsidered. That said, the DTC Bill substantially diluted several provisions of the original framework and, rather than provide a new framework, what we now have is a refined and better drafted version of the Income-tax Act, 1961.

Standing committee recommendations

The DTC Bill, after being presented to Parliament, was referred to the Standing Committee of Finance. The committee, after deliberating with various stakeholders, submitted its report to Parliament on March 9, 2012. The committee recommended certain welcome provisions like increase in the threshold limit and tax slabs for individuals and in the wealth tax, grandfathering of SEZ provisions vis-a-vis levy of dividend distribution tax and availability of tax credit to non-resident shareholders on the additional dividend distribution tax paid by the Indian domestic companies.

On the international tax front, the committee sought to obtain clarity in areas like residence rules (POEM), GAAR, CFC, etc, to avoid litigation. While the committee has recognised the need and rationale for introducing the CFC provisions, it has also recommended a suitable mechanism to grant tax credit in India.

Provisions already in the Act

Though DTC has not seen the light of the day, some of the far reaching provisions under DTC have already been introduced under the Act.

The GAAR provisions have been introduced which are proposed to be effective from April 1, 2016. Taking a cue from DTC, the scope of ‘income deemed to accrue or arise in India’ was enlarged in the Act by providing that the income deemed to be accruing or arising to non-residents directly or indirectly through the transfer of a capital asset situated in India is to be taxed in India with retrospective effect from April 1, 1962. The royalty income for non-residents now includes computer software transmission by satellite, cable, optic fibre or any such technology, with retrospective effect from June 1, 1976.

The concept of obtaining the tax residency certificate (TRC) has been introduced. It has been provided that in order to claim tax treaty benefit, the taxpayer should obtain TRC from the respective resident country. Under the existing transfer pricing regime, APA related provisions have also been introduced. The key DTC provisions are still pending to be introduced are the CFC provisions and the concept of POEM.

Way forward

The finance minister, while presenting Budget 2013, mentioned that DTC would be finalised and a revised Bill will be brought before the Lok Sabha before the end of Budget session. As per recent reports, he expressed his disappointment with the current DTC as it substantially dilutes his original proposals. However, he said that he will do his best to integrate the original proposals as envisaged by him with DTC and also incorporate the proposals of the Parliamentary panel.

He has indicated that DTC would be a new code and reference would not be made to the current Act. The Bill presented before Parliament is more or less akin to the current law. Is then DTC a good idea at all? It took more than 50 years for the courts to settle down the principles. A new law could lead to increased litigation, which would again take years to crystallise the principles on taxation. Such increased litigation could frustrate the object of introducing DTC. That said, DTC is far better worded compared to the existing law and is easier to comprehend.

The government had constituted an expert committee to deal with various issues arising under the provisions of GAAR, indirect transfer of capital assets, etc. The expert committee has considered the representations made by various stakeholders and submitted its reports to the government. Let us hope that the expert committee’s recommendations would be considered before introduction of DTC.

On the other hand, India Inc has long advocated its preference for a modern, stable and simple tax regime. Whether DTC meets these criteria is something that will be undoubtedly debated after the final version of DTC is introduced. However, it is the tax administration’s implementation that will determine the long-term impact of the new tax regime.

Courtesy: http://www.ksgindia.com/study-material/today-s-editorial/8153-03-july-2013.html

Sacrificing FDI

Sacrificing FDI

Source: By SL Rao: Deccan Herald

The current account deficit (CAD) in the balance of payments has been at record levels. It has improved a little, but the precipitate decline of the Rupee, now at over Rs 60 to the US. dollar, spells doom for many companies and for India’s foreign debt. The same borrowings are now much more in rupee value. Balance sheets will show much higher debt in rupees and much higher interest payments in rupees.

This CAD is due to excessive imports, declining exports, not matched by growth in net earnings on foreign investments or on cash transfers. Our major imports are oil, coal and gold. The rupee value of these are now much more because of the decline in the rupee’s external value. It could be made up by foreign institutional and foreign direct investment. The former has been coming but is now withdrawing to the safety of the dollar in the USA. The latter has been and remains weak.

The situation is accompanied by and is a result of the sharp falls in growth, inflation continuing for over two years, declining investment and high government deficits. Poor growth is related to poor investment. Investment is sluggish. High interest rates and the declining foreign exchange value of the rupee are two reasons. The deficit has been somewhat reduced by cuts in expenditures and on oil and gas subsidies and improved tax collection. But massive social welfare expenditures with the promise of more because of the Food Security Act keep the deficit at high levels. Inflation will therefore continue. Social welfare expenditures are stolen to a substantial extent by politicians and bureaucrats (estimates are by over 50 per cent). They do not also benefit many of the poor and deserving.

Land acquisition delays, slow environmental and forest clearances, absence of time bound bureaucratic clearances, honest investigative practices, slow Court judgments, to name a few, have kept away the investments. Nationalised coal mining has been inefficient and unable to dig as much coal out as is possible. Exports are depressed due to the sluggish world economy and the scams have affected major commodity exports like iron ore. Rising foreign investment could restore the balance of payments and stimulate the economy. Rising domestic investment (both private and public) would be an economic stimulus to growth. But there is strangely, more domestic investment going overseas than is invested in India. This is because of all the impediments listed earlier.

Foreign investment is not as confident about India as it was some years ago. That is not just because of the deteriorating macro economic factors (deficit, inflation, current account deficit, high interest rates, etc). The innumerable procedures before the many clearances are given, the enormous amount of time wasted in these procedures, the cost of these delays in unused human and financial resources, uncertain tax rules, retrospective tax demands, have combined to make foreign investors wary of investing in India. Between 2000-01 and 2011-12, direct investment rose from $ 3270 million to $ 22006 m and portfolio investment from $2590 m to $ 17171 m. Our dependence on the latter is high. They are volatile. Their seesawing inflows and outflows have made for frequent rises and falls in the stock market and rupee exchange rates.

Attractive destination

India compares poorly with China which has had consistent GDP growth, low inflation, current account surplus, superlative infrastructure and foreign direct investment. China has grown primarily because it was such an attractive destination for foreign direct investment. Low wages, productive labour and non-existent labour legislation have made it a great manufacturing destination. Like India, a significant amount was money belonging to non-residents. India actively encourages round tripping of Indian funds by treating investments from countries like Mauritius to their tax laws (no capital gains tax). For years, technology imports were controlled, royalty was low, bureaucratic approvals were many and time consuming.

Implicit policy was to encourage institutional portfolio investments and as institutional investments, external commercial borrowings and NRI remittances. FDI was more into buying existing businesses, not building new factories. India needs massive foreign investment especially in infrastructure (roads, power, ports, railways, airports, etc). The UPA government has promoted FDI in insurance, pension funds, multi-brand retail, etc, but the conditions imposed, changing rules, taxation uncertainties and regulatory frameworks, have prevented much investment. Decades of hostility to private investment, private profit and foreign investment continue. Society believes essential services (water, electricity, road transport, etc) must be free or cross-subsidised by suppliers. This has led to unbridled increases in deficits of state-owned enterprises in infrastructure.

We can become an important FDI destination and build a current account surplus, like China. But we should remove all restrictions on foreign investment including defence industries. There should be no cap nor compulsion to have local investment participation. Clearances must be simplified and speeded. Taxation should be stable, clear, and consistent. The bureaucracy and individual officers should be made responsible and accountable for time bound clearances. Land acquisition should be made easier even if it requires an ordinance in the absence of legislation. Present legislative changes will not help. Inflation should be controlled and for this government deficits must come down.
These policies should have been introduced in our years of high growth, low inflation, low current account and fiscal deficits. Today, government has no alternative but to get foreign money into our reserves by any means. But we should have a blueprint of what must be done when our situation allows it, to increase FDI significantly in foreign investment into India. The biggest stumbling block is the unspoken conspiracy between politicians, bureaucrats and businessmen, to encourage portfolio investment through many avenues.

Courtesy: http://www.ksgindia.com/study-material/today-s-editorial/8216-08-july-2013.html

Want more FDI? Relax those caps

Want more FDI? Relax those caps

Source: By Sobhomoy Bhattacharjee: The Financial Express

Around the excitement created by the easing of FDI rules by the Cabinet, it is a good test check to measure those against the actual inflows. It would tell us if the government is easing up on the right sectors and whether this would lead to the expected bulge in foreign exchange flows. A revealing analysis of company-wise inflow of foreign investment made by RBI recently makes for some startling observations, however.

It shows, for instance, that an overwhelming percentage of foreign collaborations into Indian companies were through the foreign subsidiaries. Of the 832 companies surveyed, this is 80.4%.

If foreign investment is flowing in through subsidiaries and mostly through wholly-owned ones, it is clear that serious money comes into a sector only when the overseas investor is convinced that he can exercise effective control.

This would imply that sectors where the government has kept the caps at 49% or less should not expect any big time money to come in. The only sector where this rule was countered was the insurance sector. Companies put in serious money into Indian ventures, expecting the caps to be relaxed quickly. Yet, each year the government fails to act on this promise, it hurts the investment story, which is increasingly becoming less plausible to the larger body of investors.

The RBI analysis is based on two sample surveys on foreign fund inflows for the periods 1994 to 2001 and then from 2007 to 2010. Since the second one captures the impact of the global meltdown too, it is a cogent line of argument.

Obviously, there is no surprise that foreign investment is rising rapidly in the services sector than in manufacturing. Between 2000-01 and 2007-10, the share of the services sector in foreign technical collaboration has risen from 7.5% to 25.6%. And within the manufacturing sector, there has been a transformation. From nowhere, the pharmaceutical sector has leapt to become the second largest area of interest for technical tie-ups behind machinery and equipments. But in the present round of FDI relaxation, the cap on brownfield investments in pharma has not moved beyond 49%.

The Foreign Investment Promotion Board (FIPB) is forced to take an unconventional approach of clearing the investments on a case-by-case basis while the government keeps up the red light switched on for the industry. The bias towards services and the interest among overseas investors in taking the subsidiary route also displays the reasons why the bitter battle in FDI policy is happening in insurance, retail and telecom services.

The foreign investor is following some obvious trends in the Indian market. India is not a manufacturing story except for pharma and auto. The interest is, therefore, on the action available in services.

Within services, the overseas investor wants to set up shop with his own management control. So, no amount of relaxation in manufacturing will move foreign investment significantly and caps less than 50% make no sense in any sector, least of all services. The data from the past 15 years including the Congress and the BJP years provide the same spectacle.

Instead, by preferring to maintain an ostrich-like attitude, we are risking something else. From 1994 till now the percentage of foreign collaborations that involved transfer of know-how has come down fast. It accounted for 72% of the agreements signed in the seventh round of the RBI survey. It is now only 38% in the eighth round of the survey.

In the absence of effective management control, companies abroad have cut down on technology transfer to their Indian ventures. The nature of agreements has shifted to tap the markets instead. This is evident from another table in the same study. The intensity of research and development (R&D) in the companies with foreign collaboration has come down. For the entire manufacturing sector, the percentage of R&D by Indian firms with foreign tie-ups has slipped from a healthy 1.56% of total production in 2007-08 to 1.01% in three years. The only sector where it has bucked the trend is pharmaceutical.

A related set of numbers also bear this out. The earlier vintage of foreign investments insisted on export restrictions. This applied even for the services FDI. But as technical collaborations dipped, this restriction has lost salience and has come down sharply. The advantage is that exports have gained from the inflows.

So, the Cassandras of the socialist vintage railing against foreign investment have ended up doing exactly the opposite of what they thought the restrictions would do to Indian industry. Limiting the exposure to foreign capital has cut the gains an inflow would have made to the economy. This could be instructive in the context of stiff opposition the defence ministry has mounted on raising cap for production in the sector. The Indian arm of the proposed foreign tie-ups risk becoming shops to sell the foreign production than provide any serious value-added service.

What about the employment numbers? For the set of companies that took foreign investment, employment has risen by almost 15% in just three years. It will be a serious challenge to any of the swadeshi apologists to discover any sector of the Indian economy where such a transformational rise in employment has happened, even in two decades.

Courtesy: http://www.ksgindia.com/study-material/today-s-editorial/8422-23-july-2013.html

Long Term Capital Flows

Long Term Capital Flows 

While explaining the book-keeping of the balance of payments a reference has been made to capital flows. You will now learn that the long-term capital flows are caused by the development needs of the various countries. Presently the world can be broadly divided into the capital surplus countries and the capital deficit countries. Most developed countries are the capital surplus countries, while almost all developing countries are the capital deficit countries. Since the countries falling in the latter category have not been able to save adequately for their investment requirements they import foreign capital from the capital surplus countries. 

Foreign capital usually takes two main forms :

 i) private foreign investment, and

ii) foreign aid. 

Before World War II, private foreign investment was used by the colonial powers to exploit the market

of the colonies. Since these colonies have become independent, the penetration of private foreign investment in its earlier form has stopped. 

Currently private foreign investment assumes two forms : i) direct foreign investment, and ii) indirect foreign investment. The bulk of the direct foreign investment is now made by the multi-national corporations (MNCs), These MNCs provide substantial amount of financial resources to the countries where they set up branches and subsidiaries. The capital recipient countries thus get substantial help in meeting their needs of capital for growth. But these countries subsequently face problems when repatriation of profits by MNCs starts or the production plans of these companies start causing distortions in their industrial structure,

Indirect foreign investment takes place when nationals of a country make investments in the shares and debentures of the foreign companies. At present most of the private foreign investment is'made in the direct rather than indirect form. Foreign aid, refers to official loans and grants given in currency or in kind from developed countries and international financial institutions to less developed countries.

These loans and grants are provided for development purposes. In international finance only those loans and grants are relevant which are provided in currency. The chief characteristic of such aid is that it is made available on concessional terms implying that the rate of interest is lower and the maturity period is longer. Foreign aid rarely involves any foreign exchange problems when it is provided. Since aid is given by the developed countries in their own currencies and by the international financial institutions in the currencies of the developed countries,it can be used easily to buy capital equipment and technology in the international markets. However, the problem arises when debt servicing obligations are to be met.

For this purpose aid recipient ,countries would need foreign exchange which they can acquire only by having surpluses in their balance of payments. This in most cases is quite difficult to accomplish. As a result most countries inviting foreign capital are now in tight corner. They have either already fallen in the debt trap or are facing the risk of falling into it. 

Balance of Payments - Terms

Commodity Exports and imports : 

In the balance of payments accounts of a country the most important item is commodity trade, exports and imports. While commodity from a country create claims on importing countries, commodity result in debt to the countries which have exported to this exports and imports are done by a strictly on barter basis, they are equal. Even in cases where foreign trade is planned and regulated by the government of a country, there may be  a deficit a surplus in the balance of trade of a This would lead to flow of short-term funds between the country and its trading partners, provided payments and receipts under the other heads (as shown in Table 14.1) do not eliminate the need for this flow.

Services Exports and Imports : 

Along with exports of goods a country also exports services in its which create claims against the foreigners. appear in the balance of payments accounts of a country on the receipt side. In Table 14.1, you will observe that the exports of services appear on the credit side of the balance of payments accounts. Now, form in a
country exports services requires some explanation. Major items generally included in the balance of payments accounts are payments for shipping freight services, payments banking, insurance and returns on foreign investments', expenditures by the foreign tourists and the residents of the country abroad, and expenditures by government agencies abroad, and the foreign government agencies in the country.

 Let us take the case of some country, say India. Suppose, shipping, banking insurance and such other services are provided by the Indian companies to foreign claims would be created against them thus these would appear in India's balance of payments on side. Conversely when the Indian avail the of foreign shipping corporations, and insurance they would have against the Indian concerns and these would appear in India's of on the payments side. The same is true of other receipts and payments items. 

Unilateral transfers : 

 transfers, such as remittances, gifts, grants, and indemnities, etc., do not involve any for repayment, and are, therefore, termed as transfers. These transfers may appear on both credit and debit sides of the balance of payments accounts of a country. us see what unilateral transfers would appear on the credit side of the balance of payments.  A country may receive and foreign governments and institutions involving no repayment obligation. In the of payments account, these would be shown as the receipts on the credit side. Over the three decades the less developed countries have received substantial grants from the developed countries. Remittances a recent phenomenon. In India's case have constituted the substantial portion of the unilateral transfers on the credit side of the balance of payments account. Indemnities and separations are not normal These were collected by the USA and its allies Germany after World War I. These receipts appeared in the balance of payments accounts of the recipient countries of reparations. these transfers appear on the debit side of the balance of payments then it means that the country has made gifts and has paid reparations, and has permitted remittances. 

4) Capital receipts and payments : 

Receipts and payments on account of exports and imports of commodities and services and transfers constitute the current account of the balance of payments. There is invariably a deficit or a surplus in this account. In the capital account of the balance of payments of a country, autonomous transactions involving receipts and of money capital are registered'. Capital flows between countries take various forms such as borrowings, repayments of loans and foreign private and public investments. When a country receives loans or raises equity capital the amount raised is shown as capital on the credit side. The repayment of loans and repatriation of foreign capital are shown on the debit side of balance of payments accounts. the current account, the capital account of the balance of shows a deficit or a surplus. However, it is only when we take both the current and capital accounts together that we know Whether there is a net deficit or a net surplus in the balance of accounts of the country.

5) Gold movements : 

Gold between the countries is of two kinds. First, it may be exported or imported like any other commodity. In such a case it is not to be from commodities. In the second case gold movements are caused by the need to offset deficits in the balance of payments. When this is done, gold performs the function of the medium of exchange at the international level. In the balance of payments accounts of a country, import and export of gold are treated in the same manner as exports and imports of other goods, exports of gold are shown on the credit side while imports of gold appear the debit side. Thus merely from balance of payments accounts one would fail to  know the actual reasons for gold movements.

The difference the exports and imports of a country is as the balance of trade. When exports exceed imports, the balance of is said to be favourable. Conversely when imports exceed exports, the balance of trade is considered to be The deficits in the balance of trade may be offset or accentuated upon whether the other heads have a surplus or a deficit.

This deficit could also be offset by taking short-term loans from capital-surplus developed countries and international financial institutions like the International Monetary Fund.

International Financial System

International financial system refers to the system for the flow of funds between nations. The need for the flow of funds on account of two reasons. First, trade between the nations often requires international transfer of funds. Since trade rarely assumes the form of barter, there is either a surplus or a deficit in the balance of trade of a country. This will transfer of funds between the countries. A second category of transfer of funds from one country to another involves long-term capital flows. These may be at both the government and the private levels.

The need for international finance of two kinds: 1)Long term  and 2) Short term

The balance of payments of almost all countries are invariably in disequilibrium. This implies that there is either a surplus or a deficit in the balance of payments. This would require flow of short-term funds from a surplus to a deficit country. 

On the other hand, flow of long-term capital between the countries is guided by two factors: 

1) the foreign capital needs of developing countries and

 2) the investment opportunities available abroad, Now let us detail about short-term requirements and requirements separately.

Short  Term Flow of Funds:

As discussed earlier, the need for short flow of funds at their level arises from the disequilibrium in the balance of payments of the various countries. 

But what does this disequilibrium mean? The balance of payments of a country refers to the net claims of a country against the rest of the world arising from the transactions over a certain period. these claims are positive, the balance of payments is said to be while if these claims are negative the balance of payments is termed as In order to follow this statement, it is necessary to understand the book-keeping of the balance of payments. In Table 14.1 given below, accounts of a country's balance of have presented in a summary form.

The balance of payments of a country involves double entry book keeping and is, thus, always in balance. This implies that total receipts are equal to total payments. If you  look at Table 14.1 carefully, you will observe that both credit and debit sides have the same total, that is $2,000. Still the balance of payments of this country may not be in equilibrium and may require flow of short-term funds between this country and the rest of the world. This is really a paradoxical situation and it deserves careful attention. Since this is a somewhat complex situation, it is necessary for us to consider each item of the balance of payments account separately. 

Financial accounting

I.                   Financial accounting :

Accounting: can be defined as a process which with the help of accounting records churns out financial statements from the churning of numerous transactions of business.

DEF. of A/Cing: 

Acc to AICPA Committee;           “A/cing is an art of recording, classifying and summarising in a significant manner and in terms of money; transactions and events which are in part at least of finl character and interpreting the results thereof.”    

Financial accounting V/S Cost Accounting:

Point of Difference	FA	CA
Definition	Concerned with preparation and communication of finl. Statements like B/S, P&L, CFS	Develops detailed info about costs as they relate to products, services, departments
Primary Objective	Communicating the results	Internal Control and for inventory valuation
	Superset of CA	Subset of FA
	Includes reports of Chairman, Directors

Cost Accounting V/S Managerial Accounting:

Managerial Accounting:

According to the Institute of Cost and Management Accountants of UK;

“as the application of professional knowledge and skill in preparation of accounting info in such a way as to assist management in the formulation of policies and in the planning and control of the operations undertaken.”

Point of Difference	CA	MA
Emphasis	Processing and Evaluation of Cost data	Use of Cost data in  internal planning and control and in Special decisions
		To assist managers in assisting managers in planning and control

Financial V/s Managerial Accounting:

Point of Difference	FA	MA
Intention/ Focus	For external reporting to owners, creditors etc.	Internal use of Finl info
Preparation approach	General in order to accommodate wide spectrum of users	Spl purpose finl statements are prepared acc to the needs of the mgrs.
Horizon of reporting	Reports Past	Past as well as future plans
External Enforcements / Compliance	GAAP	May be internal guidelines
Data type	Objective and Verifiable	Objective and Subjective

Preparation of 4 finl statements is basic to finl acctng:

·        Income Statement: provides info about the performance of the enterprise

o   Profitability is given importance in this regard as the past profitability (as retained earnings) acts as an imp source of growth and the current profitability emphasises on the capacity of the enterprise to use additional resources.

·        Balance Sheet: is a statement that shows at a point of time, the resources commanded by the enterprise and how these are financed.

o   Resources are called as Assets – financed by owners and lenders ;

§  Equity – assets financed by Owners

§  Liabilities – assets financed by Others

The various aspects of company can be analysed thru B/S namely the Performance, Liquidity, Solvency

·        Liquidity – Short term availability of CASH

·        Solvency – Long term       ”

·        Statement of Retained Earnings: reports the impact of NET INCOME and its distribution as a dividend on the finl position of the co.

o   Pointer to the DIVIDEND policy

·        Statement of cash Flow: a statement summarising the  CASH Inflows and OUT-flows during a time span as a result of           

o   Investing

o   Financing

o   Operating     activities.

·        Info : refined form of data

o   Info as a resource

Ø Environment: The world outside the system (Supra system)

Ø System: a collection of parts that work together harmoniously to achieve specific goals

 Ø Subsystems: units within the System that share some or all of the characteristics of the System.        

Ø Salient  Features of Systems:

o   Every system has a Purpose

o   Most systems have 5 components:

§  Input

§  Processing

§  Output         

§  Feedback

§  Control (taking necessary actions)

o   Systems are made up of Subsystems- goals of Subsys – subgoals

o   Goals are imp than subgoals

Finl A/cing Info Systems (FAIS) and its various subsystems:

FAIS is a system that provides info related to the determination of net Business Income for a period and the finl position of the enterprise on a date.

 Limitations of A/cing:

·        Only those measured in terms of money are considered

·        Cost concept; Fixed assets at Cost

·        Conflict between Principles E.g.: Principle of Conservatism vs. Consistency

·        Objectivity factor is lost

Various stakeholders for Info:

Material from Net:

The combination of the three words Accounting Information System indicate an integrated framework within an entity (such as a business firm) that employs physical resources (i.e., materials, supplies, personnel, equipment, funds) to transform economic data into financial information for;

 (1) Conducting the firm’s operations and activities, and

(2) Providing information concerning the entity to a variety of interested users.

Advantages of AIS:

·       Streamlining Data

·       Consolidation