The Green Issue

A new bond is in town; the name’s green-bond (GB). On 16 February this year, Yes Bank launched the country’s first: a Rs  500-crore 10-year paper with a coupon of 8.85 per cent per annum. When the issue closed a week later, it had mopped up Rs 1,000 crore — the Rs 500-crore green-shoe option was fully subscribed. Insurance firms, pension and provident funds, foreign portfolio investors and mutual funds had lapped it up.But first things first. What are GBs? They fall into a category called “theme bonds” — akin to what was issued to fund the railways in the 19th century, the war bonds (to kill one another!) in early 20th century, or the ones issued to finance highways in the 60s. Of course, all of this was largely in the western world — the idea being, you raise funds where investors know where exactly the proceeds will be deployed. It’s this that differentiates such issuances from the “general purpose” variety. And as the name suggests, GBs help finance green concerns; it’s caught fire of late.“Demand for GBs is mostly from institutional investors, particularly those with a mandate to consider the environmental or social impact of their portfolios, and that’s where the big money is,” says Jaideep Iyer, group president, financial management , Yes Bank. Proceeds (from the issue) will fund 5,000 MW of renewable energy (RE) projects. Iyer concedes that it will take another 3-4 years for GBs to mature in India, but early signs hold promise.On 25 March, we saw another first: a dollar-denominated GB issuance by the Export Import Bank of India (Exim Bank): a five-year $500-million offering priced at 147.50 basis points over US Treasuries (2.75 per annum). It was priced tighter than Exim’s $500 million (Regulation S bonds) issued a month earlier with a tenure of five-and-a-half years.  The issue attracted bookings worth over $1.6 billion across 140 accounts with significant participation from green investors. “The goal was to get India global visibility in this huge market,” says Kaku Nakhate, president & country head, Bank of America-Merrill Lynch, one of the lead managers of Exim Bank’s offering.Many others like state-run energy firms, which have been given a target by the Centre to invest more in RE , now look to raise funds through GBs, be it rupee or dollar-dominated.What’s The Driver?A report prepared by the Partnership to Advance Clean Energy-Deployment’s (PACE-D) technical assistance program, funded by the United States Agency for International Development, tells us how the market has shaped up. Globally, GBs have grown exponentially since 2013: fresh issuances over the past two years accounted for 80 per cent of the outstanding. As of October 2014, the size of the GB market stood at $54 billion, which included $32.5 billion of fresh issuances — that’s more than the cumulative issuance of GBs over the last eight years. It forecasts that issuances will top $100 billion by the end of 2015.“The growth of GBs can be attributed to an overarching trend towards environment, social and governance (ESG) issues in the decision process for investments by institutional investors. Currently, $45 trillion of global assets under management incorporate ESG issues,” says Anirban Chatterjee, manager, Second Party Audit and Sustainability Services, Bureau Veritas.This trend presents opportunities for Indian entities to participate in GBs at this nascent stage with ticket sizes in the range of $150 million to $250 million. It will help them capture the attention of investors in an uncluttered market, and ensure better terms due to the low-risk perception of international investors for prospective similar issuances.It’s Just BegunWith an aggressive target of 165 GW of installed RE by 2022, the Centre will require large investments. As on date, project financing sources — be it commercial banks, non-banking finance companies, multi-lateral and bi-lateral lines of credit (to financial institutions) and domestic bond issuances — are inadequate. It holds true for not just green causes, but about every other big, long-gestation project.And you need to explore options beyond traditional sources of funds. GBs will enable us to attract capital and consequently, scale up RE investments and meet the target set under the National Action Plan on Climate Change. Along the way, analysts feel large-scale foreign capital inflows will boost the forex kitty and help offset the energy (read oil) import bill.Climate Bond Initiative (CBI), an international not-for-profit investor that focuses on tapping the potential $100-billion GB mark has set standards to be met by issuers. It has appointed seven global certified verifiers: Bureau Veritas, KPMG, EY, DNV-GL, Ethifinance, Oekem Research, and TRUCOST. Their job is to verify RE projects which meet environmental and financial guidelines set by CBI and issue a Climate Bond Certificate.To get funded, projects have to meet criteria in five areas: environmental protection, contribution to local development and the well-being of local communities, fair and ethical relationships with suppliers and sub-contractors, human resources management, and good corporate governance. “These (projects) need to have positive longer-term societal impact. They have to be sustainable and should not turn out to be negative for the society and the environment at any point, otherwise the projects can be withdrawn or rejected,” says Das.Adds Santhosh Jayaram, director, Climate Change and Sustainability Practice, KPMG: “Investors need to be assured that GB proceeds are being allocated to qualifying projects appropriately, and are subsequently producing the intended positive impacts.”The Centre has floated proposals to private, state-run financial institutions and certified verifiers to become part of the accredited National Implementing Entity (NIE), which is a single entity to govern the functioning of GBs. The Department of Public Enterprises (DPE) has approached PSUs to raise low-cost long-term funds to quadruple its RE production and make it viable for debt-laden distribution companies to buy clean power.Challenges GaloreIn our context, GBs entail high hedging costs due to poor sovereign ratings (currently at ‘BBB’)  and shorter tenures (they are concentrated in the 3-10 years bucket with only some at or over 15 years). While capital demand from the sector — in general — has been low in the past 2 -3 years due to policy paralysis and the economic slowdown, the need to diversify capital pools to meet fresh capacity targets remain intact.“In order to meet the needed RE, the financial markets will need to bring in instruments and mechanisms which meet the specific requirements of the sector such as long tenure, high infusion of funds, and active participation of a variety of investors such as pension funds, sovereign wealth funds, insurance companies (which are estimated to manage over $80 trillion),” says Chatterjee.“It is tough to educate foreign investors about the viability to invest in India in GBs, as the standards and norms are still evolving,” says Nakhate. She feels that the fact that the domestic debt market is yet to offer depth and flexibility will be a key limitation as demand (for debt finance) is expected to rise in the near future, and that instruments that allow financial institutions and independent power producers to access capital at suitable terms are critical.“In India, GB is not yet huge, as there are only two so far. But there is opportunity, given the financing needs. We expect to see 5-10 more GBs from India before the end of the year,” says Sean Kidney, CEO, Climate Bond Initiative (CBI).GB is one bond that’s going to shake and stir up RE!   monica@businessworld.in  @monicabehura(This story was published in BW | Businessworld Issue Dated 13-07-2015)

Maggi Brand To Bounce Back In 6 Months: Analysts

Analysts believe that the Maggi brand will emerge stronger in a matter of just 3 to 6 months before the issue finally gets settled citing that the bigger concern for the brand would be revive its volume growthAs the future looks uncertain for Nestle India’s Maggi noodle brand with the company withdrawing 400 million packets from the market and destroying it, following an order from the Food Safety and Standards Authority of India (FSSAI) over quality issues, analysts in the Consumer and FMCG space believe that the much maligned brand will revive sooner than anticipated. “We are confident the Maggi brand will emerge stronger, but it might take 3-6 months before the issue is finally resolved,” says Nitin Mathur, research analyst, Emerging Markets, Consumer, at French financial services firm Societe Generale. Mathur said adding that the bigger concern for Nestle would be to revive the volume growth. “Nestle’s strategy of focusing excessively on gross margins proved to be short-sighted as volumes have remained elusive for the past three years,” points Mathur. Maggi noodles contributes two thirds of sales in prepared dishes and cooking aids, which was the only category to demonstrate positive volume growth in CY14.. The estimated sales value of Maggi noodles in the market is Rs 200 crore while related materials in the factories and distribution centres have an estimated value of Rs 1.10 crore, according to a recent filing with the exchange. Having been in India for over 100 years, Nestle India is present in 26 per cent the total packaged foods industry. Companies in the oligopoly market structure must focus on volumes and constantly expand their distribution network to maintain high barriers to entry, unlike companies enjoying a monopoly (ITC in tobacco). “Competition is heating up, even in categories where Nestle India has historically enjoyed a monopoly. From Mondelez in Chocolates, ITC in Noodles, Amul in Dairy, and more recently to Danone and Abbott in baby foods – everyone is now keen to have a share of the lucrative Indian market,” says Nitin.

Deviation From Low-cost Flights Led To SpiceJet Collapse: Ajay Singh

Ajay Singh, the man who had co-founded and last year rescued a collapsing Spicejet, is on a roll. He claims to have cleared all debts of the company in just three months since his takeover in December last year. Speaking to BW |Businessworld's Monica Behura, Singh says that the company is undergoing a corporate restructuring. Clearing off debts, a leaner management, expansion of fleets and hiring back people who left during the Maran times is right on his agenda. What brought you back into SpiceJet?It was both an emotional and rational decision but most importantly it was the national perspective that convinced me to join SpiceJet. With fewer players, brands are visible and any airline failure such as a shutdown gives a bad name to country’s aviation industry. Did it make any business sense for you to take on the ailing SpiceJet?Macro economic climate like low oil prices helps growth. With Modi government in power, I was convinced of a higher economic growth trajectory which is bound to have a ripple effect on all sectors including aviation. There is a growth potential to help that one per cent of population that flies in planes and its number is bound to grow. Before joining SpiceJet, were you privy to the book of accounts? How different was it from the time you founded it in terms of financers, reserves, management? It was only in December, after the commencement of dialogue that I looked into the matter. I was given a 30 day interim period and in between that I saw the books.  It was a big hit for me. When I left the company in 2011 it was making profit, it had reserves but  when I joined back, its balance sheet had accumulated huge losses. Its liability had surpassed its assets and financial condition was not healthy. What led the company to such a financial crisis? What was harming it the most? Deviation from low-cost flights which made the company grow was one of the main reasons. Shift from focuses such as trying to reduce the cost of operation was lost.  The moment I stepped in I opened stations which were disproportionate to the number of planes we had, and we also opened low-cost flights with exciting deals. Why do you think the Marans failed and what was the failure cost of the airline? Firstly, I think the airline deviated from its principles of trying to reduce cost on a regular basis. You have to keep knocking down costs which I didn't think was the focus under the Maran leadership. Secondly, in terms of revenue, there was a lot of dilution of revenues by having promotions which were not designed as well as it should have. Thirdly, I think they went more for spread, in terms of opening up of large number of operations as opposed to having higher frequency. Fourthly, the airline was functioning under an absentee leadership because the Marans were not physically present here. I think airline being a very competetive space, you can’t afford a hands off deal. It is a combination of factors that led to the failure. With almost six months in office, how does the balance sheet of Spicejet look like now? Ever since I joined I’ve cleared all the statutory debts and every single rupee of bad debt, all employee salaries are up to date and oil companies are paid. The company has turned upside down since its inception in 2005, the company was based on the premise that it will not take credit rather discount from the oil companies, but Maran had sought credit from the PSB’s. Right now we are on a recovery zone and it is always tough to recover after a shutdown. Given your connections , did you receive any government help? Nobody wanted another Kingfisher, nor the government, the stakeholders, investors, or the aviation industry. Kingfisher and Deccan Airlines were irresponsible. They got a lot of money as debt which was much higher than their revenues and ultimately consequences are known by everyone. Air India too incurs losses but it is written off by government expenses. It creates an imbalance, there has to be a coherence of policies and this government is aware of it. Yes, we did the civil aviation ministry for advice and they supported us morally which was important. As for oil companies, we asked for discount which was provided to us. There were certain allegations regarding transparency in the acquisition. How would you justify it? I would like to clear that we acted as per SEBI law who duly protected the small investors with this acquisition just because some people (referring to Subramanium Swamy) are not happy with the law the way it is then the law should be changed. Where have you raised the Rs 550 crore from that you’ve invested till now? What is the investment required for turning around SJ? Where is going to come from? Any more investors coming aboard? This money has come from a mix of investors and banks. We are getting a lot of funding offers from various players like private equity, debt providers, hybrid products and even foreign airlines. We will choose the mode of investment that comes at the lowest cost. If any further dilution of stake is needed, that will be done at better valuation. Our improved performance will reflect in our stock price. We would need another Rs 500 crore for complete revival of the company. What about the Rs 1500 crore that was talked about? Yes, it was because initially we didn’t knew the amount to clear the liability. From some portion of the fund and by the cash flow, liability was paid off. At present our cash flow is strong. From December no flights have been cancelled. Has the operation increased or has it come down? 190 flights per day from December has been increased to 230 today. My first order in business was to bring stability in operation. We have started operating in airports like Jabalpur, Dehradun, Amritsar but our basic remains same, higher frequency in few stations. So now, can it be said that SpiceJet has cleared all its debt and recovered from the financial burden? Yes, we have cleared all the debts by the intrusion of money we brought in and paid some by cash flow. Big vendors such as Lessors t has been paid off fully. Besides cost-cutting what are the business plans for revival – we hear of SpiceJet leading a low-fare war, which gives cash flow, but is debilitating in the long run. Also, major effort for ‘on-time’ and operational efficiency. Anything else?  It is completely wrong. Promotional sales are a part and parcel of low cost airlines world over. They enable people, who have never flown before, to take to the skies. However, they should not be indiscriminate and revenue-dilutive. We have achieved high load and yield factor in months of Feb, March and April. We will continue to look at reducing costs ways to increase our revenue through our launch of products like SpiceJet Assurance service among others. What about your contract with bombardier? What are your plans for fleet increase? We are renegotiating our 20-25 contracts with Bombadiers to bring the cost back in line,” asserts Singh who is looking order a large number of aircrafts by October. Reports are that top management body is leaving SpiceJet? What would you like to say in this matter? Yes, the CCO and head of HR have left the company reasons which I cannot disclose. We are having some structural changes at the top level which you will know in near future. Right now our core team consists of very experience people. Given that Vistara and Air Asia have steeped in the market, how you feel things have changed in the last five years? As of now they are small players. There is a scope for growth for everyone. Talking about development of airports by government’s PPP programme, what is your view? Government should invite tender for raising the infrastructure of airports.  Company which agrees to the work with minimum amount should be given the charge. Smaller airport development is very necessary for the development of aviation industry. What is the revival scheme based on?Simple, stick to the basics.

Tripping On Transfer Pricing

After eight consecutive days of rigorous appeals and cross appeals, the Delhi High Court on March 15, pronounced its path breaking judgement. It held that the money spent by Indian subsidiaries of foreign companies on advertising, marketing and promotion (AMP) of their global brands in India are international transactions and fall under the purview of transfer pricing rules. Ruling in favour of the tax authorities, the court said that expenses on AMP should be considered international transactions. It, however, discarded the bright line method for calculating tax payable by the subsidiaries adopted by the authorities in previous cases which was challenged by LG Electronics India Pvt Ltd. 'Bright line', is an international standard of spending on AMP and any expenditure over and above this limit is taxable to the global parent company. This practice had been adopted by the Indian tax authorities. The companies had opposed it saying such a methodology is inflexible. While disposing of their pleas, the court held "the bright line method has no statutory mandate and a broad-brush approach is not mandated or prescribed." Instead, the bench laid down a number of guidelines to be adopted by the tax authority like the Transaction Net Margin Method (TNMM) or Resale Price Method (RPM) for the revenue authorities to calculate the tax payable by the Indian subsidiary for expenses incurred on AMP. The ruling and guidelines came on the pleas of several Indian subsidiaries of MNCs including Sony Mobile Communications, Daikin Airconditioning India Pvt Ltd., Haier Appliances India Pvt Ltd, Reebok India Co. Ltd,  Discovery Communications India, Canon India Co. Pvt Ltd and Casio India Co Pvt Ltd. “Transfer Pricing provisions are anti-avoidance provisions and cannot result in double taxation. The aspect that the AMP expenses cannot be examined on a standalone basis or in a standard manner, and has to be analysed based on facts of the tax payer in line with the international norms will be of great help to the former,” says Rohan K Phatarphekar, Partner and National Head - Transfer Pricing of KPMG. Delving Deep This ruling delves deep into fundamentals of Transfer Pricing and Economics which is incongruence with international concept available in Organisation of Economic Co-operation and Development (OECD) and the Australian Taxation Office (ATO) guidelines. “The good thing is that the court accepted the concept of economic ownership of the “excess” AMP expenditure incurred by Indian entities in case it is in a long term contract with its global parent,” says Sunil Agrawal, Senior Tax Partner with law firm AZB & Partners. Like for instance, LG Electronics India, one of the official sponsors of  ICC World Cup spent around Rs 100 crore in its AMP expenditure. As per the contract, LG Global will repay a portion of the total amount spent by the cricket playing nations where its subsidiary is present. This is a long term contract and a valid related party transaction which the tax authorities cannot challenge and accept it as being on“arm’s length”. The High Court also ruled that the need for a TP valuation to determine an exit charge would arise in case a long-term distribution-cum-marketing agreement is terminated which results in transfer of economic ownership of the brands name. Cases like that of Sony India Pvt Limited, which is  a wholly-owned subsidiary of Japanese electronics company, the Sony Corporation, can be taken as an example. Sony India entered into transactions with its parent company pertaining to the import and export of some goods and material. Based on these transactions, Sony computed “Arm's Length Price” (ALP) or in justifiable terms for TP purposes. But the transfer pricing officer (TPO) disagreed. ITAT held that contractual terms of an agreement have to be recognised by the tax department along with Sony’s competitor firms, such as companies with negligible related party transactions and loss making ones. The tribunal also held that the 5 per cent relief should extend to the benefit of all taxpayers. “The revenue authorities went about carrying out artificial adjustments to deflate the operating profit of Sony and that served as a good justification to carry out a TP adjustment,” says Rajendra Nair, Tax Partner Ernst & Young that represented Sony. Legal experts believe that the high court seems to have examined different business models for distributors (viz., normal distributor, low-risk distributor) like in the cases of Canon and Daikin India Co. who are the distributors  of their Japanese based parent companies in India and that the AMP issue needs to be dealt in such arrangements, the ruling does not provide much clarity on the AMP issues in case of manufacturing arrangements. “Yes the judgement has had a major tilt to the distributors and marketers but now the ball is in the court of ITAT to come up with a framework for the licensed manufacturers,” says Lingaraj Patnaik, V.P.(Finance) and Chief Compliance Officer at Daikin Airconditioning India Pvt. Ltd. What Happens Now?The HC has held that brand building is not equivalent to advertisement and sale promotion. In the context of licensed manufacturers, like a LG Electronics, Maruti Suzuki, Honda, Nestle, among others this would be relevant, as the brand value not only consists of the trademark or trade name but is also a contribution of infrastructure, know-how, ability to compete, etc. “Also, the court gave a clarity that routine or day-to-day marketing or sale promotion expenses, even when excessive and exorbitant, would not amount per se to expenses is relevant,” says Agrawal. It laid emphasis on the relevance of intensity of the AMP function in the choice of potential competitors. “However, the HC has not provided specific guidance on how to measure the intensity of the functions while selecting competitors,” says Krishan Malhotra, Head Taxation at law firm, Amarchand & Mangaldas & Suresh A Shroff & Co.  The issue around marketing intangibles is highly factual, depending upon the FAR profile of each taxpayer, for which a common dictum could not have been laid down on merits of the issue, applying to taxpayers across the board.  “The resolution on merits for licensed manufacturers is far from over, as facts pertinent to licensed manufacturers have not been dealt with by the HC,” says Malhotra. Nonetheless, taxpayers who are licensed manufacturers are advised to follow correct approach in line with fundamentals of TP, and leveraging upon relevant legal principles laid out in this ruling.  The Way Forward India contributes more than 70 per cent of transfer pricing disputes valued at $11 billion (in number) worldwide, according to Price Waterhouse & Co LLP. Taxes paid, profit earned on a particular sales or service transaction or exporting of finished goods among others by the Indian subsidiary of multinationals to their parent company needs more approvals and comes under greater scrutiny by the tax authoriries here in India. With the Indian government making all efforts to ease doing business in India for the foreign investors, TP issues always posed a great challenge to the government but this judgement is a relief to only one of many aspects that is a bottleneck with TP. Early this year, India and the US had finalised a framework to resolve transfer pricing cases, some of them pending for five years, in what could end tax trauma for more than 200 American MNCs such as Microsoft, IBM and Oracle by the fiscal year-end and send a strong signal to overseas investors that the Modi government is indeed committed to a non-adversarial tax regime. “What any investor ( including an Indian investor) would look before investing in a country is its political and regulatory certainty. If we can provide certainty through guidelines and circulars, it will go a long way in boosting investor confidence. Further, tax policies should be framed keeping reciprocity in mind. In other words, what treatment we expect Indian companies to get for their overseas investment is something we can provide to foreign subsidiaries operating in India,” says Sanjay Tolia, Transfer Pricing leader at PriceWaterhouse & Co LLP who represented Colgate in a previos TP case. 

Business Should Exist To Create Sustainable Entrepreneurship Says, Stuart L. Hart

Business Should Exist To Create Sustainable Entrepreneurship Says, Stuart L. Hart

Seven Myths About Work That Are Bad for Your Brain

Near-constant distractions have become the norm in workplaces around the world. Workers are struggling to get more done and focus harder with little understanding of what attention is or how to attain or manage it productively. Steelcase Inc's Think Better research revealed seven myths (and their truths) about how to manage your attention at work. Steelcase Inc is the world's largest workplace solutions providers. In addition to being the workplace designer for some of the best places to work such as Google, IBM, Deloitte, Accenture, TaTa Sky amongst others. Steelcase also conducts global and country specific surveys and studies, to track changing trends in employee management and workplace trends.

Four Noodle Brands Maggi Should Be Wary Of

The comeback of Maggi might have struck an emotional chord amongst its loyal consumers, but the market leader still has to get back the consumers it lost to its competitors during it’s absence in the shelves for five months. Instant noodles are a Rs 5,300 crore market in India according to Euromonitor, with market leader Maggi from Nestle India enjoyed a 63 per cent share. Given the quality problems Maggi has lately been facing, the launch timing may be just right for Patanjali Atta noodles and Indonesia’s Joymee, whereas the existent players – ITC’s Yippie and Wai Wai that reigned the noodle market for five months are the ones to watch out for Nestle.