The government on Friday (14 August) unveiled a seven point plan to evamp public sector banks with focus on appointments, Bank Board Bureau, capitalisation, destressing, empowerment, accountability and governance reforms. According to MoS for Finance Jayant Sinha, "the Indradhanush plan for revamp of Public Sector Banks (PSBs) is the most important step in this direction since the bank nationalisation measure in 1969-70, said Finance Mos Jayant Sinha. "This would give banks the strategic space for adequate competitive positioning," he said . Now each PSB would be monitored; their key performance indicators will also be monitored. Finance Arun Jaitley said that the PSBs have been facing a challenging situation in the last few years, but there’s no cause for panic or alarm. Though for some time, the problem went unattended, the situation improved after the Narendra Modi -led BJP government came into power, said the finance minister. India needs to minimise political interference in public sector banks, Finance Minister Arun Jaitley said, as the government announced measures to improve the performance of state-run banks that are struggling with rising bad loans. India's banking sector, dominated by more than two-dozen state-run lenders, has been hobbled by its highest bad-loan ratio in a decade as slower economic expansion hurt companies' ability to service debt. While the pace of additions to bad loans has started slowing for most banks, higher provisioning is hurting their profits. State-run lenders also account for a majority of the sector's bad loans. Political interference in the functioning of PSBs has to be minimised, he said. Secretary, financial services, Hasmukh Adhia later said that political interference in the functioning of the PSBs had minimised to a great extent after the Prime Minister addressed a gyan sangam of top PSB heads in Jan early this year, and this government went going in reforming the banking sector. CapitalizationWhile calculating the capital requirement of extra capital for the next four years up to FY2019 likely to be Rs 1,80,000 crore, the government of India proposed to make available Rs 70,000 crore out of budgetary allocation for four years. Improved valuation coupled with value unlocking from non-core assets as well as improvements in capital productivity is expected to enable PSBs to raise the remaining Rs 1,10,000 crore from the market. Adhia also announced the appointment of new heads of five banks, including two from the private sector, as part of fresh measures to improve the performance of the state banks, which are struggling with rising bad loans. Indian banks may need up to 1 trillion rupees to manage the risks from their exposure to debt-stressed firms, Fitch's Indian unit said this month, on top of the tens of billions of dollars in capital they need to comply with global banking rules. Problem of NPAsFinance Minister Arun Jaitley said there have been problems with the banking sector and they were compounded by problems in sectors like steel, power, highways, discoms, sugar. As the seven-step reform progamme unfolds, these different sectors too need attention and their problem have to be dealt with to solve the ultimate banking problems. There has been some positive movement in the highway sector and some steps have been taken in the steel sector, but the problems here are more of external nature. In case of sugar, one package has already been announced; it’s more of work in progress in this sector;
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India needs to minimise political interference in public sector banks, Finance Minister Arun Jaitley said on Friday (14 August), as the government announced measures to improve the performance of state-run banks that are struggling with rising bad loans.India's banking sector, dominated by more than two-dozen state-run lenders, has been hobbled by its highest bad-loan ratio in a decade as slower economic expansion hurt companies' ability to service debt.While the pace of additions to bad loans has started slowing for most banks, higher provisioning is hurting their profits. State-run lenders also account for a majority of the sector's bad loans.(Reuters)
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Sutanu Guru argues how the lowest inflation rate in a decade must lead to lower interest rates Wholesale inflation based on the Wholesale Price Index (WPI) has plummeted to a 10 year low of – 4.1 per cent for the month of July. This, after the consumer price inflation too falling to an almost record low of 3.7 per cent in the previous month. In comparison to a negative 4.1 per cent, wholesale inflation stood at 5.4 per cent in July 2014. People, that category includes so called pundits and intellectuals will argue that the numbers are hogwash and point out to rising prices of onion, milk and pulses to claim inflation is not coming down. They will insist that the RBI Governor Raghuram Rajan is doing the right thing by not cutting interest rates. But the fact is; numbers don’t lie. They don’t even mislead. It is now a year since inflationary pressures have eased in the Indian economy. And there really is no excuse left anymore for Rajan and the RBI to not cut interest rates anymore. Prior to August 4 this year, realists as compared to pundits hoped that Rajan will tone down his inflexible stance and reduce interest rates. But he kept repo rates unchanged at 7.25 per cent. Let’s leave the esoteric jargon aside at take a common sense look at the issue. All students of economics are taught some fundamental things. One is that inflation can be caused by factors called demand pull or supply push. The second is that higher inflation rates hurts the poor more than others. And the third is that high cost of capital makes companies less competitive. On all three common sense counts, the Rajan policy of being inflexible in cutting interest rates looks more fundamentalist than realistic. Supply constraints play a huge role in inflation in developing countries like India. Keeping interest rates at artificially high levels is not going to solve the supply problem; though it does tend to have a dampening effect on demand. Even during the UPA regime, the critics were wrong when they slammed the government for rising prices of food items like milk, eggs, poultry and some vegetables. The fact is, rising household incomes have meant that more and more “poor” Indians now consume such “elitist” food items. The solution is not to look at interest rates, but at ways and means of improving farm productivity. Even now, those who criticize the NDA government for the rising prices of such food items are wrong. And keeping interest rates will worsen the supply problem rather than ease them. That is because such high rates of interest makes a majority of Indian companies globally uncompetitive. Not every company is a Reliance Industries Ltd that can tap global capital and financial markets for cheap capital. For the thousands of enterprises in the small and medium industries category, high interest rates are a fatal burden on expansion plans. Lastly, persisting with high interest rates means there is little chance of an economic stimulus through increased consumer demand. Survey after survey has shown that investors and consumers have been postponing buying homes and cars because the interest rates are deemed too high. In developed economies where financial inclusion and penetration is virtually 100%, interest rate can indeed be the most powerful tool to send signals. But in a country like, the same can be folly. It is time, Rajan stopped persisting with this folly.
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Hemant Contractor, Chairman, Pension Fund Regulatory and Development Authority (PFRDA) talks to BW|Businessworld's Sunil Dhawan about several changes NPS will witness soon including making it available online. A big contentious issue with NPS is to do with fee structure of Pension Fund Managers? What is PFRDA doing towards it?With the Act having being passed and the Pension Fund Managers (PFM) regulations also being put in place, we will have to re-register all the PFM’s. We will be going through process of re-registering and inviting bids from existing as well as new PFM’s. And the fee structure would be decided at that point of time. We are looking at that performance based model and also we are looking at 2-3 models. Last time it was done on pure price bidding, it was an auction basically. We feel that auction probably is not the best way to go about it. We are therefore also looking at other ways. What changes are you bringing on the distribution front to make NPS more of a pull-product?One issue is of this distribution problem. On paper, we have all bank branches, NBFC, and registered some 40,000 POP but they aren’t pushing hard in this. Going forward, we are putting in place an online platform to allow subscribers to join NPS for all those having Aadhaar card to invest in NPS without going through banks. It will be entirely Aadhaar-based online process and will be less expensive too as there won’t be any intermediary. This should appeal especially younger generation. Any new steps in the pipeline for the pension fund managers (PFMs)? Is there a conflict of interest in allowing them to sell NPS? This is again a recommendation of Bajpai Committee that PFM can be allowed to sell. We have taken it up with government. It was a very strong argument earlier when the PFDRA was not a statutory body and the Act had not been passed that if you permit them to sell and if there is mis-selling, since we were not statutory body, we would not have any powers to act against them. But now we have the powers and so if there is any mis-selling, we can take action. We are in much stronger position to enforce our decisions. NRIs were allowed to invest since beginning. Why is NRI investor in focus now for PFRDA? Is the clarity on tax treatment better now?It was allowed even in the past but it was not clear whether they can invest on repatriable basis or not. Unlike in insurance and mutual funds, where it is clearly defined by RBI that they can invest on repatriable basis. RBI now has clarified that NRI can invest in NPS on repatriable basis and soon FEMA by end of this month will come out with notification. Now, with notification coming, we can approach NRI with confidence. Since it is available on repatriable basis, the investment need to be made through NRE account. If they don’t want repatriation, it can come from NRO account. Is PFRDA considering investment of NPS money in venture capital (VC) and private equity (PE)? How will it benefit subscribers? Will there be an option? How much will be allowed? It’s currently at the stage of finalization and we have not really decided on it. This is also one of the recommendation of Bajpai committee that in a phased manner, we should look at other investment classes like alternate investments. We may not do it immediately but over period of time definitely we would like some of the NPS funds to be invested in VC. It won’t be much but 2-3 percent of corpus to lend diversity to the whole portfolio and also over period of time the returns from VC, PE is very high. Of course risk is also higher, but if you are putting in small amount, it does add to diversity and does increase the yield also. We are looking from that perspective to investing in VC. The Bajpai committee report recommends, “Phased movement from Directed Investment regime to Prudent Investment regime with Active Management”. What impact will it have? In the prudent investment regime, its investor deciding for himself where he would like to put his money. In the directed system we lay down categories that so much money goes into government securitises, so much into bonds but that won’t happen in prudent system as the investor himself will decide what to do. We are talking about doing this in phased manner because this requires some sort of sophistication on the part of the subscriber. Investors should understand all the risks involved before we give them the freedom to choose where to put their money. Any other recommendation of the Bajpai committee report that you are actively considering?One of them is like offering minimum guarantee product that we are actively looking at. We have set up a committee to come up with a scheme in accordance with Bajpai committee and very soon they will come out with such a scheme. Has the Budget 2105’s additional tax benefit worked to any advantage for NPS? How has been the response so far especially with regards to average collections? Little early to talk about the benefit of additional tax benefit. This will start happening around the year-end. But, certainly we are seeing an increase in the number of subscribers joining NPS in the first three months of this financial year. The numbers have grown by at least 25-30 percent over last year and as far as total additions to corpus is concerned, from government sector we get close to Rs 1,000 crore a month and for private sector its much less at about Rs. 15 crore a month. We have about 92 lakh subscribers overall of which 46-47 lakh are government, and about 40 lakh are Swavalamban and in corporate sector it would be 4-5 lakh. Swavalamban figures are included in private sector and by definition it is a scheme for under-privilege, so corpus amount is small. So that pulls done the average ticket size of corpus in private sector. Private sector average ticket size to my mind would be about Rs 10,000-Rs 12,000. We would like to see numbers grow and this year with the additional tax benefit of up to Rs 50,000, we expect many more people joining and average ticket size should also go up substantially.
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Indian refiners have got the green light to prepare to pay Iran $1.4 billion in oil dues, two sources with knowledge of the issue said, in one of the first signs that last month's nuclear deal is helping Tehran unlock frozen funds. The landmark nuclear deal between Iran and six major world powers was struck on July 14 and sanctions could begin to be removed later this year if U.N. inspectors confirm Tehran is complying with its provisions. Finance Secretary Rajiv Mehrishi asked refiners this month to prepare to pay Tehran two installment of $700 million, part of the money owed for oil imports, said the sources, who declined to be identified due to the sensitivity of the issue. Iran is desperate for funds and investment to help its economy, crippled by decades of sanction. Mehrishi last month led a delegation of officials from the Reserve Bank of India and state-run UCO Bank to Tehran to discuss oil payments. The exact timing of the payments is unclear since the finance ministry is seeking clearance from the Office of Foreign Assets Control (OFAC) of the U.S. Department of treasury to go ahead, one of the sources said. The office of India's finance secretary did not immediately respond to a request for comment. The U.S. Treasury said it did not comment specifically on countries or institutions involved in payments. But in a statement said "the U.S. government has committed to render non-sanctionable the release in installments of certain Iranian restricted funds held overseas in an amount consistent with installments provided under previous JPOA relief periods." JPOA, or Joint Plan of Action, refers to an interim nuclear pact. The Indian payments are likely to be conducted using a mechanism based on a series of back-to-back transactions in different currencies that are initially channelled through the Reserve Bank of India, the sources said. Iran would eventually get the payment in dirhams from the United Arab Emirates' central bank. India is Iran's biggest oil client after China, though New Delhi has reduced purchases under pressure from sanctions and Tehran has slipped to the seventh biggest supplier from the second before sanctions. Indian refiners Mangalore Refinery and Petrochemicals Ltd, Essar Oil, Indian Oil Corp, Hindustan Petroleum Corp and HPCL-Mittal Energy Ltd (HMEL) together owe Iran more than $6.5 billion. This represents just over half of the bill for crude bought since February 2013, when a route to pay for Iranian oil through Turkey's Halkbank was stopped. Under an interim nuclear deal in November 2013, some of Iran's blocked funds were released by Asian buyers, including India. Indian companies have deposited 45 percent of their oil payments in a rupee-denominated account at an Indian state bank that Iran is allowed to use to buy goods not covered by sanctions such as food and medicines. About 170 billion rupees ($2.62 billion) are in Iran's account with UCO Bank. (Reuters)
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Mehak Aggarwal, a fresh MBA from IIM, is earning a package of Rs 20 lakhs per annum. After paying for her daily expenses and her education loan, she still has over Rs 50,000 a month as disposable income. She is not sure what to do with it. Should she buy the latest phone, tablet, shoe or dress? Or should she just save the way her mother is forcing her to?Fresh MBAs from premier institutes are often plush with new found monetary freedom. From hefty joining bonuses to large disposable incomes, they are often not sure what to do with surplus funds. A lot of them spend it on the latest gadgets or have money lying in their savings bank accounts. As they are in the prime of their youth, saving for retirement or building a financial corpus often sounds an alien concept to them. However, spending and saving money smartly goes a long way in building an ever increasing financial corpus. The article looks at some of these guiding principles. While most people are aware of these principles, a majority of them fail to implement them.Most people in their 30s and 40s often wish they had managed their finances differently in their 20s!Most of your grandmother's money management techniques hold true even today!While consumer spending has been incessantly lauded in print media as a key driver of economic growth, the benefits of saving as much as you can still hold true. The age old cliché of saving a fixed percentage of income every month makes immense financial sense. Compounding benefits kick in when savings start early. For fresh MBA graduates who are full of disposable income, a blanket rule of saving at least 50% of monthly income, no matter what, is a great starting point.Needless to say, equity markets always return disproportionate returns over a period of time. It is a great idea to invest a percentage of your savings, ideally 100 minus your age, in equity markets. Over a period of time, equity markets often return in excess of 15% which is greater than most other asset classes. As real estate can end up giving disproportionate gains, some MBA graduates pool in initial capital and buy a plot in fast growing tier 2 / tier 3 cities.Although retirement seems four decades away, it is never too late to start planning for it. While most people think they are in the prime of their youth and retirement is many decades away; early planning for retirement can reap huge rewards and financial stability later on. Provident Fund (PF) and Public Provident Fund (PPF), without any tax burden and assured returns, are excellent instruments to plan for retirement. A PPF guaranteed return of 8.7 per cent a year amounts to 12.5 per cent return on another asset class that is taxable. A lot of MBAs contribute an amount greater than the stipulated 12 per cent to their Provident Fund accounts to realise greater gains.As with most things in life, it is most important to plan for key financial goals. Typically education, car, marriage and home in that order. A detailed extrapolation of future cash flows and requirements will automatically point to the minimum amount to be saved every month.Other aspects to sound financial management involve keeping an emergency fund with 2-3 months' salary readily accessible. It is always a good idea to track your expenses daily and start cutting down on the flab. Although most employers provide insurance, it is advisable to get a life / medical insurance.On a lighter note, some MBA graduates see their marriage as their soundest financial decision. An equal earning spouse is one of the greatest investments that can be made to securing your financial future. If your wife earns more than you, it is even better!Pitfalls to sensible money management are many; most people end up making these mistakes anyway!There are a million ways to spend money carelessly. While most people are aware of these pitfalls, most of them tend to fall prey to it.Spending substantial income piling up too many fancy gadgets is quite useless. While an odd gadget here and there is necessary for entertainment; spending quarter of a lakh on every gadget upgrade might not be necessary. Self-control is the key in such cases although it is easier said than done. Ensuring a monthly investment plan where a planned lump sum is directly debited from your account is always advisable. Idle money lying in the bank account often leads to useless expenditure.Using credit cards to fund purchase of such assets is even worse. The interest rates charged by credit cards are enormous; defaulting even by a day results in interest penalties and a negative impact on CIBIL score leading to complications later on while applying for a loan. Credit cards should be used to manage working capital for a month and not for borrowing money which cannot be paid back in the immediate period.While not blowing up your disposable income or your yearly bonus is creditable, not doing anything lucrative with it is also not advisable. Keeping money in savings bank accounts at 4 per cent interest per annum is losing money over a period of time. It is natural to use yearly bonuses to pay back any outstanding loans; the earlier you pay, the more money you save!ConclusionAlthough money is not the be all and end all of life; it goes a long way in bringing security and material comfort. With simple smart tactics, young professionals can easily accumulate up to Rs. 1 crore by the time they turn 30. Having such a corpus serves as a fantastic back up in case someone wants to pursue his true calling in his early 30s. Or to take care of a rainy day.Mehak decides to save 50 per cent every month as a habit. She postpones the Rado watch for some time. In a few years' time, the interest income on her investments can pay for the Rado watch!Did you know?1. Did you know that Warren Buffett purchased his first stock at the tender age of 11?2. Did you know that Benjamin Graham, the father of value investing, pioneered many of the principles of financial investment which are followed even till today?3. Did you know that Rs 1000 saved every month for a period of about 35 years would amount to nearly 30 lakhs at the end?4. Did you know that employees can contribute in excess of their mandatory contribution to their Provident fund (PF) accounts?5. Did you know that, as per a Motilal Oswal study, the sensex jumps 100 times every 30 years?The author, Sandeep Das, is an MBA from IIM Bangalore, the author of Yours Sarcastically and a columnist
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With the enactment of the Insurance Laws (Amendment) Act, 2015 ("Insurance Amendment Act"), there has been a perceptible increase in interest in the insurance sector. Apart from other significant changes introduced, one of the seminal changes was the change in the definition of an 'Indian insurance company' pursuant to which the cap on foreign shareholding in an Indian insurance company stands increased from 26 per cent to 49 per cent.As of the end of July 2015, the Ministry of Commerce and Industry reported that India received $184.97 million foreign direct investment ("FDI") in the insurance sector between the months of March and May 2015. While animal spirits may have awoken and there is an immense amount of discussion around deal-making in the insurance space, there are certain significant issues which are being discussed, or will need to be discussed between foreign investors (including shareholders of existing joint ventures) and Indian counterparts, in relation to investment in such Indian insurance companies. Set out below is a brief overview of some such key issues.The 'Control' ConundrumPerhaps the most significant, the Insurance Amendment Act and the Indian Insurance Companies (Foreign Investment) Rules, 2015 ("Insurance FDI Rules") provide that an Indian insurance company shall be owned and controlled by resident Indians. Rule 2(c) of the Insurance FDI Rules therein, read with Section 2(7A) of the Insurance Act, 1938, provides that "'control' shall include the right to appoint a majority of directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements". Further, given the provisions of Rule 9 of the Insurance FDI Rules and paragraph 6.2.18.7.2(f) of the Consolidated FDI Policy dated 12 May 2015 ("FDI Policy"), all conditions in relation the increase of FDI applicable to insurance companies shall apply 'on the same terms as above' to insurance brokers, third party administrators and other insurance intermediaries registered under the relevant regulations notified by the Insurance Regulatory and Development Authority of India ("IRDA"). Accordingly, Indian insurance intermediaries would also need to ensure that they remain Indian owned and controlled. The existing uncertainty arises from the fact that the requirement of 'control' of an Indian insurance company vesting with Indian residents is new and didn't exist until the introduction of the Insurance Amendment Act. In the past, there have been instances where foreigners who invested in an Indian insurance company (upto 26 per cent) had a vast set of rights (some of which could imply "control" vesting with a non-resident under the Insurance Amendment Act). Further, unlike in respect of the Securities Exchange Board of India ("SEBI") and the Competition Commission of India ("CCI"), the IRDA does not have an existing body of jurisprudence in assessing 'control'. Accordingly, there has been some uncertainty as to what rights when granted to a foreign investor (whether positive rights or 'negative' rights - termed as affirmative vote matters) under existing shareholders' agreements (which may be the case for most insurance joint venture agreements) would be permissible. For example, an affirmative vote matter at the board and shareholder meetings level in the hands of a foreign investor in respect of the appointment of key managerial personnel or determination of the insurance joint venture's business plan may not be acceptable, as they may indicate foreign 'control'. While there is a line of thought which assumes that the IRDA may adopt an interpretation of control similar to other regulators (i.e. SEBI and CCI), these may provide imperfect parallels given that each regulator has defined 'control' to satisfy its respective regulatory objectives (ie. SEBI's objective of protecting minority shareholders in listed companies, and CCI's objective of merger control and preventing anti-competitive and monopolistic arrangements). However, given the aforementioned background, there is another line of thought that joint decisions between the resident and non-resident shareholders of Indian insurance joint ventures may not fall foul of applicable law.Given that 'control' is also defined under the FDI policy, there is some apprehension as to whether the Foreign Investment Promotion Board (in stake increases beyond 26 per cent) may adopt an interpretation of 'control' different from the IRDA. However, it appears that, once FIPB and IRDA applications are filed by the foreign investor, the Indian promoter and the insurance joint venture, both regulators may enter into discussions as to whether the insurance joint venture would continue to remain Indian owned and controlled. The 'Options' in PricingOnce the 'control' question is put to rest, the next hypothetical 'bee in the bonnet' is the question of the legally permissible price per share which can be paid for acquisition of shares by a foreign investor. The share valuation saga began on 4 May 2010, when the Reserve bank of India ("RBI") published A.P. (DIR Series) Circular No. 49 ("RBI Circular") which, inter alia, replaced the requirement of determining fair value of shares in an FDI transaction in accordance with the valuation guidelines prescribed by the Controller of Capital Issues with the fair value determined by a SEBI registered Category-I merchant banker/ chartered accountant as per the discounted free cash flow method. Subsequently, the IRDA published a press release dated 16 June 2010 ("IRDA Press Release") which stated that the provisions of the RBI Circular were applicable to Indian companies in sectors other than the financial sector, and accordingly, the pricing guidelines under the RBI Circular would not be applicable to the insurance sector. There was a fair amount of comfort drawn from the clarification contained in the IRDA Press Release by insurance companies and investors alike that the pre-agreed pricing mechanisms built into call option clauses granted to foreign investors and incorporated in joint venture agreements/ shareholders' agreements between the Indian promoters and the foreign investors of Indian insurance joint ventures (which were incorporated into the articles of association of the joint venture) for future increases in foreign investment may not actually be impacted by the pricing guidelines prescribed under the RBI Circular.However, following the introduction of the Insurance Amendment Act, this criteria on valuations has been tweaked and the current position is encompassed in Rule 8 of the Insurance FDI Rules, as well as paragraph 6.2.18.7.2(f) of the FDI policy, which provide that any increase in foreign investment of an Indian insurance company shall be in accordance with the pricing guidelines specified by the RBI under the Foreign Exchange Management Act, 1999 ("FEMA"). The pricing guidelines prescribed by the RBI provide, inter alia, that a transfer of, and subscription to the shares of an unlisted company from a resident person/ entity to a non-resident entity/ person shall be at a price which is greater than the fair value worked out in accordance with any internationally accepted pricing methodology calculated on an arm's length basis by a chartered accountant.Given the above, foreign investors may not be able to increase their equity shareholding at the commercially agreed price formulae agreed to in their shareholders' agreements with the Indian promoters of their insurance joint venture. It remains to be seen whether the Central Government or the RBI provide any leeway in relation to applicability of the RBI pricing guidelines to equity stake increases. While arguments can be made by foreign investors claiming that the applicability of pricing guidelines has effectively been made retrospective (given that the relevant call options for purchase/ subscription to additional shares will actually be exercised now ie. after the clarification on the applicability of the RBI pricing guidelines to the insurance sector); the likelihood of regulators acceding to this is questionable. Accordingly, both parties would need to undertake a valuation or multiple valuations (depending on the content of their shareholders' agreement) to determine the fair value of shares in accordance with applicable law as on date.'Banking' on Exclusive Tie-upsSome of the existing Indian insurance joint ventures have been promoted by financial institutions such as banks. Most shareholders' agreements between such Indian banks and the foreign investors (as well as insurance joint ventures with Indian partners who are not banks) contain provisions which require the Indian banks to enter into distribution arrangements with the insurance joint venture they have invested in, thereby creating an exclusive distribution channel for the insurance products created by the Indian insurance joint venture. Given the value associated with having a reliable and broad-based distribution network, these exclusive distribution tie-ups are an essential contributor to the wealth of Indian insurance joint ventures.One of the significant impacts of such exclusive distribution arrangements in the insurance sector was that insurance companies effectively could not use Indian banks which had investments in other insurance joint ventures as distribution channels for their products. Accordingly, the idea of an open architecture of insurance distribution was mooted, pursuant to which it was proposed that banks and non-banking financial companies would act for more than one insurance company through the bancassurance model (registering as either a bancassurance corporate agent or a bancassurance broker). Apart from two exposure drafts in relation to bancassurance (which were not eventually notified), a more recent (albeit temporary) concern was the inclusion of provisions requiring multiple insurance distribution tie-ups under the first exposure draft of the IRDA (Registration of Corporate Agents) Regulations 2015 ("Draft Regulations"). The Draft Regulations proposed certain limitations on business generated from a single insurer , which would have effectively required corporate agents (including banks registered as corporate agents) to enter into insurance distribution arrangements with more than one insurance company in each sector of the insurance industry.However, after several industry representations, the IRDA released a revised exposure draft of the Draft Regulations on 29 May 2015, pursuant to which corporate agents were allowed to choose up to three insurers in a particular line of insurance business (ie. life, general, health) instead of a minimum of two insurers in this respect. Further, insurance business was no longer proposed to be capped as long as, at the time of the corporate agent's registration, a 'Board Approved Policy' addressing, inter alia, the manner of soliciting and servicing insurance products, and the process of adopting the open architecture policy going forward. While the most recent version of the Draft Regulations have not yet been notified, they provide some amount of relief for Indian banks which have promoted insurance companies. That being said, going forward, Indian promoters and foreign investor in insurance joint ventures would need to factor in the policy shift from exclusive distribution the open architecture - a change which may arrive gradually, but appears certain to arrive in the near future.Concluding ThoughtsGiven the aforementioned issues, foreign investors, Indian promoters and Indian insurance companies alike would need to proceed with caution, and after comprehensive discussions with legal and financial advisors, when considering equity stake increases in existing Indian joint ventures. That being said, there is information in the public domain of certain Indian insurance joint venture which have moved quickly in filing FIPB and IRDA applications, which are understood to be under process or have been approved. In any case, once there is greater clarity on the IRDA's interpretation of 'control', we may see more insurance deals being closed.Disclaimer - The views of the authors are personal, and should not be considered as those of the firm.The author are Anuj Sah, Associate Partner, Khaitan & Co. and Rohan Singh, Associate, Khaitan & Co.
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RBI Governor is unlikely to expose the country to avoidable risks, says Sumit SharmaWith the Reserve Bank of India (RBI) declaring Consumer Price Inflation (CPI) as its primary target there was good news for those looking for a repo rate cut. The CPI decelerated to 3.78 percent in July, compared with 5.4 percent in the previous month. The increasing divergence of CPI rate from RBI’s target rate of 6 per cent for January 2016 added to the industry’s joy. Another seemingly good news was an improvement in the Index of Industrial Production (IIP) numbers for June. IIP improved to 3.8 percent compared with 2.5 percent in May and 3.36 percent in April. Since January, the highest that IIP rose was 4.8 percent in February and has remained below 4 percent in the other five months. Yet, what the IIP doesn’t show is that capital goods fell 3.6 percent, and rose on the back of consumer goods and manufacturing. Consumer goods too rose on the back of a lower base. The two numbers guide one to agree that its time the central bank gave a hard look at reducing its repo rate to help industry lower its borrowing costs, and probably cut selling prices, lift demand and hopefully investments over a period of time. Adding to the sentiment, on Thursday (13 August) finance secretary Rajeev Mehrishi told a television channel that India’s interest rates are out of sync with the rest of the world, and could attract hot money since they are too high. Most of the advanced countries have rates at a negligible level. He said a rate cut would also help domestically as it would improve credit improve and exports. So, will RBI go with a rate cut much ahead of Sept 29 policy? Opinions are divided. While some economists feel the RBI should be less conservative and spring a surprise, some others would rather prefer to wait until mid-September. Two major events by then would help RBI to be on a firmer footing. The U.S Federal Reserve is likely to make its move by then on its own interest rates. Data so far suggests that U.S could be track to announce its first interest rate increase after the global financial crisis in its next Federal Open Market Committee (FOMC) meeting on Sept 16-17. Also, by then the extent of monsoon rains and areas that are likely to remain deficient would be evident. Even as better supply management can help rein in prices, authorities have regularly faltered on this count. The sudden and sharp spurt in onion prices is a case in point. Minister in-charge of ensuring such supplies said it could take four months for onion prices to return to moderate levels. Such statements surely don’t inspire confidence. Then, the surprise devaluation of the Yuan by People’s Bank of China (PBoC) is no mean factor and will continue to hang like Damocles’ sword in the coming months. A rate cut has implications on foreign inflows into local assets. Currency disturbances globally could hurt India too even though Governor Raghuram Rajan has boosted India’s foreign exchange reserves, and the current account deficit is under control. Yet, it’s anybody’s guess whether one would like to play safe or rather be sorry. So for the moment one could safely bet the RBI may wait for the tide and impending storms to settle rather than expose the country to avoidable risks.
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